May 27, 2005
Room 4561
David Brown
Chief Executive Officer and President
Website Pros, Inc.
12735 Gran Bay Parkway West, Building 200
Jacksonville, Florida 32258
Re: Website Pros, Inc.
Registration Statement on Form S-1
Filed on April 27, 2005
File No. 333-124349
Dear Mr. Brown:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Registration Statement on Form S-1
General
1. We will process your amendments without price ranges. Since
the
price range triggers a number of disclosure matters, we will need
sufficient time to process your amendments once a price range is
included. Please understand that the effect of the price range on
disclosure throughout the document may cause us to raise issues on
areas not previously commented on.
2. We note the inclusion of red herring language in the cover
page.
Please confirm that you have not yet circulated the preliminary
prospectus.
3. Please confirm that our courtesy copy includes all diagrams,
pictures and graphic information to be used in the prospectus.
Noting the graphics on the page immediately prior to the table of
contents, it appears that the "affordable," "award-winning,"
"proprietary workflow" and "strategic marketing relationships"
language contains technical jargon and may be unnecessarily
repetitive of other disclosure. Please revise as appropriate.
For
guidance, please refer to the Gatefold Graphics discussion in
Section
VIII of the Division of Corporation Finance: Current Issues and
Rulemaking Projects Quarterly Update (March 31, 2001). In this
regard, please supplementally advise as to the use of the term
"award-winning." We note the use of this term both here and in
business to describe your NetObjects Fusion software, yet we are
unable to find any discussion.
4. Please provide us with relevant portions of the research you
cite
in the prospectus (e.g., Jupiter Research and the International
Data
Corporation Reports for March 2004 and May 2004.) Also, tell us
whether all or any of the reports were prepared for you or
published
generally and if the latter, please explain how they are publicly
available. To the extent that the information is not publicly
available, please file experts` consents as exhibits to the
registration statement, as required by Rule 436 of Regulation C.
5. Please define the terms "website provisioning" and "paying
subscribers" the first time that they are used. We note that the
latter term is defined for the first time on page 24.
6. We note you filed two Forms D on April 29, 2005 and five more
on
May 16, 2005. We presume that the April transactions relate to
your
April 2005 acquisitions. Please advise.
Outside Front Cover Page
7. Please delete the words, "Sole Book-Running Manager" from the
outside front cover page of the prospectus, since the meaning and
significance of this reference to potential investors is unclear
and
an explanation would not be consistent with Rule 421(d).
8. Please state how the underwriters will apportion between the
registrant and selling shareholders should the underwriters not
exercise the complete overallotment amount (e.g., apportionment
would
be done on a pro rata basis.)
Summary
9. Please revise your opening paragraph to clarify that the
summary
contains the material terms of the offering and remove any
implication that your summary does not contain all information an
investor should consider before buying shares. As you know, a
summary by its very nature is not a complete recitation of all
possible information.
Website Pros
Our Business, page 1
10. Please provide support for the statement that you are "a
leading
provider of Web services and products that enable small and
medium-
sized businesses to establish, maintain, promote and optimize
their
Internet presence." Further, please revise your disclosure to
include the measurement or metric that you are using to gauge you
are
a leader in your industry, i.e., number of customers, gross
revenues,
net income, etc. Please also provide supplemental support for your
statement that you have 43,000 paying subscribers.
11. We note your inclusion of Discover Financial Services, Inc.,
Network Solutions and IBM as companies for which you have a
strategic
marketing relationship. From disclosure elsewhere, we understand
the importance of Discover Financial Services on your historical
revenue, however, the importance of Network Solutions and IBM is
unclear. Please revise to quantify the percentage of revenues or
leads channeled from these partners or otherwise describe why you
believe your relationships to these companies to be strategic and
material to include in the summary.
Market Opportunity, page 1
12. We note your citation to the March 2004 IDC report that
includes
projections indicating that there are 21 million small and medium
sized business consisting of 13.5 million home-based businesses
and
another 8.2 million businesses with 100 employees or fewer. For
purposes of clarity, please revise to describe how IDC defines
these
small and medium sized businesses. We note your disclosure on
page
43.
Recent Acquisitions, page 3
13. Please briefly discuss the total consideration paid to acquire
Leads.com, Inc. and E.B.O.Z., Inc. as well as how the purchase
price
was determined.
Risk Factors, page 7
14. Please note you are required to disclose the "most significant
factors" that make this offering speculative or risky. Please
revise
the first paragraph of this section to indicate clearly that you
are
including a description of all material risks associated with the
offering of shares of your common stock. Refer to Item 503 of
Regulation S-K.
15. Item 503(c) of Regulation S-K states that issuers should not
present risk factors that could apply to any issuer or to any
offering. For example, the risks you describe on pages 9 and 12-
14
regarding likely fluctuations in your financial results,
difficulty
implementing appropriate controls and procedures, being a public
company, and due to that Sarbanes-Oxley Act of 2002, the potential
lack of opportunity to attract qualified officers and directors
could
apply to nearly any issuer in any industry. If you elect to
retain
these general risk factors in your prospectus, please clearly
explain
how they apply to your industry, company or offering. For
example,
explain why you are concerned about quarterly fluctuations. Have
quarterly results fluctuated materially in the past? If so,
explain
the circumstances surrounding your historical experience with this
risk and how your business was affected. As another example, is
there a specific reason why you believe you will be unable to
attract
officers and directors based on your need to comply with Sarbanes-
Oxley?
16. We note your disclosure on page 41 and F-8 regarding your
foreign
currency exchange risk including changes in the Euro and that
sales
in Germany represented over 90% of your European revenue in 2004.
We are unclear, however, why F-8 expresses this percentage in
terms
of international revenue rather than European revenue. Please
advise
or revise. Please consider including a separate risk factor
reflecting any material risks in this area and if material, a
discussion of foreign operations and sales in management`s
discussion
and analysis.
Most of our Web services are sold on a month-to-month basis, and
if
our customers either are...page 7
17. Explain why you are experiencing a high turnover rate in your
customer base. Here, or elsewhere as appropriate, discuss what
you
are doing to address this issue.
Our business depends in part on our ability to continue to provide
value-added Web services . . . page 9
18. We note your disclosure regarding certain service providers
that
enable you to provide your services. Please revise to quantify
what
you mean by "short notice" termination.
Accounting for acquisitions under generally accepted accounting
principles...page 11
19. Briefly disclose the amount of goodwill associated with the
Leads.com acquisition.
Use of Proceeds, page 19
20. You state that you "have not made any specific plans with
respect
to the use of the net proceeds of this offering." Have you
prepared
business plans to incur expenses or engage in activities that
could
not be funded with the cash flow you anticipate from continuing
operations? If so, it appears that you have a plan to use the
funds
from the offering, which you should more specifically disclose.
Please provide a detailed supplemental analysis and revise as
appropriate.
21. As a follow-up to the comment above, we note from the third
paragraph in this section that you expect to use the net proceeds
for
working capital and general corporate purposes; however, you then
describe specific uses such as:
* sales and marketing expenses;
* research and development expenses;
* capital expenditures; and
* acquisitions and investments in businesses, services, products
or
technologies complementary to your current business.
If you are not able to fund these expenses with currently
available
resources, they would be considered planned uses of proceeds that
you
should describe and quantify under "Use of proceeds." In this
regard, we note that your disclosure on page F-4 stating you
generated $293,000 in net income, but experienced a net loss
attributable to common stockholders of ($47,000) for the three
months
ended March 31, 2005. Utilizing bullet points rather than a
serial
list, please revise to quantify the amount of your proceeds
allocated
to each use. We note your disclosure on pages 26 and 40
describing
your intention to upgrade and extend your service offerings,
develop
new technologies, expand domestic and international activities,
add
additional sales personnel, website development staff,
professional
service and custom design resources.
Capitalization, page 20
22. Tell us why you have not included the E.B.O.Z. acquisition
shares
in the pro forma as adjusted column. We may have further comment
upon
completion of the information included.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, page 24
Overview, page 24
23. We note your disclosure throughout the prospectus emphasizing
the
importance of lead generation for new subscriber services from
entities such as Discover for which you have a strategic marketing
relationship. As a key performance indicator and operational goal
to
generate new and additional revenues, lead generation and more
importantly, lead conversion, actually converting from a lead to
becoming a paid subscriber, appears to be material to your overall
operations and a key to management`s ability to manage the
company,
increase your customer base and anticipate future trends with your
customers. Based on the importance you have placed on this key
indicator, revise your MD&A to disclose the lead conversion rate
for
leads provided to you from Discover, Network Solutions and IBM.
Further, please provide any additional performance metrics on
which
management relies to determine the direction of your finances and
operations. For guidance on key financial and non-financial
performance indicators, please refer to Sections III.A and
III.B.1.
of Release No. 33-8350 (December 29, 2003).
24. Based on your Results of Operations` disclosure on pages 31-
38,
it appears that since 2002, your subscription revenues increased
each
year while your other sources of revenues decreased as a
percentage
of total revenue. Please revise to provide management`s insight
regarding this trend. See Item 303(a)(3)(ii) of Regulation S-K.
25. We note your brief references throughout the prospectus and on
pages 72-73 regarding your recapitalization and issuance of a
significant number of shares of Series A and B convertible
redeemable
preferred stock. Consider including management`s insight into
your
recapitalization, issuance of the Series A and D convertible
redeemable preferred stock and impact on your operations in the
overview.
Revenue
Subscription Revenue, page 32
26. We note your risk factor disclosure on page 7 of a high
turnover
rate in your customer base while your subscription revenue
disclosure
on pages 32 and 33 shows subscriber growth in the latest year and
interim period ended March 31, 2005. In order to clarify and
disclose any trends within the various subscription offerings
please
revise your MD&A to address the customer base cancellations and
increases among your various subscription offerings. In this
regard,
disclose a quantification of your subscriber activity over the
three
year periods by type of subscription offering. Disclosure of
these
non-financial variables may be material to investors, and may
therefore be required.
27. You disclose throughout MD&A certain elements causing
increases
and decreases to revenues and expenses. For example, license
revenues increase because of the success of the NetObjects Fusion
version 8.0 release while subscription revenues increase because
of
outbound telesales staff increases or expansion of your
subscription
package. In these and other cases you do not clearly quantify the
effects of these causes. Please revise your MD&A to quantify the
changes and disclose whether they constitute any known trends that
are reasonably likely to materially impact future operations and
liquidity. See Item 303 of Regulation S-K.
28. We note your discussion of an increase in the predominant
source
of revenue: subscription revenue. We also note an increase in
cost
of revenue based on an overall increase in the number of
subscribers.
In order to provide a clearer picture of these changes in revenue,
in
addition to your gross margin disclosure, please consider
including
disclosure regarding the change in revenue and cost per average
subscriber in dollars. By including an average gross and cost per
subscriber, your disclosure may more easily demonstrate whether or
not you are benefiting from increased marketing and economies of
scale. Similarly, if not unduly burdensome, please revise your
disclosure to include a per subscriber subscription revenue and
cost
of subscription revenue measurement comparing fiscal year end 2003
and 2004 on pages 33 and 34 and year end 2002 and 2004 on page 35.
Operating Expenses, pages 34 and 36
29. We note disclosure here and on page F-12 regarding bad debt
expenses. Please revise to describe the nature of these bad debt
expenses and reconcile the changes in your discussion here with
the
table provided on F-12.
Liquidity and Capital Resources, page 39
30. Your discussion of operating cash flows is a recitation of
items
identified on the face of the statement of cash flows. This does
not
appear to contribute to an understanding of your cash flows,
rather
it repeats items that are readily determinable from the financial
statements. Revise to address the material changes in the
underlying
drivers. See Section IV.B.1 of SEC Release No. 33-8350 for
further
guidance.
Contractual Obligations, page 40
31. Please supplementally reconcile the disclosure regarding your
operating lease obligation disclosure on page 40 with that on page
F-
36.
Business, page 43
32. Please provide a brief overview of the general development of
Website Pros during the past five years. See Item 101(a) of
Regulation S-K. Please also consider discussing research and
development, if material. See Item 101(c)(1)(xi) of Regulation S-
K.
We note your brief discussion of research and development in
management`s discussion and analysis.
Strategic Marketing Relationships, page 53 and Third-Party
Providers,
page 55
33. Please revise to include the material terms of the agreements
you
have entered into with these entities, such as term and
termination
provisions. Please ensure that you set forth a materially
complete
description of your agreement with Discover Financial Services.
Intellectual Property, page 55
34. We note your statement that you "own the core technology" that
you use to provide many of your subscription services on page 55
under the caption, "Third parties." Yet based on your disclosure
on
pages 3, 12-13 and in this section, it appears you own no patents
and
protect yourself with a combination of agreements, procedures, and
copyright, trademark and trade secret laws. Please revise to
specifically disclose here that you hold no patents and
specifically
describe the importance and duration of the intellectual property
protections you do hold. For example, specify the type of
copyright
protection you hold including works made for hire, assignments or
licenses. We note your discuss owning your proprietary workflow
processes, but the precise type of "ownership" is unclear. Refer
to
Item 101(c)(1)(iv) of Regulation S-K.
35. Further, with a view toward disclosure, please tell us whether
you engage in the creation of joint works with your third party
developers and whether you utilize open source software in your
programming. If you hold only licenses to your products, please
provide the material terms of these licenses from third parties.
36. Please clarify the extent to which your products are
substantially dependent upon third-party software.
Facilities, page 56
37. Revise to include all material terms of your major
encumbrances,
or leases, on these properties, such as lease payments and terms.
See Item 102 of Regulation S-K.
Management, page 57
38. Please designate all directors who will serve as independent
directors. In this regard, we note that you have designated
Messrs.
Parekh, Still and Maudlin independent for certain committees.
39. Please revise to disclose your policy on making loans to
executive officers and directors. We note your provisions in
Article XIV of your bylaws regarding the ability of Website Pros
to
make loans to officers or other employees, including any officer
or
employee who is a director except as otherwise prohibited by
applicable law.
Board Committees, pages 59-60
40. We note your discussion that you expect that the composition
of
your audit committee will comply with the applicable requirements
of
the Sarbanes-Oxley Act of 2002 and rules and regulations of the
SEC
and Nasdaq at the time of completion of this offering. Since this
is
a firm commitment offering, please tell us why you are unable to
disclose that you will comply with these requirements upon
effectiveness. Further, tell us why you only expect your Board
committees will be able to comply with these important
requirements
rather than will comply.
41. Please revise to state your policy should there be a tie-vote
of
the audit committee between your two independent directors,
Messrs.
Maudlin and Lieberman. Similarly, please revise to describe how
you
will resolve a tie-vote of your compensation and nominating and
corporate governance committees. Alternatively, you may want to
clarify that the number of directors on various committees will be
expanded.
Executive Compensation, pages 62-63
42. Please ensure that your Option Grant Table uses the midpoint
of
the offering price range or the grant date valuation in order to
calculate the potential realizable value and value of unexercised
in-
the-money options. Refer to Interpretation J.17 of the 1997
Division
of Corporation Finance: Telephone Interpretations Manual, as well
as
Section IV.C of Release 34-32723.
Employment Agreements, page 63
43. We note that you will be filing your employment agreements
with
Messrs. Brown and Carney in a future amendment. Please ensure that
material terms are fully explained, including any provisions for
bonuses are explained, including performance goals and amounts.
Please describe the "other customary benefits and terms"
referenced
in your disclosure. In light of these agreements, consider
whether
your risk factor disclosure on page 12 should be modified.
Benefits Plans, pages 64-71
44. For each of the 1999 and 2005 equity incentive, 2005 employee
stock option, 2005 non-employee directors` stock option plans,
please
define the "specified types" of changes to your capital structure,
corporate transactions or control transactions that may materially
affect these plans and outstanding shares issued under these
plans.
We note upon the occurrence of one of these significant events,
the
outstanding options granted may be adjusted, fully accelerated or
assumed, continued or substituted by the surviving or acquiring
entity. For example, we note multiple defined terms for these
"events" in Section 2. of Exhibit 10.2.
45. Please revise to disclose when in April 2005 your shareholders
adopted the 2005 incentive plans. Further, please include the
material terms of all termination provisions including the
termination dates for all 2005 incentive, stock purchase and
option
plans other than the 2005 equity incentive plan.
1999 Equity Incentive Plan, page 64
46. We note upon the execution of the Underwriting Agreement, this
plan will terminate, but outstanding options will be governed by
the
terms of this agreement. Please describe whether this IPO will
constitute a change of control, change of capital structure or
significant corporate transaction.
2005 Equity Incentive Plan, page 64
47. Revise to describe the performance criteria the Plan
Administrator will use when determining who will receive and
amount
of compensation that person will receive under the stock purchase
award, stock bonus award and stock appreciation rights agreements.
Certain Relationships and Related Party Transactions, pages 72-73
48. Please revise to disclose the aggregate amount of
consideration
paid for transactions entered into in February 2002 and April
2005.
Further, revise to disclose how management determined the share
prices for each transaction. We note many of the counterparties
are
either executive officers or directors of the registrant. Refer to
Item 404(a) of Regulation S-K.
Principal and Selling Stockholders, pages 76-77
49. Please identify the natural persons who exercise sole/ shared
voting and/or dispositive powers over securities offered by the
Insight Partnerships along with Mr. Parekh and Crosspoint Venture
Partners. For guidance, please refer to Exchange Act Rule 13d-3
and
Interpretation I.60 of the July 1997 manual of publicly available
Division of Corporation Finance telephone interpretations.
50. Tell us whether any of the legal entities represented by
footnotes (2)-(4) that are selling stockholders are affiliates of
broker-dealers. If any of the selling stockholders are affiliates
of
a broker-dealer, clearly identify them as such and state in your
prospectus whether:
* the sellers purchased in the ordinary course of business and
* at the time of the purchase of the securities to be resold, the
sellers had no agreements or understandings, directly or
indirectly,
with any person to distribute the securities.
Description of Capital Stock, page 79
51. The description of capital stock in the text of your filing
should be materially complete, without qualifying in its entirety
to
the provisions of your amended and restated certificate of
incorporation and amended and restated bylaws you attach as
exhibits
to this registration statement. Accordingly, please revise the
second sentence from the introductory paragraph of this section.
United States Federal Income Tax Consequences to Non-United States
Holders, page 83
52. We note your somewhat lengthy description of dividend, gain on
disposition and backup withholding tax consequences to non-U.S.
investors. Please tell us whether you received a legal opinion on
this issue or why you believe you are qualified to make legal
conclusions as to U.S. federal income tax law.
Shares Eligible for Future Sale, page 86
53. Please disclose the circumstances under which Friedman,
Billings,
Ramsey & Co., Inc. will permit early release of shares subject to
lock-up agreements.
Underwriting, page 87
54. In paragraph two, please briefly specify the "other
conditions"
that must be satisfied in order for the underwriters to purchase
your
common stock.
55. We note your disclosure at the bottom of page 89 stating that
your underwriters may make available prospectuses in electronic
format. More specifically, please tell us whether FBR, Piper
Jaffray, RBC Capital Markets or any members of the underwriting
syndicate will engage in any electronic offer, sale or
distribution
of the shares and describe their procedures to us. If you become
aware of any additional members of the underwriting syndicate that
may engage in electronic offers, sales or distributions after you
respond to this comment, promptly supplement your response to
identify those members and provide us with a description of their
procedures. Briefly describe any electronic distribution in the
filing, and confirm, if true, that the procedures you will follow
with respect to any electronic distribution will be consistent
with
those previously described to the Office of Chief Counsel.
56. Tell us whether you or the underwriters have any arrangements
with a third party to host or access your preliminary prospectus
on
the Internet. If so, identify the party and the website, describe
the material terms of your agreement, and provide us with a copy
of
any written agreement. Provide us also with copies of all
information concerning Website Pros or prospectus that has
appeared
on their website. Again, if you subsequently enter into any such
arrangements, promptly supplement your response.
57. We note that on page 89 of the prospectus you state that up to
5%
percent of your shares of common stock may be reserved for sale
under
a directed share program to certain of your business associates.
Please define "business associates" and describe to us the
mechanics
of how and when these shares were or will be offered and sold to
investors in the directed share program for this offering. For
example, tell us how the prospective recipients and number of
reserved shares is determined. Tell us how and when the Company
and
underwriter notified or will notify the directed share investors,
including the types of communications used. Discuss the
procedures
these investors must follow in order to purchase the offered
securities, including how and when any communications are sent or
received or funds are received by the underwriters or you. How do
the procedures for the directed share program differ from the
procedures for the general offering to the public? Provide us
with
copies of all written communications with prospective purchasers
about the directed share program.
Where you can find more information, page 91
58. Please revise the first paragraph of this section that
qualifies
any references to contracts or any other documents in the
prospectus
as not necessarily complete. As you know, Rule 411(a) of
Regulation
C permits this type of qualification or incorporation by reference
only where a summary of a document is required to be included in
the
prospectus.
Financial Statements - Website Pros, Inc.
Consolidated Balance Sheets, page F-3
Redeemable convertible preferred stock
59. We note that you have classified your redeemable convertible
preferred stock in the Stockholders` equity section of your
balance
sheet. Your disclosure on page 41 under "Recently Adopted and
Recently Issued Accounting Standards" indicates that because your
preferred stock is not mandatorily redeemable, you believe it is
more
properly included in stockholders` equity than between liabilities
and stockholders` equity. Supplementally explain to us why you
believe such classification is appropriate and tell us how you
considered Rule 5.02.28 of Regulation S-X, EITF Topic D-98 and ASR
268.
60. Tell us why you have not presented an unaudited pro forma
consolidated balance sheet and statement of stockholders` equity
as
of March 31, 2005 to reflect the assumed conversion of your
convertible redeemable preferred stock. We may have further
comment.
Consolidated Statement of Operations, page F-4
61. Tell us how your classification of depreciation and
amortization
complies with SAB Topic 11B.
Note 1. The Company and Summary of Significant Accounting
Policies,
page F-7
Revenue Recognition
62. You indicate that subscription packages for hosting and
marketing
services for customized websites are sold separately from the
customized website. Supplementally tell us how you have
considered
paragraph 2 of EITF 00-21. We also note that customer support and
technical support services are provided for customized websites.
These appear to be multiple element arrangements. Tell us and
revise
your disclosure to identify all elements included in each type of
sales transaction and how you have considered EITF 00-21.
63. Pursuant to footnote 1 of SOP 81-1 percentage of completion
accounting is not the appropriate accounting for your professional
services. Revise your disclosure to indicate the correct
accounting,
such as a proportional performance model for recognizing revenue.
Tell us and disclose why labor hours incurred is an appropriate
measure to allocate revenue between reporting periods.
64. Tell us about any post contract support services (PCS) you
offer
to customer that license your software products. If PCS is
offered
tell us how you have considered paragraphs 9 and 10 of SOP 97-2
and
tell us how revenue from these services is recognized.
65. We note you consider delivery of licensed software to occur
when
shipped and when the end-user has been electronically provided
activation keys. Tell us if this provision of the key is within
the
terms of your arrangement with the customer or this is something
you
provide unilaterally.
66. We note you offer professional services which relate to
license
sales and website design. Please describe to us the factors you
consider in concluding whether services are essential to the
functionality of other elements of your arrangements. Please
provide
us with specific examples. Identify elements included in multi-
element arrangement and address the extent to which you have
established VSOE for each of the elements.
67. For any rights of returns to your customers or end users
address
how your accounting and disclosure complies with SFAS 48. We note
your disclosure of customer refunds on page 28.
68. Describe for us the payment terms you offer and the
relationship
of those terms to your software license term. Tell us how you
account
for revenues billed to third party end-user under your "Billing
Module" as disclosed on page 52. Describe any installment term
arrangements you offer and your related revenue recognition.
Provide
supplemental analysis of any payment terms or arrangements
involving
set-offs or termination charge reimbursements or concessions
associated with your normal payment terms. Describe any
concessions
you make to your customers and explain your related accounting.
Explain how your normal payment terms comply with the guidance in
paragraphs 27 through 29 of SOP 97-2.
69. Tell us how you account for customer cancellation of
subscriptions to your Web services. We note there is little or no
penalty from your risk factor disclosure on page 7.
70. Where you deal with thinly-capitalized resellers explain how
you
assess the collectibility of receivables.
71. Describe the acceptance clauses you use in determining whether
delivery has occurred. Tell us if after delivery testing and
acceptance are to take place prior to revenue recognition and if
you
have clear timescales for such procedures with trigger points of
acceptance.
72. We note that your deferred revenue is related to your
subscriptions, the majority of which are billed monthly as
disclosed
on page 25 in the third paragraph. Please explain why your
deferred
revenue balances for each of the three years ended December 31,
2004
have decreased as a proportion of the fiscal year`s Subscription
revenues. Describe and disclose any changes in billing or
collection
practices and policies over that three year period.
73. Where you revise your revenue recognition policy in response
to
the foregoing comments consider similar revision to your Critical
Accounting Policies disclosure on page 27.
Note 4. Acquisition of Assets from Innuity, Inc., page F-13
74. You indicate that the shares issued to acquire the assets of
Innuity, Inc. were valued at $0.10 based on management`s valuation
analysis. Supplementally tell us more about this analysis and the
methodology used to determine the $0.10 per share value.
Note 8. Stock Based Compensation Plans, page F-16
75. Supplementally provide us the following information in tabular
chronological order for stock option grants and other equity-
related
transactions for the two years ended December 31 , 2004 and
subsequent interim period:
* The type of equity related instrument;
* The date of grant/issuance;
* Description/name of option or equity holder;
* The reason for the grant or equity related issue;
* The number of options or equity instruments granted or issued;
* The exercise price or conversion price;
* The fair value of underlying shares of common stock;
* The total amount of compensation deferred, beneficial conversion
feature and expense recognized, reconciled to your financial
statement disclosures;
* The magnitude and timing of the amortization expense; and
* Reference the authoritative accounting guidance relied upon for
each non-option grant equity transaction.
Continue to provide us with updates to the requested information
for
all equity-related transactions subsequent to this request through
the effective date of the registration statement.
76. Tell us how you determined fair value of the underlying shares
of
common stock at each grant date. Where you have used valuation
methods or preferred and common stock transactions to determine
your
common stock fair value, explain why you believe these best
represent
fair value. Describe the parties to the transactions and their
relationship to you. Describe and disclose the material
assumptions
used in your valuations and why they are appropriate in light of
the
guidance in the AICPA Audit and Accounting Practice Aid Valuation
of
Privately-Held Company Equity Securities Issued as Compensation
(the
"Practice Aid"). For example, explain why you believe straight-
line
appreciation reflects an appropriate method of determining fair
value.
77. Highlight any transactions with unrelated party parties
believed
by management to be particularly strong evidence of an objective
fair
value per share determination. Discuss and quantify the impact on
your common stock fair value of events which occurred for the one-
year period prior to the registration statement`s filing. Your
response should clarify the reasons for any difference between the
fair value at the transaction date and the estimated IPO price
range.
Describe significant intervening events within the company and the
broader market that explain the significant changes in fair value
of
your common stock.
78. In addition, tell us your proposed IPO price, when you first
initiated discussions with underwriters and when the underwriters
first communicated their estimated price range for your stock.
79. Tell us how your disclosure complies with paragraphs 179 to
182
of the Practice Aid.
Note 17. Subsequent Events, page F-25
Series B Convertible Redeemable Preferred Stock
80. We note that in February 2005 you issued Series B Convertible
Redeemable Preferred Stock. Revise to include the disclosures
required by SFAS 129.
81. Provide your analysis of the significance of the E.B.O.Z.
acquisition pursuant to Rules 1-02 and 3.05 of Regulation S-X.
Financial Statements - Leads.com Inc.
Note 1. The Company and Summary of Significant Accounting
Policies,
page F-32
Revenue Recognition
82. We note that you record revenue from subscription services as
services are performed on daily basis over the service period. We
further note on page 51 you indicate that Leads.com customers
receive
a monthly report that tracks the number of impressions, clicks,
and
calls generated by the advertisements placed on their behalf.
Your
disclosure "as services are performed" seems overly general. Do
you
recognize revenue from these transactions as impressions are
delivered or click-through`s occur? Please advise and revise your
disclosure to specify when services are performed.
Note 2. Intangible Asset, page F-35
83. It appears that you are not amortizing the domain name you
acquired in August 2004. Supplementally tell us why you believe
that
the domain name should be deemed an intangible asset with an
indefinite useful life. Explain why you believe that no legal,
regulatory, contractual, competitive, economic, or other factors
could limit the useful life of these intangible assets.
Pro Forma Financial Statements, page F-40
84. The shares you issued to acquire Leads.com were valued at
$12.6
million, or approximately $1.08 per share. Supplementally tell us
and disclose how you determined the fair value of the shares
issued.
Tell us what valuation methods you used to determine the common
stock
fair value, tell us whether you used a third-party valuation
specialist and when the valuation was performed. Describe and
disclose the material assumptions used in your valuations.
Additionally, revise your disclosure and tell us how you
determined
the estimated fair value of the Leads.com options you assumed.
Reference the authoritative literature supporting your accounting.
85. Supplementally, explain how you complied with the provisions
of
EITF 01-03 in assigning value and determining the classification
of
the assumed liability related to deferred revenue in your
acquisition
of Leads.com.
86. You refer to the use of an independent appraisal and valuation
firm to determine the fair market value of the assets acquired in
the
Leads.com acquisition. When a reference to an independent
appraisal
or valuation is included in a filing in the 1933 Act environment,
you
should also disclose the name of the expert and include the
expert`s
consent with the filing. Refer to Rule 436(b) of Regulation C.
Alternatively, you may remove this reference. Please revise.
87. Tell us why you have not classified depreciation and
amortization
within cost of revenues for the year ended December 31, 2004 and
interim period ended March 31, 2005 pursuant to SAB Topic 11B.
Part II
Item 15. Recent Sales of Unregistered Securities, pages II-2-II-3
88. You indicate in (2) that in November 2003 all outstanding
options
with an exercise price greater than $0.40 per share were repriced
to
have an exercise price of $0.40 per share. Supplementally explain
how
you accounted for the repricing and tell us how you considered the
guidance in Question 11 of FIN 44.
89. Please revise paragraphs (17) and (19)-(20) to quantify the
dollar amount of non-cash "consideration." See Item 701(c) of
Regulation S-K.
90. Currently, you group transactions (3)-(20) together and state
that you relied on Section 4(2) and/or Regulation D and/or
Regulation
S. Revise to specify the section of the Securities Act or
Commission
rule under which exemption was claimed and briefly state the facts
relied upon to make the exemption available for each unregistered
sale listed in paragraphs (18)-(20). See Item 701(d) of
Regulation
S-K. With respect to 4(2) issuances, the purchasers must in fact
be
sophisticated with access to information or accredited.
Exhibits
91. We note from your filing that you market your products and
services partly through entities for which you have strategic
relationships listed on page 54 and those entities you utilize as
consultants and third-party providers and developers listed on
page
55. Based on your disclosure, it appears you may be substantially
dependent on at least some of these third parties for purposes of
Item 601(b)(10) of Regulation S-K. To the extent that you are
substantially dependent upon any party and you have a written
agreement with this party, please file the agreement as an exhibit
or
supplementally advise. To the extent that you have no long-term
contracts with these parties (as suggested in risk factors),
please
specifically address the nature of your agreements.
92. While we are able to locate your lease agreement with FLAGLER
Development Company for leased office space, we are unable to
locate
the one relating to your co-location facility in Jacksonville,
Florida upon which you appear to be substantially dependent. As
such,
please file this agreement or tell us why it is not required. See
Item 601(b)(10)(i)(B). Please set forth the material terms of
your
agreement, including, for example, the terms and material
termination
provisions. Consider whether your risk factor disclosure on any
risks associated with the co-location facility could be enhanced.
* * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Christine Davis at (202) 551-3408 or Craig
Wilson, Senior Assistant Chief Accountant, at (202) 551-3730 if
you
have questions regarding comments on the financial statements and
related matters. Please contact Neil Miller at (202) 551-3442 or
me
at (202) 551-3730 with any other questions.
Sincerely,
Barbara C. Jacobs
Assistant Director
cc: James F. Fulton, Jr., Esq.(via facsimile)
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Facsimile: (650) 849-7400
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Mr. David Brown
Website Pros, Inc.
May 27, 2005
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