UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to
.
Commission
file number 001-32255
ANSWERS
CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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98-0202855
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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237
West 35th
Street, Suite 1101, New York, N.Y.
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10001
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (646) 502-4777
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Securities
registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Name
of each exchange on which registered
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Common
Stock
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The
NASDAQ Capital Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
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Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨
No x
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 for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K x
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See definition of “large accelerated filer”,
“accelerated filer”
and “smaller reporting company”
in Rule 12b-2 of the
Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o (do
not check if smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
No ¨
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to price at which the common equity was
sold, or the average bid and asked price of such common stock as of June 30,
2009, was $60,860,415. For purposes of this computation, the registrant has
excluded the market value of all shares of its common stock reported as being
beneficially owned by executive officers and directors and holders of more than
10% of the common stock on a fully diluted basis of the registrant; such
exclusion shall not, however, be deemed to constitute an admission that any such
person is an “affiliate” of the registrant. As of March 4, 2010, there were
7,958,928 issued and outstanding shares of common stock of the
registrant.
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Page
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References to Web Property Usage
Measurements
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Part I
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Part II
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Part III
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Part IV
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We gauge
the effectiveness of our monetization efforts and trends by measuring our
revenue per thousand page views, or RPM. Throughout this Annual Report, we refer
to estimates of traffic, or page views. In our Management’s Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”) prior to
our quarterly report on Form 10-Q for the quarterly period ended June 30, 2008,
we tracked the traffic on ReferenceAnswers and WikiAnswers Web properties using
two separate systems:
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·
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ReferenceAnswers
traffic was measured using our internally developed server-side, log-based
system (“Internal Data Warehouse”). This system was designed to identify
traffic from search engine robots and other known Web robots, commonly
referred to as Web spiders or Web crawlers, as well as from suspected
automated spidering scripts, and excluded such traffic from the traffic
activity measurements.
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·
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WikiAnswers
traffic was tracked using HBX Analytics, a tag-based Web analytics system
offered by Omniture, Inc., (“Omniture”). Traffic measurements from this
system are generated by our placement of tags on our Web pages. The
Omniture system then independently generates traffic
metrics.
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Beginning
with the MD&A in our quarterly report on Form 10-Q for the quarterly period
ended June 30, 2008, all traffic measurements (including measurements previously
reported in past filings using our Internal Data Warehouse) for ReferenceAnswers
are also presented based on the Omniture data. We estimate that the historical
page views for ReferenceAnswers pursuant to Omniture data, as set forth in our
reports beginning with our quarterly report on Form 10-Q for the
quarterly period ended June 30, 2008, are approximately 11% lower than the
traffic measurements reported in previous filings. Consequently, our
ReferenceAnswers RPMs, as reported in our current reports, reflect higher values
than those presented in previous filings.
We also
use Google, Inc.’s Google Analytics measurement services and Google AdSense data
to estimate the breakdown of our traffic sources. Google Analytics
measurements are generated by our placement of tags on our Web properties’
pages, which Google Analytics uses to count and report audience metrics
independently.
In this
Annual Report, statistics gathered from Omniture and Google Analytics are also
referred to as “internal estimates”.
We also
follow and report certain measurements performed by comScore, Inc., a global
leader in measuring the digital world and one of the preferred sources of
digital marketing intelligence. comScore’s “unique visitors” data to which we
subscribe is based on a new solution introduced by comScore in mid-2009, Media
Metrix 360, a ‘panel-centric hybrid’ solution to digital audience measurement.
The new approach combines person-level measurement from comScore’s proprietary 2
million person global panel with Web site server metrics. Our focus on
comScore’s unique visitors metric – in the U.S. and worldwide – helps us
understand and analyze our progress vis-à-vis other Web properties in general
and in the context of the competitive Q&A space, in particular.
Certain
comScore clients have moved to a full-hybrid measurement methodology, while
others have moved to partial hybrid status, or have yet to implement hybrid
measurement. Direct comparison of a ranking post-hybrid implementation vs.
pre-Hybrid implementation may not reflect the actual change in the site's
ranking or audience size over time. Answers implemented hybrid measurement
beginning August 2009.
Third
party services measuring traffic audiences may provide different estimates than
the estimates reported by other similar services and our internal estimates.
These discrepancies may result from differences in methodologies applied or the
sampling approaches used by each measuring service.
We also
generate community-related statistics, including total number of answers and new
registered users, from our own systems contained in the WikiAnswers
property.
ANSWERS
CORPORATION
PART
I
Introductory
Note
This
Annual Report on Form 10-K contains “forward looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward
looking statements are based on expectations, estimates, goals and projections
as of the date of this filing and are subject to significant risks and
uncertainties. Actual results may differ materially from those expressed in
forward looking statements.
We were
incorporated as a Texas corporation in December 1998 and reorganized as a
Delaware corporation in April 1999. In October 2005, we changed our name from
GuruNet Corporation to Answers Corporation. Our principal executive offices are
located in New York, NY. In addition, we have an office in Jerusalem, Israel. We
completed our initial public offering in October 2004 and our common stock is
listed on The NASDAQ Capital Market under the symbol “ANSW.”
In this
Annual Report, “Answers.com,” the “Company,” “we,” “us” and “our” refer to
Answers Corporation and its subsidiary, GuruNet Israel Ltd.
We use
various trademarks and trade names in our business, including without limitation
“Answers.comÒ,”
“WikiAnswersÒ,”
“WikiAnswers.comTM,”
“AnswerthonTM,”
“AnswerTipsÒ”
and “1-Click AnswersTM”.
This Annual Report also contains trademarks and trade names of other businesses
that are the property of their respective holders.
Available
Information
We make
available free of charge at www.answers.com (in the “Investor Relations”
section) copies of materials we file with, or furnish to, the Securities and
Exchange Commission, or SEC, including our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports, as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the
SEC.
Mission
Our
mission is to become the dominant and recognized market leader for answers
online.
Answers.com
is committed to bringing people the best possible answers covering all topics in
thousands of categories by leveraging a growing community of contributors and an
editorial library of authoritative content licensed from leading
publishers.
We intend
to build the best online:
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§
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Answer
experience
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§
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Answer
database
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§
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Q&A
community
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Overview
Answers.com
is a leading Q&A site catering to the growing need of online consumers to
locate answers to their questions. By integrating our two popular properties -
WikiAnswers and ReferenceAnswers –we have combined the power of community-driven
content with hundreds of expert resources from licensed content. People can ask
anything and automatically receive the best available answer, which could be
user-generated or from an editorial resource. Our community-generated social
knowledge Q&A platform, WikiAnswers, leverages wiki-based technologies;
through the contributions of a large and growing community, answers can be
edited and improved over time. The award-winning reference site ReferenceAnswers
includes content on millions of topics from over 250 licensed sources created by
leading publishers, including Houghton Mifflin Company, Barron's and
Encyclopedia Britannica.
According
to comScore data for the month of January 2010, Answers.com had 50 million
unique visitors, which ranked us number 18 in the top U.S. Web
properties. Worldwide, Answers.com had approximately 77 million unique
visitors, ranking us number 33 in the world’s top properties.
According
to our internal estimates, during 2009, Answers.com yielded approximately 3.4
billion page views.
Our
business runs on the ability to attract and monetize traffic to Answers.com.
Monetization of Answers.com is achieved by displaying online advertisements,
mostly pay-per-performance ads which require people viewing them to actually
click on them in order for us to generate revenue. We earn substantially all of
our revenue from online advertising.
We
believe our valuable content and overall user experience drives traffic to
Answers.com, which in turn drives advertising revenue.
Company
History
Prior to
January 2005, we were primarily in the business of selling subscriptions for
access to an answer-based product which benefited from intelligent aggregation
of multiple sources of content.
In
January 2005, we announced the release of the original version of Answers.com, a
free-access Web site that had been launched in August 2004 in beta version. The
answer-based service offered content from brand-name publishers licensed by us.
In conjunction with the original Answers.com, we also released 1-Click Answers,
our free downloadable software application that facilitates more efficient
access for Windows users to the original Answers.com.
In
November 2006, we acquired a questions and answers Web site, collaboratively
written and edited by its community of users, which we later re-branded
“WikiAnswers”. Our objective for WikiAnswers was twofold: First, we aimed to
turn the platform into a dynamic, multi-disciplinary resource for users to share
knowledge on similar areas of interest, thus adding a compelling facet to our
overall offering. Second, we strived to leverage the potential of the network
effect discussed in more detail below (the WikiAnswers component) and
strategically use WikiAnswers as a content creation source.
Over the
course of 2007, 2008 and 2009, our focus on user-generated content grew
considerably and became the primary driver of our business.
We began
to integrate Answers.com and WikiAnswers towards the end of 2008. The
product strategy guiding the integration was our desire to give users the best
answers to all types of questions – be they community-generated from
WikiAnswers, or editorially licensed from Answers.com, which we rebranded as
ReferenceAnswers.
In
September 2009 we announced the launch of the new Answers.com, in recognition of
our completing the integration of our two Web properties. Thus, Answers.com is
now our umbrella brand and is comprised of two properties or sub-brands,
WikiAnswers and ReferenceAnswers. At the end of 2009 we announced the
availability of the WikiAnswers component of Answers.com in four new languages:
French, Italian, German and Spanish, extending the power of the popular wiki
Q&A platform beyond our English language user base. These languages joined
our Tagalog version, which was created and developed organically by users in the
Philippines.
Products
& Services
The
New Answers.com
We own
and operate Answers.com, a leading Q&A site, dedicated to providing useful
answers to questions about anything. Answers.com includes two Web properties,
or components: WikiAnswers and ReferenceAnswers. WikiAnswers is a
community-generated social knowledge Q&A platform, leveraging wiki-based
technologies. Through the contributions of the community, our questions and
answers are continuously growing, improving and being updated, to form the
world’s best Q&A database. ReferenceAnswers provides trusted editorial
content on millions of topics licensed from the world’s top reference
publishers.
Integration
of WikiAnswers and ReferenceAnswers
The first
stages of the integration were minor - creating a similar “look and feel” for,
and cross-linking between, the two Web properties. Thus, for example, a user
looking up “Michael Jackson” in ReferenceAnswers, arrived at a page displaying
reference content covering the specific query, in addition to being asked to
answer WikiAnswers unanswered questions relating to Michael Jackson. The result
page also resembled a WikiAnswers page by way of including the standard “Ask”
and “Answer” bar in the header of the page, as opposed to the original “Search”
button displayed adjacent to the query bar. Subsequently, we added an “All”
radio button adjacent to the query bar on both properties, allowing users,
should they choose, to find a result by searching both properties. In the second
quarter of 2009, we took an important additional step in integrating both Web
properties by making the “All” radio button the default setting above the query
box of both properties. As a result of this user-interface change, users typing
in queries into either of our properties are automatically directed to the Web
page our algorithms deem most appropriate as a response. For example, a user
typing the query, “When did WWII start?” in ReferenceAnswers, lands on a Web
page belonging to WikiAnswers with an answer to that question. A user typing the
query “Who is Oprah Winfrey?” in WikiAnswers, arrives at a ReferenceAnswers page
displaying the Oprah Winfrey topic. In September 2009, we took our final step in
integrating the two Web properties by creating a new unified Answers.com home
page and login, integrating features from both properties, and making other
changes in our user interface to strengthen our positioning as having one
dominant product and brand, Answers.com, comprised of the two properties,
WikiAnswers and ReferenceAnswers.
The
WikiAnswers Component
WikiAnswers
is a user-generated content (UGC), community-based, Q&A platform where
people ask questions and the community answers them. WikiAnswers is currently
differentiated from other popular question and answer sites which facilitate a
forum where users can ask and answer questions, often repeating the same
question in many different ways, but cannot improve upon or edit the questions
or answers. WikiAnswers’ approach allows the community to transform each
question and answer into its own “wiki” page, a collaborative page that can be
improved upon by others in the community. In this manner, good answers can
potentially become better answers over time; related questions can be merged or
physically associated with each other; and ultimately, the community
user-experience is enhanced.
Content
generation is the core of WikiAnswers. The dynamics of UGC make WikiAnswers
highly scalable. We believe the size of the community helps drive the quantity
of the content, content attracts additional users which in turn grows the
community. We believe this cyclical pattern is the major source of growth for
WikiAnswers. We have seen a very high correlation between growth in
questions and answers and growth in page views. This is the self
reinforcing, self sustaining growth engine driving WikiAnswers. We intend
to focus on continuing this trend and enhance WikiAnswers to grow the overall
community, which in turn should heavily contribute to the overall growth of
Answers.com’s content and traffic.
The
WikiAnswers component grew very strongly in 2009. Average daily page views in
the fourth quarter of 2009 were 8.2 million, 88% higher than the same quarter in
2008. Based on the daily average for the month of December 2009 compared to
December 2008, we have seen the following increases in key performance
indicators:
• questions
answered on a daily basis increased from approximately 8,400 to approximately
11,500; and
• daily
new questions being added to our system grew from approximately 28,100 to
approximately 37,600.
The
ReferenceAnswers Component
ReferenceAnswers,
launched in January 2005 as the original Answers.com,
aggregates millions of topics in categories including health and medical, legal,
business and finance, science and technology, history, reference, translation
and language from brand-name publishers and other sources. Our technology
combines and presents targeted information from disparate sources and delivers
answers to users’ questions in a single consolidated view.
Our
ReferenceAnswers content includes over 250 licensed titles from leading offline
and online publishers. The publishers from which we currently license content
include, among many others, All Media Guide, Barron’s Educational Series,
Encyclopedia Britannica, Houghton Mifflin Company, McGraw-Hill, Oxford
University Press and Gale. We attribute the data source of information on
each Web page, enabling our users to make an independent evaluation as to the
credibility of the content.
Licensing
agreements with our publishers are generally for fixed periods, mostly ranging
from one year to four years, renewable by consent of the parties. A licensing
agreement will typically entitle us to provide the licensed information to our
end users through ReferenceAnswers in return for a fixed amount payable over the
life of the agreement, either in a lump sum up front or payable over the course
of a fixed schedule, either monthly, quarterly or annually. We also provide
content we license at no cost, for example, from Wikipedia. We favor content
that is difficult to find elsewhere on the Internet.
Early in
2010, ReferenceAnswers also began featuring many licensed videos. We believe
that our users will value and be attracted to the rich footage covering
thousands of topics in numerous categories.
1-Click
Answers; AnswerTips; Web-Based AnswerTips
1-Click
Answers is a tool that facilitates access to Answers.com. With 1-Click Answers
installed on a computer, a user can click on a word or phrase within virtually
any application, such as an e-mail, spreadsheet, document or database, and gain
access to Answers.com’s online library. Answers.com content related to the word
or phrase is displayed in an AnswerTips pop-up information bubble. Available for
users of both Microsoft Windows and Apple’s Macintosh OS X, 1-Click Answers
performs contextual analysis of the words or phrase clicked. For example, when
clicking on the word “Ford” appearing in the context of Ford Motor Company,
Harrison Ford, or Gerald Ford, 1-Click Answers will process and recognize the
context and deliver information on the vehicle manufacturer, the film star, or
the U.S. president, respectively.
Since
2007, we began offering other Web properties and blogs the ability to provide
their users with the 1-Click functionality through our webmaster tool version of
AnswerTips, which does not require a download. The Web version of AnswerTips is
triggered when a visitor double-clicks a word or phrase on an
“AnswerTips-enabled” site.
Internationalization
In the
third quarter of 2009 we launched French, Italian, German and Spanish language
versions of WikiAnswers, which we refer to as “FIGS”. The Q&A platform also
supports Tagalog (Filipino). Our strategy will capitalize on the needs of users
around the globe who are searching for answers online and will leverage our core
strengths: community building and Q&A space. Further, we plan on leveraging
our large and dynamic English language database and community, to grow our
foreign language versions. The WikiAnswers English language database
contains over 7 million answered questions. We are selectively translating some
of our answered English language questions, to help accelerate the adoption of
our non-English versions, and plan to continue that effort throughout
2010.
Based on
the success of our current internationalization efforts, we may decide to add
support for additional languages in 2010 and beyond.
Traffic
Generation
Our
revenues are primarily driven by the traffic generated by Answers.com and our
ability to effectively monetize that traffic. Please refer to the preamble of
this Annual Report for a full explanation of the manner in which we measure
traffic. The 2009 average daily page views and RPMs (revenue per thousand page
views) of Answers.com, by quarter, broken down by component, are as
follows:
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Q1
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Q2
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Q3
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Q4
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||||
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Traffic (page views)
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|||||||
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WikiAnswers
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5,337,000
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6,082,000
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6,336,000
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8,199,000
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|||
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ReferenceAnswers
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2,982,000
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2,965,000
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2,857,000
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2,737,000
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|||
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Total
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8,319,000
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9,047,000
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9,193,000
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10,936,000
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WikiAnswers
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64%
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67%
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69%
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75%
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|||
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ReferenceAnswers
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36%
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33%
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31%
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25%
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|||
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Total
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100%
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100%
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100%
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100%
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|||
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RPM
(Revenue
per thousand page views)
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|||||||
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WikiAnswers
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$6.58
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$6.14
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$5.87
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$5.93
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ReferenceAnswers
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$5.84
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$5.87
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$5.89
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$6.08
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Search
engines. Answers.com’s largest source of traffic is search
engines, which represented 89% of our traffic for the fourth quarter of 2009.
Among search engines, Google is by far our largest provider of search engine
traffic, providing approximately 84% of overall search engine
traffic.
We
continually seek to improve the volume and optimize the monetization of traffic
directed to our Web properties by search engines. The industry commonly refers
to these efforts as search engine optimization, or SEO. One of our principal
strategic initiatives is centered on our understanding that content drives
traffic through SEO. We believe that rich, unique content is valued by the user
and by the search engines and their content indexing algorithms. Thus, we have
historically focused on adding unique content that has not been broadly offered
on the Web. Currently, the Q&A-oriented content belonging to WikiAnswers is
playing an overwhelming role in creating rich and unique information for
Answers.com. Our additional SEO efforts involve optimizing Answers.com’s coding,
presentation and structure, such as incorporating a clear hierarchical
site-structure, and structuring the site to facilitate search engine
indexing.
In July
2007, a search engine algorithm adjustment by Google led to a drop in Google
directed traffic to ReferenceAnswers. Future changes in algorithms that search
engines use to identify Web pages towards which traffic will ultimately be
directed, or restrictions by search engines on users visiting Answers.com, could
cause a significant decrease in traffic and revenues.
Direct
users. Answers.com also receives traffic from users visiting
and returning to our sites directly. Direct users, including Google definition
link traffic, represented 11% of our traffic for the fourth quarter of
2009.
Google definition
link. Since 2005, we benefited from an informal, non-contractual
relationship with Google under which Google linked certain search results
related to definitional queries to ReferenceAnswers. This link (or links, in the
case of multiple-phrase queries) appeared at the right end of the blue header
bar for Google Search Results. For the ten months ended October 31, 2009,
according to our internal estimates, this source of traffic represented
approximately 5% of our overall traffic and revenue. In October 2009, Google
informed us that beginning sometime during the fourth quarter of 2009, they will
no longer be sending us traffic from the Google Definition Link. By the end of
2009, all Google definition link traffic had been discontinued. Despite this
change, we continue to receive very significant levels of traffic from Google’s
search engine, as described above.
Traffic
Monetization
We earn
practically all of our revenue from advertising. There are two primary
categories of Internet advertising: pay-per-performance, also known as
cost-per-click (“CPC”), and pay-per-impression display ads or cost per 1,000
impressions (“CPM”). In the CPC model, we earn revenue based on the number of
clicks associated with an ad; in the CPM model, we derive revenue from the sole
display of ads on pages that are visited by our audience. 90% and 10% of our
advertising revenue in 2009 was earned from CPC advertising and CPM advertising,
respectively. We obtain CPC and CPM advertisements from third-party ad networks.
These ad networks compensate us by paying us a portion of the revenue they earn
from advertisers for our provision of promotional space on
Answers.com.
Our
primary third party ad network, Google AdSense, provided Answers.com with almost
all of the site’s CPC ads and accounted for approximately 88% of our total
advertising revenue in 2009.
Google AdSense. Google
AdSense refers to the online program through which Google distributes
advertisers’ “AdWords” ads, for display on the web sites of its Google Network
members. Answers.com is a member of such network. Google’s AdSense program
includes, amongst others, “AdSense for search” and “AdSense for content”, both
of which are utilized on Answers.com.
AdSense for search is
Google’s online service for distributing relevant ads from advertisers for
display with search results. Google’s AdSense for search ads are targeted to
match user search queries. For example, if a user has typed into the Answers.com
search box a query with the words “going green initiatives,” the search result
page may include ads relating to environmentally-friendly products. Answers.com
displays Google’s AdSense for search ads in textual format. Most of the ads
served on the ReferenceAnswers component of Answers.com are delivered by AdSense
for search.
AdSense for content is
Google’s online service for distributing ads from its network of advertisers
that are relevant to content appearing on Answers.com. Google’s technology
analyzes the meaning of the content on Answers.com web pages and serves relevant
ads based on the meaning of such content. For example, a web page with a
question and an answer about finding a job might display ads for job placement
agencies or higher education programs. While AdSense for content allows a
variety of ad types to be shown, including text ads, image ads, Google Video Ads
and more, Answers.com utilizes text ads, almost exclusively. The ads displayed
on the WikiAnswers component of Answers.com are almost always drawn from AdSense
for content.
The
advertisers in Google’s network pay Google a fee each time an Answers.com user
clicks on their advertisement which Google served to our web site. Google shares
the revenue associated with these clicks, with us.
Google
Contract. In January 2005, we entered into the Google Services
Agreement (GSA) governing our participation in Google AdSense. In effect, the
GSA positions Google AdSense as our most significant third party ad network. The
GSA, extended for an additional two years pursuant to an October 2009 amendment,
is scheduled to expire on January 31, 2012. Google may terminate the GSA
with no advance notice for any of the following reasons:
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·
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our
breach of certain prohibited actions including, among other
things:
|
|
o
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editing
or modifying the order of search
results,
|
|
o
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redirecting
end users, producing or distributing any software which prevents the
display of ads by Google,
|
|
o
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modifying,
adapting or otherwise attempting to obtain source code from Google
technology, content, software and documentation,
or
|
|
o
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engaging
in any action or practice that reflects poorly on Google or otherwise
disparages or devalues Google’s reputation or
goodwill;
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our
breach of the grant of a license to us by Google of certain trade names,
trademarks, service marks, logos, domain names and other distinctive brand
features of Google;
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our
breach of the confidentiality provisions of the
GSA;
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our
breach of the exclusivity provisions of the
GSA; or
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our
material breach of the GSA more than two times, irrespective of any cure
to such breaches.
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Direct Ad Sales. In the
second quarter of 2008, we decided to suspend our direct ad sales efforts and to
instead focus on selling ads through advertising networks, primarily Google
AdSense. In the second and third quarter of 2008 we terminated all of our direct
ad sales employees. This decision allowed us to focus on growing the community,
growing our traffic and monetizing via Google and other ad networks.
Notwithstanding the lack of a direct ad sales team, we are occasionally
approached directly by advertisers who wish to advertise on Answers.com, and we
often facilitate such requests.
Licensing Revenue. We earn a
negligible portion of our revenues from partners that pay us for providing them
with our answer-based services that they then use in their own products, via
co-branded Web pages. Revenues from these arrangements are based on various
formulae, including fees based on the number of user queries and fixed periodic
fees.
Seasonality
Our
results of operations have historically been affected by seasonal patterns in
both traffic to Answers.com and advertising demand. For example, many of our
users are students that utilize Answers.com as reference sources. Our traffic
fluctuates with the academic school year, rising from January through May,
falling to lower levels during the summer months, rising again in September
through November, and falling again in December, coinciding with school breaks
and the holiday season. We expect traffic to Answers.com to continue to
fluctuate seasonally in the future. This seasonal fluctuation contributes to the
fluctuation in our quarterly revenues.
Community
Development
As part
of our continuous effort to support our growing community, the last year has
seen continued focus on several site-wide, community-oriented programs designed
to foster loyalty, increase repeat visits and build on the “human element” that
has fueled Answers.com’s growth.
Volunteer Premier Answerers.
Volunteer Premier Answerers are a group of dedicated contributors recognized for
the time and effort they spend researching and providing consistent improvement
to answers. Typically, they are experts in a certain field or on a particular
topic and possess the knowledge to answer complex or detailed questions. By
empowering these special contributors to focus on what they know best, the
overall quality and utility of Answers.com improves.
Volunteer WikiReviewers.
Volunteer WikiReviewers are registered users dedicated to taking on an organized
approach to improving site quality. These members review flagged questions to
fix general spelling and grammar, rewrite answers to ensure neutrality and
original content, and generally improve answers to make them more applicable to
the question being asked. Some volunteer WikiReviewers research difficult
questions that are unanswered for a prolonged period of time. By improving the
quality of the content in these areas, the site becomes more user-friendly and
improves site credibility.
Mentoring Program. The
Mentoring Program is an effort to provide a friendly, fun and worthwhile
learning experience for newly appointed volunteer Supervisors who are looking to
pursue a more active role in the community. Experienced volunteer Mentors are
matched-up with new volunteer Supervisors. Mentors are site veterans who have
garnered considerable experience and knowledge, enabling them to provide solid
support and guidance to up-and-coming contributors.
Community Outreach Program.
Volunteer WikiGuides enhance the community environment by creating a sense of
citizenship and interconnectedness among Answers.com participants. Through the
Outreach Program, new contributors are greeted with a warm welcome, infrequent
visitors are given positive feedback on their contributions, and less-active
volunteer Supervisors are encouraged to return to active participation.
WikiGuides also deliver invitations to participate in site-wide events and
congratulations on special occasions and for participation achievements. The
welcoming atmosphere created by our Outreach Program improves member retention
and draws back site contributors when their motivation lags.
Influential Teens Program.
The Influential Teen Program, also known as WIT (WikiAnswers Influential Teens),
builds on the growing community of teen contributors on the site. The aim of the
program is to provide a constructive and safe online locale for teens to “hang
out” and ask and answer questions. WIT is about empowering teens through
specially created individual projects. Through WIT, these future trailblazers
develop their leadership abilities while learning how to use the site and its
features correctly.
Vandal Patrol Program. The
Vandal Patrol Program addresses the problem of damaging or abusive edits to
content, a common problem on wiki-based sites. As user-generated
content on Answers.com grows in both size and recognition, it continues to
attract not only great contributors, but more vandals as well. Through this
targeted program, volunteer participants enjoy finding, eliminating, and
defending against vandalism on the site.
Dispute Resolution Program.
With an ever-growing and diverse community spanning across the globe, the need
for a Dispute Resolution Program on Answers.com is apparent. Our Community
Development team receives reports regarding editing conflicts – large and small
– that they work to resolve amicably. Through appealing to this mediating
service, contributors enjoy improved communication, less discord, and better
understanding of their fellow contributors.
Moving
toward the future, Community Development intends to further strengthen our
ability to support a growing population of people asking, answering, and
organizing questions through clear community oriented policies and community
influenced projects that embrace the ability for large crowds to collaborate at
a pace with the site’s expected growth.
Our
Strategy
We
believe our valuable content and overall user experience drives traffic to
Answers.com, which in turn drives the creation of more content and more traffic.
Our traffic is monetized through advertising. As we view our business consisting
of the core Answers.com platform with several possible product extensions, the
key elements of our strategy to increase revenue will include:
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1.
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Investment
in, and development of, our core Answers.com service,
by:
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Growing
our Q&A database;
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Improving
content quality by, among others, developing tools and engaging
users;
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Building
and empowering our user community;
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Improving
overall user-experience and core user
functionality;
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Enhancing
our search engine optimization (SEO)
efforts;
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Improving
the relevance of internal text search;
and
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Introducing
newly-licensed content
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2.
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Continuous
development of our international versions,
by:
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Translating
English Q&A content into other
languages;
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Building
communities around the international languages;
and
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Launching
additional languages
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3.
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Enabling
mobile access to Answers.com via
smart-phones
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4.
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Connecting
more aggressively to social media platforms,
by:
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More
tightly integrating the question and answering process with popular social
networks, such as Facebook and Twitter;
and
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Leveraging
our community towards greater social
engagement
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5.
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Entering
the video space, by:
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Syndicating
video from third-party video aggregators and potentially adding a video
creation platform to Answers.com
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Technology
Research
and Development
We devote
a substantial portion of our resources to enhancing and improving our existing
core product, Answers.com, developing new product extensions and strengthening
our technological expertise. In fiscal years 2008 and 2009, we spent
approximately $3.5 million and $3.6 million, respectively, on research and
development of our products and services. Our engineering and production teams
are located in our Jerusalem, Israel development facility, with additional
production support provided from our office in New York City. We have developed
our technology internally, acquired it or licensed it from outside
vendors.
Hosting Services
We manage
our Web operations through our two independently-managed data centers, which we
refer to as colocation facilities. Our facility located in New Jersey is
supported by Net Access Corporation (the “First Facility”) and our facility
located in Utah is supported by C7 Data Centers, Inc. (the “Second Facility”).
Our agreements with Net Access Corporation and C7 Data Centers provide us with
the right to use space, equipment, Internet bandwidth, electrical power, cooling
and other facility functionalities, enabling us to monitor and manage our
applications, databases, servers, routers, IT devices and other networkable
assets. Continuous maintenance and operation of the colocation facilities are
critical to the stability and growth of Answers.com and our ancillary Web
operations. The advantages of managing our operations out of two separate
colocation facilities include, among others:
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Near-to-complete
redundancy and load balancing;
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Greater
ability to handle traffic spikes, Internet attacks and Internet
brownouts;
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Much
faster recovery from single-site issues or disasters;
and
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Built-in
backup by virtue of maintaining a copy of all data in both
locations.
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Net Access
Contract. On April 19, 2008, we entered into a Network Access
and Data Center Services Agreement with Net Access with respect to the First
Facility (the “NetAccess Agreement”). The term of the NetAccess Agreement is
thirty six months and is scheduled to expire in April 2011. Specific services
are provided by Net Access pursuant to service-specific Service Orders entered
into by the parties from time to time. The NetAccess Agreement will
automatically renew unless cancelled by us sixty days prior to its scheduled
expiration, and does not include provisions affording Net Access the right to
terminate its services prior to such scheduled expiration. We have also entered
into a service level agreement pursuant to which Net Access has guaranteed
certain standards of service level and operational specifications (the
“NetAccess SLA”). We believe that the NetAccess SLA sufficiently addresses our
operational needs. Termination of our relationship with Net Access, for whatever
reason, would result in our need to replace this relationship and obtain
colocation facility services from alternative providers. We believe we would
successfully locate and engage such alternative providers, however, there is no
assurance we would receive equally favorable terms as those provided in the
NetAccess Agreement and NetAccess SLA.
C7 Contract. On
March 31, 2009, we entered into a Master Services Agreement with C7 with respect
to the Second Facility (the “C7 Agreement”). The term of the C7 Agreement is
thirty six months from the date of installation and is scheduled to expire in
April 2012. Specific services are provided by C7 pursuant to service-specific
Statements of Work entered into by the parties from time to time. Each statement
of work automatically renews unless cancelled by us ninety days prior to its
scheduled expiration. C7 is afforded the right to terminate its services upon
the failure by us to cure a breach of the C7 Agreement on our part, following a
twenty day cure period. The C7 Agreement includes a service level agreement
pursuant to which C7 has guaranteed certain standards of service level and
operational specifications (the “C7 SLA”). We believe that the C7 SLA
sufficiently addresses our operational needs. Termination of our relationship
with C7, for whatever reason, would result in our need to replace this
relationship and obtain colocation facility services from alternative providers.
We believe we would successfully locate and engage such alternative providers,
however, there is no assurance we would receive equally favorable terms as those
provided in the C7 Agreement and C7 SLA.
Competition
Competition
in the questions and answers space has greatly intensified over the past several
years, and Answers.com faces significant competition from a wide variety of Web
properties. Question and answer sites, such as Yahoo! Answers (owned by
Yahoo!), Yedda (owned by AOL), Answerbag.com (owned by Demand
Media, Inc.), Aardvark (owned by Google), Wikia, Inc., Askville (owned by
Amazon), StackOverflow, ChaCha, Mahalo Answers, Hunch and many other properties,
all compete with our community-driven component of Answers.com. Content sites
that compete for the same users searching for information include destination
portals and other free online information and/or reference services, such as
e-How (owned by Demand Media), Seed.com (owned by AOL), About.com (owned by the
New York Times), Dictionary.com (owned by IAC/InterActiveCorp), HowStuffWorks
(owned by Discovery Communication), WikiHow, TheFreeDictionary.com and
Wikipedia.org. These sites also compete with Answers.com.
Since
several companies operating traditional search engines, such as Google, Yahoo!,
Microsoft, AOL and Ask.com offer answers within their search services, these
companies too can be viewed as competitors of our answers-driven products,
particularly in light of the fact that some search engines have begun putting
snippets of useful answers at the top of many of their pages, in response to
queries made by users. Nevertheless, search engines remain the greatest source
of traffic arriving at our Web properties.
Many of
our competitors have longer operating histories, more extensive management
experience, an employee base with more extensive experience, better geographic
coverage, larger consumer bases, greater brand recognition and significantly
greater financial, marketing and other resource than we do. We expect
competition to further intensify in the future. If our competitors are more
successful than we are in developing compelling products or attracting and
retaining users, then our competitive position and financial results could be
adversely affected.
Marketing
To
enhance the Answers.com brand, we are pursuing a brand development strategy that
includes word-of-mouth marketing, direct marketing, spreading the word via
social media networks, blogging and public relations efforts.
Word of Mouth Marketing. We
benefit from word of mouth advertising when users share their positive
experience using Answers.com with friends, colleagues, family, and others. We
work to encourage the practice by adding features that make it simple to link to
Answers.com, or post information from, or send an e-mail with information from
answers.com.
Direct Marketing. We aim to
annually produce several events for directly reaching our community audience in
an interactive manner. We have institutionalized the Answerthon™ weekend
contests on Answers.com, occurring several times throughout the year, in which
users attempt to answer as many questions as they can and compete for prizes. We
have also established an Answers.com Scholarship Fund in order to better connect
with our student demographic, by offering $20,000 in scholarships for answering
questions in any categories of interest. This initiative took place in 2009 and
is recurring in 2010. We also held certain community events, virtual and live,
for purposes of bolstering loyalty of prominent contributors and volunteer
supervisors, while at the same time facilitating the establishment of stronger
community identification and more social interaction between members of the
site. For example, in December 2009, we held the Answers Summit, an event which
included workshops on growing, improving and celebrating our Q&A
platform.
Social Media Networks.
Answers.com includes features that enable users to share a question or an answer
with their friends and contacts via Facebook, or Twitter. Our site also
facilitates interaction by users with the brand via becoming a fan of
Answers.com on Facebook, subscribing to the Answers.com channel on YouTube or
following Answers.com on Twitter. We have also retained a consultant focused on
attracting Twitter users to feeds concerning Answers.com in an effort to raise
awareness of and create mass linking to the site by way of
“Tweets”.
Blogging. We maintain a blog
at www.nostupidanswers.com which we use to share news about the community,
acquaint users with our top contributors and volunteer supervisors, update the
community about the Company and recent product features and developments, as
well as engage the community by sharing stories, tips and trivia about a wide
variety of topics of interest.
Public Relations Efforts.
Over the years, we have received multiple favorable reviews from numerous
publications and we plan on continuing our public relations efforts with
outreach, speaking opportunities and sponsorships at conferences, press
releases, interviews and briefings. For example, in 2009 we sponsored such
conferences as DEMOfall ‘09, Web 2.0 Summit, LeWeb and the Online Community
Summit.
Employees
At
December 31, 2009, we had 86 employees, of which 73 were full-time
employees and 13 were part-time employees. As of such date, 60 employees
were located in our office in Jerusalem and 26 employees were based in the
United States. None of our employees is subject to a collective bargaining
agreement, and we consider our employee relations to be
satisfactory.
Intellectual
Property
We regard
our domain names, patents, trademarks, copyrights, trade dress, trade secrets,
proprietary technologies and similar intellectual property as critical to our
success, and we rely on patent, trademark and copyright law, trade-secret
protection, and confidentiality and/or license agreements with our employees,
customers, partners, and others to protect our proprietary rights.
The
United States Patent and Trademark Office has granted us four United States
patents; the Israeli Patent Office has granted us one patent. We have one patent
pending in the United States and a corresponding patent pending under the Patent
Cooperation Treaty.
The
status of any patent involves complex legal and factual questions, and the
breadth of claims allowed is uncertain. Accordingly, we cannot assure you that
any patent application filed by us will result in a patent being issued or that
our issued patents, and any patents that may be issued in the future, will
afford adequate protection against competitors with similar technology. We
similarly face the risk that any patents issued to us might be infringed or
designed around by others.
While we
rely on patent and other intellectual property laws to protect our technology,
we also believe that factors such as the technological and creative skills of
our personnel, new product developments, frequent product enhancements and
reliable product maintenance are essential to establishing and maintaining our
market position. We enter into confidentiality agreements, as appropriate, with
our employees, consultants and customers, and otherwise seek to control access
to, and distribution of, our proprietary information. These measures, however,
afford only limited protection. There is no guarantee that these safeguards will
protect our technology and other valuable competitive information from being
used by competitors.
We have
applied for, or have been assigned by third parties, numerous domain names and
have filed applications for a number of trademarks by U.S. governmental
authorities. To date, we have been granted a Community Trademark (“CTM”) by the
European Office for Harmonization in the Internal Market for the Answers.com
mark and we expect the U.S. registration for the Answers.com mark in the first
half of 2010. We have also been granted a CTM and a registered U.S. mark for the
word WikiAnswers, and a U.S. mark for the word AnswerTips.
Companies
in the Internet, technology, and media industries own large numbers of patents,
copyrights, and trademarks and frequently enter into litigation based on
allegations of infringement or other violations of intellectual property rights.
As we face increasing competition, the possibility of intellectual property
claims against us grows. Answers.com has been, and from time to time we expect
to continue to be, subject to claims of alleged infringement of copyrights,
trademarks and other intellectual property rights of third parties. These claims
and any resultant litigation, should it occur, could subject us to significant
liability for damages. Our technologies may not be able to withstand any
third-party claims or rights against their use. In addition, even if we prevail,
litigation could be time-consuming and expensive to defend and could result in
the diversion of our time and attention. Any claims from third parties may also
result in limitations on our ability to use the intellectual property subject to
these claims, unless we are able to enter into license agreements with the third
parties making these claims.
Government
Regulation
We are
subject to a number of domestic and foreign laws and regulations that affect
corporations using the Internet as their business platform. The interpretation
of laws and regulations pertaining to the privacy of users, freedom of
expression, content, advertising and intellectual property rights in the United
States and in foreign jurisdictions may at times be unclear or unsettled.
Additionally, rules and regulations in these areas are being debated and
considered for adoption in other countries, and we face risks from proposed
legislation that may be adopted in the future.
In the
U.S., laws governing the liability of Internet companies offering online
services for the activity of Website users and/or other third parties, are
currently being tested by a number of claims. Cases include actions for libel,
slander, invasion of privacy and other tort claims, unlawful activity, trademark
and copyright infringement, as well as other theories based on the nature and
content of the materials searched, the ads posted, or the content generated by
users. Certain foreign jurisdictions are also testing the liability of providers
of online services for activities of their users and other third parties. Any
court ruling that will impose liability on providers of online services for
activities of their users and other third parties could harm our
business.
Nevertheless,
to resolve some of the current legal uncertainty, we expect the courts to
interpret these laws and regulations and such rulings may be applicable to our
activities. Such rulings could generally dampen the growth in use of the
Internet and could potentially expose us to substantial liability, including
significant expenses necessary to comply with applicable laws and regulations.
Several U.S. federal laws that could have an impact on our business
include, among others:
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The
Digital Millennium Copyright Act (“DMCA”), intended to reduce the
liability of online service providers for listing or linking to third
party Web properties that include materials that infringe copyrights of
others. The DMCA is intended to limit, but does not necessarily eliminate,
our liability for listing, linking, or hosting third-party content that
includes materials that infringe
copyrights.
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Portions
of the Communications Decency Act, intended to provide statutory
protections to online service providers who distribute third party
content.
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The
Child’s Online Protection Act, or COPA, the Children’s Online Privacy
Protection Act, or COPPA and the Prosecutorial Remedies and Other Tools to
End Exploitation of Children Today Act, are intended to restrict the
distribution of certain materials deemed harmful to children and impose
additional restrictions on the ability of online services to collect user
information from minors.
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The
CAN-SPAM Act is intended to regulate spam and create criminal penalties
for unmarked sexually-oriented material and emails containing fraudulent
headers.
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A range
of other laws and new interpretations of existing laws could have an impact on
our business. For example, in the area of data protection, many states have
passed laws requiring notification to users when there is a security breach for
personal data, such as California’s Information Practices Act. The costs of
compliance with these laws may increase in the future as a result of changes in
interpretation. Furthermore, any failure on our part to comply with these laws
may subject us to significant liabilities.
We post
our privacy policy and practices concerning the use and disclosure of user data.
Any failure by us to comply with our posted privacy policy, U.S. Federal
Trade Commission requirements or other domestic or international privacy-related
laws and regulations could result in proceedings by governmental or regulatory
bodies, that could potentially harm our business, results of operations and
financial condition. In this regard, there are a large number of legislative
proposals before the European Union, as well as before the United States
Congress and various state legislative bodies, regarding privacy issues related
to our business. It is not possible to predict whether or when such legislation
may be adopted, and certain proposals, if adopted, could harm our business
operations. For example, decreases in usage of Answers.com could be caused by,
among other provisions, the required use of disclaimers or other requirements
before users can utilize our services.
In
addition, because our services are accessible worldwide, and particularly in
light of our recent launch of several international versions of WikiAnswers,
certain foreign jurisdictions may claim that we are required to comply with
their laws, including laws relating to labor arrangements, taxes, media and
content, among others, even where we have no local entity, employees, or
infrastructure. We might unintentionally violate such laws, such laws may be
modified or interpreted to our detriment, and new laws may be enacted in the
future. Any such developments could harm our business, operating results and
financial condition.
We may be
subject to legal liability for specific types of online services we provide. We
direct users to a wide variety of services that enable individuals to exchange
information, conduct business and engage in various online activities on an
international basis. The law relating to the liability of providers of these
online services for activities of their users is currently unsettled both within
the United States and abroad. Claims may be threatened against us for aiding and
abetting defamation, negligence, copyright or trademark infringement, or other
theories based on the nature and content of information to which we provide
links or that may be posted online.
Operations
in Israel
The Law
for the Encouragement of Capital Investments, 5719 – 1959 (the “Investment
Law”), provides that upon application to the Investment Center of the Ministry
of Industry, Commerce and Employment of the State of Israel, or the Investment
Center, a proposed capital investment in eligible capital expenditures may be
designated as an Approved Enterprise. Each certificate of approval for an
Approved Enterprise relates to a specific investment program delineated both by
its financial scope, including its capital sources, and by its physical
characteristics, such as the equipment to be purchased and utilized under the
program. The tax benefits derived from any certificate of approval relate only
to taxable income derived from growth in manufacturing revenues attributable to
the specific Approved Enterprise. If a company has more than one approval or
only a portion of its capital investments are approved, its effective tax rate
is the result of a weighted combination of the applicable rates.
Taxable
income of a company derived from an Approved Enterprise is subject to tax at the
maximum rate of 25% for the benefit period. This period is ordinarily
7 years, beginning with the year in which the Approved Enterprise first
generates taxable income, and is limited to 12 years from when production
begins or 14 years from the date of approval, whichever is earlier. A
company owning an Approved Enterprise may elect to receive an alternative
package of benefits, which allows the company to receive tax exemptions rather
than grants. Under the alternative package, the company’s undistributed income
derived from an Approved Enterprise will be exempt from tax for a period of
between 2 and 10 years from the first year of taxable income, depending on
the geographic location of the Approved Enterprise within Israel, and the
company will be eligible for the tax benefits under the Investment Law for the
remainder of the benefit period.
The
benefits available to an Approved Enterprise are conditional upon compliance
with the conditions stipulated in the Investment Law and related regulations and
the criteria described in the specific certificate of approval. If a company
violates these conditions, in whole or in part, it would be required to refund
the amount of tax benefits and any grants received plus an amount linked to the
Israeli consumer price index and interest.
On April
1, 2005, amendment No. 60 to the Investment Law became effective (the
“Amendment") and has changed several provisions of the Investment Law, mainly in
respect of the alternative package. The Amendment sets forth the scope of
enterprises which may qualify as a Beneficiary Enterprise - under the Amendment,
the designation is Beneficiary Enterprise rather than Approved Enterprise - by
setting forth criteria for qualification of a company. Additionally, the
Amendment determined that companies operating under the alternative package no
longer require Investment Center approval in order to qualify for tax benefits.
Instead, this position will be incorporated as part of the regular tax audits of
the Israeli Tax Authorities (the “ITA”).
Under the
Amendment, the year in which a company elects to commence its tax benefits is
designated as the year of election (“Year of Election”). A company may choose
its Year of Election by notifying the ITA in its annual tax return or within
twelve months after the end of the Year of Election, whichever is earlier, or by
requesting a pre-ruling from the ITA no later than six months after the end of
the Year of Election. However, the Investment Law provides that terms and
benefits included in any letter of approval which was granted prior to the
effective date of the Amendment, will remain subject to the provisions of the
law as they were on the date of such approval. Therefore, our Israeli
subsidiary’s (GuruNet Israel Ltd.) existing Approved Enterprise status will
generally not be subject to the provisions of the Amendment, while in order to
receive further benefits, it will have to meet the Amendment's requirements.
During 2009, GuruNet Israel Ltd. elected 2008 as the Year of Election under the
Amendment, for its second expansion.
GuruNet
Israel Ltd. currently has three capital investment programs, two of which were
granted Approved Enterprise status under the Investment Law prior to the
Amendment, ending December 31, 2009 and December 31, 2014, respectively, and one
Beneficiary Enterprise pursuant to the Amendment, ending December 31, 2017.
Qualifying income arising from our Approved Enterprise is tax-free in Israel
under the alternative package of benefits described above for a period of
10 years from the first year in which our Israeli subsidiary generates
taxable income from such Approved Enterprise, but not later than certain
specified periods. We have begun to generate taxable income for purposes of the
Investment Law, and we have utilized these tax benefits beginning in 2000. The
Investment Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program.
Our New
York office, which serves as our corporate U.S. headquarters for community
development, investor relations, sales and parts of production operations, is
located at 237 West 35th
Street, Suite 1101, New York, NY 10001 and occupies a portion of the 11th
floor at this location. The current per annum rent for this office is
approximately $73,000. The lease for these premises expires in June 2010 and we
are actively seeking new office space with a view towards expanding our U.S.
headquarters.
Our
research and development facility is located on the entire 7th
floor of the Tower (Building 2), Jerusalem Technology Park, P.O. Box 48253,
Jerusalem 91481, Israel in approximately 1,000 square meters of space, occupied
under a 5-year lease with a current monthly rental rate of approximately $21,000
based on the Dollar-NIS exchange rate on December 31, 2009. The lease will
expire in July 2010, with an option to extend the term for an additional 5
years. Our current plan is to locate and lease additional space or alternative
space for expanding our research and development operations in advance of
the expiration of this lease. We believe that there is space available in the
local markets at reasonable rates that will be suitable for our
needs.
From time
to time, we receive various legal claims incidental to our normal business
activities, such as intellectual property infringement claims and claims of
defamation and invasion of privacy. Although the results of claims cannot be
predicted with certainty, we believe the final outcome of such matters will not
have a material adverse effect on our financial position, results of operations,
or cash flows. Regardless of the outcome, litigation can have an adverse
impact on us because of defense costs, diversion of management resources, and
other factors. In addition, it is possible that an unfavorable resolution of any
proceeding could in the future materially and adversely affect our financial
position, results of operations, or cash flows.
PART
II
Item 5. Market for the Registrant’s Common Stock,
Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our
common stock has been quoted on The NASDAQ Global Market under the symbol “ANSW”
between August 2, 2005 and September 28, 2008 and on The NASDAQ Capital
Market, under the same symbol, since September 29, 2008. The following table
sets forth the high and low closing sale prices for our common stock as quoted
on The NASDAQ Global Market (or The NASDAQ Capital Market, as the case may be)
for the fiscal years ended December 31, 2008 and 2009 and the subsequent
period indicated.
|
|
High
|
Low
|
|
|
Year
ended December 31, 2008
|
|||
|
First
quarter
|
$6.93
|
$3.76
|
|
|
Second
quarter
|
$5.52
|
$3.27
|
|
|
Third
quarter
|
$5.77
|
$2.82
|
|
|
Fourth
quarter
|
$7.23
|
$3.70
|
|
|
Year
ended December 31, 2009
|
|||
|
First
quarter
|
$9.56
|
$5.62
|
|
|
Second
quarter
|
$8.88
|
$6.05
|
|
|
Third
quarter
|
$9.11
|
$7.73
|
|
|
Fourth
quarter
|
$10.86
|
$7.40
|
|
|
Year
ending December 31, 2010
|
|||
|
First
quarter (through March 5, 2010)
|
$8.95
|
$7.46
|
The
closing sale price of our common stock as reported by The NASDAQ Capital Market
on March 5, 2010 was $8.45 per share.
As of
March 1, 2010, there were approximately 40 holders of record of our common
stock (not including beneficial owners holding shares in nominee accounts). We
have not paid any common stock cash dividends since formation and we do not
expect to pay any common stock cash dividends in the foreseeable future. During
2009 we did not repurchase any shares of our common stock.
Equity
Compensation Plan Information
The
following table sets forth certain information at December 31, 2009 with respect
to our compensation plans that provide for the issuance of options, warrants or
rights to purchase our securities.
|
No.
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
No.
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||
|
Equity
compensation plans approved
by security holders
|
2,316,088
|
$8.80
|
379,255
|
||
|
Equity
compensation plans not approved
by security holders
|
—
|
—
|
—
|
||
|
Total
|
2,316,088
|
379,255
|
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operation.
The
following discussion and analysis should be read in conjunction with, and is
qualified in its entirety by, our financial statements (and notes related
thereto) and other more detailed financial information appearing elsewhere in
this annual report. In addition to historical information, this annual report
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Exchange Act. These
statements include, among other things, statements concerning:
|
·
|
Our
expectations relating to the growth of our business and
revenue;
|
|
·
|
Our
expectations concerning future traffic
trends;
|
|
·
|
Our
expectations concerning future RPM
trends;
|
|
·
|
Our
plans to continue investing resources in our core platform in areas such
as content quality, maintaining and improving search engine optimization,
performance, scalability, and
usability;
|
|
·
|
Our
plans to continue our investment in the FIGS versions of WikiAnswers and
our belief that this area will be critical to our growth in future
years;
|
|
·
|
Our
plans surrounding mobile Answers.com
access;
|
|
·
|
Our
plans to further address the social answers space by more tightly
integrating the question-answering process with popular social
networks;
|
|
·
|
Our
intention to enter the video space in order to enrich the types of answers
we serve our user base;
|
|
·
|
Our
expectation that at least some of our planned product extensions will
contribute significantly to 2011
revenue;
|
|
·
|
Our
expectations concerning seasonality and traffic patterns in the
future;
|
|
·
|
Our
expectation that CPC ads will continue to generate the overwhelming
majority of our revenue;
|
|
·
|
Our
expectation to grow our research and development team significantly in
2010;
|
|
·
|
Our
expectation that going forward, cash flow from operations will continue to
be our principal source of liquidity;
and
|
|
·
|
Our
belief that we have sufficient cash and cash equivalents to meet our
working capital and operating requirements for at least the next twelve
months;
|
As
well as other statements concerning our future operations, financial condition
and prospects and business strategies. These forward-looking statements are
subject to certain risks and uncertainties that could cause our actual results
to differ materially from those reflected in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in this annual report, and in particular, the risks
discussed in other documents we file with the SEC. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements. Given the risks and uncertainties, readers are cautioned not to
place undue reliance on such forward-looking statements.
Introduction
This
Management discussion and analysis, or
MD&A, is divided into sections entitled “General,” “Results of
Operations,” “Liquidity and Capital Resources,” “Off Balance Sheet
Arrangements,” “Critical Accounting Estimates” and “Quarterly Results”. The
“General” section contains information regarding our business and recent events
as well as background and commentary regarding the revenue and expense captions
that comprise our Statement of Operations. The “Results of Operations” section
is our commentary on this year’s results of operations compared to the
immediately preceding year. All of the sections herein should help provide a
better understanding of the major factors and trends that affect our earnings
performance and financial condition, and how our performance during 2009
compares to prior years.
General
We own
and operate Answers.com, a leading Q&A site, dedicated to providing useful
answers to questions about anything. Answers.com includes WikiAnswers and
ReferenceAnswers. WikiAnswers is a community-generated social knowledge Q&A
platform, leveraging wiki-based technologies. Through the contributions of the
community, our questions and answers are continuously growing, improving and
being updated, to form the world’s greatest Q&A database. ReferenceAnswers
provides trusted editorial content on millions of topics licensed from what we
believe to be the world’s top reference publishers. ReferenceAnswers usually
provides the best results for simple questions of the who-is, what-is variety. More
complex questions are better handled by WikiAnswers. Our goal is to become the
dominant and recognized market leader for answers on the Internet.
According
to our internal estimates, Answers.com generated 9.4 million average daily page
views in 2009 compared to 5.8 million average daily page views in 2008.
According to comScore, under its new hybrid audience measurement methodology,
Answers.com had 50 million unique visitors in the U.S. in January 2010, ranking
the site number 18 among the top U.S. Web properties for that month. Also
according to comScore, Answers.com had approximately 77 million unique visitors
worldwide in January 2010, ranking us number 33 worldwide.
New
Answers.com: Integration of WikiAnswers and ReferenceAnswers
In
September 2009 we announced the launch of the new Answers.com, in recognition of
the integration of our two Web properties, culminating a process that began
several quarters earlier. Answers.com is the name we now use for our combined
site, as well as our umbrella brand, and is comprised of two properties or
sub-brands, WikiAnswers and ReferenceAnswers. The product strategy guiding the
integration was our desire to give users one address for the best answers to all
types of questions – be they community-generated from WikiAnswers, or
editorially licensed from ReferenceAnswers.
The first
stages of the integration were minor - creating a similar “look and feel” for,
and cross-linking between, the properties. Thus, for example, a user looking up
“Michael Jackson” in ReferenceAnswers, arrived at a page displaying reference
content covering the specific query, in addition to being asked to answer
WikiAnswers unanswered questions relating to Michael Jackson. The result page
also resembled a WikiAnswers page by way of including the standard “Ask” and
“Answer” bar in the header of the page, as opposed to the original “Search”
button displayed adjacent to the query bar. Subsequently, we added an “All”
radio button adjacent to the query bar on both properties, allowing users,
should they choose, to find a result by searching both properties. In the second
quarter of 2009, we took an additional and important step in integrating both
Web properties by making the “All” radio button the default setting above the
query box of both properties. As a result of this user-interface change, users
typing in queries into either of our properties are automatically directed to
the Web page our algorithms deem most appropriate as a response. For example, a
user typing the query, “When did WWII start?” in ReferenceAnswers, lands on a
Web page belonging to WikiAnswers with an answer to that question. A user typing
the query “Who is Oprah Winfrey?” in WikiAnswers, arrives at a ReferenceAnswers
page displaying the Oprah Winfrey topic. In September 2009, we took our final
step in integrating the two Web properties by creating a new unified Answers.com
home page and login, integrating features from both properties, and making other
changes in our user interface to strengthen our positioning as having one
dominant product and brand, Answers.com, comprised of the two properties,
WikiAnswers and ReferenceAnswers.
How
we Generate Revenue
Traffic
Our
revenue is driven by the traffic generated by Answers.com and our ability to
effectively monetize that traffic. Search engines, primarily Google, are
responsible for most of the traffic to Answers.com. Users submit queries and
search engines respond by generating a list of Web pages that they deem likely
to offer the most relevant content. When an Answers.com page ranks high in the
algorithmic systems of search engines, our results are more likely to be
accessed by users. For the three and twelve months ended December 31, 2008,
according to our internal estimates, this source of traffic represented
approximately 80% and 76%, respectively, of Answers.com’s traffic. For the three
and twelve months ended December 31, 2009, according to our internal estimates,
this source of traffic represented approximately 89% and 86%, respectively, of
Answers.com’s traffic.
The balance
of the traffic arriving at Answers.com in 2008 and 2009 originated from direct
usage, i.e., users visiting our home page and/or navigating within Answers.com,
and from users who have clicked on Google’s Definition Link feature. Beginning
in 2005, we benefited from an informal, non-contractual relationship with Google
under which Google linked certain search results related to definitional queries
to ReferenceAnswers. This link (or links, in the case of multiple-phrase
queries) appeared at the right end of the blue header bar for Google Search
Results. For the nine months ended September 30, 2009, according to our internal
estimates, this source of traffic represented approximately 5% of our overall
traffic and revenue. In October 2009, Google informed us that beginning sometime
during the fourth quarter of 2009, they would no longer be sending us traffic
from the Google Definition Link. We began to see the impact of this change at
various points in the fourth quarter, and by the end of 2009, this traffic
ceased.
Search
engines, at any time and for any reason, could change their algorithms that
direct search queries to Answers.com or other web properties, or could restrict
the flow of users visiting Answers.com specifically. In fact, we have previously
experienced decreases in traffic, and consequently in revenue, in response to
such search engine action. Thus, we expend resources guarding and improving the
volume of this traffic. The industry commonly refers to such efforts as search
engine optimization, or SEO. We often refer to traffic from search engines as
SEO traffic. We also focus on the “quality” of our Q&A database, since a
potential result of poor quality content may be a negative impact on our SEO
traffic.
Seasonality
Our
results of operations have historically been affected by seasonal traffic
patterns and advertising demand. Many of our users are students who utilize our
Web properties as reference sources. Our traffic fluctuates with the academic
school year, rising from January through May, falling to lower levels during the
summer months, rising again in September through November, and falling again in
December, coinciding with school breaks and the holiday season. We expect
traffic to our Web properties to continue to fluctuate seasonally in the future.
This seasonal fluctuation in traffic results in a fluctuation in our quarterly
revenues, since lower traffic to Answers.com translates into fewer users
clicking on or viewing the advertisements we display. Our current seasonal
patterns may become more pronounced or may change as we grow
domestically.
Monetization
Advertising Revenue. We
earn practically all of our revenue from advertising. There are two primary
categories of Internet advertising: pay-per-performance, also known as
cost-per-click (“CPC”), and pay-per-impression display ads or cost per 1,000
impressions (“CPM”) In the CPC model, we earn revenue based on the number of
clicks associated with an ad; in the CPM model, we derive revenue from the
display of ads. The overwhelming majority of our advertising revenue is earned
from CPC advertising. We obtain all of our CPC, and most of our CPM
advertisements from third-party ad networks. These ad networks compensate us by
paying us a portion of the revenue they earn from advertisers for our provision
of promotional space on our Web properties.
Our
primary third party ad network, Google AdSense, accounted for approximately 88%
of our total revenue in 2009, as compared to approximately 82% of our total
revenue in 2008. We obtain practically all our CPC ads from Google. In addition
to Google, we utilize the services of other third party ad networks that provide
us with CPM ads. We expect that for the foreseeable future, CPC ads will
continue to generate the overwhelming majority of our revenue, and we have no
plans to reduce our reliance on CPC ads.
Our
relationship with Google is governed by our Google Services Agreement, or GSA,
which was recently renewed for a two-year period ending January 31, 2012.
We participate in two Google AdSense programs, “Adsense for Search” or “AFS” and
“Adsense for Content” or “AFC”. AFS is the online service for distributing
relevant ads from Google’s advertisers for search results on Google Network
members’ sites. AFC, on the other hand, is Google’s online service for
distributing ads from its advertisers that are relevant to content on its
Network members’ web sites. Under this program, Google uses automated technology
to analyze the meaning of the content on the web page and serve relevant ads
based on the meaning of such content. Queries resulting in WikiAnswers pages are
almost always monetized via AFC ads, while queries triggering ReferenceAnswers
pages are mostly monetized via AFS ads.
For a
full discussion explaining our monetization and traffic metrics, please refer to
the first section in this Annual Report, titled “References to Web Property
Usage Measurements”.
Direct Ad Sales. In the
second quarter of 2008, we decided to suspend our direct ad sales efforts and to
instead focus on selling ads through third-party advertising networks, primarily
Google AdSense. In the second and third quarter of 2008 we terminated all of our
direct ad sales employees. This decision allowed us to focus on our core
competency – growing the community, growing our traffic and monetizing via
Google and other ad networks. Notwithstanding the lack of a direct ad sales
team, we are occasionally approached directly by advertisers who wish to
advertise on Answers.com, and we often facilitate such requests. Direct ads
represented an immaterial portion of our total 2009 revenue.
Licensing Revenue. We earn a
negligible portion of our revenues from partners that pay us for providing them
with our answer-based services that they then use in their own products, via
co-branded Web pages.
Costs
and Expenses
Cost
of Revenue
Cost of
revenue consists of compensation, travel and overhead costs relating to
personnel who are engaged in production operations, content editing and
integration, fees to third parties to license and translate content, data center
costs, including depreciation of information technology assets, Web search
service fees, ad serving fees, amortization of the cost of acquired software
used in our products, and contractual revenue sharing fees to various Web
property operators for visitors directed to our Web properties, or traffic
acquisition costs. We expect our cost of revenue, as a percentage of revenue, to
increase in 2010 because of the various initiatives we are planning, including
translation of significantly more English-language content into foreign
languages.
Research
and Development Expenses
Research
and development expenses consist of compensation, travel and overhead costs of
personnel conducting research and development of our products and services, and
consulting costs. Our research and development team works primarily on projects
to improve and enhance product functionality, quality, performance, scalability,
user interface, and monetization. In the long term, we expect that our research
and development expenses will decline as a percentage of revenue as we grow our
revenue. However, since we expect to grow our research and development team
significantly in 2010, we expect our research and development expenses, as a
percentage of revenue, to increase in 2010.
Community
Development, Sales and Marketing Expenses
Community
development, sales and marketing expenses consist of compensation, travel and
overhead costs of personnel in charge of developing and encouraging the
WikiAnswers community of users asking and answering questions and volunteer
supervisors, sales and marketing, product management, marketing and market
information services, public relations and promotional costs. As a result of our
termination of direct ad sales in 2008, we expect that the primary future growth
in this expense line item will be in the area of WikiAnswers community
development. In the long term we expect that our community development, sales
and marketing expenses will decline as a percentage of revenue as we grow our
revenue, however we may not experience that improvement in 2010.
General
and Administrative Expenses
General
and administrative expenses consist primarily of compensation, travel and
overhead costs for general executive, financial, legal, human resources, and
other administrative personnel, professional services, including investor
relations, legal, accounting, payroll and other consulting services, insurance
fees, amortization of domain names, and other general corporate expenses. We
generally expect that our general and administrative expenses will decline as a
percentage of revenue as we grow our revenue.
Overhead
Costs
Overhead
costs consist primarily of rent, telecommunications, utilities and depreciation
expenses.
Stock-Based
Compensation
New
employees typically receive stock option awards within three months of their
start date. We also grant additional stock option awards to existing employees
and directors. We account for stock-based awards under Accounting Standards
Codification (“ASC”) 718, “Compensation – Stock
Compensation” , which requires measurement of compensation cost for all
stock-based awards at fair value on date of grant and recognition of
compensation over the service period awards are expected to vest. Costs
resulting from stock-based compensation are part of our compensation expense and
are included in the operating expense categories in our Statements of
Operations.
Impact
of Foreign Currency Fluctuations
The
dollar cost of our operations is heavily influenced by changes in the value of
the dollar in relation to the New Israeli Shekel (“NIS”), mostly due to the
NIS-based salaries of our Israel-based employees. Close to half of our operating
expenses, excluding non-cash items such as stock-based compensation, are
denominated in New Israel Shekels. We enter into forward contracts to hedge some
of our NIS-based expenses. Prior to May 2009, these derivatives were not
designated as hedging instruments under the rules of ASC 815, “Derivatives and Hedging”,
and therefore, the net gains (losses) arising from these derivatives were
recognized in operating expenses as they occurred. Starting May 2009, we
designated all of our currency hedging activity as cash flow hedges as they were
all eligible. Thus, the change in those hedges are recorded as other
comprehensive income (loss), and are reclassified to earnings as the forward
contracts mature or if, and to the extent that the hedging relationship is
deemed ineffective.
In 2009,
compensation, excluding stock-based compensation (thereafter, “Cash-Based
Compensation”), to employees amounted to $7,134 thousand compared to $7,071
thousand during the same period in 2008, a net increase of $63 thousand. As a
result of the strengthening of the dollar as compared to the NIS and the effect
of foreign currency derivatives, Cash-Based Compensation in 2009 declined
approximately $495 thousand as compared to 2008; however, such decline was
offset by other compensation changes, including increases in headcount and
raises, amounting to $558 thousand.
Our
period-over-period discussion regarding operating expenses includes the impact
of foreign currency on such expenses. We expect our NIS-based expenses in 2010,
to be in excess of 2009 levels, thus, if the dollar continues to fluctuate as
compared to the NIS, we will experience further fluctuation in the dollar amount
of our NIS-based expenses.
Termination
fees and write-off of cost relating to the terminated Lexico acquisition and
abandoned follow-on offering
In the
first quarter of 2008, our planned acquisition of Lexico Publishing Group LLC
and the related planned offering of securities were terminated due to
unfavorable market conditions. As a result, we recorded a charge to our
statement of operations, amounting to approximately $2.54 million.
Interest
Expense, Net
Interest
expense, net, is comprised of interest income earned on cash, cash equivalents
and marketable securities, interest expense on capital leases, transaction costs
we incurred in connection with the issuance of the Series B Warrants in June
2009 and amortization of deferred costs we incurred in connection with the
issuance of the Series B Unit Warrant, in June 2008.
Other
Income, Net
Other
income, net, is comprised of foreign currency gains and losses.
Loss
Resulting from Fair Value Adjustment of Warrants
The
Series A Warrants, the Series B Warrants and the Series B Unit Warrant (prior to
exercise), which are components of transactions with Redpoint Omega, L.P. and
Redpoint Omega Associates, LLC (collectively, “Redpoint”) are revalued each
reporting date. Any change to their fair value is recorded as a gain or loss in
the Statement of Operations. Background regarding the transaction with Redpoint
follows.
Redpoint
Financings
On
June 16, 2008, pursuant to a private placement of our securities, Redpoint
purchased $6 million of our Series A Convertible Preferred Stock (60,000
shares), convertible into 1,333,333 shares of common stock at an initial
conversion price of $4.50 per share, along with Common Stock Purchase Warrants
exercisable for 666,667 shares of common stock at an exercise price of $4.95 per
share (“Series A Warrants”). In conjunction therewith, Redpoint also received a
warrant, referred to as the “Series B Unit Warrant”, exercisable until
June 16, 2009, to purchase units of up to $7 million of Series B
Convertible Preferred Stock (70,000 shares) and Common Stock Purchase Warrants
exercisable for 636,364 shares of common stock (“Series B Warrants”). The
Series B Convertible Preferred Stock is initially convertible into
1,272,727 shares of common stock at an initial conversion price of $5.50 per
share. The Series B Warrants have an exercise price of $6.05 per
share. On June 10, 2009, Redpoint exercised the Series B Unit Warrant, in
full.
After
deducting placement agent fees and legal expenses, our net proceeds from the
private placement, in June 2008, were $5.38 million, while our net proceeds from
the exercise of the Series B Unit warrant, in June 2009, were $6.48 million. The
transaction that took place on June 16, 2008 is referred to as the “Series A
Financing”. The transaction that took place on June 10, 2009 is
referred to as the “Series B Financing”. The two transactions, in aggregate, are
collectively referred to as the “Redpoint Financings”. The Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, the Series A Warrants
and the Series B Warrants are collectively referred to as the “Redpoint
Securities”.
The
Series A Convertible Preferred Stock has the rights and preferences set
forth in our Certificate of Designations, Number, Voting Powers, Preferences and
Rights of Series A Convertible Preferred Stock, which, as of its date of filing
on June 16, 2008, amended our Amended and Restated Certificate of Incorporation.
The Series B Convertible Preferred Stock has the rights and preferences set
forth in the Company’s Certificate of Designations, which amended the Company’s
Amended and Restated Certificate of Incorporation on June 9, 2009. For a
detailed description of the rights and preferences of the Series A Convertible
Preferred Stock and the Series B Convertible Preferred Stock, we refer you to
the notes to the financial statements contained in this annual
report.
In
connection with the Redpoint Financings, Redpoint received and exercised their
right to appoint two individuals to serve as voting members of our board of
directors.
In
connection with the Redpoint Financings we entered into a registration rights
agreement with Redpoint, pursuant to which we agreed to register with the SEC
for resale the common stock underlying the Redpoint Securities. In connection
with the registration rights agreement, we agreed to pay a penalty of 1.0% per
month, on a daily pro rata basis, up to a maximum of 8.0%, of the aggregate
purchase price, as partial liquidated damages, for certain default events and
subject to certain circumstances. The partial liquidated damages may trigger if
the registration statements covering the Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock, which we filed on July 30, 2008 and
June 15, 2009, respectively, and which were declared effective by the SEC on
September 16, 2008 and July 28, 2009, respectively, cease to remain continuously
effective.
Income
Tax Benefit (Expense), Net
Our
effective tax rate differs from the statutory federal rate primarily due to
differences between income and expense recognition prescribed by income tax
regulations and Generally Accepted Accounting Principles. We utilize different
methods and useful lives for depreciating and amortizing property, equipment and
intangible assets and different methods and timing for certain expenses.
Furthermore, permanent differences arise from certain income and expense items
recorded for financial reporting purposes but not recognizable for income tax
purposes, and from certain income and expense items recorded for income tax
purposes financial but not recognizable for reporting purposes. In addition, our
income tax expense has been adjusted for the effect of state and local taxes and
foreign income from our wholly owned subsidiary. At December 31, 2009, our
deferred tax assets were almost entirely offset by a valuation allowance.
Despite the fact that we had income in 2009, we experienced a cumulative loss in
recent years and view this as a significant piece of negative evidence that
makes it difficult to support a conclusion that expected taxable income from
future operations justifies recognition of deferred tax assets.
Our
Israeli subsidiary had net income in 2008 and 2009, resulting from services we
received from the Israeli subsidiary. The Israeli subsidiary charges us for
research & development it provides us, plus a profit margin, currently 8.3%.
However, the subsidiary operates primarily through plans recognized as “approved
enterprises” (and a “beneficiary enterprise” as later amended in amendment No.
60 to the Investment Law) under Israeli law, which means that income arising
from the subsidiary’s approved research & development activities, is subject
to zero percent tax under the “alternative benefit” path for a period of ten
years. Currently, the subsidiary operates under two separate “approved
enterprise” plans, ending December 31, 2009 and December 31, 2014, respectively,
and a “beneficiary enterprise” plan ending December 31, 2017. After
the close of the first approved enterprise plan in 2009, the subsidiary will
have to pay taxes at the regular corporate income tax rate on the relative
proportion of taxable income attributable to the first approved enterprise
plan.
Additionally,
the Israeli subsidiary provides Answers Corporation with certain management
services plus a profit margin, currently 8.3%. Income derived from such services
are taxable at the Israeli corporate tax rate in effect at the time (27% and 26%
in 2008 and 2009, respectively).
In the
event of distributions by our Israeli subsidiary to Answers Corporation, the
Israeli subsidiary would have to pay a 10% corporate tax on the amount
distributed, and Answers Corporation would have to pay a 15% tax to be withheld
at source on the amounts of such distributions received. Furthermore, Answers
Corporation would be subject to a 35% federal tax on dividends received, before
applying any credits possibly allowed for NOL carryforwards or by the income tax
treaty between the United States and Israel. At present, we do not plan on
having the subsidiary distribute a dividend to Answers
Corporation.
Results
of Operations
|
Year
Ended December 31
|
|||||
|
2008
|
2009
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
WikiAnswers
advertising revenue
|
7,524
|
14,454
|
6,930
|
||
|
ReferenceAnswers
advertising revenue
|
6,622
|
6,230
|
(392)
|
||
|
Licensing
revenue
|
81
|
71
|
(10)
|
||
|
14,227
|
20,755
|
6,528
|
|||
Revenue
Revenue
increased $6,528 thousand, or 46%, from $14,227 thousand for the year ended
December 31, 2008 to $20,755 thousand for the year ended December 31,
2009.
WikiAnswers
advertising revenue in 2009 increased $6,930 thousand, or 92%, compared to the
preceding year, due to increases in traffic, offset to some extent by decreased
RPM. WikiAnswers average daily page views in the year ended December 31, 2009
were 6,496,000, an increase of 123% compared to the average daily page views of
2,916,000 in 2008. We believe that the traffic growth that WikiAnswers has
experienced in the year ended December 31, 2009 as compared to the same period
in 2008 is primarily due to the dynamics of the property. As our database of
questions and answers grows, we draw new traffic, primarily from SEO, which in
turn results in the creation of new questions and answers, or new content, which
in turn drives additional growth. The growth in revenue from the aforesaid
traffic growth was partially offset by a decrease in our RPM. The average
WikiAnswers RPM in the year ended December 31, 2009 was $6.10, a decrease of 14%
compared to the average RPM of $7.07 in 2008. Google AdSense comprised 89% of
our WikiAnswers ad revenue in 2009, thus, the decrease in RPM resulted mostly
from a decrease in the RPM we earn from Google AdSense. We believe the decline
in Google AdSense RPM may be attributed to any of a number of possible factors,
or a combination of several such factors, including, changes we made to the
site, changes that Google may have made to the AdSense algorithm that connects
advertisers and publishers and changes in how advertisers may have managed their
advertising costs in response to uncertain economic conditions.
ReferenceAnswers
advertising revenue in 2009 decreased $392 thousand, or 6%, compared
to the preceding year, due to lower RPM. ReferenceAnswers RPM in the year ended
December 31, 2009 was $5.92, a decrease of 6%, compared to the RPM of $6.28 in
2008. We attribute the decline mostly due to the elimination of direct ad sales
in the third quarter of 2008. Unlike WikiAnswers, the ReferenceAnswers Google
RPM did not decline in 2009, as compared to 2008, notwithstanding our
belief that the possible factors discussed above with respect to the
Google AdSense RPM on WikiAnswers are the same factors that may have played a
role in determining ReferenceAnswers’ Google AdSense RPM. ReferenceAnswers
average daily page views in 2009 were 2,884,000, which approximates our average
daily page views of 2,889,000 in 2008.
As
described in further detail above, in September 2009, we announced the launch of
the new Answers.com, in recognition of our integration of WikiAnswers and
ReferenceAnswers. The product strategy guiding such integration was our desire
to give users a common address for the best answers to all types of questions –
be they community-generated from WikiAnswers, or editorially licensed from
ReferenceAnswers. In September 2009, we took our final step in this integration
by creating a new unified Answers.com home page and login, integrating features
from both properties, and making other changes in our user interface to
strengthen our positioning as having one dominant product and brand,
Answers.com, comprised by two properties, WikiAnswers and ReferenceAnswers.
Since the new unified Answers.com home page was designed to give prominence to
WikiAnswers and to encourage users to enter their questions into the site’s
query bar, beginning September 2009, visits to that page, which on average
approximate 175,000 per day, are being recorded as a WikiAnswers page-view
rather than a ReferenceAnswers page-view, contrary to the previous
practice.
Traffic
and Revenue Trends
The
following table illustrates the historical trends of our two Web properties’
revenues, average daily page views and RPMs, by quarter, beginning the first
quarter of 2008.
|
2008
|
2009
|
||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4
|
||||||||
|
Ad
Revenue
($
- in thousands)
|
|||||||||||||||
|
WikiAnswers
|
1,185
|
1,500
|
1,960
|
2,879
|
3,162
|
3,400
|
3,422
|
4,470
|
|||||||
|
ReferenceAnswers
|
1,828
|
1,485
|
1,579
|
1,730
|
1,567
|
1,585
|
1,548
|
1,530
|
|||||||
|
Total
|
3,013
|
2,985
|
3,539
|
4,609
|
4,729
|
4,985
|
4,970
|
6,000
|
|||||||
|
WikiAnswers
|
39%
|
50%
|
55%
|
62%
|
67%
|
68%
|
69%
|
75%
|
|||||||
|
ReferenceAnswers
|
61%
|
50%
|
45%
|
38%
|
33%
|
32%
|
31%
|
25%
|
|||||||
|
Total
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
|||||||
|
Traffic
Average
Daily Page Views
|
|||||||||||||||
|
WikiAnswers
|
1,885,000
|
2,318,000
|
3,094,000
|
4,350,000
|
5,337,000
|
6,082,000
|
6,336,000
|
8,199,000
|
|||||||
|
ReferenceAnswers
|
3,225,000
|
2,641,000
|
2,666,000
|
3,027,000
|
2,982,000
|
2,965,000
|
2,857,000
|
2,737,000
|
|||||||
|
Total
|
5,110,000
|
4,959,000
|
5,760,000
|
7,377,000
|
8,319,000
|
9,047,000
|
9,193,000
|
10,936,000
|
|||||||
|
WikiAnswers
|
37%
|
47%
|
54%
|
59%
|
64%
|
67%
|
69%
|
75%
|
|||||||
|
ReferenceAnswers
|
63%
|
53%
|
46%
|
41%
|
36%
|
33%
|
31%
|
25%
|
|||||||
|
Total
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
|||||||
|
RPM
|
|||||||||||||||
|
WikiAnswers
|
$6.91
|
$7.11
|
$6.89
|
$7.19
|
$6.58
|
$6.14
|
$5.87
|
$5.93
|
|||||||
|
ReferenceAnswers
|
$6.23
|
$6.18
|
$6.44
|
$6.21
|
$5.84
|
$5.87
|
$5.89
|
$6.08
|
|||||||
Traffic
Trends
The
traffic and RPM trend discussion that follows pertains to our Answers.com
English site and not the FIGS sites that are currently in their infancy and are
immaterial.
Since we
purchased WikiAnswers in November 2006, the Web property has grown
significantly, both in terms of traffic and revenue. We believe that the growth
that WikiAnswers has experienced is primarily due to the dynamics of the
property. As our database of questions and answers grows, we draw new traffic,
primarily from SEO, which in turn results in the creation of new questions and
answers, or new content, which drives additional growth. This is a
self-reinforcing growth model that we consider a “virtuous cycle of growth”.
Notwithstanding this cycle of growth, WikiAnswers’ growth has, over time
decelerated, and we believe that, as WikiAnswers grows further and gets larger,
its rate of growth will decelerate further. In addition, the integration of our
two Web properties may further decelerate the growth of WikiAnswers as compared
to past periods.
Beginning
the third quarter of 2007, when we experienced a drop in our traffic to
ReferenceAnswers due to a search engine algorithm adjustment by Google, through
the first quarter of 2009, ReferenceAnswers average daily page views in every
quarter has declined, compared to the same quarter in the immediately preceding
year. In the second and third quarters of 2009, ReferenceAnswers average daily
page views were 12% and 7% higher, respectively, than the average daily page
views for the same periods in 2008. However, ReferenceAnswers experienced
traffic declines in the months of September and October 2009, as compared to the
same months in 2008. Finally, in the fourth quarter of 2009, ReferenceAnswers
stopped receiving traffic from the Google Definition Link. We are presently not
able to identify a predictable traffic trend for this property.
RPM
Trends
As noted
earlier, 88% of our 2009 revenue was earned via Google AdSense. Since we are not
planning to change this dependence anytime in the near future, our RPM will
largely be a function of the revenue we earn from Google AdSense. We renewed our
GSA in October 2009, extending the agreement through January 2012, at financial
terms that are slightly less favorable than the terms we had for the two-year
period ending January 31, 2010, therefore we expect a slightly lower Google
AdSense RPM. Further, we believe that there are many other factors, any one of
which or a combination thereof, that may impact our Google AdSense revenue,
including changes we make to the site, positioning of ads, the geographic mix of
our traffic, the growing percentage of returning visitors and changes that
Google may make to the algorithm that connects advertisers and publishers. In
addition, advertisers may lower or increase their bids for keywords in response
to how much they are able to make per paid click. As a result of the multiple
possible factors, many of which are not in our control, we cannot predict
whether the RPM declines we saw in 2009 will continue in 2010.
Costs
and Expenses
Cost
of Revenue
|
Year
Ended December 31
|
|||||
|
|
2008
|
2009
|
Change
|
||
|
($
- in thousands)
|
|||||
|
Cost
of revenue
|
4,641
|
4,796
|
155
|
||
Cost of
revenue increased $155 thousand, or 3%, from $4,641 thousand in 2008, to $4,796
thousand in 2009,. The change in cost of revenue was due primarily to an
increase of $275 thousand in compensation costs, excluding stock based
compensation, and an increase of $150 thousand in content licensing costs.
Additionally, in 2009 we started translating WikiAnswers into four languages,
which resulted in translation expenses of $132 thousand, an expense we did not
incur in 2008. The aforesaid increases were partially offset by decreases of $35
thousand in stock-based compensation, and $358 thousand in amortization expense
from intangible technology assets we purchased in connection with the Brainboost
acquisition that took place in December 2005. As we wrote off the Brainboost
Answer Engine on May 25, 2008, there was no amortization recorded subsequent to
such date.
Research
and Development Expenses
|
Year
Ended December 31
|
|||||
|
|
2008
|
2009
|
Change
|
||
|
($
- in thousands)
|
|||||
|
Research
and development
|
3,482
|
3,608
|
126
|
||
Research
and development expenses increased $126 thousand, or 4%, from $3,482 thousand in
2008, to $3,608 thousand in 2009. The change in research and development
expenses was due primarily to an increase of $49 thousand in compensation
related expenses, excluding stock based compensation, and increases in travel
and overhead of $52 thousand and $46 thousand, respectively. Such increases were
offset, to some extent, by a decrease in stock based compensation of $34
thousand.
Community
Development, Sales and Marketing Expenses
|
Year
Ended December 31
|
|||||
|
|
2008
|
2009
|
Change
|
||
|
($
- in thousands)
|
|||||
|
Community
development, sales and marketing
|
2,734
|
2,459
|
(275)
|
||
Community
development, sales and marketing expenses decreased $275 thousand, or 10%, from
$2,734 thousand in 2008, to $2,459 thousand, in 2009. The primary factor that
caused this decrease was that compensation related expenses, excluding stock
based compensation, decreased $312 thousand, and stock based compensation
decreased $75 thousand, mostly due to the termination of our direct ad sales
team in the second and third quarters of 2008. At the end of the second quarter
of 2008 we decided to abandon direct ad sales, and terminated most of our direct
ad sales staff. Further, as a result of such decision we recorded a net charge
of $90 thousand, in 2008, to account for the termination of certain service
contracts relating to our abandoned direct ad sales efforts. Finally,
there was also a decrease of $62 thousand in overhead expenses in 2009 as
compared to 2008. The aforesaid decreases were partially offset by increases in
costs relating to promotion and marketing, including WikiAnswers community
events, of $196 thousand, and increases in consulting and other services of $64
thousand.
General
and Administrative Expenses
|
Year
Ended December 31
|
|||||
|
|
2008
|
2009
|
Change
|
||
|
($
- in thousands)
|
|||||
|
General
and administrative
|
4,799
|
4,899
|
100
|
||
General
and administrative expenses increased $100 thousand, or 2%, from $4,799 thousand
in 2008, to $4,899 thousand in 2009. The change in general and administrative
expenses was due primarily to the following factors: Compensation costs,
excluding stock based compensation, increased by $51 thousand, travel and
conference expenses increased by $104 thousand, consulting fees increased by $57
thousand and non-income related taxes increased by $73 thousand. The aforesaid
increases were partially offset by decreases of $115 thousand in
accounting and legal fees, $22 thousand in stock based compensation, and $30
thousand in overhead expenses.
Write-off
of the Brainboost Answer Engine
|
Year
Ended December 31
|
|||||
|
|
2008
|
2009
|
Change
|
||
|
($
- in thousands)
|
|||||
|
Write-off
of the Brainboost Answer Engine
|
3,138
|
-
|
(3,138)
|
||
As a
result of our decision to effectively abandon our use of the Brainboost Answer
Engine, the net book value of the Brainboost Answer Engine, as of May 25, 2008,
in the amount of $3,138 thousand, was written off and the resulting charge was
included in our statement of operations for 2008.
Termination
Fees and Write-off of Costs Relating to the Terminated Lexico Acquisition and
Abandoned Follow-on Offering
|
Year
Ended December 31
|
|||||
|
|
2008
|
2009
|
Change
|
||
|
($
- in thousands)
|
|||||
|
Termination
fees and write-off of costs relating to the terminated Lexico acquisition
and abandoned follow-on offering
|
2,543
|
-
|
(2,543)
|
||
In 2008
we recorded a charge of $2,543 thousand for various costs and fees we incurred
in connection with the terminated acquisition of Lexico and the abandoned
follow-on offering of securities.
Interest
Expense, Net
|
Year
Ended December 31
|
|||||
|
2008
|
2009
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Interest
expense, net
|
(55)
|
(440)
|
(385)
|
||
Interest
expense, net, rose $(385) thousand, from $(55) thousand expense, net, in 2008,
to $(440) thousand expense, net, in 2009. The change in interest expense, net,
resulted mostly from the following matters: Firstly, in 2009, we recorded $166
thousand of amortization relating to $363 thousand of transaction costs that we
incurred in connection with the Series B Unit Warrant in June 2008, while in
2008, such amortization amounted to $196 thousand. Secondly, in 2009, we
recorded a $290 thousand charge relating to the Series B Warrants transaction
costs we incurred in June 2009. Finally, interest earned from our cash balance
in 2009 was $25 thousand, compared to $148 thousand in 2008. The reduction in
interest income earned on our cash balances was the result of lower short-term
interest rates.
Other
Income, Net
|
Year
Ended December 31
|
|||||
|
2008
|
2009
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Other
income, net
|
19
|
6
|
(13)
|
||
Other
income, net, declined $13 thousand, from $19 thousand in 2008, to $6 thousand,
net, in 2009. Other income, net, results from foreign currency net
gains and losses.
Loss
Resulting from Fair Value Adjustments of Warrants
|
Year
Ended December 31
|
|||||
|
2008
|
2009
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Loss
resulting from fair value adjustment of warrants
|
(5,187)
|
(2,634)
|
2,553
|
||
The
Series A Warrants and Series B Warrants are revalued each reporting date, and
any change to their fair value is recorded in the statement of operations. The
Warrant to Purchase Units of Series B Preferred Stock and Warrants was, up to
its exercise in June 2009, also revalued each reporting period and the change in
its fair value was recorded in the statement of operations.
The
primary reason for the change in value of the aforesaid warrants is the market
price of our common stock on the measurement dates. An increase in the price of
our common stock increases the value of the warrants and thus results in a loss
on our statement of operations. Conversely, a decline in the price of our common
stock decreases the value of the warrants and thus results in a gain on our
statement of operations.
Income
Tax Benefit (Expense), Net
|
Year
Ended December 31
|
|||||
|
2008
|
2009
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Income
tax benefit (expense), net
|
82
|
(165)
|
(247)
|
||
Income
tax benefit (expense), net, changed by $(247) thousand, from 2008 to 2009. The
tax benefit for the year ended December 31, 2008 was primarily the result of the
recognition of $147 thousand of tax benefits relating to closed tax years, which
was partially offset by Israeli income taxes amounting to approximately $53
thousand. The tax expense for the year ended December 31, 2009 was primarily the
result of $190 thousand related to estimated income taxes for U.S. federal,
state and local, and Israeli income taxes, partially offset by $36 thousand of
net deferred tax assets recorded by the subsidiary.
We have
net operating loss (“NOL”) carryforwards for federal income tax purposes of
approximately $53 million at December 31, 2009. The federal NOLs will expire if
not utilized on various dates from 2021 through 2028. Section 382 of the
Internal Revenue Code of 1986 (“Section 382”) generally imposes an annual
limitation on the amount of NOL carryforwards that may be used to offset taxable
income where a corporation has undergone significant changes in its stock
ownership. We estimate two ownership changes, as defined under Section 382, have
occurred, that would trigger this limitation. Based on our current estimates and
assumptions, we may currently use approximately $36 million of our accumulated
NOLs. The remaining approximate $17 million NOL is available to
offset taxable income in an amount of approximately $1.4 million per year.
Any unused portion of the $1.4 million is available for use in future years
until such NOL is scheduled to expire. The Subsidiary has capital loss
carryforwards of approximately $789 thousand, which can be applied to future
capital gains for an unlimited period of time under current tax
rules.
We file
U.S. federal, various state and local and foreign income tax returns. We are no
longer subject to U.S. federal income tax examinations by tax authorities for
years prior to 2005 and New York State and City income tax examinations for
years prior to 2006. Our Israeli subsidiary is no longer subject to tax
examinations by the Israeli income tax authorities for years prior to
2007.
Liquidity
and Capital Resources
Historically,
our principal sources of liquidity were our cash inflows from revenues and funds
that were raised through various financing events that took place through June
2008. Beginning the last quarter of 2008, our principal source of liquidity has
been our cash inflows from operations, and we expect that going forward, cash
flow from operations will continue to be our principal source of liquidity.
Notwithstanding, as a result of Redpoint’s exercise of their Series B Unit
Warrant in June 2009, we received an additional infusion of funds in the amount
of $7 million before transaction costs.
|
Year
Ended December 31
|
|||
|
|
2008
|
2009
|
|
|
($
- in thousands)
|
|||
|
Net
cash provided by (used in) operating activities
|
(299)
|
6,799
|
|
|
Net
cash provided by (used in) investing activities
|
82
|
(2,333)
|
|
|
Net
cash provided by financing activities
|
5,196
|
6,047
|
|
Operating
Activities
Despite a
net loss of $12,251 thousand in 2008, net cash used in operations was $299
thousand. The adjustments to reconcile the two amounts, including changes to the
balances of our various operating assets and liabilities, are noted in detail on
the accompanying statement of cash flows. The largest reconciling items are the
loss resulting from the fair value adjustment of the Series B Unit Warrant of
$5,187 thousand, the write-off of the Brainboost Answers Engine of $3,138
thousand, stock-based compensation of $1,719 thousand, and depreciation and
amortization of $1,329 thousand.
Although
net income in 2009 was $1,760 thousand in 2009, the net cash provided by
operations was $6,799 thousand. The adjustments to reconcile the two amounts,
including changes to the balances of our various operating assets and
liabilities, are noted in detail on the accompanying statement of cash flows.
The largest reconciling items are the loss resulting from the fair value
adjustment of the warrants of $2,634 thousand, stock-based compensation of
$1,553 thousand, and depreciation and amortization of $1,185
thousand.
Investing
Activities
Net cash
provided by investing activities of $82 thousand, in 2008, is attributable to
the proceeds from the sale of marketable securities of $700 thousand, less cash
used to increase long-term deposits of $60 thousand and cash used for capital
expenditures of $558 thousand.
Net cash
used in investing activities of $2,333 thousand, in 2009, is attributable to
cash used for capital expenditures of $1,515 thousand, cash used to purchase
marketable securities of $799 thousand, and cash used to increase long-term
deposits of $19 thousand. Most of our capital expenditures resulted from the
establishment of our second colocation facility. We expect capital expenditures
in 2010 will continue to grow as we continue to invest in various areas
including our existing colocation facilities and office facilities.
Financing
Activities
Net cash
flow from financing activities in 2008 and 2009 were mostly the result of the
Redpoint Financings, less dividends paid to Redpoint.
Future
Operations
Based on
our current cash and cash equivalents, marketable securities and expected cash
flow from operations, we believe we have sufficient cash and cash equivalents to
meet our working capital and operating requirements for at least the next twelve
months.
We assess
acquisition opportunities as they arise. Financing in excess of our current cash
and cash equivalents may be required if we decide to make additional
acquisitions. There can be no assurance, however, that any such opportunities
may arise, or that any such acquisitions may be consummated. Additional
financing may not be available on satisfactory terms when required. To the
extent that we raise additional funds by issuing equity securities, our
stockholders may experience significant dilution.
As a
result of the Redpoint Financings in June 2008 and June 2009, we raised net
proceeds of approximately $11.9 million, significantly improving our cash
position. The Series A and Series B Preferred Stock contain redemption
provisions which allow the holders of a majority of the Series A and Series B
Preferred Stock to request redemption, at any time on or after June 16, 2014, of
all or any part of their stock.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, there were no off-balance sheet arrangements.
Critical
Accounting Estimates
While our
significant accounting policies are more fully described in the notes to our
audited consolidated financial statements for the years ended December 31,
2008 and 2009, we believe the following accounting policies to be the most
critical in understanding the judgments and estimates we use in preparing our
consolidated financial statements.
Goodwill,
Intangibles and Other Long-Lived Assets
We
account for our purchases of acquired companies in accordance with ASC 805,
“Business Combinations”
)formerly SFAS 141(, and for goodwill and other identifiable
definite and indefinite-lived acquired intangible assets in accordance with
ASC 350, “Intangibles –
Goodwill and Other” (formerly SFAS 142, “Goodwill and Other Intangible
Assets”). Additionally, we review our long-lived assets for
recoverability in accordance with ASC 360, “Property, Plant and Equipment”
(formerly SFAS 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”).
The
identification and valuation of intangible assets and the determination of the
estimated useful lives at the time of acquisition are based on various valuation
methodologies including reviews of projected future cash flows. The use of
alternative estimates and assumptions could increase or decrease the estimated
fair value of our goodwill and other intangible assets, and potentially result
in a different impact to our results of operations. Further, changes in business
strategy and/or market conditions may significantly impact these judgments
thereby impacting the fair value of these assets, which could result in an
impairment of the goodwill and acquired intangible assets.
We
evaluate our long-lived tangible and intangible assets for impairment in
accordance with ASC 350, with the annual goodwill impairment testing date
set at September 30. Further, in accordance with ASC 360 and ASC 350, we
also evaluate our long-lived tangible and intangible assets, respectively, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. While we use available information to prepare our estimates and to
perform impairment evaluations, the completion of annual impairment tests
requires significant management judgments and estimates.
As of
December 31, 2009, we determined that there was no impairment of goodwill and
that there were no events or changes in circumstances indicating that the
carrying amount of our intangible and other long-lived assets may not be
recoverable; therefore, there was no need to evaluate the recoverability or
compute impairment of any of the aforesaid assets.
Accounting
for Stock-based Compensation
We
account for stock-based awards under ASC 718, “Compensation – Stock Compensation”
(formerly SFAS 123R, “Share-Based Payment”), which
requires measurement of compensation cost for stock-based awards at fair value
on date of grant and recognition of compensation over the service period awards
are expected to vest. The estimation of stock-based awards that will ultimately
vest requires judgment, and to the extent actual results differ from our
estimates, such amounts will be recorded as a cumulative adjustment in the
period estimates are revised. We consider various factors when estimating
expected forfeitures, including historical experience. Actual results may differ
substantially from these estimates.
We
determine the fair value of stock options granted to employees and directors
using the Black-Scholes valuation model, which requires significant assumptions
regarding the expected stock price volatility, the risk-free interest rate and
the dividend yield, and the estimated period of time option grants will be
outstanding before they are ultimately exercised. We estimate our expected stock
volatility based on our own historical stock volatility rates. Had we made
different assumptions about our stock price volatility or the estimated time
option and warrant grants will be outstanding before they are ultimately
exercised, the related stock based compensation expense, and our net income
(loss) and net earnings (loss) per share amounts could have been significantly
different, in 2009 and 2008.
Accounting
for Income Taxes
As part
of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves management estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and, to the extent we believe that
recovery is not more likely than not, we must establish a valuation allowance.
Significant management judgment is required in determining our provision for
income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. At December 31, 2009, we
have fully offset our U.S. net deferred tax asset with a valuation
allowance. Despite the fact that we had income in 2009, we experienced a
cumulative loss in recent years and view this as a significant piece of negative
evidence that makes it difficult to support a conclusion that expected taxable
income from future operations justifies recognition of deferred tax
assets.
ASC 740,
“Income Taxes”
(formerly FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — an Interpretation of FASB Statement 109”), prescribes
how a company 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. Additionally, for tax positions to qualify for deferred tax
benefit recognition under ASC 740, the position must have at least a “more
likely than not” chance of being sustained upon challenge by the respective
taxing authorities, and whether or not it means that criteria is a matter if
significant judgment.
We have
not provided U.S. and Israeli income taxes and withholding taxes on the
undistributed earnings of our Israeli subsidiary as of December 31, 2009
because we intend to permanently reinvest such earnings outside the U.S. As of
December 31, 2009, the cumulative amount of earnings upon which U.S. income
taxes have not been provided is approximately $4.4 million. We make an
evaluation at the end of each reporting period as to whether or not the
undistributed earnings of our foreign subsidiary are permanently reinvested.
While, to date, we have concluded that such undistributed earnings are
permanently reinvested, facts and circumstances may change in the future.
Changes in facts and circumstances may include a change in the estimated capital
needs of our foreign subsidiaries, or a change in our corporate liquidity
requirements. Such changes could result in our management determining that some
or all of such undistributed earnings are no longer permanently reinvested. In
that event, we would be required to recognize income tax liabilities on the
assumption that our foreign undistributed earnings will be distributed to the
U.S.
Accounting
for Redpoint Financings
In
accounting for the Series A Financing, the proceeds were first allocated to the
Series B Unit Warrant, which was classified as a current liability, based on its
fair value, and the residual amount was allocated among the Series A Convertible
Preferred Stock and the Series A Warrants based on their relative fair values,
all in accordance with the guidance in ASC 480, “Distinguishing Liabilities from
Equity” (formerly SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”), ASC
815, “Derivatives and Hedging”
(formerly SFAS 133, “Accounting for Derivative
Instruments and Hedging Activities”) and ASC 815–40, “Derivatives and hedging – Contracts
in Entity’s Own Equity” (formerly EITF 00-19, ”Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock”). The Series B Unit Warrant has been revalued at each reporting
date, since its inception until it was exercised on June 10, 2009. The Series A
Convertible Preferred Stock has been classified as temporary equity, in
accordance with the guidance in ASC 480-10-S99A (formerly EITF D-98, “Classification and Measurement of
Redeemable Securities”),and, prior to January 1, 2009, the Series A
Warrants were classified in permanent equity.
In June
2008, the FASB ratified the consensus of EITF 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (incorporated
in ASC 815–40). ASC 815–40 responded to practice
questions about whether an instrument or embedded feature is indexed to the
reporting company’s own stock by establishing a framework for the determinations
and by nullifying some previous requirements. The adoption of ASC 815–40’s
requirements affects issuers’ accounting for warrants and many convertible
instruments with provisions that protect holders from declines in the stock
price (“Down-Round” provisions). Warrants with such provisions are no longer
recorded in equity, and many convertible instruments with such provisions
require “bifurcation” with the conversion option separately accounted for as a
derivative under ASC 815. As a result of ASC 815–40, effective January
1, 2009, and due to the Down-Round Protection of the Series A Warrants, such
warrants are separately accounted for as a derivative under ASC 815 and are
no longer recorded in equity but rather as a liability to be revalued at each
reporting date.
On June
10, 2009, Redpoint exercised, in full, the Series B Unit Warrant, which was
valued at approximately $10.8 million on such date, thus extinguishing this
liability from the Company’s balance sheet through a corresponding increase to
additional paid-in capital. In accounting for the Series B Financing, the
proceeds were first allocated to the Series B Warrants which were classified as
a liability, based on its fair value, and the residual amount was allocated to
the Series B Convertible Preferred Stock, all in accordance with the guidance in
ASC 480,
ASC 815 and ASC 815-40. The Series B Convertible Preferred
Stock has been classified as temporary equity, in accordance with the guidance
in ASC 480-10-S99A.
We used
various valuation models and techniques to determine the individual values of
the various components in the Redpoint Financings, including Monte Carlo and
Black-Scholes. Inputs used in the models include our stock price and risk-free
interest rate. Additionally, significant assumptions used in applying these
techniques included redemption behavior estimates (including likelihood of
forced conversion, and timing of liquidation event if such event transpires) and
expected volatility of our stock price. While we believe we applied appropriate
judgment in the aforesaid assumptions, variations in judgment could have
materially affected the valuation results, and thus, our financial statements.
We continue to use the Black-Scholes valuation model in our periodic fair value
adjustments.
The
Series A Convertible Preferred Stock and the Series B Convertible Preferred
Stock issued as part of the Redpoint Financings contain an embedded conversion
option which could potentially require separate accounting under ASC 815.
According to ASC 815-15 (formerly paragraph 12(a) of SFAS 133), in order
to determine whether separate accounting is required, one has to evaluate
whether the economic characteristics and risks of the conversion option are
closely related to the host contract, and the nature of the host
contract. We exercised judgment and evaluated this matter in
accordance with ASC 815-10 (formerly EITF Topic D-109, "Determining the Nature of a Host
Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share
under FASB Statement No.133"). ASC 815-10 conveys the SEC staff's
views on determining whether the characteristics of a host contract in a hybrid
financial instrument issued in the form of a share is more akin to debt or
equity. In evaluating an embedded derivative feature for separation under
ASC 815, the consideration of the economic characteristics and risks of the
host contract should not ignore the stated or implied substantive terms and
features of the hybrid financial instrument. We considered various factors
including redemption provisions, stated rate, voting rights, whether returns are
discretionary or mandatory, collateral requirements, participation in residual
earnings and liquidation preferences, in making our determination that the host
contract was more akin to equity. The most important factor that led us to the
conclusion that the host contract was more akin to equity was the fact that the
redemption feature was not mandatory or likely to occur. Had we determined that
the host contract was more akin to debt and not equity it would have impacted
the accounting for the host contract and the embedded conversion option and
could have had a material impact on our financial statements.
Quarterly
Results
The
following table sets forth our historical quarterly consolidated statement of
operations data and certain non-GAAP financial measures beginning with the first
quarter of 2008. You should read this information together with our consolidated
financial statements and the related notes appearing elsewhere in our filings.
The results of historical periods are not necessarily indicative of the results
of operations for a full year or any future period.
|
Quarter
Ended
|
|||||||||||||||
|
Mar.
31, 2008
|
Jun.
30, 2008
|
Sep.
30, 2008
|
Dec.
31, 2008
|
Mar.
31, 2009
|
Jun.
30, 2009
|
Sep.
30, 2009
|
Dec.
31, 2009
|
||||||||
|
(in
thousands, except page views and RPM data)
|
|||||||||||||||
|
Revenues:
|
|||||||||||||||
|
Advertising
revenue
|
$3,013
|
$2,985
|
$3,539
|
$4,609
|
$4,729
|
$4,985
|
4,970
|
$6,000
|
|||||||
|
Answers
services licensing
|
18
|
18
|
24
|
21
|
18
|
19
|
17
|
17
|
|||||||
|
3,031
|
3,003
|
3,563
|
4,630
|
4,747
|
5,004
|
4,987
|
6,017
|
||||||||
|
Costs
and expenses:
|
|||||||||||||||
|
Cost
of revenue
|
1,393
|
1,416
|
945
|
887
|
1,059
|
1,166
|
1,264
|
1,307
|
|||||||
|
Research
and development
|
875
|
929
|
866
|
812
|
873
|
817
|
921
|
997
|
|||||||
|
Community
development, sales and marketing
|
762
|
933
|
563
|
476
|
499
|
558
|
621
|
781
|
|||||||
|
General
and administrative
|
1,131
|
1,198
|
1,311
|
1,159
|
1,219
|
1,248
|
1,201
|
1,231
|
|||||||
|
Write-off
of the Brainboost Answers Engine
|
—
|
3,138
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
Termination
fees and write-off of costs relating to the terminated Lexico acquisition
and abandoned follow-on offering
|
2,543
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
Total
operating expenses
|
6,704
|
7,614
|
3,685
|
3,334
|
3,650
|
3,789
|
4,007
|
4,316
|
|||||||
|
Operating
income (loss)
|
(3,673)
|
(4,611)
|
(131)
|
1,296
|
1,097
|
1,215
|
980
|
1,701
|
|||||||
|
Interest
income (expense), net
|
55
|
18
|
(43)
|
(86)
|
(87)
|
(362)
|
4
|
5
|
|||||||
|
Other
income (expense), net
|
(38)
|
(11)
|
11
|
57
|
15
|
(9)
|
(5)
|
5
|
|||||||
|
Gain
(loss) resulting from fair value adjustment of warrants
|
—
|
—
|
(2,056)
|
(3,131)
|
2,010
|
(4,385)
|
(999)
|
740
|
|||||||
|
Income
(loss) before income taxes
|
(3,655)
|
(4,604)
|
(2,210)
|
(1,864)
|
3,035
|
(3,541)
|
(20)
|
2,451
|
|||||||
|
Income
tax benefit (expense), net
|
(11)
|
(15)
|
91
|
17
|
6
|
(78)
|
(50)
|
(43)
|
|||||||
|
Net
income (loss)
|
$(3,667)
|
$(4,619)
|
$(2,119)
|
$(1,847)
|
$3,041
|
$(3,619)
|
$(70)
|
$2,408
|
|||||||
|
Other
Data:
|
|||||||||||||||
|
Adjusted
EBITDA(1)
|
$(181)
|
$(670)
|
$520
|
$1,950
|
$1,744
|
$1,895
|
$1,708
|
$2,389
|
|||||||
|
WikiAnswers
average daily page views
|
1,885,000
|
2,318,000
|
3,094,000
|
4,350,000
|
5,337,000
|
6,082,000
|
6,336,000
|
8,199,000
|
|||||||
|
ReferenceAnswers
average daily page views
|
3,225,000
|
2,641,000
|
2,666,000
|
3,027,000
|
2,982,000
|
2,965,000
|
2,857,000
|
2,737,000
|
|||||||
|
WikiAnswers
RPM
|
$6.91
|
$7.11
|
$6.89
|
$7.19
|
$6.58
|
$6.14
|
$5.87
|
$5.93
|
|||||||
|
ReferenceAnswers
RPM
|
$6.23
|
$6.18
|
$6.44
|
$6.21
|
$5.84
|
$5.87
|
$5.89
|
$6.08
|
|||||||
(1) We
define Adjusted EBITDA as net earnings before interest, taxes, depreciation,
amortization, gain (loss) resulting from fair value adjustment of Series A
Warrants, Series B Warrants and warrant to purchase units of Series B preferred
stock and warrants, stock-based compensation, foreign currency exchange rate
differences and certain non-recurring expenses.
We use
Adjusted EBITDA as an additional measure of our overall performance for purposes
of business decision-making, developing budgets and managing expenditures. It is
useful because it removes the impact of our capital structure (interest expense
and gain (loss) resulting from fair value adjustment of Series A Warrants,
Series B Warrants and warrant to purchase units of Series B preferred stock and
warrants), asset base (amortization and depreciation), stock-based compensation
expenses, taxes, foreign currency exchange rate differences and certain
non-recurring expenses from our results of operations. We believe that the
presentation of Adjusted EBITDA provides useful information to investors in
their analysis of our results of operations for reasons similar to the reasons
why we find it useful and because these measures enhance their overall
understanding of the financial performance and prospects of our ongoing business
operations. By reporting Adjusted EBITDA, we provide a basis for comparison of
our business operations between current, past and future periods, and peer
companies in our industry.
More
specifically, we believe that removing these impacts is important for several
reasons:
|
·
|
Amortization
of Intangible Assets. Adjusted EBITDA disregards amortization of
intangible assets. Specifically, we exclude (a) amortization, and the
write-off, of acquired technology from the acquisition of Brainboost
Technology, LLC, developer of the Brainboost Answer Engine in December
2005; and (b) amortization of intangible assets resulting from the
acquisition of WikiAnswers and other related assets in November 2006.
These acquisitions resulted in operating expenses that would not otherwise
have been incurred. We believe that excluding such expenses is significant
to investors, due to the fact that they derive from prior acquisition
decisions and are not necessarily indicative of future cash operating
costs. In addition, we believe that the amount of such expenses in any
specific period may not directly correlate to the underlying performance
of our business operations. While we exclude the aforesaid expenses from
Adjusted EBITDA we do not exclude revenues derived as a result of such
acquisitions. The amount of revenue that resulted from the acquisition of
WikiAnswers and other related assets is disclosed in the revenue
discussion of this Item 2. The amount of revenue that resulted from the
acquisition of technology from Brainboost is not quantifiable due to the
nature of its integration.
|
|
·
|
Stock-based
Compensation Expense. Adjusted EBITDA disregards expenses associated with
stock-based compensation, a non-cash expense arising from the grant of
stock-based awards to employees and directors. We believe that, because of
the variety of equity awards used by companies, the varying methodologies
for determining stock-based compensation expense, and the subjective
assumptions involved in those determinations, excluding stock-based
compensation from Adjusted EBITDA enhances the ability of management and
investors to compare financial results over multiple
periods.
|
|
·
|
Depreciation,
Interest, Gain (Loss) Resulting from Fair Value Adjustment of Series A
Warrants, Series B Warrants and Warrant to Purchase Units of Series B
Preferred Stock and Warrants, Taxes and Exchange Rate Differences. We
believe that, excluding these items from the Adjusted EBITDA measure
provides investors with additional information to measure our performance,
by excluding potential differences caused by variations in capital
structures (affecting interest expense), asset composition, and tax
positions.
|
|
·
|
Terminated
Lexico Acquisition and Follow-On Offering. Adjusted EBITDA disregards
$2,543 thousand in costs associated with our terminated acquisition of
Lexico and the cancellation of our follow-on offering. We believe that,
excluding these costs provides investors with additional information to
measure our performance, by excluding events that are of a non-recurring
nature.
|
Adjusted
EBITDA is not a measure of liquidity or financial performance under generally
accepted accounting principles, or GAAP, and should not be considered in
isolation from, or as a substitute for, a measure of financial performance
prepared in accordance with GAAP. Investors are cautioned that there are
inherent limitations associated with the use of Adjusted EBITDA as an analytical
tool. Some of these limitations are:
|
·
|
Non-GAAP
financial measures are not based on a comprehensive set of accounting
rules or principles;
|
|
·
|
Many
of the adjustments to Adjusted EBITDA reflect the exclusion of items that
are recurring and will be reflected in our financial results for the
foreseeable future;
|
|
·
|
Other
companies, including other companies in our industry, may calculate
Adjusted EBITDA differently than us, thus limiting its usefulness as a
comparative tool;
|
|
·
|
Adjusted
EBITDA does not reflect the periodic costs of certain tangible and
intangible assets used in generating revenues in our
business;
|
|
·
|
Adjusted
EBITDA does not reflect interest income from our investments in cash and
investment securities;
|
|
·
|
Adjusted
EBITDA does not reflect foreign exchange net gains and
losses;
|
|
·
|
Adjusted
EBITDA does not reflect interest expense and other cost relating to
financing our business, including gains and losses resulting from fair
value adjustment of Redpoint Venture’s Series A Warrants, Series B
Warrants and their Warrant to Purchase Units of Series B Preferred Stock
and Warrants;
|
|
·
|
Adjusted
EBITDA excludes taxes, which are an integral cost of doing
business; and
|
|
·
|
Because
Adjusted EBITDA does not include stock-based compensation, it does not
reflect the cost of granting employees equity awards, a key factor in
management’s ability to hire and retain
employees.
|
We
compensate for these limitations by providing specific information in the
reconciliation to the GAAP amounts excluded from Adjusted EBITDA, as
follows:
|
Quarter
Ended
|
|||||||||||||||
|
|
Mar. 31,
2008
|
Jun. 30,
2008
|
Sep. 30,
2008
|
Dec. 31,
2008
|
Mar. 31,
2009
|
Jun. 30,
2009
|
Sep. 30,
2009
|
Dec. 31,
2009
|
|||||||
|
(in
thousands)
|
|||||||||||||||
|
Net
income (loss)
|
$(3,667)
|
$(4,619)
|
$(2,119)
|
$(1,847)
|
$3,041
|
$(3,619)
|
$(70)
|
$2,408
|
|||||||
|
Interest
(income) expense, net
|
(55)
|
(18)
|
43
|
86
|
87
|
362
|
(4)
|
(5)
|
|||||||
|
Foreign
currency (gains) losses
|
38
|
11
|
(11)
|
(57)
|
(15)
|
9
|
5
|
(5)
|
|||||||
|
Income
tax (benefit) expense, net
|
11
|
15
|
(91)
|
(17)
|
(6)
|
78
|
50
|
43
|
|||||||
|
Depreciation
and amortization
|
448
|
383
|
250
|
248
|
261
|
299
|
328
|
302
|
|||||||
|
Stock-based
compensation
|
501
|
420
|
392
|
406
|
386
|
381
|
400
|
386
|
|||||||
|
Write-off
of the Brainboost Answers Engine
|
—
|
3,138
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
Termination
fees and write-off of costs relating to
the terminated Lexico acquisition and abandoned follow-on
offering
|
2,543
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
(Gain)
loss resulting from fair value adjustment of
warrants
|
—
|
—
|
2,056
|
3,131
|
(2,010)
|
4,385
|
999
|
(740)
|
|||||||
|
Adjusted
EBITDA
|
$(181)
|
$(670)
|
$520
|
$1,950
|
$1,744
|
$1,895
|
$1,708
|
$2,389
|
|||||||
Our
2010 Outlook
We see our business consisting of
core
platform plus product
extensions. We plan to
invest in our core platform and product extensions in 2010.
The core
platform is Answers.com in English, comprised of WikiAnswers and
ReferenceAnswers. We will continue to invest resources in our core platform in
areas such as content quality, maintaining and improving search engine
optimization, performance, scalability, and usability. In particular, we see
content quality as the single biggest opportunity and challenge of WikiAnswers.
To date, the essential driving force behind the growth of traffic continues to
be the expansion of our database of Questions and Answers. Content quality plays
a crucial role in our search engine rankings, as well as user experience. This
fundamental relationship drives our product and community
directions.
There are
four product extension areas that we have already begun or are
planning.
In the
third quarter of 2009 we launched our French, Italian, German and Spanish, or
“FIGS”, language versions of WikiAnswers. In 2010 we plan to continue our
investment in the FIGS versions of WikiAnswers. Our strategy will capitalize on
the needs of users around the globe who are searching for answers online and
will leverage our core strengths: community building and Q&A space. We plan
on leveraging our large and dynamic English language database to grow our
foreign language versions, by selectively translating some of the 7.3 million
answered questions we have in our WikiAnswers English language database. Our
largest competitor already has successful international sites and receives much
of its traffic from those sites, thus we view this area as critical to our
future growth.
The other
three product extensions we are planning in 2010 are in the realm of mobile,
social media and video. Users are not always in front of a desktop or laptop
when they need answers, and market research, as well as recent announcements by
Apple, Google, RIM and others, point to the expected growth of handheld Internet
access devices. We think that mobile Answers.com access could add usage, greater
engagement, and brand recognition. In terms of connecting more aggressively to
social media, we’ve already taken the first step, in the form of our Facebook
Connect solution announced in January 2010. Users can now log into Answers.com
using their Facebook, Twitter, Yahoo or Google identity. Our goal is to
further address the social answers space by more tightly integrating the
question-answering process with popular social networks. Lastly, video is
another natural extension of our Web-based text solution, and we intend to enter
this space to enrich the types of answers we serve our user base.
None of
the four product extensions we are planning to begin in 2010 are likely to
produce significant amounts of revenue in 2010.
Item 8. Financial Statements and Supplemental
data.
The
following are our consolidated financial statements and notes to financial
statements, and of our consolidated subsidiary, which are filed as part of this
Annual Report.
Answers
Corporation
Index
to Consolidated Financial Statements
Financial
Statements:
Report
of Independent Registered Public Accounting Firm
We have
audited the accompanying consolidated balance sheets of Answers Corporation and
Subsidiary (collectively referred to as “the Company”) as of December 31, 2008
and 2009, and the related consolidated statements of operations, changes in
stockholders’ equity and comprehensive income (loss), and cash flows for each of
the years in the two-year period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). These standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Answers Corporation and
Subsidiary as of December 31, 2008 and 2009, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2009, in conformity with US generally accepted accounting
principles.
As
discussed in Note 2 to the consolidated financial statements, the Company has
applied the new accounting and disclosure requirements issued by the FASB as of
January 1, 2008, with respect to its assets and liabilities measured at fair
value on a recurring basis. With respect to nonfinancial assets and liabilities
measured at fair value on a non-recurring basis, the Company has adopted the new
requirements as of January 1, 2009.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of evaluating other-than-temporary impairments of marketable
securities due to the adoption of new accounting requirements issued by the
FASB, as of April 1, 2009.
As
discussed in Note 9 to the consolidated financial statements, the Company
changed its method for accounting for its Redpoint warrants due to the adoption
of new accounting requirements issued by the FASB, as of January 1,
2009.
/s/
Somekh Chaikin
Somekh
Chaikin
Certified
Public Accountants (Israel)
A member
firm of KPMG International
Jerusalem,
Israel
March 8,
2010
Answers
Corporation and Subsidiary
|
December
31
|
December
31
|
||
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Assets
|
|||
|
Current
assets:
|
|||
|
Cash
and cash equivalents
|
11,739
|
22,234
|
|
|
Marketable
securities
|
-
|
795
|
|
|
Accounts
receivable
|
1,680
|
2,350
|
|
|
Prepaid
expenses and other current assets
|
818
|
907
|
|
|
Deferred
tax asset
|
-
|
34
|
|
|
Total
current assets
|
14,237
|
26,320
|
|
|
Long-term
deposits (restricted)
|
257
|
276
|
|
|
Deposits
in respect of employee severance obligations
|
1,337
|
1,756
|
|
|
Property
and equipment, net
|
1,234
|
1,858
|
|
|
Other
assets:
|
|||
|
Intangible
assets, net
|
994
|
797
|
|
|
Goodwill
|
437
|
437
|
|
|
Prepaid
expenses, long-term, and other assets
|
220
|
167
|
|
|
Deferred
tax asset, long-term
|
-
|
14
|
|
|
Total
other assets
|
1,651
|
1,415
|
|
|
Total
assets
|
18,716
|
31,625
|
|
|
Liabilities
and stockholders' equity
|
|||
|
Current
liabilities:
|
|||
|
Accounts
payable
|
537
|
403
|
|
|
Accrued
expenses and other current liabilities
|
767
|
774
|
|
|
Accrued
compensation
|
628
|
1,009
|
|
|
Warrant
to purchase units of Series B preferred stock and
warrants
|
8,698
|
-
|
|
|
Capital
lease obligations – current portion
|
78
|
82
|
|
|
Total
current liabilities
|
10,708
|
2,268
|
|
|
Long-term
liabilities:
|
|||
|
Liability
in respect of employee severance obligations
|
1,534
|
1,838
|
|
|
Capital
lease obligations, net of current portion
|
106
|
24
|
|
|
Deferred
tax liability
|
26
|
38
|
|
|
Series
A and Series B Warrants
|
-
|
8,008
|
|
|
Total
long-term liabilities
|
1,666
|
9,908
|
|
|
Commitments
and contingencies
|
|||
|
Series A and Series B
convertible preferred stock: $0.01 par value; stated value and
liquidation preference
of $101.76 per share for the Series A and $100 per share for the Series
B Convertible
Preferred Stock; 6% cumulative annual dividend; 60,000 and 130,000
shares authorized,
issued and outstanding as of December 31, 2008 and 2009,
respectively
|
624
|
2,381
|
|
|
Stockholders'
equity:
|
|||
|
Preferred
stock: $0.01 par value; 940,000 and 870,000 shares authorized as
of December
31, 2008 and 2009, respectively, none issued
|
-
|
-
|
|
|
Common
stock: $0.001 par value; 100,000,000 shares authorized; 7,870,538 and
7,951,329 shares
issued and outstanding as of December 31, 2008 and 2009,
respectively
|
8
|
8
|
|
|
Additional
paid-in capital
|
77,091
|
88,539
|
|
|
Accumulated
other comprehensive income (loss)
|
(28)
|
28
|
|
|
Accumulated
deficit
|
(71,353)
|
(71,507)
|
|
|
Total
stockholders' equity
|
5,718
|
17,068
|
|
|
Total
liabilities and stockholders' equity
|
18,716
|
31,625
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Answers
Corporation and Subsidiary
|
Year
ended December 31
|
|||
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Revenues:
|
|||
|
Advertising
revenue -
|
|||
|
WikiAnswers
|
7,524
|
14,454
|
|
|
ReferenceAnswers
|
6,622
|
6,230
|
|
|
Answers
service licensing
|
81
|
71
|
|
|
14,227
|
20,755
|
||
|
Costs
and expenses:
|
|||
|
Cost
of revenue
|
4,641
|
4,796
|
|
|
Research
and development
|
3,482
|
3,608
|
|
|
Community
development, sales and marketing
|
2,734
|
2,459
|
|
|
General
and administrative
|
4,799
|
4,899
|
|
|
Write-off
of the Brainboost Answer Engine
|
3,138
|
-
|
|
|
Termination
fees and write-off of costs relating to the terminated Lexico
acquisition and abandoned follow-on offering
|
2,543
|
-
|
|
|
Total
operating expenses
|
21,337
|
15,762
|
|
|
Operating
income (loss)
|
(7,110)
|
4,993
|
|
|
Interest
expense, net
|
(55)
|
(440)
|
|
|
Other
income, net
|
19
|
6
|
|
|
Loss
resulting from fair value adjustments of warrants, net
|
(5,187)
|
(2,634)
|
|
|
Income
(loss) before income taxes
|
(12,333)
|
1,925
|
|
|
Income
tax benefit (expense), net
|
82
|
(165)
|
|
|
Net
income (loss)
|
(12,251)
|
1,760
|
|
|
Basic
and diluted net loss per common share
|
(1.65)
|
(0.07)
|
|
|
Weighted
average number of shares used in computing basic
and diluted net loss per common share
|
7,863,917
|
7,909,353
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Answers
Corporation and Subsidiary
|
Common
stock
|
Additional
paid-in capital
|
Accumulated
other comprehensive loss
|
Accumulated
deficit
|
Total
stockholders’ equity
|
Comprehensive
income (loss)
|
||||||||
|
Shares
|
Amount
($)
|
$
|
$
|
$
|
$
|
$
|
|||||||
|
Balance
as of December 31, 2007
|
7,859,890
|
8
|
73,893
|
(28)
|
(59,102)
|
14,771
|
|||||||
|
Issuance
of common stock in connection with
exercise of vested stock options
|
10,648
|
-
|
10
|
-
|
-
|
10
|
-
|
||||||
|
Stock-based
compensation to employees and Directors
|
-
|
-
|
1,719
|
-
|
-
|
1,719
|
-
|
||||||
|
Dividends
on preferred stock, $3.30
per share
|
-
|
-
|
(198)
|
-
|
-
|
(198)
|
-
|
||||||
|
Discount
to temporary equity resulting from
beneficial conversion feature in
the Redpoint Financing (Series A)
|
-
|
-
|
1,768
|
-
|
-
|
1,768
|
-
|
||||||
|
Discount
to temporary equity resulting from
the issuance of the Series A Warrants in
the Redpoint Financing
|
-
|
-
|
464
|
-
|
-
|
464
|
-
|
||||||
|
Amortization
of discounts resulting from Redpoint
Financing
|
-
|
-
|
(518)
|
-
|
-
|
(518)
|
-
|
||||||
|
Stock
registration cost
|
-
|
-
|
(47)
|
-
|
-
|
(47)
|
-
|
||||||
|
Net
loss for year
|
-
|
-
|
-
|
-
|
(12,251)
|
(12,251)
|
(12,251)
|
||||||
|
Comprehensive
loss
|
(12,251)
|
||||||||||||
|
Balance
as of December 31, 2008
|
7,870,538
|
8
|
77,091
|
(28)
|
(71,353)
|
5,718
|
|||||||
|
Cumulative
effect of change in accounting principle (see note 9)
|
-
|
-
|
(1,657)
|
(1,914)
|
(3,571)
|
-
|
|||||||
|
Issuance
of common stock in connection with
exercise of vested stock options
|
80,791
|
-
|
247
|
-
|
-
|
247
|
-
|
||||||
|
Stock-based
compensation to employees and directors
|
-
|
-
|
1,553
|
-
|
-
|
1,553
|
-
|
||||||
|
Dividends
on Series A Convertible Preferred Stock, $6.10 per share
|
-
|
-
|
(366)
|
-
|
-
|
(366)
|
-
|
||||||
|
Dividends
on Series B Convertible Preferred Stock, $3.37 per share
|
-
|
-
|
(236)
|
-
|
-
|
(236)
|
-
|
||||||
|
Amortization
of discounts resulting from Redpoint
Financing
|
-
|
-
|
(1,740)
|
-
|
-
|
(1,740)
|
-
|
||||||
|
Discount
to temporary equity resulting from
beneficial conversion feature in
the Redpoint Financing (Series B)
|
-
|
-
|
2,867
|
-
|
-
|
2,867
|
-
|
||||||
|
Exercise
of the Series B Unit Warrant
|
-
|
-
|
10,780
|
-
|
-
|
10,780
|
-
|
||||||
|
Unrealized
gains on derivative and hedging activity, net
|
-
|
-
|
-
|
60
|
-
|
60
|
60
|
||||||
|
Unrealized
loss on marketable securities
|
-
|
-
|
-
|
(4)
|
-
|
(4)
|
(4)
|
||||||
|
Net
income for year
|
-
|
-
|
-
|
-
|
1,760
|
1,760
|
1,760
|
||||||
|
Comprehensive
income
|
1,816
|
||||||||||||
|
Balance
as of December 31, 2009
|
7,951,329
|
8
|
88,539
|
28
|
(71,507)
|
17,068
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Answers
Corporation and Subsidiary
|
Year
ended December 31
|
|||
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Cash
flows from operating activities:
|
|||
|
Net
income (loss)
|
(12,251)
|
1,760
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating
activities:
|
|||
|
Depreciation
and amortization
|
1,329
|
1,185
|
|
|
Increase
in deposits in respect of employee severance obligations
|
(105)
|
(407)
|
|
|
Increase
in liability in respect of employee severance obligations
|
304
|
288
|
|
|
Stock-based
compensation to employees and directors
|
1,719
|
1,553
|
|
|
Increase
in deferred tax asset
|
-
|
(48)
|
|
|
Increase
in deferred tax liability
|
12
|
12
|
|
|
Write-off
of the Brainboost Answer Engine
|
3,138
|
-
|
|
|
Write-off
of amounts paid in prior periods, relating to the terminated Lexico
acquisition and
abandoned
follow on offering
|
663
|
-
|
|
|
Fair
value adjustments of warrants, net
|
5,187
|
2,634
|
|
|
Loss
on disposal of property and equipment
|
7
|
73
|
|
|
Loss
from foreign exchange rate forward contracts
|
10
|
-
|
|
|
Exchange
rate losses
|
10
|
6
|
|
|
Changes
in operating assets and liabilities:
|
|||
|
Increase
in accounts receivable, and prepaid expenses and other current
assets
|
(212)
|
(410)
|
|
|
(Increase)
decrease in prepaid expenses, long-term, and other assets
|
39
|
49
|
|
|
Decrease
in accounts payable
|
(214)
|
(307)
|
|
|
Increase
in accrued expenses, accrued compensation and other current
liabilities
|
65
|
411
|
|
|
Net
cash provided by (used in) operating activities
|
(299)
|
6,799
|
|
|
Cash
flows from investing activities:
|
|||
|
Capital
expenditures
|
(558)
|
(1,515)
|
|
|
Increase
in long-term deposits (restricted)
|
(60)
|
(19)
|
|
|
Purchases
of marketable securities
|
-
|
(799)
|
|
|
Proceeds
from sale of marketable securities
|
700
|
-
|
|
|
Net
cash provided by (used in) investing activities
|
82
|
(2,333)
|
|
|
Cash
flows from financing activities:
|
|||
|
Repayment
of capital lease obligation
|
(55)
|
(78)
|
|
|
Stock
registration costs
|
(47)
|
-
|
|
|
Redpoint
financing, net of issuance cost
|
5,380
|
6,480
|
|
|
Dividends
paid
|
(92)
|
(602)
|
|
|
Exercise
of common stock options and warrants
|
10
|
247
|
|
|
Net
cash provided by financing activities
|
5,196
|
6,047
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
(18)
|
(18)
|
|
|
Net
increase in cash and cash equivalents
|
4,961
|
10,495
|
|
|
Cash
and cash equivalents at beginning of year
|
6,778
|
11,739
|
|
|
Cash
and cash equivalents at end of year
|
11,739
|
22,234
|
|
|
Supplemental
disclosures of cash flow information:
|
|||
|
Income
taxes paid
|
-
|
171
|
|
|
Interest
paid on capital lease obligations
|
7
|
9
|
|
|
Non-cash
investing activities:
|
|||
|
Acquisition
of assets through capital lease obligation
|
239
|
-
|
|
|
Capital
expenditures on account
|
127
|
170
|
|
|
Non-cash
financing activities:
|
|||
|
Increase
in accrued dividends
|
(106)
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Answers
Corporation (“the Parent”), a Delaware corporation, and its wholly-owned Israeli
subsidiary (‘the Subsidiary”) that engages primarily in research and development
services to the Parent, are collectively referred to as “the Company.” The
Parent is a public company and trades on the NASDAQ Capital Market under the
symbol “ANSW”.
The
Company provides answer-based search services to users primarily through its
website Answers.com®, which includes WikiAnswers® and ReferenceAnswersTM. In
the Company’s reports prior to its quarterly report for the second quarter of
2009, it referred to ReferenceAnswers as Answers.com. Beginning with the
quarterly report for the second quarter of 2009 it refers to that property as
ReferenceAnswers or ReferenceAnswers.com.
In the
first quarter of 2008, the Company’s planned acquisition of Lexico Publishing
Group LLC and the related planned offering of securities were terminated due to
unfavorable market conditions. As a result, the Company recorded a charge to its
statement of operations, amounting to approximately $2.54 million.
On
June 16, 2008, the Company raised $6 million, before related fees and
costs, in a private placement offering, and on June 10, 2009 the Company raised
an additional $7 million, before related fees and costs, from the exercise of
the second tranche warrant of such private placement offering. See Note 9 for
further details.
As of
December 31, 2009, approximately $678 thousand of the Company’s net assets were
located outside of the United States.
Note
2 - Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of Answers
Corporation and its Subsidiary and are presented in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). All
significant intercompany balances and transactions have been eliminated in
consolidation.
During
the third quarter of 2009, the new Accounting Standards Codification (ASC) as
issued by the Financial Accounting Standards Board (FASB) became effective. The
ASC has become the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. The ASC does not change U.S. GAAP and,
therefore, does not have any impact on the Company’s consolidated financial
statements. All references to GAAP in the notes to the consolidated financial
statements use the new codification numbering system.
Foreign
Currency Translation
The
currency of the primary economic environment in which the operations of the
Company are conducted is the U.S. dollar (“dollar”), therefore, the dollar has
been determined to be the Company’s functional currency. Transactions in foreign
currency (substantially all in New Israeli Shekels – “NIS”) are recorded at the
exchange rate as of the transaction date. Monetary assets and liabilities
denominated in foreign currency are translated on the basis of the
representative rate of exchange at the balance sheet date. Non-monetary assets
and liabilities denominated in foreign currency are stated at historical
exchange rates. All exchange gains and losses from remeasurement of monetary
balance sheet items denominated in non-dollar currencies are reflected in the
statement of operations as they arise.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported results of operations during the reporting periods. The current
economic environment has increased the degree of uncertainty inherent in those
estimates and assumptions. Actual results could differ from those
estimates.
Cash
and Cash Equivalents, and Marketable Securities
All
highly liquid investments with stated maturities of three months or less from
date of purchase are classified as cash equivalents.
All
highly liquid investments with stated maturities of greater than three months
are classified as marketable securities. The Company determines the appropriate
classification of its investments in marketable securities at the time of
purchase. The Company’s marketable securities have been classified and accounted
for as available-for-sale. After consideration of its risk versus reward
objectives, as well as its liquidity requirements, the Company may sell these
securities prior to their stated maturities. As these securities are viewed by
the Company as available to support current operations, securities with
maturities beyond 12 months are classified as current assets under the caption
marketable securities in the accompanying consolidated balance sheets. These
securities are carried at fair value, with the unrealized gains and losses
reported as a component of stockholders’ equity, except for unrealized losses
determined to be other than temporary which are recorded as other income
(expense), net. Any realized gains or losses on the sale of marketable
securities are determined on a specific identification method, and such gains
and losses are reflected as a component of other income (expense),
net.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124- 2, Recognition and Presentation of
Other-Than-Temporary Impairments (included in FASB Topic 320, Investment Debt and Equity
Securities), which amends the recognition guidance for
other-than-temporary impairments (OTTI) of debt securities and expands the
financial statement disclosures for OTTI on debt and equity securities. When an
other-than-temporary impairment has occurred, the amount of the
other-than-temporary impairment recognized in earnings depends on whether the
Company intends to sell the security or more likely than not will be required to
sell the security before recovery of its amortized cost basis less any
current-period credit loss. If the Company intends to sell the security or more
likely than not will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss, the
other-than-temporary impairment is recognized in earnings equal to the entire
difference between the investment’s amortized cost basis and its fair value at
the balance sheet date. If the Company does not intend to sell the security and
it is not more likely than not that the Company will be required to sell the
security before recovery of its amortized cost basis less any current-period
credit loss, the other-than-temporary impairment is separated into the amount
representing the credit loss and the amount related to all other factors. The
amount of the other-than-temporary impairment related to the credit loss is
recognized in earnings. The amount of the other-than-temporary impairment
related to other factors is recognized in other comprehensive income, net of
applicable income taxes.
The
Company considers all available information relevant to the collectibility of
the security, including past events, current conditions, and reasonable and
supportable forecasts when developing estimate of cash flows expected to be
collected. Evidence considered in this assessment includes the reasons for the
impairment, the severity and duration of the impairment, changes in value
subsequent to year-end, forecasted performance of the investee, and the general
market condition in the geographic area or industry the investee operates
in.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Accounts
Receivable
Accounts
receivable are recorded when earned and do not bear interest. If necessary, the
Company records an allowance for doubtful accounts to reflect the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. As of the balance sheet dates such allowance was not
significant.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Annual depreciation rates are as
follows:
|
%
|
|
|
Computer
equipment
|
33
|
|
Furniture
and fixtures
|
7 -
20
|
Leasehold
improvements are amortized over the shorter of the estimated useful life or the
expected life of the lease.
Revenue
Recognition
The
Company, through its website Answers.com, generates revenues via advertising in
the form of pay-per-performance ads and paid-for-impression advertising. In the
pay-per-performance model, the Company earns revenue based on the number of
clicks associated with such ads. In the paid-for-impression model, the Company’s
revenue is derived from the display of ads.
Almost
all of the Company’s advertising revenue is obtained through the efforts of
third parties rather than through direct contracts with advertisers. The third
party is obligated to pay the Company a portion of the revenue it receives from
advertisers, as compensation for the Company’s sale of promotional space on its
Internet properties. Amounts received from such third parties are reflected as
revenue in the period in which such advertising services are
provided.
The
Company also earns an immaterial amount of revenue from partners that pay the
Company for providing them with answer-based services that they then use in
their own products, via co-branded web pages.
Research
and Development
The
Company expenses research and development costs as incurred. Certain internal
use software and website development costs are capitalized in accordance with
the FASB’s authoritative guidance on accounting for intangibles.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Stock-Based
Compensation
The fair
value of stock options granted to employees and directors, is estimated at the
date of grant using the Black-Scholes option-pricing model, which takes into
consideration the share price at the date of grant, the exercise price of the
option, the expected life of the option, expected interest rates and the
expected volatility. The value of stock options, as noted, is recognized as
compensation expense on a straight-line basis, over the requisite service period
of the entire award, net of estimated forfeitures.
Beginning
in 2008, as the Company accumulated its own volatility history, the estimates of
the expected stock volatility are based on the Company’s own historical stock
volatility rates.
The fair
value for each stock option granted to employees and directors during the years
ended December 31, 2008 and 2009, was estimated at the date of grant using the
Black-Scholes option-pricing model, assuming no dividends and the following
average assumptions:
|
Year
ended December 31
|
|||
|
2008
|
2009
|
||
|
Expected
risk-free interest rate
|
2.80%
|
1.97%
|
|
|
Expected
life (in years)
|
4.08
|
4.08
|
|
|
Expected
volatility
|
84.66%
|
72.7%
|
|
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant for periods corresponding with the expected life of the
option.
The
expected life represents the average period of time that options granted are
expected to be outstanding. The Company estimates the expected life of
outstanding options by taking the average of the vesting term and the
contractual term of the option, in accordance with the SEC’s non-authoritative
guidance (the “Simplified Method”). The Company uses the Simplified Method as
adequate historical experience is not available to provide a reasonable estimate
of the expected life for stock option grants, and it will continue to apply the
Simplified Method until enough historical experience is available.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment
date.
In
assessing the need for a valuation allowance, the Company looks at cumulative
losses in recent years, estimates of future taxable earnings, feasibility of
on-going tax planning strategies, the realizability of tax benefit
carryforwards, and other relevant information. Valuation allowances related to
deferred tax assets can be impacted by changes to tax laws, changes to statutory
tax rates and future taxable earnings. Ultimately, the actual tax benefits to be
realized will be based upon future taxable earnings levels, which are very
difficult to predict. In the event that actual results differ from these
estimates in future periods, the Company will be required to adjust the
valuation allowance.
Significant
judgment is required in evaluating the Company's federal, state and foreign tax
positions and in the determination of its tax provision. Despite management's
belief that the Company's liability for unrecognized tax benefits is adequate,
it is often difficult to predict the final outcome or the timing of the
resolution of any particular tax matters. The Company may adjust these reserves
as relevant circumstances evolve, such as guidance from the relevant tax
authority, its tax advisors, or resolution of issues in the courts. The
Company's tax expense includes the impact of reserve provisions and changes to
reserves that it considers appropriate, as well as related interest and
penalties. These adjustments are recognized as a component of income tax expense
entirely in the period in which they are identified.
Impairment
of Property and Equipment, Goodwill and Intangible Assets
The
Company reviews property and equipment and intangible assets, excluding
goodwill, for impairment whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable. Recoverability of these
assets is measured by comparison of carrying amounts to the future undiscounted
cash flows the assets are expected to generate. If property and equipment and
intangible assets are considered to be impaired, the impairment to be recognized
equals the amount by which the carrying value of the asset exceeds its fair
market value.
Additionally,
the Company tests its goodwill for impairment at least annually, in accordance
with the provisions of FASB ASC Topic 350, “Intangibles - Goodwill and Other”,
with the annual impairment testing date set at September 30, or more
frequently if events or changes in circumstances indicate that this asset may be
impaired. There was no impairment in any of the years presented.
Comprehensive
Income (Loss)
Comprehensive
income represents net income (loss) plus any revenue, expenses, gains and losses
that are specifically excluded from net income (loss) and recognized directly as
a component of shareholders’ equity.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Net
Loss per Share
Basic net
loss per share is computed by dividing the net loss for the period by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing the net loss for the period, adjusted
with the Redpoint dividends and amortizations of discounts, by the weighted
average number of shares of common stock and potentially dilutive common stock
outstanding during the period. The dilutive effect of outstanding options and
warrants is reflected in diluted earnings per share by application of the
treasury stock method. The dilutive effect of the issued and outstanding Series
A Convertible Preferred Stock and Series B Convertible Preferred Stock (collectively,
the “Series A and Series B Convertible Preferred Stock”) is reflected in
diluted earnings per share by application of the if-converted method. The
calculation of diluted net loss per share excludes all anti-dilutive shares. The
diluted net loss per share for the years ended December 31, 2008 and 2009 is the
same as basic net loss per share as the inclusion of the Company’s common stock
equivalents would be anti-dilutive.
The
following table sets forth the computation of basic and diluted net loss per
share for the periods indicated:
|
Year
ended December 31
|
|||
|
2008
|
2009
|
||
|
$
(in thousands, except share and per share amounts)
|
|||
|
Basic and diluted net loss per common share
computation
|
|||
|
Numerator:
|
|||
|
Net
income (loss)
|
(12,251)
|
1,760
|
|
|
Series
A and Series B Convertible Preferred Stock dividends
|
(198)
|
(602)
|
|
|
Amortization
of Series A and Series B Convertible Preferred Stock
discounts
|
(518)
|
(1,740)
|
|
|
Net
loss attributable to common shares
|
(12,967)
|
(582)
|
|
|
Denominator:
|
|||
|
Weighted
average number of common shares outstanding during the
period
|
7,863,917
|
7,909,353
|
|
|
Basic
and diluted net loss per common share
|
(1.65)
|
(0.07)
|
|
|
Common
stock equivalents excluded because their effect would have been
anti-dilutive
|
784,041
|
2,912,635
|
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Derivatives
and Hedging
To
mitigate the potential impact of adverse fluctuations in cash flows resulting
from forecasted new Israeli shekels (NIS) exchange rates, the Subsidiary hedges
portions of its forecasted expenses denominated in NIS with currency forwards
and options. The Subsidiary does not speculate in these hedging instruments in
order to profit from foreign currency exchanges, nor does it enter into trades
for which there are no underlying exposures.
The
Company recognizes all derivatives on the balance sheet at fair value. If the
derivatives meet the definition of a hedge and are so designated, depending on
the nature of the hedge, the effective portion of the gain or loss on the
derivative is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The ineffective portion of a derivative’s change
in fair value, if any, is recognized in earnings. Gains (losses) from a
derivative’s change in fair value that are not designated as hedges are
recognized in earnings.
Through
April 2009, the Subsidiary’s currency forwards and options were not designated
as hedging instruments and, therefore, the net gains (losses) that resulted from
such derivatives were recognized in earnings as they occurred.
Starting
May 2009, the Subsidiary designated all of its currency hedging activity, which
currently consists only of forward contracts, as cash flow hedges, as they were
all eligible. The Company documents all relationships between the hedging
instruments and hedged items, as well as its risk management objective for
undertaking these hedging transactions. The Company also formally assesses, both
at the inception of the hedge and on an ongoing basis, whether or not each
derivative is highly effective in offsetting changes in fair value of the hedged
items.
Gains
(losses) from forward and option contracts are included in operating expenses,
as follows:
|
Year
ended December 31
|
|||
|
2008
|
2009
|
||
|
$
(in thousands)
|
|||
|
Cost
of revenue
|
(1)
|
-
|
|
|
Research
and development
|
(5)
|
15
|
|
|
Sales
and marketing
|
-
|
1
|
|
|
General
and administrative
|
(4)
|
4
|
|
|
(10)
|
20
|
||
The net
gain for the year ended December 31, 2009 of $20 thousand, is comprised by $110
thousand of gains from contracts that were designated as hedging instruments,
less $90 thousand of losses from contracts that were not designated as hedging
instruments.
As of
December 31, 2009, the notional amount of the Subsidiary’s outstanding forward
contracts was approximately $2.64 million, constituting
assets with a fair value of $60 thousand. Such assets are included in prepaid
expenses and other current assets as the foreign exchange forward contracts
mature through September 29, 2010, and the change in fair value has been
recorded as other comprehensive income (loss). The amounts recorded as
accumulated other comprehensive income will be reclassified to earnings as the
forward contracts mature or if, and to the extent that the hedging relationship
is deemed ineffective.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
Fair
Value Measurements
On
January 1, 2008, the Company adopted the provisions of FASB Statement No. 157,
“Fair Value
Measurements”, included in ASC Topic 820, “Fair Value Measurements and
Disclosures”, for fair value measurements of financial assets and
financial liabilities and for fair value measurements of nonfinancial items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. Statement 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC Topic 820
(Statement 157) also establishes a framework for measuring fair value and
expands disclosures about fair value measurements
(see Note 10).
On
January 1, 2009, the Company adopted the provisions of ASC Topic 820 (Statement
157) to fair value measurements of nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
3 - Cash and Cash Equivalents
Cash and
cash equivalents consist of the following (in thousands):
|
2008
|
2009
|
||
|
$
|
$
|
||
|
In
US dollars:
|
|||
|
Cash
|
218
|
890
|
|
|
Cash
equivalents (money market funds)
|
10,948
|
20,885
|
|
|
In
New Israeli Shekels:
|
|||
|
Cash
|
235
|
57
|
|
|
Cash
equivalents
|
338
|
402
|
|
|
11,739
|
22,234
|
Note
4 – Marketable Securities
The
Company’s marketable securities are invested in debt instruments of the
U.S. government.
Gross
unrealized losses on marketable securities for which other-than-temporary
impairments have not been recognized, and the fair values of those securities,
at December 31, 2009, were as follows (in thousands):
|
Aggregate
cost basis
|
Other
than temporary impairment
|
Unrealized
loss
|
Fair
value
|
||||
|
$
|
$
|
$
|
$
|
||||
|
Available
for sale
|
|||||||
|
U.S.
government securities
|
799
|
-
|
4
|
795
|
Note
5 - Long-term Deposits (Restricted)
Long-term
deposits are comprised of a restricted deposit with a bank in the amount of $140
thousand to secure a bank guarantee and other long-term deposits with vendors
and credit card companies. During 2008 and 2009, the long-term deposits earned
immaterial amounts of interest.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
6 - Property and Equipment, Net
Property
and equipment as of December 31, 2008 and 2009 consisted of the following (in
thousands):
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Computer
equipment(1)
|
2,965
|
3,951
|
|
|
Furniture
and fixtures
|
177
|
186
|
|
|
Leasehold
improvements
|
175
|
185
|
|
|
3,317
|
4,322
|
||
|
Less:
accumulated depreciation and amortization(1)
|
(2,083)
|
(2,464)
|
|
|
1,234
|
1,858
|
|
(1)
|
Includes
leased equipment of $239 thousand, less accumulated depreciation of $58
thousand and $138 thousand as of December 31, 2008 and 2009,
respectively.
|
As of
December 31, 2008 and 2009, approximately $338 thousand and $285 thousand of the
aggregate value of the Company’s net book value of property and equipment,
respectively, were located in Israel.
During
the years 2008 and 2009, the Company recorded $695 thousand, and $968 thousand
of depreciation expense, respectively.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7 – Intangible Assets, Net
The
following table summarizes the Company’s intangible assets as of December 31,
2008 and 2009 (in thousands):
|
December
31, 2008
|
December
31, 2009
|
||||||||||
|
Gross
carrying amount
|
Accumulated
amortization
|
Net
|
Gross
carrying amount
|
Accumulated
amortization
|
Net
|
||||||
|
$
|
$
|
$
|
$
|
$
|
$
|
||||||
|
WikiAnswers
|
|||||||||||
|
Technology
|
30
|
(13)
|
17
|
30
|
(19)
|
11
|
|||||
|
Q&A
Database
|
207
|
(189)
|
18
|
207
|
(207)
|
-
|
|||||
|
Domain
Names
|
1,068
|
(231)
|
837
|
1,068
|
(338)
|
730
|
|||||
|
Covenant
Not to Compete (“CNC”)
|
280
|
(202)
|
78
|
-
|
-
|
-
|
|||||
|
Capitalized
software development costs
|
98
|
(98)
|
-
|
49
|
(49)
|
-
|
|||||
|
Domain
names
|
80
|
(36)
|
44
|
100
|
(44)
|
56
|
|||||
|
1,763
|
(769)
|
994
|
1,454
|
(657)
|
797
|
||||||
During
the years 2008 and 2009, the Company recorded $634 thousand and $217 thousand of
amortization expense of intangible assets, respectively. Additionally, in May
2008, the Company wrote off the net book value of the Brainboost Answer Engine,
in the amount of $3.14 million.
Amortization
of intangible assets, net, in each of the succeeding five years and thereafter
is estimated as follows (in thousands):
|
Year
ending December 31
|
$
|
||
|
2010
|
123
|
||
|
2011
|
122
|
||
|
2012
|
117
|
||
|
2013
|
117
|
||
|
2014
|
113
|
||
|
Thereafter
|
205
|
||
|
797
|
|||
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7 – Intangible Assets, Net (cont’d)
Brainboost
Answer Engine
In
December 2005, the Company acquired Brainboost Technology, LLC, developer of the
Brainboost Answer Engine (“BAE”), an artificial intelligence technology enabling
natural language question-and-answer search on the Web. As consideration for the
acquisition, the Company paid $4.0 million in cash and 439,000 shares of its
restricted stock, valued at approximately $5.6 million at the time of the
acquisition. In connection with the initial allocation of the purchase price,
the Company recorded an intangible asset, with an estimated useful life of six
years, of approximately $5.4 million.
In the
second quarter of 2008, the Company decided to focus its efforts in the realm of
questions-and-answers, solely on user-generated questions-and-answers, and
effectively abandoned its use of the BAE. This decision was implemented on May
25, 2008, when changes were made to Answers.com, virtually eliminating the use
of the BAE. Additionally, the Company no longer has any staff assigned to this
project, has no plans to reinstate the use of the BAE and considers it to have
no further service potential.
As a
result of the Company’s decision to effectively abandon its use of the BAE, the
net book value of the BAE as of May 25, 2008, in the amount of $3.14 million,
was written-off, and the resulting charge is included in the Company’s operating
expenses for the year ended December 31, 2008.
WikiAnswers
All
assets related to the WikiAnswers acquisition, except for the goodwill, are
being amortized over their estimated useful lives as follows: Technology – 5
years; Database of questions and answers – 3 years (accelerated); Domain Names –
10 years; CNC – 3 years. Technology and Database of questions and answers are
being amortized to cost of revenue, and Domain Names and CNC to general and
administrative. In 2008, the Company recorded $61 thousand and $200 thousand of
such amortization to cost of revenue and general and administrative expenses,
respectively. In 2009, the Company recorded $23 thousand and $185 thousand of
such amortization to cost of revenue and general and administrative expenses,
respectively. The goodwill, although not amortized for accounting purposes, and
all other assets relating to the WikiAnswers acquisition, are deductible for tax
purposes over a fifteen year period.
Note
8 – Deposits and Liability in Respect of Employee Severance
Obligations
The
Subsidiary’s liability for severance pay for most employees is calculated
pursuant to Israeli Severance Pay Law based on its employees’ most recent
monthly salaries, multiplied by the number of years of their employment, or a
portion thereof, as of the balance sheet date. As of December 31, 2008 and 2009,
this liability is fully provided for by monthly deposits in insurance policies
and by an accrual. The deposited funds may be withdrawn by the Company only upon
the fulfillment of the obligation pursuant to Israeli Severance Pay Law or labor
agreements.
Beginning
November 2008, the Subsidiary’s agreements with newly hired employees are
generally in accordance with section 14 of the Israeli Severance Pay Law,
whereas, the Company’s contributions for severance pay shall fulfill its
severance liability. Upon a monthly contribution of an amount equal to 8.33% of
the employee’s monthly salary, and release of the policy to the employee, no
additional payments shall be made by the Company to the employee upon the
employee’s termination. Further, the related obligation and amounts deposited on
behalf of such obligation are not stated on the balance sheet, as the Subsidiary
is legally released from obligation to employees once the deposited amounts have
been deposited in insurance policies.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing
General
On
June 16, 2008 (the “Initial Closing Date”), pursuant to a private placement
of the Company’s securities, Redpoint Omega, L.P. and Redpoint Omega Associates,
LLC (collectively “Redpoint”) purchased $6 million of the Company’s
Series A Convertible Preferred Stock (the “Series A Financing”), initially
convertible into 1,333,333 shares of common stock at a conversion price of $4.50
per share (the “Series A Convertible Preferred Stock”), and
common stock purchase warrants exercisable for 666,667 shares of common stock at
an exercise price of $4.95 per share (the “Series A Warrants”). Redpoint also
received a warrant (the “Series B Unit Warrant”), exercisable until
June 16, 2009, to purchase units of up to $7 million of Series B
Convertible Preferred Stock and common stock purchase warrants. After deducting
placement agent fees and legal expenses, the Company’s net proceeds from the
private placement on June 16, 2008, were approximately $5.38
million.
On June
10, 2009, Redpoint exercised its Series B Unit Warrant and purchased $7 million
of the Company’s Series B Convertible Preferred Stock (the “Series B
Financing”), initially convertible into 1,272,727 shares of common stock at a
conversion price of $5.50 per share (the
“Series B Convertible Preferred Stock”), and common stock
purchase warrants exercisable for 636,364 shares of common stock at an exercise
price of $6.05 per share (the “Series B Warrants”). After deducting placement
agent fees and legal expenses, the Company’s net proceeds from the Series B
Financing were approximately $6.48 million.
Transaction
costs for both investments were allocated on a pro rata basis, based on the
amounts allocated to each of the components of the transaction. Transaction
costs relating to the Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock have been reflected as a reduction to the proceeds
from the issuance of such instruments. Transaction costs relating to the Series
B Unit Warrant were deferred and amortized to interest expense over one year,
which was the life of the unit warrant. Transaction costs relating to the Series
A Warrants were initially reflected as a reduction to the proceeds from the
issuance of such instrument and then written off to retained earnings upon
adoption of EITF Issue 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (now
incorporated in ASC 815–40, “Derivatives and hedging – Contracts
in Entity’s Own Equity”) (see below). Transaction costs relating to the
Series B Warrants have been included in the statement of operations as interest
expense for the year ended December 31, 2009.
The
Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock,
the Series A Warrants and the Series B Warrants are collectively referred to as
the “Redpoint Securities”. The two transactions, in aggregate, are collectively
referred to as the “Redpoint Financings”.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing (cont’d)
The
Series A Convertible Preferred Stock has the rights and preferences set
forth in the Company’s Certificate of Designations, which amended the Company’s
Amended and Restated Certificate of Incorporation on June 16, 2008. The
Series B Convertible Preferred Stock has the rights and preferences set
forth in the Company’s Certificate of Designations, which amended the Company’s
Amended and Restated Certificate of Incorporation on June 9, 2009.
In
connection with the Redpoint Financings the Company entered into a registration
rights agreement with Redpoint, pursuant to which the Company agreed to register
with the SEC for resale the common stock underlying the Redpoint Securities. In
connection with the registration rights agreements, the Company agreed to pay a
penalty of 1.0% per month, on a daily pro rata basis, up to a maximum of 8.0%,
of the aggregate purchase price, as partial liquidated damages, for certain
default events and subject to certain circumstances. The partial liquidated
damages may trigger if the applicable registration statement ceases to remain
continuously effective. On July 30, 2008, following the Series A Financing, the
Company filed a registration statement for the registration of shares of common
stock issuable upon conversion of Series A Convertible Preferred Stock, and
shares of common stock issuable upon exercise of the Series A Warrants, which
was declared effective by the SEC on September 16, 2008. On June 15, 2009,
following the Series B Financing, the Company filed a registration statement for
the registration of shares of common stock issuable upon conversion of
Series B Convertible Preferred Stock, shares of common stock issuable upon
exercise of the Series B Warrants, and shares of common stock that may be issued
as dividends pursuant to the terms of the Series A Convertible Preferred Stock
and the Series B Convertible Preferred Stock, which was declared effective by
the SEC on July 28, 2009.
In
connection with the Redpoint Financings, Redpoint received and exercised their
right to appoint two individuals to serve as voting members of the Company’s
board of directors.
Accounting
for Series A Financing
The $6
million of proceeds from the Series A Financing, were first allocated to the
Series B Unit Warrant, which was classified as a liability, based on its fair
value, and the residual amount was allocated among the Series A Convertible
Preferred Stock and the Series A Warrants based on their relative fair values,
all in accordance with the guidance in ASC 480, “Distinguishing Liabilities from
Equity” (formerly SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”), and
ASC 815–40, “Derivatives
and hedging – Contracts in Entity’s Own Equity” (formerly EITF 00-19,
”Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock”). The Series A Convertible Preferred Stock has been classified as
temporary equity, in accordance with the guidance in ASC 480-10-S99A
(formerly EITF D-98, “Classification and Measurement of
Redeemable Securities”), and, prior to January 1, 2009, the Series A
Warrants were classified in permanent equity.
In June
2008, the FASB ratified the consensus of EITF 07-5 (incorporated in
ASC 815–40). ASC 815–40 responded to practice questions
about whether an instrument or embedded feature is indexed to the reporting
company’s own stock by establishing a framework for the determinations and by
nullifying some previous requirements. The adoption of EITF 07-5 (incorporated
in ASC 815–40) requirements affects issuers’ accounting for warrants and
many convertible instruments with provisions that protect holders from declines
in the stock price (“Down-Round” provisions). Warrants with such provisions are
no longer recorded in equity, and many convertible instruments with such
provisions require “bifurcation” with the conversion option separately accounted
for as a derivative under ASC 815 (formerly SFAS 133).
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing (cont’d)
Accounting
for Series A Financing (cont’d)
As a
result of the adoption of ASC 815–40, effective January 1, 2009, and due to
the Down-Round Protection of the Series A Warrants, such warrants are separately
accounted for as a derivative under ASC 815 (formerly SFAS 133) and are no
longer recorded in equity but rather as a liability, initially valued at fair
value to be revalued at each reporting date at fair value.
ASC 815–40
was initially applied by recording a cumulative-effect adjustment to opening
retained earnings as of January 1, 2009, to effect the accounting for the Series
A Warrants as a liability. The following table summarizes the allocation of the
Series A Financing had the Company been subject to the provisions of
ASC 815–40 at the Initial Closing Date:
|
Series
A Convertible Preferred Stock
|
Series
A Warrants
|
Series
B Unit Warrant
|
Total
|
|||||
|
$
(in thousands)
|
||||||||
|
Allocated
amount
|
661
|
1,828
|
3,511
|
6,000
|
||||
|
Less:
Transaction costs
|
(69)
|
(188)
|
(363)
|
(620)
|
||||
|
592
|
1,640
|
3,148
|
5,380
|
|||||
On
January 1, 2009, the Company recorded a cumulative effect of change in
accounting principle as reflected in the following table:
|
December
31, 2008
|
Effect
of
Adoption
of EITF 07-5
|
January
1, 2009
|
|||
|
$
(in thousands)
|
|||||
|
Additional
paid-in capital
|
77,091
|
(1,657)(1)
|
75,434
|
||
|
Accumulated
deficit
|
(71,353)
|
(1,726)(2)
|
(73,267)
|
||
|
(188)(3)
|
|||||
|
Long-term
liability – Series A Warrants
|
-
|
3,554
(4)
|
3,554
|
||
|
Series
A convertible preferred stock
|
624
|
17 (5)
|
641
|
||
|
-
|
|||||
|
(1)
|
Reflects
the re-allocation of the Series A Warrants from equity to liabilities and
the reduction of the discount relating to the Beneficial Conversion
Feature.
|
|
(2)
|
Reflects
the cumulative change in the fair value of the Series A Warrants between
June 16, 2008 and December 31, 2008
|
|
(3)
|
Reflects
the deferred charges attributable to the Series A Warrants that would have
been expensed at the Redpoint Closing
Date
|
|
(4)
|
Reflects
the fair value of the Series A Warrants as of December 31,
2008
|
|
(5)
|
Reflects
the increased amortization due to change in
discounts.
|
On
December 31, 2009, the Company assessed the fair value of the Series A Warrants
as compared to their value as of December 31, 2008. The change in fair value has
been included in the statement of operations as loss resulting from fair value
adjustment of Series A Warrants, and amounted $446 thousand for the year ended
December 31, 2009.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing (cont’d)
Accounting
for Series B Financing
The
Series B Unit Warrant that was issued on June 16, 2008, was recorded as a
liability, with a corresponding discount to the Series A Convertible Preferred
Stock. and was revalued at each reporting date. On December 31, 2008, the
Company assessed the value of the Series B Unit Warrant as compared to its fair
value at the Redpoint Closing Date. The change in the amount of $5.19 million is
included in the 2008 statement of operations as loss resulting from fair value
adjustment of warrant to purchase units of Series B preferred stock and
warrants. The change in value of the Series B Unit Warrant from January 1, 2009
through June 10, 2009, has been included in the 2009 statement of operations as
loss resulting from fair value adjustment of warrant to purchase units of Series
B preferred stock and warrants, and amounted to $2.08 million. On June 10, 2009,
Redpoint exercised, in full, the Series B Unit Warrant, which was valued at
approximately $10.8 million on such date, thus extinguishing this liability from
the Company’s balance sheet through a corresponding increase to additional
paid-in capital.
The $7
million of proceeds from the Series B Financing, were first allocated to the
Series B Warrants which were classified as a liability, recorded at fair value,
and the residual amount was allocated to the Series B Convertible Preferred
Stock, all in accordance with the guidance in ASC 815 (formerly
SFAS 133), ASC 480 (formerly
SFAS 150) and ASC 815–40 (formerly EITF Issue No. 07-5). The Series B
Convertible Preferred Stock has been classified as temporary equity, in
accordance with the guidance in ASC 480-10-S99A (formerly EITF
D-98).
Resulting
from the allocation of the proceeds as described above, and in comparison to the
fair market value of the Company’s common stock on the date of issuance, the
effective conversion rate of the Series B Convertible Preferred Stock,
represents an additional beneficial conversion value. Thus, the Company recorded
an additional discount to the Series B Convertible Preferred Stock, with a
corresponding increase in paid-in capital, of $2.87 million, reducing the Series
B Convertible Preferred Stock to zero. In accordance with ASC 470–20, “Debt with Conversion and Other
Options” (formerly EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments”), the aforesaid discount is amortized to
paid-in capital over five years from the date of issuance, the earliest
redemption date of the stock.
The
following table summarizes the allocation of the Series B
Financing:
|
Series
B Convertible Preferred Stock
|
Series
B Warrants
|
Total
|
|||
|
$
(in thousands)
|
|||||
|
Allocated
amount
|
3,098
|
3,902
|
7,000
|
||
|
Less:
Transaction costs
|
(230)
|
(290)
|
(520)
|
||
|
2,868
|
3,612
|
6,480
|
|||
On
December 31, 2009, the Company assessed the fair value of the Series B Warrants
as compared to their value on June 10, 2009. The change in fair value has been
included in the statement of operations as a loss resulting from fair value
adjustment of Series B Warrants, and amounted $106 thousand.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
10 – Fair Value Measurements
The
Company measures fair value in accordance with ASC 820-10, “Fair Value Measurements and
Disclosures” (formerly SFAS 157, “Fair Value Measurements”).
ASC 820-10 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, ASC 820-10 establishes a three-tier value
hierarchy, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
Level 1 - Observable
inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2 - Include other
inputs that are directly or indirectly observable in the
marketplace.
Level 3 - Unobservable
inputs which are supported by little or no market activity.
The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
The
Company measures its cash equivalents, marketable securities, foreign currency
derivative contracts and Series A and B Warrants at fair value. In accordance
with ASC 820-10, the Company’s cash equivalents and marketable securities
are classified within Level 1. This is because the cash equivalents and the
marketable securities are valued using quoted active market prices. The
Company’s foreign currency derivative contracts are classified within Level 2,
because they are valued utilizing market observable inputs. The Series A and B
Warrants are classified within Level 3 because they are valued using the
Black-Scholes model which utilizes significant inputs that are unobservable in
the market such as expected stock price volatility, risk-free interest rate and
the dividend yield, and remaining period of time the warrants will be
outstanding before they expire.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
10 – Fair Value Measurements (cont’d)
The
following table presents the Company’s assets and liabilities measured at fair
value on a recurring basis as of December 31, 2008 and 2009, aggregated by the
level in the fair-value hierarchy within which those measurements
fall:
|
Fair value measurement at reporting date using
|
||||||||
|
Description
|
December 31,
2008
|
Quoted Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
Significant Other
Observable Inputs
(Level
2)
|
|
Significant
Unobservable
Inputs
(Level
3)
|
||
|
$
(in thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
Equivalents
|
11,286
|
11,286
|
-
|
-
|
||||
|
Foreign
currency derivative contracts
|
26
|
-
|
26
|
-
|
||||
|
Total
Assets
|
11,312
|
11,286
|
26
|
-
|
||||
|
Liabilities
|
||||||||
|
Series
B Unit Warrant
|
8,698
|
-
|
-
|
8,698
|
||||
|
Fair
value measurement at reporting date using
|
||||||||
|
Description
|
December 31,
2009
|
Quoted Prices in
Active Markets for
Identical Assets
(Level
1)
|
Significant Other
Observable Inputs
(Level
2)
|
Significant
Unobservable
Inputs
(Level
3)
|
||||
|
$
(in thousands)
|
||||||||
|
Assets
|
||||||||
|
Cash
Equivalents
|
21,287
|
21,287
|
-
|
-
|
||||
|
Marketable
Securities
|
795
|
795
|
-
|
-
|
||||
|
Foreign
currency derivative contracts
|
60
|
-
|
60
|
-
|
||||
|
Total
Assets
|
22,142
|
22,082
|
60
|
-
|
||||
|
Liabilities
|
||||||||
|
Series
A Warrants
|
4,000
|
-
|
-
|
4,000
|
||||
|
Series
B Warrants
|
4,008
|
-
|
-
|
4,008
|
||||
|
Total
Liabilities
|
8,008
|
-
|
-
|
8,008
|
||||
In
addition to the above, the Company's financial instruments at December 31, 2008
and 2009, consisted of cash, accounts receivable, long term deposits, accrued
expenses, accrued compensation and related liabilities. The carrying amounts of
all the aforementioned financial instruments, approximate fair
value.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
10 – Fair Value Measurements (cont’d)
The
following table summarizes the changes in the Company’s liabilities measured at
fair value using significant unobservable inputs (Level 3), during the years
ended December 31, 2008 and 2009:
|
Level
3
|
|||||
|
$
(in thousands)
|
|||||
|
Series
B Unit Warrant
|
Series
A and B Warrants
|
Total
|
|||
|
Balance
at December 31, 2007
|
-
|
-
|
-
|
||
|
Initial
valuation of warrant to purchase units of Series B preferred
stock and warrants on June 16, 2008
|
3,511
|
-
|
3,511
|
||
|
Fair
value adjustments included in Statement of Operations
|
5,187
|
-
|
5,187
|
||
|
December 31,
2008
|
8,698
|
-
|
8,698
|
||
|
Cumulative
effect of change in accounting principle – adoption
of EITF 07-5 (incorporated in ASC 815 – 40)
|
-
|
3,554
|
3,554
|
||
|
Fair
value adjustments included in Statement of Operations
|
2,082
|
552
|
2,634
|
||
|
Exercise
of the Series B Unit Warrant
|
(10,780)
|
-
|
(10,780)
|
||
|
Issuance
of series B warrants
|
-
|
3,902
|
3,902
|
||
|
December
31, 2009
|
-
|
8,008
|
8,008
|
||
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
11 - Series A and Series B Convertible Preferred Stock (Redeemable)
The
following table summarizes the changes in Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock (collectively,
the “Series A and Series B Convertible Preferred Stock”) during the years
ending December 31, 2008 and 2009:
|
Series
A Convertible Preferred Stock
|
Series
B Convertible Preferred Stock
|
Total
|
|||
|
|
$
(in thousands)
|
||||
|
Issuance
of Series A Convertible Preferred Stock
|
6,000
|
-
|
6,000
|
||
|
Issuance
costs
|
(204)
|
-
|
(204)
|
||
|
Discount
resulting from the issuance of the Series A Warrants
|
(517)
|
-
|
(517)
|
||
|
Discount
resulting from the issuance of the Series B Unit Warrant
|
(3,511)
|
-
|
(3,511)
|
||
|
Discount
resulting from the Beneficial Conversion Feature
|
(1,768)
|
-
|
(1,768)
|
||
|
Amortizations
of discounts during the period
|
518
|
-
|
518
|
||
|
Dividends
paid in kind
|
106
|
-
|
106
|
||
|
December
31, 2008
|
624
|
-
|
624
|
||
|
Cumulative
effect of change in accounting principle – adoption
of EITF 07-5 (incorporated in ASC 815–40) -
see Note 9
|
17
|
-
|
17
|
||
|
Issuance
of Series B Convertible Preferred Stock
|
-
|
7,000
|
7,000
|
||
|
Issuance
costs
|
-
|
(230)
|
(230)
|
||
|
Discount
resulting from the issuance of the Series B Warrants
|
-
|
(3,902)
|
(3,902)
|
||
|
Discount
resulting from the Beneficial Conversion Feature
|
-
|
(2,868)
|
(2,868)
|
||
|
Amortizations
of discounts during the period
|
989
|
751
|
1,740
|
||
|
December
31, 2009
|
1,630
|
751
|
2,381
|
||
The
Series A and Series B Convertible Preferred Stock accrue cumulative
dividends at a rate of 6% per annum whether or not dividends have been declared
by the Company’s Board of Directors and whether or not there are profits,
surplus or other funds available for the payment of such dividends. Due to the
Company’s decision to pay Series A Convertible Preferred Stock dividends accrued
through September 30, 2008, in the form of additional shares of Series A
Convertible Preferred Stock, the dividend accrual through such date is reflected
as an increase in the stated value of the Series A Convertible Preferred Stock
from $100 per share to $101.76 per share, with a corresponding decrease in the
additional paid-in capital. All dividends on Series A and Series B Convertible
Preferred Stock subsequent to September 30, 2008, were paid in
cash.
As a
result of the Redpoint Financings (see Note 9), the Company’s Amended and
Restated Certificate of Incorporation has been amended to provide for the
issuance of up to 60,000 shares of Series A Convertible Preferred Stock and
70,000 shares of Series B Convertible Preferred Stock, with a stated value
of $100 per share (the “Stated Value”) pursuant to the Certificate of
Designations, Number, Voting Powers, Preferences and Rights of Series A
Convertible Preferred Stock filed with the State of Delaware on June 16,
2008 and Series B Convertible Preferred Stock filed with the State of
Delaware on July 28, 2009 (the “Certificate of Designations”).
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
11 - Series A and Series B Convertible Preferred Stock (Redeemable)
(cont’d)
The
Certificate of Designations provides for the following rights and
preferences:
Dividends
The
Series A and Series B Convertible Preferred Stock will accrue cumulative
dividends at a rate of 6% per annum whether or not dividends have been declared
by the Board of Directors and whether or not there are profits, surplus or other
funds available for the payment of such dividends. Dividends may be
payable in kind at the option of the Company upon satisfaction of certain
conditions.
Voting
Rights
The
Series A and Series B Convertible Preferred Stock shall vote on an as
converted basis with the Company’s common stock. So long as any shares of
Series A Convertible Preferred Stock or Series B Convertible Preferred
Stock are outstanding, the Company shall not, without the affirmative vote of
the holders of a majority of the shares of the Series A and Series B
Convertible Preferred Stock then outstanding (each holder of Series A and
Series B Convertible Preferred Stock, a “Holder” and collectively, the
“Holders”), (a) alter or change adversely the powers, preferences or rights
given to the Series A and Series B Convertible Preferred Stock or
alter or amend the Certificate of Designations (whether by merger, consolidation
or otherwise), (b) authorize or create any class of stock ranking as to
dividends, redemption or distribution of assets upon a Liquidation senior to or
otherwise pari passu with the Series A and Series B Convertible
Preferred Stock, except for any series of Preferred Stock issued to the Holders,
(c) amend its certificate of incorporation or other charter documents
(whether by merger, consolidation or otherwise) so as to affect adversely any
rights of the Holders, (d) increase or decrease the authorized number of
shares of Series A and Series B Convertible Preferred Stock, or
(e) enter into any agreement with respect to the foregoing.
Liquidation
Upon an
event of liquidation, as defined in the Certificate of Designations (a
“Liquidation”), the Holders shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Series A and Series B Convertible Preferred Stock an amount equal to
greater of (i) the Stated Value per share plus any accrued and unpaid
dividends thereon and any other fees or liquidated damages owing thereon before
any distribution or payment shall be made to the holders of any junior
securities or (ii) such amount per share as would have been payable had all
shares of Series A and Series B Convertible Preferred Stock been upon
any such Liquidation converted to common stock immediately prior to such
Liquidation, in any case, and if the assets of the Company shall be insufficient
to pay in full such amounts, then the entire assets to be distributed to the
Holders shall be distributed among the Holders ratably in accordance with the
respective amounts that would be payable on such shares if all amounts payable
thereon were paid in full.
Conversion
at Option of Holder
Each
share of Series A Convertible Preferred Stock shall be convertible into
that number of shares of common stock determined by dividing the Stated Value
plus any accrued but unpaid dividends thereon (to the extent not already
included in the Stated Value) of such share of Series A Convertible
Preferred Stock by $4.50 (the “Series A Conversion Price”), at the option of the
Holder, at any time and from time to time.
Each
share of Series B Convertible Preferred Stock shall be convertible into
that number of shares of common stock determined by dividing the Stated Value
plus any accrued but unpaid dividends thereon (to the extent not already
included in the Stated Value) of such share of Series B Convertible
Preferred Stock by $5.50 (the “Series B Conversion Price”), at the option of the
Holder, at any time and from time to time.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
11 - Series A and Series B Convertible Preferred Stock (Redeemable)
(cont’d)
Mandatory
Conversion
With
respect to the Series A Convertible Preferred Stock, beginning December 16,
2009, provided certain conditions are satisfied, if the closing price of the
common stock equals an average of $13.50 (subject to adjustment for stock
splits, reclassifications, combinations and similar adjustments) per share for
the 45 consecutive trading days immediately prior to the Automatic Conversion
Notice Date (as defined below), and average daily volume of the common stock on
The NASDAQ Capital Market averages at least $1 million during such measurement
period, unless the Holder is prohibited from converting the Series A
Convertible Preferred Stock pursuant to certain limitations set forth in the
Certificate of Designations, the Company shall have the right to deliver a
notice to the Series A Holder (a Series A Automatic Conversion Notice), to
convert any portion of the shares of Series A Convertible Preferred Stock
then held by the holder into shares of common stock at the then-effective
Conversion Price.
With
respect to the Series B Convertible Preferred Stock, beginning December 10,
2010, provided the certain conditions are satisfied, if the closing price of the
common stock equals an average of $16.50 (subject to adjustment for stock
splits, reclassifications, combinations and similar adjustments) per share for
the 45 consecutive trading days immediately prior to the Automatic Conversion
Notice Date (as defined below), and average daily volume of the common stock on
The NASDAQ Capital Market averages at least $1 million during such measurement
period, unless the Holder is prohibited from converting the Series B
Convertible Preferred Stock pursuant to certain limitations set forth in the
Certificate of Designations, the Company shall have the right to deliver a
notice to the Series B Holder (a Series B Automatic Conversion Notice), to
convert any portion of the shares of Series B Convertible Preferred Stock
then held by the holder into shares of common stock at the then-effective
Conversion Price.
Redemption
At
anytime on or after June 16, 2014, upon written request by the majority of
the Holders, the Company shall redeem all or any portion of the then outstanding
Series A and Series B Convertible Preferred Stock, for an amount in cash
equal to the sum of (i) 100% of the aggregate Stated Value then outstanding
and (ii) accrued but unpaid dividends (to the extent not already included
in Stated Value) and (iii) all liquidated damages and other amounts due in
respect of the Series A and Series B Convertible Preferred Stock. Upon
the lapse 4.5 years from December 31, 2009, approximately $13.1 million will be
redeemable.
Subsequent
Equity Sales
If the
Company, at any time while the Series A and the Series B Convertible
Preferred Stock are outstanding, shall sell or grant any option to purchase or
otherwise dispose of or issue any common stock or common stock equivalents
entitling any person to acquire shares of common stock, at an effective price
per share less than the then effective Conversion Price, then, the Conversion
Price shall be adjusted on a broad weighted average basis, as defined in the
Redpoint Financings agreement.
Participation
Rights
At any
time while Series A and or Series B Convertible Preferred Stock are
outstanding (or the common stock issuable or issued upon conversion thereof) and
the Holders or their affiliates collectively hold a majority of the outstanding
Series A and or Series B Convertible Preferred Stock (or the common
stock issuable or issued upon conversion thereof) purchased by the Holders, each
Holder shall have a right to participate pro rata with respect to the issuance
or possible issuance by the Company of any future equity or equity-linked
securities or debt which is convertible into or exercisable or exchangeable for
equity or in which there is an equity component on the same terms and conditions
as offered by the Company to the other purchasers of such
securities.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
12 – Stockholders’ Equity
Common
Stock
During
2008, the Company issued a total of 10,648 shares of common stock due to the
exercise of 10,648 outstanding stock options, for a total consideration of
approximately $10 thousand.
During
2009, the Company issued a total of 80,791 shares of common stock due to the
exercise of 80,791 outstanding stock options, for a total consideration of
approximately $247 thousand.
Stock
Warrants
As of
December 31, 2009, there were 1,155,591 outstanding stock warrants with a
weighted average exercise price of $16.17. All issued and outstanding warrants
are exercisable immediately. No warrants were exercised during
2009.
In April
2009, 2,172 warrants expired. Subsequent to the balance sheet date, in February,
2010, 1,029,488 warrants with an exercise price of $17.27 per warrant expired.
The remaining 126,103 warrants, with an exercise price of $7.20 per warrant,
will expire on January 30, 2011, if not exercised by then.
Redpoint
Warrants
In
connection with the Redpoint Financings (see Note 9), the Company issued to
Redpoint Series A Warrants, exercisable for 666,667 shares of common stock at an
exercise price of $4.95 per share, and Series B Warrants, exercisable for
636,364 shares of common stock at an exercise price of $6.05 per share. The
Series A and the Series B Warrants are exercisable immediately and, if not
exercised, they will expire on June 16, 2014 and June 10, 2015,
respectively.
Stock
Compensation Plans
The
Company provides for direct grants or sales of common stock, and common stock
options to employees and non-employees through the following: the 1999 Stock
Option Plan (the 1999 Plan), the 2000 Stock Option Plan (the 2000 Plan) and the
2003 Stock Option Plan (the 2003 Plan) (thereafter collectively “Prior Option
Plans”), the 2004 Stock Option Plan (the 2004 Plan) and the 2005 Incentive
Compensation Plan (the 2005 Plan). In addition, prior to 2005, the Company had
granted stock options outside of its stock options plans, to certain individuals
and entities.
The 2005
Plan was approved by the Company’s stockholders in July 2005, following the
earlier adoption by the Company’s board of directors. Under the 2005 Plan, the
Company may grant stock options, stock appreciation rights, restricted stock,
deferred stock, other stock-related awards and performance awards to officers,
directors, employees, consultants and other persons who provide services to the
Company. The total number of Company shares of common stock allowed for under
the 2005 Plan was set at 850,000, upon its adoption, and was increased by
250,000 on each of the dates June 21, 2006, September 9, 2008 and September 9,
2009, following the approval of the Company’s stockholders.
Under all
of the Company’s option plans, options generally vest 25%, with respect to the
number granted, upon the first anniversary date of the option grant, and the
remainder vest in equal monthly installments over the 36 months thereafter.
Vested options are exercisable immediately. The Company issues new shares upon
share option exercises.
The
options generally expire between six to ten years after grant date. Except for
grants to certain executives, employee options are generally forfeited, if not
exercised, within three months of termination of employment or service to the
Company.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
12 – Stockholders’ Equity (cont’d)
Stock
Options
During
2009, the Company granted a total of 369,750 stock options under its 2005 and
2004 Plans.
The
following table summarizes the Company’s stock option activity during
2009:
|
Number of stock
options
|
Weighted
average
exercise price
|
||
|
Balance
as of December 31, 2008
|
2,102,135
|
$8.75
|
|
|
Granted
|
369,750
|
7.95
|
|
|
Exercised
|
(80,791)
|
3.06
|
|
|
Forfeited
|
(75,006)
|
9.66
|
|
|
Outstanding
as of December 31, 2009
|
2,316,088
|
$8.80
|
The
weighted average grant date fair value of options granted during 2008 and 2009
was $2.71 and $4.42, respectively. The aggregate intrinsic value of options
exercised during 2008 and 2009, was approximately $36 thousand, and $362
thousand, respectively, at the date of exercise.
As of
December 31, 2008, 424,651 options were available for grant under the 2005 and
2004 Plans. As of December 31, 2009, 379,255 options were available for grant
under the 2005 and 2004 Plans. All Prior Option Plans are closed for future
grants.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
12 – Stockholders’ Equity (cont’d)
Stock
Options (cont’d)
The
following table summarizes information about stock options outstanding as of
December 31, 2009:
|
Options
outstanding
|
Options
exercisable
|
|||||||||||
|
Range
of exercise price
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
(years)
|
Weighted
average
exercise
price
|
Number
outstanding
|
Weighted
average
remaining
contractual
life
(years)
|
Weighted
average
exercise
price
|
||||||
|
$0.69
– 5.00
|
312,631
|
4.10
|
$3.43
|
162,295
|
3.71
|
$2.82
|
||||||
|
5.06
– 9.71
|
1,086,065
|
4.65
|
6.60
|
589,696
|
4.07
|
5.89
|
||||||
|
10.54
– 14.49
|
788,692
|
2.60
|
12.77
|
693,151
|
2.53
|
12.88
|
||||||
|
15.35
– 16.93
|
128,700
|
5.47
|
15.97
|
128,700
|
5.47
|
15.97
|
||||||
|
December
31, 2009
|
2,316,088
|
3.92
|
$8.80
|
1,573,842
|
3.47
|
$9.48
|
||||||
The
aggregate intrinsic value of stock options outstanding as of December 31, 2009,
was approximately $4.06 million of which approximately $2.56 million relates to
vested awards. Intrinsic value for stock options is calculated based on the
exercise price of the underlying awards and the quoted price of the Company’s
common stock as of the reporting date.
The total
fair value of stock options that vested during 2008 and 2009 amount to $1.72
million and $1.55 million, respectively, and was recorded as stock-based
compensation expense.
As of
December 31, 2009, there was $2.77 million of unrecognized compensation cost,
net of estimated forfeitures of $10 thousand, related to nonvested stock options
granted under the Company’s 2005 and 2004 stock option plans. That cost is
expected to be recognized as follows (in thousands):
|
Year
ending December 31
|
$
|
|
|
2010
|
1,116
|
|
|
2011
|
784
|
|
|
2012
|
585
|
|
|
2013
|
282
|
|
|
2,767
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
13 - Income Taxes
The
components of income (loss) before income taxes were (in
thousands):
|
Years
ended December 31
|
||||
|
2008
|
2009
|
|||
|
$
|
$
|
|||
|
U.S.
|
(13,954)
|
1,383
|
||
|
Non-U.S.
|
1,621
|
542
|
||
|
(12,333)
|
1,925
|
|||
Income
tax expense (benefit) attributable to income from continuing operations consists
of the following (in thousands):
|
Current
|
Deferred
|
Total
|
|||
|
$
|
$
|
$
|
|||
|
Year
ended December 31, 2008:
|
|||||
|
U.S.
|
-
|
12
|
12
|
||
|
Non-U.S.
|
(94)
|
-
|
(94)
|
||
|
(94)
|
12
|
(82)
|
|||
|
Year
ended December 31, 2009:
|
|||||
|
U.S.
|
177
|
12
|
189
|
||
|
Non-U.S.
|
19
|
(43)
|
(24)
|
||
|
196
|
(31)
|
165
|
As of
December 31, 2009, income tax refunds receivable from U.S. federal, foreign,
state and local jurisdictions amounted to approximately $15
thousand. As of that same date, income taxes payable to such
jurisdictions amounted to approximately $38 thousand.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
13 - Income Taxes (cont’d)
The
income tax expense (benefit) for the years ended December 31, 2008 and 2009,
differed from the amounts computed by applying the U.S. federal income tax rate
of 34% to pretax income as a result of the following (in
thousands):
|
Years
ended December 31
|
|||
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Computed
“expected” tax benefit
|
(4,193)
|
654
|
|
|
Effect
of State and Local taxes
|
(320)
|
161
|
|
|
Income
tax rate adjustment for State & Local taxes
|
49
|
62
|
|
|
Foreign
tax rate differential
|
(113)
|
(38)
|
|
|
Tax
benefit of “Approved Enterprise”/“Beneficiary Enterprise” tax
holiday
|
(532)
|
(170)
|
|
|
Change
in valuation allowance
|
1,474
|
(3,380)
|
|
|
Non-deductible
expenses
|
2,754
|
1,509
|
|
|
Adjustment
to prior year’s NOLs and other items
|
799
|
1,367
|
|
|
Actual
income tax expense (benefit)
|
(82)
|
165
|
|
The types
of temporary differences that give rise to significant portions of the Company’s
deferred tax assets and liabilities are set out below (in
thousands):
|
Years
ended December 31
|
|||
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Deferred
tax assets:
|
|||
|
Miscellaneous
accrued expenses
|
143
|
170
|
|
|
Intangible
assets
|
165
|
188
|
|
|
Property
and equipment
|
27
|
54
|
|
|
Deferred
stock compensation
|
327
|
358
|
|
|
Foreign
capital loss carryforwards
|
191
|
197
|
|
|
Other
|
4
|
4
|
|
|
Net
operating loss
|
22,957
|
19,517
|
|
|
Total
gross deferred tax assets
|
23,814
|
20,488
|
|
|
Less:
Valuation allowance
|
(23,814)
|
(20,440)
|
|
|
Net
deferred tax assets
|
-
|
48
|
|
|
Deferred
tax liability:
|
|||
|
Goodwill
|
(26)
|
(38)
|
|
|
Net
deferred tax asset (liability)
|
(26)
|
10
|
|
At
December 31, 2009, the Parent’s deferred tax assets were entirely offset by a
valuation allowance. Despite the fact that the Parent had income in 2009, it
experienced a cumulative loss in recent years and views this as a significant
piece of negative evidence that makes it difficult to support a conclusion that
expected taxable income from future operations justifies recognition of deferred
tax assets. A valuation allowance has not been established for the Subsidiary’s
deferred tax assets of approximately $48 thousand because the Company believes
that it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax
assets.
The net
change in the total valuation allowance for the years ended December 31, 2008
and 2009 was an increase of $1,451 thousand and a decrease of $3,374 thousand,
respectively.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
13 - Income Taxes (cont’d)
Subsequently
recognized tax benefits related to the valuation allowance for deferred tax
assets as of December 31, 2009 will be allocated as follows (in
thousands):
|
$
|
|
|
Income
tax benefits that would be reported in the consolidated statement of
earnings
|
20,344
|
|
Non-current
intangible assets
|
-
|
|
Additional
Paid in Capital
|
96
|
|
20,440
|
The
Company has net operating loss (“NOL”) carryforwards for federal income tax
purposes of approximately $53 million at December 31, 2009. The federal
NOLs will expire if not utilized on various dates from 2021 through 2028.
Section 382 of the Internal Revenue Code of 1986 (“Section 382”) generally
imposes an annual limitation on the amount of NOL carryforwards that may be used
to offset taxable income where a corporation has undergone significant changes
in its stock ownership. The Company estimates two ownership changes, as defined
under Section 382, have occurred, that would trigger this limitation. Based on
current estimates and assumptions, the Company may currently use approximately
$36 million of its accumulated NOLs. The remaining approximate $17 million NOL
is available to offset taxable income in an amount of approximately $1.4 million
per year. Any unused portion of the $1.4 million annual limitation applicable to
the Company's restricted NOL is available for use in future years until such NOL
is scheduled to expire. The Subsidiary has capital loss carryforwards of
approximately $789 thousand, which can be applied to future capital gains for an
unlimited period of time under current tax rules.
During
the year 2000, the Subsidiary was granted "Approved Enterprise" status under the
Israeli Law for the Encouragement of Capital Investments - 1959 (the “Investment
Law”) under the "alternative benefits" path. As an "Approved Enterprise" the
Subsidiary is entitled to receive future tax benefits, which are limited to a
period of ten years from the first year that taxable income is generated from
the approved assets. In addition, the benefits must be utilized within: the
earlier of 12 years of the year of implementation (as defined) of the investment
program or 14 years of the year that approval is granted. The Subsidiary began
claiming benefits in the 2000 tax year. The effect of the tax holiday on the
basic and diluted loss per share is $0.06 and $0.04, for the years ended
December 31, 2008 and 2009, respectively.
Under its
"Approved Enterprise" status, income arising from the Subsidiary's approved
activities is subject to zero tax under the "alternative benefits” path for a
period of ten years. In the event of distributions by the Subsidiary to the
Parent, the Subsidiary would have to pay a 10% corporate tax on the amount
distributed, and the recipient would have to pay a 15% tax (to be withheld at
source) on the amounts of such distribution received. Should the Subsidiary
derive income from sources other than the Approved Enterprise during the
relevant period of benefits, such income would be taxable in Israel at the tax
rate in effect at that time (26% being the rate in effect during
2009).
As of
December 31, 2009, the Company has not provided for deferred income taxes on the
undistributed earnings of approximately $4.5 million of its Subsidiary since
these earnings are intended to be reinvested indefinitely. A deferred tax
liability will be recognized when the Company no longer demonstrates that it
plans to permanently reinvest the undistributed earnings. It is impracticable at
this time to determine the amount of additional taxes payable when these
earnings are remitted.
During
2003, the Subsidiary filed a completion report on its first investment program.
Final approval of the program was received from the Investment Center in March
2004. In December 2006, the Subsidiary filed a completion report on its second
(expansion) investment program and final approval of the program was received
from the Investment Center in October 2008. Under its Approved Enterprise
status, the Subsidiary must maintain certain conditions. Failure to comply with
the conditions of the Approved Enterprise status could cause the Subsidiary to
lose previously accumulated tax benefits.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
13 - Income Taxes (cont’d)
On April
1, 2005, amendment No. 60 to the Investment Law came into effect (the
“Amendment") and has changed several provisions of the Investment Law, mainly in
respect of the "alternative benefits" track. The Amendment sets forth the scope
of enterprises which may qualify as a “Beneficiary Enterprise” - under the
Amendment, the designation is “Beneficiary Enterprise” rather than “Approved
Enterprise” - by setting forth criteria for qualification of a company.
Additionally, the Amendment enacted that companies operating under the
"alternative benefits" track no longer require Investment Center approval in
order to qualify for tax benefits. Instead, this position will be incorporated
as part of the regular tax audits of the Israeli Tax Authorities (the
“ITA”).
Under the
Amendment, the year in which a company elects to commence its tax benefits is
designated as the year of election (“Year of Election”). A company may choose
its Year of Election by notifying the ITA in its annual tax return or within
twelve months after the end of the Year of Election, whichever is earlier, or by
requesting a pre-ruling from the ITA no later than six months after the end of
the Year of Election. However, the Investment Law provides that terms and
benefits included in any letter of approval which was granted prior to the
effective date of the Amendment, will remain subject to the provisions of the
law as they were on the date of such approval. Therefore, the Subsidiary’s
existing Approved Enterprise status will generally not be subject to the
provisions of the Amendment, while in order to receive further benefits, the
Subsidiary will have to meet the Amendment's requirements. The Company elected
2008 as its Year of Election for its second expansion under the Amendment to the
Investment Law.
The
Subsidiary currently has three capital investment programs, two of which were
granted Approved Enterprise status under the Investment Law prior to the
Amendment, ending December 31, 2009 and December 31, 2014, respectively, and one
Beneficiary Enterprise pursuant to the Amendment, ending December 31, 2017.
As of the
balance sheet dates, the Subsidiary believes that it is in compliance with both,
the conditions of the Approved Enterprise and Beneficiary Enterprise
programs.
The
Company accounts for its income tax uncertainties in accordance with ASC
Subtopic 740-10 which clarifies the accounting for uncertainties in income taxes
recognized in a company’s financial statements and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
Interest and penalties related to unrecognized tax benefits are recognized as a
component of income tax expense.
The
Company did not record any unrecognized tax benefits in 2008 and 2009, and does
not expect this amount to change significantly within the next twelve
months.
The
Parent and its Subsidiary, collectively, file income tax returns in the U.S.
federal jurisdiction, various state & local and foreign jurisdictions. The
Parent is no longer subject to U.S. federal and state & local income tax
examinations by tax authorities for years prior to 2006. The Subsidiary is no
longer subject to foreign income tax examinations by tax authorities for years
prior to 2007.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
14 - Commitments and Contingencies
|
|
(a)
|
The
Parent rents its offices under an operating lease agreement expiring in
June 2010, and is actively seeking new office space with a view towards
expanding its U.S. headquarters.
|
The
Subsidiary rents its offices under an operating lease agreement with an initial
term expiring in July 2010, and an option to extend the term for an additional 5
years. The Subsidiary’s current plan is to locate and lease additional space or
alternative space for expanding its research and development operations in
advance of the expiration of this lease.
The
remaining minimum lease payments under the non-cancelable operating leases for
office space through the end of their respective terms in 2010 were $234
thousand as of December 31, 2009.
Rent
expenses for the office space operating leases for the years ended December 31,
2008, and 2009 were approximately $404 thousand, and $399 thousand,
respectively.
|
|
(b)
|
The
Subsidiary leases its motor vehicles under cancelable operating lease
agreements. The minimum payment under these operating leases, upon
cancellation of these lease agreements amounted to $35 thousand as of
December 31, 2009.
|
Future
minimum lease payments under non-cancelable operating leases for motor vehicles,
as of December 31, 2009, are as follows (in thousands):
|
Year
ending December 31
|
$
|
|
|
2010
|
142
|
|
|
2011
|
110
|
|
|
2012
|
57
|
|
|
309
|
Lease expenses
for the motor vehicles operating leases for the years ended December 31, 2008,
and 2009 were approximately $206 thousand, and $173 thousand,
respectively.
|
|
(c)
|
Future
minimum lease payments under non-cancelable capital leases for computer
equipment, as of December 31, 2009, are as
follows:
|
|
Principal
|
Interest
|
|||
|
Year
ending December 31
|
$
(in thousands)
|
|||
|
2010
|
82
|
3
|
||
|
2011
|
24
|
1
|
||
|
106
|
4
|
|||
|
(d)
|
A
bank guarantee given to the Subsidiary’s landlord, is secured by a lien on
some of the Subsidiary’s bank deposits. As of December 31, 2009, such
deposits amounted to $816 thousand, including a restricted long-term
deposit of $140 thousand.
|
|
(e)
|
The
Subsidiary’s hedging activity is secured by a lien on one of its bank
deposits in an amount of up to
$150 thousand.
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
14 - Commitments and Contingencies (cont’d)
|
(f)
|
In
connection with the Redpoint Financings the Company entered into
registration rights agreements with Redpoint, pursuant to which the
Company agreed to register with the SEC for resale the common stock
underlying the Redpoint Securities. In connection with the registration
rights agreements, the Company agreed to pay a penalty of 1.0% per month,
on a daily pro rata basis, up to a maximum of 8.0%, of the aggregate
purchase price, as partial liquidated damages, for certain default events
and subject to certain circumstances. The partial liquidated damages may
trigger if the registration statements, which the Company filed on July
30, 2008 and June 15, 2009, and which were declared effective by the SEC
on September 16, 2008 and July 28, 2009, respectively, cease to remain
continuously effective.
|
|
(g)
|
In
the ordinary course of business, the Company enters into various
arrangements with vendors and other business partners, principally for
content, web-hosting, marketing and various consulting arrangements. As of
December 31, 2009, the total future commitments under these arrangements
amounted to approximately
$963 thousand.
|
|
(h)
|
In
the ordinary course of business, the Company may provide indemnifications
of varying scope and terms to customers, vendors, lessors, business
partners, and other parties with respect to certain matters, including,
but not limited to, losses arising out of its breach of agreements,
services to be provided by it, or from intellectual property infringement
claims made by third parties. Additionally, the Company has indemnified
its board members, officers, employees, and agents serving at the request
of the Company to the fullest extent permitted by applicable law. It is
not possible to determine the maximum potential amount of liability under
these indemnification agreements due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in
each particular agreement. Such indemnification agreements may not be
subject to maximum loss clauses. To date, the Company has not incurred
costs as a result of obligations under these agreements and has not
accrued any liabilities related to such indemnification obligations in its
accompanying financial
statements.
|
|
(i)
|
From
time to time, the Company receives various legal claims incidental to its
normal business activities, such as intellectual property infringement
claims and claims of defamation and invasion of privacy. Although the
results of claims cannot be predicted with certainty, the Company believes
the final outcome of such matters will not have a material adverse effect
on its financial position, results of operations, or cash
flows.
|
|
(j)
|
On
or about July 24, 2009, the Company received a letter from Wikia, Inc.
(Wikia) advising that Wikia believes that it has superior rights in the
Company's registered trademark WikiAnswers®, and threatening to file a
Petition with the U.S. Trademark Office to cancel the Company's recently
registered WikiAnswers trademark and possibly take other action, if the
Company does not abandon its registered mark for WikiAnswers and its
application to register WikiAnswers.com and cease use of the WikiAnswers
trademark. In September 2009, Wikia also filed a notice of opposition with
the Trade Marks and Design Registration Office of the European Union with
respect to our WikiAnswers Community Trade Mark application (“CTM”). Wikia
has not followed up on its threat made in July 2009, and in the beginning
of 2010, the Company learned that it had withdrawn its opposition to the
Company’s WikiAnswers CTM application. Regardless of Wikia’s inaction
since approaching the Company on this matter, the Company has investigated
Wikia's claims, believes the claims are without merit and intends to
vigorously defend its rights in and to its U.S. registered mark
WikiAnswers and its CTM application. Notwithstanding the foregoing, there
is no assurance that the Company will obtain a favorable ruling, should
litigation ensue. An adverse judgment forcing the Company to abandon its
use of the WikiAnswers and/or WikiAnswers.com marks would have the
potential of materially harming the Company’s business. Litigation could
also be costly for the Company and divert management
attention.
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
15 – Interest Expense, Net
Interest
expense, net, in 2008 is comprised of the amortization of the transaction costs
relating to the Series B Unit Warrant in the amount of $196 thousand and $7
thousand of interest expenses paid in connection with assets acquired under
several capital lease agreements. Such amounts have been reduced by interest
income earned from cash and cash equivalents and marketable securities in the
amount of $148 thousand.
Interest
expense, net, in 2009 is comprised of the amortization of the transaction costs
relating to the Series B Unit Warrant in the amount of $166 thousand,
transaction costs relating to the issuance of the Series B Warrants in the
amount of $290 thousand and $9 thousand of interest expenses paid in connection
with assets acquired under several capital lease agreements. Such amounts have
been reduced by interest income earned from cash and cash equivalents in the
amount of $25 thousand.
Note
16 – Other Income, Net
Other
income, net, is comprised of foreign currency exchange gains and
losses.
Note
17 – Risks and Uncertainties
|
(a)
|
Most
of the Company's revenue was generated through the efforts of third party
suppliers (the “Monetization Partners”). In 2008 and 2009, the Company
earned approximately 82% and 88% of its revenue, respectively, through one
of its Monetization Partners, Google Inc. (“Google”). The Company’s
relationship with Google is governed by its Google Services Agreement,
which was renewed in the fourth quarter of 2009 for a two-year period
ending January 31, 2012.
|
|
(b)
|
Search
engines serve as origination Web properties for users in search of
information, and the Company’s Websites’ topic pages often appear as one
of the top links on the pages returned by search engines in response to
users’ search queries. Thus, in addition to the ads the Company receives
through Google, its traffic is mostly driven by search engine traffic,
mostly from the Google search engine. In 2008 and 2009, according to the
Company’s internal estimates, search engine traffic represented
approximately 82% and 86% of traffic, respectively. Search engines, at any
time and for any reason, could change their algorithms that direct queries
to the Company’s Web properties or could specifically restrict the flow of
users visiting the Company’s Web properties. On occasion the Company’s Web
properties have experienced decreases in traffic, and consequently in
revenue, due to these search engine actions. The Company cannot guarantee
that it will successfully react to these actions in the future and recover
lost traffic. Accordingly, a change in algorithms that search engines use
to identify Web pages towards which traffic will ultimately be directed,
or a restriction on the flow of users visiting the Company’s Web
properties from search engines, could cause a significant decrease in
traffic and revenues.
|
|
(c)
|
Close
to half of the Company’s operating expenses, excluding non-cash items such
as stock-based compensation, are denominated in New Israel Shekels (NIS).
The Company expects the amount of such NIS expenses to grow in the
foreseeable future. In recent years, the U.S. dollar-NIS exchange rate has
been volatile. If the value of the U.S. dollar weakens against the value
of NIS, there will be a negative impact on the Company’s operating costs.
In addition, to the extent the Company holds monetary assets and
liabilities that are denominated in currencies other than the U.S. dollar,
the Company will be subject to the risk of exchange rate fluctuations. The
Company uses various hedging tools, including forward contracts, to lessen
the effect of currency fluctuations on its results of
operations.
|
|
(d)
|
The
Series A Warrants and Series B Warrants are revalued each reporting date,
and any change in their fair value is recorded in the Statement of
Operations. The Company uses the Black-Scholes valuation model to
determine the values of the warrants. Inputs used in this model include
our stock price and risk-free interest rate. The primary reason for the
change in value of the aforesaid warrants over the last year has been the
change in the market value of our common stock on the measurement dates.
To the extent that the market value of our common stock rises or declines
in future periods, the Company may continue to experience significant
gains or losses resulting from the fair value adjustments of Series A
Warrants and Series B
Warrants.
|
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
Item 9A(T). Controls and Procedures.
Our
management has evaluated, with the participation of our principal executive and
principal financial officers, the effectiveness of our disclosure controls and
procedures and of our internal control over financial reporting, as of
December 31, 2009. Based on their evaluation, our principal executive and
principal financial officers have concluded that, as of December 31, 2009, our
disclosure controls and procedures were effective.
Disclosure
controls and procedures are our controls and other procedures that are designed
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Internal control over financial
reporting is a process designed by our principal executive and principal
financial officers, under the supervision of our board, and effected by our
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that: (1) pertain to
the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and dispositions of assets, (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors, and (3) and
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Management’s
Annual Report on Internal Control over Financial Reporting
Management
of Answers Corporation (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company’s
internal control over financial reporting was designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
of the Company assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2009. In making this assessment, it
used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based
on our assessment, management concluded that, as of December 31, 2009, the
Company’s internal control over financial reporting is effective based on those
criteria.
|
|
Changes
in Internal Control over Financial
Reporting
|
There
were no changes in the Company's internal control over financial reporting (as
defined in Rule 13a-15(f) of the Exchange Act) that occurred during the fourth
quarter of the year ended December 31, 2009 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
In our
annual report on form 10-K for the period ending December 31, 2007, we stated
that we had fully remediated a control deficiency with respect to access to, and
changes in, the Company’s information technology financial applications and
underlying financial data, and that we were in the process of remediating a
control deficiency with respect to the authority of the officers of the Company
to obligate the Company. We further explained that subsequent to
December 31, 2007, the Board of Directors of the Company had adopted an
approval policy limiting the authority of certain officers of the Company to
obligate the Company. Finally, we stated that it was our intention to further
implement such approval policy by notifying the Company’s banking institutions
and causing the Company’s wholly-owned subsidiary, GuruNet Israel Ltd., to
establish a similar approval policy.
In July
2008 we completed the process of remediating the control deficiency with respect
to the authority of the officers of the Company to obligate the Company by
notifying the Company’s banking institutions of the Company’s newly established
signatory rights and approval policies adopted by the Board of Directors and by
causing the Company’s wholly-owned subsidiary, GuruNet Israel Ltd., to establish
the same approval policy as Answers Corporation, mutatis mutandis.
Item 9B. Other Information.
None.
PART
III
Item 10. Directors, Executive Officers and Corporate
Governance.
The
following table sets forth certain information regarding our executive officers
and directors as of December 31, 2009:
|
Name
|
Age
|
Position
|
||
|
Executive
Officers
|
||||
|
Robert
S. Rosenschein
|
56
|
CEO,
President and Chairman of the Board
|
||
|
Steven
Steinberg
|
49
|
Chief
Financial Officer
|
||
|
Jeff
Schneiderman
|
46
|
Chief
Technical Officer
|
||
|
Bruce
D. Smith
|
48
|
Chief
Strategic Officer
|
||
|
Caleb
A. Chill
|
35
|
Vice
President, General Counsel and Corporate Secretary
|
||
|
Directors
|
||||
|
Mark
A. Tebbe
|
49
|
Vice
Chairman and Lead Director
|
||
|
Yehuda
Sternlicht
|
55
|
Director
|
||
|
Mark
B. Segall
|
47
|
Director
|
||
|
Lawrence
S. Kramer
|
59
|
Director
|
||
|
W.
Allen Beasley
|
42
|
Director
|
||
|
R.
Thomas Dyal
|
44
|
Director
|
Executive
Officers:
Robert S.
Rosenschein has been Chairman of our Board and President since he founded
Answers Corporation in December 1998. From December 1998 to April 2000 and since
May 2001, Mr. Rosenschein has served as our Chief Executive Officer. Prior
to founding Answers, he was the Chief Executive Officer of Accent Software
International Ltd. (formerly Kivun), a company that developed multi-lingual
software tools, and from 1988 to 1997 and from 1997 to 1998, he was the Chief
Technical Officer. Mr. Rosenschein previously served as a software developer for
Data General, American Management Systems, the World Bank and Ashton Tate.
Mr. Rosenschein graduated with a B.Sc. in Computer Science from the
Massachusetts Institute of Technology and received the Prime Minister of
Israel’s Award for Software Achievement in 1997.
Steven
Steinberg has been our Chief Financial Officer since January 2004. From
December 2002 to December 2003, Mr. Steinberg was our Vice President of
Finance. From January 2001 to November 2002, he was the Vice President of
Finance at Percite Information Technologies, Ltd., a supply-chain software
company. From November 1998 to December 2000, he was the Controller at Albar
Mimunit Services Ltd., a finance and leasing company. From October 1993 to July
1998, he held various positions with Health Partners, Inc. culminating with
Chief Financial Officer of the New York Operations. From August 1983 to October
1993, he held various positions with Coopers and Lybrand, an accounting firm,
culminating with audit manager at the New York offices. Mr. Steinberg
graduated with a B.B.A. from Florida International University.
Jeff
Schneiderman has been our Chief Technical Officer since March 2003. From
January 1999 to February 2003, Mr. Schneiderman was our Vice President of
Research and Development. Prior to joining Answers, he worked at Accent Software
International Ltd., from November 1991 to December 1998 during which time he
served as Vice President of Engineering from October 1996 to March 1998 and Vice
President of Product Development from March 1998 to December 1998. From June
1986 to June 1991, Mr. Schneiderman held various development positions at
AT&T Bell Labs, a global telecommunication organization, and the Whitewater
Group, a firm specializing in object oriented technologies.
Mr. Schneiderman graduated with a B.S. in Computer Science from the
University of Illinois at Urbana-Champaign and a M.S. in Computer Science from
the Illinois Institute of Technology.
Bruce D.
Smith has been our Chief Strategic Officer since June 2007. From July
2005 to June 2007, Mr. Smith was our Vice President of Investor Relations
and Strategic Development. In 2008 Mr. Smith assumed the additional role of
leader of the WikiAnswers Community Development Team. Prior to joining Answers,
he was a Managing Director at Archery Capital, a New York based investment firm
from July 1999 to July 2005. From June 1998 to July 1999, he was a sell side
analyst at Jefferies & Company, where he was responsible for coverage
of the Internet industry as well as individual companies. From November 1995 to
March 1998, Mr. Smith maintained coverage of the Internet industry at
Merrill Lynch & Co. From April 1994 to October 1995, he was a Security
Analyst at Morgan Stanley Asset Management, a division of Morgan
Stanley & Co. Mr. Smith graduated with a B.B.A., Magna Cum Laude,
from Bernard M. Baruch College, City University of New York. He is a Chartered
Financial Analyst and member of the New York Society of Security
Analysts.
Caleb A.
Chill has been our Vice President, General Counsel and Corporate
Secretary since January 2007. From January 2005 to January 2007, Mr. Chill
was our In-House Counsel. From August 2002 to November 2004, he was an associate
in the Corporate Department of Sills Cummis & Gross P.C., based out of
the firm’s New York office. His practice concentrated on the structuring and
negotiating of corporate transactions in high-tech and other industries. From
August 1999 to August 2001, Mr. Chill was an associate in the international
department of Baratz, Horn & Co., an Israeli corporate law firm.
Mr. Chill holds an LL.B. from Bar-Ilan University of Israel, has earned an
M.B.A. from the same institution, and is admitted to practice law in Israel and
New York.
Board
of Directors:
The
following provides certain qualifications, attributes, skills and other
biographical information with respect to our six non-management directors
currently serving on our board of directors:
Mark A.
Tebbe has served as a director since December 1998 and as Vice Chairman
and Lead Director since April 2007. Mr. Tebbe currently serves as the
chairman of our Compensation Committee and as a member of our Audit Committee.
Since February 2002, Mr. Tebbe has been Chairman of Techra Networks LLC, a
technology-oriented consulting firm. From August 1984 to January 2002,
Mr. Tebbe served as Chairman of Lante Corporation, a technology consulting
firm he founded. Mr. Tebbe is also a board member of SBI Group, Elexos
Corp. and Selective Search, Inc. and several non-profit and civic organizations.
Mr. Tebbe graduated with a B.S. in Computer Science from the University of
Illinois at Urbana/Champaign. As a co-founder of the Company, Mr. Tebbe was
originally selected to serve as a director due to his deep familiarity with our
business, his extensive entrepreneurial background and many years of senior
management experience in the technology sector.
Yehuda
Sternlicht has served as a director since June 2004 and currently serves
as the chairman of our Audit Committee and since July 2005 has also served as a
member of our Financing Committee. Since 2004, Mr. Sternlicht has been an
independent financial consultant. Between 2004 and 2008, he served as the Chief
Financial Officer of NanoVibronix Inc., a medical device company. From 1992 to
2003, he was the Chief Financial Officer of Savient Pharmaceuticals, Inc. Prior
to 1992, he served in several financial and accounting positions in public and
private companies and in a large CPA firm in Israel and in the United States.
Mr. Sternlicht served as a member of the board of directors of Ubank Provident
fund management (2005) Ltd. Between June 2006 and January 2008. He also served
as a member of the board of Lumus Ltd. Between December 2003 and January 2006.
Mr. Sternlicht graduated with a B.A. in Accounting and Economy from The
Hebrew University. He is qualified as a Certified Public Accountant in the State
of Israel. Mr. Sternlicht brings to the board substantial financial and
accounting experience due to the professional positions he has held over the
course of his career. Mr. Sternlicht qualifies as an “audit committee
financial expert” under SEC guidelines.
Mark B.
Segall has served as a director since December 2004 and currently serves
as the chairman of our Finance Committee and as a member of our Audit Committee.
Mr. Segall has been the Senior Managing Director of Kidron Corporate Advisors,
LLC, a New York based mergers and acquisitions corporate advisory boutique
serving emerging growth companies primarily in the technology, consumer goods
and financial services sectors, which he founded in 2003. He is also a founder
and managing member of Kidron's private equity fund, Kidron Opportunity Fund I,
LLC. From 2001 to 2003, Mr. Segall was the Co-Chief Executive Officer of
Investec, Inc., the U.S. investment banking operations of the Investec Group, a
South African based specialist bank. He served as head of investment banking and
general counsel at Investec Inc. between 1999 and 2001. From 1996 to 1999, he
was a partner at the law firm of Kramer, Levin, Naftalis & Frankel LLP,
specializing in cross-border mergers and acquisitions and capital markets
activities and between 1991 and 1995 he was an associate at the same firm. Mr.
Segall currently serves as a director of Integrated Asset Management plc, an
alternative asset management company, and Ronson Europe N.V., a Polish
residential real estate development company. Mr. Segall served as director of
the Spectrum Group (formerly Escala) from 1999 to 2007 and of Cogo (formerly the
Comtech Group) from 2000 to 2006. Mr. Segall graduated with an A.B.
from Columbia University and a J.D. from New York University Law School. Mr.
Segall brings significant business finance experience as well as his extensive
management expertise to the Company from his background as a chief executive
officer in the corporate advisory and investment banking industries, board
member of several corporations and counsel to numerous technology company
clients.
Lawrence S.
Kramer has served as a director since May 2005 and currently serves as
the chairman of our Nominating/Corporate Governance Committee and as a member of
our Financing Committee. Mr. Kramer is Adjunct Professor of Media Management at
the Newhouse School at Syracuse University. He was a senior advisor to Polaris
Venture Partners from July 2007 until January 2010. From November 2006 until May
2007, he was an advisor to CBS. From March 2005 to November 2006, he served as
the first President of CBS Digital Media. From October 1997 to January 2005, Mr.
Kramer was the Chairman and CEO of MarketWatch, Inc., a media company he
founded. From February 1994 to October 1997, he served as Vice President of
News, Sports and Marketing at Data Broadcasting Corporation. For 20 years prior
to that, Mr. Kramer had a distinguished career in journalism as a reporter and
top editor at the San Francisco Examiner and the Washington Post. In 2009, Mr.
Kramer joined the board of directors of American Media, Inc., a privately-held
publishing company in the celebrity journalism and health & fitness
categories. In 2008, Mr. Kramer became a board member of Discovery
Communications Inc. (NASDAQ: DISCA). Mr. Kramer has been awarded a National
Press Club Award, Gerald E. Loeb Award and Associated Press Awards for
reporting. Mr. Kramer graduated with a B.S. in Journalism and Political Science
from Syracuse University and an M.B.A. from Harvard University and has been a
Guest Lecturer at the Harvard Business School for 10 years. Mr. Kramer’s many
years of experience creating and managing content, along with his strong
background of service in the media industry and his past experience as a
chairman and chief executive officer of a public company, make him a valuable
member of our board of directors who can assist in the development of our growth
strategy and business plans.
W. Allen
Beasley has served as a director since June 2008 and currently serves as
a member of our Compensation Committee and our Financing Committee. Since
October 1999, Mr. Beasley has been a partner with Redpoint Ventures. From June
1998 to September 1999, Mr. Beasley was an associate with Institutional Venture
Partners (IVP). Before joining IVP, Allen worked in marketing and product
management for Ipsilon Networks, a developer of IP switching technology founded
in 1994 and acquired by Nokia in 1997. Mr. Beasley focuses on infrastructure and
media investments and currently serves on the Boards of Directors of Buzz Media,
Inc. and Obopay, Inc. Mr. Beasley holds a B.A. in Economics from Stanford
University and an M.B.A. from the Stanford Graduate School of Business. Because
of his strong background of investment activity in growth-stage companies and
his focus on opportunities in the Internet sector, we believe that Mr. Beasley
provides a unique perspective and useful insight to our board as we strive to
deliver on our growth strategy and strategic initiatives.
R. Thomas
Dyal has served as a director since June 2009, as a designee of the
holders of the Company's Series B Convertible Preferred Stock, and currently
serves as a member of our Nominating/Corporate Governance Committee. Since
October 1999, Mr. Dyal has been a partner with Redpoint Ventures. From June 1997
to September 1999, Mr. Dyal was a partner and associate with Institutional
Venture Partners (IVP). Before joining IVP, Mr. Dyal spent ten years in
operating roles in the communications and networking industry, most recently at
Bay Networks, Inc. At Bay Networks, he ran product management for its network
management software business. Mr. Dyal began his career as a systems engineer
with AT&T Bell Laboratories. Mr. Dyal focuses on a wide range of technology
investment areas, including infrastructure and application software, services
and systems targeting the Internet, mobile and enterprise segments. Currently,
he is leading the firm's investments in Clearwell Systems, Inc. and NextG
Networks, Inc. Mr. Dyal holds a B.S. in Electrical Engineering from the Georgia
Institute of Technology and a M.S. in Electrical Engineering from Stanford
University. Mr. Dyal’s background, which includes investment activity in
companies focused on opportunities in the Internet, software and mobile
industries, is complementary to the oversight of our business and his past
operating roles in the communications and networking industry bring additional
value to our board.
There are
no family relationships among directors, executive officers, or persons
nominated or chosen to become directors or executive officers.
Board
Classes
Our
Amended and Restated Certificate of Incorporation provides that the number of
directors shall be not less than five or no more than nine directors. Our board
of directors is divided into three classes with only one class of directors
being elected in each year and each class serving a three-year term. We
currently have no Class II board members. The following chart sets forth the
term of office of each class of directors and which directors are assigned to
each class:
|
Class
|
Term
|
Members
|
|
Class I
|
Expires
upon 2011 annual meeting
|
Mark
A. Tebbe and Lawrence S. Kramer
|
|
Class II
|
Expires
upon 2012 annual meeting
|
N/A
|
|
Class III
|
Expires
upon 2010 annual meeting
|
Robert
Rosenschein, Yehuda Sternlicht and Mark
Segall
|
W. Allen
Beasley, the director designee of the holders of a majority of the Company’s
outstanding Series A Convertible Preferred Stock, is not a member of a
class. Mr. Beasley’s term as a director will expire at the 2010
annual meeting of stockholders at which time he will be nominated to be
reelected as a director provided that the holders of a majority of the Company’s
outstanding Series A Convertible Preferred Stock meet certain ownership
requirements as set forth in the Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Preferred Stock.
R. Thomas
Dyal, the director designee of the holders of a majority of outstanding
Series B Convertible Preferred Stock, is not a member of a class.
Mr. Dyal’s term as a director expires at the 2010 Annual Meeting of
stockholders at which time he will be nominated to be reelected as a director
provided that the holders of a majority of the Company’s outstanding
Series B Convertible Preferred Stock meet certain ownership requirements as
set forth in the Certificate of Designations, Number, Voting Powers, Preferences
and Rights of Series B Preferred Stock.
Director
Independence
The
NASDAQ listing standards require that a majority of our board must be composed
of “independent directors,” which is defined generally as a person other than an
officer or employee of the company or its subsidiaries or any other individual
having a relationship, which, in the opinion of the company’s board of directors
would interfere with the director’s exercise of independent judgment in carrying
out the responsibilities of a director. Our board of directors has determined
that its members are currently “independent” in accordance with the applicable
listing standards of NASDAQ as currently in effect, with the exception of
Messrs. Rosenschein, Beasley and Dyal.
Committees
of the Board
The
Company’s board of directors has adopted a written charter for each of the Audit
Committee, Compensation Committee and Nominations/ Corporate Governance
Committee. Each charter is available on the Company’s
website.
Audit
Committee. In May 2004, the Company established an Audit
Committee of the board of directors. The Audit Committee consists of
Mr. Sternlicht, Chairman, Mr. Segall and Mr. Tebbe, each of whom
satisfy the current independence standards as promulgated by the SEC and NASDAQ,
as such standards apply specifically to members of audit committees. The Audit
Committee’s scope of authority, which is specified in our Audit Committee
Charter, includes, but is not limited to:
|
·
|
Reviewing
and discussing with management and the independent accountants our annual
and quarterly financial statements and discussing with management any
earnings guidance provided to the
market;
|
|
·
|
Directly
appointing, compensating, retaining, and overseeing the work of the
independent auditor;
|
|
·
|
Approving,
in advance, the provision by the independent auditor of all audit and
permissible non-audit services;
|
|
·
|
Establishing
procedures for the receipt, retention, and treatment of complaints
received by the Company regarding accounting, internal accounting
controls, or auditing matters and the confidential, anonymous submissions
by the Company’s employees of concerns regarding questionable accounting
or auditing matters;
|
|
·
|
Retaining
independent legal and other advisors as the Audit Committee deems
necessary or appropriate;
|
|
·
|
Determining
and receiving from the Company appropriate funding to compensate the
independent accountants and any outside advisors engaged by the Audit
Committee; and
|
|
·
|
Reviewing
reports and disclosure of insider and affiliated party
transactions.
|
The Audit
Committee will at all times be composed exclusively of “super independent
directors” who are “financially literate” as defined under the NASDAQ listing
standards. The NASDAQ listing standards define “financially literate” as being
able to read and understand fundamental financial statements, including a
company’s balance sheet, income statement and cash flow statement.
In
addition, the Company must certify to NASDAQ that the committee has, and will
continue to have, at least one member who has past employment experience in
finance or accounting, requisite professional certification in accounting, or
other comparable experience that results in the individual’s financial
sophistication. The board of directors believes that Mr. Sternlicht
satisfies NASDAQ’s definition of financial sophistication and also qualifies as
an “audit committee financial expert,” as defined under rules and
regulations of the SEC.
Compensation
Committee. In May 2004, the Company established a
Compensation Committee of the board of directors. The Compensation Committee
consists of Mr. Tebbe, Chairman, Mr. Beasley and Mr. Kramer. With
the exception of Mr. Beasley, each of the Compensation Committee members is an
independent director under the current definition promulgated by NASDAQ. The
Compensation Committee reviews and approves the Company’s salary and benefits
policies, including the compensation of executive officers. The Compensation
Committee also administers the Company’s stock option plans and recommends and
approves grants of stock options and/or other stock-based awards under the
plans.
Nominating/Corporate Governance
Committee. In May 2004, the Company established a
Nominating/Corporate Governance Committee (“Nominating Committee”) of the board
of directors. The Nominating Committee consists of Mr. Kramer, Chairman,
Mr. Tebbe and Mr. Dyal. With the exception of Mr. Dyal, each of the
Nominating Committee members is an independent director under the current
definition promulgated by NASDAQ. The purpose of the Nominating Committee is to
select, or recommend for the entire board’s selection, the individuals to stand
for election as directors at the annual meeting of stockholders and to oversee
the selection and composition of committees of the board. The committee’s
duties, which are specified in the Nominating Committee Charter, include, but
are not limited to:
|
·
|
Establishing
criteria for the selection of new
directors;
|
|
·
|
Recommending
directors to serve on the committees of the
board;
|
|
·
|
Considering
the adequacy of the Company’s corporate governance and proposing
amendments accordingly;
|
|
·
|
Overseeing
and approving management continuity planning process;
and
|
|
·
|
Reporting
regularly to the board matters relating to the committee’s
duties.
|
Financing Committee. In July
2005, the Company established a Financing Committee of the board of directors.
The Financing Committee consists of Mr. Segall, Chairman,
Mr. Sternlicht and Mr. Kramer, each of whom is an independent director
under the current definition promulgated by NASDAQ. The purpose of the Financing
Committee is to review and discuss with management financing opportunities that
the Company is considering, to evaluate the Company’s strategy on investing
excess cash, to evaluate business merits of all potential mergers and
acquisitions and to provide the board of directors with a recommendation as to
the terms and conditions of any extraordinary transactions, in consultation with
the management team, legal advisors and financial consultants.
Vice-Chairman of the Board of
Directors and Lead Director. On April 12, 2007, Mark
A. Tebbe was appointed Vice-Chairman of the board of directors and Lead
Director. In this capacity, Mr. Tebbe is authorized to call meetings of the
board, in consultation with the non-employee directors, advise the Chairman as
to scheduling board meetings and provide the Chairman with input regarding the
agendas for the board meetings, preside at all meetings at which the Chairman is
not present including executive sessions of the non-employee directors and
apprise the Chairman of the issues considered, be available for consultation and
direct communication with the Company’s major stockholders and perform such
other duties as the board may from time to time delegate.
Code
of Ethics
In May
2004, we adopted a Code of Ethics and Business Conduct that applies to all of
our executive officers, directors and employees. The Code of Ethics and Business
Conduct codifies the business and ethical principles that govern all aspects of
our business. A copy of the Code of Ethics and Business Conduct may be found on
our website at http://ir.answers.com.
Compliance
with Section 16(a) of the Exchange Act.
Section 16(a) of
the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish us with copies of
all Section 16(a) forms they file. Based on a review of the copies of
such forms received, we believe that during 2009, all filing requirements
applicable to our officers, directors and greater than ten percent beneficial
owners were complied with.
Item 11. Executive Compensation.
Summary
Compensation Table
The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer, and our two other
highest paid executive officers for fiscal year 2009.
|
Name
& Principal Position
|
Year
|
Salary ($)
|
Bonus
($)
|
Option
Awards ($)*
|
All
Other Compensation($)(4)
|
Total
($)
|
||||||
|
Robert
S. Rosenschein(1)
|
2009
|
256,044
|
(5)
|
26,700
|
140,352
|
60,332
|
(6)
|
483,428
|
||||
|
Chief
Executive Officer
|
2008
|
257,020
|
(5)
|
—
|
102,483
|
58,211
|
(7)
|
417,714
|
||||
|
and
Chairman
|
||||||||||||
|
Steven
Steinberg(2)
|
2009
|
159,620
|
(5)
|
26,700
|
109,650
|
45,983
|
(8)
|
341,953
|
||||
|
Chief
Financial Officer
|
2008
|
173,087
|
(5)
|
—
|
84,257
|
48,419
|
(9)
|
305,763
|
||||
|
Bruce
D. Smith(3)
|
2009
|
240,072
|
26,700
|
127,194
|
35,934
|
(10)
|
429,900
|
|||||
|
Chief
Strategic Officer
|
2008
|
223,200
|
—
|
91,882
|
32,428
|
(10)
|
347,510
|
|
*
|
Amounts
represent the aggregate grant date fair value in accordance with FASB ASC
Topic 718.
|
|
(1)
|
Mr. Rosenschein
founded our company and was appointed our Chief Executive Officer in May
2001.
|
|
(2)
|
Mr. Steinberg
joined us in December 2002 and was appointed our Chief Financial Officer
in January 2004.
|
|
(3)
|
Mr. Smith
joined us as Vice President of Investor Relations and Strategic
Development in July 2005 and was promoted to Chief Strategic Officer in
June 2007.
|
|
(4)
|
With
the exception of reimbursement of expenses incurred by our named executive
officers during the scope of their employment and unless expressly stated
otherwise in a footnote below, none of the named executive officers
received other compensation, perquisites and/or personal benefits in
excess of $10,000.
|
|
(5)
|
Does
not include benefit associated with possession of company-leased
vehicle.
|
|
(6)
|
Includes
contributions to continued education fund (Keren Hishtalmut) in the amount
of $3,595; contributions to retirement plan feature of Managers’ Insurance
(Kupat Gemel), statutory severance payments (Pitzuei Piturin) and
contributions made for disability insurance Ovdan Kosher Avoda) in the
amount of $35,947; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $8,755; and payments associated with
possession of company-leased vehicle in the amount of
$10,802.
|
|
(7)
|
Includes
contributions to continued education fund (Keren Hishtalmut) in the amount
of $3,940; contributions to retirement plan feature of Managers’ Insurance
(Kupat Gemel), statutory severance payments (Pitzuei Piturin) and
contributions made for disability insurance Ovdan Kosher Avoda) in the
amount of $35,836; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $6,431; and payments associated with
possession of company-leased vehicle in the amount of
$10,800.
|
|
(8)
|
Includes
contributions to continued education fund (Keren Hishtalmut) in the amount
of $3,595; contributions to retirement plan feature of Managers’ Insurance
(Kupat Gemel), statutory severance payments (Pitzuei Piturin) and
contributions made for disability insurance Ovdan Kosher Avoda) in the
amount of $24,355; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $7,332; and payments associated with
possession of company-leased vehicle in the amount of
$9,429.
|
|
(9)
|
Includes
contributions to continued education fund (Keren Hishtalmut) in the amount
of $3,940; contributions to retirement plan feature of Managers’ Insurance
(Kupat Gemel), statutory severance payments (Pitzuei Piturin) and
contributions made for disability insurance Ovdan Kosher Avoda) in the
amount of $26,043; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $6,431; and payments associated with
possession of company-leased vehicle in the amount of
$10,800.
|
|
(10)
|
Includes
payments made on account of medical insurance, short and long term
disability, life insurance and 4% contributions to 401(k)
plan.
|
Employment
Contracts
Robert
S. Rosenschein
Robert S.
Rosenschein is employed as our President and Chief Executive Officer pursuant to
an employment agreement that commenced on January 1, 2002 and was amended
and restated as of January 8, 2004 and further amended on November 27,
2006, November 6, 2007 and July 30, 2008. The term of the agreement expires
on January 7, 2012 and will automatically renew for successive two year
periods unless the agreement is terminated earlier by the parties.
Mr. Rosenschein’s annual base salary was set at 1,049,400 NIS (New Israeli
Shekel) throughout 2009.
According
to his amended agreement, Mr. Rosenschein’s annual base salary is subject
to a 10% annual increase and he is eligible to receive an annual bonus based on
his performance and as approved by our board of directors in its sole
discretion. We may voluntarily terminate the employment agreement by providing
no less than ninety days’ prior written notice.
If we
terminate Mr. Rosenschein’s employment without cause, we shall extend the
period during which Mr. Rosenschein may exercise his options to the earlier
of (i) one year from the date of termination or (ii) the expiration
date of the options granted. Furthermore, if we terminate Mr. Rosenschein’s
employment for any reason other than cause, we are required to pay him the
entire amount payable under the severance portion of his Manager’s Insurance
Policy. In the event of a change in control, we will accelerate the vesting of
50% of any options granted to Mr. Rosenschein that have not vested as of
the effective date of the change in control. If, within twelve months after such
change in control, Mr. Rosenschein’s employment is terminated without
cause, 100% of Mr. Rosenschein’s unvested options would vest immediately
upon the effective date of the termination. Mr. Rosenschein has agreed to
refrain from competing with us for a period of twenty-four months following
the termination of his employment.
A table
describing the payments that would have been due to Mr. Rosenschein under
his employment agreement had Mr. Rosenschein’s employment with us been
terminated at the end of 2009 under various circumstances appears under
“Potential Payments and Benefits upon Termination of Employment — Robert S.
Rosenschein,” below.
Steven
Steinberg
Steven
Steinberg is employed as our Chief Financial Officer pursuant to an employment
agreement that commenced on April 1, 2004 and was amended on
November 6, 2007. The agreement will remain in effect indefinitely unless
it is terminated earlier by the parties. Mr. Steinberg’s annual base salary
was set at 664,800 NIS throughout 2009. We may terminate Mr. Steinberg’s
employment agreement without cause at any time upon three months
notice.
If we
terminate Mr. Steinberg’s employment without cause or due to death or
disability, we shall extend the period during which Mr. Steinberg may
exercise his options granted after the date of his employment agreement by
one year from the effective date of Mr. Steinberg’s termination. In
the event of a change in control, we will accelerate the vesting of 50% of any
options granted to Mr. Steinberg that have not vested as of the effective
date of the change of control. If, within twelve months after such change
in control, Mr. Steinberg’s employment is terminated without cause,
Mr. Steinberg would be entitled to four months written notice and any
unvested options that were granted to Mr. Steinberg, subsequent to the date
of his employment agreement, would vest immediately upon the effective date of
the termination. Mr. Steinberg has agreed to refrain from competing with us
for a period of twelve months following the termination of his
employment.
A table
describing the payments that would have been due to Mr. Steinberg under his
employment agreement had Mr. Steinberg’s employment with us been terminated
at the end of 2009 under various circumstances appears under “Potential Payments
and Benefits upon Termination of Employment — Steve Steinberg,”
below.
Bruce
D. Smith
Bruce D.
Smith is employed as our Chief Strategic Officer pursuant to an employment
agreement that commenced on July 27, 2005 and was amended on
November 6, 2007. Mr. Smith’s annual base salary was set at $237,600
throughout 2009. In addition to his base salary, Mr. Smith is eligible to
receive an annual bonus as determined by the Compensation Committee in
consultation with the Chief Executive Officer based on certain stated
performance goals. We may terminate the employment agreement without cause at
any time upon three months written notice.
If we
terminate Mr. Smith’s employment without cause, we shall extend the period
during which Mr. Smith may exercise his options granted by one year from
the effective date of Mr. Smith’s termination. In the event of a change in
control, we will accelerate the vesting of 50% of any options granted to
Mr. Smith subsequent to his employment agreement that have not vested as of
the effective date of the change of control. If we terminate Mr. Smith’s
employment without cause at any time during the twelve months subsequent to a
change in control, then, Mr. Smith will be entitled to three months written
notice and 100% of any options granted to Mr. Smith, subsequent to the date
of his employment agreement, that have not vested will immediately vest.
Mr. Smith has agreed to refrain from competing with us following the
termination of his employment for a period of twelve months.
A table
describing the payments that would have been due to Mr. Smith under his
employment agreement had Mr. Smith’s employment with us been terminated at
the end of 2009 under various circumstances appears under “Potential Payments
and Benefits upon Termination of Employment — Bruce D. Smith,”
below.
Contributions
to Israeli Employees
We make
contributions on behalf of our Israeli employees, including on behalf of our
Israeli named executive officers in accordance with their employment agreements,
to a fund known as Managers’ Insurance. This fund provides a combination of
retirement plan, insurance and severance pay benefits to the employee, giving
the employee, or his or her estate, payments upon retirement or death and
securing the severance pay, if legally entitled, upon termination of employment.
Each full-time employee is entitled to participate in the plan, and each
employee who participates contributes an amount equal to 5% of his or her salary
to the retirement plan, and we contribute between 13.33% and 15.83% of his or
her salary (consisting of 5% to the retirement plan, 8.33% to secure severance
payments and up to 2.5% for disability insurance).
Under the
retirement plan component of the Managers’ Insurance, both our 5% contribution
and the 5% contribution made by the employee are immediately vested and
non-forfeitable upon contribution to the Managers’ Insurance. In some cases, we
substitute other retirement arrangements, such as provident funds (kupot gemel)
for the retirement plan feature of the Managers’ Insurance. The features of the
provident funds are substantially similar to those of the retirement plan
feature of the Managers’ Insurance.
In
addition, we make contributions on behalf of our Israeli employees, including
all of our Israeli named executive officers, in accordance with their employment
agreements, to a fund known as a continued education fund (Keren Hishtalmut). We
contribute an amount equal to 7.5% of the employee’s salary and deduct 2.5% of
the employee’s salary. Our contributions to the continuing education fund are
only up to the permissible tax-exempt salary ceiling according to the income tax
regulations in effect from time to time, which ceiling was 15,712 NIS monthly as
of December 31, 2009.
Option
Grant Practice
The
Compensation Committee has delegated the authority to make initial option grants
to new employees (within an approved range) to executive management. During
2009, initial option grants that were within executive management’s approved
range were granted quarterly, on March 30, June 29 and September 28.
According to our practice, we execute the grants on the 27th of
the last month of each calendar quarter. If the 27th of
the last month of a quarter falls on a Friday, Saturday or Sunday (or a
holiday), the meeting approving the grant is postponed to the following
non-holiday Monday. Options are granted at 100% of the closing sales price of
our stock on the last market trading date prior to the grant
date.
We did
not have any initial hire grants that were above executive management’s approved
range. In the event such a case was to occur in the future, such grants would be
approved by the Compensation Committee with the grant date being the day after
the first day of service and the exercise price being the closing sale price on
the last market trading day prior to the grant date. For annual option grants to
all employees, the Compensation Committee must review and submit its approval.
It is the Board of Directors’ practice to approve the Compensation Committee’s
option grants. In 2009, these grants were made on September 9,
2009.
Mr.
Rosenschein received an option grant to purchase 32,000 shares of our common
stock on September 9, 2009, with an exercise price of $7.91 per share, based on
the NASDAQ closing price on September 8, 2009. Mr. Steinberg received an
option grant to purchase 25,000 shares of our common stock on September 9, 2009,
with an exercise price of $7.91 per share, based on the NASDAQ closing price on
September 8, 2009. Mr. Smith received an option grant to purchase 29,000
shares of our common stock on September 9, 2009, with an exercise price of $7.91
per share, based on the NASDAQ closing price on September 8, 2009. 25% of
the options granted to Messrs. Rosenschein, Steinberg and Smith will vest after
one year from the date of grant and 1/36th of
the options vest in equal monthly installments thereafter. These options were
granted under the Company’s 2005 Incentive Compensation Plan.
We do not
time the granting of our options with any favorable or unfavorable news released
by us. The initial grants are based on the timing of the quarterly
pre-determined end-of-quarter dates. Proximity of any awards to an earnings
announcement or other market events is coincidental.
Performance-Based
Compensation and Financial Restatement
We have
not considered or implemented a policy regarding retroactive adjustments to any
cash or equity-based incentive compensation paid to our executives and other
employees where such payments were predicated upon the achievement of certain
financial results that were subsequently the subject of a financial
restatement.
Tax
and Accounting Considerations
Compliance with Internal Revenue
Code Section 162(m). Section 162(m) of the Internal
Revenue Code of 1986, as amended, restricts deductibility of executive
compensation paid to our Chief Executive Officer and each of the three other
most highly compensated executive officers holding office at the end of any year
(except for our Chief Financial Officer) to the extent such compensation exceeds
$1,000,000 for any of such officers in any year and does not qualify for an
exception under Section 162(m) or related regulations. The Compensation
Committee’s policy is to qualify its executive compensation for deductibility
under applicable tax laws to the extent practicable. Income related to stock
options granted under our 1999 Stock Option Plan, the 2000 Stock Plan, the 2003
Stock Plan, the 2004 Stock Plan and the 2005 Incentive Compensation Plan
generally qualify for an exemption from these restrictions imposed by
Section 162(m). In the future, the Compensation Committee will continue to
evaluate the advisability of qualifying its executive compensation for full
deductibility, in particular in light of the recent IRS Revenue Ruling
2008-13.
2009
Bonus Plan
An
aggregate bonus grant of $240,000, or 3% of $7,992,000 in Adjusted EBITDA
(before bonus), was approved by the Compensation Committee. Two thirds of such
amount was distributed among members of the executive management team and one
third of such amount was allocated to other managers and employees of the
company. Messrs Rosenschein, Steinberg and Smith each received a bonus grant of
$26,700.
Potential
Payments and Benefits upon Termination of Employment
This
section sets forth in tabular form quantitative disclosure regarding estimated
payments and other benefits that would have been received by our Israeli
executive officers if their employment had been terminated on December 31,
2009 (the last business day of the fiscal year).
For a
narrative description of the severance and change in control arrangements in the
employment agreements of the executive officers, see “Employment Contracts”
above.
The
amounts referenced in the tables below have been converted from New Israeli
Shekels foreign currency, or NIS, based on the US Dollar — Israeli NIS
exchange rate recorded by the Bank of Israel on December 31,
2009.
Robert
S. Rosenschein
The
following table describes the potential payments and benefits upon employment
termination for Robert S. Rosenschein, our Chairman and Chief Executive Officer,
pursuant to applicable law and the terms of his employment agreement with us, as
if his employment had terminated on December 31, 2009 (the last business
day of the fiscal year) under the various scenarios described in the column
headings as explained in the footnotes below:
|
Payments
and Benefits
|
Involuntary
Termination(1)
|
Termination
at
Will(2)
|
Death
or
Disability(3)
|
Cause(4)
|
Termination
following
a Change
of
Control(5)
|
|||||
|
Manager’s
insurance(6)
|
$114,005
|
$114,005
|
$114,005
|
$114,005
|
$114,005
|
|||||
|
Contractual
severance
|
—
|
—
|
$133,367
|
—
|
—
|
|||||
|
Statutory
severance(7)
|
$250,529
|
$250,529
|
$250,529
|
$250,529
|
$250,529
|
|||||
|
Vacation(8)
|
$40,606
|
$40,606
|
$40,606
|
$40,606
|
$40,606
|
|||||
|
Continuing
education fund(9)
|
$40,774
|
$40,774
|
$40,774
|
$40,774
|
$40,774
|
|||||
|
Advance
notice(10)
|
$66,683
|
$66,683
|
—
|
—
|
$66,683
|
|
(1)
|
“Involuntary
Termination” is defined in Mr. Rosenschein’s employment agreement as
(i) without Mr. Rosenschein’s express written consent, a
material reduction in his duties, position or responsibilities with us
relative to his duties, position or responsibilities in effect immediately
prior to such reduction, provided, however, that a reduction in duties,
position or responsibilities solely by virtue of our being acquired and
made part of a larger entity, shall not constitute an “Involuntary
Termination”; (ii) without Mr. Rosenschein’s express written
consent, a reduction of the facilities and perquisites (including office
space and location) available to him immediately prior to such reduction;
(iii) without Mr. Rosenschein’s express written consent, a
reduction by us of his base salary or kind or level of his employee
benefits in effect immediately prior to such reduction; (iv) without
Mr. Rosenschein’s written consent, his relocation to a facility or
location more than fifty (50) kilometers from Jerusalem, Israel;
(v) any purported termination of Mr. Rosenschein without Cause;
or (vi) our failure to obtain the assumption of
Mr. Rosenschein’s employment agreement by any
successors.
|
|
(2)
|
Pursuant
to Mr. Rosenschein’s employment agreement, he may voluntarily
terminate his employment with us upon no less than ninety days’ prior
written notice, for any reason. With respect to Termination at Will by
Mr. Rosenschein, we are not legally required to release to
Mr. Rosenschein the monies deposited in the fund which secure payment
of statutory severance obligations, however, it would be customary to
release such funds.
|
|
(3)
|
“Disability”
is defined in Mr. Rosenschein’s employment agreement as any case in
which he is unable, due to any physical or mental disease or condition, to
perform his normal duties of employment for 120 consecutive days or
180 days in any twelve-month period. According to
Mr. Rosenschein’s employment agreement, if his employment terminates
due to death or Disability, he or his heirs, as the case may be, will
receive a lump-sum payment equal to six months of his annual base salary
in effect at the time of termination. If Mr. Rosenschein is
terminated due to Death or Disability, he is entitled to both contractual
and statutory severance.
|
|
(4)
|
“Cause”
is defined in Mr. Rosenschein’s employment as the occurrence of any
one or more of the following: (i) Mr. Rosenschein’s misconduct
which materially injures us; (ii) Mr. Rosenschein’s conviction
by, or entry of a plea of guilty or nolo contendere in, a court of
competent jurisdiction for any crime which constitutes a felony in the
jurisdiction involved; or (iii) Mr. Rosenschein’s gross
negligence in the scope of his services.
|
|
(5)
|
“Change
in Control” is defined in Mr. Rosenschein’s employment agreement as
(a) the consummation of a merger or consolidation of us with or into
another entity or any other corporate reorganization, if persons who are
not our stockholders immediately prior to such merger, consolidation or
other reorganization own immediately after such merger, consolidation or
other reorganization 50% or more of the voting power of the outstanding
securities of each of the (i) continuing or surviving entity and
(ii) any direct or indirect parent corporation of such continuing or
surviving entity; or (b) the sale, transfer or other disposition of
all or substantially all of our assets.
|
|
(6)
|
Payments
to Managers’ Insurance, a benefit customarily given to executives in
Israel, though given by us to all our employees in Israel, amount to up to
15.83% of Mr. Rosenschein’s base salary, consisting of 8.33% for
payments made to a fund to secure payment of statutory severance
obligations, 5% towards pension and up to 2.5% for disability. The
Manager’s Insurance fund amounts reflected in the table represent only the
5% towards pension. These amounts do not include (i) the 8.33%
payments to a fund to secure payment of statutory severance obligations
with respect to amounts paid prior to December 31, 2009, which funds
are reflected in the table under the “Statutory Severance” heading, and
(ii) payments for disability.
|
|
(7)
|
Pursuant
to Israeli law, employees terminated other than “for cause” receive
statutory severance in the amount of one month’s base salary for each year
of work, according to their salary rate at the date of termination (see
footnote 6 above).
|
|
(8)
|
As
of December 31, 2009, Mr. Rosenschein was entitled to 33 annual
vacation days. A maximum of 20 days of unused paid vacation days may
be carried over from year to year by Mr. Rosenschein. At the end of
each calendar year, all unused vacation days in excess of 20, are
automatically forfeited.
|
|
(9)
|
Pursuant
to Mr. Rosenschein’s employment agreement, we must contribute an
amount equal to 7.5% of Mr. Rosenschein’s base salary to a continuing
education fund, up to the permissible tax-exempt salary ceiling according
to the income tax regulations in effect from time to time. We make these
deposits on a monthly basis. At December 31, 2009, the ceiling then
in effect was NIS 15,712 (approximately $4,220). According to Israeli law,
Mr. Rosenschein is entitled to redeem his continuing education fund
once every six years, independent of his status of employment with us and
he has discretion over the type of fund in which the deposits are
invested. The amount set forth in the table reflects the total sum we
deposited on behalf of Mr. Rosenschein since the beginning of his
employment with us.
|
|
(10)
|
Pursuant
to Mr. Rosenschein’s employment agreement, he may voluntarily
terminate his employment with us upon no less than ninety days’ prior
written notice, for any reason. We shall have the right to require
Mr. Rosenschein to continue working during any notice
period.
|
Steven
Steinberg
The
following table describes the potential payments and benefits upon employment
termination for Steven Steinberg, our Chief Financial Officer, pursuant to
applicable law and the terms of his employment agreement with us, as if his
employment had terminated on December 31, 2009 (the last business day of
the fiscal year) under the various scenarios described in the column headings as
explained in the footnotes below:
|
Payments
and Benefits
|
Termination(1)
|
Termination
at
Will(2)
|
Death
or
Disability(3)
|
Cause(4)
|
Termination
following
a Change
of
Control(5)
|
|||||
|
Manager’s
insurance(6)
|
$51,007
|
$51,007
|
$51,007
|
$51,007
|
$51,007
|
|||||
|
Contractual
severance (7)
|
—
|
—
|
$42,571
|
—
|
—
|
|||||
|
Statutory
severance(8)
|
$97,895
|
$97,895
|
$97,895
|
$97,895
|
$97,895
|
|||||
|
Vacation(9)
|
$13,171
|
$13,171
|
$13,171
|
$13,171
|
$13,171
|
|||||
|
Continuing
education fund(10)
|
$26,433
|
$26,433
|
$26,433
|
$26,433
|
$26,433
|
|||||
|
Advance
notice(11)
|
$41,571
|
$41,571
|
—
|
—
|
$55,428
|
|
(1)
|
According
to Mr. Steinberg’s employment agreement, we may terminate his
employment without cause, at any time, upon three months
notice.
|
|
(2)
|
According
to Mr. Steinberg’s employment agreement, he may terminate his
employment, at any time, upon three months notice. With respect to
Termination at Will by Mr. Steinberg, we are not legally required to
release to Mr. Steinberg the monies deposited in the fund which
secure payment of statutory severance obligations, however, it would be
customary to release such funds.
|
|
(3)
|
“Disability”
is defined in Mr. Steinberg’s employment agreement as any case in
which he is unable, due to any physical or mental disease or condition, to
perform his normal duties of employment for 120 consecutive days or
180 days in any twelve-month period. According to
Mr. Steinberg’s employment agreement, if his employment terminates
due to death or disability, he or his heirs, as the case may be, will be
entitled to continue to receive his annual salary for three months
following his last day of employment. Such amount shall be in addition to
any payment he is entitled to receive pursuant to any statutory severance
arrangement.
|
|
(4)
|
“Cause”
is defined in Mr. Steinberg’s employment as the occurrence of any one
or more of the following: (i) Mr. Steinberg’s act of fraud,
dishonesty or willful misconduct; (ii) Mr. Steinberg’s material
breach of his confidentiality or non-competition obligations set forth in
his employment agreement; (iii) Mr. Steinberg’s material breach
of any other provision in his employment agreement, including but not
limited to his habitual neglect or gross failure to perform the duties of
his position or any other contractual or fiduciary duty owed to us; or
(iv) Mr. Steinberg’s conviction of a criminal offense involving
fraud, embezzlement or dishonesty.
|
|
(5)
|
“Change
of Control” is defined in Mr. Steinberg’s employment agreement as
(a) the consummation of a merger or consolidation of us with or into
another entity or any other corporate reorganization, if persons who were
not our stockholders immediately prior to such merger, consolidation or
other reorganization own immediately after such merger, consolidation or
other reorganization 50% or more of the voting power of the outstanding
securities of each of the (i) continuing or surviving entity and
(ii) any direct or indirect parent corporation of such continuing or
surviving entity; or (b) the sale, transfer or other disposition of
all or substantially all of our assets. According to Mr. Steinberg’s
employment agreement, a “Change of Control” shall not be deemed to have
occurred as a consequence of the initial public offering of our
securities.
|
|
(6)
|
Payments
to Managers’ Insurance, a benefit customarily given to executives in
Israel, though given by us to all our employees, amount to up to 15.83% of
Mr. Steinberg’s base salary, consisting of 8.33% for payments made to
a fund to secure payment of statutory severance obligations, 5% towards
pension and up to 2.5% for disability. The Manager’s Insurance fund
amounts reflected in the table represent only the 5% towards pension.
These amounts do not include (i) the 8.33% payments to a fund to
secure payment of statutory severance obligations with respect to amounts
paid prior to December 31, 2009, which funds are reflected in the
table under the “Statutory Severance” heading, and (ii) payments for
disability.
|
|
(7)
|
According
to Mr. Steinberg’s employment agreement, if his employment terminates
due to death or disability, he or his heirs, as the case may be, will be
entitled to continue to receive his annual salary for three months
following his last day of employment. Except for the foregoing,
Mr. Steinberg is not entitled to any other contractual severance
amounts.
|
|
(8)
|
Pursuant
to Israeli law, employees terminated other than “for cause” receive
statutory severance in the amount of one month’s base salary for each year
of work, according to their salary rate at the date of termination (see
footnote 6 above).
|
|
(9)
|
As
of December 31, 2009, Mr. Steinberg was entitled to 17.17 annual
vacation days. A maximum of 20 days of unused paid vacation days may
be carried over from year to year by Mr. Steinberg. At the end of
each calendar year, all unused vacation days in excess of 20, are
automatically forfeited.
|
|
(10)
|
Pursuant
to Mr. Steinberg’s employment agreement, we must contribute an amount
equal to 7.5% of Mr. Steinberg’s base salary to a continuing
education fund, up to the permissible tax-exempt salary ceiling according
to the income tax regulations in effect from time to time. We make these
deposits on a monthly basis. At December 31, 2009, the ceiling then
in effect was NIS 15,712 (approximately $4,220). According to Israeli law,
Mr. Steinberg is entitled to redeem his continuing education fund
once every six years, independent of his status of employment with us and
he has discretion over the type of fund in which the deposits are
invested. The amount set forth in the table reflects the total sum we
deposited on behalf of Mr. Steinberg since the beginning of his
employment with us.
|
|
(11)
|
Pursuant
to Mr. Steinberg’s employment agreement, he may voluntarily terminate
his employment with us upon no less than ninety days’ prior written
notice, for any reason. We shall have the right to require
Mr. Steinberg to continue working during any notice period. Should
Mr. Steinberg’s employment be terminated without cause at any time
during a period of 12 months subsequent to the effective date of a
Change of Control, he will be entitled to 4 months written
notice.
|
Bruce
D. Smith
The
following table describes the potential payments and benefits upon employment
termination for Bruce D. Smith, our Chief Strategic Officer, pursuant to
applicable law and the terms of his employment agreement with us, as if his
employment had terminated on December 31, 2009 (the last business day of
the fiscal year) under the various scenarios described in the column headings as
explained in the footnotes below:
|
Payments
and Benefits
|
Termination(1)
|
Termination
at
Will(2)
|
Death
or
Disability(3)
|
Cause(4)
|
Termination
following
a Change
of
Control(5)
|
|||||
|
401(k)(6)
|
$30,323
|
$30,323
|
$30,323
|
$30,323
|
$30,323
|
|||||
|
Vacation(7)
|
$17,154
|
$17,154
|
$17,154
|
$17,154
|
$17,154
|
|||||
|
Advance
notice(8)
|
$59,400
|
$59,400
|
—
|
—
|
$59,400
|
|
(1)
|
According
to Mr. Smith’s employment agreement, we may terminate his employment
without cause, at any time, upon three months notice.
|
|
(2)
|
According
to Mr. Smith’s employment agreement, he may terminate his employment,
at any time, upon three months notice.
|
|
(3)
|
According
to Mr. Smith’s employment agreement, we may terminate his employment
if he has been unable to perform the material duties of his employment due
to a disability which (i) continues for more than 90 days and
(ii) cannot be reasonably accommodated.
|
|
(4)
|
“Cause”
is defined in Mr. Smith’s employment agreement as the occurrence of
any one or more of the following: (i) Mr. Smith’s act of fraud
or dishonesty or gross negligence; (ii) Mr. Smith’s willful
misconduct which materially injures us (iii) Mr. Smith’s
conviction by, or entry or a plea of guilty or nolo contendre in, a court
of competent jurisdiction for any crime which constitutes a felony in the
jurisdiction involved, or (iv) a material breach by Mr. Smith of
any other provision hereof, including but not limited to, the habitual
neglect or gross failure by Mr. Smith to adequately perform the
duties of his position, or of any other contractual or legal fiduciary
duty to us.
|
|
(5)
|
“Change
of Control” is defined in Mr. Smith’s employment agreement as:
(a) the consummation of a merger or consolidation of us with or into
another entity or any other corporate reorganization, if persons who were
not our stockholders immediately prior to such merger, consolidation or
other reorganization own immediately after such merger, consolidation or
other reorganization 50% or more of the voting power of the outstanding
securities of each of the (i) continuing or surviving entity and
(ii) any direct or indirect parent corporation of such continuing or
surviving entity; or (b) the sale, transfer or other disposition of
all or substantially all of our assets. A Change of Control shall not be
deemed to have occurred as a consequence of a secondary
offering.
|
|
(6)
|
We
provide all U.S. employees the opportunity to participate in a 401(k)
plan. Under the 401(k) plan we provide a contribution of 3%. The executive
officers participate in the 401(k) plan on the same terms as other
eligible employees.
|
|
(7)
|
As
of December 31, 2009, Mr. Smith was entitled to 15.65 annual
vacation days. A maximum of 20 days of unused paid vacation days may
be carried over from year to year by Mr. Smith. At the end of each
calendar year, all unused vacation days in excess of 20, are automatically
forfeited.
|
|
(8)
|
Pursuant
to Mr. Smith’s employment agreement, he may voluntarily terminate his
employment with us upon no less than ninety days’ prior written notice,
for any reason. We shall have the right to require Mr. Smith to
continue working during any notice
period.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information for the named executive officers
regarding the number of shares subject to both exercisable and unexercisable
stock options, as well as the exercise prices and expiration dates thereof, as
of December 31, 2009.
|
Name
|
Number
of Securities Underlying
Unexercised
Options (#)
Exercisable
|
Number
of Securities Underlying
Unexercised
Options (#)
Unexercisable
|
Option
Exercise
Price
($/Sh)
|
Option
Expiration
Date
|
||||
|
Robert
S. Rosenschein
|
241,964
|
—
|
5.06
|
January
8, 2014
|
||||
|
78,333
|
1,667
(1)
|
13.75
|
January
30, 2012
|
|||||
|
17,187
|
7,813
(2)
|
11.61
|
March
5, 2013
|
|||||
|
7,083
|
12,917
(3)
|
2.95
|
July
14, 2014
|
|||||
|
5,625
|
12,375
(4)
|
5.77
|
September
9, 2014
|
|||||
|
—
|
32,000
(5)
|
7.91
|
September
9, 2015
|
|||||
|
Steven
Steinberg
|
10,861
|
—
|
11.51
|
August
5, 2013
|
||||
|
13,186
|
—
|
2.76
|
August
5, 2013
|
|||||
|
26,353
|
—
|
5.25
|
November
9, 2014
|
|||||
|
53,854
|
1,146
(1)
|
13.75
|
January
30, 2012
|
|||||
|
14,781
|
6,719
(2)
|
11.61
|
March 5,
2013
|
|||||
|
6,375
|
11,625
(3)
|
2.95
|
July
14, 2014
|
|||||
|
4,375
|
9,625
(4)
|
5.77
|
September
9, 2014
|
|||||
|
—
|
25,000
(5)
|
7.91
|
September
9, 2015
|
|||||
|
Bruce
D. Smith
|
75,000
|
—
|
15.35
|
July
27, 2015
|
||||
|
14,687
|
313
(1)
|
13.75
|
January
30, 2012
|
|||||
|
13,125
|
1,875
(6)
|
9.65
|
June
21, 2012
|
|||||
|
14,781
|
6,719
(2)
|
11.61
|
March 5,
2013
|
|||||
|
6,445
|
11,755
(3)
|
2.95
|
July
14, 2014
|
|||||
|
5,000
|
11,000
(4)
|
5.77
|
September
9, 2014
|
|||||
|
—
|
29,000(5)
|
7.91
|
September
9, 2015
|
|
(1)
|
Continues
to vest monthly in equal installments through January 30,
2010
|
|
(2)
|
Continues
to vest monthly in equal installments through March 5,
2011
|
|
(3)
|
Continues
to vest monthly in equal installments through July 14,
2012
|
|
(4)
|
Continues
to vest monthly in equal installments through September 9,
2012
|
|
(5)
|
25%
of the grant will be exercisable on September 9, 2010; 1/36 of the
remainder exercisable on each of the following 36 monthly
anniversaries
|
|
(6)
|
Continues
to vest monthly in equal installments through June 21,
2010
|
Director
Compensation
|
Name
|
Fees
Earned
|
Option
Awards(*)
|
Total
|
|||
|
Mark
A. Tebbe (1)
|
$29,056
|
$31,470
|
$60,526
|
|||
|
Yehuda
Sternlicht (2)
|
$35,000
|
$31,470
|
$66,470
|
|||
|
Mark
B. Segall (3)
|
$30,000
|
$31,470
|
$61,470
|
|||
|
Lawrence
S. Kramer (4)
|
$25,778
|
$31,470
|
$57,248
|
|||
|
W.
Allen Beasley (5)
|
$25,000
|
$31,470
|
$56,470
|
|||
|
R.
Thomas Dyal (6)
|
$11,944
|
$163,577
|
$175,521
|
|||
|
Edward
G. Sim (7)
|
$20,667
|
$33,647
|
$54,314
|
* Amounts
represent the aggregate grant date fair value in accordance with FASB ASC Topic
718.
|
(1)
|
82,322
options were outstanding as of 12/31/09, of which 58,344 were exercisable
as of December 31, 2009.
|
|
(2)
|
49,575
options were outstanding as of 12/31/09, of which 33,879 were exercisable
as of December 31, 2009.
|
|
(3)
|
64,575
options were outstanding as of 12/31/09, of which 48,879 were exercisable
as of December 31, 2009.
|
|
(4)
|
64,575
options were outstanding as of 12/31/09, of which 48,879 were exercisable
as of December 31, 2009.
|
|
(5)
|
43,050
options were outstanding as of 12/31/09, of which 13,004 were exercisable
as of December 31, 2009.
|
|
(6)
|
Thomas
R. Dyal was appointed as a board member on June 10, 2009; 35,875 options
were outstanding as of 12/31/09, none of which were exercisable as of
December 31, 2009.
|
|
(7)
|
Upon
the departure of Mr. Sim from the board of directors on September 9, 2009,
he received a benefit in the form of an extension to the exercisability of
his stock options. Mr. Sim’s Option Award amount for 2009 represents the
fair value of the modification to the exercise period associated with the
company stock options held by Mr. Sim on September 9,
2009.
|
Cash
Compensation. Our non-employee directors receive an annual
base fee of $20,000, with no additional fee rendered for attendance at board
meetings. In addition to their base fees, directors receive annual fees for
membership on our committees, pursuant to the fee schedule set forth
below:
|
|
Director
Fee
Base
|
Audit
Membership
|
Compensation
Membership
|
Governance
Membership
|
Financing
Membership
|
Audit
Chair
|
Other
Chair
|
Total
|
|||||||
|
Mr.
Tebbe
|
20,000
|
5,000
|
2,500
|
2,500
|
—
|
—
|
2,500
|
32,500
|
|||||||
|
Mr.
Sternlicht
|
20,000
|
5,000
|
—
|
—
|
2,500
|
7,500
|
—
|
35,000
|
|||||||
|
Mr.
Segall
|
20,000
|
5,000
|
—
|
—
|
2,500
|
—
|
2,500
|
30,000
|
|||||||
|
Mr.
Kramer
|
20,000
|
—
|
2,500
|
2,500
|
—
|
—
|
2,500
|
27,500
|
|||||||
|
Mr.
Beasley
|
20,000
|
—
|
2,500
|
—
|
2,500
|
—
|
—
|
25,000
|
|||||||
|
Mr.
Dyal
|
20,000
|
—
|
—
|
2,500
|
—
|
—
|
—
|
22,500
|
|||||||
|
Total
|
$120,000
|
$15,000
|
$7,500
|
$7,500
|
$7,500
|
$7,500
|
$7,500
|
$172,500
|
We
reimburse our non-employee directors for all reasonable out-of-pocket expenses
incurred in the performance of their duties as directors. Employee directors are
not compensated for board services in addition to their regular employee
compensation.
Equity
Compensation. During fiscal year 2009, each non-employee
member of the board of directors was eligible to receive stock awards under the
terms of our 2005 Incentive Compensation Plan. New non-employee directors
receive an initial option grant to purchase 28,700 shares of our common
stock with 25% of the shares vesting after one year from the date of grant and
1/36th of the shares vesting in equal monthly installments thereafter.
Continuing non-employee directors receive an annual option grant of
7,175 shares of common stock. These annual grants are effected on the date
of the Annual Shareholders’ Meeting, with 25% of the shares vesting after one
year from the date of grant and 1/36th of the shares vesting in equal
shares monthly thereafter.
There was
one new member added to the board of directors during fiscal year 2009, Mr.
Dyal, who received a one-time initial option grant to purchase 28,700 shares of
our common stock on June 10, 2009, with an exercise price of $8.20 per share,
based on the NASDAQ closing price on June 9, 2009. The grant date fair
value of these options, based on Black-Scholes valuation model, was $4.60 per
option. All other option grants were to continuing non-employee directors,
including Mr. Dyal. Thus, each non-employee director received options to
purchase 7,175 shares of the company’s common stock, granted on
September 9, 2009, with an exercise price of $7.91 per share, based on the
NASDAQ closing price on September 8, 2009. The grant date fair value of
these options, based on Black-Scholes valuation model, was $4.39 per
option.
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
The
following table and accompanying footnotes set forth certain information as of
March 8, 2010 with respect to the ownership of our common stock by:
|
•
|
each
person or group who beneficially owns more than 5% of our common
stock;
|
|
•
|
each
of our directors;
|
|
•
|
our
Chief Executive Officer, Chief Financial Officer and our two
other highest paid executive officers for fiscal year
2009; and
|
|
•
|
all
of our directors and officers as a
group.
|
A person
is deemed to be the beneficial owner of securities that can be acquired within
sixty days from March 8, 2010, as a result of the exercise of options and
warrants. Accordingly, common stock issuable upon exercise of options and
warrants that are currently exercisable or exercisable within sixty days of
March 8, 2010, have been included in the table with respect to the beneficial
ownership of the person or entity owning the options and warrants, but not with
respect to any other persons or entities.
Applicable
percentage of ownership for each holder is based on 7,958,928 shares of common
stock outstanding on March 8, 2010, plus any presently exercisable stock options
and warrants held by each such holder, and options and warrants held by each
such holder that will become exercisable within sixty days after March 8,
2010.
|
Name
and Address of Beneficial Owner (1)
|
Shares
Beneficially
Owned
|
Percentage
of
Common
Stock
|
||
|
Executive
Officers and Directors:
|
||||
|
Robert
S. Rosenschein
|
658,590
(2)
|
7.92%
|
||
|
c/o Answers
Corporation, Jerusalem Technology Park, The Tower, Jerusalem 91481
Israel
|
||||
|
Steven
Steinberg
|
142,336
(3)
|
1.76%
|
||
|
c/o Answers
Corporation, Jerusalem Technology Park, The Tower, Jerusalem
91481 Israel
|
||||
|
Bruce
D. Smith
|
150,690
(4)
|
1.86%
|
||
|
Mark
A. Tebbe
|
102,232
(5)
|
1.27%
|
||
|
Yehuda
Sternlicht
|
35,673
(6)
|
*
|
||
|
Mark
B. Segall
|
56,173
(7)
|
*
|
||
|
Lawrence
S. Kramer
|
53,173
(8)
|
*
|
||
|
Allen
Beasley
|
3,948,539
(9)
|
33.16%
|
||
|
Thomas
R. Dyal
|
3,932,545
(10)
|
33.07%
|
||
|
All
directors and executive officers as a group (11
individuals)
|
5,147,406
(11)
|
40.42%
|
||
|
5% or greater
stockholders:
|
||||
|
Redpoint
Ventures
|
3,932,545
(12)
|
33.07%
|
||
|
3000
Sand Hill Road, Building 2, Suite 290, Menlo Park, CA
94025
|
||||
|
Marlin
Sams Fund, L.P.
|
683,000
(13)
|
8.58%
|
||
|
645
Fifth Avenue, New York, New York 10022
|
||||
|
Outboard
Investments Limited
|
690,000
(14)
|
8.67%
|
||
|
BCM
Cape Building Leeward Highway, Providencials Turks and
Caicos
|
||||
|
*
less than 1%
|
|
(1)
|
Unless
otherwise indicated, the business address of each of the following is
c/o Answers Corporation, 237 West 35th
Street, Suite 1101, New York, NY 10001.
|
|
(2)
|
Consists
of 300,960 shares of common stock and 357,630 shares of common
stock issuable upon exercise of options.
|
|
(3)
|
Consists
of 6,500 shares of common stock and 135,836 shares of common
stock issuable upon exercise of options.
|
|
(4)
|
Consists
of 15,000 shares of common stock and 135,690 shares of common
stock issuable upon exercise of options.
|
|
(5)
|
Consists
of 40,062 shares of common stock and 62,170 shares of common
stock issuable upon exercise of options.
|
|
(6)
|
Consists
of 35,673 shares of common stock issuable upon exercise of
options.
|
|
(7)
|
Consists
of 5,500 shares of common stock and 50,673 shares of common
stock issuable upon exercise of options.
|
|
(8)
|
Consists
of 2,500 shares of common stock and 50,673 shares of common
stock issuable upon exercise of options.
|
|
(9)
|
Consists
of (i) 1,296,667 shares of Common Stock initially issuable upon conversion
of 58,350 shares of Series A Convertible Preferred Stock (the “Series A
Preferred Stock”) held by Redpoint Omega, L.P. (“RO LP”); (ii) 648,334
shares of Common Stock issuable pursuant to common stock purchase warrants
(the “Class A Warrants”) held by RO LP, (iii) 36,667 shares of Common
Stock initially issuable upon conversion of 1,650 shares of Series A
Preferred Stock held by Redpoint Omega Associates, LLC (“ROA LLC” and
together with RO LP, “Redpoint”); (iv) 18,333 shares of Common Stock
issuable pursuant to Class A Warrants held by ROA LLC; (v) 23,453 shares
of Common Stock initially issuable upon conversion of shares of Series A
Preferred Stock pursuant to dividends paid to Redpoint; (vi) 1,237,727
shares of Common Stock initially issuable upon conversion of 68,075 shares
of Series B Convertible Preferred Stock (the “Series B Preferred Stock”)
held by RO LP; (vii) 618,864 shares of Common Stock issuable pursuant to
common stock purchase warrants (the “Class B Warrants”) held by RO LP;
(viii) 35,000 shares of Common Stock initially issuable upon conversion of
1,925 shares of Series B Preferred Stock held by ROA LLC; and (ix) 17,500
shares of Common Stock issuable pursuant to Class B Warrants held by ROA
LLC. Additionally, includes 15,994 shares of Common Stock
issuable upon exercise of options held by Mr. Beasley.
RO
LP is under common control with ROA LLC. Redpoint Omega, LLC
(“RO LLC”) is the general partner of RO LP and possesses sole voting and
investment control over the shares owned by RO LP and may be deemed to
have indirect beneficial ownership of the shares held by RO LP. Mr.
Beasley is Managing Director of RO LLC. As such, Mr. Beasley shares voting
and investment power over the shares held by RO LP and may be deemed to
have indirect beneficial ownership of the shares held by RO LP. Mr.
Beasley disclaims beneficial ownership of these securities except to the
extent of his proportionate pecuniary interest therein. The
securities are owned by ROA LLC as nominee for its
members. Allen Beasley is a Manager of ROA LLC. As such, Mr.
Beasley shares voting and investment power over the shares held by ROA LLC
and may be deemed to have indirect beneficial ownership of the shares held
by ROA LLC. Mr. Beasley disclaims beneficial ownership of these securities
except to the extent of his proportionate pecuniary interest
therein.
|
|
(10)
|
Consists
of (i) 1,296,667 shares of Common Stock initially issuable upon conversion
of 58,350 shares of Series A Convertible Preferred Stock (the “Series A
Preferred Stock”) held by Redpoint Omega, L.P. (“RO LP”); (ii) 648,334
shares of Common Stock issuable pursuant to common stock purchase warrants
(the “Class A Warrants”) held by RO LP, (iii) 36,667 shares of Common
Stock initially issuable upon conversion of 1,650 shares of Series A
Preferred Stock held by Redpoint Omega Associates, LLC (“ROA LLC” and
together with RO LP, “Redpoint”); (iv) 18,333 shares of Common Stock
issuable pursuant to Class A Warrants held by ROA LLC; (v) 23,453 shares
of Common Stock initially issuable upon conversion of shares of Series A
Preferred Stock pursuant to dividends paid to Redpoint; (vi) 1,237,727
shares of Common Stock initially issuable upon conversion of 68,075 shares
of Series B Convertible Preferred Stock (the “Series B Preferred Stock”)
held by RO LP; (vii) 618,864 shares of Common Stock issuable pursuant to
common stock purchase warrants (the “Class B Warrants”) held by RO LP;
(viii) 35,000 shares of Common Stock initially issuable upon conversion of
1,925 shares of Series B Preferred Stock held by ROA LLC; and (ix) 17,500
shares of Common Stock issuable pursuant to Class B Warrants held by ROA
LLC.
RO
LP is under common control with ROA LLC. Redpoint Omega, LLC
(“RO LLC”) is the general partner of RO LP and possesses sole voting and
investment control over the shares owned by RO LP and may be deemed to
have indirect beneficial ownership of the shares held by RO LP. Mr. Dyal
is a Managing Director of RO LLC. As such, Mr. Dyal shares voting and
investment power over the shares held by RO LP and may be deemed to have
indirect beneficial ownership of the shares held by RO LP. Mr. Dyal
disclaims beneficial ownership of these securities except to the extent of
his proportionate pecuniary interest therein. The securities
are owned by ROA LLC as nominee for its members. Mr. Dyal is a
Manager of ROA LLC. As such, Mr. Dyal shares voting and investment power
over the shares held by ROA LLC and may be deemed to have indirect
beneficial ownership of the shares held by ROA LLC. Mr. Dyal disclaims
beneficial ownership of these securities except to the extent of his
proportionate pecuniary interest therein
|
|
(11)
|
Consists
of 370,522 shares of common stock, 844,339 shares of common stock issuable
upon exercise of options, 1,356,787 shares of common stock issuable upon
conversion of Series A Preferred Stock, 1,272,727 shares of common stock
issuable upon conversion of Series B Preferred Stock and 1,303,031 shares
of common stock issuable upon exercise of common stock purchase
warrants
|
|
(12)
|
Based
on information included on Schedule 13D/A filed with the SEC on
June 16, 2009 and the Company’s records.
|
|
(13)
|
Based
on information included on Schedule 13D/A filed with the SEC on December
18, 2008
|
|
(14)
|
Based
on information included on Schedule 13D filed with the SEC on
December 18, 2007
|
Item 13. Certain Relationships and Related
Transactions and Director Independence
There
have been no transactions, or proposed transactions, during the last two years,
to which we were or will be a party, in which any director, executive officer,
beneficial owner of more than 5% of our common stock or any member of the
immediate family (including spouse, parents, children, siblings and in-laws) of
any of these persons, had or is to have a direct or indirect material
interest.
Any
future transactions with officers, directors or 5% stockholders will be on terms
no less favorable to us than could be obtained from independent parties. Any
affiliated transactions must be approved by a majority of our independent and
disinterested directors who have access to our counsel or independent legal
counsel at our expense.
Item
14. Principal
Accountant Fees and Services
Our
auditors for the year ended December 31, 2009 were Somekh Chaikin,
Certified Public Accountants (Israel), a member firm of KPMG International. We
expect that KPMG will serve as our auditors for fiscal year 2010. All of the
services described in the following fee table were pre-approved by the Audit
Committee.
|
2008
|
2009
|
||
|
$
|
$
|
||
|
Audit
Fees(1)
(2)
|
478,551
|
256,374
|
|
|
Tax
Fees(3)
|
27,570
|
25,512
|
|
|
Total
|
506,121
|
281,886
|
|
(1)
|
This
category includes fees associated with the audit of our annual financial
statements, review of financial statements included in our Form 10-Q
quarterly reports, and services that are normally provided by the
independent registered public accounting firm in connection with statutory
and regulatory filings or engagements, for those fiscal years. Includes
$113 thousand and $108 thousand accrued as of December 31, 2008 and
December 31, 2009, respectively.
|
|
(2)
|
This
category also consists of: $77 thousand and $53 thousand of fees
relating to the Redpoint transactions during the years ended December 31,
2008, and December 31, 2009, respectively, and $213 thousand of fees
relating to the failed Lexico acquisition and the terminated follow-on
offering of securities during the year ended December 31,
2008.
|
|
(3)
|
This
category consists of services provided by KPMG for tax compliance.
Includes $5 thousand accrued as of December 31, 2008 and December 31,
2009.
|
Consistent
with SEC policies and guidelines regarding audit independence, the Audit
Committee is responsible for the pre-approval of all audit and permissible
non-audit services provided by our principal independent accountants on a
case-by-case basis. Our Audit Committee has established a policy regarding
approval of all audit and permissible non-audit services provided by our
principal independent accountants. In cases involving engagements of our
principal independent accountants that do not exceed $25 thousand, the Audit
Committee has approved delegating to the Committee Chairman the approval of such
engagements, as part of the Company’s pre-approval policy. Our Audit Committee
pre-approves these services by category and service. Our Audit Committee has
pre-approved all of the services provided by our principal independent
accountants in 2009.
PART
IV
Item 15. Exhibits
and Financial Statement Schedules
|
1.
|
Financial
Statements.
|
See Index
to Financial Statements on page 34
|
2.
|
Financial
Statement Schedule.
|
None.
|
3.
|
Exhibits.
|
See
exhibits Index immediately below.
|
Exhibit
No.
|
Description
|
|
|
3.1
|
Amended
and Restated Certificate of Incorporation, as amended (Previously filed as
Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K (File No.
001-32255) filed March 9, 2009, and incorporated herein by
reference)
|
|
|
3.1A
|
Certificate
of Designations, Number, Voting Powers, Preferences and Rights of
Series A Convertible Preferred Stock of the
Registrant (Previously filed as Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K (File No. 001-32255) filed June 17, 2008, and
incorporated herein by reference)
|
|
|
3.1B
|
Certificate
of Designations, Number, Voting Powers, Preferences and Rights of
Series B Convertible Preferred Stock of the
Registrant (Previously filed as Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K (File No. 001-32255) filed June 15, 2009, and
incorporated herein by reference)
|
|
|
3.2
|
|
Amended
and Restated By-laws of Registrant (Previously filed as Exhibit 3.2 to the
Registration Statement on Form SB-2 (File No. 333-115424) filed May 12,
2004, and incorporated herein by reference)
|
|
4.1
|
|
Specimen
Common Stock Certificate of the Registrant (Previously filed as Exhibit
4.1 to the Registration Statement on Form SB-2 (File No. 333-115424) filed
July 16, 2004, and incorporated herein by reference)
|
|
10.1«
|
|
1999
Stock Option Plan of Registrant and form of Option Agreement thereunder
(Previously filed as Exhibits 4.5B and 4.5A, respectively, to the
Registration Statement on Form S-8 (File No. 333-123185) filed March 8,
2005, and incorporated herein by reference)
|
|
10.2«
|
|
2000
Stock Plan of Registrant and form of Option Agreement thereunder
(Previously filed as Exhibits 4.4B and 4.4A, respectively, to the
Registration Statement on Form S-8 (File No. 333-123185) filed March 8,
2005, and incorporated herein by reference)
|
|
10.3«
|
2003
Stock Plan (Previously filed as Exhibit 10.1 to the Registration Statement
on Form SB-2 (File No. 333-115424) filed May 12, 2004, and incorporated
herein by reference)
|
|
|
10.3A«
|
Forms
of Stock Option Agreement under the 2003 Stock Plan covering (i) employees
of Registrant, and (ii) officers of Registrant (Previously filed as
Exhibits 4.3A and 4.3B, respectively, to the Registration Statement on
Form S-8 (File No. 333-123185) filed March 8, 2005, and incorporated
herein by reference)
|
|
|
10.4«
|
2004
Stock Plan (Previously filed as Exhibit 10.2 to the Registration Statement
on Form SB-2 (File No. 333-115424) filed May 12, 2004, and incorporated
herein by reference)
|
|
|
10.4A«
|
Forms
of Stock Option Agreement under the 2004 Stock Plan covering (i) employees
of Registrant, and (ii) officers of Registrant (Previously filed as
Exhibits 4.2A and 4.2B, respectively, to the Registration Statement on
Form S-8 (File No. 333-123185) filed March 8, 2005, and incorporated
herein by reference)
|
|
|
10.5«
|
2005
Incentive Compensation Plan (Previously filed as Annex B to the
Registrant’s Definitive Proxy Statement filed May 31, 2005, and
incorporated herein by reference)
|
|
|
10.5A«
|
|
Amendment
to 2005 Incentive Compensation Plan approved by the Registrant’s
stockholders on June 21, 2006 (Previously filed within the
Registrant’s Definitive Proxy Statement filed May 1, 2006, and
incorporated herein by reference)
|
|
10.5B«
|
Amendment
to 2005 Incentive Compensation Plan approved by the Registrant’s
stockholders on September 9, 2008 (Previously filed within the
Registrant’s Definitive Proxy Statement filed July 28, 2008, and
incorporated herein by reference)
|
|
|
10.5C
|
Amendment
to 2005 Incentive Compensation Plan approved by the Registrant’s
stockholders on September 9, 2009 (Previously filed within the
Registrant’s Definitive Proxy Statement filed July 22, 2009, and
incorporated herein by reference)
|
|
|
10.5D«
|
Form
of Stock Option Agreement under the 2005 Incentive Compensation Plan
covering Israel-based employees (Previously filed as Exhibit 10.5A to the
Registrant's Annual Report on Form 10-KSB (File No. 001-32255) filed March
20, 2006, and incorporated herein by reference)
|
|
|
10.5E«
|
Form
of Stock Option Agreement under the 2005 Incentive Compensation Plan
covering U.S.-based employees (Previously filed as Exhibit 10.5B to the
Registrant's Annual Report on Form 10-KSB (File No. 001-32255) filed March
20, 2006, and incorporated herein by reference)
|
|
|
10.6«
|
Robert
S. Rosenschein Employment Agreement (Previously filed as Exhibit 10.6 to
the Registration Statement on Form SB-2 (File No. 333-115424) filed May
12, 2004, and incorporated herein by reference)
|
|
|
10.7«
|
Steven
Steinberg Employment Agreement (Previously filed as Exhibit 10.7 to the
Registration Statement on Form SB-2 (File No. 333-115424) filed May 12,
2004, and incorporated here by reference)
|
|
|
10.8«
|
Jeff
Schneiderman Employment Agreement (Previously filed as Exhibit 10.8 to the
Registration Statement on Form SB-2 (File No. 333-115424) filed May 12,
2004, and incorporated herein by reference)
|
|
|
10.9«
|
Bruce
D. Smith Employment Agreement (Previously filed as Exhibit 10.10 to the
annual report on Form 10-KSB (File No. 001-32255) filed March 20, 2006,
and incorporated herein by reference)
|
|
|
10.10
|
Form
of Warrants issued in connection with the Bridge Financing (Previously
filed as Exhibit 10.5 to the Registration Statement on Form SB-2 (File No.
333-115424) filed May 12, 2004, and incorporated herein by
reference)
|
|
|
10.11
|
Form
of Warrants issued in connection with exercise of Bridge Warrants
(Previously filed as Exhibit 99.2 to the Current Report on Form 8-K/A
(File No. 001-32255) filed February 7, 2005, and incorporated herein by
reference)
|
|
|
10.12+
|
Google
Services Agreement (“GSA”), GSA Order Form and GSA Order Form Terms and
Conditions, all dated January 28, 2005 (Previously filed as Exhibit 10.19
to the Registrant's Annual Report on Amendment No. 3 to Form 10-KSB (File
No. 001-32255) filed June 7, 2006, and incorporated herein by
reference)
|
|
|
10.13+
|
Amendment
No. 1 to Google Order Form and GSA, dated December 20, 2005 (Previously
filed as Exhibit 10.20 to the Registrant's Annual Report on Amendment No.
2 to Form 10-KSB (File No. 001-32255) filed May 19, 2006, and incorporated
herein by reference)
|
|
|
10.14+
|
Amendment
No. 2 to Google Order Form, dated January 31, 2006 (Previously filed as
Exhibit 10.21 to the Registrant's Annual Report on Amendment No. 2 to Form
10-KSB (File No. 001-32255) filed May 19, 2006, and incorporated herein by
reference)
|
|
|
10.15+
|
API
Agreement with Shopping.com, Inc. dated May 2, 2005 (Previously filed as
Exhibit10.22 to the Registrant's Annual Report on Form 10-KSB (File No.
001-32255) filed March 20, 2006, and incorporated herein by
reference)
|
|
|
10.16
|
Lease
Agreement with 35th Street Associates to lease office space in the
building known as 237 West 35th Street in New York, NY, dated April 29,
2005 (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K
(File No. 001-32255) filed May 4, 2005, and incorporated herein by
reference)
|
|
|
10.17
|
Supplemental
agreement to operating lease agreement between GuruNet Israel Ltd.,
Answers Corporation’s wholly-owned subsidiary (“Subsidiary”) and Jerusalem
Technology Park Ltd. dated July 26, 2005 in connection with Subsidiary’s
relocation to new office space (a summary of the principal terms of this
lease was previously filed as Exhibit 10.1 to the Current Report on Form
8-K (File No. 001-32255) filed July 28, 2005, and incorporated herein by
reference)
|
|
|
10.18«
|
Amendment
to Robert S. Rosenschein's Amended and Restated
Employment Agreement, dated as of November 27, 2006 (Previously
filed as Exhibit 10.1 to the Current Report on Form 8-K (File No.
001-32255) filed November 29, 2006, and incorporated herein by
reference)
|
|
|
10.19+
|
|
Amendment
No. 5 to Google Order Form, dated September 21, 2007 (Previously filed as
Exhibit 10.5 to the Quarterly Report on Form 10-Q (File No. 001-32255)
filed November 9, 2007, and incorporated herein by
reference)
|
| 10.20 | Amendment No. 7 to Google Order Form and Google Services Agreement, dated October 13, 2009 (Previously filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 001-32255) filed November 9, 2009, and incorporated herein by reference) | |
|
10.21«
|
Amendment
to Robert S. Rosenschein's Amended and Restated
Employment Agreement, dated as of November 6, 2007 (Previously
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No.
001-32255) filed November 9, 2007, and incorporated herein by
reference)
|
|
|
10.22«
|
Amendment
to Steve Steinberg's Employment Agreement, dated as of November
6, 2007 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form
10-Q (File No. 001-32255) filed November 9, 2007, and incorporated herein
by reference)
|
|
|
10.23«
|
Amendment
to Jeff Schneiderman's Employment Agreement, dated as of
November 6, 2007 (Previously filed as Exhibit 10.3 to the Quarterly Report
on Form 10-Q (File No. 001-32255) filed November 9, 2007, and incorporated
herein by reference)
|
|
|
10.24«
|
Amendment
to Bruce Smith's Employment Agreement, dated as of November 6,
2007 (Previously filed as Exhibit 10.4 to the Quarterly Report on Form
10-Q (File No. 001-32255) filed November 9, 2007, and incorporated herein
by reference)
|
|
|
10.25«
|
|
Amendment
to Robert S. Rosenschein's Amended and Restated
Employment Agreement, dated as of July 30, 2008 (Previously
filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No.
001-32255) filed August 4, 2008, and incorporated herein by
reference)
|
|
10.26
|
Securities
Purchase Agreement dated June 16, 2008 between Answers Corporation
and Redpoint Omega, L.P. and Redpoint Omega Associates, LLC (Previously
filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File
No. 001-32255) filed June 17, 2008, and incorporated herein by
reference)
|
|
|
10.27
|
Form of
Common Stock Purchase Warrant granted to Redpoint Omega, L.P. and Redpoint
Omega Associates, LLC on June 16, 2008 (Previously filed as Exhibit 10.2
to the Registrant’s Current Report on Form 8-K (File No. 001-32255) filed
June 17, 2008, and incorporated herein by reference)
|
|
|
10.28
|
Warrant
Agreement dated as of June 16, 2008 between Answers Corporation and
Redpoint Omega, L.P. and Redpoint Omega Associates, LLC (Previously filed
as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No.
001-32255) filed June 17, 2008, and incorporated herein by
reference)
|
|
|
10.29
|
Registration
Rights Agreement dated as of June 16, 2008 between Answers
Corporation and Redpoint Omega, L.P. and Redpoint Omega Associates, LLC
(Previously filed as Exhibit 10.3 to the Registrant’s Current Report on
Form 8-K (File No. 001-32255) filed June 17, 2008, and incorporated herein
by reference)
|
|
|
|
||
|
|
||
|
14.1
|
Code
of Ethics and Business Conduct (Previously filed as Exhibit 14.1 to the
Registration Statement on Form SB-2 (File No. 333-115424) filed May 12,
2004, and incorporated herein by reference)
|
|
|
|
* Filed herewith.
+ Portions of this exhibit
were omitted and filed separately with the U.S. Securities and Exchange
Commission pursuant to a request for confidential treatment.
^ The certifications attached
as Exhibit 32 accompany this Annual Report on Form 10-K pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by Answers
Corporation for purposes of Section 18 of the Exchange Act.
« Indicates a management
contract or compensatory plan or arrangement.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
Answers
Corporation
|
|
|
By:
|
/s/
Robert S. Rosenschein
|
|
Robert
S. Rosenschein
|
|
|
Chief
Executive Officer
|
|
|
Date:
March 8, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Each
person whose signature appears below hereby authorizes Robert S. Rosenschein and
Steve Steinberg, or any of them, as attorneys-in-fact to sign on his behalf,
individually, and in each capacity stated below, and to file all amendments
and/or supplements to this Annual Report on Form 10-K.
|
Signature
|
Capacity
|
Date
|
||
|
/s/
Robert S. Rosenschein
|
Chairman
of the Board and Chief Executive Officer
|
March
8, 2010
|
||
|
Robert
S. Rosenschein
|
(Principal
Executive Officer)
|
|||
|
/s/
Steven Steinberg
|
Chief
Financial Officer
|
March
8, 2010
|
||
|
Steven
Steinberg
|
(Principal
Financial Officer and Principal Accounting Officer)
|
|||
|
/s/
Mark A. Tebbe
|
Director
|
March
8, 2010
|
||
|
Mark
A. Tebbe
|
||||
|
/s/
Yehuda Sternlicht
|
Director
|
March
8, 2010
|
||
|
Yehuda
Sternlicht
|
||||
|
/s/
Mark B. Segall
|
Director
|
March
8, 2010
|
||
|
Mark
B. Segall
|
||||
|
/s/
Lawrence S. Kramer
|
Director
|
March
8, 2010
|
||
|
Lawrence
S. Kramer
|
||||
|
/s/
W. Allen Beasley
|
Director
|
March
8, 2010
|
||
|
W.
Allen Beasley
|
||||
|
/s/
R. Thomas Dyal
|
Director
|
March
8, 2010
|
||
|
R.
Thomas Dyal
|