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DEMAND MEDIA INC. (DMD)
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 02/24/2012
Filed Period 12/31/2011

Table of contents

  • Page 1
    DEMAND MEDIA INC. (DMD) 10-K Annual report pursuant to section 13 and 15(d) Filed on 02/24/2012 Filed Period 12/31/2011

  • Page 2
    ..., 2011 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-35048 DEMAND MEDIA, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation...

  • Page 3
    ... in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý 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...

  • Page 4
    ... $439 million (based upon the closing sale price of the common stock on that date on the New York Stock Exchange). As of February 23, 2012, there were 83,388,483 shares of the common stock, $0.0001 par value, outstanding. Documents Incorporated by Reference Part III of this Annual Report on Form 10...

  • Page 5
    ... Item 14 Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services 67...

  • Page 6
    ..." and similar terms include Demand Media, Inc. and its subsidiaries, unless the context indicates otherwise. "Demand Media," "eHow," "Cracked" and other trademarks of ours appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do...

  • Page 7
    ... domain name registration and offer value-added services to over 8,800 active resellers, including small businesses, large e-commerce websites, Internet service providers and web-hosting companies. • Our Content & Media service offering generates revenue primarily through the sale of advertising...

  • Page 8
    ...a proprietary set of solutions that we believe addresses the market challenges and unfulfilled needs of online consumers, freelance creative professionals, website publishers and advertisers. Our business is comprised of two distinct and complementary service offerings: Content & Media and Registrar...

  • Page 9
    ...), advertisers (large corporations, brand marketers and small businesses seeking access to our consumers), customers (third-party website publishers and brands who display our content on their websites, deploy our social media tools or use our domain registrar services and individuals who pay us...

  • Page 10
    ... 2012, according to comScore. In addition to the content and social media features provided through our platform, some of our websites also feature unique online and mobile applications. Users visit our sites through search engine referrals, direct navigation and social media referrals. Our websites...

  • Page 11
    ... reseller solution allows a reseller to quickly start selling our Registrar service offering products through their own website. We also provide domain name registration and related value-added services directly to consumers. The Internet Corporation for Assigned Names and Numbers ("ICANN") recently...

  • Page 12
    ... services that help keep domain owners' information private through our ID Protect service; web hosting plans for both Linux and Windows; and customizable email accounts that allow the customer to set up multiple mailboxes using a domain name. We have also developed a number of proprietary services...

  • Page 13
    ... the SEC. We make available free of charge in the investor relations section of our corporate website (http://ir.demandmedia.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after...

  • Page 14
    ...ad-serving platform to deliver advertisements to our developed websites, which arrangement expires in the third quarter of 2014, and have another revenue-sharing agreement with respect to revenue generated by our content posted on Google's YouTube, which expires in the fourth quarter of 2012. In the...

  • Page 15
    ... types of content in a cost-effective manner or that meets rapidly changing consumer demand in a timely manner, if at all. Any such failure to do so could adversely affect user and customer experiences and reduce traffic driven to our owned and operated websites and to our customer websites through...

  • Page 16
    ... on a cohort of content as the annual discount rate that, when applied to the advertising revenue, less certain direct ongoing costs, generated from the cohort over a period of time, produces an amount equal to the initial investment in that cohort. Our calculations are based on certain material...

  • Page 17
    ...and 2011, respectively, from advertising. One component of our platform that we use to generate advertiser interest in our content is our system of monetization tools, which is designed to match content with advertisements in a manner that maximizes revenue yield and end-user experience. Advertisers...

  • Page 18
    ... of our Content & Media service offering has been closely tied to the success of eHow, if eHow's performance falters it could have a material adverse effect on our business, financial condition, and operations. For the years ended December 31, 2010 and 2011, Demand Media generated approximately 25...

  • Page 19
    ... attractive to our advertisers or to drive traffic to our owned and operated websites and to our network of customer websites, we may incur substantial costs in procuring suitable replacement content, which could have a negative impact on our business, revenue and financial condition. We may not...

  • Page 20
    ... media tools allow websites to add feature-rich applications, such as user profiles, comments, forums, reviews, blogs, photo and video sharing, media galleries, groups and messaging offered through our social media application product suite. We also provide social media services by powering live...

  • Page 21
    .... We recently acquired a Spanish language content creation business platform located in Argentina. Operating internationally, where we have limited experience, exposes us to additional risks and operating costs. We cannot be certain that we will be successful in introducing or marketing our services...

  • Page 22
    ... the variety of services that they offer. These competitors include, among others, domain name registrars, website design firms, website hosting companies, Internet service providers, Internet portals and search engine companies, including GoDaddy, Network Solutions, Tucows, Microsoft and Yahoo...

  • Page 23
    ...an automated service that enables users to register domain names and populate websites with content. We do not monitor or review, nor does our accreditation agreement with ICANN require that we monitor or review, the appropriateness of the domain names we register for our customers or the content of...

  • Page 24
    ... 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 UDRP administered by ICANN or actions under the ACPA. Additionally, we display paid listings...

  • Page 25
    ... typically imposes a fee in association with the registration of each domain name. For example, VeriSign, the registry for .com, presently charges a $7.85 fee for each .com registration after a recently enacted 7% fee increase. ICANN charges a $0.18 fee for each domain name registered in the generic...

  • Page 26
    ... to generate revenue from traffic to our owned and operated websites and to our network of customer websites; failure of our content to generate sufficient or expected revenue during its estimated useful life to recover its unamortized creation costs, which may result in increased amortization...

  • Page 27
    ... of services sold in a particular period between our Registrar and our Content & Media service offerings; changes in our pricing policies or those of our competitors, changes in domain name fees charged to us by Internet registries or the Internet Corporation for Assigned Names and Numbers, or ICANN...

  • Page 28
    ... useful to our customers in both our Content & Media and Registrar service offerings. Our competitors are constantly developing innovations in content creation and distribution as well as in domain name registration and related services, such as web hosting, email and website creation solutions...

  • Page 29
    ... our operating results. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our business, revenue and financial condition. If the security measures for our systems are breached, or if our products or services are subject to attacks...

  • Page 30
    ... our technology infrastructure may be challenging to implement and manage, may take time to test and deploy, may cause us to incur substantial costs and may cause us to suffer data loss or delays or interruptions in service. For example, we have suffered a number of server outages at our data center...

  • Page 31
    ... visits our websites or certain pages of our customers' websites, we use technologies, including "cookies," to collect information related to the user, such as the user's Internet Protocol, or IP, address, demographic information, and history of the user's interactions with content or advertisements...

  • Page 32
    ... require us to pay significant damages or curtail our offerings. We cannot be certain that our internally-developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property...

  • Page 33
    ... based on our content, products and services or content generated by our users. We receive, process and store large amounts of personal data of users on our owned and operated websites and from our freelance creative professionals. Our privacy and data security policies govern the collection, use...

  • Page 34
    ...business, financial condition or results of operations. Many of the customers of our Content & Media and Registrar service offerings pay amounts owed to us using a credit card or debit card. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise...

  • Page 35
    ... common stock were sold in our initial public offering in January 2011 at a price of $17.00 per share, our closing stock price has ranged from $5.62 to $24.57 through February 23, 2012. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this Annual Report on Form 10...

  • Page 36
    ...a decrease in the trading price of our common stock. We recently announced a stock repurchase program approved by our board of directors whereby we are authorized to repurchase shares of our common stock. Such purchases may be limited, suspended, or terminated at any time without prior notice. There...

  • Page 37
    ...as a public company. Any failure by us to provide the required financial information in a timely reliable manner could materially and adversely impact our financial condition and the trading price of our securities. In addition, we may incur additional expenses and commitment of management's time in...

  • Page 38
    ...a method for displaying advertising on the Internet. In May 2011, the Company filed its response to the complaint, denying all liability, and is in the process of discussing a resolution with the plaintiff. The Company intends to vigorously defend its position. In addition, Demand Media from time to...

  • Page 39
    ... 12 of this Annual Report on Form 10K. Performance Graph The following performance graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing of Demand Media under the Securities Act of 1933, as amended, or the Exchange Act, except...

  • Page 40
    ... repurchase of our common stock during the quarter ended December 31, 2011: Period Total Number of Shares Purchased 609,905 448,583 825,708 1,884,196 (1) Average Price Paid per Share 7.01 7.13 7.24 7.14 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 609,905 448...

  • Page 41
    ... 19, 2011 to repurchase up to $25.0 million of our outstanding common stock as share price, market conditions and other factors warrant. In addition, as previously disclosed in a current report on Form 8-K filed on February 16, 2012, our Board of Directors approved a $25.0 million increase to this...

  • Page 42
    ... of the preferred stock conversion ratio. December 31, 2007 Consolidated Balance Sheet Data: Cash and cash equivalents and marketable securities Working capital Total assets Long term debt Capital lease obligations, long term Convertible preferred stock Total stockholders' equity (deficit) $ 47,365...

  • Page 43
    38

  • Page 44
    ... be useful to exclude certain non-cash charges because the amount of such expenses is the result of long-term investment decisions in previous periods rather than day-to-day operating decisions. For example, due to the long-lived nature of our media content, revenue generated from our content assets...

  • Page 45
    ...129) 20,958 47,174 28,856 2,099 - costs(4) $ 1,282 - 18,854 $ 32,443 $ 36,813 $ 62,005 $ 85,958 Represents revenue-sharing payments made to our network customers from advertising revenue generated from such customers' websites. Income (loss) from operations and amortization expense for the...

  • Page 46
    ... to our network of customer websites. Our Content & Media service offering also includes a number of websites primarily containing advertising listings, which we refer to as undeveloped websites. Our Registrar is the world's largest wholesale registrar of Internet domain names and the world's second...

  • Page 47
    ... service offering and through domain name registration subscriptions in our Registrar service offering. Our advertising revenue is primarily generated by advertising networks, which include both performance based Internet advertising, such as cost-per-click where an advertiser pays only when a user...

  • Page 48
    ... platform through a number of initiatives, including creating new content formats to meet rapidly changing consumer demand. Such changes may include increasing our investment in video and long-form content, increasing and expanding distribution of our content to our network of customer websites...

  • Page 49
    ... operated websites and our network of customer websites, include cost-per-click performance-based advertising; display advertisements where revenue is dependent upon the number of page views; and lead generating advertisements where revenue is dependent upon users registering for, or purchasing or...

  • Page 50
    ... new, renewed and transferred domain name registrations. In addition, our Registrar also generates revenue from the sale of other value-added services that are designed to help our customers easily build, enhance and protect their domains, including security services, e-mail accounts and web-hosting...

  • Page 51
    ... million in additional stock-based compensation related to awards granted to certain executive officers in prior years to acquire approximately 2.6 million of our shares that vested in that quarter upon meeting an average closing price of our stock for a stipulated period of time subsequent to our...

  • Page 52
    ...and allowance for doubtful accounts, capitalization and useful lives associated with our intangible assets, including our internal software and website development and content costs, income taxes, stock-based compensation and the recoverability of our goodwill and long-lived assets have the greatest...

  • Page 53
    ...-line basis over the membership term. We configure, host and maintain almost all of our platform's social media services for commercial customers. We earn revenues from our social media services through initial set-up fees, recurring management support fees, overage fees in excess of standard usage...

  • Page 54
    ... ratably as services are performed at contractual rates. Registrar Domain Name Registration Fees Registration fees charged to third parties in connection with new, renewed and transferred domain name registrations are recognized on a straight line basis over the registration term, which range...

  • Page 55
    30 to 60 days from the date the advertising services are delivered and billed; and • customers who syndicate the Company's content over their websites in exchange for a share of related advertising revenue. Accounts receivable from our customers are recorded at the revenue share as reported by our...

  • Page 56
    ... recent content cohorts, is somewhat limited. To date, certain content that we acquired in business combinations has generated cash flows from advertisements beyond a five year useful life. The acquisition of content, at scale, however, is a new and rapidly evolving model, and therefore we closely...

  • Page 57
    ... for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions, the fair value is estimated using the Black-Scholes option pricing model. The value...

  • Page 58
    ...have no history or expectation of paying cash dividends on our common stock. The forfeiture rate is established based on the historical average period of time that options were outstanding and adjusted for expected changes in future exercise patterns. Under the Company's Employee Stock Purchase Plan...

  • Page 59
    ... our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results. Year ended December 31, 2009 2010 (In thousands) 2011 Revenue Operating expenses(1)(2): Service costs (exclusive of amortization of intangible...

  • Page 60
    ... (1.5)% (2.1)% -% (0.3)% (0.1)% (0.4)% (4.4)% (1.3)% (5.7)% % Change Year Ended December 31, 2009 to 2010 2009 2010 (In thousands) 2011 2010 to 2011 Content & Media: Owned and operated websites Network of customer websites Total Content & Media Registrar Total revenue $ $ 73,204 34,513 107,717...

  • Page 61
    ... generate higher RPMs than display advertising that we deliver from our advertising networks, such as Google. Content & Media Revenue from Network of Customer Websites 2011 compared to 2010. Content & Media revenue from our network of customer websites for the year ended December 31, 2011 increased...

  • Page 62
    ...-based domain resellers transferring over their domain registrations in the latter half of 2010 as compared to 2009. Cost and Expenses Operating costs and expenses were as follows: % Change Year ended December 31, 2009 to 2010 2009 2010 (in thousands) 2011 2010 to 2011 Service costs (exclusive...

  • Page 63
    ... stock-based compensation expense, net of internal costs capitalized as internal software development, due to additional headcount to further develop our platform, our owned and operated websites, and to support and grow our Registrar product and service offerings. The remaining increase was...

  • Page 64
    ... the same period in 2010. The increase in other income (expense) net during the year ended December 31, 2011 was primarily a result of the change in the value of our preferred stock warrants which were recorded at fair value with changes in value recorded in earnings through the closing date of our...

  • Page 65
    ... million during the year ended December 31, 2010 to $22.7 million in the same period in 2011 now applies to both federal and state deferred tax assets. In addition, the tax increase was also impacted by movement in the company's state tax apportionment rates due to changes in state tax laws and the...

  • Page 66
    ...30, 2010 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 (in thousands, except per share data) Revenue: Content & Media: Owned and operated websites Network websites Total Content & Media Registrar Total revenue Operating expenses(1)(2) : Service costs (exclusive...

  • Page 67
    ... in our platform, company infrastructure and equipment for both service offerings and the net sales and purchases of our marketable securities. During the fourth quarter of 2011, we commenced an evaluation of changes to improve our content creation and distribution platform, through a number of...

  • Page 68
    ...offset in part by increases in accounts receivable, deferred registration costs and deposits with registries of $13.3 million. The increases in our deferred revenue and deferred registry fees were primarily due to growth in our Registrar service during the period. The increase in accrued expenses is...

  • Page 69
    ...in purchases of intangible assets and property and equipment, including internally developed software, was largely to support the growth of our business and infrastructure during these periods. Cash Flow from Financing Activities Year ended December 31, 2009, 2010 and 2011 Net cash provided by (used...

  • Page 70
    ...condition of our large advertising network providers, large direct advertisers and their agencies, large Registrar resellers and other large customers when we enter into or amend agreements with them and limit credit risk by collecting in advance when possible and setting and adjusting credit limits...

  • Page 71
    ... Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based on...

  • Page 72
    ... public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report due to a transition period for newly public companies. Item 9B. Other Information None. PART III Item 10. Directors, Executive...

  • Page 73
    ...'s Annual Report on Form 10-K filed with the SEC on March 1, 2011) Form of Demand Media, Inc. Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Company's Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on December 21, 2010...

  • Page 74
    ...SEC on January 3, 2010) Demand Media, Inc. 2006 Equity Incentive Plan Restricted Stock Purchase Agreement, between Demand Media, Inc. and Joanne Bradford, dated March 26, 2010 (incorporated by reference to Exhibit 10.30 to the Company's Amendment No. 5 to the Registration Statement on Form S-1 (File...

  • Page 75
    ... 6, 2010) Amendment Number 3 to Google Services Agreement, entered into as of September 1, 2011, between Google, Inc. and Demand Media, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011) Credit Agreement, dated as...

  • Page 76
    ... are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability...

  • Page 77
    ... 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. DEMAND MEDIA, INC. By: /s/ RICHARD M. ROSENBLATT Richard M. Rosenblatt Chairman and Chief Executive Officer Date: February 24, 2012 POWER OF...

  • Page 78
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Demand Media, Inc. Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Deficit) Consolidated Statements...

  • Page 79
    ...financial position of Demand Media, Inc. and its subsidiaries (the "Company") as of December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the...

  • Page 80
    Demand Media, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share amounts) December 31, December 31, 2010 2011 Assets Current assets Cash and cash equivalents Accounts receivable, net Prepaid expenses and other current assets Deferred registration costs Total current ...

  • Page 81
    The accompanying notes are an integral part of these consolidated financial statements. F-3

  • Page 82
    Demand Media, Inc. and Subsidiaries Consolidated Statements of Operations (In thousands, except per share amounts) Year ended December 31, 2009 2010 2011 Revenue Operating expenses Service costs...) Basic and diluted net loss per share Weighted average number of shares $ (4.78) 11,159 $ (2.86)...

  • Page 83
    ... Repurchase of restricted stock Stock-based compensation expense Unrealized loss on marketable securities Foreign currency translation adjustment Net loss Comprehensive loss Balance at December 31, 2009 Grant of restricted stock purchase rights Proceeds from exercise of stock options Income tax...

  • Page 84
    ...costs related to debt and equity financings Payments of withholding tax on net exercise of stock-based awards Net cash provided by (used in) financing activities Effect of foreign currency on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents, beginning of period...

  • Page 85
    F-6

  • Page 86
    ... its content creation studio, social media applications and a system of monetization tools designed to match content with advertisements in a manner that is optimized for revenue yield and end-user experience. Registrar The Company's Registrar service offering provides domain name registration and...

  • Page 87
    ... maturity of 90 days or less at the time of purchase to be cash equivalents. The Company considers funds transferred from its credit card service providers but not yet deposited into its bank accounts at the balance sheet dates, as funds in transit and these amounts are recorded as unrestricted cash...

  • Page 88
    ... membership term. The Company configures, hosts, and maintains its platform social media services under private-labeled versions of software for commercial customers. The Company earns revenue from its social media services through initial set-up fees, recurring management support fees, overage fees...

  • Page 89
    ... sale, net of payments to third parties since it is acting as an agent only. Service Costs Service costs consist primarily of fees paid to registries and ICANN associated with domain registrations, advertising revenue recognized by the Company and shared with its customers or partners as a result of...

  • Page 90
    ...balance sheet dates. Registry services accounts receivable is recorded at the amount of registration fees paid by the Company to a registry for all registrations placed on auto-renew status. Subsequent to the lapse of a prior registration period, a registrant either renews the applicable domain name...

  • Page 91
    ... The Company records renewal registration fees of website name intangible assets in deferred registration costs and amortizes the costs over the renewal registration period, which is included in service costs. Intangibles-Media Content The Company capitalizes the direct costs incurred to acquire its...

  • Page 92
    ... in traffic to eHow.com. the Company's largest website. The Company determined that the resulting decline in page views did not represent an indication of impairment of its Content & Media long-lived assets, including goodwill, based on an assessment of all relevant factors including increasing...

  • Page 93
    ... cost for an award that has a market condition is recognized as the requisite service period is fulfilled, even if the market condition is never satisfied. Stock-based awards issued to non-employees are accounted for at fair value determined using the Black-Scholes option-pricing model. Management...

  • Page 94
    ... reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date...

  • Page 95
    ..., receivables from domain name registries, registry deposits, accounts payable, accrued liabilities and customer deposits approximate fair value because of their short maturities. The Company's investments in marketable securities are recorded at fair value. Prior to the net exercise of the Series...

  • Page 96
    ... a reconciliation of the Company's liabilities measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2009, 2010 and 2011: Series C Preferred Stock Warrants Balance at December 31, 2008 Change in fair value included...

  • Page 97
    ... and annual periods beginning after December 15, 2011. Other than presentational changes, the Company does not anticipate a significant impact to the consolidated financial statements upon adoption in 2012. In September 2011, FASB issued amendments to its accounting guidance on testing goodwill...

  • Page 98
    ...$ 228,620 $ (126,506) December 31, 2011 $ 102,114 Gross carrying amount Accumulated amortization Net Weighted average useful life Owned website names Customer relationships Media content Technology Non-compete agreements Trade names Content publisher relationships $ 43,343 27,325 130,981...

  • Page 99
    ... from registries Accounts receivable, net Accrued expenses and other liabilities consisted of the following: $ $ 24,569 2,274 26,843 $ $ 29,695 2,970 32,665 December 31, 2010 December 31, 2011 Accrued payroll and related items Domain owners' royalties payable Commissions payable Customer...

  • Page 100
    ... certain payment arrangements with domain name registries as well as security agreements related to real estate leases. Revolving Line of Credit Agreements On August 4, 2011, the Company replaced its previous revolving credit facility by entering into a credit agreement (the "Credit Agreement") with...

  • Page 101
    ... of $1,575 over the term of the agreement. The contract can be terminated by either the Company or the counter party within 60 days prior to the end of each annual renewal period. The aggregate value of expired domain names purchased by the Company from inception through December 31, 2011 was $642...

  • Page 102
    ... Company's effective income tax rate is as follows: December 31, 2009 December 31, 2010 December 31, 2011 Expected income tax benefit (expense) at U.S. statutory rate Difference between U.S. and foreign taxes State tax (expense) benefit, net of federal taxes Non-deductible stock-based compensation...

  • Page 103
    ... Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382. Changes in the Company's equity structure and the acquisitions by the Company of eNom, Trails.com...

  • Page 104
    ...the transaction. In consideration for the services to be provided under the agreement, the Company agreed to pay RSS Graffiti $700 over a seven month period commencing May 2011, and received a two year warrant to purchase 10% of RSS Graffiti for an aggregate exercise price of $2,000. During the year...

  • Page 105
    ...with service and/or performance conditions was determined on the date of grant using the BlackScholes option pricing model with the following assumptions: Year ended December 31, 2009 Year ended December 31, 2010 Year ended December 31, 2011 Expected life (in years) Risk-free interest rate Expected...

  • Page 106
    ... 31, 2010 and 2011 and their exercise prices, respectively for all awards where the fair value of the Company's common stock exceeds the exercise price. Options expected to vest reflect an estimated forfeiture rate. During the year ended December 31, 2010, the Company granted certain executive-level...

  • Page 107
    ... Demand Media, Inc. 2010 Employee Stock Purchase Plan (the "ESPP"), which allows eligible employees to purchase, through payroll deductions, a limited amount of the Company's common stock at a 15% discount to the lower of market price as of the beginning or ending of each six-month purchase period...

  • Page 108
    ...owned and operated website on beauty and fashion, typeF.com, which was launched during the three months ended March 31, 2011. As consideration for Ms. Banks' services, the Company issued a fully-vested four-year warrant to purchase 375 shares of the Company's common stock at an exercise price of $12...

  • Page 109
    ... stock valued at $707, based on the Company's stock price on the acquisition date. On August 5, 2011, the Company acquired 100% of the membership units (including the profits interest) of RSS Graffiti, LLC, a creator of content sharing applications on Facebook, helping online publishers, brands and...

  • Page 110
    ... generated outside of the United States is not material for any of the periods presented. Revenue derived from the Company's Content & Media and Registrar Services is as follows Year ended December 31, 2009 2010 2011 Content & Media revenue Owned & operated Network Total Content & Media revenue...

  • Page 111
    ... of the Cost of Registered Names For the years ended December 31, 2009, 2010 and 2011, approximately 85%, 84% and 80%, respectively, of the payments for the cost of registered names and prepaid registration fees were made to a single domain name registry, which is accredited by ICANN to be...

  • Page 112
    ...Directors approved a plan to increase amounts authorized under the Company's stock repurchase plan by $25,000. Under the revised plan, the Company is authorized to repurchase up to $50,000 of its common stock from time to time in open market purchases or in negotiated transactions. During the period...

  • Page 113
    ...'s Annual Report on Form 10-K filed with the SEC on March 1, 2011) Form of Demand Media, Inc. Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Company's Amendment No. 4 to the Registration Statement on Form S-1 (File No. 333-168612) filed with the SEC on December 21, 2010...

  • Page 114
    ... Report on Form 10-Q filed with the SEC on August 12, 2011) Demand Media, Inc. 2010 Incentive Award Plan Stock Option Grant Notice and Stock Option Agreement, between Demand Media, Inc. and Joanne Bradford, dated August 3, 2010 (incorporated by reference to Exhibit 10.31 to the Company's Amendment...

  • Page 115
    ... 6, 2010) Amendment Number 3 to Google Services Agreement, entered into as of September 1, 2011, between Google, Inc. and Demand Media, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with the SEC on November 14, 2011) Credit Agreement, dated as...

  • Page 116
    ... non-revocation thereof, the Company will pay or provide to you (immediately following the expiration of the applicable revocation period contained therein) the following payments and benefits: a. Subsidized COBRA Premiums. Subject to and conditioned upon your valid and timely election to receive...

  • Page 117
    ... name of Executive and to be credited to Executive's Limited Individual Investor Account maintained with Bank of America Merrill Lynch net of any shares necessary to cover applicable tax withholding requirements. Stock Option Exercisability. The Company acknowledges that, notwithstanding the terms...

  • Page 118
    ... elections directly to the name and addresses provided to you under separate cover as part of the COBRA process. A package of information will be sent to you via mail within twenty-one (21) days of the Separation Date detailing the process for COBRA coverage during the Continuation Period, including...

  • Page 119
    ... so desires, and may sign Exhibit A to this Agreement to indicate waiver of this review period); and Executive was informed that he has seven (7) days following the date of execution of the Agreement in which to revoke the Agreement. Executive may revoke this Agreement by providing Courtney Montpas...

  • Page 120
    ...or more agreements with media companies or other third-parties concerning the financing, distribution, and/or monetization of such videos or the aggregation of multi-channel networks (collectively, the "Approved Activities"). The Company acknowledges and agrees that: (i) Executive's participation in...

  • Page 121
    ...be performed entirely within California. 17. If this Agreement is acceptable to you, please sign below and return the original to Courtney Montpas, the Company's Executive Vice President-People Operations. Sincerely, Demand Media, Inc. By: /s/ Richard Rosenblatt Richard Rosenblatt Chairman & Chief...

  • Page 122
    ... and forever discharge the "Releasees" hereunder, consisting of Demand Media, Inc., a Delaware corporation (the "Company") and each of its partners, subsidiaries, associates, affiliates, successors, heirs, assigns, agents, directors, officers, employees, representatives, lawyers, insurers, and all...

  • Page 123
    ... demands, damages, costs, expenses and attorneys' fees incurred by Releasees, or any of them, as the result of any such assignment or transfer or any rights or Claims under any such assignment or transfer. It is the intention of the parties that this indemnity does not require payment as a condition...

  • Page 124
    Larry Fitzgibbon

  • Page 125
    ... of Demand Media, Inc. Subsidiaries Acquire This Name, Inc. Afterdark Domains, Inc. Arab Internet Names, Inc. Asiadomains, Incorporated Big house Services, Inc. Dagnabit, Incorporated Demand Media (Netherlands) B.V. Demand Media International Holdings Limited Demand Media Europe Limited Demand Media...

  • Page 126
    ..., Incorporated eNom405, Incorporated eNom407, Incorporated eNom409, Incorporated eNom411, Incorporated eNom413, Incorporated eNom415, Incorporated eNom417, Incorporated eNom419, Incorporated eNom420, Incorporated eNom421, Incorporated eNom423, Incorporated eNom425, Incorporated eNom427, Incorporated...

  • Page 127

  • Page 128
    ... Mark Barker, Incorporated Mobile Name Services Incorporated Name Nelly Corporation Name Thread Corporation NameJet, LLC Nerd Names Corporation Nom Infinitum, Inc. One Putt, Inc. Out of the Box S.A. Pluck UK Limited Postal Domains, Incorporated Private Domains, Incorporated Retail Domains, Inc...

  • Page 129

  • Page 130
    SssassS, Incorporated The Internet Chef, Inc. Traffic Names, Incorporated Travel Domains, Incorporated Vedacore.com, Inc. Whiteglove Domains, Incorporated Whois Privacy Protection Services, Inc. Nevada Canada Nevada Nevada Nevada Nevada Nevada

  • Page 131
    Exhibit 23.1 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-172371) of Demand Media, Inc. of our report dated February 24, 2012 relating to the financial statements, which appears in this Form 10-K. /s/ ...

  • Page 132
    Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard M. Rosenblatt, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Demand Media, Inc.; Based on my knowledge, this report does not contain any untrue ...

  • Page 133
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Richard M. Rosenblatt Richard M. Rosenblatt Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: February 24...

  • Page 134
    ... TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Charles S. Hilliard, certify that: 1. 2. I have reviewed this Annual Report on Form 10-K of Demand Media, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary...

  • Page 135
    ... fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Charles S. Hilliard Charles S. Hilliard President and Chief Financial Officer (Principal Financial Officer) Date: February 24...

  • Page 136
    ...connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 of Demand Media, Inc. (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard M. Rosenblatt, Chief Executive Officer of the Company, certify, pursuant...

  • Page 137
    ...is not to be incorporated by reference into any filing of Demand Media, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such...