10-Q 1 g04082e10vq.htm WEB.COM WEB.COM
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-17932
Web.com, Inc.
(Exact name of registrant as specified in its charter)
     
Minnesota
(State or other jurisdiction
of incorporation or organization)
  41-1404301
(I.R.S. Employer
Identification No.)
303 Peachtree Center Avenue, Suite 500, Atlanta, GA 30303
(Address, including Zip Code, of principal executive offices)
(404) 260-2477
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o       Accelerated filer þ      Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The number of outstanding shares of the registrant’s Common Stock on October 31, 2006 was 16,733,750.
 
 

 


 


Table of Contents

PART I.- FINANCIAL INFORMATION
Item 1. Financial Statements
WEB.COM, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
                                 
    For the three months ended     For the nine months ended  
    September 30,     August 31,     September 30,     August 31,  
    2006     2005     2006     2005  
Revenues
  $ 12,348     $ 20,618     $ 36,663     $ 65,547  
 
                               
Operating costs and expenses:
                               
Network operating costs, exclusive of depreciation shown below*(1)
    2,174       5,642       6,827       17,218  
Sales and marketing, exclusive of depreciation shown below*
    3,600       4,469       10,085       14,537  
Technical support, exclusive of depreciation shown below*
    1,701       2,612       5,184       9,271  
General and administrative, exclusive of depreciation shown below*
    4,457       7,980       19,064       23,358  
Bad debt expense
    314       321       833       1,321  
Depreciation and amortization(1)
    1,014       4,370       4,373       15,362  
Restructuring costs
          950       66       2,616  
Impairment of investment in and advances to WebSource Media
                3,488        
Loss (Gain) on sale of accounts
    205       705       205       (1,210 )
Other expense (income), net
    (2 )     (4 )     (5 )     (28 )
 
                       
Total operating costs and expenses
    13,463       27,045       50,120       82,445  
Operating loss
    (1,115 )     (6,427 )     (13,457 )     (16,898 )
Interest income (expense), net
    227       181       736       395  
 
                       
Loss from continuing operations before income taxes
    (888 )     (6,246 )     (12,721 )     (16,503 )
Income tax benefit
    411       850       1,274       850  
 
                       
Loss from continuing operations
    (477 )     (5,396 )     (11,447 )     (15,653 )
Loss from discontinued operations, net of tax
    (117 )     (778 )     (362 )     (1,040 )
 
                       
Net loss
  $ (594 )   $ (6,174 )   $ (11,809 )   $ (16,693 )
 
                       
 
                               
Net loss per share, basic and diluted:
                               
Continuing operations
  $ (0.03 )   $ (0.34 )   $ (0.69 )   $ (0.98 )
Discontinued operations
    (0.01 )     (0.05 )     (0.02 )     (0.06 )
 
                       
 
  $ (0.04 )   $ (0.39 )   $ (0.71 )   $ (1.04 )
 
                       
 
                               
Number of shares used in per share calculation:
                               
Basic and diluted
    16,570       16,103       16,493       16,024  
 
                               
(*) Includes stock-based compensation as follows:
                               
Network operating costs
  $ 7     $     $ 19     $  
Sales and marketing
    64             118        
Technical support
    9             26        
General and administrative
    113             5,526       162  
 
                       
Total stock-based compensation
  $ 193     $     $ 5,689     $ 162  
 
                       
 
                               
(1) Depreciation and Amortization of intangible assets
                               
 
                       
Network operating costs
  $ 693     $ 2,243     $ 3,413     $ 8,483  
 
                       
The accompanying notes are an integral part of these consolidated financial statements

3


Table of Contents

WEB.COM, INC.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
                 
    As of  
    September 30,     December 31,  
    2006     2005  
Assets
               
Current assets
               
Cash and cash equivalents
  $ 16,294     $ 17,370  
Trade receivables, net of allowance for doubtful accounts
    1,526       1,812  
Other receivables
    615       1,180  
Other current assets
    1,473       2,026  
Restricted investments
    164       276  
 
           
Total current assets
    20,072       22,664  
 
               
Restricted investments
    7,914       9,015  
Securities, held-to-maturity
          53  
Property, plant and equipment, net
    4,301       6,303  
Goodwill
    986       921  
Intangibles, net
    5,566       6,568  
Other assets
    3,149       5,600  
 
           
Total assets
  $ 41,988     $ 51,124  
 
           
 
               
Liabilities and shareholders’ equity
               
Current liabilities
               
Accounts payable
  $ 1,847     $ 934  
Accrued expenses
    5,836       6,232  
Accrued restructuring charges
    2,584       4,416  
Current portion of long-term debt and capital lease obligations
    1,737       1,693  
Deferred revenue
    4,665       4,637  
 
           
Total current liabilities
    16,669       17,912  
 
               
Long-term debt and capital lease obligations
    2,443       3,850  
Deferred revenue, long-term
    226       206  
Other liabilities
    149       934  
 
           
Total liabilities
    19,487       22,902  
 
           
 
               
Commitments and contingencies (note 10)
           
 
               
Shareholders’ equity
               
Common stock, $.01 par value, authorized 26 and 21 million shares, issued and outstanding 16.7 and 16.6 million shares, respectively
    167       166  
Additional capital
    331,580       325,493  
Warrants
    2,128       2,128  
Note receivable from shareholder
    (735 )     (735 )
Accumulated deficit
    (310,639 )     (298,830 )
 
           
Total shareholders’ equity
    22,501       28,222  
 
               
 
           
Total liabilities and shareholders’ equity
  $ 41,988     $ 51,124  
 
           
The accompanying notes are an integral part of these consolidated financial statements

4


Table of Contents

WEB.COM, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
                 
    For the nine months ended  
    September 30, 2006     August 31, 2005  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net loss
  $ (11,809 )   $ (16,693 )
Adjustments to reconcile net loss to net cash used in operating activities from continuing operations:
               
Loss from discontinued operations
    362       1,039  
Depreciation and amortization
    4,373       15,363  
Bad debt expense
    833       1,321  
Gain on sale of assets
    (5 )     (28 )
Loss (Gain) on sale of accounts
    205       (1,210 )
Impairment of investment in and advances to WebSource Media
    3,488        
Stock-based compensation
    5,689       162  
Changes in operating assets and liabilities net of effect of acquisition:
               
Receivables
    18       (347 )
Other current assets
    553       (30 )
Accounts payable, accrued expenses and deferred revenue
    1,877       (1,414 )
 
           
Cash provided by (used in) operating activities of continuing operations
    1,830       (1,837 )
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Expenditures for property, plant, and equipment
    (1,364 )     (8,565 )
Payment for purchase of WebSource Media
    (3,261 )      
Release of funds from escrow account from sale of accounts
    2,247        
Net proceeds from sale of accounts
          2,517  
Payment of fees on sale of dedicated accounts
          (338 )
Purchase of held-to-maturity investment securities
          (50 )
Proceeds from sale of held-to-maturity investment securities
    53        
Purchases of auction rate securities
          (6,000 )
Proceeds from auction rate securities
          19,025  
Net change in restricted investments
    1,213       819  
Other
    (65 )      
 
           
Cash (used in) provided by investing activities of continuing operations
    (1,177 )     7,408  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Repayments of debt and capital lease obligations
    (1,363 )     (1,435 )
Proceeds from exercises of stock options
    400       609  
 
           
Cash used in financing activities of continuing operations
    (963 )     (826 )
 
           
 
               
Net cash (used in) provided by continuing operations
    (310 )     4,745  
 
           
Net cash used in discontinued operations (Revised — See note 2)
               
Operating cash flows
    (766 )     (986 )
Investing cash flows
           
Financing cash flows
           
 
           
Total cash flows used in discontinued operations
    (766 )     (986 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (1,076 )     3,759  
 
Cash and cash equivalents at beginning of period
    17,370       13,132  
 
           
Cash and cash equivalents at end of period
  $ 16,294     $ 16,891  
 
           
The accompanying notes are an integral part of these consolidated financial statements

5


Table of Contents

WEB.COM, INC.
Notes to Consolidated Financial Statements
1. General
Business — On March 20, 2006, Interland, Inc. announced that it had changed the company’s name to Web.com, Inc. (“Web.com”) in order to align itself more closely with its core web services business. The company has continued to trade on the Nasdaq Stock Market with the new stock symbol “WWWW”. Web.com, together with its subsidiaries (collectively the “Company”), is a leader in providing simple, yet powerful solutions for websites and web services. Web.com offers do-it-yourself and professional website design, website hosting, ecommerce, web marketing and email.
History of operating losses — The Company’s web services business has historically incurred net losses and losses from operations. The Company’s future operations are dependent upon its ability to achieve and sustain positive cash flow prior to the depletion of cash resources. There can be no assurance that Web.com’s continuing efforts to stabilize or increase its revenue will be successful and the Company will be able to continue as a going concern. If the Company is unable to successfully execute its business plan, it may require additional capital, which may not be available on suitable terms. Nonetheless, management believes it has adequate cash and liquid resources to fund operations and planned capital expenditures through at least the next 12 months.
Increase in authorized shares of common stock — At the Annual Meeting of Shareholders on March 31, 2006, the Shareholders of the Company approved the proposal of the Board of Directors to increase the number of the Company’s authorized shares by five million (5,000,000) shares from twenty one million (21,000,000) shares to twenty six million (26,000,000) shares.
2. Significant Accounting Policies
Interim Unaudited Financial Information — The accompanying consolidated financial statements include our results of operations for the three and nine-month periods ended September 30, 2006, our third quarter of fiscal 2006, and the most comparable reported quarter of the prior year, the three and nine-month periods ended August 31, 2005. In October 2005, the Board of Directors decided to change the Company’s fiscal year end from August 31 to December 31. We have presented the period ended August 31, 2005 as a prior year comparative to the current year period because our business is non-seasonal and, therefore, the data are comparable and recasting our prior year results of operations and related supporting schedules would not have been practicable nor cost justified. The accompanying unaudited consolidated financial statements for the three and nine-month periods ended September 30, 2006 and August 31, 2005, have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. In management’s opinion, these statements include all adjustments necessary for a fair statement of the results of the interim periods shown. All adjustments are of a normal recurring nature unless otherwise disclosed. Operating results for the three and nine-month periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the full fiscal year.
Basis of Presentation — This report on Form 10-Q (“10-Q”) for the nine-months ended September 30, 2006 should be read in conjunction with the Company’s Annual Report on Form 10-K (“10-K”) for the fiscal year ended August 31, 2005 and the Transition Period Report on Form 10-Q (“10-QT”) for the four months ended December 31, 2005. In October 2005 the Board of Directors decided to change the Company’s fiscal year end from August 31 to December 31. As a requirement of this year-end change, the Company reported results for the period September 1, 2005 through December 31, 2005 as a separate transition period. Audited financial statements for the transition period September 1, 2005 through December 31, 2005 will be included in the Company’s Annual Report on Form 10-K to be filed for the Company’s new fiscal year ending December 31, 2006, pursuant to the transition rules. The financial statements include the accounts of Web.com, Inc. and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated. The Company operates as one reportable segment.
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates.
Basic and diluted income (loss) per share — Basic income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per share is computed using the weighted average number of common shares outstanding and potential common shares outstanding when their effect is dilutive. Potential common shares result from the assumed exercise of outstanding stock options and warrants. Because the Company has reported a loss from continuing operations during fiscal years 2005, 2004 and 2003, the effect of these securities are excluded from the calculation of per share amounts for these years as their effect would be anti-dilutive. Employee stock options and warrants

6


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
of approximately 4.2 million and 3.5 million outstanding as of September 30, 2006 and August 31, 2005, respectively, have been excluded.
Stock-Based Compensation — Stock-based compensation is recorded in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), which requires measurement of all employee stock-based compensation awards using a fair-value method and the recording of such expense in the consolidated financial statements. The Company uses the Black-Scholes option-pricing model and recognizes compensation cost on a straight-line basis over the vesting periods for the awards (See Note 4).
Changes to the Statement of Cash Flows Relating to Discontinued Operations — In 2006, the Company has separately disclosed the operating, investing and financing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported on a combined basis as a single amount.
New Accounting Standards — In June 2006, the Financial Accounting Standards Board (“FASB”) issued its interpretation. FASB Interpretation No. 48 — Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 — Accounting for Income Taxes (“FIN 48”). FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values. The provisions of this Interpretation shall be applied to all tax positions upon initial adoption of the Interpretation and shall be effective for fiscal years beginning after December 15, 2006.
The Company has not yet adopted nor does it expect to early adopt the new interpretation. The impact that may result from the adoption of FIN 48 on the Company’s results of operations, financial position or its cash flows is not yet known.
3. other assets
On August 31, 2005 the company sold substantially all of its dedicated server assets and the customer accounts associated with those assets to Peer 1 Acquisition Corp. for a selling price of $14 million in cash. $11.4 million of the proceeds was received by the Company in September 2005 and $2.8 million was held in escrow pursuant to an Escrow Agreement signed at closing to secure the Company's indemnification obligations under the Asset Purchase Agreement. The Escrow Agreement was for a period of one year after closing. The amount of $2.4 million was released from the escrow amount in September 2006, $2.2 million to Web.com and $0.2 million to Peer 1. The remaining balance of $0.4 million will be released when all pending claims have been settled.
4. acquisition and impairment of WebSource Media, llc
On May 19, 2006 the Company acquired WebSource Media, LLC (“WebSource Media”) a privately held web services provider for small and medium-sized businesses. Except for assumed liabilities and debt payments, the acquisition was structured as an earn-out in which the owners of WebSource Media would earn payments based on reaching revenue and profitability goals. The majority of these payments were scheduled to occur only if the aforementioned goals were achieved over a three-year period. At closing the Company paid approximately $3.1 million for the acquisition and incurred closing costs of $0.1 million.
On June 12, 2006, approximately three weeks following the closing of the acquisition, the Federal Trade Commission (“FTC”) filed a sealed complaint in the U.S. District Court for the Southern District of Texas (the “FTC Litigation”) alleging that WebSource Media, among other defendants, had engaged in unfair and deceptive trade practices. Included among other defendants were the four former principals of WebSource Media, Marc Smith, Keith Hendrick, Steve Kennedy and Kathleen Smalley (collectively, the “Smith Defendants”), each of whom were alleged by the FTC to have engaged in a common enterprise with WebSource Media and other corporate defendants (not affiliated with the Company) to engage in unfair and deceptive trade practices.
In addition, on June 12, 2006, the FTC sought and obtained from the Court, an ex parte, Temporary Restraining Order and Order Appointing a Receiver over the assets of WebSource Media, its subsidiaries, the Smith Defendants, and the other corporate and individual defendants in that case. The FTC served its Complaint and the Court’s June 12th orders on WebSource Media and the Smith Defendants on June 13, 2006.
On June 21, 2006 the Court in the FTC litigation entered an Agreed Preliminary Injunction Order in which the Court vacated and superseded certain of its earlier orders and in which the court appointed a Receiver over the assets of WebSource Media, its subsidiaries, the Smith Defendants and the other corporate and individual defendants in the FTC Litigation. In addition, the Court authorized the Receiver to appoint the Company as the Receiver’s agent to take certain steps in managing the WebSource Media business.
In addition, on June 21, 2006, the Company filed suit against WebSource Media, the Smith Defendants and others, alleging breach of contract and other claims, and seeking to rescind the Company’s May 19, 2006 acquisition of WebSource Media (the “Rescission Litigation”). On June 21, 2006, the Company also issued a press release and filed a Current Report on Form 8-K, disclosing the actions of the court in the FTC Litigation with respect to the Agreed Preliminary Injunction Order and also disclosing the Company’s actions in filing the Rescission Litigation.

7


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
Pursuant to the Agreed Preliminary Injunction Order, the Company and its employees have only limited access to the assets and business of WebSource Media. The WebSource Media business is under the general control and supervision of the Court-appointed Receiver, and its business and operations have been substantially restricted. While the Company is, from time to time, requested by the Receiver to perform specific acts as part of the Receiver’s duty in managing the business, the Company does not have control over the WebSource Media assets or business activities.
Because the WebSource Media business was placed under the general control and supervision of a Court-appointed Receiver and its business and operations have been substantially restricted, the Company had to revise the accounting treatment and recorded the investment under the cost method deconsolidated by Accounting Research Bulletin No. 51. Since the Receiver took over control of the business, the account base has deteriorated significantly due to a combination of events such as the cancellation of billing services by some local exchange carriers (“LEC”), normal cancellation rates without corresponding sales and the possible invalidation of a number of accounts.
Our analysis of WebSource Media’s current customer base, the rate of deterioration of the business, along with the Receiver’s preliminary analysis have led us to conclude that there will be little or no value after the Receiver returns control of the business to the Company. The Company’s analysis estimated the discounted cash flows of the business based on the estimated number of accounts remaining at the time the Company would regain control of the business. Accordingly, the Company has determined that an impairment of the entire value of the investment is required. This impairment in the amount of $3.2 million was recorded to the income statement in the second quarter of fiscal 2006. Additionally and also under the same assessment, the Company impaired advances to WebSource Media of $0.3 and recorded them to the income statement in the second quarter of 2006. Those advances were made subsequent to Web.com’s acquisition of WebSource Media but before the Company’s awareness of the appointment of the Receiver pursuant to the arrangement contemplated in the May 19, 2006 merger agreement, and at this time we consider those advances uncollectible.
5. stock-based compensation
Effective September 1, 2005, the Company adopted SFAS No. 123(R). This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted using the modified prospective method of application, which requires us to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods. SFAS No. 123(R) also requires that excess tax benefits (none for the Company in the current period due to tax losses) related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.
With the adoption of SFAS No. 123(R), the Company is required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility, forfeiture rate and option life assumptions require a greater level of judgment which make them critical accounting estimates.
The Company uses an expected stock-price volatility assumption that is based on historical volatilities of the underlying stock which is obtained from public data sources. With regard to the weighted-average option life and forfeiture rate assumptions, the Company considers the behavior of past grants and in accordance with Staff Accounting Bulletin No. 107 (“SAB 107”), uses the safe-harbor calculations recommended when the Company’s historic trends of exercises are limited. During the three and nine months ended September 30, 2006, the Company granted 103,500 and 1,089,250 options respectively with a weighted average exercise price per share of $4.50 and $5.52 respectively, compared to 2,000,000 and 2,128,500 options for the three and nine months ended August 31, 2005 with a weighted average exercise price per share of $2.27 and $2.30 respectively.
The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions:

8


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
                 
    For the nine months ended
    September 30,   August 31,
    2006   2005
Dividend yield
    0.00 %       0.00 %
Expected volatility
    67.52% - 75.16 %       74.08 %
Risk-free interest rate
    4.33% - 5.24 %       4.14 %
Expected term (in years)
  5.8 years   5.8 years  
As of September 30, 2006, the Company had approximately 1.0 million shares of common stock reserved for future issuance under our stock option plans and warrants.
In August 2005, Mr. Jeff Stibel, the Company’s President and Chief Executive Officer, and Mr. Peter Delgrosso, Senior Vice President of Corporate Communications, were granted options to purchase 1,700,000 and 200,000 shares, respectively of the Company’s common stock. On March 31, 2006, the Compensation Committee of the Board of Directors approved the acceleration of the remaining 1.6 million unvested stock options of the 1.9 million granted in July 2005. This was done primarily to eliminate any future compensation expense the Company would otherwise recognize in its financial statements with respect to these options due to the Company’s implementation of the SFAS No. 123(R). The Company also granted an additional 677,500 stock options to its board of directors and management team that were fully vested upon their grant date. During the nine months ended September 30, 2006, 175,000 of these options were forfeited due to employee resignations. By accelerating the vesting of these options as described above, the Company effectively reduced its future reported compensation expense, before tax, by a significant amount over the remainder of the vesting periods. The compensation expense recognized during the nine months ended September 30, 2006 related to these options was $5.2 million.
The Company has five stock option plans, the 2006 Equity Incentive Plan (the “2006 Plan”), 2005 Equity Incentive Plan (the “2005 Plan”), the 2002 Equity Incentive Plan (the “2002 Plan”), the 2001 Equity Incentive Plan (the “2001 Plan”) and the 1995 Stock Option Plan (the “1995 Plan”), collectively referred to as the “Option Plans”. Options issued under these option plans have an option term of 10 years. Vesting periods range from 0 to 5 years. All awards outstanding under the 2002 Plan, 2001 Plan and 1995 Plan continue in accordance with their terms. At the Company’s Annual Meeting of Shareholders on March 31, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan (“the 2006 Plan”). The Company reserved 1,000,000 shares of common stock on March 31, 2006 for issuance under the 2006 Plan.
Prior to the Company’s adoption of SFAS No. 123(R), SFAS No. 123 required that the Company provide pro forma information regarding net earnings and net earnings per common share as if compensation cost for the Company’s stock-based awards had been determined in accordance with the fair value method prescribed therein. The Company had previously adopted the disclosure portion of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, “requiring quarterly SFAS No. 123 pro forma disclosure. The pro forma charge for compensation cost related to stock-based awards granted was recognized over the service period. For stock options, the service period represents the period of time between the date of grant and the date each option becomes exercisable without consideration of acceleration provisions.
The following table illustrates the effect on net earnings per common share as if the fair value method had been applied to all outstanding awards for the three and nine months ended August 31, 2005 (in thousands):

9


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
                 
    Three months ended     Nine months ended  
    August 31, 2005     August 31, 2005  
Net loss, as reported
  $ (6,174 )   $ (16,693 )
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
          162  
Deduct:
               
Total stock-based compensation expense determined under fair value method for all awards
    (616 )     (1,945 )
 
           
Pro forma net loss
  $ (6,790 )   $ (18,476 )
 
           
 
               
Loss per common share:
               
Net loss per common share — Basic and diluted, as reported
  $ (0.38 )   $ (1.04 )
 
           
Net loss per common share — Basic and diluted, pro forma
  $ 0.42     $ (1.15 )
 
           
 
               
Number of shares used in per share calculation:
               
Basic and diluted
    16,103       16,024  
A summary of the transactions during the nine months ended September 30, 2006 with respect to the Company’s Stock Option Plans follows:
                                 
            Weighted-   Aggregate   Weighted-Average
    Shares   Average   Intrinsic Value (1)   Contractual Life
    (000s)   Exercise Price   (000s)   Remaining in Years
 
Outstanding at December 31, 2005
    3,510     $ 4.19                  
Granted at fair value
    1,089     $ 5.52                  
Exercised
    (137 )   $ 3.41                  
Forfeited
    (254 )   $ 3.43                  
Expired
    (362 )   $ 11.23                  
Outstanding at September 30, 2006
    3,846     $ 3.96     $ 716       7.65  
Exercisable at September 30, 2006
    2,878     $ 4.08     $ 3,085       7.35  
 
(1)   The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option.
During the three and nine months ended September 30, 2006, a total of 101,998 and 137,298 options, with an intrinsic value of $138,700 and $171,680 respectively, were exercised, compared to an intrinsic value of $0.0 and $2,600 for the zero and 1,000 options exercised during the three and nine months ended August 31, 2005.
A summary of the status of the Company’s non-vested options as of September 30, 2006, and changes during the nine months ended September 30, 2006, is presented below:
                 
            Weighted-Average
    Shares   Grant-Date
Nonvested Shares   (000s)   Fair Value
 
Nonvested at January 1, 2006
    2,498     $ 1.73  
Granted
    1,089     $ 3.25  
Vested
    (2,550 )   $ 2.24  
     
Nonvested at September 30, 2006
    1,037     $ 2.08  
     
Total net stock-based compensation expense is attributable to the granting of and the remaining requisite service periods of stock options previously granted. Compensation expense attributable to net stock-based compensation in the three and nine months ended September 30, 2006 was $0.2 million and $5.7 million respectively, increasing both basic and diluted loss per share by $0.02 and $0.34 respectively. As of September 30, 2006, the total unrecognized compensation cost related to non-

10


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
vested stock awards was $2.3 million net of forfeitures and the related weighted-average period over which it is expected to be recognized is approximately 5 years.
6. Restructuring And Facility Exit Costs
2005 Plan
In 2005, in conjunction with the sale of its dedicated accounts and related assets and the assignment of all its data centers and in accordance with SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), the Company initiated a restructuring plan requiring a reduction of force, exiting a portion of the remaining office space and the termination of a contract. As of December 31, 2005, the company had a liability of $1.2 million on its books related to the 2005 restructuring plan. During the nine months ending September 30, 2006, the Company paid the final $0.1 million of severance, and $0.4 million related to lease expense. The remaining outstanding liability as of September 30, 2006 is $0.7 million related to the remaining lease obligation of its exited office space.
2001 Plan
During the fourth quarter of 2001, the Company approved and implemented a restructuring program in connection with its acquisition of Interland-Georgia. During the nine months ended September 30, 2006, the Company negotiated and paid a settlement of $0.7 million on the exited office space and paid $0.5 million in expenses on the subleased space. With this settlement completed an outstanding liability of $1.9 million is recorded for the remaining lease obligation, less sublease income, for the exited data center facility. The annual activity from inception was disclosed in the last Annual Report on Form 10-K and the most current Quarterly Report on Form 10-QT.
7. Purchase Business Combination Liabilities
In December 2005, the Company acquired the assets and accounts of Web Internet, LLC. In accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”, the Company recorded liabilities totaling $0.2 million related to this transaction. There is a balance of $0.1 million remaining at September 30, 2006.
In connection with the acquisition of Interland-Georgia in 2001, the Company accrued certain liabilities representing estimated costs of exiting certain facilities, termination of bandwidth contracts and involuntary termination of employees in accordance with EITF 95-3. During the nine months ended September 30, 2006 the Company continued to make its monthly lease payment and to collect offsetting rent from its subtenants equaling $0.4 million leaving an accrual balance of $0.4 million. These lease abandonment obligations are contractually scheduled to end in 2009.
8. Accrued Income Taxes
During the three-month period ended September 30, 2006, the Company released a $0.5 million income tax payable after reaching a resolution with the Internal Revenue Service (“IRS”). The Company recorded a $0.4 million income tax benefit and $0.1 million in other income for previously accrued interest and penalties. As of September 30, 2006 there were no remaining reserves for income taxes.
During the nine-month period ended September 30, 2006, the Company reached final resolutions with several federal and state taxing authorities regarding income taxes. The Company received refunds of $0.4 million from the IRS and released approximately $1.1 million of payables and reserves that were on its books. As a result, the Company recorded a $1.3 million income tax benefit and $0.1 million in other income for previously accrued interest and penalties.
9. Discontinued Operations
In 2001, the Company sold its Micron PC Systems business to GTG PC Holdings, LLC (“GTG PC”), an affiliate of the Gores Technology Group. The Company retained all liabilities of the PC Systems business not assumed by GTG PC and any contingent liabilities arising prior to the closing date. During the nine months ended September 30, 2006, the Company recognized a loss of $0.4 million. This loss consisted primarily of required legal fees in defense of Micron PC legal matters including a legal settlement paid to Integraph, offset by the reversal of previously accrued expenses where the statute of limitations has expired hence the Company has no further obligation to pay. The Company’s litigation pertaining to our discontinued Micron operations is ongoing and management expects that there will be additional defense costs throughout 2006 and thereafter.

11


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
10. Contingencies
In February 2003, the Company filed a lawsuit in Cobb County, Georgia against Mr. Gabriel Murphy, one of the former principals of Web.com’s subsidiary, CommuniTech.Net, Inc. (“Communitech”), which was acquired by the Company in February 2002. The Company’s lawsuit claims, among other things, that Mr. Murphy breached certain covenants under his employment agreement and also demands payment of two promissory notes made by Mr. Murphy (one of which was “non-recourse” while the other was “recourse”). In March 2004, Web.com foreclosed upon and retired the 273,526 shares of stock held as collateral and wrote off the $2,000,000 non-recourse promissory note, which had been carried as Stockholders’ Equity. The other $735,000 full recourse promissory note (also carried as Stockholders’ Equity) remains outstanding and continues to be a subject of the Cobb County litigation. Mr. Murphy has asserted various counterclaims in response to the Company’s suit.
In February 2003, Mr. Bryan Heitman, also a former principal of Web.com’s subsidiary Communitech, and Mr. Murphy filed a lawsuit against the Company, its former Chief Executive Officer, Mr. Joel Kocher, and Communitech, in Jackson County, Missouri claiming, among other things, that the Company acted unreasonably and thereby breached the Merger Agreement under which it acquired all of the stock of Communitech by failing to have the Form S-3 registration statement for their stock declared effective by the SEC on a timely basis and further claiming that the Company and/or Mr. Kocher made inaccurate disclosures in connection with the acquisition of Communitech. The complaint seeks compensatory and punitive damages in an unspecified amount. Web.com believes that these claims are without merit and will not have a material adverse effect on Web.com and is vigorously defending the claims.
The Company is the defendant in a case involving the Telephone Consumer Protection Act (“TCPA”) in state court in Allegheny County, Pennsylvania. A competing web hosting company, PairNetworks, filed this case in December 2001 as a putative class action, claiming that the Company’s distribution of a facsimile on November 15, 2001 to market domain name registration services violated the TCPA. Several years later, two additional plaintiffs joined in the action. The plaintiffs have conceded that all of the putative class members were customers of the Company. Federal Communications Commission regulations in effect at the time provided that the distribution of facsimiles to persons with whom the sender had an “established business relationship” did not amount to a violation of the TCPA. The Company believes that Congress expressly extended those regulations through the Junk Fax Act of 2005. Web.com has asked the court to deny class certification and a ruling on that motion is pending. If the court denies class certification, the Company’s potential exposure to damages, even if it were liable, should not exceed $1,500 for each of the three named plaintiffs. If the court grants class certification, however, the size of the class may exceed 50,000 members. Web.com has also asked the court for summary judgment and that motion has been briefed and argued to the court. If granted, that motion would result in the dismissal of all claims asserted by the named plaintiffs. Web.com believes that the plaintiffs’ claims are without merit, plans to continue to contest the matter vigorously and believes that no material adverse effect on the Company will occur as a result of this litigation.
On August 2, 2006 the company filed suit in the United States District Court for the Western District of Pennsylvania against Federal Insurance Company and Chubb Insurance Company of New Jersey. The suit seeks, among other things, a declaratory judgment that the two insurance companies owe the Company a defense and indemnification for costs associated with the PairNetworks litigation (see above). The suit also seeks recovery against the insurance companies for breach of contract, insurance company bad faith and breach of fiduciary duty.
The Company is defending a case tried in the United States District Court for the Southern District of Florida. This dispute arose out of the management of a co-located server by the Company’s predecessor, Worldwide Internet Publishing Corporation. The Company suffered a judgment of nominal damages of $1 in response to the Company’s pre-trial and post-trial motions. The case is on appeal.
In May 2004, Net Global Marketing filed suit against the Company and its predecessor, Dialtone, in state court in Los Angeles, California asserting claims for lost data. The Company had cancelled Net Global’s web hosting accounts in October 2002 and again in January 2003 as a result of complaints that the servers were being used to send spam, and has asserted counterclaims arising from these incidents. The Company removed the case to federal court and filed a motion to dismiss in favor of arbitration which was denied, a decision the Company has appealed to the Ninth Circuit Court of Appeals. The Company believes that, even if the litigation proceeds, it has adequate defenses including provisions in the contract with the plaintiff that shield Dialtone from damages for “erasure” and “loss of data” and generally prohibit recovery of the kind of damages sought by plaintiff. The Company believes that the plaintiff’s claims are without merit, plans to continue to contest the matter vigorously and believes that no material adverse effect on the Company will occur as a result of this litigation.

12


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
The Company has filed a lawsuit against Certain Underwriters at Lloyd’s of London (“Underwriters”) in state court in Idaho (see Interland, Inc. v. Certain Underwriters at Lloyd’s of London, Case No. CV OC 0506184 (District Court for the Fourth Judicial District of Idaho, County of Ada) (the “Lloyd’s Litigation”) seeking a declaration that the Directors, Officers and Company Liability Insurance Policy dated July 26, 2000 (the “Policy”) provides coverage for the Losses sustained by the Company as a result of the claims made in a class action alleging violations of the federal Fair Labor Standards Act. The Company has also asserted claims for breach of contract and bad faith refusal to make payments due under the Policy. The Company is seeking in excess of $1.7 million in damages in this litigation. To date, Underwriters have denied coverage under the Policy and have indicated that they will vigorously defend this suit. There can be no assurance that the Company will be able to recover the amounts claimed in this case.
On March 9, 2006, the Company received notice of the appeal of Vincent Salazar, an individual, of the December 13, 2005 dismissal of his lawsuit against the Company and its predecessor HostPro. Mr. Salazar had brought suit in state court in Los Angeles claiming that he was entitled to money as a result of his alleged involvement in brokering the Company’s acquisition of accounts from AT&T in January 2002. The Plaintiff claimed that he is due 20% of the revenue that the Company has received from the acquired accounts. The Company believes that the claims are without merit, plans to continue to contest the appeal vigorously and believes that no material adverse effect on the Company will occur as a result of this litigation.
On or about March 27, 2006, the Company received notice of a lawsuit filed against it and its predecessor, HostPro, by a former sales employee, Randy Nein, in state court in Los Angeles. Mr. Nein’s claims are related to those of Mr. Salazar, above. Mr. Nein claims that he is due a commission for his alleged involvement in brokering the Company’s acquisition of accounts from AT&T in January 2002. The Company believes that it has meritorious defenses, plans to contest the matter vigorously and believes that no material adverse effect on the Company will occur as a result of this litigation.
On June 12, 2006, the FTC filed a sealed action in the United States District Court for the Southern District of Texas against WebSource Media, LLC, nka WebSource Media, L.P., certain of its former members, Telsource International (a telemarketing firm that provided telemarketing services to WebSource Media) and certain of the principals of Telsource International. In addition, the FTC obtained a Temporary Restraining Order and Order Appointing a Temporary Receiver which, among other things, froze the assets of all of the defendants and appointed a receiver for WebSource Media and the other corporate defendants. In its complaint, the FTC alleged that WebSource Media and the other defendants were operated as a “common enterprise” for the purpose of inducing consumers to purchase websites from WebSource Media using “unfair and deceptive” trade practices sometimes known as “cramming.” On June 21, the Court issued an Agreed Preliminary Injunction Order appointing the Company as an agent for the Receiver. Pursuant to this Order, the Company has acted on behalf of the Receiver in certain respects with respect to the WebSource Media business. Discovery and other proceedings in this litigation have been stayed temporarily during the receivership period.
Web.com is not a defendant in the FTC litigation. Prior to learning of the FTC litigation, Web.com was not aware of any pending FTC investigation into WebSource Media and was not aware of the allegations of unfair and deceptive business practices that were made in the FTC litigation. At this time Web.com is unable to determine what liability, if any, WebSource Media will have in connection with the FTC litigation. Because Web.com is not a party to the FTC litigation, Web.com does not believe that it will have any material liability in connection with the FTC litigation against WebSource Media.
On June 21, 2006 the Company filed a Complaint in the U.S. District Court for the Northern District of Georgia against the former members of WebSource Media, LLC, seeking damages for fraud, fraudulent inducement and breach of contract, as well as rescission of the merger agreement entered into on May 19, 2006. In the Complaint the Company has alleged that the members of WebSource Media misrepresented material information and failed to disclose material information to it during the due diligence process. The Company is seeking damages, including expenses related to the acquisition, attorney fees and rescission of the merger agreement. The outcome of litigation cannot be assured and it is uncertain whether the Company will be able to recover the amounts claimed in this case.
The Smith Defendants (defined above) have also filed suit against Web.com in state court in Harris County, Texas, claiming to be owed earn-out compensation under the May 19, 2006 Merger Agreement. The Company has filed a motion to remove the matter to the U.S. District Court for the Southern District of Texas. The Company believes that it has meritorious defenses, plans to contest the matter vigorously and believes that no material adverse effect on the Company will occur as a result of this litigation.

13


Table of Contents

Web.com, Inc.
Notes to Consolidated Financial Statements (continued)
On June 19, 2006, the Company filed suit in the United States District Court for the Northern District of Georgia against The Go Daddy Group, Inc. The Company is seeking damages, a permanent injunction and attorney fees related to infringement of four of the Company’s patents. There can be no assurance that the Company will be able to recover the amounts claimed in this case.
Periodically, the Company is made aware that technology it has used may have infringed on intellectual property rights held by others. The Company evaluates all such claims and, if necessary and appropriate, obtains licenses for the use of such technology. If the Company or its suppliers are unable to obtain licenses necessary to use intellectual property in the applicable products or processes, it may be forced to defend legal actions taken against it relating to allegedly protected technology. The Company evaluates all such claims and accrues a liability for the estimated costs of settlement or adjudication of claims when appropriate.
The Company is also a defendant in a number of other lawsuits seeking lesser amounts, and which the Company regards as unlikely to result in any material payment. The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation, or the reasonableness of its estimates and reserves, the Company’s cash balances could nonetheless be materially affected by an adverse judgment. In accordance with SFAS No. 5 “Accounting for Contingencies,” the Company believes it has adequately reserved for the contingencies arising from the above legal matters where an unfavorable outcome is deemed to be probable and the loss amount can be reasonably estimated. As such, the Company does not believe that the anticipated outcome of the aforementioned proceedings will have a materially adverse impact on its results of operations, its financial condition or its cash flows.

14


Table of Contents

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Statements contained in this Form 10-Q that are not purely historical are forward-looking statements and are being provided in reliance upon the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “could,” ‘would,” “potential,” ‘continue,” and similar expressions, including variations or negatives of these words, identify forward-looking statements. These forward-looking statements include but are not limited to statements regarding Web.com’s expectations of its future liquidity needs, its expectations regarding its future operating results including stabilization of revenues and costs, its expectations regarding increasing its revenue levels and branding its product and service offerings, and the actions the Company expects to take in order to maintain its existing customers and expand its operations, distribution reach, and customer base. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. All forward-looking statements are made as of the date hereof and are based on current management expectations, estimates, projections, beliefs and assumptions, and information available to it as of such date. The Company assumes no obligation to update any forward-looking statement. It is important to note that actual results could differ materially and adversely from historical results or those contemplated in the forward-looking statements. Forward-looking statements are not guarantees of future results and involve a number of risks and uncertainties, and include risks associated with the Company’s target markets and risks pertaining to our ability to successfully integrate the operations and personnel of the recent acquisitions. Factors that could cause actual results to differ materially from expected results are identified in “Risk Factors” below, and in the Company’s Annual Report on Form 10-K for the year ended August 31, 2005 and in the Company’s other filings with the Securities and Exchange Commission. All quarterly references are to the Company’s fiscal periods ended September 30, 2006, or August 31, 2005, unless otherwise indicated. All annual references are on a fiscal August 31st year-end basis, unless otherwise indicated. All tabular dollar amounts are stated in thousands.
Overview
Web.com, Inc. (NASDAQ: WWWW) is a leading destination for simple yet powerful solutions for websites and web services. Web.com offers do-it-yourself and professional website design, website hosting, ecommerce, web marketing and email. Since 1995, Web.com has been helping individuals and small businesses leverage the power of the Internet to build a web presence. In fact, more than four million websites have been built or hosted using Web.com proprietary tools, services and patented technology.
Web.com understands that people want to leverage the power of the Internet to express themselves or to grow their business, but typically don’t have the time, resources or technical know-how to create, manage and promote a successful website. To address the market’s growing demands, Web.com offers a virtual one-stop-shop of simple, feature-rich web tools and services including do-it-yourself and professional website design, website hosting, ecommerce, web marketing and email. As one of the longest-standing leaders in the website hosting industry, Web.com offers powerful, proprietary, point-and-click technologies and expert support professionals to ensure simplicity and ease-of-use at every step of the process
The Board of Directors recruited Jeff Stibel to join the company as President and Chief Executive Officer in August 2005. Subsequent to August 2005, the company’s senior management team developed a three-pronged business strategy for the company, consisting of stabilization, diversification and growth. One of the first steps in implementing this strategy was the Company’s decision to focus on offering products and services utilizing shared hosting only (multiple users sharing a server) and ceasing to offer the products and services requiring dedicated hosting (one user on one server). Consequently, in August 2005, the Company sold the dedicated server assets to an unrelated third party.
By shifting to a business that requires no incremental capital expenditures for the addition of new customers (shared hosting), from a business that requires minimal incremental expense for each new customer (dedicated hosting), the Company should be able to recognize significant cost savings over time and rationalize the existing infrastructure in a cost-efficient way. A major goal of the Company is to create a scalable web services business model that is customer-focused and drives revenue growth.

15


Table of Contents

Critical Accounting Policies and Estimates
The accompanying discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments routinely require adjustments. We are required to make estimates and judgments in many areas, the useful lives of long-lived assets such as property and equipment and potential losses from contingencies and litigation. We believe the policies disclosed are the most critical to our financial statements because their application places the most significant demands on management’s judgments. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors.
We believe there have been no significant changes during the three months ended September 30, 2006 to the items that we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations in our 2005 Form 10-K, except as noted below.
Stock-Based Compensation Expense
We account for stock-based compensation in accordance with the provisions of SFAS 123R. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is estimated at grant date based on the value of the award and is recognized as expense on a straight line basis over the vesting period. Determining the appropriate fair value model and calculating the fair value of stock-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rates and the expected awards to be forfeited.
Recent development
In July 2006, the Company entered into a non-exclusive license agreement with Hostopia.com, Inc (“Hostopia”) that grants Hostopia rights to two of Web.com’s patents over five years on a non-transferable basis. The license agreement states that Hostopia will pay Web.com a royalty equal to 10% of Hostopia’s gross U.S retail revenues for five years (estimated using a trailing run rate). The royalty was due in full at signing. The companies have also agreed to a mutual covenant not to sue for patent infringement that will continue until the expiration of the last to expire of either party’s patents, including patents issued in response to the pending patent applications of either party.
The Company is in discussions with other companies with regard to the licensing of its patents. However, there can be no guarantee that any of these discussions will result in future revenues.
Shareholder Rights Plan
On August 7, 2006 the Board of Directors adopted a shareholder rights plan, which was entered into with the Rights Agent on August 4, 2006. The primary purpose of the shareholder rights plan is to preserve the Company’s net operating loss carryforwards, or “NOLs,” for federal income tax purposes. NOLs are past losses that a corporation can use to reduce future taxable income. As of the beginning of 2006, the Company had NOLs of approximately $300 million.
Until the Company’s market capitalization increases, Web.com’s future use of these NOLs could be substantially limited or eliminated in the event of an “ownership change,” as defined under Section 382 of the Internal Revenue Code. In general, a company would experience an ownership change for this purpose if holders of at least 5% of the outstanding shares of common stock increase their aggregate ownership interest in the company over a three-year testing period by more than 50%.
As part of the adoption of the rights plan, the Company’s Board of Directors declared a dividend of one right for each share of Common Stock held of record as of the close of business on August 15, 2006. The rights may cause substantial dilution to a person or group that attempts to acquire 4.99% or greater of Web.com’s Common Stock on terms not approved by the Board of Directors. Acquisitions of the Company’s Common Stock that would otherwise trigger the rights under the terms of the plan are permitted where the Board of Directors has determined, prior to consummation, that the transaction is fair to and in the best interests of the Company’s shareholders.

16


Table of Contents

The plan will automatically expire on July 23, 2007, unless earlier terminated, redeemed, exchanged or amended by the Board of Directors.
Key Metrics
As of September 30, 2006 the Company had approximately 152,000 paid hosting subscribers compared to approximately 148,000 subscribers as of June 30, 2006. This increase is entirely due to net organic growth of approximately four thousand accounts.
Average Monthly Customer Churn (“Churn”) was 2.6% and 2.3% for the quarters ended September 30, 2006 and June 30, 2006, respectively. Churn is calculated as the number of subscribers cancelled during the period divided by the sum of the number of subscribers at the beginning of the period plus the gross number of subscribers added during the period, divided by the number of months in the period.
Subscriber Acquisition Cost (“SAC”) was $89 and $108 for the quarters ended September 30, 2006 and June 30, 2006, respectively. Subscriber Acquisition Cost is calculated as the cost of advertising and marketing expenditures, calculated in accordance with GAAP, divided by gross subscriber additions other than through acquisitions during the period.
The Company’s Average Revenue Per User (“ARPU”) was $24.78 and $24.94 for the quarters ended September 30, 2006 and June 30, 2006, respectively. ARPU is calculated using the GAAP Hosting revenue for the quarter reported divided by the average number of subscribers for the period.
The Company’s consolidated financial information presents the net effect of discontinued operations separate from the results of the Company’s continuing operations.
Results Of Continuing Operations
Comparison of the Three Months and Nine Months Ended September 30, 2006 and August 31, 2005
The loss from continuing operations decreased $4.9 million, or 91.2%, from $5.4 million to $0.5 million for the three months ended September 30, 2006 as compared to the three months ended August 31, 2005. This decrease is mainly attributable to the decrease in operating costs and expenses due to the sale of the dedicated server assets in August 2005.
The loss from continuing operations decreased $4.2 million, or 26.9%, to $11.4 million for the nine months ended September 30, 2006 from $15.7 million for the nine months ended August 31, 2005. This decrease is mainly attributable to the decrease in operating costs and expenses due to the sale of dedicated server assets in August 2005.
As a result, the basic and diluted loss per share from continuing operations decreased $0.31 per share, or 91.2%, to $0.03, for the three months ended September 30, 2006 as compared to the three months ended August 31, 2005, and decreased $0.29 per share, or 29.6%, to $0.69 for the nine months ended September 30, 2006 when compared to the nine months ended August 31, 2005.
Revenues
Total revenues decreased $8.3 million, or 40.1%, for the three months ended September 30, 2006 as compared to the three months ended August 31, 2005 primarily as a result of the sale of the dedicated assets in August 2005. Total revenues decreased $28.9 million, or 44.1% for the nine months ended September 30, 2006 when compared to the nine months ended August 31, 2005. Revenue decline year over year was primarily due to the sale of dedicated server assets in August 2005.
The following table summarizes revenues for the periods indicated:
                                 
    For the three months ended     For the nine months ended  
    September 30,     August 31,     September 30,     August 31,  
    2006     2005     2006     2005  
Hosting revenue
  $ 11,130     $ 19,762     $ 34,192     $ 62,798  
Other revenue
    1,218       856       2,471       2,749  
 
                       
Total revenue
  $ 12,348     $ 20,618     $ 36,663     $ 65,547  
 
                       

17


Table of Contents

When compared to the three and nine months ended August 31, 2005, hosting revenues decreased $8.6 million, or 43.7%, and $29.1 million or 46.3%, respectively, for the three and nine months ended September 30, 2006. Hosting revenues are comprised of shared hosting services and domain name registrations. The significant decline in hosting revenues is primarily attributable to the sale in May 2005 of 32,000 shared hosting accounts who purchased shared hosting services under the Hostcentric brand. Additionally, in August 2005, Web.com sold approximately 7,200 dedicated web server accounts to an unrelated buyer. The combined sales of accounts and account cancellations, net of new customers obtained through sales and marketing activities and the acquisition of the Web.com domain name and related hosting assets from Web Internet LLC in December 2005 (the “WILLC Acquisition”), resulted in the decrease mentioned above. Account cancellations occur as a result of any of the following reasons: a) customer action; b) termination by the Company for non-payment; or c) termination by the Company as a result of a decision to no longer provide a particular service.
Other revenues are primarily comprised of license fees, bandwidth transfer overage billings, co-location services and Web-based business solution services. Other revenues increased $0.4 million or 42.3% for the three months ended September 30, 2006 as compared to the three months ended August 31, 2005 primarily as a result of a one time billing of license fees of $0.7 million. Other revenues decreased $0.3 million, or 10.1%, for the nine months ended September 30, 2006, when compared to the nine-month periods ended August 31, 2005. The decline in other revenues for the nine months ended September 30, 2006 compared to the nine months ended August 31, 2005 is primarily attributable to the sales of dedicated hosting accounts and the related non-hosting revenues such as bandwidth transfer overage billings and co-location services.
Operating Costs and Expenses
The following table summarizes expenses for the periods indicated:
                                 
    For the three months ended   For the nine months ended
    September 30,   August 31,   September 30,   August 31,
    2006   2005   2006   2005
Network operating costs, exclusive of depreciation shown below
    2,174       5,642       6,827       17,218  
Sales and marketing, exclusive of depreciation shown below
    3,600       4,469       10,085       14,537  
Technical support, exclusive of depreciation shown below
    1,701       2,612       5,184       9,271  
General and administrative, exclusive of depreciation shown below
    4,457       7,980       19,064       23,358  
Bad debt expense
    314       321       833       1,321  
Depreciation and amortization
    1,014       4,370       4,373       15,362  
Restructuring costs
          950       66       2,616  
Impairment of investment in and advances to WebSource Media
                3,488        
Gain on sale of accounts
    205       705       205       (1,210 )
Other expense (income), net
    (2 )     (4 )     (5 )     (28 )
Network Operating Costs
Network operating costs were $2.2 million for the three months ended September 30, 2006, compared to $5.6 million for the three months ended August 31, 2005. This decrease of $3.5 million, or 61.5%, is primarily attributable to a $1.8 million reduction in labor costs, a $0.6 million decrease in bandwidth connectivity costs, a $0.9 million reduction in software and services fees and a $0.2 million reduction in occupancy costs. All of these reductions were a direct result of the sale of the Hostcentric accounts and the dedicated hosting assets.
For the nine months ended September 30, 2006, network operating expenses were $6.8 million, compared to $17.2 million for the nine months ended August 31, 2005. This decrease of $10.4 million, or 60.3% is primarily attributable to the same cost reductions from the sale of the Hostcentric accounts and the dedicated hosting assets noted in the quarter comparison above, with reductions in labor costs of $5.2 million, a decrease of $2.7 million in bandwidth costs, a reduction of $2.1 million in software and service fees, a decrease of $0.8 million in repairs and maintenance, and a reduction of $0.7 million in rent expenses.
Sales and Marketing
Sales and marketing expenses were $3.6 million for the three months ended September 30, 2006, compared to $4.5 million for the three months ended August 31, 2005. This decrease of $0.9 million, or 19.4%, is primarily due to a decrease in labor costs of $0.1 million, a reduction of $0.2 million in sales commission and a reduction in advertising costs of $0.4 million

18


Table of Contents

All these reductions are related to reduced sales and marketing activities resulting from the disposition of the dedicated accounts in 2005. During the quarter ended September 30, 2006, the Company spent $1.5 million on media advertising.
For the nine months ended September 30, 2006, sales and marketing expenses were $10.1 million compared to $14.5 million for the nine months ended August 31, 2005. This decrease of $4.5 million, or 30.6%, is mainly caused by a $0.4 million reduction in labor costs, a $0.9 million reduction in sales commissions, and a $3.0 million decrease in advertising costs, due to the same reasons stated in the quarterly comparison above.
As a percentage of revenue, sales and marketing expenses were 29.2% and 27.5% for the three and nine months ended September 30, 2006, respectively, as compared to 21.7% and 22.2% for the three and nine months ended August 31, 2005.
Technical Support
Technical support expenses were $1.7 million for the three months ended September 30, 2006, compared to $2.6 million for the three months ended August 31, 2005. The overall decrease of $0.9 million, or 34.9%, is primarily related to the sale of the Company’s dedicated hosting business and related support staff, as well as a continued reduction in customer call volume and contacts. This reduction has occurred largely as a result of outsourcing initiatives which began in fiscal year 2005, as well as a continued focus on reducing customer contacts through increased first call resolution rates. These operational efficiencies yielded decreases of $0.9 million in payroll costs, $0.2 million in facilities overhead and were partially offset by an increase of $0.1 million in outsourcing fees.
For the nine months ended September 30, 2006, technical support expenses were $5.2 million compared to $9.3 million for the nine months ended August 31, 2005. This decrease of $4.1 million, or 44.1%, was primarily attributable to a decrease $4.4 million decrease in labor costs and a decrease of $0.9 million decrease in occupancy costs, partially offset by an increase of $1.2 million in outsourcing fees.
As a percentage of revenue, technical support expenses were 13.8% and 14.1% for the three and nine months ended September 30, 2006, respectively, compared to 12.7% and 14.1% for the three and nine months ending August 31, 2005.
General and Administrative
General and administrative expenses were $4.5 million for the three months ended September 30, 2006 compared to $8.0 million for the three months ended August 31, 2005. This decrease of $3.5 million, or 44.1%, is primarily attributable to a $1.7 million decrease in labor costs, a decrease of $0.3 million in occupancy overhead costs, a decrease of $1.1 million in legal fees and settlements, a decrease of $0.2 million in credit card fees, a decrease of $0.1 million in telephone expenses, and a reduction of $0.2 million in insurance costs. These reductions were partially offset by an increase of $0.1 million in other taxes. These cost reductions were primarily related to the Company’s restructuring following the sale of its dedicated hosting assets in August 2005.
Included within general and administrative are expenses related to the Company’s executives, human resources, finance and accounting, legal, business development, research and development, information technologies, product development and quality assurance teams.
For the nine months ended September 30, 2006, general and administrative expenses were $19.1 million compared to $23.4 million for the nine months ended August 31, 2005. This decrease of $4.3 million, or 18.4%, is primarily attributable to a decreases in labor costs and benefits of $3.8 million, occupancy costs of $1.1 million, technical and professional fees of $1.0 million, legal fees and settlements of $1.9 million, telephone expenses of $0.2 million, credit card fees of $0.7 million, other taxes of $0.3 million, and a $0.4 million decrease in insurance expenses. These reductions were significantly offset by an increase in stock-based compensation expense of $5.4 million.
Bad Debt Expense
Bad debt expenses remained stable at $0.3 million for the three months ended September 30, 2006 when compared to the three months ended August 31, 2005.
For the nine months ended September 30, 2006, bad debt expenses were $0.8 million compared to $1.3 million for the nine months ended August 31, 2005, a reduction of $0.5 million or 36.9% mostly due to the sale of the dedicated hosting assets in August 2005.

19


Table of Contents

Depreciation and Amortization
Depreciation and amortization expenses were $1.0 million for the three months ended September 30, 2006, compared to $4.4 million for the three months ended August 31, 2005. The decrease of $3.4 million, or 76.8%, in depreciation expense is a result of the disposition of assets related to the sale of the dedicated accounts in August 2005.
For the nine months ended September 30, 2006, depreciation and amortization expenses were $4.4 million compared to $15.4 million for the nine months ended August 31, 2005. This decrease of $11.0 million or 71.5% is attributable to the same factors noted in the quarter comparison above offset by the accelerated depreciation of assets. In April 2006, management accelerated depreciation of certain assets after management decided to abandon its new billing platform and continue using its historic billing system where the legacy customer base resides. Management concluded that a change in the estimated useful life of these assets is appropriate. During the second quarter, the Company completed the migration of all customers off of the new system on to its legacy system and ceased to use the system. Following the guidance under FAS 144 – Accounting for the Impairment or Disposal of Long-Lived Assets, the Company accelerated the depreciation of the remaining book value during the second quarter 2006. The original cost of the assets abandoned was approximately $1.5 million and were placed in service in October, 2005. The total amount of the accelerated depreciation was approximately $1.1 million.
Impairment of investment in and advances to WebSource Media
The Company recorded a charge of $3.5 million as an impairment of investment in and advances to WebSource Media for the nine months ended September 30, 2006. For details see note 3 “Acquisition and impairment of WebSource Media, LLC”. No impairments were recorded in the three months ended September 30, 2006.
Gain on sale of accounts
There was a loss on sale of accounts of $0.2 million for the three and nine months ended September 30, 2006, attributable to the sale of the dedicated assets in August 2005 compared to a $1.2 million gain for the three and nine months ended August 31, 2005. The gain is attributable to the sale of Hostcentric shared accounts in May 2005.
Interest Income (Expense), net
Interest income was $0.2 million for the three months ended September 30, 2006, and $0.2 million for the three months ended August 31, 2005. Interest income (expense), net consists of interest income earned on the Company’s combined cash and cash equivalents, short-term investments, and restricted investments less interest expense on debt
For the nine months ended September 30, 2006 interest income was $0.7 million compared to $0.4 million for the nine months ended August 31, 2005. This increase of $0.3 million, or 86.3% in interest was primarily due to the recognition of interest income from tax refunds received during the first nine months of 2006.
Accrued Income Taxes
During the three-month period ended September 30, 2006, the Company released a $0.5 million income tax payable after reaching a resolution with the Internal Revenue Service (“IRS”). The Company recorded a $0.4 million income tax benefit and $0.1 million in other income for previously accrued interest and penalties. As of September 30, 2006 there were no remaining reserves for income taxes.
During the nine-month period ended September 30, 2006, the Company reached final resolutions with several federal and state taxing authorities regarding income taxes. The Company received refunds of $0.4 million from the IRS and released approximately $1.1 million of payables and reserves that were on its books. As a result, the Company recorded a $1.3 million income tax benefit and $0.1 million in other income for previously accrued interest and penalties.
Stock Based Compensation
Stock-based compensation represents non-cash compensation expense related to stock options and restricted stock, which were granted under the 2005 and 2006 stock incentive plans. Compensation expense attributable to stock-based compensation in the three months and nine months ended September 30, 2006 was $0.2 and $5.7 million, respectively, compared to no such expense in the three months ended August 31, 2005 and $0.2 million for the nine months ended August 31, 2005. Total stock-based compensation expense for the nine months ended September 30, 2006 is attributable to the accelerated vesting of stock options and the expense from previously granted stock options. On March 31, 2006 the Compensation Committee of the Board of Directors approved the acceleration of the remaining 1.6 million unvested stock options of the 1.9 million granted in July 2005. The Company also granted an additional 677,500 stock options to its board

20


Table of Contents

of directors and management team that were fully vested upon their grant date. By accelerating the vesting of these options as described above, the Company will reduce its future reported compensation expense, before tax, by a significant amount over the remainder of the vesting periods. The compensation expense recognized during the nine months ended September 30, 2006 related to these options was $5.5 million.
Related Party Transactions
The Company purchases online marketing services, including online advertising, from The Search Agency, Inc. (“TSA”), an entity in which the Company’s Chief Executive Officer, Jeffrey M. Stibel, has an equity interest. Mr. Stibel is also a member of the Board of Directors of TSA. The Company’s purchases of online marketing services from TSA are made pursuant to the Company’s standard form of purchase order. The purchase order imposes no minimum commitment or long-term obligation on the Company. The Company may terminate the arrangement at any time. The Company pays TSA fees equal to a specified percentage of the Company’s purchases of online advertising made through TSA. The Company believes that the services it purchases from TSA, and the prices it pays, are competitive with or superior to those available from alternative providers. The total amount of fees paid to TSA for services rendered for the three months and nine months ended September 30, 2006 was $0.1 million and $0.2 million respectively.
Results of Discontinued Operations
PC Systems
In fiscal 2001 the Company discontinued the operations of its PC Systems business segment, which was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion (APB) No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” For the nine months ended September 30, 2006 a loss of $0.4 million was recognized compared to $1.0 million for the nine months ended August 31, 2005. The loss was attributable to legal fees in defense and settlement of Micron PC matters, offset by the reversal of previously accrued expenses where the statute of limitations has expired.
Liquidity and Capital Resources
As of September 30, 2006, the Company had $16.3 million in cash and cash equivalents. In addition, the Company had $8.1 million in short and long-term securities and restricted investments representing a total of $24.4 million of restricted and unrestricted cash and investments. This represents a decrease of $2.3 million or 8.6% compared to December 31, 2005.
On a comparative basis, cash provided by operating activities of continuing operations was $1.8 million for the nine months ended September 30, 2006 as compared to 1.8 million of cash used in operating activities for the nine months ended August 31, 2005. The increase in cash provided by continuing operations is primarily due to fluctuations in working capital.
Cash used in investing activities was $1.2 million for the nine months ended September 30, 2006 versus $7.4 million of cash provided by investing activities for the period ended August 31, 2005. The increase of $8.6 million in cash used in investing activities is primarily related to the decision to cease investing in auction rate securities, the decrease in net proceeds from sale of assets offset by a decrease in purchase of fixed assets, and the receipt of approximately $2.2 million disbursed from the escrow account relating to the sale of the dedicated hosting accounts in August 2005.
Cash used in financing activities increased $0.1 million, or 16.6%, for the nine months ended September 30, 2006, to $1.0 million, compared to $0.8 million of cash used in financing activities for the period ended August 31, 2005. This increase in cash used in financing activities is primarily due to the reduction of overall debt and capital lease obligations and the proceeds from the exercise of stock options.
Cash used by discontinued operations decreased $0.2 million, or 22.3%, to $0.8 million for the nine months ended September 30, 2006 compared to $1.0 million of cash used to fund discontinued operations during the period ended August 31, 2005. The decrease in cash used was primarily due to the continued winding down of outstanding litigation.
In February 2004, the Company executed a five-year promissory note with US Bancorp Oliver-Allen Technology Leasing for $4.8 million. As of September 30, 2006, the principal balance on the promissory note was $2.4 million. The Company has pledged $5.0 million as collateral for this promissory note; this amount will gradually decrease until the agreement terminates in February 2009. As of September 30, 2006, the amount of collateral is $2.5 million. These restrictions prevent

21


Table of Contents

the Company from utilizing the related cash and cash equivalents until all of its obligations under the note are satisfied. The promissory note bears an interest rate of 6.75% and requires monthly payments of $94,000 over five years beginning in February 2004.
At the closing of the WILLC acquisition in December 2005, Web.com assumed approximately $2.3 million in outstanding indebtedness of WILLC to Web Service Company, Inc. (“Web Service”) and that indebtedness was amended and restated in that certain Amended and Restated Line of Credit Note and Loan Agreement (the “Web Service Note”) issued by Web.com and its wholly-owned subsidiary WDC Holdco, Inc. in favor of Web Service. The Web Service Note bears interest at the rate of 3% per year and is to be repaid in approximately equal monthly installments of $67,886 beginning on January 1, 2006 with a final payment of any remaining principal and interest due on December 1, 2008. As of September 30, 2006, the principal balance on the indebtedness was $1.8 million.
During the nine months ended September 30, 2006, the Company made capital expenditures of $1.4 million primarily related to network storage equipment, leasehold improvements, servers and personal computers.
The Company’s web hosting business has historically incurred net losses and losses from operations. The Company’s future operation is dependent upon its ability to achieve and sustain positive cash flow prior to the depletion of cash resources. The Company has reduced its level of cash requirements through decreases in capital purchases with the sale of its dedicated accounts and related assets and by improving sales and reducing churn. The Company has also reduced cash outlays for payments associated with prior integration and discontinued operation liabilities and has reduced debt payments because of the buyout of capital lease obligations during the prior fiscal year. The Company expects to continue to have negative cash flows as it continues to execute on its business plan. There can be no assurance that Web.com’s continuing efforts to stabilize or increase its revenue will be successful or that the Company will be able to continue as a going concern. If the Company is unable to successfully execute its business plan, it may require additional capital, which may not be available on suitable terms. Nonetheless, management believes it has adequate cash and liquid resources to fund operations and planned capital expenditures through at least the next 12 months.
Off-Balance Sheet Arrangements
At September 30, 2006, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board (“FASB”) issued its interpretation, FASB Interpretation No. 48 – Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 – Accounting for Income Taxes (“FIN 48”). FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under the Interpretation, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without considering time values. The provisions of this Interpretation shall be applied to all tax positions upon initial adoption of the Interpretation and shall be effective for fiscal years beginning after December 15, 2006.
The Company has not yet adopted nor does it expect to early adopt the new interpretation. The impact that may result from the adoption of FIN 48 on the Company’s results of operations, financial position or its cash flows is not yet known.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
Substantially all of the Company’s liquid investments and a majority of its debt are at fixed interest rates, and therefore the fair value of these instruments is affected by changes in market interest rates. As of September 30, 2006, 100% of the Company’s liquid investments mature within three months. As of September 30, 2006, management believes the reported amounts of liquid investments and debt to be reasonable approximations of their fair values. Generally, the fair market value of fixed interest rate investment securities will increase as interest rates fall and decrease as interest rates rise. The Company does not use derivative financial instruments in its investment portfolio. The portfolio has been primarily comprised of commercial paper rated A1/P1, bank certificates rated AA or better and corporate medium-term notes rated AA or better. At September 30, 2006, the Company’s investment portfolio included fixed rate securities with an estimated fair value of $19.6 million. The interest rate changes affect the fair market values but do not impact earnings or cash flows. The fair market value of long-term fixed interest rate debt is also subject to interest rate risk. Generally, the fair market value of fixed interest

22


Table of Contents

rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of the Company’s long-term debt at September 30, 2006 was $4.7 million.
Item 4. Controls and Procedures
The Company’s management, including its chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-15(e) and 15d-15(e) as of September 30, 2006. Based on this review, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective to provide reasonable assurance that such disclosure controls and procedures satisfy their objectives and that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to management, including its chief executive officer and chief financial officer as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Nevertheless, the Company’s management, including its chief executive officer and chief financial officer do not expect that the Company’s disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. The design may not succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, an evaluation of controls may not detect all control issues and instances of fraud, if any, within the Company. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of the Company’s current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data. The Company has, however, designed its disclosure controls and procedures to provide, and believes that such controls and procedures do provide, reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
While we continued to make incremental improvements to our internal controls over financial reporting during the three months ended September 30, 2006, there were no changes in the Company’s internal control over financial reporting in the three months ended September 30, 2006 which have materially affected its internal controls.

23


Table of Contents

Web.com, Inc.
PART II. – OTHER INFORMATION
Item 1. Legal Proceedings
For a description of material developments relating to certain pending legal proceedings, See Note 9 to the Consolidated Financial Statements.
Item 1A. Risk Factors
You should carefully consider the following factors and all other information contained in this Form 10-Q and the Company’s filed Form 10-K for the fiscal year ended August 31, 2005 before you make any investment decisions with respect to the Company’s securities. The risks and uncertainties described below are not the only risks the Company faces.
Web.com has incurred losses since inception and could incur losses in the future.
Web.com has incurred net losses and losses from operations for all but one of each quarterly period from its inception through the quarterly period ended September 30, 2006. A number of factors could increase its operating expenses, such as:
    Adapting network infrastructure and administrative resources to accommodate additional customers and future growth;
 
    Developing products, distribution, marketing, and management for the broadest-possible market;
 
    Broadening customer technical support capabilities;
 
    Developing or acquiring new products and associated technical infrastructure;
 
    Developing additional indirect distribution partners;
 
    Increased costs from third party service providers;
 
    Improving network security features;
 
    Legal fees and settlements associated with litigation and contingencies; and
 
    To the extent that increases in operating expenses are not offset by increases in revenues, operating losses will increase.
Web.com’s management and Board of Directors may be unable to execute their plans to turn around the Company, grow its revenues and achieve profitability and positive cash flows.
Web.com’s former Chief Executive Officer, Joel J. Kocher, resigned his position as an officer of the Company in August 2005 and was replaced by Jeffrey M. Stibel as Chief Executive Officer. At approximately the same time, the Company added three new Directors to its Board of Directors and since December 2005 has also added several key executives to its management team. If the Company’s new Chief Executive Officer is unable to attract and retain management to execute the Company’s plans, or if management and the Board of Directors are unable to execute those plans, then the Company may fail to grow the Company’s revenues, contain costs and achieve profitability and positive cash flows.
Ours is a recurring-revenue subscriber business and as such the effects of a net loss of monthly recurring revenue is magnified.
A large majority of our revenue is derived from monthly recurring charges. Accordingly, the termination of a single account will affect revenue every month in the future. The loss of such a customer at the beginning of a fiscal year will result in a twelve-fold reduction in revenue for that fiscal year. Absent the addition of customers through acquisitions, Web.com had previously incurred a net loss in monthly recurring charges, and this situation may continue with material negative effects on reported revenue and net income. Although reductions in monthly recurring charges may be offset for a time by increases in revenue derived from one-time or non-recurring charges, the compounding effect of monthly recurring charges losses will likely result in a meaningful reduction of reported revenue over time. Moreover, because of Web.com’s relatively low percentage of variable costs, significant revenue loss can result in a loss of net income. There can be no assurance that Web.com’s continuing efforts to stabilize or increase its monthly recurring charges and revenue will be successful. If revenue declines, the Company may eventually require additional capital, which may not be available on suitable terms. Although the Company can reduce spending to some degree, there can be no assurance in such an event that the Company would be able to continue as a going concern.

24


Table of Contents

Unfavorable results of existing litigation may cause Web.com to have additional expenses or operating losses that exceed the Company’s ability to pay.
The Company is defending a number of matters in active litigation (See Note 9 to the Consolidated Financial Statements). The cost of defending lawsuits, regardless of their merit, can be substantial. Although the Company has favorably resolved a number of lawsuits through rulings, verdicts, and settlements, and although the Company may be successful in defending ongoing litigation, the costs of defense cannot be expected to be avoided. The Company believes it has appropriately established reserves for the contingency of adverse verdicts in accordance with GAAP. In order for a loss contingency to be reserved for in the financial statements, GAAP requires that the information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss and the amount of loss can be reasonably estimated. Therefore, the Company has not reserved for all of its pending lawsuits. Consequently, lawsuits for which there is no reserve pose a risk of substantial loss which could have a material effect on the Company’s results and financial position. Additionally, even in those cases where a reserve has been established, the amount of the reserve is necessarily an estimate and the actual result may differ materially. Reserves are established only for the damages that may be assessed, and do not take into account the costs of litigation. Even in those instances where Web.com may ultimately prevail on appeal, an adverse verdict in a substantial amount may damage the reputation of the Company, may require the Company to post an appeal bond in an amount which deprives the Company of cash, and require additional expenditures for the cost of appeal. The outcome of litigation is unpredictable, and an adverse final verdict could exceed the Company’s ability to pay.
Because Web.com’s historical financial information is not representative of its future results, investors and analysts will have difficulty analyzing Web.com’s future earnings potential.
Because the Company has grown through acquisition and its past operating results reflect the costs of integrating these acquisitions, as well as revenues from operations which have now been sold, historical results are not representative of future expected operating results. The Company has recognized very sizeable charges and expenditures in the past for impairment charges, restructuring costs and network enhancements. Because these items are not necessarily recurring, it is more difficult for investors to predict future results.
Web.com has a limited operating history and its business model is still evolving, which makes it difficult to evaluate its prospects.
Web.com’s limited operating history makes evaluating its business operations and prospects difficult. Its range of service offerings has changed since inception and its business model is still developing. Web.com has changed from being primarily a seller of personal computers and related accessories to being primarily a provider of web hosting and web services to consumers and small and medium-sized businesses. Because some of its services are new, the market for them is uncertain. As a result, the revenues and income potential of its business, as well as the potential benefits of its acquisitions, may be difficult to evaluate.
Quarterly and annual operating results may fluctuate, which could cause Web.com’s stock price to be volatile.
Past operating results have fluctuated significantly on a quarterly and an annual basis. Quarterly and annual operating results may continue to fluctuate due to a wide variety of factors. Because of these fluctuations, comparing operating results from period to period is not necessarily meaningful, and it would not be meaningful to rely upon such comparisons as an indicator of future performance. Factors that may cause its operating results to fluctuate include, but are not limited to:
    Demand for and market acceptance of the Company’s services and products;
 
    Introduction of new services or enhancements by Web.com or its competitors;
 
    Costs of implementing new network security features, CRM systems, and billing modules;
 
    Technical difficulties or system downtime affecting the Internet generally or its hosting operations specifically;
 
    Customer retention;
 
    Increased competition and consolidation within the web hosting and applications hosting markets;
 
    Changes in its pricing policies and the pricing policies of its competitors;
 
    Gains or losses of key strategic partner relationships;
 
    Impairment charges;

25


Table of Contents

    Restructuring charges;
 
    Merger and integration costs;
 
    Litigation expenses;
 
    Insurance expenses;
 
    Marketing expenses; and
 
    Seasonality of customer demand.
Web.com cannot provide any assurances that it will succeed in its plans to increase the size of its customer base, the amount of services it offers, or its revenues during the next fiscal year and beyond. In addition, relatively large portions of its expenses are fixed in the short term, and therefore its results of operations are particularly sensitive to fluctuations in revenues. Also, if it cannot continue using third-party products in its service offerings, its service development costs could increase significantly.
Web.com operates in a new and evolving market with uncertain prospects for growth and may not be able to generate and sustain growth in its customer base.
Web.com operates in a new and evolving market with uncertain prospects for growth and may not be able to achieve and sustain growth in its subscriber base, maintain its average revenue per user or subscriber acquisition costs. The market for web hosting and applications-hosting services for small and medium-sized businesses, and the consumer market, have only recently begun to develop and are evolving rapidly. The market for Web.com’s services may not develop further, customers may not widely adopt its services and significant numbers of businesses or organizations may not use, or may discontinue the use of, the Internet for commerce and communication. If this market fails to develop further or develops more slowly than expected, or if Web.com’s services do not achieve broader market acceptance, Web.com will not be able to retain and grow its customer base. In addition, Web.com must be able to differentiate itself from its competition through its service offerings and brand recognition. These activities may be more expensive than Web.com anticipates, and Web.com may not succeed in differentiating itself from its competitors, achieving market acceptance of its services, or selling additional services to its existing customer base.
Because Web.com’s target markets are volatile, the Company may face a loss of customers or a high level of non-collectible accounts.
The Company intends to continue to concentrate on serving the small and medium-sized business market. This market contains many businesses that may not be successful, and consequently present a substantially greater risk for non-collectible accounts receivable and for non-renewal. Moreover, a significant portion of this target market is highly sensitive to price, and may be lost to a competitor with a lower pricing structure. Because few businesses in this target market employ trained technologists, they tend to generate a high number of customer service and technical support calls. The expense of responding to these calls is considerable, and the call volume is likely to increase in direct proportion to revenue, potentially limiting the scalability of the business. Additionally, if the customer becomes dissatisfied with the Company’s response to such calls, cancellation, non-payment, or non-renewal becomes more likely. Web.com’s strategy for minimizing the negative aspects of its target market includes:
    Capitalizing on infrastructure efficiencies to become a profitable provider at the lowest sustainable price;
 
    Automating customer care and technical support to reduce the cost per call, and to minimize the time spent by Company personnel;
 
    Intensive training and supervision of customer care and technical support personnel to maximize customer satisfaction; and,
 
    Increasing the number and breadth of services to differentiate the Company from competition.
The Company can give no assurance, however, that any of these measures will be successful, and the Company’s failure to manage these risks could decrease revenues and increase losses.
Web.com could incur liabilities in the future relating to its discontinued PC Systems business, which could cause additional operating losses.
Web.com could incur liabilities relating to its discontinued PC Systems business and from the sale of the PC Systems business to GTG PC. According to the terms of the agreement with GTG PC, Web.com retained liabilities relating to the operation of the PC systems business prior to the closing of the transaction. Web.com also agreed to indemnify GTG PC and its affiliates for any breach of its representations

26


Table of Contents

and warranties contained in the agreement for a period of two years, or for the applicable statute of limitations for matters related to taxes. Its indemnification obligation is capped at $10.0 million. Except for claims for fraud or injunctive relief, this indemnity is the exclusive remedy for any breach of Web.com’s representations, warranties and covenants contained in the agreement with GTG PC. Accordingly, Web.com could be required in the future to make payments to GTG PC and its affiliates in accordance with the agreement, which could adversely affect its future results of operations and cash flows. Web.com believes it is unlikely that it will have any obligation to indemnify GTG PC because the two year period has passed and the applicable statute of limitations has also passed for most applicable matters. If Web.com were obligated to indemnify GTG PC such obligation could adversely affect its future results of operations and cash flows.
Because Web.com faces intense competition, it may not be able to operate profitably in its markets.
The web hosting and applications hosting markets are highly competitive, which could hinder Web.com’s ability to successfully market its products and services. The Company may not have the resources, expertise or other competitive factors to compete successfully in the future. Because there are few substantial barriers to entry, the Company expects that it will face additional competition from existing competitors and new market entrants in the future. Many of Web.com’s current and potential competitors have greater name recognition and more established relationships in the industry and greater resources. As a result, these competitors may be able to:
    Develop and expand their network infrastructures and service offerings more rapidly;
 
    Adapt to new or emerging technologies and changes in customer requirements more quickly;
 
    Devote greater resources to the marketing and sale of their services; and,
 
    Adopt more aggressive pricing policies than the Company can.
Current and potential competitors in the market include web hosting service providers, applications hosting providers, Internet service providers, telecommunications companies, large information technology firms and computer hardware suppliers. These competitors may operate in one or more of these areas and include companies such as Yahoo!, NTT/Verio, Affinity Internet, Website Pros, and Earthlink.
Impairment of Web.com’s intellectual property rights could negatively affect its business or could allow competitors to minimize any advantage that Web.com’s proprietary technology may give it.
Although the Company has a number of patents that it believes should preclude competitors from practicing certain technologies, the Company currently has no patented technology that would preclude or inhibit competitors from entering the web hosting market generally. While it is the Company’s practice to enter into agreements with all employees and with some of its customers and suppliers to prohibit or restrict the disclosure of proprietary information, the Company cannot be sure that these contractual arrangements or the other steps it takes to protect its proprietary rights will prove sufficient to prevent illegal use of its proprietary rights or to deter independent, third-party development of similar proprietary assets.
In addition, the Company may find the cost of enforcing its patent and other intellectual property rights to be high and the cost of prosecuting patent infringement cases could negatively impact the Company’s attempts to become profitable.
Effective copyright, trademark, trade secret and patent protection may not be available in every country in which the Company’s products and services are offered. Web.com sometimes is, and in the future may be, involved in legal disputes relating to the validity or alleged infringement of its intellectual property rights or those of a third party. Intellectual property litigation is typically extremely costly and can be disruptive to business operations by diverting the attention and energies of management and key technical personnel. In addition, any adverse decisions could subject it to significant liabilities, require it to seek licenses from others, prevent it from using, licensing or selling certain of its products and services, or cause severe disruptions to operations or the markets in which it competes which could decrease profitability.
Periodically, the Company is made aware of claims, or potential claims, that technology it used in its discontinued operations may have infringed on intellectual property rights held by others. The Company has accrued a liability and charged operations for the estimated costs of settlement or adjudication of several asserted and unasserted claims for alleged infringement relating to its discontinued operations prior to the balance sheet date. Resolution of these claims could be costly and decrease profitability.
If Web.com is unable to attract and retain key personnel, it may not be able to compete effectively in its market.
The future success of Web.com will depend, in part, on its ability to attract and retain key management, technical, and sales and marketing personnel. The Company attempts to enhance its management and technical expertise by recruiting qualified individuals who possess desired skills and experience in certain targeted areas. The Company experiences strong competition for such personnel in the web hosting industry. The Company’s inability to retain employees and attract and retain sufficient additional employees, information technology, engineering, and technical support resources could adversely affect its ability to remain competitive in its markets. The Company has and may continue to face the loss of key personnel, which could limit the ability of the Company to develop and market its products and services.

27


Table of Contents

Web.com depends on its reseller sales channel to market and sell many of its services. Web.com does not control its resellers, and if it fails to develop or maintain good relations with resellers, it may not achieve the growth in customers and revenues that it expects.
An element of the strategy for the Company’s growth is to further develop the use of third parties that resell or recommend its services. Many of these resellers are web development or web consulting companies that also sell Web.com’s web hosting services, but that generally do not have established customer bases to which they can market these services. The Company is not currently dependent on any one reseller to generate a significant level of business, but it has benefited and continues to significantly benefit from business generated by the reseller channel. Although Web.com attempts to provide its resellers with incentives such as price discounts on its services that the resellers seek to resell at a profit, the failure of its services to be commercially accepted in some markets, whether as a result of a reseller’s performance or otherwise, could cause its current resellers to discontinue their relationships with the Company. The Company also is developing relationships with larger distribution partners, and although the percentage of the Company’s current revenues generated by any of these relationships is currently small, if the Company’s strategy is successful, future revenue growth will be dependent on the success and maintenance of these relationships.
Web.com is vulnerable to system failures, which could harm its reputation, cause its customers to seek reimbursement for services paid for and not received, and cause its customers to seek another provider for services.
The Company must be able to operate the systems that manage its network around the clock without interruption. Its operations will depend upon its ability to protect its network infrastructure, equipment and customer files against damage from human error, fire, earthquakes, hurricanes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. The Company’s networks are currently subject to various points of failure. For example, a problem with one of its routers (devices that move information from one computer network to another) or switches could cause an interruption in the services the Company provides to a portion of its customers. In the past, the Company has experienced periodic interruptions in service. The Company has also experienced, and in the future it may continue to experience, delays or interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees, or others. Any future interruptions could:
    Cause customers or end users to seek damages for losses incurred;
 
    Require the Company to replace existing equipment or add redundant facilities;
 
    Damage the Company’s reputation for reliable service;
 
    Cause existing customers to cancel their contracts; or
 
    Make it more difficult for the Company to attract new customers.
Web.com’s data centers are maintained by third parties.
Substantially all of the network services and computer servers utilized by Web.com in its provision of services to customers are housed in data centers owned by other service providers. In particular, a significant number of Web.com’s servers are housed in the data center in Atlanta, Georgia that Web.com sold to Peer 1 Networks on August 31, 2005. Web.com obtains Internet connectivity for those servers, and for the customers who rely on those servers, in part through direct arrangements with network service providers and in part indirectly through Peer 1 Networks. In the future, Web.com may house other servers and hardware items in facilities owned or operated by other service providers.
A disruption in the ability of one of these service providers to provide service to Web.com could cause a disruption in service to Web.com’s customers. A service provider could be disrupted in its operations through a number of contingencies, including unauthorized access, computer viruses, accidental or intentional actions, electrical disruptions, and other extreme conditions. Although Web.com believes it has taken adequate steps to protect itself through its contractual arrangements with its service providers, Web.com cannot eliminate the risk of a disruption in service resulting from the accidental or intentional disruption in service by a service provider. In addition, a service provider could raise its prices or otherwise change its terms and conditions in a way that adversely affects the Company’s ability to support its customers or financial performance.
Data centers and communications networks are vulnerable to security breaches that could cause disruptions in service, liability to third parties, or loss of customers.
A significant barrier to electronic commerce and communications is the need for secure transmission of confidential information over public networks. Some of the Company’s services rely on security technology licensed from third parties that provides the encryption and authentication necessary to effect the secure transmission of confidential information.

28


Table of Contents

Despite the design and implementation of a variety of network security measures by the Company, unauthorized access, computer viruses, accidental or intentional actions and other disruptions could occur. In addition, inappropriate use of the network by third parties could also potentially jeopardize the security of confidential information, such as credit card and bank account numbers stored in the Company’s computer systems. These security problems could result in the Company’s liability and could also cause the loss of existing customers and potential customers.
Although the Company continues to implement industry-standard security measures, third parties may be able to overcome any measures that it implements. The costs required to eliminate computer viruses and alleviate other security problems could be prohibitively expensive and the efforts to address such problems could result in interruptions, delays or cessation of service to customers, and harm the Company’s reputation and growth. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet, especially as a means of conducting commercial transactions.
Disruption of Web.com’s services caused by unknown software or hardware defects could harm its business and reputation.
The Company’s service offerings depend on complex software and hardware, including proprietary software tools and software licensed from third parties. Complex software and hardware may contain defects, particularly when first introduced or when new versions are released. The Company may not discover software or hardware defects that affect its new or current services or enhancements until after they are deployed. Although Web.com has not experienced any material software or hardware defects to date, it is possible that defects may exist or occur in the future. These defects could cause service interruptions, which could damage its reputation or increase its service costs, cause it to lose revenue, delay market acceptance or divert its development resources.
Providing services to customers with critical websites and web services could potentially expose Web.com to lawsuits for customers’ lost profits or other damages.
Because the Company’s web hosting and applications hosting services are critical to many of its customers’ businesses, any significant interruption in those services could result in lost profits or other indirect or consequential damages to its customers as well as negative publicity and additional expenditures for it to correct the problem. Although the standard terms and conditions of the Company’s customer contracts disclaim liability for any such damages, a customer could still bring a lawsuit against it claiming lost profits or other consequential damages as the result of a service interruption or other website or application problems that the customer may ascribe to it. A court might not enforce any limitations on Web.com’s liability, and the outcome of any lawsuit would depend on the specific facts of the case and legal and policy considerations even if the Company believes it would have meritorious defenses to any such claims. In such cases, it could be liable for substantial damage awards. Such damage awards might exceed its liability insurance by unknown but significant amounts, which would seriously harm its business.
Web.com could face liability for information distributed through its network.
The law relating to the liability of online services companies for information carried on or distributed through their networks is currently unsettled. Online services companies could be subject to claims under both United States and foreign law for defamation, negligence, copyright or trademark infringement, violation of securities laws or other theories based on the nature and content of the materials distributed through their networks. Several private lawsuits seeking to impose such liability upon other entities are currently pending against other companies. In addition, organizations and individuals have sent unsolicited commercial e-mails from servers hosted by service providers to massive numbers of people, typically to advertise products or services. This practice, known as “spamming,” can lead to complaints against service providers that enable such activities, particularly where recipients view the materials received as offensive. The Company may, in the future, receive letters from recipients of information transmitted by its customers objecting to such transmission. Although the Company prohibits its customers by contract from spamming, it cannot provide assurances that its customers will not engage in this practice, which could subject it to claims for damages. In addition, the Company may become subject to proposed legislation that would impose liability for or prohibit the transmission over the Internet of some types of information. Other countries may also enact legislation or take action that could impose liability on the Company or cause it not to be able to operate in those countries. The imposition upon the Company and other online services of potential liability for information carried on or distributed through its systems could require it to implement measures to reduce its exposure to this liability, which may require it to expend substantial resources, or to discontinue service offerings. The increased attention focused upon liability issues as a result of these lawsuits and legislative proposals also could affect the rate of growth of Internet use.

29


Table of Contents

Web.com’s business operates in an uncertain legal environment where future government regulation and lawsuits could restrict Web.com’s business or cause unexpected losses.
Due to the increasing popularity and use of the Internet, laws and regulations with respect to the Internet may be adopted at federal, state and local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. The Company cannot fully predict the nature of future legislation and the manner in which government authorities may interpret and enforce such legislation. As a result, Web.com and its customers could be subject to potential liability under future legislation, which in turn could have a material adverse effect on the Company’s business. The adoption of any such laws or regulations might decrease the growth of the Internet which in turn could decrease the demand for the Company’s services, or increase the cost of doing business. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. These laws generally pre-date the advent of the Internet and related technologies and, as a result, do not consider or address the unique issues of the Internet and related technologies.
Web.com’s stock price may be volatile which could cause an investment in its common stock to decrease significantly.
The market price of its common stock has experienced significant volatility. The price has been and is likely to continue to be highly volatile. The following are examples of factors or developments that would likely cause the Company’s stock price to continue to be volatile:
    Variations in operating results and analyst earnings estimates;
 
    The volatility of stock within the sectors within which it conducts business;
 
    Announcements by Web.com or its competitors regarding introduction of new services;
 
    General changes in economic conditions;
 
    Changes in the volume of trading in its common stock and
 
    The Company’s inability to reduce the rate of account cancellations, or to increase the rate of account additions, or both.
During the 52 weeks ended September 30, 2006 the high and low closing price for Web.com common stock on NASDAQ was $6.45 and $2.79, respectively.
Web.com could face liability and expense in connection with its acquisition of WebSource Media and related litigation.
On May 19, 2006 Web.com acquired WebSource Media which was merged into a wholly-owned subsidiary of Web.com. On June 12, 2006 the Federal Trade Commission filed a complaint under seal in federal court in Texas alleging that WebSource Media, together with its former owners and other defendants, engaged in unfair and deceptive trade practices in connection with the marketing and sale of WebSource Media’s products. All WebSource Media telemarketing activities and sales to new customers were halted on or about June 13, 2006. On June 21, 2006 the federal court entered an order that froze the assets of WebSource Media and appointed a Receiver over WebSource Media. Pursuant to that order, Web.com was appointed as an agent of the Receiver to perform certain services with respect to WebSource Media. Web.com is not a party to the FTC litigation.
On June 21, 2006, Web.com sued the former owners of WebSource Media in federal court in Georgia, claiming fraud and breach of contract in connection with the WebSource Media acquisition and seeking to rescind the acquisition and recover damages from the defendants. Subsequently certain of the former principals of WebSource Media sued Web.com in state court in Texas seeking payment of earn-out compensation under the merger agreement.
Web.com could face liability and expense in connection with these matters. Web.com cannot determine at this time what liability, if any, WebSource Media may have as a result of the FTC litigation. WebSource Media may also face liability to third parties in connection with the acts and practices alleged by the FTC in that litigation. Even if WebSource Media is ultimately determined to have no liability for the acts and practices alleged by the FTC, the asset freeze, the imposition of the receivership and the interruption of business attendant to the litigation may degrade the business of WebSource Media to a point where it is no longer a going concern.
Web.com should have no liability for any of the acts and practices alleged by the FTC against WebSource Media in the FTC litigation. Nevertheless, Web.com may incur expense and experience inconvenience and distraction in connection with its

30


Table of Contents

involvement in the matter through its role as the agent of the Receiver and as the owner of WebSource Media. In addition, although Web.com has sued the former owners of WebSource Media and is seeking to rescind the acquisition and recover damages from those defendants, there can be no guarantee that Web.com will prevail in that litigation or, if it prevails, that the defendants will have sufficient resources to pay Web.com’s damages.
Substantial future sales of shares by shareholders could negatively affect Web.com’s stock price.
A number of groups of investors hold substantial numbers of Web.com’s shares, including current employees, the former shareholders of acquired companies, and hedge funds reported to have investment styles that lead to short-term holdings. Substantial sales by these holders may adversely affect Web.com’s stock price.
Item 6. Exhibits
Exhibits:
     
Exhibit   Description
 
3.03
  Certificate of Designation, Rights and Preferences of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 7, 2006).
 
   
4.09
  Form of Rights Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 7, 2006).
 
   
4.10
  Rights Agreement dated as of August 4, 2006, by and between the Company and Wells Fargo Shareowner Services, as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 7, 2006).
 
   
31.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

31


Table of Contents

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
  Web.com, Inc.    
 
 
 
(Registrant)
   
 
       
Dated: November 9, 2006
  /s/ Gonzalo Troncoso    
 
       
 
  Gonzalo Troncoso    
 
  Executive Vice President and Chief Financial Officer    
 
  (Principal Financial Officer)