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, 2008
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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|
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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
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨
No x
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,
2008, was $23,857,648. 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 6, 2009, there were
7,876,270 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 |
4
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Part I
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5
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18
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32
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32
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32
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32
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Part II
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33
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34
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53
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87
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87
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87
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Part III
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88
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92
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103
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105
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105
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Part IV
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106
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Throughout
this Annual Report, we refer to estimates of traffic. We gauge the progress of
our traffic trends and the effectiveness of our monetization efforts by
measuring our revenue per thousand page views, or RPM. In our Management’s
Discussion and Analysis of Financial Condition and Results of Operations prior
to our quarterly report on Form 10-Q for the quarterly period ended June 30,
2008, we tracked the traffic on our Answers.com and WikiAnswers.com Web
properties using two separate systems:
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(a)
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Our
Answers.com 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 excludes such traffic from
the traffic activity measurements.
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(b)
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WikiAnswers.com
traffic was tracked using HBX Analytics, a tag-based web analytics system
offered by Omniture, Inc. (formerly offered by WebSideStory). Traffic
measurements from this system are generated by our placement of tags on
our WikiAnswers.com Web pages. The HBX Analytics system then generates
traffic metrics. WikiAnswers community-related statistics, including total
number of questions, answers and users, are generated from the
WikiAnswers.com Web property.
|
Beginning
with the Management’s Discussion and Analysis of Financial Condition and Results
of Operations contained 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
Answers.com are also presented based on the HBX Analytics data. We estimate that
the historical page views for Answers.com pursuant to HBX Analytics data, as set
forth in our quarterly 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 Answers.com RPMs, as reported in those quarterly reports, are higher than
previous filings.
We also
use Google, Inc.’s Google Analytics measurement services and Google AdSense data
for various internal analyses. Our breakdown of our traffic sources, noted
above, is based on such data. 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 HBX Analytics and Google Analytics are
also referred to as “internal estimates”.
Third
party services measuring traffic audiences may provide different estimates than
the estimates reported by other external services and the estimates reported by
internal tracking. These discrepancies may result from differences in
methodologies applied or the sampling approaches used by each measuring
service.
ANSWERS
CORPORATION
PART
I
|
ITEM 1
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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. See Item 1A of part I – “Risk Factors.”
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,” “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
“WikiAnswersTM,”
“WikiAnswers.comTM,”
“Answers.comÒ,”
“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.
General
As a
leading online answer engine, we own and operate Web properties known as
WikiAnswers.com and Answers.com, which are dedicated to providing useful answers
in thousands of categories. WikiAnswers.com is a community-generated social
knowledge Q&A platform, leveraging wiki-based technologies. Through the
contributions of WikiAnswers' large and growing community, answers are
constantly improved and updated over time. WikiAnswers.com was ranked by
comScore, a global Internet information provider, as the fastest growing domain
of the top 200 in the U.S. in terms of unique monthly visitors in 2008. The
award-winning reference site Answers.com 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, our combined Web properties –WikiAnswers.com and Answers.com – had
approximately 25.6 million unique visitors in January 2009, which ranked
Answers Corporation number 33 in the top U.S. Web properties. Our goal
is to become the premier online provider of and leading destination for answers
to questions.
According
to our internal estimates, our Web properties had approximately 675 million
page views during the fourth quarter of 2008. During the same period,
approximately 80% of our traffic was generated by search engines; 15% from
direct traffic, which consists of traffic resulting from a direct type-in of our
URL, a bookmarked Favorite, a direct link from other Web properties, a
downloaded toolbar, or other software or utilities we make available; and 5% by
the definition link appearing on Google’s Website result pages.
We
believe our valuable content and overall user experience drives traffic to our
Web properties, which in turn drives advertising revenue. Our revenue is derived
from third party ad networks, primarily Google AdSense, which aggregate Web
properties looking to monetize their Web traffic and advertisers seeking to
advertise on the Internet.
Products & Services
WikiAnswers.com
WikiAnswers.com
is a user-generated content (UGC) community-based question and answer site where
users ask questions and the community answers them. This question and answer
site 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.com’s 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 at the core of our business. The dynamics of UGC make
WikiAnswers.com highly scalable. We believe the size of the community drives 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.com. 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.com. We
intend to focus on continuing this trend and enhance WikiAnswers.com to grow the
overall community, which in turn should heavily contribute to the overall growth
of the site’s content and traffic.
WikiAnswers.com
continued to grow very strongly in 2008. Based on a 31-day average for the month
of December 2008 compared to a 31-day average for the month of December 2007, we
have seen the following increases in key performance indicators:
• new
users registering with WikiAnswers.com every day rose from approximately 1,900
to approximately 5,200;
• questions
answered on a daily basis increased from approximately 3,200 to approximately
8,400; and
• daily
new questions being added to our system grew from approximately 6,600 to
approximately 28,100.
Answers.com
Answers.com,
launched in January 2005, aggregates millions of topics in numerous
categories including health and medical, legal, business and finance, science
and technology, history, reference 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
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, 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.
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.
Traffic
Generation
Our
revenues are primarily driven by the traffic generated by our Web properties 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 average daily page views, RPM and revenues of Answers.com and of
WikiAnswers.com for 2008 are as follows:
|
Q1
|
Q2
|
Q3
|
Q4
|
|||||
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Ad
Revenue ($ - in thousands)
|
||||||||
|
Answers.com
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1,828
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1,485
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1,579
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1,730
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||||
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WikiAnswers.com
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1,185
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1,500
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1,960
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2,879
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||||
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Total
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3,013
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2,985
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3,539
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4,609
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||||
|
Answers.com
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61%
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50%
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45%
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38%
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||||
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WikiAnswers.com
|
39%
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50%
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55%
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62%
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||||
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Total
|
100%
|
100%
|
100%
|
100%
|
||||
|
Traffic
|
||||||||
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Answers.com
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3,225,000
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2,641,000
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2,666,000
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3,027,000
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||||
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WikiAnswers.com
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1,885,000
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2,318,000
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3,094,000
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4,350,000
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||||
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Total
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5,110,000
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4,959,000
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5,760,000
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7,377,000
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||||
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Answers.com
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63%
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53%
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46%
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41%
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||||
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WikiAnswers.com
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37%
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47%
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54%
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59%
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||||
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Total
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100%
|
100%
|
100%
|
100%
|
||||
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RPM
|
||||||||
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Answers.com
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$6.23
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$6.18
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$6.44
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$6.21
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||||
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WikiAnswers.com
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$6.95
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$7.11
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$6.89
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$7.19
|
Our
current traffic is primarily generated by search engines, direct users and the
Google definition link:
Search
engines. Our largest source of traffic is search engines,
which represented 80% of our traffic for the fourth quarter of 2008. 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.com
is playing an overwhelming role in creating rich and unique information for our
Web properties. Our additional SEO efforts involve optimizing our Web
properties’ coding, presentation and structure, such as incorporating a clear
hierarchical site-structure, and structuring the site to facilitate search
engine indexing.
Direct
users. Answers.com, and to a lesser extent, WikiAnswers.com,
also receive traffic from users visiting and returning to our sites directly, as
well as other software and utilities. Direct users represented approximately 15%
of our traffic for the fourth quarter of 2008.
Google definition
link. Our informal, non-contractual relationship with Google,
under which Google links to search results related to certain definitional
queries to Answers.com, accounted for approximately 5% of our traffic for the
fourth quarter of 2008.
Traffic
Monetization
Our
business runs on the ability to effectively attract and monetize traffic. Our
revenue model for monetizing query traffic on our Web properties is
advertising.
Third
Party Ad Networks. In 2008, we obtained the bulk of our
advertisements through third party ad networks. Third party ad networks
generally compensate us by paying us a portion of the revenue they earn from
advertisers for our provision of promotional space on our Web properties. Of
these current third party ad networks, Google AdSense accounted for
approximately 82% of our total revenues for 2008.
Direct Ad
Sales. In an effort to improve monetization, in the fourth quarter of
2006, we began marketing directly to advertisers and generating additional
advertising revenue through an in-house team of direct ads salespeople. However,
at the end of the second quarter of 2008 we decided to suspend this business
initiative, and by the end of the third quarter of 2008 we no longer employed a
direct sales staff. Although we currently employ no direct ad sales staff we do
occasionally accept orders from advertisers who approach us directly, however
this is not significant to our overall revenues. Further details
concerning our suspension of direct ad sales can be found in Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operation.
Seasonality
Our
results of operations have historically been affected by seasonal patterns in
both traffic to our Web properties 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 on our Web
properties translates into fewer users clicking on or viewing the
advertisements on our Web properties.
Community
Development
As part
of our effort to continuously grow the WikiAnswers.com community, the focus has
been on several site-wide programs designed to increase loyalty, foster repeat
visits and build on the “human element” that has fueled the site’s
growth.
Mentoring
Program
The
Mentoring Program is an effort to provide a friendly, fun and worthwhile
learning experience for volunteer Supervisors who are looking to pursue a more
active role in the WikiAnswers.com community. Through this program experienced
Mentors are matched-up with newly-joined volunteer Supervisors, known as
Protégés. Mentors are often site veterans who have garnered an array
of experience and knowledge – enabling them to provide solid support and
guidance to fellow up-and-comers. The program serves as an optional extra level
of involvement.
Community
Outreach Program
As
WikiAnswers.com continues to grow, feelings of belonging and interconnectivity
must be nurtured so that participants at all levels can develop a sense of
citizenship and community. Through the Outreach Program infrequent visitors are
given positive feedback on their contributions and less-active volunteer
Supervisors are constantly cheered on to encourage their active return and
participation and help them become more involved and engaged. The Outreach
Program has a volunteer advisory panel which convenes online and shares
experiences in furtherance to the outreach goals. There are currently numerous
outreach participants that have voluntarily assumed various roles within the
program, including “WikiGuides,” “Talent Scouts” and “Forum Fanatics.” On a
day-to-day basis, outreach volunteers welcome and follow-up with new
contributors, spread information about group chats and contests, encourage
inactive contributors and scout for potential contributors who are interested in
volunteering and greater involvement.
Influential
Teens Program
The
WikiAnswers.com Influential Teen Program, affectionately known as WIT, was
created to build on the growing community of teen contributors on
WikiAnswers.com. 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 group projects. Through WIT, these
future trailblazers develop their leadership abilities while learning how to
correctly use the site and its features.
Vandal
Patrol Program
The
Vandal Patrol Program was started to address the problem of vandalism, found on
many wiki-based sites. As WikiAnswers.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 WikiAnswers.com is apparent. Our Community
Development team receives numerous emails in the form of editing conflicts –
large and small – which they work to peacefully resolve. With the ability to
appeal to this new mediating capacity, contributors enjoy enhanced
communication, less discord and better understanding between one
another.
Our
Strategy
We
believe our valuable content and overall user experience drives traffic to our
Web properties, which in turn drives advertising revenue. The key elements of
our strategy to increase site usage and revenue include:
Become
the Best Place to Get Answers
We
believe that the core value proposition of our products is to help people find
usable answers quickly. Some users will value our highly specific user-generated
content from WikiAnswers.com; others will prefer the licensed Answers.com
editorial content. To that end, we intend to better connect our Web properties
to drive traffic between them, with the goal of helping users seamlessly
discover their answers from whichever source.
Build
the WikiAnswers.com Community
The
WikiAnswers.com community is a source of continuous content creation. We believe
the size of the community drives 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.com. We intend to
accelerate this growth by further enhancing WikiAnswers.com, incorporating new
features to maximize user experience and promoting the unique nature of this
Q&A platform. We intend to continue building the loyal user-base of the site
by continuing to focus on all our community programs (see discussion under Community Development above).
We also intend to promote the community through more public relations efforts
and marketing programs.
Internationalizing
WikiAnswers.com
We plan
to offer WikiAnswers.com in several languages other than English and enable
native speakers to help volunteer supervise country-specific communities forming
around foreign sister sites of WikiAnswers.com. 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; Q&A space; and our
large and growing database of questions and answers. Efforts in this area are
underway and several foreign-language WikiAnswers.com versions are expected to
launch in the second and third quarters of 2009.
Expand
Content
Content
is critical to the success of our business. We plan to continue to offer users
relevant, unique content, which is valued by the user and recognized by the
search engine algorithms. Our content strategy includes adding new, rich and
unique content and having our content continually indexed by the search
engines.
Improving
User-Generated Content Quality
We are
increasingly aware that it is high-quality answers that provide the greatest
value to users and, ultimately, the progression and growth of WikiAnswers.com.
While the wiki form of content management is an engaging platform, it raises
concerns about quality, including, among others, vandalism, bias, plagiarism,
and errors. As our WikiAnswers content base expands, we will continue to develop
tools and engage in initiatives to assist users in creating and maintaining
quality content. Among our primary efforts are the better measurement of the
quality of questions and answers on WikiAnswers.com; establishing quality
control mechanisms; encouraging the community to eliminate bad content; and
enhancing the user interface to facilitate better and easier ways to maintain
and increase quality content. Some examples of planned site changes and features
that are aimed at improving content quality are set forth below:
|
·
|
Delete
low quality questions;
|
|
·
|
Incorporate
User generated rankings;
|
|
·
|
Create
new ways for users to report bad
content;
|
|
·
|
Increase
usage of watch lists & RSS feeds (Rich Site Summary, a format for
delivering regularly changing web content);
and
|
|
·
|
Develop
sub-communities, enabling each category and sub category to develop its
own loyal user-base.
|
Improve
Access and Enhance the User Experience
Over
time, we plan to enhance the user experience for visitors to our properties and
further differentiate them from other online services offering answers,
including functionality, usability, performance, and access from various
platforms, including mobile access. We continuously invest in improving these
enhancements, which we believe lead to increased user stickiness and user
retention.
Strengthen
the Answers Brand
We are
pursuing a brand development strategy that includes public relations, product
features that encourage word-of-mouth sharing, and direct marketing to enhance
public awareness of our Web properties. Our branding strategy centers on
positioning us as a leading online answer engine, showcasing authoritative
content on our rich collection of topics, with a platform for the creation of
compelling user-generated content. We believe that building our Answers brand
will not only increase traffic to our Web properties directly, but will also
encourage search engine visitors to select links to us when our topics appear in
search engine results pages. The goal of these marketing efforts is to increase
direct traffic to our Web properties, as well as search engine traffic and
traffic directed from other sources.
Answers.com
Content
Scope
and Quality of Content
Answers.com’s
collection of information related to millions of topics is drawn from
more than 250 licensed titles from leading publishers. As shown in the taxonomy
table below, our services offer users access to a multitude of subjects through
the following select content categories:
|
Category
|
Topics
|
Publishers
|
|||
|
Business &
Finance
|
Accounting
terms
|
Finance
terms
|
Barron’s
Educational Series
|
||
|
Banking
terms
|
Insurance
terms
|
Dun
& Bradstreet
|
|||
|
Business
plans
|
Investment
terms
|
Dow
Jones Marketwatch
|
|||
|
Company
history
|
Marketing
terms
|
Gale
|
|||
|
Company
news
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Content
License Agreements
We
license content under written agreements with recognized publishers of
information. These agreements are generally for fixed periods, mostly ranging
from one year and more, renewable by consent of the parties, and entitle us to
provide the licensed information to our end users through our services 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, content publicly available from the Web
and content we develop and author independently. We are increasingly looking to
license and make available content that is difficult to find elsewhere on the
Internet.
Technology
Research
and Development
We devote
a substantial portion of our resources to developing new products and services,
maintaining and enhancing existing products and services, expanding and
improving our fundamental technology and strengthening our technological
expertise. In fiscal years 2007 and 2008, we spent approximately
$3.0 million and $3.5 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 Answers.com and WikiAnswers.com Web operations through our own colocation
facility. Our colocation facility, located in New Jersey, is provided by
NetAccess Corporation. We plan to add a second colocation site during the first
half of 2009 in order to provide redundancy of Web operations at the data center
level. Until such time, our operations are centered in one single data center
facility. Prior to launching our colocation facility in 2008, we outsourced our
Web hosting to Terremark Worldwide, Inc.
Competition
We face
significant competition from a wide variety of Web properties. Question and
answer sites, such as Yahoo! Answers (owned by Yahoo!), Askville (owned by
Amazon), Live QnA (owned by Microsoft), Yedda (owned by AOL), Answerbag.com
(owned by Demand Media, Inc.) and Wikia, Inc. compete with WikiAnswers.com.
Destination portals and other free online information and/or reference services,
such as About.com (owned by the New York Times), Dictionary.com (owned by
IAC/InterActiveCorp), TheFreeDictionary.com and Wikipedia.org, compete with
Answers.com. Other competitors of Answers.com include vertical industry-specific
Web properties, such as Bankrate.com and WebMD.com.
Since
several companies operating traditional search engines, such as Google, Yahoo!,
Microsoft, AOL and Ask.com offer answers within their search services, they 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 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.
Advertising
Relationships
We obtain
almost all of our advertising revenue through agreements with third party ad
networks. Third party ad networks generally compensate us by paying us a portion
of the revenue they earn from ads that appear on our Web properties. Our primary
ad network partner, Google AdSense, accounted for approximately 82% of our total
revenue in 2008.
Google AdSense. In
January 2005, we entered into the Google Services Agreement (GSA) governing our
participation in Google AdSense. Pursuant to the GSA, we display listings from
Google’s network of advertisers on our Web properties. There are two methods by
which AdSense advertisements are generated on our Web properties:
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•
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AdSense
for Search, or AFS; and
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•
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AdSense
for Content, or AFC.
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In
effect, the GSA positions Google AdSense as our most significant third party ad
network. In December 2005, we amended the GSA in order to obtain Google’s
permission to display image ads. In September 2007, we entered into a renewal of
the GSA, thereby extending its term through January 2010 and improving our
revenue-share percentage. 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:
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editing
or modifying the order of search
results,
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redirecting
end users, producing or distributing any software which prevents the
display of ads by Google,
|
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modifying,
adapting or otherwise attempting to obtain source code from Google
technology, content, software and documentation
or
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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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•
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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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•
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our
breach of the confidentiality provisions of the
GSA;
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•
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our
breach of the exclusivity provisions of the
GSA; or
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•
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our
material breach of the GSA more than two times, irrespective of any cure
to such breaches.
|
In
addition to the GSA, we also benefit from a non-contractual, informal
relationship, described earlier, pursuant to which Google currently links to our
Answers.com Web property for definitions of certain words.
Direct
Ad Sales
In
an effort to improve monetization, in the fourth quarter of 2006, we began
marketing directly to advertisers and generating additional advertising revenue
through an in-house team of direct ads salespeople. However, at the end of the
second quarter of 2008 we decided to suspend this business initiative, and by
the end of the third quarter of 2008 we no longer employed a direct sales staff.
We initially saw promise in this area, with the belief that our Web properties
would see RPM increases as a result of direct ad sales. In the fourth quarter of
2007, the sales force generated $575 thousand of direct ad revenue. However,
direct ad revenue in 2008 was disappointing, with revenue in the first quarter
amounting to $231 thousand and in the second quarter to $200
thousand.
At the
end of the second quarter of 2008, we came to the belief that the horizontal,
educational, reference nature of www.answers.com Answers.com made direct ads
less compelling for this Web property. While we viewed WikiAnswers.com as having
the potential to successfully implement a direct ad sales strategy, we decided
not to pursue that strategy and to instead focus on selling ads through
advertising networks, primarily Google AdSense. This decision allowed us to
focus on our core competency – growing the WikiAnswers community, growing
traffic to our Web properties and monetizing via Google AdSense and other ad
networks.
Marketing
To
enhance the Answers brands, we are pursuing a brand development strategy that
includes direct marketing, word-of-mouth marketing, public relations efforts and
licensing arrangements.
Word
of Mouth Marketing
We
benefit from word of mouth advertising when users share their positive
experience using our answer engine services with friends, colleagues, family,
and others. We work to encourage the practice by adding features that make it
simple to link to our Web properties or send an e-mail with information from our
Web properties, by targeting bloggers which may include links from their blogs
to our Web properties, and by working with computer user groups and newsletter
publishers, all of whom share new technologies with constituents. We provide
bloggers, who communicate actively online, with tools and features to enhance
their blogs and share Answers.com and WikiAnswers.com services with
readers.
Public
Relations Efforts
Over the
years, we have received multiple favorable reviews from numerous publications
including USA Today, The Washington Post, The Wall Street Journal, Forbes and PC
Magazine and plan on continuing our public relations efforts with outreach,
speaking opportunities, press releases, interviews and briefings.
Employees
At
February 28, 2009, we had 70 employees, of which 57 were full-time
employees and 13 were part-time employees. As of such date, 56 employees
were located in our office in Jerusalem; 14 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. Among these are trademark applications for registering
“Answers.com,” "WikiAnswers.com" and “WikiAnswers.” We have been recently
granted a Community Trademark (“CTM”) by the European Office for Harmonization
in the Internal Market for the Answers.com mark.
From time
to time in the ordinary course of business, we have been, and 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. 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
The
manner in which existing laws regulating the Internet, in general, and how they
relate to our business in particular, is unclear or unsettled in many cases.
Such uncertainty arises under existing laws regulating matters, including user
privacy, defamation, pricing, advertising, taxation, gambling, sweepstakes,
promotions, content regulation, quality of products and services and
intellectual property ownership and infringement.
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
fairly recent U.S. federal laws that could have an impact on our business
include, among others:
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•
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The
Digital Millennium Copyright Act is intended to reduce the liability of
online service providers for listing or linking to third party Web
properties that include materials that infringe copyrights or other rights
of others.
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•
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Portions
of the Communications Decency Act are intended to provide statutory
protections to online service providers who distribute third party
content.
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•
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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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•
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The
Protection of Children From Sexual Predators Act requires online service
providers to report evidence of violations of federal child pornography
laws under certain circumstances.
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•
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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.
|
Likewise,
other laws could have an impact on our business. Under the U.K. Data Protection
Act and the European Union Data Protection Directive, a failure to ensure that
personal information is accurate and secure or a transfer of personal
information to a country without adequate privacy protections could result in
criminal or civil penalties. Such legislation may impose significant additional
costs on our business or subject us to additional 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 our services could be caused by,
among other possible provisions, the required use of disclaimers or other
requirements before users can utilize our services.
Due to
the global nature of the Web, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws. We might unintentionally violate such
laws, such laws may be modified 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 in other countries. 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 “Investments
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%, rather than the current rate of 27%, for the benefit period
(the "Benefit Period"). The Benefit 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, if
any.
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, linked to the Israeli
consumer price index, plus 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.
GuruNet
Israel Ltd., currently has two capital investment programs, both of which were
granted Approved Enterprise status under the Investment Law prior to the
Amendment, ending December 31, 2009 and December 31, 2014, respectively.
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. In addition to our two existing capital investment programs, we
intend to elect 2008 as our Year of Election for our second expansion under the
Amendment to the Investment Law.
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ITEM 1A.
|
Forward-Looking
Statements
This
Annual Report contains forward-looking statements within the meaning of the
“safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the description of our plans and
objectives for future operations, assumptions underlying such plans and
objectives and other forward-looking statements included in this section, “Item
1 Business,” “Item 7 Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” and in other places in this Annual Report. Such
statements may be identified by the use of forward-looking terminology such as
“may”, “will”, “expect”, “believe”, “estimate”, “anticipate”, “intend”,
“continue”, or similar terms, variations of such terms or the negative of such
terms. Such statements are based on management’s current expectations and are
subject to a number of factors and uncertainties that could cause actual results
to differ materially from those described in the forward-looking statements. We
expressly disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based. Factors that
could cause such results to differ materially from those described in the
forward-looking statements include those set forth below.
Risks
Relating to our Business
If search engines
alter their algorithms or methods or otherwise restrict the flow of users visiting
our Web properties, our business and financial results could
suffer.
Search
engines serve as the primary Web entry point for most users in search of
information, and our topic and answer pages often appear as one of the top links
on the pages returned by search engines in response to users’ search queries. As
a result, we rely heavily on search engines for the overwhelming share of
users visiting our Web properties. According to our internal estimates, traffic
to our Web properties originating from search engines during the fourth quarter
of 2008, excluding Google-directed definition link traffic, was approximately
80% of the overall traffic to our Web properties, the majority of which
originated from Google and, to a lesser but still significant extent, Yahoo!.
WikiAnswers.com search engine traffic during the same period was even more
significant, amounting to approximately 90% of its overall traffic. If our
traffic from search engines declines for any reason, we would suffer a
significant decline in overall traffic and revenue. For example, in July 2007, a
search engine algorithm adjustment by Google led to a drop in Google directed
traffic to Answers.com. This adjustment reduced our overall traffic by
approximately 28% based on the average traffic directed to Answers.com from
Google for the week prior to the adjustment as compared to the week after. As a
result, our revenue declined proportionately. In September 2007, Yahoo! dropped
our content from its search index, which led to a drop in our Yahoo! directed
traffic. This action was reversed within a week. Search engines, at any time and
for any reason, could change their algorithms that direct search queries to our
Web properties or could restrict the flow of users visiting our Web properties
specifically. In fact, as illustrated above, on occasion our Web properties –
which both rely so heavily on search engine traffic – have experienced decreases
in traffic, and consequently in revenue, due to these search engine actions. We
cannot guarantee that we will successfully react to these actions in the future
and recover the 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 users visiting our Web properties from the search
engines, could cause a significant decrease in traffic and revenues, which could
adversely affect our business and financial results.
If the Google
Services Agreement (GSA) is terminated by Google, we would have to seek an
alternative provider of listings and
advertisements, which could adversely affect our business and financial
results.
Our
business is dependent on the GSA, under which we obtain most of the
advertisements displayed on our Web properties and earn most of our ad revenues.
Google may terminate the GSA with no advance notice if we:
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·
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take
certain prohibited actions including, among other
things:
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o
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redirecting
end users, producing or distributing any software which prevents the
display of ads by Google,
|
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o
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editing
or modifying the order of search
results,
|
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o
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modifying,
adapting or otherwise attempting to obtain source code from Google
technology, content, software and
documentation, or
|
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o
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engaging
in any action or practice that reflects poorly on Google or otherwise
disparaging or devaluing Google’s reputation or
goodwill;
|
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·
|
breach
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;
|
|
·
|
breach
the confidentiality provisions of the
GSA;
|
|
·
|
breach
the exclusivity provisions of the
GSA; or
|
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·
|
materially
breach the GSA more than two times, irrespective of any cure to such
breaches.
|
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|
The
GSA is scheduled to expire on January 31, 2010, unless renewed upon
mutual written consent.
|
Google’s
termination of the GSA would result in our need to replace this relationship and
obtain listings and advertisements from alternative providers, and we may not
succeed in receiving equally favorable terms as those provided in the GSA.
Termination of the GSA and our failure to replace it on equally favorable terms
could result in a material reduction in our ad revenues and could adversely
affect our business and financial results. In addition, a renewal of the GSA in
February 2010 on terms less favorable to us than the current terms, including
the revenue-share percentage, could result in a material reduction in our ad
revenues and could adversely affect our business and financial
results.
A
downturn in the United States and global economic conditions could adversely
affect the profitability of our business.
The U.S.
and global economies are currently experiencing a significant contraction, and
it is expected that we will see further economic downturn in the immediate and
near future. This may result in fewer page views that result in commercial
activities by our users, and may cause advertisers to reduce the amount they
spend on online advertising, thus having a significant negative impact on
the RPMs of both our Web properties in 2009 and beyond. A drop in RPM may result
in a material reduction in our ad revenues which would adversely affect our
business and financial results.
The failure of
WikiAnswers.com to grow in accordance with our expectations could have an
adverse
impact on our business and financial results.
WikiAnswers.com
is currently our primary growth driver, and it exceeds Answers.com in both
traffic and revenue. Our projections assume that the 2009 growth of
WikiAnswers.com will continue to be greater than that of Answers.com. If, for
whatever reason, WikiAnswers.com fails to perform as well as we anticipate, and
the growth we are experiencing decelerates significantly, falters or ceases, our
business and financial results could be adversely affected.
If Internet users
do not interact with WikiAnswers.com frequently or if we fail to
attract new users to the service, our business and financial
results will suffer.
The
success of WikiAnswers.com is largely dependent upon users constantly
visiting the site by asking questions, posting answers and improving upon both.
We have seen a very high correlation between growth in questions and answers and
growth in the site’s page views. We need to attract users to visit the Web
property frequently and spend increasing amounts of time on the Web property
when they visit. If we are unable to encourage users to interact more frequently
with WikiAnswers.com and to increase the amount of user generated content they
provide, our ability to attract new users to the Web property and increase the
number of loyal users will be diminished and adversely affected. As a result,
our business and financial results will suffer, and we will not be able to grow
our business as planned.
If we are unable
to improve and maintain the quality of content being contributed to WikiAnswers.com,
and if we fail to fight vandalism the site has been experiencing, the Web
property will become less valuable to the users, less popular as a destination for
obtaining answers to questions and its growth will be negatively affected, which
in turn could adversely impact our financial results.
It is
critical that we ensure that the quality of content being posted on
WikiAnswers.com, both questions and answers, is maintained to as high an extent
as reasonable, and improved over time. The better the quality of the content
generated on the Web property, the more valuable the Web property will be for
users in search of answers, as well as for search engines indexing the content
to continue featuring it in their search engine result pages. Improved quality
content should lead to stronger growth in the community size and will lessen the
risk of a search engine’s algorithm and/or policy makers downgrading the rank of
WikiAnswers.com. In addition, it is critical that we ward off vandals and
eliminate vandalism on the Web property to the greatest extent possible. If we
fail to maintain and improve the quality of the Web property’s content, the
appeal of WikiAnswers.com to users and search engines may diminish and the
growth of the Web property may be negatively affected, which in turn could cause
our financial results to suffer.
If,
in the interest of improving user experience and user satisfaction, we decide to
decrease the number of ad elements displayed on our Web properties, our
advertising revenues will decline and our financial results will be adversely
impacted.
We
closely monitor the ratio between ad elements and actual content appearing on
our Web pages. In the future we may decide that in order to enhance the
user-experience and increase user satisfaction, our pages should display fewer
ad elements. Displaying less ad-intensive Web pages is likely to result in
faster page-load and offering more content per-page is likely to appeal more to
the user. A better user experience may result in more stickiness on our Web
properties and a higher rate of user-retention and return visits. However, there
is no assurance that reducing advertising on our Web properties will result in
better user-retention and return visits and there can be no guarantee that the
short term reduction in ad revenues will pay off in the long term in the form of
increased traffic. A decrease in the number of ad elements displayed on
our Web properties will result in a drop in RPM and advertising revenues which
may not be recovered through higher traffic, thus having an adverse impact on
our results of operations.
If we are unable
to attract and retain dedicated volunteer supervisors for encouraging the
community’s expansion, our
plans for growing WikiAnswers.com may fail and our results of operations
may be
adversely affected.
We
benefit from the heavy involvement of a large group of external volunteer
supervisors who are not employed by us and are not compensated for their site
activity. The volunteer supervisors, for their own personal motives and
enjoyment, are involved in monitoring questions and answers in specific
categories in an effort to help questions get answered quickly. Volunteers also
help prevent vandalism, improve content consistency, encourage high-quality
contributions and identify potential new volunteers. Volunteers are also engaged
in various community programs aimed at strengthening the community and
contributors’ sense of connection to the site and the community at large and
help instill a sense of camaraderie among users interested in various categories
of WikiAnswers.com. As of December 31, 2008, the community enjoyed the
benefit of over 500 such supervisors. If we are not able to attract enough
volunteers, WikiAnswers.com may suffer and the Web property may become
less attractive to users, which in turn will adversely affect the site’s growth,
our business and financial results. Alternatively, we may be forced to hire paid
employees to engage in many of the initiatives that volunteers currently take
upon themselves for their own personal pleasure and gratification, which, in
turn, would increase the cost of maintaining and improving WikiAnswers.com and
adversely affect our financial results.
We benefit from
Google's directing of traffic to Answers.com through its definition link,
and the loss of this
source of traffic could reduce our ad revenues and adversely affect our business and
financial results.
Approximately
5% of our overall traffic during the fourth quarter of 2008 was directed to
Answers.com by the definition link appearing on Google’s website result pages.
This traffic includes secondary pages viewed on Answers.com as a result of
visitors arriving at the site via the definition performing additional searches.
The definition link traffic is the result of a unilateral decision by Google to
link certain definitions to Answers.com, and not any contractual relationship.
Google may change these links at any time, in its sole discretion. If Google
stops directing traffic to Answers.com through its definition link, we would
experience a reduction in our traffic and the corresponding ad revenues, which
would adversely affect our business and financial results.
Components of our
business and operations are experiencing rapid growth. If we fail to effectively
manage our growth, our business and operating results could be
harmed.
We have
experienced rapid growth in our operations over the past several years, which
has placed, and will continue to place, significant demands on our management,
operational and financial infrastructure. If we do not effectively manage our
growth, the quality of our products and services could suffer, which could
negatively affect our brand and operating results. To effectively manage this
growth, we will need to continue to improve our operational, financial and
management controls and our reporting systems and procedures. These systems
enhancements and improvements will require significant capital expenditures and
management resources. Failure to implement these improvements could hurt our
ability to manage our growth and our financial position.
We have a short
operating history and a relatively new business model in an emerging
and rapidly
evolving market. This makes it difficult to evaluate our future prospects
and may
increase the risks that we will not continue to be successful and that
our financial results
could suffer.
There are
two primary categories of Internet advertising, pay-per-performance, or most
commonly cost per click, or CPC, and pay-per-impression, or cost per 1,000
impressions, or CPM. In the case of performance-based advertising, the
advertiser only pays when a user clicks on an ad, as opposed to viewing the ad,
as in impression-based advertising. We first derived advertising revenue in the
first quarter of 2005, and we have only a short operating history with our CPC
and CPM advertising model. As a result, we have very little operating history to
aid in assessing our future prospects. Also, we derive nearly all of our
revenues from online advertising, which is an immature industry that has
undergone rapid and dramatic changes in its short history. We will encounter
risks and difficulties as a growing company in a new and rapidly evolving
market. We may not be able to successfully address these risks and difficulties,
which could materially harm our business and operating results.
We may not be
able to obtain capital when desired on favorable terms, if at all, or
without
dilution to our stockholders.
We
believe we have sufficient cash and cash equivalents to meet our working capital
and operating requirements for the next twelve months, based on our current cash
and cash equivalent levels and expected cash flow from
operations. Further, in estimating our expected cash flow during the
next twelve months, we have considered the current general economic
downturn and its impact on our future revenue. However, we may need or
desire additional financing to execute on our current or future business
strategies, including to:
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acquire
businesses or technologies;
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improve
and expand content on our Web properties;
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otherwise
respond to competitive pressures; and
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enhance
our operating infrastructure.
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If we
decide to raise additional funds through the issuance of equity or convertible
debt securities, and are successful at raising such capital, the percentage
ownership of our stockholders could be significantly diluted, and these newly
issued securities may have rights, preferences or privileges senior to those of
existing stockholders. We cannot assure you that additional financing will be
available on terms favorable to us, or at all, particularly in light of the
weakness of the financial markets and the economic crisis. For example, we
experienced such financing difficulties during the course of our recent failed
attempt to acquire Lexico Publishing Group, LLC and our ultimate abandonment of
a follow-on offering. If adequate funds are not available or are not available
on acceptable terms, when we desire them, our ability to fund our operations,
take advantage of unanticipated opportunities, develop or enhance our services,
or otherwise respond to competitive pressures would be significantly
limited.
New
technologies could block Internet ads, which could harm our financial
results.
Technologies
have been developed, and are likely to continue to be developed, that can block
the display of Internet ads. Most of our revenues are derived from fees paid to
us by advertisers in connection with the display of their ads. Ad-blocking
technology may cause a decrease in the number of ads that we can display on our
Web properties, which could adversely affect our ad revenues and our financial
results.
We face
significant competition from question and answer sites, search engines and
other free reference
and industry-specific Web properties that could adversely impact our
competitive
position.
We face
significant competition from a wide variety of Web properties. Question and
answer sites, such as Yahoo! Answers, Askville (owned by Amazon), Live QnA
(owned by Microsoft), Yedda (owned by AOL), Answerbag.com (owned by Demand
Media, Inc.) and Wikia, Inc. compete with WikiAnswers.com. Destination
portals and other free online information and/or reference services, such as
About.com (owned by the New York Times), TheFreeDictionary.com, Dictionary.com
(owned by IAC/InterActiveCorp) and Wikipedia.org, compete with Answers.com.
Other competitors of Answers.com include vertical industry-specific Web
properties, such as Bankrate.com and WebMD.com. Since several companies
operating traditional search engines, such as Yahoo!, Microsoft, AOL and Ask.com
offer their own question and answer services, they 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 intensify in the future. If our competitors are more successful
than we are in developing compelling products or attracting and retaining more
users, then our competitive position and financial results could be adversely
affected.
Our failure to
generate direct traffic to our Web properties could adversely affect
our
business and financial results.
In
addition to search engine traffic and traffic directed by the Google definition
link, our traffic also originates from Internet users arriving at our Web
properties directly by typing our website address directly into their Web
browser, bookmarking our Web properties, using AnswerTips and visiting sites
that direct users to our Web properties. Given the wide availability of free
search engines and reference content sites, we may not be able to retain current
Internet users or attract new Internet users in this direct fashion. If we are
unable to retain our direct Internet users or attract new direct Internet users,
our ability to generate revenues would be adversely impacted, which could
adversely affect our business and financial results.
Traffic to our
Web properties and advertising demand fluctuates significantly on a seasonal basis,
which impacts our operations from quarter to quarter.
Many of
our users are students that 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 fewer users to our Web
properties translates into fewer users clicking on or viewing the advertisements
on our Web properties. In addition, the demand for our advertising inventory
fluctuates during the year based on the seasonal needs of our advertisers,
rising to its highest levels during the fourth quarter and falling to its lowest
levels in the first quarter. Accordingly, our revenue fluctuates based on the
seasonality of our traffic and advertising demand. The effect of this
seasonality makes it difficult to estimate future revenues based on the results
of any specific quarter, thus it is difficult to make operating plans relating
to hiring and expenses. Additionally, as a result of the difficulty to estimate
revenues, we may be unable to meet our revenue or profit and loss forecasts
which could have a negative impact on the market price of our common
stock.
Our
operating results may fluctuate, which makes comparing our operating results on
a period-to-period basis difficult and could cause our results to fall short of
expectations.
Our
operating results may fluctuate as a result of a number of factors, many outside
of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not rely on our
past results as an indication of our future performance. Our quarterly,
year-to-date and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Our operating results in
future quarters may fall below expectations. Any of these events could cause our
stock price to fall.
We may not be
successful in expanding our business through acquisitions, business combinations and
other transactions, and, even if we are successful, our operations may be adversely
affected as a result of these transactions.
We may
pursue acquisitions, business combinations and joint ventures, which we refer to
as extraordinary transactions. Our ability to implement this business strategy
depends in large part on our ability to compete successfully with other entities
for acquisition candidates and joint venture partners. Factors affecting our
ability to compete successfully include:
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our
financial condition and resources relative to the financial condition and
resources of competitors;
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our
ability to issue common stock as potential
consideration;
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the
attractiveness of our common stock as potential consideration relative to
the common stock of competitors;
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our
ability to obtain
financing; and
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our
available cash, which depends upon our results of operations and our cash
demands.
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In
addition, we may not be able to find suitable acquisition candidates and we may
not be able to complete acquisitions on favorable terms, if at all. If we do
complete acquisitions, we may not ultimately strengthen our competitive position
or achieve our goals, or such acquisitions may be viewed negatively by
customers, financial markets or investors. In addition, any acquisitions that we
make could lead to difficulties in integrating personnel and operations from the
acquired businesses and in retaining and motivating key personnel from these
businesses. Acquisitions may disrupt our ongoing operations, divert management
from day-to-day responsibilities, increase our expenses or adversely affect our
business, operating results and financial condition. For example, we experienced
such disruption, diversion and increased expenses during the course of our
recent failed attempt to acquire Lexico Publishing Group, LLC. Future
acquisitions may reduce our cash available for operations and other uses and
could result in an increase in amortization expense related to identifiable
assets acquired, potentially dilutive issuances of equity securities or the
incurrence of debt, which could harm our business, financial condition and
operating results.
If we fail to
maintain and enhance awareness of our Web properties, our business and
financial
results could be adversely affected.
We
believe that maintaining and enhancing awareness of our Web properties is
critical to achieving widespread acceptance of our services and to the success
of our business. We also believe that the importance of brand recognition will
increase due to the relatively low barriers to entry in our market. Maintaining
and enhancing our Web properties may require us to spend increasing amounts of
money on, and devote greater resources to, advertising, marketing and other
brand-building efforts, and these investments may not be successful. Further,
even if these efforts are successful, they may not be cost-effective. If we are
unable to continuously maintain and enhance our Web properties, our traffic may
decrease and we may fail to attract advertisers, which could in turn result in
lost revenues and adversely affect our business and financial
results.
Our failure to
license compelling content could result in lost revenue, as a result of a loss
of users and
advertisers.
We
believe our future success depends in part upon our ability to deliver valuable
content through our Web properties. While our user-generated content continues
to grow, we continue to also utilize traditional licensed content. We cannot
guarantee that we will be able to enter into new or renew current or future
content agreements on commercially acceptable terms or at all. If we are unable
to maintain and enhance our existing relationships with content providers or
develop new relationships with alternative providers of content, our Answers.com
service may become less attractive to Internet users, resulting in decreased
traffic to Answers.com, which could have an adverse effect on our ad revenues
and a negative impact on our business.
If we are unable
to maintain and expand our computer and communications systems, then
interruptions and
failures in our services could result, making our services less attractive to
consumers and subjecting us to lost revenue from the loss of users and
advertisers.
Our
ability to provide high quality user experience depends on the efficient and
uninterrupted operation of our computer and communications systems. Over time,
our Web properties have experienced significant increases in traffic, and we
continuously seek to further increase our user base. Accordingly, our Internet
servers must accommodate spikes in demand for our Web pages in addition to
potential significant growth in traffic. Delays and interruptions could
frustrate users and reduce traffic on our Web properties, adversely affecting
our operations and growth prospects. Furthermore, our systems may be vulnerable
to damage or interruption from earthquakes, terrorist attacks, floods, fires,
power loss, telecommunications failures, computer viruses, computer denial of
service attacks or other attempts to harm our systems, which could adversely
affect our operations.
We manage
our Answers.com and WikiAnswers.com Web operations through our own colocation
facility. Our colocation facility, located in New Jersey, is provided by
NetAccess Corporation. We plan to add a second colocation site in the first half
of 2009 in order to provide redundancy of Web operations at the data center
level. Until such time, our operations are centered in one single data center
facility. Our single facility could suffer interruptions or failures
in service. Our Web operations would be adversely affected, making our services
less attractive to consumers and subjecting us to lost revenue. Additionally, if
we are unable to recruit and retain skilled employees to manage the Web hosting
operations, we may not be able to properly manage the necessary tasks to keep
our systems running smoothly and grow the business.
If we were to
lose the services of our key personnel, we may not be able to execute
our
business plan and our business could be adversely affected.
Our
ability to execute our business plan depends upon the continued service of our
executive officers and other key technology, marketing, sales and support
personnel. Our employment agreements with our executive officers and key
employees are terminable by either party upon 30-90 days notice. If we lose
the services of one or more of our key employees, or if one or more of our
executive officers or key employees joined a competitor or otherwise competed
with us, our business could be adversely affected. We cannot give assurance that
we will be able to retain or replace our key personnel, and the services of key
members of our research and development team, in particular, would be difficult
to replace. If we do not succeed in retaining or replacing our key personnel, we
may be unable to execute our business plan and, as a result, our stock price may
decline.
Our business
depends on increasing use of the Internet by users searching for information,
advertisers marketing products and services and Web properties seeking
to earn
revenue to support their Web content. If the Internet infrastructure does
not grow and is not
maintained to support these activities, our business will be
harmed.
Our
success will depend on the continued growth and maintenance of the Internet
infrastructure. This includes maintenance of a reliable network backbone with
the necessary speed, data capacity and security for providing reliable Internet
services. Internet infrastructure may be unable to support the demands placed on
it if the number of Internet users continues to increase, or if existing or
future Internet users access the Internet more often or increase their bandwidth
requirements. In addition, viruses, worms and similar programs may harm the
performance of the Internet. The Internet has experienced a variety of outages
and other delays as a result of damage to portions of its infrastructure, and
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as our ability to provide our
solutions.
Rules established
by the Financial Accounting Standards Board, or FASB, require us to expense equity
compensation given to our employees and may impact our ability to effectively
utilize equity compensation to attract and retain employees.
The FASB
has adopted changes that require companies to record a charge to earnings for
employee stock option grants and other equity incentives effective
January 1, 2006, which we have adopted. These accounting changes may cause
us to reduce the availability and amount of equity incentives provided to
employees, which may make it more difficult for us to attract, retain and
motivate key personnel. Additionally, it may be difficult for us to estimate the
impact of such compensation charges on future operating results because they
will be based upon the fair market value of our common stock and other
assumptions at future dates.
We may be subject
to liability for online services, which may not be limited by the safe harbors in
The Digital Millennium Copyright Act, or DMCA, The Communications Decency Act, or
CDA, or the U.S. Children’s Online Privacy Protection Act, or COPPA.
If we do
not meet the safe harbor requirements, or if it is otherwise determined
that our Web
properties contain actionable content, we could be subject to claims,
which could be costly
and time-consuming to defend.
We host
certain services that enable individuals to generate content and engage in
various online activities. 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 internationally. Claims have been threatened and
may in the future be brought against us for defamation, invasion of privacy,
negligence, copyright or trademark infringement, unlawful activity, tort,
including personal injury, fraud, or other theories based on the nature and
content of information to which we provide links, or that may be posted online
or generated by the users of our Web properties. Our defense of any of these
actions could be costly and involve significant time and attention of our
management and other resources.
The DMCA
is intended, among other things, to reduce the liability of online service
providers for listing or linking to third party Web properties that include
materials that infringe copyrights or rights of others. Additionally, portions
of the CDA are intended to provide statutory protections to online service
providers who distribute third party content. A safe harbor for copyright
infringement is also available under the DMCA to certain online service
providers that provide specific services, if the providers take certain
affirmative steps as set forth in the DMCA. Important questions regarding the
safe harbor under the DMCA and the CDA have yet to be litigated, and we can not
guarantee that we will meet the safe harbor requirements of the DMCA or of the
CDA. If we are not covered by a safe harbor, for any reason, we could be exposed
to claims, which could be costly and time-consuming to defend.
In
addition, COPPA was enacted in October 1998. COPPA imposes civil and criminal
penalties on persons distributing material harmful to minors over the Internet
to persons under the age of 17 or collecting personal information from children
under the age of 13. We do not knowingly collect and disclose personal
information from minors. The manner in which COPPA may be interpreted and
enforced cannot yet be determined. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership, copyright,
defamation, obscenity and personal privacy is uncertain. We may be subject to
claims that our content violates such laws, which could damage our business and
cause our stock price to decline.
We also
periodically enter into arrangements to offer third party products, services or
content under the Answers brand or through our Web properties. We may be subject
to claims concerning these products, services or content by virtue of our
involvement in marketing, branding, broadcasting or providing access to them,
even if we do not ourselves host, operate, provide, or provide access to
them.
It is
also possible that, if any information provided directly by us contains errors
or is otherwise negligently provided to users, third parties could make claims
against us. While it is our belief that the Terms of Use governing the use of
our Web properties covers us against these types of claims, there are no
assurances as to the final determination of these types of claims by any court
of law. Furthermore, investigating and defending any of these types of claims is
expensive, even to the extent that the claims are without merit or do not
ultimately result in liability.
Third parties may
claim that we are infringing on their patents, trademarks or copyrights, which
could result in substantial costs, diversion of significant managerial
resources and significant harm to our reputation.
The
industry in which we operate is characterized by the existence of a large number
of patents and frequent litigation based on allegations of patent infringement.
We expect that Internet technologies, software products and services may be
increasingly subject to third party patent infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. From time to time, third parties may
assert patent infringement claims against us in various jurisdictions that are
important to our business. Additionally, third parties may assert trademark
infringement claims with respect to brand names we use from time to time and
content we display on our Web properties. For example, a third party may make
claims against us over the display of search results triggered by search terms
that include trademark terms. Furthermore, we may be faced with copyright
infringement claims. We have received, and are likely to continue to receive,
“cease and desist” letters demanding that we remove infringing content from our
Web properties based on a theory of copyright and trademark
infringement.
A
successful patent, trademark or copyright infringement claim against us by any
third party, could subject us to:
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substantial
liability for damages and litigation costs, including attorneys’
fees;
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lawsuits
that prevent us from further use of intellectual property and require us
to permanently cease and desist from selling or marketing products that
use the intellectual property;
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licensing
intellectual property from a third party, which could include significant
licensing and royalty fees not presently paid by us, adding materially to
our costs of operations;
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developing
new intellectual property, as a non-infringing alternative, that could
delay projects, add materially to our costs of operations and be
unacceptable to our users, which in turn could adversely affect our
traffic and revenues; and
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indemnifying
third parties who have entered into agreements with us with respect to
losses they incurred as a result of the infringement, which could include
consequential and incidental damages that are material in
amount.
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Regardless
of the merit of third party infringement claims, these claims could result in
substantial costs, diversion of significant resources and management attention,
termination of customer contracts, loss of customers and significant harm to our
reputation.
Finally,
many of our agreements with advertisers, distribution partners, and other third
party partners require us to indemnify these partners for certain third party
intellectual property infringement claims, which could increase our costs as a
result of defending the claims and may require that we pay damages if there were
an adverse ruling in any of the claims. An adverse determination could also
prevent us from offering our products and services to others and may require
that we procure substitute products or services, which could adversely affect
our business and financial results.
Misappropriation
of our intellectual property could harm our reputation, adversely affecting our
competitive position and financial results.
Our
ability to compete depends in part upon the strength of our proprietary rights
in our technologies, brands and content. We rely on a combination of
U.S. and foreign patents, copyrights, trademark, trade secret laws and
license agreements to establish and protect our intellectual property and
proprietary rights. The efforts we have taken to protect our intellectual
property and proprietary rights may not be sufficient or effective at stopping
unauthorized use of our intellectual property. In addition, effective trademark,
domain name, patent, copyright and trade secret protection may not be available
or cost-effective in every country in which our services are made available
through the Internet. There may be instances where we are not able to fully
protect or utilize our intellectual property in a manner that maximizes
competitive advantage. If we are unable to protect our intellectual property and
proprietary rights from unauthorized use, the value of our Web properties may be
reduced, which could negatively impact our business. In addition, protecting our
intellectual property and other proprietary rights is expensive and diverts
critical managerial resources. If any of the foregoing were to occur, or if we
are otherwise unable to protect our intellectual property and proprietary
rights, our business and financial results could be adversely
affected.
We have incurred
significant and continuing net losses since our inception and may continue to incur
losses.
We
incurred net losses of approximately $12.3 million and $4.1 million
for the years ended December 31, 2008 and 2007, respectively. As of
December 31, 2008, we had an accumulated deficit of approximately
$71 million. We cannot assure you that we will be able to achieve net
income on a quarterly or annual basis. If our revenues do not increase, or if
our operating expenses exceed expectations or cannot be reduced, we will
continue to incur substantial losses, which would materially adversely affect
our business and financial results.
New government
regulation and legal uncertainties could require us to incur significant
expenses.
The laws
and regulations applicable to the Internet, and to our products and services,
are evolving and unclear and could damage our business. In addition, we will be
subject to any new laws and regulations directly applicable to our products and
services. It is possible that laws and regulations may be adopted covering
issues such as user privacy, pricing, taxation, content regulation, quality of
products and services, and intellectual property ownership and infringement.
This legislation could expose us to substantial liability as well as dampen the
growth in use of the Internet generally, decrease the acceptance of the Internet
as a communications and commercial medium, or require us to incur significant
compliance expenses. Compliance with these laws and regulations may also cause
us to change or limit our business practices in a manner adverse to our
business.
Increased
regulation or the imposition of access fees could substantially increase the
costs of communicating on the Internet, potentially decreasing the demand for
our products. A number of proposals have been made at the federal, state and
local level that would impose additional taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce and could adversely affect us.
Due to
the global nature of the Internet, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws. We might unintentionally violate
these laws. Such laws may be modified, or new laws may be enacted, in the
future. Our business may be negatively affected by a variety of new or existing
laws and regulations, which may expose us to substantial compliance costs and
liabilities and may impede the growth in use of the Internet
generally.
Risks
Related to our Common Stock
Our common stock
may be affected by limited trading volume and may fluctuate significantly.
Our
common stock is traded on the NASDAQ Capital Market. Although an active trading
market has developed for our common stock, there can be no assurance that an
active trading market for our common stock will be sustained. Failure to
maintain an active trading market for our common stock may adversely affect our
shareholders’ ability to sell our common stock in short time periods, or at all.
Our common stock has experienced, and may experience in the future, significant
price and volume fluctuations, which could adversely affect the market price of
our common stock.
You
may experience dilution in your percentage ownership interest as a result of any
additional issuances of our common stock.
We have
authorized 100 million shares of our common stock, of which approximately 15.1
million shares were issued and outstanding after giving effect to the assumed
exercise of all outstanding warrants and options and assumed conversion of
preferred stock as of December 31, 2008. Our board of directors has the
authority, without action or vote of our stockholders in many cases, to issue
all or a part of any authorized but unissued shares. Such stock issuances may be
made at a price that reflects a discount from the then-current trading price of
our common stock. In addition, we may need to issue securities that are
convertible into or exercisable for a significant amount of our common stock.
For example, on June 16, 2008, we sold Series A Convertible Preferred Stock
and related warrants for $6.0 million to Redpoint Ventures. Additionally,
Redpoint Ventures is in possession of a warrant entitling the fund to invest a
second tranche in the amount of $7.0 million, in exchange for Series B
Convertible Preferred Stock and related warrants. See “Redpoint Financing”
discussion in Item 7 below for a description of these transactions and the
related securities. These issuances may dilute your percentage ownership
interest, which will have the effect of reducing your influence on matters on
which our stockholders vote.
You may
incur additional dilution if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options or if warrant
holders exercise their warrants to purchase shares of our common stock. In
addition, these issuances, or the perception that such issuances may occur in
the future, may have a depressant effect on our stock price and make it more
difficult to raise capital in the future on reasonable terms or at
all.
There may be
substantial sales of our common stock, which could cause our stock price
to
fall.
All of
our issued and outstanding shares are immediately available for sale in the
public market without registration under Rule 144. Sales of a substantial
number of shares of our common stock could cause the price of our securities to
fall and could impair our ability to raise capital by selling additional
securities.
We
do not intend to pay dividends on our common stock.
We have
never declared or paid any cash dividend on our common stock. We currently
intend to retain any future earnings and do not expect to pay any dividends on
our common stock in the foreseeable future.
We
may incur penalties if the registration statement covering the common stock
underlying the Series A Convertible Preferred Stock and the Common Stock
Purchase Warrants does not remain effective.
Under the
terms of the registration rights agreement we entered into with the holders of
our Series A Convertible Preferred Stock, we are obligated to register the
common stock underlying the Series A Convertible Preferred Stock and the Common
Stock Purchase Warrants. The registration rights carry penalties in the event we
do not meet these registration obligations. The registration statement
registering the common stock underlying the Series A Convertible Preferred Stock
and the Common Stock Purchase Warrants was declared effective by the Securities
and Exchange Commission on September 16, 2008. We agreed to use our commercially
reasonable best efforts to ensure the continued effectiveness of the
registration statement thereafter. In the event sales of any or all of the
securities covered by the registration statement cannot be made, whether because
of our failure to keep the registration statement effective, or for various
other reasons, then we must pay liquidated damages in cash to the holders of our
Series A Convertible Preferred Stock in the amount of 1.0% per month, on a
daily pro rata basis, up to a maximum of 8.0%, of the aggregate purchase price
of $6,000,000.
We have issued
and could issue “blank check” preferred stock without stockholder approval with
the effect of
diluting then current stockholder interests.
Our
certificate of incorporation authorizes the issuance of up to
1,000,000 shares of “blank check” preferred stock with designations, rights
and preferences as may be determined from time to time by our board of
directors. Accordingly, our board of directors is empowered, without stockholder
approval, to issue a series of preferred stock with dividend, liquidation,
conversion, voting or other rights, which could dilute the interest of, or
impair the voting power of, our stockholders. The issuance of a series of
preferred stock could be used as a method of discouraging, delaying or
preventing a change in control. Although we do not presently intend to issue any
additional shares of preferred stock, we may do so in the future. On June 16,
2008, we issued 60,000 shares of Series A Convertible Preferred Stock to
Redpoint Ventures. In the event Redpoint Ventures exercises a warrant
we granted it, we will issue shares of Series B Convertible Preferred
Stock.
The
holders of our Series A Convertible Preferred Stock are entitled to receive
liquidation payments in preference to the holders of our common
stock.
Pursuant
to the terms of the certificate of designation creating the Series A
Convertible Preferred Stock, upon a liquidation of our company, the holders of
shares of the Series A Convertible Preferred Stock are entitled to receive
a liquidation payment prior to the payment of any amount with respect to the
shares of our common stock. The amount of this preferential liquidation payment
is equal to the greater of (i) $100 per share of Series A Convertible
Preferred Stock, plus the amount of any accrued but unpaid dividends on those
shares and any other fees or liquidated damages owing thereon or (ii) such
amount per share as would have been payable had all shares of Series A
Convertible Preferred Stock been upon any such liquidation converted to common
stock immediately prior to such liquidation. Dividends accrue on the
shares of Series A Convertible Preferred Stock at a rate of 6% per
annum. In addition, in the event the Unit Warrant is exercised we
will issue up to 70,000 shares of Series B Convertible Preferred
Stock. If issued, the Series B Convertible Preferred Stock would have
pari passu rights with the Series A Convertible Preferred Stock upon a
liquidation of our company to receive a liquidation payment prior to the payment
of any amount with respect to the shares of our common stock on substantially
similar terms as the Series A Convertible Preferred Stock.
Provisions in our
charter documents and under Delaware law could discourage a takeover that
stockholders may consider favorable.
Provisions
of our Amended and Restated Certificate of Incorporation and Bylaws could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. For example, our board of directors is divided
into three classes, with one class being elected each year by our stockholders,
which generally makes it more difficult for stockholders to replace a majority
of directors and obtain control of our board. In addition, stockholder meetings
may be called only by our board of directors, the chairman of the board and the
president, advance notice is required prior to stockholder proposals and
stockholders may not act by written consent. Furthermore, we have authorized
preferred stock that is undesignated, making it possible for our board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of our
company.
Delaware
law also could make it more difficult for a third party to acquire us.
Specifically, Section 203 of the Delaware General Corporation Law, to which
our company is subject, may have an anti-takeover effect with respect to
transactions not approved in advance by our board of directors, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by our stockholders.
We
are at risk of securities class action litigation.
Securities
class action litigation has often been brought against a company following a
decline in the market price of its securities. This risk is especially relevant
for us because Internet companies often experience significant stock price
volatility. If we faced such litigation, it could result in substantial costs
and diversion of management’s attention and resources, which could adversely
affect our business.
As
of December 31, 2007, we determined that we had material weaknesses in our
internal control over financial reporting. As a result, current and potential
stockholders could lose confidence in our financial reporting, which could harm
our business and trading price of our stock.
Section 404
of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of
the SEC require annual management assessments of the effectiveness of our
internal control over financial reporting. As of December 31, 2007, we were also
required to obtain and disclose a report by our independent registered public
accounting firm attesting to and reporting on these controls. We dedicated
significant amounts of time and resources to ensure compliance with this
legislation for the year ended December 31, 2007. Based on their
evaluation, our principal executive and principal financial officers concluded
that, as of December 31, 2007, our disclosure controls and procedures were
not effective due to the material weaknesses in our internal controls over
(i) access to, and changes in, our information technology financial
applications and underlying financial data; and (ii) the authority of our
officers to obligate the Company. Because of these material weaknesses, our
management concluded that, as of December 31, 2007, we did not maintain
effective internal control over financial reporting based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Additionally, our
auditors issued an adverse opinion with respect to the effectiveness of our
internal controls over financial reporting as of December 31,
2007.
Although
we remediated the material weaknesses by removing our controller as the
information technology administrator for our enterprise resource management
system in March 2008 and by adopting an approval policy that limits the
authority of certain officers to obligate us in April 2008, current and
potential stockholders could negatively view the abovementioned material
weaknesses and lose confidence in our financial reporting which could harm our
business and trading price of our common stock.
Material
weaknesses in our internal controls may impede our ability to produce timely
and accurate financial statements, which could cause us to fail to file our periodic
reports timely, result in inaccurate financial reporting or restatements of
our financial statements, subject our stock to delisting and materially harm
our business reputation and stock price.
As a
public company, we are required to file annual and quarterly periodic reports
containing our financial statements with the Securities and Exchange Commission
within prescribed time periods. As part of The NASDAQ Capital Market listing
requirements, we are also required to provide our periodic reports, or make them
available, to our shareholders within prescribed time periods. If we are
required to restate our financial statements in the future, any specific
adjustment may be adverse and may cause our operating results and financial
condition, as restated, on an overall basis to be materially and adversely
impacted. As a result, we or members of our management could be the subject of
adverse publicity, investigations and sanctions by such regulatory authorities
as the Securities and Exchange Commission and subject to shareholder lawsuits.
Any of the above consequences could cause our stock price to decline materially
and could impose significant unanticipated costs on us.
If we are
not able to issue our financial statements in a timely manner, we will not be
able to comply with the periodic reporting requirements of the Securities and
Exchange Commission and the listing requirements of The NASDAQ Capital Market.
If these events occur, our common stock listing on The NASDAQ Capital Market
could be suspended or terminated and our stock price could materially suffer. In
addition, we or members of our management could be subject to investigation and
sanction by the Securities and Exchange Commission and other regulatory
authorities and to shareholder lawsuits, which could impose significant
additional costs on us, divert management attention and materially harm our
operating results, financial condition, business reputation and stock
price.
Risks
Related to our Location in Israel
Conditions in
Israel may limit our ability to produce and sell our product, which would lead to a
decrease in revenues.
Because
most of our operations are conducted in Israel, our operations are directly
affected by economic, political and military conditions affecting Israel.
Specifically, we could be adversely affected by:
|
·
|
any
hostilities involving Israel;
|
|
·
|
a
full or partial mobilization of the reserve forces of the Israeli
army;
|
|
·
|
the
interruption or curtailment of trade between Israel and its present
trading partners;
|
|
·
|
risks
associated with the fact that a certain number of our key employees and
one officer reside in what are commonly referred to as occupied
territories;
|
|
·
|
risks
associated with outages and disruptions of communications networks due to
any hostilities involving
Israel; or
|
|
·
|
a
significant downturn in the economic or financial conditions in
Israel.
|
Since the
establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors and a state of hostility,
varying in degree and intensity, has led to security and economic problems for
Israel. Despite negotiations to effect peace between Israel and its Arab
neighbors, the future of these peace efforts is uncertain. Since October 2000,
there has been a significant increase in violence, civil unrest and hostility,
including armed clashes between the State of Israel and the Palestinians, and
acts of terror have been committed inside Israel and against Israeli targets in
the West Bank and Gaza Strip. In addition, the armed conflict with Hezbollah on
the northern border of Israel during the summer of 2006 and the most recent
armed conflict with Hamas on the southern border of Israel negatively affected
business conditions in Israel. There is no indication as to how long the current
hostilities will last or whether there will be any further escalation. Any
further escalation in these hostilities or any future conflict, political
instability or violence in the region may have a negative effect on our
business, harm our results of operations and adversely affect our share
price.
Furthermore,
there are a number of countries that restrict business with Israel or with
Israeli companies, which may limit our ability to promote our products and
services those countries.
We may not be
able to enforce covenants not-to-compete under current Israeli law that
might
result in added competition for our products.
We have
non-competition agreements with all of our employees, almost all of which are
governed by Israeli law. These agreements prohibit our employees from competing
with or working for our competitors, generally during and for up to
12 months after termination of their employment. However, Israeli courts
are reluctant to enforce non-compete undertakings of former employees and tend,
if at all, to enforce those provisions for relatively brief periods of time in
restricted geographical areas and only when the employee has obtained unique
value to the employer specific to that employer’s business and not just
regarding the professional development of the employee. If we are not able to
enforce non-compete covenants, we may be faced with added
competition.
The Israeli
government tax benefits program in which we currently participate and
from which
we receive benefits requires us to meet several conditions. These
programs or benefits may
be terminated or reduced in the future, which may result in an increase in our
tax liability.
Our
Israeli subsidiary receives tax benefits authorized under Israeli law for
capital investments that are designated as “Approved Enterprises.” To be
eligible for these tax benefits, we must meet certain conditions. If we fail to
meet such conditions, these tax benefits could be cancelled, and we could be
required to pay increased taxes or refund the amount of tax benefits we
received, together with interest and penalties. Israeli governmental authorities
have indicated that the government may in the future reduce or eliminate the
benefits of such programs. The termination or reduction of these programs and
tax benefits could increase our Israeli tax rates, and thereby reduce our net
profits or increase our net losses.
U.S. and Israeli
tax authorities may interpret tax issues in manners other than those
which we
have adopted, which may expose us to tax liabilities.
We
operate in the U.S. and in Israel and our earnings are subject to taxation
in both jurisdictions, at different rates. Relevant tax authorities may disagree
with our interpretation and application in practice of tax laws and may dispute
various assumptions we make during our tax planning process. Further, the tax
authorities in the U.S. and/or Israel may take exception with the transfer
price of transactions between Answers Corporation and its wholly owned Israeli
subsidiary. If there is a successful tax challenge of our tax position, our
interpretation and/or application of tax laws in practice, we may be forced to
recognize additional tax liabilities, which may include interest and penalties.
This may harm our results of operations and adversely affect our financial
condition.
Our business may
be impacted by NIS exchange rate fluctuations, which may negatively affect our
earnings.
Exchange
rate fluctuations between the U.S. dollar and the NIS may negatively affect
our earnings. Our revenues are denominated in U.S. dollars. However, a
significant portion of our expenses, associated with our Israeli operations,
including personnel and facilities-related expenses, are incurred in NIS.
Consequently, a devaluation of the U.S. dollar in comparison to the NIS
will have the effect of increasing the dollar cost of our operations in Israel.
In 2008 and 2007, the average value of the dollar declined 12.7% and 7.8%,
respectively, as compared to its value in the years immediately preceding such
years. We cannot predict any future trends in the rate of devaluation or
appreciation of the NIS against the U.S. dollar or of the U.S. dollar
against the NIS. Despite the fact that we often use various hedging tools,
including forward contracts and options, to minimize the effect of currency
fluctuations on our income, if the U.S. dollar cost of our operations in
Israel increases, our dollar-measured consolidated results of operations will be
adversely affected.
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ITEM 1B.
|
None.
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ITEM 2.
|
Our New
York office, which serves as our corporate U.S. headquarters for investor
relations, sales, marketing, community development and business development
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 lease for these premises commenced in May 2005 and will
expire in June 2010, and, according to its terms, the average base rent for the
offices during the first year is approximately $66,000 per annum, gradually
increasing to approximately $74,000 per annum for the final year.
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 $19,000 based on the
Dollar-NIS exchange rate on December 31, 2008. The lease will expire in July
2010, with an option to extend the term for an additional 5 years.
We may
require additional space for our expanding operations, both in Israel and New
York, before the expiration of these leases. We believe that there is
suitable space available in the local markets (although for the New York
office, possibly not in our current facilities) at reasonable rates that is
available to us if we need expansion space prior to the end of our
leases.
|
ITEM 3.
|
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.
No matter was submitted to a vote of
our security holders during the fourth quarter of the fiscal year ended
December 31, 2008.
PART
II
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. Prior to August 2,
2005, our common stock was traded on the American Stock Exchange, under the
symbol GRU, between October 13, 2004 and August 1, 2005. There was no
established market for our shares before October 13, 2004. 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, 2007 and 2008 and the subsequent
period indicated.
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High
|
Low
|
||
|
Year
ended December 31, 2007
|
|||
|
First
quarter
|
$14.84
|
$11.24
|
|
|
Second
quarter
|
$17.12
|
$10.14
|
|
|
Third
quarter
|
$13.20
|
$6.20
|
|
|
Fourth
quarter
|
$9.15
|
$5.58
|
|
|
Year
ending 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
ending December 31, 2009
|
|||
|
First
quarter (through March 6, 2009)
|
$9.56
|
$5.73
|
The
closing sale price of our common stock as reported by the NASDAQ Capital Market
on March 6, 2009 was $6.00 per share.
As of March 6, 2009, there were approximately
44 holders of record of
our common stock (not including beneficial owners holding shares in nominee
accounts). We have not paid any cash dividends since formation and we do not
expect to pay any cash dividends in the foreseeable future. During 2008 we did
not repurchase any shares of our common stock. Except as disclosed in this
Annual Report (see Item 7), we have not sold any securities during the past
three years which were not registered under the Securities Act. For details concerning securities
authorized for issuance under our equity compensation plans, see Item 12 of
this Annual Report.
Equity
Compensation Plan Information
The
following table sets forth certain information at December 31, 2008 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
|
2,066,484
|
$8.87
|
424,651
|
||
|
Equity
compensation plans not approved
by security holders
|
35,651
|
$2.23
|
—
|
||
|
Total
|
2,102,135
|
424,651
|
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 report. Consequently,
you should read the following
discussion and analysis of our financial condition and results of operations
together with such financial statements and other financial data included
elsewhere in this report. Some of the information contained in this discussion
and analysis or set forth elsewhere in this report, including information with
respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review the “Risk
Factors” section of this report for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis. See also “Risk Factors” in Part I, Item 1A, of this
report.
Overview
We own
and operate two leading Web properties dedicated to providing useful answers in
thousands of categories. WikiAnswers.com is a community-based social knowledge
Q&A platform, leveraging wiki-based technologies. Through the contributions
of WikiAnswers.com's user-community and dedicated volunteer supervisors, answers
to the site’s growing database of questions are added and improved over time.
Our award-winning reference site, Answers.comAnswers.com, includes reference
content on millions of topics from over 250 licensed sources.
According to comScore, our Web properties had approximately 25.6 million unique
visitors in January 2009, ranking Answers Corporation number 33 in the top
U.S. Web properties for that month. Our goal is to become the leading
online provider of answers about anything and the best place for people to share
answers to questions.
On
September 29, 2008, the listing of our common stock was transferred from The
NASDAQ Global Market to The NASDAQ Capital Market. Our trading symbol was not
impacted and remains "ANSW".
Redpoint
Financing
On
June 16, 2008, pursuant to a private placement of our securities, Redpoint
Omega, L.P. and Redpoint Omega Associates, LLC (collectively, “Redpoint”)
purchased $6,000,000 of our Series A Convertible Preferred Stock, initially
convertible into 1,333,333 shares of common stock at a 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
Purchase Warrants”). In conjunction therewith, Redpoint also received a 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
Purchase Warrants”). The warrant to purchase units of Series B Convertible
Preferred Stock and Series B Purchase Warrants is referred to as the “Series B
Unit Warrant”. The Series B Convertible Preferred Stock is initially
convertible into 1,272,727 shares of common stock at a conversion price of $5.50
per share. The Series B Purchase Warrants have an exercise price of $6.05
per share. After deducting placement agent fees and legal expenses, our
net proceeds from the private placement were $5,380 thousand. This transaction
is collectively referred to as the “Redpoint Financing”. The Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock, the
Series A Purchase Warrants and the Series B Purchase 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, if purchased by Redpoint pursuant
to the Series B Unit Warrant, will have similar rights and preferences as the
Series A Convertible Preferred Stock. For a detailed description of the
rights and preferences of the Series A Convertible Preferred Stock, we refer you
to the notes to the financial statements included in this annual
report.
In
connection with the Redpoint Financing, Redpoint received the right to appoint
an individual to serve as a voting member of our board of directors. If
Redpoint exercises the Series B Unit Warrant and meets certain ownership
requirements, it will be entitled to appoint a second member to our
board.
In
connection with the private placement, 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 will trigger if
the registration statement filed with the SEC on July 30, 2008, and declared
effective on September 16, 2008, ceases to remain continuously
effective.
The
accounting for this transaction is discussed in the notes to the accompanying
financial statements.
Revenue
Traffic
Our
revenue is driven by the traffic generated by our Web properties and our ability
to effectively monetize that traffic. Our current sources of traffic include the
following:
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|
•
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Search
engines: 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 our pages rank high in the algorithmic systems of
search engines, our results are more likely to be accessed by users. For
the fourth quarter and full year of 2008, according to our internal
estimates, this source of traffic represented approximately 80% and 76% of
our overall traffic, respectively.
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|
|
•
|
Direct
users: Users visiting and returning to our home pages, and to a
far lesser extent, arriving from Web properties that send us traffic, or
via 1-Click Answers and AnswerTips. For the fourth quarter and full year
of 2008, according to our internal estimates, direct users represented
approximately 15% and 18% of our overall traffic,
respectively.
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|
|
•
|
Google’s
definition link: We have an informal, non-contractual
relationship with Google under which Google links certain search results
related to definitional queries to Answers.com. For the fourth quarter and
full year of 2008, according to our internal estimates, this source of
traffic represented approximately 5% and 6% of our overall traffic,
respectively.
|
Since
most of our traffic originates from search engines, we expend considerable
resources improving the volume of this traffic. The industry commonly refers to
such efforts as search engine optimization, or SEO. Our Web properties have at
times experienced decreases in traffic, and consequently decreases in revenue,
due to search engine actions, including actions by Google. In July 2007, a
search engine algorithm adjustment by Google led to a drop in Google directed
traffic to Answers.com. This adjustment reduced our overall traffic by
approximately 28% based on the average traffic directed to Answers.com from
Google for the week prior to the adjustment as compared to the week after. As a
result, our revenue also declined proportionately. The
change made by Google did not affect the traffic directed to
WikiAnswers.com.
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, or CPC, and
pay-per-impression, also known as display ads or cost per 1,000 impressions, or
CPM. In the pay-per-performance model, we earn revenue based on the number of
clicks associated with an ad; in the pay-per-impression model, we derive revenue
from the display of ads. The overwhelming majority of our advertising revenue is
earned from CPC advertising. 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 our Web properties.
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 prior to our quarterly
report on Form 10-Q for the quarterly period ended June 30, 2008, we tracked the
traffic on our Answers.com and WikiAnswers.com Web properties using two separate
systems:
|
·
|
Answers.com
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 excludes such traffic from the traffic
activity measurements.
|
|
·
|
WikiAnswers.com
traffic was tracked using HBX Analytics, a tag-based web analytics system
offered by Omniture, Inc. (formerly offered by WebSideStory). Traffic
measurements from this system are generated by our placement of tags on
our WikiAnswers.com pages. The HBX Analytics system then independently
generates traffic metrics. WikiAnswers.com community-related statistics,
including total number of questions, answers and users, are generated from
the WikiAnswers.com Web property.
|
Beginning
with the Management’s Discussion and Analysis of Financial Condition and Results
of Operations contained 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
Answers.com are also presented based on the HBX Analytics data. We estimate that
the historical page views for Answers.com pursuant to HBX Analytics 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
Answers.com RPMs, as reported in those reports, are higher than previous
filings.
We also
use Google, Inc.’s Google Analytics measurement services and Google AdSense data
for various internal analyses. Our breakdown of our traffic sources, noted
above, is based on such data. 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 HBX Analytics and Google Analytics are
also referred to as “internal estimates”.
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.
Our
primary third party ad network, Google AdSense, accounted for approximately 88%
of our total revenue in the fourth quarter of 2008 as compared to approximately
60% of our total revenue in the fourth quarter of 2007. Google AdSense accounted
for approximately 82% of our total revenue in 2008 as compared to approximately
64% of our total revenue in 2007. We obtain 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 at least the next year, CPC ads will continue
to generate the overwhelming majority of our revenue, and we have no plans to
reduce our reliance on CPC ads. Although there are many companies that provide
third party ad networks, the loss of Google as a third party ad network could
have a material adverse impact on our financial condition and results of
operations, as we may not succeed in receiving terms and ad services as
favorable as those provided under our Google Services Agreement (GSA). The GSA
was last renewed for an additional two years, through January 31,
2010.
Direct Ad
Sales. In an effort to improve monetization, in the fourth
quarter of 2006, we began marketing directly to advertisers and generating
additional advertising revenue through an in-house team of direct ads
salespeople. However, at the end of the second quarter of 2008 we decided to
suspend this business initiative, and by the end of the third quarter of 2008 we
no longer employed a sales staff. We initially saw promise in this area, with
the belief that our Web properties would see RPM increases as a result of direct
ad sales. In the fourth quarter of 2007, the sales force generated $575 thousand
of direct ad revenue. However, direct ad revenue in 2008 was disappointing, with
Q1 at $231 thousand and Q2 at $200 thousand. At the end of the second quarter we
came to believe that the horizontal, educational, reference nature of
Answers.com www.answers.commade direct ads less compelling for this Web
property, as compared to vertical sites that direct advertisers often prefer.
While we viewed WikiAnswers.com as having the potential to successfully
implement a direct ad sales strategy, we decided not to pursue that strategy and
to instead focus on selling ads through advertising networks, primarily Google
AdSense. This decision has allowed us to focus on our core competency – growing
the WikiAnswers.com community, growing traffic to our Web properties and
monetizing via Google and other ad networks.
Licensing
Revenue. We also earn a very minor 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. Revenue from
these arrangements are based on various formulas, including fees based on the
number of user queries and fixed periodic fees.
Costs
and Expenses
Cost
of Revenue
Cost of
revenue consists of fees to third parties to license content, data
center costs, including depreciation of information technology assets,
compensation, travel and overhead costs relating to personnel who are engaged in
content editing, content integration and production operations ,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. As revenues increase, we expect our cost of revenue as a
percentage of revenue to decrease, since many of its components, such as content
licensing, are not directly tied to revenue. Notwithstanding, in the first half
of 2009, our cost of revenue, as a percentage of revenue, is expected to
increase as we add our second colocation facility.
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, user
interface, and monetization. We generally expect that our research
and development expenses will decline as a percentage of revenue as we grow our
revenue.
Sales,
Marketing and Community Development Expenses
Sales,
marketing and community development expenses consist of compensation, travel and
overhead costs of personnel in-charge of sales and marketing, and developing and
encouraging the WikiAnswers.com community of users asking and answering
questions and volunteer supervisors; 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 the primary future growth in
this expense line item will be in the area of WikiAnswers.com community
development. We generally expect that our sales, marketing and community
development expenses will decline as a percentage of revenue as we grow our
revenue.
General
and Administrative Expenses
General
and administrative expenses consist primarily of compensation, travel and
overhead costs for financial, legal, human resource, and other administrative
personnel, insurance fees, professional services, including investor relations,
legal, accounting, payroll and other consulting 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. From time-to-time, we also grant additional stock option awards to
existing employees and directors. We account for stock-based awards under
SFAS No. 123 (revised 2004), “Share-Based Payments”, or
SFAS 123R, 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 Statement of
Operations.
Impact
of Currency Fluctuations
The
dollar cost of our operations in Israel 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. In 2008 and 2007, the
average value of the dollar declined 12.7% and 7.8%, respectively, as compared
to its value in the years immediately preceding such years. In 2008 and 2007,
approximately $6.5 million and $4.5 million of our expenses, respectively, were
NIS-based, thus the devaluation noted above, significantly influenced our
operating expenses. While hedging activities somewhat reduced the impact of the
devaluation of the dollar during those periods, we absorbed most of the
devaluation.
We expect
our NIS-based expenses in 2009, to at least remain at the 2008 levels, thus, if
the dollar continues to fluctuate as compared to the NIS, we will experience
further fluctuation in the dollar amount of our expenses.
Write-off
of the Brainboost Answer Engine
In
December 2005, we acquired Brainboost Technology, LLC, developer of the
Brainboost Answer Engine, or the BAE, an artificial intelligence technology
enabling natural language question-and-answer search on the Web. As
consideration for the acquisition, we paid $4.0 million in cash and 439,000
shares of restricted stock, valued at approximately $5.6 million at the time of
the acquisition. In connection with the initial allocation of the purchase
price, we recorded an intangible asset, the BAE, with an estimated useful life
of six years, of approximately $5.4 million. Since the acquisition,
through the first quarter of 2008, we spent time further developing the BAE and
integrating it into our Answers.com Web property.
In
November 2006, we acquired a Web property, then known as www.faqfarm.com, and
subsequently rebranded as WikiAnswers.com, a dynamic, user-generated, questions
and answers website. Although handled in different ways, BAE and WikiAnswers.com
are effectively focused on similar areas, answering complex natural language
questions. Since its acquisition, WikiAnswers.com has grown significantly, in
terms of both traffic and revenue. Conversely, during that period, Answers.com
traffic and revenue has been in decline. Detailed information regarding these
trends is provided in the revenue discussion in this annual report. As a result
of that trend, and the success of user-generated questions and answers as
compared to the technology-driven answers presented by the BAE, we made a
strategic decision in the second quarter of 2008 to focus our efforts, in the
realm of questions-and-answers, on user-generated questions and answers, and
effectively abandoned our use of the BAE. This strategic decision was reflected
in a change that we made to Answers.com on May 25, 2008. Prior to
that date, users asking a question on Answers.com caused the site to access the
BAE in an attempt to locate an answer on the Web. The BAE results
were then presented on the Answers.com result page. Beginning May 25, 2008,
users no longer received BAE-derived result pages, rather they were instead
encouraged to post their question to WikiAnswers.com, and in a less pronounced
fashion, offered a link to another page for purposes of accessing BAE should
they wish to do so. This user-interface change virtually eliminated the use of
the BAE as demonstrated by the elimination of virtually all BAE-derived page
views. In November 2008, we eliminated the link to the BAE.
As a
result of our decision to effectively abandon our use of the BAE, the net book
value of the BAE, as of May 25, 2008, in the amount of $3,138 thousand, was
written off in the three months ended June 30, 2008.
Termination
fees and write-off of cost relating to the terminated Lexico acquisition and
abandoned follow-on offering
In the
first quarter of 2008, we recorded a charge of $2,543 thousand consisting of
$1,618 thousand of accounting, legal, banking, consulting and travel costs we
incurred in 2007 and in the first quarter of 2008, in connection with the
abandoned acquisition of Lexico and follow-on offering of securities, and $925
thousand relating to termination fees we paid as a result of the termination of
the acquisition and a Securities Purchase Agreement with an institutional
investor, for the optional purchase and sale of $8.5 million of our senior
secured convertible notes. A summary of the events that led to the termination
of the acquisition and financing follows:
On
July 13, 2007, we entered into a Purchase Agreement that we subsequently
amended on July 31, 2007 and November 12, 2007; and on January 15, 2008 we
entered into an Amended and Restated Purchase Agreement, which we subsequently
amended on February 8, 2008, to acquire all of the outstanding limited liability
interests of Lexico Publishing Group, LLC for an aggregate purchase price of
$100 million in cash, subject to adjustments for closing net working
capital. Consummation of the acquisition of Lexico was subject to our
ability to secure financing for the acquisition.
On July
17, 2007, we filed a universal shelf registration statement on Form S-3 with the
Securities and Exchange Commission which was declared effective on August 6,
2007. The registration statement covers up to an aggregate of $140
million of common stock, preferred stock, warrants, debt securities, units or
any combination thereof. On January 16, 2008, we filed a prospectus supplement
for a proposed public offering which we later amended on February 8,
2008. On February 13, 2008 we canceled our proposed public offering
due to unfavorable market conditions. On March 1, 2008, the members of Lexico
terminated the purchase agreement, due to our inability to finance the
acquisition. Additionally, in connection with the Lexico transaction,
on January 15, 2008, we entered into a Securities Purchase Agreement with
an institutional investor, or the senior notes investor, for the optional
purchase and sale of $8.5 million of our senior secured convertible notes.
Our intent was to close the senior secured convertible notes financing in
conjunction with our follow-on offering, if we needed such funds to close the
Lexico acquisition. Since our purchase agreement with Lexico was terminated, the
Securities Purchase Agreement also terminated.
Interest
Income (Expense), Net
Interest
income (expense), net, is comprised of interest income earned on cash, cash
equivalents and investment security balances, and amortization of deferred costs
we incurred in connection with the issuance of the Series B Unit
Warrant.
Other
Income (Expense), Net
Other
income (expense), net, is comprised of foreign currency gains and
losses.
Loss
Resulting from Fair Value Adjustment of Warrant to Purchase Units of Series B
Preferred Stock and Warrants
The
Series B Unit Warrant is revalued each reporting date. Any change to its fair
value is recorded as a loss in the statement of operations.
Income
Tax Benefit (Expense), Net
Our
effective tax rate differs from the statutory federal rate 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. 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,
2008, our deferred tax assets are fully offset by a valuation allowance because
realization depends on generating future taxable income, which, in our
estimation, is not more likely than not to transpire.
Our
Israeli subsidiary had net income in 2008 and 2007, resulting from services we
receive from the Israeli subsidiary. The Israeli subsidiary charges us for
research & development and certain management services it provides us, plus
a profit margin ranging from 6 to 12.5%. However, the subsidiary is an “approved
enterprise” under Israeli law, which means that income arising from the
subsidiary’s approved research & development activities, is subject to zero
tax under the “alternative benefit” path for a period of ten years. Management
services are taxable at the Israeli corporate tax rate in effect at the time
(27% in 2008). Currently, the subsidiary operates under two separate “approved
enterprise” plans, ending December 31, 2009 and December 31, 2014, respectively.
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. At present, we do not plan on having the subsidiary
distribute a dividend to Answers Corporation.
Revenue
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
WikiAnswers.com
advertising revenue
|
7,524
|
1,302
|
6,222
|
||
|
Answers.com
advertising revenue
|
6,622
|
9,449
|
(2,827)
|
||
|
Answers
services licensing revenue
|
81
|
219
|
(138)
|
||
|
Subscription
revenue
|
-
|
425
|
(425)
|
||
|
14,227
|
11,395
|
2,832
|
|||
Revenue
increased $2,832 thousand, or 25%, to $14,227 thousand for the year ended
December 31, 2008 from $11,395 thousand for the year ended December 31,
2007.
WikiAnswers.com
advertising revenue in 2008 increased $6,222 thousand compared to 2007, due to
increases in traffic, and to a lesser extent, due to improvement in
RPM. WikiAnswers.com average daily page views in 2008 were 2,916,000,
an increase of 360% compared to the average daily page views of 633,000 in 2007.
We believe that the dramatic growth that WikiAnswers.com has experienced since
we acquired it, in November 2006, is primarily due to the unique dynamics of the
site. 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. This is a
self-perpetuating growth model. The WikiAnswers.com RPM in 2008 was $7.07, an
increase of 26% compared to the RPM of $5.63 in 2007. The increase is primarily
due to the inclusion of WikiAnswers.com under our Google Services Agreement in
November 2007, replacing the standard AdSense terms that governed the site prior
to our acquisition of WikiAnswers.com.
Answers.com
advertising revenue in 2008 decreased $2,827 thousand compared to 2007. The
decrease was the result of decreased traffic, and to a lesser extent, due to
lower RPM. Answers.com average daily page views in 2008 were
2,890,000, a decline of 28% compared to the average daily page views of
4,021,000 in 2007. The decline in traffic is primarily due to the July 2007
Google algorithm change that significantly impacted Answers.com traffic,
reducing our overall traffic by approximately 28% based on the average traffic
directed to Answers.com from Google for the week prior to the adjustment as
compared to the week after. As a result, our revenue also declined
proportionately. The Answers.com RPM in 2008 was $6.28, a decrease of 2%,
compared to the RPM of $6.44, in 2007. We have found that this metric often
moves up or down moderately due to many factors including how we are evaluated
by our advertising partners.
Historically,
we operated on the premise that adding rich unique content to Answers.com
positively impacted the site’s traffic growth, guided by the principle that rich
unique content was not only appreciated by the human user, but was also highly
valued by the search engines and their content indexing programs. While
Answers.com receives significant SEO traffic to its rich content pages, the
Google algorithm change caused us to doubt whether licensing additional content
would yield a positive return. During the last few months we made certain
changes to and ran certain tests on Answers.com that have led us to believe that
adding content may, once again, be a viable way to grow traffic, thus, we are
planning on licensing new content in order to grow Answers.com. Notwithstanding,
given the significance of the opportunity we believe we have with
WikiAnswers.com, we do not expect to invest significant amounts of resources,
above current levels, to implement a strategy of licensing new
content.
Approximately
$660 thousand and $990 thousand of our advertising revenue in 2008 and 2007,
respectively, resulted from the efforts of our direct ad sales force. In an
effort to improve monetization, in the fourth quarter of 2006, we began
marketing directly to advertisers and generating additional advertising revenue.
However, at the end of the second quarter of 2008 we decided to abandon that
effort, and by the end of the third quarter of 2008, all of our direct sales
staff left the Company.
Subscription
revenue in 2007 of $425 thousand resulted from the recognition of revenue from
the sale of lifetime subscriptions to our GuruNet service prior to December
2003. As of December 31, 2006, we had approximately $425 thousand of
deferred revenue relating to these subscriptions. Prior to 2007, we did not
recognize any revenue from the lifetime subscriptions to our GuruNet service
because the subscriptions had no defined term. On February 2, 2007, in
accordance with our rights under the agreements we entered into with such
subscribers, we terminated the GuruNet service and thereby extinguished our
service obligations to our subscribers. As a result, we recognized the entire
$425 thousand previously deferred, as revenue, in the first quarter of 2007.
After the launch of Answers.com in January 2005, we ceased offering new
subscriptions to GuruNet.
Revenue
Trends by Web Property
The
following table illustrates the historical trends of our two Web properties’
average daily traffic, revenues and RPMs, by quarter, beginning the first
quarter of 2007:
|
2007
|
2008
|
||||||||||||||
|
Q1
|
Q2
|
Q3
|
Q4
|
Q1
|
Q2
|
Q3
|
Q4
|
||||||||
|
Ad
Revenue ($ - in thousands)
|
|||||||||||||||
|
Answers.com
|
2,768
|
2,551
|
1,861
|
2,270
|
1,828
|
1,485
|
1,579
|
1,730
|
|||||||
|
WikiAnswers.com
|
116
|
177
|
304
|
704
|
1,185
|
1,500
|
1,960
|
2,879
|
|||||||
|
Total
|
2,884
|
2,728
|
2,165
|
2,974
|
3,013
|
2,985
|
3,539
|
4,609
|
|||||||
|
Answers.com
|
96%
|
94%
|
86%
|
76%
|
61%
|
50%
|
45%
|
38%
|
|||||||
|
WikiAnswers.com
|
4%
|
6%
|
14%
|
24%
|
39%
|
50%
|
55%
|
62%
|
|||||||
|
Total
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
|||||||
|
Traffic
|
|||||||||||||||
|
Answers.com
|
4,945,000
|
4,441,000
|
3,276,000
|
3,447,000
|
3,225,000
|
2,641,000
|
2,666,000
|
3,027,000
|
|||||||
|
WikiAnswers.com
|
293,000
|
440,000
|
639,000
|
1,152,000
|
1,885,000
|
2,318,000
|
3,094,000
|
4,350,000
|
|||||||
|
Total
|
5,238,000
|
4,881,000
|
3,915,000
|
4,599,000
|
5,110,000
|
4,959,000
|
5,760,000
|
7,377,000
|
|||||||
|
Answers.com
|
94%
|
91%
|
84%
|
75%
|
63%
|
53%
|
46%
|
41%
|
|||||||
|
WikiAnswers.com
|
6%
|
9%
|
16%
|
25%
|
37%
|
47%
|
54%
|
59%
|
|||||||
|
Total
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
100%
|
|||||||
|
RPM
|
|||||||||||||||
|
Answers.com
|
$6.22
|
$6.31
|
$6.17
|
$7.16
|
$6.23
|
$6.18
|
$6.44
|
$6.21
|
|||||||
|
WikiAnswers.com
|
$4.40
|
$4.42
|
$5.17
|
$6.64
|
$6.95
|
$7.11
|
$6.89
|
$7.19
|
|||||||
Since we
purchased WikiAnswers.com in November 2006, the website has grown significantly,
each quarter, both in terms of traffic and revenue. Conversely, in 2007, and
especially beginning the third quarter of 2007, when we experienced a
drop in our traffic due to a search engine algorithm adjustment by Google,
Answers.com’s traffic and revenue have been in decline. We expect the
aforesaid trends of our individual Web properties to continue in
2009.
The
current general economic downturn may result in fewer page views that
result in commercial activities by our users, and may cause advertisers to
reduce the amount they spend on online advertising. These potential developments
could have a significant negative impact on the RPM of both our Web properties.
In fact, our RPM has shown some moderate decline in the first quarter of 2009,
which we believe is due to both the seasonality of advertising rates as well as
the general economic downturn. We believe that, to date, we have been
better insulated from the economic downturn than many other content websites due
to the fact that the overwhelming majority of our ad revenue is earned from CPC
ads, which appear to have been less negatively impacted by the economic downturn
than CPM ads. It is still uncertain whether our RPM will be further
negatively impacted in 2009.
Additionally,
our CPC revenue, which is earned through Google, is governed by our GSA, which
is scheduled to expire on January 31, 2010. Renewal of the GSA in February
2010 on terms less favorable to us than the current terms, including the
revenue-share percentage, could result in reduced revenue from CPC
ads.
We do not
expect the current general economic downturn to affect our expected overall
growth in traffic.
Costs
and Expenses
Cost
of Revenue
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Cost
of revenue
|
4,641
|
4,890
|
(249)
|
||
Cost of
revenue decreased $249 thousand, or 5%, to $4,641, in 2008 from $4,890 in 2007.
The change in cost of revenue was due primarily to the following factors:
Amortization expense from intangible technology assets we purchased in
connection with the Brainboost acquisition that took place in December 2005 and
the WikiAnswers.com acquisition that took place in November 2006 decreased $593
thousand. Such decrease transpired because we wrote off the
Brainboost Answer Engine on May 25, 2008, thus we only recorded $358 thousand of
Brainboost Answer Engine amortization in 2008, as compared the full twelve
months of amortization, of $892 thousand, recorded in 2007. The amortization of
the intangible assets related to WikiAnswers.com decreased by $59 thousand in
2008, as compared to 2007, since we use accelerated depreciation to amortize the
database of questions and answers we acquired in conjunction with the
acquisition of WikiAnswers. Additionally, there was a decrease in data center
costs (including depreciation of information technology assets) of $93 thousand,
due to our moving to our own colocation facility rather than managed hosting. In
a colocation facility, many of the tasks that were handled by the managed
hosting provider are now handled by our employees, thus the fees we pay are
lower. The aforesaid decreases were partially offset by increases in
compensation costs of $307 thousand as a result of staffing additions, salary
increases and the weak U.S. dollar as compared to the New Israel Shekel,
increases in traffic acquisition costs of $22 thousand, increases in ad serving
fees of $29 thousand, increases in travel of $32 thousand, increases in content
licensing costs of $42 thousand, and higher overhead of $20
thousand.
Research
and Development Expenses
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Research
and development
|
3,482
|
2,978
|
504
|
||
Research
and development expenses increased $504 thousand, or 17%, to $3,482 thousand in
2008 from $2,978 thousand in 2007. The change in research and development
expenses was due primarily to an increase of $463 thousand in compensation, as a
result of salary increases, the weak U.S. dollar as compared to the New Israel
Shekel, and new hires, and higher overhead of $44 thousand.
Sales,
Marketing and Community Development Expenses
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Sales,
marketing and Community Development
|
2,734
|
3,951
|
(1,217)
|
||
Sales,
marketing and community development expenses decreased $1,217 thousand or 31%,
to $2,734, in 2008, from $3,951 in 2007. The decrease in sales and marketing
expenses is due primarily to the following factors: Compensation related
expenses, excluding stock-based compensation, decreased $737 thousand, mostly
due to the termination of our Chief Revenue Officer in the third quarter of
2007, and the termination of our direct ad sales team in the second and third
quarters of 2008. Additionally, stock-based compensation decreased $536
thousand, mostly due to the termination of employment of our Chief Revenue
Officer in the third quarter of 2007. The termination of our direct ad sales
team also resulted in a reduction of $31 thousand in allocated overhead
expenses, and marketing related expenses decreased $37 thousand. The aforesaid
decreases were partially offset by a charge of $132 thousand, in the second
quarter of 2008, to account for the estimated cost of terminating certain
service contracts relating to our abandoned direct ad sales
efforts.
General
and Administrative Expenses
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
General
and administrative
|
4,799
|
4,020
|
779
|
||
General
and administrative expenses increased $779 thousand, or 19%, to $4,799 thousand
in 2008 from $4,020 thousand in 2007. The change in general and administrative
expenses was due primarily to the following factors: Compensation costs,
excluding stock-based compensation, increased by $344 thousand as a result
of salary increases and the weak U.S. dollar as compared to the New
Israel Shekel, and stock-based compensation rose $98 thousand. Investor
relations and stock administration fees increased $101 thousand, mostly due to
our retaining an external investor relations firm in the second quarter of 2008.
Additionally, insurance increased $73 thousand, travel expenses increased $58
thousand, overhead increased $33 thousand and accounting and legal fees
increased $20 thousand.
Write-off
of the Brainboost Answer Engine
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- 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 BAE, the net book
value of the BAE, as of May 25, 2008, in the amount of $3,138 thousand, has been
written off and the resulting charge is included in our statement of operations
for 2008.
Termination
fees and write-off of costs relating to the terminated Lexico acquisition and
abandoned follow-on offering
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- 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 $2,543 thousand for various costs and fees we incurred
in connection with the terminated acquisition of Lexico and the follow-on
offering of securities.
Interest
Income (Expense), Net
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Interest
income (expense), net
|
(55)
|
385
|
(440)
|
||
Interest
income (expense), net decreased $440 thousand to $(55) thousand (expense), net,
in 2008 from $385 thousand, income, net, in 2007. The change in interest income
(expense), net resulted from certain transaction costs that we incurred in
connection with the Series B Unit Warrant, which have been deferred and are
being amortized to interest expense over one year. In 2008, $196 thousand of
such deferred costs were amortized and charged to interest expense, while we had
no similar charge in 2007. Further, interest earned from our cash balance in
2008 was $149 thousand, compared to interest earned of $385 thousand, during
2007. The reduction in interest income earned on our cash balances was the
result of lower short-term interest rates.
Loss
Resulting from Fair Value Adjustment of Warrant to Purchase Units of Series B
Preferred Stock and Warrants
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Loss
Resulting from Fair Value Adjustment of Series B Unit
Warrant
|
(5,187)
|
-
|
(5,187)
|
||
The
Series B Unit Warrant is revalued each reporting date, and any change to its
fair value is recorded in the statement of operations. The primary reason for
the increase in the value of this liability in 2008 was the increase in the
market value of our common stock between the date we issued the Series B Unit
Warrant, June 16, 2008, and December 31, 2008, from $3.92 to $7.13.
Other
Income (Expenses), Net
|
Year
Ended December 31,
|
|||||
|
2008
|
2007
|
Change
|
|||
|
($
- in thousands)
|
|||||
|
Other
income (expense), net
|
19
|
(11)
|
30
|
||
Other
income (expense), net, in 2008 was $19 thousand, income, net, compared to $(11)
thousand (expense), net, in 2007. Other income (expense), net, results from
foreign currency net gains and losses.
Income
Tax Benefit (Expense), Net
We had
net operating loss carryforwards, or NOLs, for federal income tax purposes of
approximately $59 million at December 31, 2008, and approximately $54 million at
December 31, 2007. The federal net operating losses will expire if not utilized
on various dates from 2019 through 2028. Because we have experienced one or more
ownership changes, within the meaning of Section 382 of the Internal
Revenue Code of 1986, as amended, an annual limitation is imposed on our ability
to use at least $32 million of these carryforwards. We estimate that the
annual limitation on the use of such $32 million of our NOLs is
approximately $1.8 million per year. Any unused portion of the
$1.8 million annual limitation applicable to our restricted NOLs is
available for use in future years until such NOLs are scheduled to expire. The
recent Redpoint Financing and other financing events that transpired since
October 2004 may further impact our ability to use our NOLs, however, since we
have not conducted a Section 382 Study since October 2004 we cannot make that
determination. Our Israeli subsidiary has capital loss carryforwards of
approximately $775 thousand that can be applied to future capital gains for
an unlimited period of time under current tax rules.
We file
U.S. federal, various state & local and foreign income tax returns. Answers
Corporation is no longer subject to U.S. federal income tax examinations by tax
authorities for years prior to 2005 and state & local income tax
examinations for years prior to 2006. In September 2008, the Israeli income tax
authorities completed its audit of our Israeli subsidiary for the tax years 2004
through 2006, resulting in no adjustments. As a result of the findings of such
audit, we reversed previously accrued tax provisions for uncertain positions,
during the third quarter of 2008.
Liquidity
and Capital Resources
In 2008
and 2007, our principal sources of liquidity were our cash inflows from revenues
and cash and cash equivalents, and investment securities that were raised
through various financing events that took place through June 2008. Going
forward, we expect that our principal source of liquidity will be cash inflows
from operations. We further expect that such cash inflows from operations will
be sufficient to fund our capital expenditures. Further, if Redpoint decides to
exercise their Series B Unit Warrant, of up to $7 million, between now and June
16, 2009, that could add to liquidity in 2009.
|
Year
ended December 31,
|
|||
|
2008
|
2007
|
||
|
($
- in thousands)
|
|||
|
Net
cash used in operating activities
|
(299)
|
(647)
|
|
|
Net
cash provided by investing activities
|
82
|
2,420
|
|
|
Net
cash provided by (used in) financing activities
|
5,196
|
(54)
|
|
Operating
Activities
Despite a
net loss of $12,251 thousand in 2008, net cash used in operations was only $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 item is the
loss resulting from the fair value adjustment of the Series B Unit Warrant of
$5,187 thousand. The primary factor that caused the fair value of the Series B
Unit Warrant, a liability on our balance sheet, to rise, is the rise in our
stock price between June 16, 2008, the closing date of the Redpoint transaction,
and December 31, 2008. Should Redpoint exercise such warrant, which terminates
after June 16, 2009, such investment will add an additional $7 million of
liquidity. Other very large reconciling items were the write-off of the
Brainboost Answers Engine of $3,138 thousand, $1,719 thousand of operating
expenses that were the result of non-cash stock-based compensation to employees
and directors, and depreciation and amortization of $1,329
thousand.
Despite a
net loss of $4,118 thousand in 2007, net cash used by operations was $647
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 resulted
from the fact that we incurred $2,123 thousand of non-cash, stock-based
compensation to employees and directors, depreciation and amortization of $1,797
thousand, while recognizing $425 thousand of previously deferred revenue from
lifetime subscriptions we sold for our GuruNet service in 2003.
Investing
Activities
Net cash
provided by investing activities of $82 thousand, in 2008, is attributable to
the proceeds from the sale of investment 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
provided by investing activities in 2007 is attributable mostly to the proceeds
from the sale of investment securities less cash used from purchases of
investment securities, and cash used for capital expenditures, long-term
deposits and deferred costs relating to the proposed Lexico acquisition, as
delineated in our Consolidated Statement of Cash Flows.
Financing
Activities
Net cash
flow from financing activities in 2008 of $5,196 thousand was mostly from the
Redpoint Financing, which raised $5,380 thousand after expenses. The other
factors impacting net cash flow from financing activities are delineated in the
accompanying statement of cash flows.
Cash flow
used in financing activities in 2007 stems from deferred costs relating to the
proposed Lexico financing, less net proceeds from the exercise of stock options,
as delineated our Consolidated Statement of Cash Flows.
Future
Operations
As a
result of the Redpoint Financing in June 2008, we raised net proceeds of
approximately $5.4 million, significantly improving our cash position. As part
of the Redpoint Financing, Redpoint received the Series B Unit Warrant, a
warrant to purchase units, exercisable at any time until June 16, 2009, for
up to $7 million of Series B Convertible Preferred Stock (70,000 shares)
and Series B Purchase Warrants. The Series A Preferred Stock
contains a redemption provision which allows the holder of a majority of the
Series A Preferred Stock to request redemption, at any time on or after June 16,
2014, of all or any part of the outstanding Series A Preferred
Stock. If issued, the Series B Preferred Stock would have a similar
redemption provision.
The 2008
funding we received from Redpoint is important to us because of prior events
that decreased our cash position considerably. In connection with the abandoned
proposed public offering and the terminated Lexico purchase agreement, we made
cash payments of $1,878 thousand in the first quarter of 2008, in addition to
the $663 thousand we expended in 2007, for termination fees and
costs. These payments had a material impact on the balance of our
cash and cash equivalents, which were $5,462 thousand as of March 31,
2008.
Based on
our current cash and cash equivalents levels and expected cash flow from
operations, we believe we have sufficient cash and cash equivalents to meet our
working capital and operating requirements for the next twelve months,
irrespective of whether we receive additional funding pursuant to the Series B
Unit Warrant. Further, in estimating our expected cash flow during the next
twelve months we have considered the current general economic downturn and its
impact on our future revenue, as discussed in the earlier revenue
discussion.
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.
Off-Balance
Sheet Arrangements
Except
for the Series A Purchase Warrant described in note 9 to the financial
statements in Item 8 below, we have not entered into any transactions with
unconsolidated entities in which we have financial guarantees, subordinated
retained interests, derivative instruments or other contingent arrangements that
expose us to material continuing risks, contingent liabilities or any other
obligations under a variable interest in an unconsolidated entity that provides
us with financing, liquidity, market risk or credit risk support.
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 2007, 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 (for those acquired before
December 31, 2008) in accordance with SFAS No. 141, “Business Combinations”, or
SFAS 141, and for goodwill and other identifiable definite and
indefinite-lived acquired intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets”, or SFAS 142. Additionally, we review our long-lived assets
for recoverability in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, or SFAS 144.
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 SFAS 142, with the annual impairment testing date set at
September 30, and in accordance with SFAS 144 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, 2008, we determined that there were no events or changes in
circumstances indicating that the carrying amount of an asset may not be
recoverable; therefore, there was no need to evaluate the recoverability or
compute impairment of our long-lived assets.
In
response to the search engine algorithm adjustment by Google in July 2007, we
examined what impact this event might have on the recoverability of our
long-lived assets in accordance with the guidance contained in SFAS 142 and
SFAS 144. As a result of our analysis, we concluded that the carrying value
of our assets had not been impaired. However, while we use available information
to prepare our estimates and to perform impairment evaluations, our
recoverability calculations and impairment tests require significant management
judgment and estimates. These estimates included our projections of undiscounted
cash flows and assumptions used in calculating projected RPM, page-views, and
expenses. In preparing such estimates we considered many factors including
historical and seasonal trends, industry and macro-economic trends and specific
company initiatives and plans. In addition, a certain degree of judgment was
exercised in determining asset groups in accordance with generally accepted
accounting principles. Had our estimates and assumptions differed, the
accounting treatment might have resulted differently. Future actual results
could differ significantly from the anticipated results as reflected in our
analysis.
Accounting
for Stock-based Compensation
We
account for stock-based awards under SFAS No. 123R 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 for awards
expected to vest, using the modified prospective method. The estimation of stock
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 considers the exercise price
relative to the market value of the underlying stock, 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. Subsequent to our IPO, through 2006, we did not have
sufficient history to predict our volatility and therefore our assumptions about
stock price volatility were based on the volatility rates of comparable publicly
held companies. These rates may or may not reflect our actual stock price
volatility. During 2007, as we accumulated our own volatility history over
longer periods of time, our assumptions about our stock price volatility were
based on a rate that was derived by taking into consideration the volatility
rates of the aforesaid comparable publicly held companies as well as our own
historical volatility rates. Beginning 2008, we are estimating our expected
stock volatility based solely 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 loss and net
loss per share amounts could have been significantly different, in 2008 and
2007.
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, 2008, we
have fully offset our U.S. net deferred tax asset with a valuation
allowance. Our lack of earnings history and the uncertainty surrounding our
ability to generate US taxable income prior to the expiration of such deferred
tax assets were the primary factors considered by management in establishing the
valuation allowance.
In July
2006, FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — an Interpretation of FASB Statement 109”, or
FIN 48, effective for fiscal years beginning after December 15, 2006.
FIN 48 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 FIN 48, the position
must have at least a “more likely than not” chance of being sustained upon
challenge by the respective taxing authorities. We adopted the provisions of
FIN 48 as of January 1, 2007 and it has not had a material impact on
our financial statements.
Redpoint
Financing
In
accounting for the Redpoint 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 SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”, and
EITF 00-19, ”Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock”. Further, The Series B Unit Warrant is revalued at
each reporting date.
We used
various valuation models and techniques to determine the individual values of
the three components, 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 include 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 have applied appropriate judgment in the aforesaid
assumptions , variations in judgment could have a material effect upon the
valuation results, and thus, on our financial statements.
The
Series A Convertible Preferred Stock issued as part of the Redpoint
Financing contains an embedded conversion option which could possibly require
separate accounting under SFAS No. 133 – “Accounting for Derivative
Instruments and Hedging Activities”(SFAS
133). According to 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 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" (Topic D-109). Topic D-109
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 SFAS 133, 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.
Recently
Issued Accounting Pronouncements
In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No.
133" (SFAS 161). SFAS 161 gives financial statement users better
information about the reporting entity's hedges by providing for qualitative
disclosures about the objectives and strategies for using derivatives,
quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their
hedged positions. SFAS 161 is effective for financial statements issued for
fiscal years beginning after November 15, 2008 and interim periods within those
years. The adoption of SFAS 161 is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows.
In April
2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under Statement 142. FSP FAS
142-3 is effective for fiscal years beginning after December 15, 2008. We
are currently evaluating the impact, if any, of adopting FSP FAS 142-3 on our
financial position and results of operations.
On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1(FSP APB 14-1), “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”. FSP APB 14-1 requires issuers of convertible debt that may
be settled wholly or partly in cash when converted to account for the debt and
equity components separately. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 and must be applied retrospectively to all
periods presented. The adoption of FSP APB 14-1 is not expected to have a
material impact on our consolidated financial position, results of operations or
cash flows.
In June
2008, the FASB ratified the consensus of EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own
Stock”. EITF 07-5 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’s requirements will affect
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 will no longer be recorded in equity,
and many of the convertible instruments with such provisions will have to be
bifurcated, with the conversion option separately accounted for as a derivative
under SFAS 133. EITF 07-5 is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. It will initially be applied by recording a
cumulative-effect adjustment to opening retained earnings at the date of
adoption for the effect on outstanding instruments. The adoption of EITF 07-5
will have a material impact on our consolidated financial position and results
of operations and is discussed in Note 9 to the accompanying financial
statements.
Quarterly
Results
The
following table sets forth our historical unaudited quarterly consolidated
statement of operations data and certain non-GAAP financial measures beginning
2007. You should read this information together with our unaudited 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,
2007
|
Jun. 30,
2007
|
Sep. 30,
2007
|
Dec. 31,
2007
|
Mar.
31,
2008
|
Jun.
30,
2008
|
Sep.
30,
2008
|
Dec.
31,
2008
|
||||||||
|
(in
thousands, except page view and RPM data)
|
|||||||||||||||
|
Revenues:
|
|||||||||||||||
|
Advertising
revenue
|
$
2,884
|
$
2,728
|
$
2,165
|
$
2,974
|
$
3,013
|
$
2,985
|
$
3,539
|
$4,609
|
|||||||
|
Answers
services licensing
|
77
|
82
|
43
|
17
|
18
|
18
|
24
|
21
|
|||||||
|
Subscriptions
|
425
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
3,386
|
2,810
|
2,208
|
2,991
|
3,031
|
3,003
|
3,563
|
4,630
|
||||||||
|
Costs
and expenses:
|
|||||||||||||||
|
Cost
of revenue
|
1,144
|
1,320
|
1,179
|
1,247
|
1,393
|
1,416
|
945
|
887
|
|||||||
|
Research
and development
|
722
|
748
|
769
|
739
|
875
|
929
|
866
|
812
|
|||||||
|
Sales
and marketing
|
982
|
1,072
|
1,221
|
676
|
762
|
933
|
563
|
476
|
|||||||
|
General
and administrative
|
926
|
1,019
|
1,058
|
1,017
|
1,131
|
1,198
|
1,311
|
1,159
|
|||||||
|
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
|
3,774
|
4,159
|
4,227
|
3,679
|
6,704
|
7,614
|
3,685
|
3,334
|
|||||||
|
Operating
loss
|
(388)
|
(1,349)
|
(2,019)
|
(688)
|
(3,673)
|
(4,611)
|
(131)
|
1,296
|
|||||||
|
Interest
income (expense), net
|
100
|
112
|
88
|
85
|
55
|
18
|
(43)
|
(86)
|
|||||||
|
Other
income (expense), net
|
(15)
|
4
|
—
|
—
|
(38)
|
(11)
|
11
|
57
|
|||||||
|
Loss
resulting from fair value adjustment of warrant to
purchase
units of
Series B preferred stock and
warrants
|
—
|
—
|
—
|
—
|
—
|
—
|
(2,056)
|
(3,131)
|
|||||||
|
Loss
before income taxes
|
(303)
|
(1,233)
|
(1,931)
|
(603)
|
(3,655)
|
(4,604)
|
(2,210)
|
(1,864)
|
|||||||
|
Income
tax benefit (expense), net
|
—
|
(14)
|
(19)
|
(15)
|
(11)
|
(15)
|
91
|
17
|
|||||||
|
Net
loss
|
$(303)
|
$(1,247)
|
$(1,950)
|
$(618)
|
$(3,667)
|
$(4,619)
|
$(2,119)
|
$(1,847)
|
|||||||
|
Other
Data:
|
|||||||||||||||
|
Adjusted
EBITDA(1)
|
$160
|
$(306)
|
$(727)
|
$180
|
$(181)
|
$(670)
|
$520
|
$1,950
|
|||||||
|
Answers.com
average daily page views
|
4,945,000
|
4,441,000
|
3,276,000
|
3,447,000
|
3,225,000
|
2,641,000
|
2,666,000
|
3,027.000
|
|||||||
|
WikiAnswers.com
average daily page views
|
293,000
|
440,000
|
639,000
|
1,152,000
|
1,885,000
|
2,318,000
|
3,094,000
|
4,350,000
|
|||||||
|
Answers.com
RPM
|
$6.22
|
$6.31
|
$6.17
|
$7.16
|
$6.23
|
$6.18
|
$6.44
|
$6.21
|
|||||||
|
WikiAnswers.com
RPM
|
$4.40
|
$4.42
|
$5.17
|
$6.64
|
$6.95
|
$7.11
|
$6.89
|
$7.19
|
|||||||
(1) We
define Adjusted EBITDA as net earnings before interest, Loss Resulting from Fair
Value Adjustment of Warrant to Purchase Units of Series B Preferred Stock and
Warrants, taxes, depreciation, amortization, stock-based compensation, foreign
currency exchange rate differences and certain non-recurring revenues and
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 Loss Resulting from Fair Value Adjustment of 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 revenues and 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 and other specified costs resulting from acquisitions.
Specifically, we exclude (a) amortization , and the write-off, of
acquired technology from our acquisition of Brainboost Technology, LLC, or
Brainboost, developer of the Brainboost Answer Engine in December 2005;
and (b) amortization of intangible assets resulting from the acquisition
of WikiAnswers.com and other related assets in November 2006. These
acquisitions resulted in operating expenses that would not otherwise have
been incurred. We believe that excluding these expenses is helpful to
investors, due to the fact that they derive from prior acquisition
decisions and are not necessarily indicative of future operating expenses.
In addition, we believe that the amount of such expenses in any specific
period may not directly correlate to the underlying performance of our
core business operations. While we exclude the aforesaid expenses from
Adjusted EBITDA we do not exclude revenues derived as a
result of such acquisitions. The revenue attributable to
WikiAnswers.com in 2008 and 2007 was $7,524 thousand, and $1,302 thousand,
respectively. The revenue attributable to our acquisition of the
Brainboost technology was 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, Loss
Resulting from Fair Value Adjustment of Warrant to Purchase Units of
Series B Preferred Stock and Warrants, Taxes and foreign currency gains
(losses). 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 core
business performance, by excluding events that are of a non-recurring
nature.
|
|
·
|
Prior
to December 2003, we sold lifetime subscriptions to our GuruNet service,
generally for $40 per subscription. In December 2003, we decided to alter
our pricing model and moved to an annual subscription model, for which we
generally charged our subscribers $30 per year. We have not sold
subscriptions since our launch of Answers.com in January 2005. In February
2007, we terminated the GuruNet service and recognized $425 thousand of
deferred revenue as revenue during the quarter ended March 31, 2007.
We believe that the recognition of the $425 thousand of revenue is a
one-time, non-cash event and is not reflective of our core business and
core operating results, and we have therefore excluded this amount from
Adjusted EBITDA.
|
Adjusted
EBITDA is not a measure of liquidity or financial performance under generally
accepted accounting principles 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 of 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 interest expense and other cost relating to
financing our business, including Loss Resulting from Fair Value
Adjustment of Warrant to Purchase Units of Series B Preferred Stock and
Warrants;
|
|
·
|
Adjusted
EBITDA does not reflect foreign currency gains and
losses;
|
|
·
|
Adjusted
EBITDA excludes taxes, which is 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 of Adjusted EBITDA to the GAAP net loss, as follows:
|
Quarter
Ended
|
|||||||||||||||
|
Mar. 31,
2007
|
Jun. 30,
2007
|
Sep. 30,
2007
|
Dec. 31,
2007
|
Mar. 31,
2008
|
Jun. 30,
2008
|
Sep. 30,
2008
|
Dec. 31,
2008
|
||||||||
|
Net
loss
|
$(303)
|
$(1,247)
|
$(1,950)
|
$(618)
|
$(3,667)
|
$(4,619)
|
$(2,119)
|
$(1,847)
|
|||||||
|
Interest
(income) expense, net
|
(100)
|
(112)
|
(88)
|
(85)
|
(55)
|
(18)
|
43
|
86
|
|||||||
|
Foreign
currency (gains) losses
|
15
|
(4)
|
—
|
—
|
38
|
11
|
(11)
|
(57)
|
|||||||
|
Income
tax (benefit) expense, net
|
—
|
14
|
19
|
15
|
11
|
15
|
(91)
|
(17)
|
|||||||
|
Depreciation
and amortization
|
448
|
444
|
464
|
442
|
448
|
383
|
250
|
248
|
|||||||
|
Stock-based
compensation
|
525
|
599
|
574
|
426
|
501
|
420
|
392
|
406
|
|||||||
|
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
|
—
|
—
|
—
|
|||||||
|
Loss
resulting from fair value adjustment of warrant to purchase units
of Series B preferred stock and warrants
|
—
|
—
|
—
|
—
|
—
|
—
|
2,056
|
3,131
|
|||||||
|
Cost
related to August 2007 layoff
|
—
|
—
|
254
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
Subscription
revenue from lifetime subscriptions
|
(425)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||
|
Adjusted
EBITDA
|
$160
|
$(306)
|
$(727)
|
$180
|
$(181)
|
$(670)
|
$520
|
$1,950
|
|||||||
The
following are the consolidated financial statements and exhibits of Answers
Corporation and its consolidated subsidiary, which are filed as part of this
Annual Report.
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Stockholders of
Answers Corporation:
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 2007, and the related consolidated statements of operations, changes in
stockholders’ equity and comprehensive loss, and cash flows for each of the
years in the two-year period ended December 31, 2008. 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 misstatement. 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 the Board of Directors and 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 2007, and the results of their operations
and their cash flows for each of the years in the two-year period ended December
31, 2008, in conformity with US generally accepted accounting
principles.
As
discussed in Note 2(o) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No.157,
Fair Value Measurements, as of January 1, 2008, for fair value measurements of
all 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.
/s/
Somekh Chaikin
________________
Somekh
Chaikin
Certified
Public Accountants (Israel)
A member
firm of KPMG International
Jerusalem,
Israel
March 9,
2009
Answers
Corporation and Subsidiary
Consolidated
Balance Sheets (in thousands except share and per share data)
|
December
31
|
December
31
|
||
|
2008
|
2007
|
||
|
$
|
$
|
||
|
Assets
|
|||
|
Current
assets:
|
|||
|
Cash
and cash equivalents
|
11,739
|
6,778
|
|
|
Investment
securities
|
-
|
700
|
|
|
Accounts
receivable
|
1,680
|
1,448
|
|
|
Prepaid
expenses and other current assets
|
818
|
487
|
|
|
Total
current assets
|
14,237
|
9,413
|
|
|
Long-term
deposits (restricted)
|
257
|
196
|
|
|
Deposits
in respect of employee severance obligations
|
1,337
|
1,232
|
|
|
Property
and equipment, net
|
1,234
|
1,012
|
|
|
Other
assets:
|
|||
|
Intangible
assets, net
|
994
|
4,766
|
|
|
Goodwill
|
437
|
437
|
|
|
Prepaid
expenses, long-term, and other assets
|
220
|
275
|
|
|
Deferred
charges (Lexico acquisition and public offering)
|
-
|
1,267
|
|
|
Total
other assets
|
1,651
|
6,745
|
|
|
Total
assets
|
18,716
|
18,598
|
|
|
Liabilities
and stockholders' equity
|
|||
|
Current
liabilities:
|
|||
|
Accounts
payable
|
537
|
968
|
|
|
Accrued
expenses
|
751
|
1,045
|
|
|
Accrued
compensation
|
628
|
551
|
|
|
Warrant
to purchase units of Series B preferred stock and
warrants
|
8,698
|
-
|
|
|
Capital
lease obligation – current portion
|
78
|
-
|
|
|
Deferred
revenues
|
16
|
16
|
|
|
Total
current liabilities
|
10,708
|
2,580
|
|
|
Long-term
liabilities:
|
|||
|
Liability
in respect of employee severance obligations
|
1,534
|
1,233
|
|
|
Capital
lease obligation, net of current portion
|
106
|
-
|
|
|
Deferred
tax liability, long-term
|
26
|
14
|
|
|
Total
long-term liabilities
|
1,666
|
1,247
|
|
|
Commitments
and contingencies
|
|||
|
Series A convertible preferred
stock: $0.01 par value; stated value of $100 per share; aggregate
redemption amount and liquidation preference of $6,000,000; 6%
cumulative annual dividend; 60,000 shares authorized, 60,000 and 0
shares issued
and outstanding as of December 31, 2008 and 2007,
respectively
|
624
|
-
|
|
|
Stockholders'
equity:
|
|||
|
Preferred
stock: $0.01 par value; 940,000 shares authorized, none
issued
|
-
|
-
|
|
|
Common
stock: $0.001 par value; 100,000,000 and 30,000,000 shares
authorized; 7,870,538
and 7,859,890 shares issued and outstanding as
of December 31, 2008 and 2007, respectively
|
8
|
8
|
|
|
Additional
paid-in capital
|
77,091
|
73,893
|
|
|
Accumulated
other comprehensive loss
|
(28)
|
(28)
|
|
|
Accumulated
deficit
|
(71,353)
|
(59,102)
|
|
|
Total
stockholders' equity
|
5,718
|
14,771
|
|
|
Total
liabilities and stockholders' equity
|
18,716
|
18,598
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Answers
Corporation and Subsidiary
Consolidated
Statements of Operations (in thousands except share and per share
data)
|
Year
ended December 31
|
|||
|
2008
|
2007
|
||
|
$
|
$
|
||
|
Revenues:
|
|||
|
Advertising
revenue
|
14,146
|
10,751
|
|
|
Answers
service licensing
|
81
|
219
|
|
|
Subscriptions
|
-
|
425
|
|
|
14,227
|
11,395
|
||
|
Costs
and expenses:
|
|||
|
Cost
of revenue
|
4,641
|
4,890
|
|
|
Research
and development
|
3,482
|
2,978
|
|
|
Sales,
marketing and community development
|
2,734
|
3,951
|
|
|
General
and administrative
|
4,799
|
4,020
|
|
|
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
|
15,839
|
|
|
Operating
loss
|
(7,110)
|
(4,444)
|
|
|
Interest
income (expense), net
|
(55)
|
385
|
|
|
Other
income (expense), net
|
19
|
(11)
|
|
|
Loss
resulting from fair value adjustment of warrant to purchase units
of Series B preferred stock and warrants
|
(5,187)
|
-
|
|
|
Loss
before income taxes
|
(12,333)
|
(4,070)
|
|
|
Income
tax benefit (expense), net
|
82
|
(48)
|
|
|
Net
loss
|
(12,251)
|
(4,118)
|
|
|
Basic
and diluted net loss per common share
|
(1.65)
|
(0.52)
|
|
|
Weighted
average number of shares used in computing
basic
and diluted net loss per common share
|
7,863,917
|
7,847,610
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
Answers
Corporation and Subsidiary
Consolidated
Statement of Changes in Stockholders' Equity and Comprehensive Loss (in
thousands except common stock data)
|
Common
stock
|
Additional
paid-in capital
|
Accumulated
other comprehensive loss
|
Accumulated
deficit
|
Total
stockholders’ equity
|
Comprehensive
loss
|
|||||||||
|
Shares
|
Amount
($)
|
$
|
$
|
$
|
$
|
$
|
||||||||
|
Balance
as of December 31, 2006
|
7,809,394
|
7,809
|
71,599
|
(31)
|
(54,984)
|
16,592
|
||||||||
|
Issuance
of common stock in connection with exercise
of
vested stock options
|
50,496
|
51
|
171
|
-
|
-
|
171
|
-
|
|||||||
|
Stock-based
compensation to employees and
directors
|
-
|
-
|
2,123
|
-
|
-
|
2,123
|
-
|
|||||||
|
Unrealized
gain on securities
|
-
|
-
|
-
|
3
|
-
|
3
|
3
|
|||||||
|
Net
loss for year
|
-
|
-
|
-
|
-
|
(4,118)
|
(4,118)
|
(4,118)
|
|||||||
|
Comprehensive
loss
|
(4,115)
|
|||||||||||||
|
Balance
as of December 31, 2007
|
7,859,890
|
7,860
|
73,893
|
(28)
|
(59,102)
|
14,771
|
||||||||
|
Issuance
of common stock in connection with
exercise of vested stock options
|
10,648
|
11
|
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
|
-
|
-
|
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
|
7,871
|
77,091
|
(28)
|
(71,353)
|
5,718
|
||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Answers
Corporation and Subsidiary
Consolidated
Statements of Cash Flows (in thousands)
|
Years
ended December 31
|
|||
|
2008
|
2007
|
||
|
$
|
$
|
||
|
Cash
flows from operating activities:
|
|||
|
Net
loss
|
(12,251)
|
(4,118)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||
|
Depreciation
and amortization
|
1,329
|
1,797
|
|
|
Deposits
in respect of employee severance obligations
|
(105)
|
(376)
|
|
|
Loss
on disposal of property and equipment
|
7
|
3
|
|
|
Increase
in liability in respect of employee severance obligations
|
304
|
394
|
|
|
Deferred
income taxes
|
12
|
14
|
|
|
Stock-based
compensation to employees and directors
|
1,719
|
2,123
|
|
|
Write-off
of the Brainboost Answers 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 adjustment of warrant to purchase units of Series B preferred stock
and warrants
|
5,187
|
-
|
|
|
Loss
(gains) from foreign exchange rate forward contracts
|
10
|
(86)
|
|
|
Exchange
rate losses
|
10
|
5
|
|
|
Changes
in operating assets and liabilities:
|
|||
|
Increase
in accounts receivable, and prepaid expenses and other current
assets
|
(212)
|
(185)
|
|
|
Decrease
in prepaid expenses, long-term, and other assets
|
39
|
87
|
|
|
(Decrease)
increase in accounts payable
|
(214)
|
601
|
|
|
Increase
(decrease) in accrued expenses and accrued compensation
|
65
|
(457)
|
|
|
Increase
(decrease) in deferred revenues
|
-
|
(449)
|
|
|
Net
cash used in operating activities
|
(299)
|
(647)
|
|
|
Cash
flows from investing activities:
|
|||
|
Capital
expenditures
|
(558)
|
(570)
|
|
|
(Increase)
decrease in long-term deposits (restricted)
|
(60)
|
22
|
|
|
Deferred
charges relating to planned acquisition
|
-
|
(437)
|
|
|
Purchases
of investment securities
|
-
|
(5,467)
|
|
|
Proceeds
from sales of investment securities
|
700
|
8,872
|
|
|
Net
cash provided by investing activities
|
82
|
2,420
|
|
|
Cash
flows from financing activities:
|
|||
|
Repayment
of capital lease obligation
|
(55)
|
-
|
|
|
Stock
registration cost
|
(47)
|
(225)
|
|
|
Redpoint
financing, net of $620 thousand issuance cost
|
5,380
|
-
|
|
|
Dividends
paid
|
(92)
|
-
|
|
|
Exercise
of common stock options and warrants
|
10
|
171
|
|
|
Net
cash provided by (used in) financing activities
|
5,196
|
(54)
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
(18)
|
83
|
|
|
Net
increase in cash and cash equivalents
|
4,961
|
1,802
|
|
|
Cash
and cash equivalents at beginning of year
|
6,778
|
4,976
|
|
|
Cash
and cash equivalents at end of year
|
11,739
|
6,778
|
|
|
Supplemental
disclosures of cash flow information:
|
|||
|
Income
taxes paid
|
-
|
8
|
|
|
Non-cash
investing activities:
|
|||
|
Acquisition
of assets through capital lease obligation
|
239
|
-
|
|
|
Capital
expenditures on account
|
127
|
-
|
|
|
Deferred
charges relating to proposed acquisition
|
-
|
125
|
|
|
Unrealized
net gain from securities
|
-
|
(3)
|
|
|
Non-cash
financing activities:
|
|||
|
Deferred
charges relating to proposed acquisition
|
-
|
480
|
|
|
Discounts
from the Redpoint financing
|
2,232
|
-
|
|
|
Amortizations
of discounts from the Redpoint financing
|
(518)
|
-
|
|
|
Dividends
paid in kind
|
(106)
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 - Business
Answers
Corporation (“the Parent”) was founded as a Texas corporation on December 22,
1998, and reorganized as a Delaware corporation in April 1999. On December 27,
1998, the Parent formed a subsidiary based in Israel (“the Subsidiary”),
primarily for the purpose of providing research and development services to the
Parent. The Parent and its wholly owned Subsidiary are collectively referred to
as “the Company.” The Parent is a public company and trades on the Nasdaq
Capital Market under the symbol “ANSW”.
As of
December 31, 2008, approximately $576,000 of the Company’s net assets were
located outside of the United States.
The
Company provides answer-based search services to users primarily through its
websites, Answers.com and WikiAnswers.com.
On
June 16, 2008, the Company raised $6,000,000, before related fees and
costs, in a private placement offering. See Note 9 for further
details.
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 $2.54 million (see Note 14
(g)).
In an
effort to improve monetization, in the fourth quarter of 2006, the Company began
marketing directly to advertisers and generating additional advertising revenue.
However, at the end of the second quarter of 2008, the Company decided to
abandon that effort, and by the end of the third quarter of 2008, the direct
sales staff left the Company. In connection with the winding down of this
effort, the Company paid $90,000 of termination fees for terminating certain
related service contracts and employment agreements.
In the
second quarter of 2008, the Company abandoned its use of the Brainboost Answer
Engine and recorded a charge in the amount of $3,138,000 (see Note
7).
Note
2 - Summary of Significant Accounting Policies
(a) 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.
(b) Foreign
Currency Translation
The
currency of the primary economic environment in which the operations of the
Company are conducted is the US dollar (“dollar”). Therefore, the dollar has
been determined to be the Company’s functional currency. Non-dollar transactions
and balances have been translated into dollars in accordance with the principles
set forth in Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign
Currency Translation” (SFAS No. 52).
Transactions
in foreign currency (primarily 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)
(c) 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.
(d) Cash
and Cash Equivalents, and Investment Securities
All
highly liquid investments with an original maturity of three months or less are
considered cash equivalents.
Investment
securities are classified as available-for-sale, in accordance with SFAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities”, and are
reported at fair value, with unrealized gains and losses, net of tax, recorded
in other comprehensive income (loss). Realized gains or losses and declines in
value judged to be other than temporary, if any, on available-for-sale
securities are reported in other income, net.
(e) 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.
(f) 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.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
(g) Revenue
Recognition
The
Company, through its websites Answers.com and WikiAnswers.com, generates
revenues via advertising in the form of sponsored links and image ads. This
includes both 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.
The
majority of the Company’s advertising revenue has been obtained through the
efforts of third party ad networks and has not been the result of direct
contracts with advertisers. The third party ad networks are obligated to pay the
Company a portion of the revenues they receive 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 revenues 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.
In 2003,
the Company sold lifetime subscriptions to its GuruNet product, which had no
defined termination date. Cash received from such lifetime subscriptions was
recorded as deferred revenues and amounted to $425,000. In February 2007,
in accordance with the Company’s rights under the agreements it previously
entered into with such lifetime subscribers, the Company terminated its GuruNet
service and thereby extinguished its service obligation to such subscribers.
Thus, the Company recognized the $425,000 previously deferred, as revenue in the
first quarter of 2007.
The
Company earned advertising revenue from its two web properties, as follows (in
thousands):
|
Year
ended December 31
|
|||
|
2008
|
2007
|
||
| $ |
$
|
||
|
Advertising
revenue
|
|||
|
Answers.com
|
6,622
|
9,449
|
|
|
WikiAnswers
|
7,524
|
1,302
|
|
|
14,146
|
10,751
|
||
(h) Research
and Development
The
Company capitalizes certain internal use software and website development costs
in accordance with FASB Statement No. 86, “Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed” and SOP
98-1, “Accounting for the Cost
of Computer Software Developed or Obtained for Internal Use” Costs
incurred during the years 2008 and 2007 for the development of internal use
software were not material.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
(i) Accounting
for 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.
Through
December 31, 2006, due to the lack of adequate history of its own stock
volatility, the Company estimated its own expected stock volatility based on the
historical stock volatility of three other comparable publicly held companies.
During 2007, as the Company accumulated its own volatility history over longer
periods of time, the Company’s assumptions about its stock price volatility were
based on a rate that was derived by taking into consideration the volatility
rates of the aforesaid comparable publicly held companies as well as its own
historical volatility rates. Beginning in 2008, the Company estimates its
expected stock volatility based on its own historical stock volatility
rates.
Valuation
Assumptions for Stock Options
The fair
value for each stock option granted to employees and directors during the years
ended December 31, 2008 and 2007, 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
|
2007
|
||
|
Expected
risk-free interest rate
|
2.80%
|
4.57%
|
|
|
Expected
life (in years)
|
4.08
|
4.08
|
|
|
Expected
volatility
|
84.66%
|
49.52%
|
|
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 expected life of the options granted to
employees and directors during 2008 and 2007, is calculated based on the
Simplified Method as allowed under Staff Accounting Bulletin (SAB) No. 107,
giving consideration to the contractual term of the options and their vesting
schedules.
In
December 2007, the SEC published Staff Accounting Bulletin (“SAB”)
No. 110, which amends SAB No. 107 by extending the usage of the
Simplified Method, as discussed in SAB No. 107, in developing an estimate
of expected term of “plain vanilla” share options in accordance with SFAS
No. 123 (revised 2004), ”Share-Based Payment”. SAB
No. 110 was declared effective on January 1, 2008, and allows companies, which
do not have sufficient historical experience, to provide a reasonable estimate
to continue use of the Simplified Method for estimating the expected term of
“plain vanilla” share option grants after December 31, 2007. Accordingly, the
Company will continue to use the Simplified Method until there is sufficient
historical experience to provide a reasonable estimate of expected term. SAB No.
110 was effective for the Company on January 1, 2008.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
(j) 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. A
valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not more likely than not to be
realized.
As of
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109” (FIN 48). FIN
48 clarifies the accounting for uncertainties in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes”. FIN 48 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.
(k) Impairment
of Property and Equipment, Goodwill and Intangible Assets
The
Company. evaluates its long-lived tangible and intangible assets for impairment
in accordance with SFAS No. 142, “Goodwill and Other Intangible
Assets”, with the annual impairment testing date set at September 30, and
in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When required, impairment losses on assets to be held and used are
recognized based on the fair value of the asset. The fair value is determined
based on estimates of future cash flows, market value of similar assets, if
available, or independent appraisals, if required. If the carrying amount of the
long-lived asset is not recoverable from its undiscounted cash flows, an
impairment loss is recognized for the difference between the carrying amount and
fair value of the asset. When fair values are not available, the Company
estimates fair value using the expected future cash flows discounted at a rate
commensurate with the risk associated with the recovery of the
assets.
(l) Net
Loss per Share Data
Basic and
diluted net loss per common share is presented in conformity with SFAS No. 128,
"Earnings per Share" and computed by dividing the net loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per share is the same as basic net loss per
share as the inclusion of the Company’s outstanding common stock equivalents
would be anti-dilutive.
The table
below presents the computation of basic and diluted net loss per common
share:
|
Year
ended December 31
|
|||
|
2008
|
2007
|
||
|
$
(in thousands,
except
share
and per share data)
|
|||
|
Net
loss
|
(12,251)
|
(4,118)
|
|
|
Series
A Convertible Preferred Stock dividends
|
(198)
|
-
|
|
|
Amortization
of Series A Convertible Preferred Stock discounts
|
(518)
|
-
|
|
|
Net
loss attributable to common shares
|
(12,967)
|
(4,118)
|
|
|
Weighted
average number of shares used in computing basic and diluted net loss per
common share
|
7,863,917
|
7,847,610
|
|
|
Basic
and diluted net loss per common share
|
(1.65)
|
(0.52)
|
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
(m) Comprehensive
Loss and Accumulated Other Comprehensive Loss
Comprehensive
loss as defined includes all changes in equity during a period from non-owner
sources, and net loss. Accumulated other comprehensive loss, consists of
cumulative net unrealized gains and losses on available-for-sale securities, net
of tax, and the cumulative foreign currency translation adjustment.
(n) Derivatives
and hedging
The
Company accounts for derivatives and hedging based on Statement of SFAS
No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (SFAS 133). SFAS 133
requires the Company to recognize 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, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative’s change in fair value is recognized in
earnings.
During
2008 and 2007, the Subsidiary entered into several forward and option contracts
to hedge certain foreign currency denominated expenses. These derivatives were
not designated as hedging instruments under the rules of SFAS 133 and therefore
the net gains (losses) are recognized in earnings as they occur. Such gains
(losses) are included in operating expenses as follows (in
thousands):
|
Year
ended December 31
|
|||
|
2008
|
2007
|
||
| $ | $ | ||
|
Cost
of revenue
|
(1)
|
9
|
|
|
Research
and development
|
(5)
|
31
|
|
|
Sales,
marketing and community development
|
-
|
24
|
|
|
General
and administrative
|
(4)
|
22
|
|
|
(10)
|
86
|
||
(o) Fair
Value Measurements
On
January 1, 2008, the Company adopted the provisions of Financial Accounting
Standards Board (FASB) Statement No. 157, “Fair Value Measurements”
(SFAS 157), 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. SFAS 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. SFAS 157 also establishes a
framework for measuring fair value and expands disclosures about fair value
measurements (see Note 10).
FASB Staff Position FAS 157-2, “Effective Date of FASB Statement
No. 157”, delays the effective date of Statement 157 until fiscal years
beginning after November 15, 2008 for all nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis
On
January 1, 2009, the Company will be required to apply the provisions of SFAS
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. The Company does not believe the adoption of
these provisions of SFAS 157 will have any impact on its consolidated financial
position, results of operations or cash flows.
In
October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active”, which was
effective immediately. FSP FAS 157-3 clarifies the application of Statement 157
in cases where the market for a financial instrument is not active and provides
an example to illustrate key considerations in determining fair value in those
circumstances. The Company has considered the guidance provided by FSP FAS 157-3
in its determination of estimated fair values during 2008.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
2 - Summary of Significant Accounting Policies (cont’d)
(p) Recently
Issued Accounting Standards
In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No.
133" (SFAS 161). SFAS 161 gives financial statement users better
information about the reporting entity's hedges by providing for qualitative
disclosures about the objectives and strategies for using derivatives,
quantitative data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent features in their
hedged positions. SFAS 161 is effective for financial statements issued for
fiscal years beginning after November 15, 2008 and interim periods within those
years. The adoption of SFAS 161 is not expected to have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.
In April
2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under Statement 142. FSP FAS
142-3 is effective for fiscal years beginning after December 15, 2008. The
Company is currently evaluating the impact, if any, of adopting FSP FAS 142-3 on
its financial position and results of operations.
On May 9,
2008, the FASB issued FASB Staff Position No. APB 14-1(FSP APB 14-1), “Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”. FSP APB 14-1 requires issuers of convertible debt that may
be settled wholly or partly in cash when converted to account for the debt and
equity components separately. FSP APB 14-1 is effective for fiscal years
beginning after December 15, 2008 and must be applied retrospectively to all
periods presented. The adoption of FSP APB 14-1 is not expected to have a
material impact on the Company’s consolidated financial position, results of
operations or cash flows.
In June 2008, the FASB ratified the
consensus of EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own
Stock”. EITF 07-5 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’s requirements will affect
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 will no longer be recorded in equity,
and many of the convertible instruments with such provisions will have to be
“bifurcated,” with the conversion option separately accounted for as a
derivative under SFAS 133. EITF 07-5 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. It will initially be applied by recording
a cumulative-effect adjustment to opening retained earnings at the date of
adoption for the effect on outstanding instruments. The adoption of EITF 07-5
will have a material impact on the Company’s consolidated financial position and
results of operations (see Note 9).
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
|
2007
|
||
|
$
|
$
|
||
|
In
US dollars
|
|||
|
Cash
|
218
|
1,915
|
|
|
Cash
equivalents (Money market funds)
|
10,948
|
4,575
|
|
|
In
New Israeli Shekels (cash only)
|
573
|
288
|
|
|
11,739
|
6,778
|
Note
4 – Investment Securities
As of
December 31, 2007, the Company’s investment securities consisted of corporate
bonds, certificates of deposit and auction rate securities. As of December 31,
2008, the Company held no investment securities.
Note
5 - Long-term Deposits (Restricted)
Long-term
deposits are comprised of a restricted deposit with a bank to secure a bank
guarantee and other long-term deposits with vendors and credit card companies.
The aforesaid deposit with a bank bears interest at the London Inter-Bank Bid
Rate (LIBID) less 0.7% (0.25% as of December 31, 2008) and automatically renews
on a monthly basis. The other long-term deposits bear interest at rates of up to
2.3%.
Note
6 - Property and Equipment, Net
Property
and equipment as of December 31, 2008 and 2007 consisted of the following (in
thousands):
|
2008
|
2007
|
||
|
$
|
$
|
||
|
Computer
equipment(1)
|
2,965
|
2,266
|
|
|
Furniture
and fixtures
|
177
|
186
|
|
|
Leasehold
improvements
|
175
|
175
|
|
|
3,317
|
2,627
|
||
|
Less:
accumulated depreciation and amortization(1)
|
(2,083)
|
(1,615)
|
|
|
1,234
|
1,012
|
|
(1)
|
Includes
leased equipment of $239,000, less accumulated depreciation of $58,000 as
of December 31, 2008 ($0 as of December 31,
2007)
|
As of
December 31, 2008 and 2007, approximately $338,000 and $510,000 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 2007, the Company recorded $695,000, and $553,000 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 2007 (in thousands):
|
December
31, 2008
|
December
31, 2007
|
||||||||||
|
Gross
carrying
amount
|
Accumulated
amortization
|
Net
|
Gross
carrying amount
|
Accumulated
amortization
|
Net
|
||||||
|
$
|
$
|
$
|
$
|
$
|
$
|
||||||
|
Brainboost
Answer Engine Technology
|
-
|
-
|
-
|
5,355
|
(1,860)
|
3,495
|
|||||
|
WikiAnswers
(formerly FAQ-Farm)
|
|||||||||||
|
Technology
|
30
|
(13)
|
17
|
30
|
(7)
|
23
|
|||||
|
Q&A
Database
|
207
|
(189)
|
18
|
207
|
(134)
|
73
|
|||||
|
Domain
Names
|
1,068
|
(231)
|
837
|
1,068
|
(125)
|
943
|
|||||
|
Covenant
Not to Compete
|
280
|
(202)
|
78
|
280
|
(109)
|
171
|
|||||
|
Domain
name
|
80
|
(36)
|
44
|
80
|
(28)
|
52
|
|||||
|
Capitalized
software development
costs (see Note 2(h))
|
98
|
(98)
|
-
|
98
|
(89)
|
9
|
|||||
|
1,763
|
(769)
|
994
|
7,118
|
(2,352)
|
4,766
|
||||||
During
the years 2008 and 2007, the Company recorded $634,000 and $1,244,000 of
amortization expenses of intangible assets, respectively. Additionally, in 2008
the Company wrote off the net book value of the Brainboost Answer Engine as of
May 25, 2008, of $3,138,000.
Amortization
of Intangible Assets, Net, in each of the succeeding five years is estimated as
follows (in thousands):
|
Year
ending December 31
|
$
|
||
|
2009
|
216
|
||
|
2010
|
121
|
||
|
2011
|
120
|
||
|
2012
|
115
|
||
|
2013
|
115
|
||
|
|
|||
|
687
|
|||
The
Company evaluates its long-lived intangible assets for impairment in accordance
with SFAS No. 142, “Goodwill
and Other Intangible Assets”, with the annual impairment testing date set
at September 30, and in accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. During the years ended December 31, 2008 and 2007, no impairments
of long-lived assets have occurred.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7 – Intangible Assets, Net (cont’d)
(a) 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 $3,138,000, was
written-off, and the resulting charge is included in the Company’s
operating expenses for the year ended December 31, 2008.
(b) WikiAnswers
(formerly FAQ-Farm)
On
November 2, 2006 (the “Closing Date”), the Company acquired certain assets of
Interesting.com, Inc. including the domain name known as www.faqfarm.com, a
dynamic questions and answers website (the “Acquired Website”) collaboratively
written and edited by its visitors. Subsequent to the acquisition, the Company
rebranded the Acquired Website as WikiAnswers.com. Additionally, in connection
with the acquisition of the Acquired Website, the Company also purchased certain
other assets, including numerous other domain names, certain trade names,
trademarks and other related intellectual property rights, certain databases of
questions and answers accumulated at the Closing Date by the Acquired Website,
software utilized for the operation of the Acquired Website and goodwill. These
assets (collectively referred to as “WikiAnswers”) were acquired in exchange for
$2,000,000 in cash (the “Acquisition Costs”). In addition there were $22,000 of
certain direct costs of acquisition, which have been added to the Acquisition
Cost.
Following
this acquisition, through September 2007, the sole shareholder of
Interesting.com Inc. (the “Selling Shareholder”) was employed by the Company.
Furthermore, the Selling Shareholder provided the Company with a Non-Competition
Covenant, pursuant to which he undertakes not to compete, directly or
indirectly, with the Company. Specifically, the Selling Shareholder agreed not
to compete with the Company’s business in the areas of (i) collaborative
questions and answers websites, (ii) "wiki" community websites, and/or (iii) any
websites targeting the collection and editing of information through
user-generated content for a period of (A) 3 years for the area described in the
foregoing (i) and (B) 1 year for the areas described in the foregoing
(ii) - (iii). The Selling Shareholder further agreed not to interfere
with the Company’s business and to refrain from approaching,
contacting, or soliciting the Company’s users in connection with any
purpose related to the above-mentioned non-compete areas.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
7 – Intangible Assets, Net (cont’d)
(b) WikiAnswers
(formerly FAQ-Farm) (cont’d)
All
assets related to WikiAnswers, 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, 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 (2007 - $120
thousand and $200 thousand, respectively). The Goodwill, although not amortized
for accounting purposes, is deductible for tax purposes over a fifteen year
period.
Note
8 – Deposits and Liability in Respect of Employee Severance
Obligations
Under
Israeli law, employers are required to make severance payments to dismissed
employees and employees leaving employment in certain other circumstances, based
on the latest monthly salary multiplied by the number of years of employment as
of the date of dismissal. As of December 31, 2008, this liability is covered by
payments of premiums to insurance companies under approved plans and by a
provision in these financial statements. The Deposits in respect of employee
severance obligations as stated on the balance sheets as of December 31, 2008
and 2007 represent contributions to managers’ insurance policies and are stated
at their current redemption value.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing
On
June 16, 2008 (the “Redpoint Closing Date”), pursuant to a private
placement of the Company’s securities, Redpoint Omega, L.P. and Redpoint Omega
Associates, LLC (collectively, “Redpoint”) purchased $6,000,000 of the Company’s
Series A Convertible Preferred Stock, initially convertible into 1,333,333
shares of common stock at a conversion price of $4.50 per share, and Common
Stock Purchase Warrants exercisable for 666,667 shares of common stock at an
exercise price of $4.95 per share (“Series A Warrants”). The conversion price of
the Series A Convertible Preferred Stock and the exercise price of the Series A
Warrants, are subject to certain adjustments, should the Company 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 any effective price per share that is less than the original conversion and
the exercise prices (the “Down-Round Protection”).
Redpoint
also received a 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 a conversion
price of $5.50 per share. The Series B Warrants have an exercise price of
$6.05 per share. After deducting placement agent fees and legal expenses, the
Company’s net proceeds from the private placement were approximately $5,380,000.
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 warrant to purchase units of Series B
Convertible Preferred Stock and Series B Warrants is referred to as the “Series
B Unit Warrant”.
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 as of its date of filing on
June 16, 2008 (see Note 11). The Series B Convertible Preferred Stock, if
purchased by Redpoint pursuant to its Series B Unit Warrant, will have similar
rights and preferences as the Series A Convertible Preferred
Stock.
In
connection with the private placement 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 agreement, 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 statement, which the Company filed on
July 30, 2008, and which was declared effective by the SEC on September 16,
2008, ceases to remain continuously effective. The Company also agreed to use
its reasonable best efforts to obtain all required stockholder approval for the
authorization and issuance of the common stock underlying the Redpoint
Securities by September 15, 2008, and such approval was obtained on September 9,
2008.
In
connection with the private placement, Redpoint received the right to appoint an
individual to serve as a voting member of the Company’s board of directors. If
Redpoint exercises the Series B Unit Warrant and meets certain ownership
requirements, it will be entitled to appoint a second member to the Company’s
board of directors.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing (cont’d)
Accounting
The
$6,000,000 of proceeds from the Redpoint Financing 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 SFAS 150, “Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity”, and
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 EITF D-98,
“Classification and
Measurement of Redeemable Securities”, and the Series A Warrants have
been classified in permanent equity.
In
recording the effects of the transaction, the Company allocated the
consideration from the purchase of the Redpoint Securities as follows (in
thousands):
|
Series
A Convertible Preferred Stock
|
Series
A Warrants
|
Series
B Unit Warrant
|
Total
|
||||
| $ |
$
|
$
|
$
|
||||
|
Allocated
amount
|
1,972
|
517
|
3,511
|
6,000
|
|||
|
Less:
Transaction costs
|
(204)
|
(53)
|
(363)
|
(620)
|
|||
|
1,768
|
464
|
3,148
|
5,380
|
Transaction
costs 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 Series A Warrants have been reflected as a
reduction of the proceeds from the issuance of such instruments. Transaction
costs relating to the Series B Unit Warrant have been deferred and are being
amortized to interest expense over one year, which is the life of the
warrant.
Series
A Convertible Preferred Stock
In
accordance with guidance in EITF D-98, “Classification and Measurement of
Redeemable Securities” and other accounting literature, the Series A
Convertible Preferred Stock has been recorded at its initial relative fair value
and classified in temporary equity. Subsequent changes to its fair value will
not be recognized as long as the stock continues to be classified as temporary
equity and not as a liability.
Series
A Warrants
The
relative fair value of the Series A Warrants, as explained above, has been
recorded and classified as additional paid-in capital in permanent equity, as
described above, with a corresponding discount to the Series A Convertible
Preferred Stock. Such discount is amortized to paid-in capital through the
earliest redemption date of the stock, which is six years after the date of
issuance. As of December 31, 2008, approximately $41,000 of such discount has
been amortized.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing (cont’d)
Series
B Unit Warrant
The
Series B Unit Warrant has been recorded as a liability, with a corresponding
discount to the Series A Convertible Preferred Stock. Such discount
is amortized against additional paid-in capital through the earliest redemption
date of the stock, which is six years after the date of issuance. As of December
31, 2008, approximately $317,000 of such discount has been
amortized.
The
Series B Unit Warrant is revalued at each reporting date. The Company assessed
the value of the Series B Unit Warrant as of December 31, 2008, as compared to
its fair value at the Redpoint Closing Date. The change in the amount of
$5,187,000 has been 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.
Beneficial
Conversion Feature
The
effective conversion rate of the Series A Convertible Preferred Stock, after
allocation of the proceeds as described above, as compared to the fair market
value of the Company’s common stock on the date of issuance, represents an
additional beneficial conversion value. Thus, the Company recorded an additional
discount to the Series A Convertible Preferred Stock, with a corresponding
increase in additional paid-in capital, of $1,768,000, reducing the Series A
Convertible Preferred Stock to zero. In accordance with EITF 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments”, the aforesaid discount is amortized to
additional paid-in capital over six years from the date of issuance, the
earliest redemption date of the stock. As of December 31, 2008, approximately
$160,000 of such discount has been amortized.
There are
additional features of the Series A Convertible Preferred Stock which represent
contingent beneficial conversion features, to be reevaluated in the future. In
the event that the facts and circumstances indicate that a contingency is
removed, at that point the beneficial conversion feature, if any, will be
recorded.
Dividends
The
Series A Convertible Preferred Stock accrues 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. Dividends are paid
quarterly. Any unpaid dividends are reflected as an increase in the stated value
of the Series A Convertible Preferred Stock with a corresponding decrease in the
additional paid-in capital.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
9 – Redpoint Financing (cont’d)
EITF
07-5
As a
result of the adoption of EITF 07-5, effective January 1, 2009, and due to the
Down-Round Protection of the Series A Warrants as described above, such warrants
are to be separately accounted for as a derivative under SFAS 133 and will no
longer be recorded in equity but rather as a liability.
EITF 07-5
will be initially applied by recording a cumulative-effect adjustment to opening
retained earnings as of January 1, 2009, for the effect of accounting for the
Series A Warrants as a liability. The following table summarizes the Redpoint
allocation had the Company been subject to the provisions of EITF 07-5 at the
Redpoint Closing Date (in thousands):
|
Series
A Convertible Preferred Stock
|
Series
A Warrants
|
Series
B Unit Warrant
|
Total
|
||||
|
$
|
$
|
$
|
$ | ||||
|
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 will record a cumulative effect of change in
accounting principle as reflected in the following table (in
thousands):
|
December
31, 2008
|
Effect
of
Adoption
of EITF 07-5
|
January
1, 2009
|
|||
|
$
|
$
|
$
|
|||
|
Additional
paid-in capital
|
77,091
|
(1,657)(1)
|
78,748
|
||
|
Accumulated
deficit
|
(71,353)
|
(1,730)(2)
|
(73,271)
|
||
|
(188)(3)
|
|||||
|
Long-term
liability – Series A Warrants
|
-
|
3,558
(4)
|
3,558
|
||
|
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.
|
At each
reporting date subsequent to January 1, 2009, the Series A Warrants will be
revalued and any changes in its fair value will be included in the statement of
operations.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
10 – Fair Value Measurements
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards 157, “Fair Value
Measurements”, (SFAS 157), except as it applies to the nonfinancial
assets and nonfinancial liabilities subject to FASB Staff Position No. 157-2.
SFAS 157 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, SFAS 157 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, foreign currency derivative contracts and
warrant to purchase units of Series B preferred stock and warrant, at fair
value. In accordance with SFAS 157, the Company’s cash equivalents and foreign
currency derivative contracts are classified within Level 1 or Level 2. This is
because the cash equivalents and foreign currency derivative contracts are
valued using quoted market prices or alternative pricing sources and models
utilizing market observable inputs. The warrant to purchase units of Series B
preferred stock and warrants is classified within Level 3 because it is valued
using a combination of Monte-Carlo simulation and Black-Scholes model. Some of
the inputs to this valuation are unobservable in the market and are significant,
including, redemption behavior estimates (including likelihood of forced
conversion, and timing of liquidation event if such event transpires) and
expected volatility of the Company’s stock price.
Assets
and liabilities measured at fair value are summarized below (in
thousands):
|
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)
|
||
|
$
|
$
|
$
|
$
|
|||||
|
Assets
|
||||||||
|
Cash
Equivalents (Money
Market Funds)
|
10,948
|
10,948
|
-
|
-
|
||||
|
Foreign
currency derivative contracts
|
26
|
-
|
26
|
-
|
||||
|
Total
Assets
|
10,974
|
10,948
|
26
|
-
|
||||
|
Liabilities
|
||||||||
|
Warrant
to purchase units of Series B preferred
stock and warrants
|
8,698
|
-
|
-
|
8,698
|
||||
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
10 – Fair Value Measurements (cont’d)
The
following table presents the changes in the Company’s liabilities measured at
fair value using significant unobservable inputs (Level 3) as defined in SFAS
157, as of December 31, 2008 (in thousands):
|
Level
3
|
|
|
$
|
|
|
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
|
|
Loss
included in statement of operations, resulting from the change in fair
value between June
16, 2008 and December 31, 2008
|
5,187
|
|
Balance
at December 31, 2008
|
8,698
|
Note
11 - Series A Convertible Preferred Stock (Redeemable)
The
following table summarizes the changes in the Series A Convertible Preferred
Stock that took place between the Redpoint Closing Date and December 31, 2008
(in thousands):
|
$
|
||
|
Gross
proceeds
|
6,000
|
|
|
Issuance
costs
|
(204)
|
|
|
Discount
resulting from the issuance of the Series A Warrants
|
(517)
|
|
|
Discount
resulting from the issuance of the Series B Unit Warrant
|
(3,511)
|
|
|
Discount
resulting from the Beneficial Conversion Feature
|
(1,768)
|
|
|
-
|
||
|
Amortizations
of discounts from the Redpoint Closing Date through December 31,
2008
|
518
|
|
|
Dividends
paid in kind
|
106
|
|
|
624
|
||
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
11 - Series A Convertible Preferred Stock (Redeemable) (cont’d)
As a
result of the Redpoint Financing (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
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 (the “Certificate of Designations”).
The
Certificate of Designations provides for the following rights and
preferences:
Dividends
The
Series A 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 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 are outstanding, the Company shall not, without the
affirmative vote of the holders of a majority of the shares of the Series A
Convertible Preferred Stock then outstanding (each holder of Series A
Convertible Preferred Stock, a “Holder” and collectively, the “Holders”),
(a) alter or change adversely the powers, preferences or rights given to
the Series A 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 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
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 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 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 (“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 “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 Convertible Preferred Stock (Redeemable) (cont’d)
Mandatory
Conversion
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
$1,000,000 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 Holder (an 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.
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 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 Convertible Preferred Stock. There are no amounts
redeemable within five years following December 31, 2008.
Subsequent
Equity Sales
If the
Company, at any time while Series A Convertible Preferred Stock is
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 Financing
agreement.
Participation
Rights
At any
time while Series A Convertible Preferred Stock is 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
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.
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 total consideration of
approximately $10,000.
During
2007, the Company issued a total of 50,496 shares of common stock due to the
exercise of 50,496 outstanding stock options, for a total consideration of
approximately $171,000.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
12 – Stockholders’ Equity (cont’d)
Stock
Warrants
As of
December 31, 2008, there were 1,157,763 outstanding stock warrants with a
weighted average exercise price of $16.21.
Additionally,
in connection with the Redpoint Financing (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 warrant, and a warrant to purchase units of up to $7
million of Series B Convertible Preferred Stock and Common Stock Purchase
Warrants. The Series B Convertible Preferred Stock, if purchased, will be
initially convertible into 1,272,727 shares of common stock at a conversion
price of $5.50 per share. The Series B Warrants, if purchased, will be
exercisable for 636,364 shares of common stock at an exercise price of $6.05 per
share.
All
issued and outstanding warrants are exercisable immediately. No warrants were
exercised during 2008.
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. As of December 31, 2008, 35,651 options were issued and
outstanding outside of the Company’s stock option plans.
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 June 21, 2006, and by additional 250,000 on September 9, 2008,
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
2008, the Company granted a total of 280,450 stock options under its 2005 Plan
and 149,900 stock options under its 2004 Plan.
The
following table summarizes the Company’s stock option activity during
2008:
|
Number
of
stock
options
|
Weighted
average
exercise
price
|
||
|
Balance
as of December 31, 2007
|
2,067,243
|
$10.61
|
|
|
Granted
|
430,350
|
4.31
|
|
|
Exercised
|
(10,648)
|
0.93
|
|
|
Forfeited
|
(384,810)
|
13.95
|
|
|
Outstanding
as of December 31, 2008
|
2,102,135
|
$8.75
|
The
weighted average fair value of options granted during 2008 and 2007, was $2.71
and $5.20, respectively. The aggregate intrinsic value of options exercised
during 2008 and 2007, was approximately $36,000, and $390,000, respectively, at
the date of exercise.
As of
December 31, 2008, 267,863 and 156,788 options were available for grant under
the 2005 Plan and the 2004 Plan, respectively. 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, 2008:
|
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
|
377,495
|
4.79
|
$3.26
|
139,895
|
3.56
|
$3.54
|
||||||
|
5.06
– 9.71
|
788,407
|
4.98
|
6.09
|
562,745
|
4.50
|
5.99
|
||||||
|
10.54
– 14.49
|
807,533
|
3.61
|
12.77
|
527,944
|
3.50
|
12.92
|
||||||
|
15.35
– 16.93
|
128,700
|
6.47
|
15.97
|
112,167
|
6.47
|
15.99
|
||||||
|
December
31, 2008
|
2,102,135
|
4.51
|
$8.75
|
1,342,751
|
4.17
|
$9.30
|
||||||
The
aggregate intrinsic value of stock options outstanding as of December 31, 2008,
was approximately $2,581,000 of which approximately $1,374,000 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 amounts to $1,719,000 and
was recorded as stock-based compensation expense.
As of
December 31, 2008, there was $2,756,000 of unrecognized compensation cost, net
of estimated forfeitures of $10,000, related to nonvested stock options granted
under the Company’s various stock option plans. That cost is expected to be
recognized as follows (in thousands):
|
Year
ending December 31
|
$
|
|
|
2009
|
1,406
|
|
|
2010
|
753
|
|
|
2011
|
403
|
|
|
2012
|
194
|
|
|
2,756
|
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
|
2007
|
||
|
$
|
$
|
||
|
U.S.
|
(13,954)
|
(4,971)
|
|
|
Non-U.S.
|
1,621
|
901
|
|
|
(12,333)
|
(4,070)
|
||
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, 2007:
|
|||||
|
U.S.
|
-
|
14
|
14
|
||
|
Non-U.S.
|
34
|
-
|
34
|
||
|
34
|
14
|
48
|
The
income tax expense (benefit) for the years ended December 31, 2008 and 2007,
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
|
2007
|
||
|
$
|
$
|
||
|
Computed
“expected” tax benefit
|
(4,193)
|
(1,384)
|
|
|
Effect
of State and Local taxes
|
(320)
|
(142)
|
|
|
Income
tax rate adjustment for State & Local taxes
|
49
|
152
|
|
|
Foreign
tax rate differential
|
(113)
|
(45)
|
|
|
Tax
benefit of “Approved Enterprise”/“Beneficiary Enterprise” tax
holiday
|
(532)
|
(228)
|
|
|
Change
in valuation allowance
|
1,474
|
1,233
|
|
|
Non-deductible
expenses
|
2,754
|
640
|
|
|
Adjustment
to prior year’s NOL's and other items
|
799
|
(178)
|
|
|
Actual
income tax expense (benefit)
|
(82)
|
48
|
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
13 - Income Taxes (cont’d)
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
|
2007
|
||
|
$
|
$
|
||
|
Deferred
tax assets:
|
|||
|
Miscellaneous
accrued expenses
|
143
|
205
|
|
|
Intangible
assets
|
165
|
197
|
|
|
Fixed
Assets
|
27
|
-
|
|
|
Deferred
stock compensation
|
327
|
217
|
|
|
Foreign
capital loss carryforwards
|
191
|
215
|
|
|
Other
|
4
|
-
|
|
|
Net
operating loss
|
22,957
|
21,577
|
|
|
Total
gross deferred tax assets
|
23,814
|
22,391
|
|
|
Less:
Valuation allowance
|
(23,814)
|
(22,363)
|
|
|
Net
deferred tax asset
|
-
|
28
|
|
|
Deferred
tax liabilities:
|
|||
|
Property
and equipment
|
-
|
(28)
|
|
|
Goodwill
|
(26)
|
(14)
|
|
|
Total
gross deferred tax liabilities
|
(26)
|
(42)
|
|
|
Net
deferred tax liability
|
(26)
|
(14)
|
|
Because
of the Company's lack of earnings history, as of December 31, 2008 and 2007, the
deferred tax assets have been offset by a valuation allowance. The net change in
the total valuation allowance for the years ended December 31, 2008 and 2007,
was an increase of $1,451 and $1,241 thousand, respectively.
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
13 - Income Taxes (cont’d)
The
Company had net operating loss (“NOL”) carryforwards for federal income tax
purposes of approximately $59 million at December 31, 2008. The federal NOLs
will expire if not utilized on various dates from 2019 through 2028. Section 382
of the Internal Revenue Code of 1986 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 at least two significant changes of ownership, as defined
under Section 382 of the Internal Revenue Code of 1986, have occurred, that
would trigger the limitations. The first took place in September 1999 in
connection with the Preferred Stock Class C issuance and the second took place
in October 2004 with respect to the Initial Public Offering. Based on current
estimates and assumptions, an annual limitation is imposed on the ability of the
Company to use $32 million of its NOL carryforwards. The Company's best estimate
at this time is that the annual limitation on the use of $32 million of the
Company's NOLs is approximately $1.8 million per year. Any unused portion of the
$1.8 million annual limitation applicable to the Company's restricted NOLs is
available for use in future years until such NOLs are scheduled to expire. The
Company has not yet determined if and to what extent subsequent changes in
ownership beyond October 2004 have triggered further limitations on its ability
to use its remaining $27 million of NOLs. The Subsidiary has capital
loss carryforwards of approximately $775,000, 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 $0.03, for the years ended
December 31, 2008 and 2007, respectively.
Under its
"Approved Enterprise" status, income arising from the Subsidiary's approved
activities is subject to zero tax under the "alternative benefit” 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 (27% being the rate in effect during
2008).
As of
December 31, 2008, the Company has not provided for deferred income taxes on the
undistributed earnings of approximately $3.7 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 intends
to elect 2008 as its Year of Election for its second expansion under the
Amendment to the Investment Law.
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.
In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes - An Interpretation of FASB Statement No. 109” (FIN 48). FIN
48 clarifies the accounting for uncertainties in income taxes recognized in a
company’s financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes”. FIN 48 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. The Company adopted the
provisions of FIN 48 as of January 1, 2007. Interest and penalties related to
unrecognized tax benefits are recognized as a component of income tax
expense.
The
Company does not expect the amount of unrecognized tax benefits to change
significantly within the next twelve months. A reconciliation of the beginning
and ending amount of unrecognized tax benefits is as follows (in
thousands):
|
$
|
|
|
Balance
at January 1, 2007
|
180
|
|
Additions
based upon tax positions related to the current year
|
64
|
|
Additions
for tax positions of prior years
|
19
|
|
Balance
at December 31, 2007
|
263
|
|
Reductions
for tax positions of prior years
|
(263)
|
|
Balance
at December 31, 2008
|
-
|
Of the
total unrecognized tax benefits at December 31, 2007, approximately $114
thousand, if recognized, would have impacted the effective tax rate in
2007.
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 income tax examinations by tax
authorities for years prior to 2005 and state & local income tax
examinations 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)
|
Future
minimum lease payments under non-cancelable operating leases for office
space and cars, as of December 31, 2008, are as follows (in
thousands):
|
|
Year
ending December 31
|
$
|
|
|
2009
|
463
|
|
|
2010
|
298
|
|
|
2011
|
22
|
|
|
783
|
Rental
expense for operating leases for the years ended December 31, 2008, and 2007 was
approximately $610,000, and $501,000, respectively.
|
|
(b)
|
Future
minimum lease payments under non-cancelable capital leases for computer
equipment, as of December 31, 2008, are as follows (in
thousands):
|
|
Principal
|
Interest
|
|||
|
Year
ending December 31
|
$
|
|||
|
2009
|
78
|
8
|
||
|
2010
|
82
|
3
|
||
|
2011
|
24
|
1
|
||
|
184
|
12
|
|||
|
|
(c)
|
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, 2008, such
deposits amounted to $529,000, including a restricted long-term deposit of
$139,000 (see Note 5).
|
|
|
(d)
|
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 investor relations arrangements. As of
December 31, 2008, the total future commitments under these arrangements
amount to approximately $525,000.
|
|
|
(e)
|
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, through its
operating agreement, has indemnified its 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.
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
14 - Commitments and Contingencies (cont’d)
|
|
(f)
|
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.
|
|
|
(g)
|
On
July 13, 2007, the Company entered into a Purchase Agreement to
acquire all of the outstanding limited liability interests of Lexico
Publishing Group, LLC for an aggregate purchase price of $100 million in
cash, subject to adjustments for closing net working capital. Consummation
of the acquisition of Lexico was subject to the Company’s ability to
secure financing for the
acquisition.
|
On
July 17, 2007, the Company filed a universal shelf registration statement
on Form S-3 with the Securities and Exchange Commission which was declared
effective on August 6, 2007. The registration statement, which will expire
on the second anniversary of its effective date, covers up to an aggregate of
$140,000,000 of common stock, preferred stock, warrants, debt securities, units
or any combination thereof. The Company filed various prospectus supplements for
a proposed public offering, the latest of which was filed on February 8,
2008. On February 13, 2008, the Company canceled its proposed public
offering due to unfavorable market conditions.
On
March 1, 2008, the members of Lexico terminated the purchase agreement, due
to the Company’s inability to finance the acquisition. As a result of the
termination of the purchase agreement, the Company reimbursed $500,000 of the
sellers’ transaction-related legal and accounting expenses, as provided for in
the Purchase Agreement.
Additionally,
in connection with the Lexico transaction, on January 15, 2008, the Company
entered into a Securities Purchase Agreement with an institutional investor, or
the senior notes investor, for the optional purchase and sale of $8.5 million
aggregate principal amount of its senior secured convertible notes due 2010, or
the senior secured convertible notes. The Company’s intent was to close the
senior secured convertible notes financing in conjunction with its follow-on
offering, if it needed such funds to close the Lexico acquisition. Since the
Company’s purchase agreement with Lexico was terminated, the Securities Purchase
Agreement was also terminated and the Company paid the senior secured
convertible notes investor a termination fee of $425 thousand, as provided for
in the Securities Purchase Agreement.
In
addition to the payments to Lexico and the senior notes investor, aggregating
$925,000, the Company incurred approximately $1,270,000 and $348,000 of costs,
including legal, accounting, banking, consulting and travel costs, in 2007 and
in the first quarter of 2008, respectively, in connection with the proposed
acquisition of Lexico and follow-on offering. The payments to Lexico, to the
senior notes investor, and the additional costs, collectively $2,543,000, are
included in the operating expenses on the Company’s statement of operations for
the year ended December 31, 2008.
|
|
(h)
|
In
connection with the Redpoint Financing 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 agreement,
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 of
$6,000,000, as partial liquidated damages, for certain default events and
subject to certain circumstances (see Note
9).
|
ANSWERS
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
15 – Interest Income (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 $196,000 (see Note 9),
and $7,000 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 investment securities in the
amount of $148,000.
Interest
income, net, in 2007 is comprised almost entirely of interest income earned from
cash and cash equivalents and investment securities.
Note
16 – Other Income (Expense), Net
Other
income (expense), net, is comprised of foreign currency exchange gains and
losses.
Note
17 – Risks and Uncertainties
|
(a)
|
Practically
all of the Company's advertising revenue is generated through the efforts
of third party ad networks (the “Monetization Partners”). In 2008 and
2007, the Company earned approximately 82% and 68% of its advertising
revenue, respectively, through one of its Monetization Partners, Google
Inc.
|
|
(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. According to the Company’s internal
estimates, in 2008 and 2007, search engine traffic represented
approximately 82% and 78% 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 restrict the flow of users
visiting the Company’s Web properties specifically. In fact, 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)
|
A
significant portion of the Company’s expenses are denominated in NIS. The
Company expects this level of NIS expenses to continue for the foreseeable
future. In 2008 and 2007, the average value of the dollar declined 12.7%
and 7.8%, respectively, as compared to its value in the years immediately
preceding such years. If the value of the U.S. dollar further 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 and options, to lessen the effect of currency fluctuations on
its results of operations.
|
None.
|
ITEM 9A(T).
|
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, 2008. Based on their evaluation, our principal executive and
principal financial officers have concluded that, as of December 31, 2008, 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, 2008. 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, 2008, 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, 2008 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
|
ITEM 9B.
|
None.
PART
III
The
following table sets forth certain information regarding our executive officers
and directors as of December 31, 2008:
|
Name
|
Age
|
Position
|
||
|
Executive
Officers
|
||||
|
Robert
S.
Rosenschein
|
55
|
Chief
Executive Officer, President and Chairman of the Board
|
||
|
Steven
Steinberg
|
48
|
Chief
Financial Officer
|
||
|
Jeff
Schneiderman
|
45
|
Chief
Technical Officer
|
||
|
Bruce
D.
Smith
|
47
|
Chief
Strategic Officer
|
||
|
Caleb
A.
Chill
|
34
|
Vice
President, General Counsel and Corporate Secretary
|
||
|
Directors
|
||||
|
Mark
A.
Tebbe .
|
48
|
Vice
Chairman and Lead Director
|
||
|
Edward
G.
Sim
|
37
|
Director
|
||
|
Yehuda
Sternlicht
|
54
|
Director
|
||
|
Mark
B.
Segall
|
46
|
Director
|
||
|
Lawrence
S.
Kramer
|
58
|
Director
|
||
|
W.
Allen
Beasley
|
41
|
Director
|
||
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. From
1988 to 1997, Mr. Rosenschein was Chief Executive Officer of Accent
Software International Ltd. (formerly Kivun), a company that developed
multi-lingual software tools, and from 1997 to 1998, he was the Chief Technical
Officer of Accent. Previously, he worked for Data General, American Management
Systems and the World Bank. Mr. Rosenschein graduated with a B.Sc. in
Computer Science from the Massachusetts Institute of Technology in 1976 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.
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 Nominating/Corporate Governance Committee and as a member of our
Compensation 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.
Edward G.
Sim has served as a director since August 1999 and currently serves as
the chairman of our Compensation Committee and as a member of our Audit
Committee. Mr. Sim is a member and Managing Director of the Dawntreader
Group and Dawntreader Funds, which he co-founded in 1998. From April 1996 to
April 1998, he worked on software and technology investments, such as 24/7
Media, at Prospect Street Ventures, a New York-based venture capital firm. From
June 1994 to April 1996, Mr. Sim worked with J.P. Morgan’s Structured
Derivatives Group on the development of a real-time trading application for
global asset allocation. Mr. Sim also serves as a director of DeepNines,
Inc., netForensics, Inc., Greenplum, and SIPphone, Inc. Mr. Sim graduated
with an A.B. in Economics from Harvard University.
Yehuda
Sternlicht has served as a director since June 2004 and currently serves
as the chairman of our Audit Committee and as a member of our Financing
Committee. Since 2004, Mr. Sternlicht has been an independent financial
consultant and since 2004, he has been 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.. He has also served in
several financial and accounting positions in public and private companies and
in a large CPA firm. 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.
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. 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 graduated
with an A.B. from Colombia University and a J.D. from New York University Law
School.
Lawrence S.
Kramer has served as a director since May 2005 and currently serves as a
member of our Financing Committee and our Nominating/Corporate Governance
Committee. Mr. Kramer has been a senior advisor to Polaris Venture Partners
since July 2007. 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. In 2008, Mr. Kramer became a board member of
Discovery Communications Inc. (NASDAQ: DISCA). In September 2007, he became a
director of Xinhua Finance Media (NASDAQ: XFML) and in July 2007,
Mr. Kramer became a board member of CreditCards.com, Inc., an online credit
card marketplace. 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.
W. Allen Beasley has served as
a director since June 2008 and currently serves as a member of our Compensation
Committee and our Nominating/Corporate Governance 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 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 Airplay, Buzznet and Obopay. Mr. Beasley holds a
B.A. in Economics from Stanford University and an M.B.A. from the Stanford
Graduate School of Business.
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 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. 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
at our annual meeting in 2011
|
Mark
A. Tebbe and Lawrence S. Kramer
|
||
|
Class II
|
Expires
at our annual meeting in 2009
|
Edward
G. Sim
|
||
|
Class III
|
Expires
at our annual meeting in 2010
|
Robert
S. Rosenschein, Yehuda Sternlicht and Mark B.
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 2009
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.
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. Currently, we have a majority of
independent directors on our board. Our independent directors have regularly
scheduled meetings at which only independent directors are present.
Any
affiliated transactions 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.
Committees
of the Board
Audit
Committee. In May 2004, we established an Audit Committee of
the board of directors. The Audit Committee consists of Mr. Sternlicht,
Chairman, Mr. Segall and Mr. Sim, 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
us regarding accounting, internal accounting controls, or auditing matters and
the confidential, anonymous submissions by our 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 us 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, we 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, we established a Compensation
Committee of the board of directors. The Compensation Committee consists of
Mr. Sim, Chairman, Mr. Tebbe and Mr. Beasley, each of whom is an
independent director under the current definition promulgated by NASDAQ. The
Compensation Committee reviews and approves our salary and benefits policies,
including the compensation of executive officers. The Compensation Committee
also administers our stock option plans and recommends and approves grants of
stock options under such plans.
Nominating/Corporate Governance
Committee. In May 2004, we established a Nominating/Corporate
Governance Committee of the board of directors. The Nominating/Corporate
Governance Committee consists of Mr. Tebbe, Chairman, Mr. Kramer and
Mr. Beasley, each of whom is an independent director under the current
definition promulgated by NASDAQ. The purpose of the Nominating/Corporate
Governance Committee is to select, or recommend for our 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 our board. The committee’s duties, which are specified in our
Nominating/Corporate Governance Committee Charter, include, but are not limited
to:
|
|
•
|
Establishing
criteria for the selection of new
directors;
|
|
|
•
|
Recommending
directors to serve on the committees of our
board;
|
|
|
•
|
Considering
the adequacy of our corporate governance and proposing amendments
accordingly;
|
|
|
•
|
Overseeing
and approving our management continuity planning
process; and
|
|
|
•
|
Reporting
regularly to the board matters relating to the committee’s
duties.
|
We have
made no material changes to the procedures by which stockholders may recommend
nominees to our board of directors.
Financing Committee. In July 2005, we
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, to evaluate the
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.
Meetings
of the Board of Directors and its Committees
During
the year ended December 31, 2008, our board of directors held
11 meetings; our Audit Committee held 6
meetings; our Compensation Committee held 5 meetings; and our
Nominations / Corporate Governance Committee held 2
meetings.
During
the year ended December 31, 2008, no director attended fewer than 75% of the
aggregate of the total number of meetings of our board of directors (held during
the period for which he was a director) and the total number of meetings held by
all committees of our board of directors on which he served (held during the
period that he served), with the exception of Lawrence S. Kramer who was absent
from one of the two meetings held by the Nominations / Corporate Governance
Committee in 2008.
Compensation
Committee Interlocks and Insider Participation
None of
our executive officers serves as a member of the board of directors or
Compensation Committee of any entity which has one or more executive officers
serving as a member of our board of directors or Compensation Committee. No
member of our Compensation Committee during fiscal year 2008 was an officer or
employee of our company.
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 2008, all filing requirements
applicable to our officers, directors and greater than ten percent beneficial
owners were complied with.
|
ITEM 11.
|
Introductory
Remark
We
believe our success depends on the continued contributions of our named
executive officers. Personal relationships are very important in our industry.
Our named executive officers are primarily responsible for many of our critical
customer and business development relationships. The maintenance of these
relationships is critical to ensuring our future success. Therefore, it is
important to our success that we retain the services of these individuals and
prevent them from competing with us should their employment with us
terminate.
General
Philosophy
Our
overall compensation philosophy is to provide an executive compensation package
that enables us to attract, retain and motivate executive officers to achieve
our short-term and long-term business goals. We strive to apply a uniform
philosophy regarding compensation of all employees, including members of senior
management. This philosophy is based upon the premise that the achievements of
the company result from the combined and coordinated efforts of all employees
working toward common goals and objectives in a competitive, evolving market
place. The goals of our compensation program are to align remuneration with
business objectives and performance and to enable us to retain and competitively
reward executive officers and employees who contribute to our long-term success.
We attempt to pay our executive officers and employees competitively to enable
us to retain the most capable people in the industry. In making executive
compensation and other employment compensation decisions, the Compensation
Committee considers achievement of certain criteria, some of which relate to our
performance and others of which relate to the performance of the individual
employee. Awards to executive officers are based on achievement of company and
individual performance criteria.
The
Compensation Committee will evaluate our compensation policies on an ongoing
basis to determine whether they enable us to attract, retain and motivate key
personnel. To meet these objectives, the Compensation Committee may from time to
time increase salaries, award additional stock options or provide other short
and long-term incentive compensation to executive officers and other
employees.
Compensation
Program and Forms of Compensation
We
provide our executive officers with a compensation package consisting of base
salary, bonus and participation in benefit plans generally available to other
employees. In setting total compensation, the Compensation Committee considers
individual and company performance, as well as market information regarding
compensation paid by other companies in our industry.
In order
to achieve the above goals, our total compensation packages include base salary,
annual bonus and in cases of our sales employees, commissions, all paid in cash,
as well as long-term compensation in the form of stock options.
Base
Salary. Salaries for our executive officers are initially set
based on negotiation with individual executive officers at the time of
recruitment and with reference to salaries for comparable positions in the
industry for individuals of similar education and background to the executive
officers being recruited. We also consider the individual’s experience,
reputation in his or her industry and expected contributions to our company.
Base salary is continuously evaluated by competitive pay and individual job
performance. Base salaries for executives are reviewed annually or more
frequently should there be significant changes in responsibilities. In each
case, we take into account the results achieved by the executive, his or her
future potential, scope of responsibilities and experience, and competitive
salary practices.
Bonuses. A
component of each executive officer’s potential annual compensation may take the
form of a performance-based bonus. Contractually, our Chief Executive Officer is
entitled to an annual bonus, to be determined at the discretion of our board of
directors or the Compensation Committee, based on the CEO's performance in light
of corporate goals and objectives. Bonus payments to officers other than the
Chief Executive Officer are determined by the Board of Directors, by
recommendation of the Compensation Committee and in consultation with the Chief
Executive Officer, based on our financial performance. The achievement of an
officer’s individual performance objectives may also be factored into decisions
affecting bonus levels.
Long-Term
Incentives. Longer-term incentives are provided through stock
options, which reward executives and other employees through the growth in value
of our stock. The Compensation Committee believes that employee equity ownership
provides a major incentive for employees to build stockholder value and serves
to align the interests of employees with those of our stockholders. Grants of
stock options to executive officers are based upon each officer’s relative
position, responsibilities and contributions to Answers, with primary weight
given to the executive officer’s relative rank and responsibilities. Initial
stock option grants designed to recruit an executive officer to join Answers may
be based on negotiations with the officer and with reference to historical
option grants to existing officers. Stock options are granted at an exercise
price equal to the market price of our common stock on the date of grant and
will provide value to the executive officers only when the price of our common
stock increases over the exercise price.
Based on
our compensation philosophy, a substantial portion of our compensation rewards
long-term performance of our company and promotes executive retention. This is
delivered to our executives through stock options granted upon their initial
hire and through ongoing annual option grants. Similar to base salary increases,
option grants are also granted to address promotions and significant changes in
responsibility. Although the expenses of stock options affect our financial
statements negatively, we continue to believe that this is a strong element of
compensation that focuses the employees on financial and operational performance
to create value for the long-term. Stock option awards are “time based". In
order to provide an incentive for continued employment, stock options granted
under our stock option plans generally vest 25% upon completion of
12 months of service and 1/36 per month thereafter, and generally expire
six or ten years from the date of the grant. This provides a
reasonable time frame to align the executive officer compensation with the
appreciation of our stock price while managing potential dilution
effectively.
Initial
stock option grants and annual option grants for plan participants are generally
determined within ranges established for each job level. These ranges are
established based on our desired pay positioning relative to the competitive
market. Specific recruitment needs are taken into account for establishing the
levels of initial option grants. Annual option grants take into consideration a
number of factors, including performance of the individual, job level, prior
grants and competitive external levels. The goals of option grant guidelines are
to ensure future grants remain competitive from a grant value perspective and to
ensure option usage consistent with option pool forecasts.
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, 2008.
Option
Grant Practice
The
Compensation Committee has delegated the authority to make initial option grants
to new non-executive employees (within an approved range) to executive
management. During 2008, initial option grants that were within executive
management’s approved range were granted quarterly, on March 27,
June 30, September 29 and December 29. 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 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 2008, these grants were made on
July 14, 2008 and September 9, 2008.
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.
Executive
Equity Ownership
We
encourage our executives to hold a significant equity interest in our company.
However, we do not have specific share retention and ownership guidelines for
our executives.
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, inparticular in light of the recent IRS Revenue Ruling
2008-13.
Accounting for Stock-Based
Compensation. On January 1, 2006, we began accounting for
stock-based payments including our stock option program in accordance with the
requirements of FASB Statement 123(R).
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. Mr. Rosenschein’s annual
base salary was set at $263,544 from January 1, 2008 until February 28,
2008, and adjusted to 954,000 NIS (New Israeli Shekel) commencing March 1, 2008
(the equivalent of $250,920 based on the US Dollar — Israeli NIS
exchange rate recorded by the Bank of Israel on December 31, 2008).
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. Either party 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 a lump
sum of $150,000 less the severance pay portion of his Manager’s Insurance
Policy, regardless of the period remaining in the term of his employment
agreement. Since Mr. Rosenschein’s Manager’s Insurance Policy is greater
than $150,000, he will be entitled to the entire amount payable under the
Manager’s Insurance Policy. At the time Mr. Rosenschein’s employment
agreement was amended and restated in 2004, 241,964 options were granted to
Mr. Rosenschein under the 2003 Stock Option Plan. 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 will 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 2008 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 $157,920 from January 1, 2008 until February 28, 2008, and
adjusted to 664,800 NIS commencing March 1, 2008 (the equivalent of
$174,855 based on the US Dollar — Israeli NIS exchange rate recorded
by the Bank of Israel on December 31, 2008). Either party may
terminate the 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 is entitled to four months written notice and any
unvested options that were granted to Mr. Steinberg, subsequent to the date
of his employment agreement, will 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 2008 under various circumstances appears under “Potential Payments
and Benefits upon Termination of Employment — Steve Steinberg,”
below.
Jeff
Schneiderman
Jeff
Schneiderman is employed as our Chief Technical 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. Schneiderman’s annual base
salary was set at $157,920 from January 1, 2008 until February 28,
2008, and adjusted to $664,800 NIS commencing March 1, 2008 (the equivalent
of $174,855 based on the US Dollar — Israeli NIS exchange rate
recorded by the Bank of Israel on December 31, 2008). Either party may
terminate the employment agreement without cause at any time upon three months
notice.
If we
terminate Mr. Schneiderman’s employment without cause or due to death or
disability, we shall extend the period during which Mr. Schneiderman may
exercise his options granted after the date of his employment agreement by one
year from the effective date of Mr. Schneiderman’s termination. In the
event of a change in control, we will accelerate the vesting of 50% of any
options granted to Mr. Schneiderman subsequent to his employment agreement
that have not vested as of the effective date of the change in control. If,
within twelve months after such change in control, Mr. Schneiderman’s
employment is terminated without cause, Mr. Schneiderman is entitled to
four months written notice and any unvested options that were granted to
Mr. Schneiderman subsequent to the date of his employment agreement will
vest immediately upon the effective date of the termination.
Mr. Schneiderman 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. Schneiderman under
his employment agreement had Mr. Schneiderman’s employment with us been
terminated at the end of 2008 under various circumstances appears under
“Potential Payments and Benefits upon Termination of Employment — Jeff
Schneiderman,” 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 $216,000
from January 1, 2008 until August 31, 2008, and adjusted to $237,600
commencing September 1, 2008. 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. Either party 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 2008 under various circumstances appears under “Potential Payments
and Benefits upon Termination of Employment — Bruce D. Smith,”
below.
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 certain executive
officers if their employment had been terminated on December 31, 2008 (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 Agreements”
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,
2008.
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, 2008 (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)
|
$98,381
|
$98,381
|
$98,381
|
$98,381
|
$98,381
|
|||||
|
Contractual
severance
|
—
|
—
|
$120,410
|
—
|
—
|
|||||
|
Statutory
severance(7)
|
$205,758
|
$205,758
|
$205,758
|
$205,758
|
$205,758
|
|||||
|
Vacation(8)
|
$32,218
|
$32,218
|
$32,218
|
$32,218
|
$32,218
|
|||||
|
Continuing
education fund(9)
|
$36,766
|
$36,766
|
$36,766
|
$36,766
|
$36,766
|
|||||
|
Advance
notice(10)
|
$60,205
|
$60,205
|
—
|
—
|
$60,205
|
|
(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, 2008, 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, 2008, Mr. Rosenschein was entitled to 29 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, 2008, the ceiling then
in effect was NIS 15,712 (approximately $4,130). 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, 2008 (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)
|
$50,550
|
$50,550
|
$50,550
|
$50,550
|
$50,550
|
|||||
|
Contractual
severance(7)
|
—
|
—
|
$41,110
|
—
|
—
|
|||||
|
Statutory
severance(8)
|
$83,105
|
$83,105
|
$83,105
|
$83,105
|
$83,105
|
|||||
|
Vacation(9)
|
$10,370
|
$10,370
|
$10,370
|
$10,370
|
$10,370
|
|||||
|
Continuing
education fund(10)
|
$22,527
|
$22,527
|
$22,527
|
$22,527
|
$22,527
|
|||||
|
Advance
notice(11)
|
$41,110
|
$41,110
|
—
|
—
|
$54,813
|
|
(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, 2008, 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, 2008, Mr. Steinberg was entitled to 13.67 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, 2008, the ceiling then
in effect was NIS 15,712 (approximately $4,130). 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.
|
Jeff
Schneiderman
The
following table describes the potential payments and benefits upon employment
termination for Jeff Schneiderman, our Chief Technical Officer, pursuant to
applicable law and the terms of his employment agreement with us, as if his
employment had terminated on December 31, 2008 (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)
|
$80,463
|
$80,463
|
$80,463
|
$80,463
|
$80,463
|
|||||
|
Contractual
severance(7)
|
—
|
—
|
$41,157
|
—
|
—
|
|||||
|
Statutory
severance(8)
|
$138,751
|
$138,751
|
$138,751
|
$138,751
|
$138,751
|
|||||
|
Vacation(9)
|
$14,430
|
$14,430
|
$14,430
|
$14,430
|
$14,430
|
|||||
|
Continuing
education fund(10)
|
$36,766
|
$36,766
|
$36,766
|
$36,766
|
$36,766
|
|||||
|
Advance
notice(11)
|
$41,157
|
$41,157
|
—
|
—
|
$54,876
|
|
(1)
|
According
to Mr. Schneiderman’s employment agreement, we may terminate his
employment without cause upon three months notice.
|
|
(2)
|
According
to Mr. Schneiderman’s employment agreement, he may terminate his
employment, at any time, upon three months notice. With respect to
Termination at Will by Mr. Schneiderman, we are not legally required
to release to Mr. Schneiderman 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. Schneiderman’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. Schneiderman’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. Schneiderman’s employment as the occurrence of any
one or more of the following: (i) Mr. Schneiderman’s act of
fraud, dishonesty or willful misconduct; (ii) Mr. Schneiderman’s
material breach of his confidentiality or non-competition obligations set
forth in his employment agreement; (iii) Mr. Schneiderman’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. Schneiderman’s conviction of a
criminal offense involving fraud, embezzlement or
dishonesty.
|
|
(5)
|
“Change
of Control” is defined in Mr. Schneiderman’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. Schneiderman’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. Schneiderman’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 the (i) 8.33% payments to a fund to
secure payment of statutory severance obligations with respect to amounts
paid prior to December 31, 2008, which funds are reflected in the
table under the “Statutory Severance” heading, and (ii) payments for
disability.
|
|
(7)
|
According
to Mr. Schneiderman’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. Schneiderman 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, 2008, Mr. Schneiderman was entitled to 19 annual
vacation days. A maximum of 20 days of unused paid vacation days may
be carried over from year to year by Mr. Schneiderman. At the end of
each calendar year, all unused vacation days in excess of 20, are
automatically forfeited.
|
|
(10)
|
Pursuant
to Mr. Schneiderman’s employment agreement, we must contribute an
amount equal to 7.5% of Mr. Schneiderman’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, 2008, the
ceiling then in effect was NIS 15,712 (approximately $4,130). According to
Israeli law, Mr. Schneiderman 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. Schneiderman since the
beginning of his employment with us.
|
|
(11)
|
Pursuant
to Mr. Schneiderman’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. Schneiderman to continue working during any notice period. Should
Mr. Schneiderman’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, 2008 (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)
|
$20,720
|
$20,720
|
$20,720
|
$20,720
|
$20,720
|
|||||
|
Vacation(7)
|
$14,962
|
$14,962
|
$14,962
|
$14,962
|
$14,962
|
|||||
|
Advance
notice(8)
|
$54,000
|
$54,000
|
—
|
—
|
$54,000
|
|
(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, 2008, Mr. Smith was entitled to 13.65 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.
|
Summary
Compensation Table
The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer, Chief Financial
Officer and our two other highest paid executive officers whose total annual
salary and bonus exceeded $100,000 (collectively, our named executive officers)
for fiscal year 2008.
|
Name
& Principal Position
|
Year
|
Salary ($)
|
Bonus
($)
|
Option
Awards ($)*
|
All
Other Compensation($)(5)
|
Total
($)
|
||||||
|
Robert
S. Rosenschein(1)
|
2008
|
257,020(6)
|
—
|
142,170
|
58,211(7)
|
457,401
|
||||||
|
Chief
Executive Officer
|
2007
|
227,874(6)
|
—
|
127,499
|
52,756(8)
|
408,129
|
||||||
|
And
Chairman
|
||||||||||||
|
Steven
Steinberg(2)
|
2008
|
173,087(6)
|
—
|
116,237
|
48,419(9)
|
337,743
|
||||||
|
Chief
Financial Officer
|
2007
|
146,858(6)
|
—
|
115,100
|
42,806(10)
|
304,764
|
||||||
|
Jeff
Schneiderman(3)
|
2008
|
172,222(6)
|
—
|
128,004
|
46,544(11)
|
346,770
|
||||||
|
Chief
Technical Officer
|
2007
|
146,858(6)
|
—
|
119,213
|
41,309(12)
|
307,380
|
||||||
|
Bruce
D. Smith(4)
|
2008
|
223,200
|
—
|
186,900
|
32,428(13)
|
442,527
|
||||||
|
Chief
Strategic Officer
|
2007
|
211,667
|
—
|
173,971
|
32,090(13)
|
417,728
|
||||||
|
*
|
Amounts
represent stock-based compensation expense for fiscal years 2008 and 2007
under SFAS 123R.
|
|
(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. Schneiderman
joined us in January 1999 as Vice President of Research and Development
and appointed our Chief Technical Officer in March
2003.
|
|
(4)
|
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.
|
|
(5)
|
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.
|
|
(6)
|
Does
not include benefit associated with possession of company-leased
vehicle.
|
|
(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 $3,441; 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 $32,199; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $6,457; and payments associated with
possession of company-leased vehicle in the amount of
$9,600.
|
|
(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
contributions to continued education fund (Keren Hishtalmut) in the amount
of $3,441; 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 $22,249; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $6,457; and payments associated with
possession of company-leased vehicle in the amount of
$9,600.
|
|
(11)
|
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 $24,168; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $6,432; and payments associated with
possession of company-leased vehicle in the amount of
$10,800
|
|
(12)
|
Includes
contributions to continued education fund (Keren Hishtalmut) in the amount
of $3,441; 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 $20,571; contributions towards statutory national insurance
(Bituach Leumi) in the amount of $6,457; and payments associated with
possession of company-leased vehicle in the amount of
$9,600.
|
|
(13)
|
Includes
payments made on account of medical insurance, short and long term
disability, life insurance and 3% contributions to 401(k)
plan.
|
Grants
of Plan-Based Awards
The
following table sets forth information regarding stock option awards to our
named executive officers under our stock option plans during the fiscal year
ended December 31, 2008:
|
Name
|
Grant
Date(1)
|
All
Other
Option
Awards:
Number
of Securities
Underlying
Options
(#)
|
Exercise
or Base Price of Option Awards
($/Sh)
|
Total
Grant-Date Fair Value
($)
|
||||
|
Robert
S. Rosenschein
|
July
14, 2008
|
20,000
|
$2.95
|
$37,209
|
||||
|
September
9, 2008
|
18,000
|
$5.77
|
$65,274
|
|||||
|
Steven
Steinberg
|
July
14, 2008
|
18,000
|
$2.95
|
$33,488
|
||||
|
September
9, 2008
|
14,000
|
$5.77
|
$50,769
|
|||||
|
Jeff
Schneiderman
|
July
14, 2008
|
18,100
|
$2.95
|
$33,674
|
||||
|
September
9, 2008
|
14,000
|
$5.77
|
$50,769
|
|||||
|
Bruce
D. Smith
|
July
14, 2008
|
18,200
|
$2.95
|
$33,860
|
||||
|
September
9, 2008
|
16,000
|
$5.77
|
$58,021
|
|
(1)
|
25%
of the grant exercisable as of 12 months following the Grant Date;
1/36 of the remainder exercisable on each of the following 36 monthly
anniversaries.
|
Outstanding
Equity Awards at Fiscal Year-End
The
following table sets forth information for the named executive officers
regarding the number of shares subject to both exercisable and unexercisable
stock options, as well as the exercise prices and expiration dates thereof, as
of December 31, 2008.
|
Name
|
Number
of Securities Underlying
Unexercised
Options (#)
Exercisable
|
Number
of Securities Underlying
Unexercised
Options (#)
Unexercisable
|
Option
Exercise
Price
($/Sh)
|
Option
Expiration
Date
|
||||
|
Robert
S. Rosenschein
|
241,964
|
—
|
5.06
|
August
5, 2013
|
||||
|
58,333
|
21,667
|
13.75
|
January
30, 2012
|
|||||
|
10,937
|
14,063
|
11.61
|
March
5, 2013
|
|||||
|
—
|
20,000
|
2.95
|
July
14, 2014
|
|||||
|
—
|
18,000
|
5.77
|
September
9, 2014
|
|||||
|
Steven
Steinberg
|
10,861
|
—
|
11.51
|
August
5, 2013
|
||||
|
17,786
|
—
|
2.76
|
August
5, 2013
|
|||||
|
26,353
|
—
|
5.25
|
November
9, 2014
|
|||||
|
40,104
|
14,896
|
13.75
|
January
30, 2012
|
|||||
|
9,406
|
12,094
|
11.61
|
March 5,
2013
|
|||||
|
—
|
18,000
|
2.95
|
July
14, 2014
|
|||||
|
—
|
14,000
|
5.77
|
September
9, 2014
|
|||||
|
Jeff
Schneiderman
|
10,861
|
—
|
2.76
|
October
20, 2009
|
||||
|
4,345
|
—
|
6.91
|
April
8, 2010
|
|||||
|
8,689
|
—
|
11.51
|
August
1, 2011
|
|||||
|
22,876
|
—
|
5.25
|
November
9, 2014
|
|||||
|
47,395
|
17,605
|
13.75
|
January
30, 2012
|
|||||
|
9,406
|
12,094
|
11.61
|
March 5,
2013
|
|||||
|
—
|
18,100
|
2.95
|
July
14, 2014
|
|||||
|
—
|
14,000
|
5.77
|
September
9, 2014
|
|||||
|
Bruce
D. Smith
|
64,062
|
10,938
|
15.35
|
July
17, 2015
|
||||
|
10,937
|
4,063
|
13.75
|
January
30, 2012
|
|||||
|
9,375
|
5,625
|
9.65
|
June
21, 2012
|
|||||
|
9,406
|
12,094
|
11.61
|
March 5,
2013
|
|||||
|
—
|
18,200
|
2.95
|
July
14, 2014
|
|||||
|
—
|
16,000
|
5.77
|
September
9, 2014
|
Option
Exercises and Stock Vested
The
following table summarizes the options exercised by named executive officers
during the year ended December 31, 2008 and the value realized upon
exercise:
|
Option
Awards
|
||||
|
Name
|
Number
of Shares
Acquired
on Exercise
(#)
|
Value
Realized
Upon
Exercise
($)
|
||
|
Robert
S. Rosenschein
|
—
|
—
|
||
|
Steven
Steinberg
|
—
|
—
|
||
|
Jeff
Schneiderman
|
5,648
|
18,864
|
||
|
Bruce
D. Smith
|
—
|
—
|
||
Director
Compensation
The
following table sets forth summary information concerning the total compensation
paid to our non-employee directors in 2008 for services to our
company:
|
Name
|
Fees
Earned
($)
|
Option
Awards
($)(*)
|
Total
($)
|
|||
|
Mark
A. Tebbe (1)
|
25,679
|
52,511
|
78,190
|
|||
|
Edward
G. Sim (2)
|
30,000
|
29,809
|
59.809
|
|||
|
Yehuda
Sternlicht (3)
|
35,000
|
36,649
|
71,649
|
|||
|
Mark
B. Segall (4)
|
30,571
|
49,309
|
79,880
|
|||
|
Lawrence
S. Kramer (5)
|
25,000
|
79,896
|
104,896
|
|||
|
Allen
Beasley (6)
|
13,437
|
10,581
|
24,018
|
|||
|
Jerry
Colonna (7)
|
6,875
|
—
|
6,875
|
|
*
|
Amounts
represent stock-based compensation expense for fiscal year 2008 under
SFAS 123R.
|
|
(1)
|
75,147
options were outstanding as of 12/31/08, of which 45,842 were exercisable
as of December 31, 2008.
|
|
(2)
|
57,371
options were outstanding as of 12/31/08, of which 41,973 were exercisable
as of December 31, 2008.
|
|
(3)
|
42,400
options were outstanding as of 12/31/08, of which 27,002 were exercisable
as of December 31, 2008.
|
|
(4)
|
57,400
options were outstanding as of 12/31/08, of which 42,002 were exercisable
as of December 31, 2008.
|
|
(5)
|
57,400
options were outstanding as of 12/31/08, of which 39,012 were exercisable
as of December 31, 2008.
|
|
(6)
|
Allen
Beasley was appointed as a board member on June 16, 2008; 35,875 options
were outstanding as of 12/31/08, none of which were exercisable as of
December 31, 2008.
|
|
(7)
|
Jerry
Colonna resigned from the board of directors on March 31,
2008.
|
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
|
—
|
2,500
|
2,500
|
—
|
—
|
2,500
|
27,500
|
|||||||
|
Mr.
Sim
|
20,000
|
5,000
|
2,500
|
—
|
—
|
—
|
2,500
|
30,000
|
|||||||
|
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
|
—
|
—
|
25,000
|
|||||||
|
Mr.
Beasley
|
20,000
|
—
|
2,500
|
2,500
|
—
|
—
|
—
|
25,000
|
|||||||
|
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 2008, 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 monthly 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 monthly thereafter.
There was
one new member added to the board of directors during fiscal year 2008, Mr.
Beasley, who received a one-time initial option grant to purchase 28,700 shares
of our common stock on June 16, 2008. The grant date fair value of these
options, based on Black-Scholes valuation model, was $2.50 per option All other
option grants were to continuing non-employee directors, including Mr. Beasley.
Thus, each non-employee director received options to purchase 7,175 shares
of the company’s common stock, granted on September 9, 2008, with an
exercise price of $5.77 per share, based on the Nasdaq closing price on
September 8, 2008. The grant date fair value of these options, based on
Black-Scholes valuation model, was $3.63 per option.
|
ITEM 12.
|
The following table and
accompanying footnotes set forth certain information as of March 6, 2009 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 whose total compensation exceeded
$100,000 during the year ended December 31,
2008; 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 6, 2009, 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 6, 2009, 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 7,876,270 shares of
common stock outstanding on March 6, 2009, 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
6, 2009.
|
Name
and Address of Beneficial Owner (1)
|
Shares
Beneficially
Owned
|
Percentage
of
Common
Stock
|
||
|
Executive
Officers and Directors:
|
||||
|
Robert
S. Rosenschein
|
621,465
(2)
|
7.58%
|
||
|
c/o Answers
Corporation, Jerusalem Technology Park, The Tower, Jerusalem 91481
Israel
|
||||
|
Steven
Steinberg
|
121,332
(3)
|
1.52%
|
||
|
c/o Answers
Corporation, Jerusalem Technology Park, The Tower, Jerusalem
91481 Israel
|
||||
|
Jeff
Schneiderman
|
109,669
(4)
|
1.37%
|
||
|
c/o Answers
Corporation, Jerusalem Technology Park, The Tower, Jerusalem 91481
Israel
|
||||
|
Bruce
D. Smith
|
119,769
(5)
|
1.50%
|
||
|
Mark
A. Tebbe
|
89,573
(6)
|
1.13%
|
||
|
Edward
G. Sim
|
44,683
(7)
|
*
|
||
|
Yehuda
Sternlicht
|
28,796
(8)
|
*
|
||
|
Mark
B. Segall
|
47,796
(9)
|
*
|
||
|
Lawrence
S. Kramer
|
45,698
(10)
|
*
|
||
|
Allen
Beasley
|
3,932,545
(11)
|
33.316%
|
||
|
All
directors and executive officers as a group (11
individuals)
|
5,161,326
(12)
|
40.76%
|
||
|
5% or greater
stockholders:
|
||||
|
Redpoint
Ventures
|
3,932,545
(13)
|
33.30%
|
||
|
3000
Sand Hill Road, Building 2, Suite 290, Menlo Park, CA
94025
|
||||
|
Marlin
Sams Fund, L.P.
|
683,000
(14)
|
8.67%
|
||
|
645
Fifth Avenue, New York, New York 10022
|
||||
|
Outboard
Investments Limited
|
690,000
(15)
|
8.76%
|
||
|
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 320,505 shares of common
stock issuable upon exercise of options.
|
|
(3)
|
Consists
of 10,000 shares of common stock and 111,332 shares of common
stock issuable upon exercise of options.
|
|
(4)
|
Consists
of 109,669 shares of common stock issuable upon exercise of
options.
|
|
(5)
|
Consists
of 15,000 shares of common stock and 104,769 shares of common
stock issuable upon exercise of options.
|
|
(6)
|
Consists
of 40,062 shares of common stock and 49,511 shares of common
stock issuable upon exercise of options.
|
|
(7)
|
Consists
of 916 shares of common stock and 43,767 shares of common stock
issuable upon exercise of options.
|
|
(8)
|
Consists
of 28,796 shares of common stock issuable upon exercise of
options.
|
|
(9)
|
Consists
of 4,000 shares of common stock and 43,796 shares of common
stock issuable upon exercise of options.
|
|
(10)
|
Consists
of 2,500 shares of common stock and 43,198 shares of common
stock issuable upon exercise of options.
|
|
(11)
|
Based
on information included on Schedule 13D/A filed with the SEC on September
9, 2008 and 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) 1,237,727 shares of Common Stock issuable upon conversion
of 68,075 shares of Series B Convertible Preferred Stock (the “Series B
Preferred Stock”) that are issuable upon exercise of warrants (the “Unit
Warrants”) to purchase 68,075 Units held by RO LP; (vi) 618,864 shares of
Common Stock issuable pursuant to common stock purchase warrants (the
“Class B Warrants”) issuable upon exercise of the Unit Warrants held by RO
LP; (vii) 35,000 shares of Common Stock issuable upon conversion of 1,925
shares of Series B Preferred Stock issuable upon exercise of Unit Warrants
to purchase 1,925 Units held by ROA LLC, (viii) 17,500 shares of Common
Stock issuable pursuant to the Class B Warrants issuable upon
exercise of the Unit Warrants held by ROA LLC and (ix) 23,453 shares of
common stock issuable to Redpoint upon conversion of shares of Series A
Preferred Stock, representing the increase in stated value of the Series A
Preferred Stock pursuant to payment in kind of cumulative accrued
dividends as of December 31, 2008. Does not include an option held
by Mr. Beasley to purchase up to 35,875 shares of Common Stock, none of
which shares are exercisable within 60 days from the Record
Date.
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.
|
|
(12)
|
Consists
of (i) 373,438 shares of common stock; (ii) 855,343 shares of common stock
issuable upon exercise of options; (iii) 1,333,334 shares of common stock
issuable upon conversion of Series A Preferred Stock; (iv) 666,667 shares
of common stock issuable upon exercise of the Class A Warrants; (v)
1,272,727 shares of common stock issuable upon conversion of Series B
Preferred Stock; (vi) 636,364 shares of common stock issuable upon
exercise of the Class B Warrants; and (vii) 23,453 shares of common stock
issuable to Redpoint upon conversion of shares of Series A Preferred
Stock, representing the increase in stated value of the Series A Preferred
Stock pursuant to payment in kind of cumulative accrued dividends as of
December 31, 2008.
|
|
(13)
|
Based
on information included on Schedule 13D/A filed with the SEC on September
9, and 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) 1,237,727
shares of Common Stock issuable upon conversion of 68,075 shares of Series
B Convertible Preferred Stock (the “Series B Preferred Stock”) that are
issuable upon exercise of warrants (the “Unit Warrants”) to purchase
68,075 Units held by RO LP; (vi) 618,864 shares of Common Stock issuable
pursuant to common stock purchase warrants (the “Class B Warrants”)
issuable upon exercise of the Unit Warrants held by RO LP; (vii) 35,000
shares of Common Stock issuable upon conversion of 1,925 shares of Series
B Preferred Stock issuable upon exercise of Unit Warrants to purchase
1,925 Units held by ROA LLC, (viii) 17,500 shares of Common Stock issuable
pursuant to the Class B Warrants issuable upon exercise of the Unit
Warrants held by ROA LLC and (ix) 23,453 shares of common stock issuable
to Redpoint upon conversion of shares of Series A Preferred Stock,
representing the increase in stated value of the Series A Preferred Stock
pursuant to payment in kind of cumulative accrued dividends as of December
31, 2008. Does not include an option held by Mr. Beasley to purchase
up to 35,875 shares of Common Stock, none
of which shares are exercisable within 60 days from the Record
Date.
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.
|
|
(14)
|
Based
on information included on Schedule 13D/A filed with the SEC on December
17, 2008
|
|
(15)
|
Based
on information included on Schedule 13D filed with the SEC on
December 18, 2007
|
Unless otherwise indicated, we believe
that all persons named in the table have sole voting and investment power over
all shares of common stock beneficially owned by them.
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.
Our
auditors for the year ended December 31, 2008 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 2009. All of the
services described in the following fee table were approved by the Audit
Committee.
|
2008
|
2007
|
||
|
$
|
$
|
||
|
Audit
Fees(1)
(2)
|
478,551
|
453,286
|
|
|
Tax
Fees(3)
|
27,570
|
43,632
|
|
|
Total
|
506,121
|
496,918
|
|
(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
$113,000 and $180,000 accrued as of December 31, 2008 and December 31,
2007, respectively.
|
|
(2)
|
This
category also consists of: $76,750 of fees relating to the Redpoint
transaction during the year ended December 31, 2008, and $212,500 and
$116,000 of fees relating to the failed Lexico acquisition and the
terminated follow-on offering of securities during the years ended
December 31, 2008 and December 31, 2007, respectively.
|
|
(3)
|
This
category consists of services provided by KPMG for tax compliance.
Includes $5,000 and $17,500 accrued as of December 31, 2008 and December
31, 2007, respectively.
|
The Audit
Committee has adopted policies and procedures that require the pre-approval by
the Audit Committee of all fees paid to and services performed by our principal
registered independent accountants and other auditing firms. At the beginning of
each year, the Audit Committee approves the proposed services along with the
range of corresponding fees to be provided by our independent registered
accountants. If any proposed service would exceed the pre-approved cost levels,
the proposed service requires specific pre-approval. In addition, specific
pre-approval is required for any proposed services that may arise during the
year that are outside the scope of the initial services pre-approved by the
Audit Committee. The Audit Committee also adopted a policy acknowledging and
specifically prohibiting our independent registered accountants from performing
any of those non-audit services that a company’s principal independent
accountant are prohibited from performing by the Sarbanes-Oxley Act. In cases
involving engagements of our principal registered independent accountants that
do not exceed $25,000, the Audit Committee has delegated to the Committee
Chairman the approval of such engagements, as part of the Company’s pre-approval
policy.
PART
IV
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(a)
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Document
List:
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|
1.
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Financial
Statements.
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The
financial statements of the Company filed herewith are set forth in Part II,
Item 8 of this report.
|
2.
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Financial
Statement Schedule.
|
None.
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3.
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Exhibits.
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The
exhibits to this report are as follows:
|
Exhibit
No.
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Description
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3.1*
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Amended
and Restated Certificate of Incorporation, as amended
|
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3.1A
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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)
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|
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3.2
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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)
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|
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4.1
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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)
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|
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10.1«
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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)
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|
|
10.2«
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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)
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|
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10.3«
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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)
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|
|
10.3A«
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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)
|
|
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10.4«
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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)
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|
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10.4A«
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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)
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10.5«
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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)
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10.5A
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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)
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10.5B«
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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)
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10.5C«
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Form
of Stock Option Agreement under the 2005 Incentive Compensation Plan
covering Israel-based employees
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10.5D«
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Form
of Stock Option Agreement 2005 Incentive Compensation Plan covering
U.S.-based employees.
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10.6«
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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)
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|
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10.7«
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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)
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|
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10.8«
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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)
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|
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10.9«
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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)
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|
|
10.10
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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)
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|
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10.11
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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)
|
|
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10.12+
|
Google
Services Agreement (“GSA”), GSA Order Form and GSA Order Form Terms and
Conditions, all dated January 28, 2005
|
|
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10.13+
|
Amendment
No. 1 to Google Order Form and GSA, dated December 20,
2005
|
|
|
10.14+
|
Amendment
No. 2 to Google Order Form, dated January 31, 2006
|
|
|
10.15+
|
API
Agreement with Shopping.com, Inc. dated May 2, 2005
|
|
|
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)
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|
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10.17
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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)
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|
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10.18«
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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)
|
|
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10.20«
|
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)
|
|
|
10.21«
|
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)
|
|
|
10.22«
|
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)
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|
|
10.23«
|
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)
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|
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10.24
|
Purchase
Agreement dated July 13, 2007 among Answers Corporation, Lexico Publishing
Group, LLC, Brian Kariger, as trustee of the Brian Patrick Kariger
Charitable Remainder Unitrust Trust dated April 9, 2007, Brian
Kariger, as trustee of the Brian Patrick Kariger Revocable Trust dated
February 9, 2007, Daniel Fierro and Brian Kariger, as the sellers’
representative (Previously filed as Exhibit 10.1 to the Current Report on
Form 8-K (File No. 001-32255) filed July 17, 2007, and incorporated herein
by reference)
|
|
|
10.25
|
Bonus
Plan/Documents Escrow Agreement, dated July 13, 2007 among Answers
Corporation, Lexico Publishing Group, LLC, Brian Kariger, as trustee of
the Brian Patrick Kariger Charitable Remainder Unitrust Trust dated
April 9, 2007, Brian Kariger, as trustee of the Brian Patrick Kariger
Revocable Trust dated February 9, 2007, Daniel Fierro, Brian Kariger,
as seller representative and American Stock Transfer & Trust Co.
(Previously filed as Exhibit 10.2 to the Current Report on Form 8-K (File
No. 001-32255) filed July 17, 2007, and incorporated herein by
reference)
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|
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10.26
|
Indemnity
Escrow Agreement, dated July 13, 2007 among Answers Corporation,
Brian Kariger, as trustee of the Brian Patrick Kariger Charitable
Remainder Unitrust Trust dated April 9, 2007, Brian Kariger, as
trustee of the Brian Patrick Kariger Revocable Trust dated
February 9, 2007, Daniel Fierro, Brian Kariger, as seller
representative and American Stock Transfer & Trust Co. (Previously
filed as Exhibit 10.3 to the Current Report on Form 8-K (File No.
001-32255) filed July 17, 2007, and incorporated herein by
reference)
|
|
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10.27
|
First
Amendment to the Purchase Agreement, dated as of July 31, 2007, between
Answers Corporation and Brian Kariger, as Sellers Representative
(Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File
No. 001-32255) filed August 6, 2007, and incorporated herein by
reference)
|
|
|
10.28
|
Second
Amendment to the Purchase Agreement, dated as of November 12, 2007,
between Answers Corporation and Brian Kariger, as Sellers Representative
(Previously filed as Exhibit 10.1 to the Current Report on Form 8-K (File
No. 001-32255) filed November 16, 2007, and incorporated herein by
reference)
|
|
|
10.29
|
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)
|
|
|
10.30
|
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)
|
|
|
10.31
|
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)
|
|
|
10.32
|
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)
|
|
|
10.33
|
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)
|
|
|
21.1*
|
List
of Subsidiaries
|
|
|
23.1*
|
Consent
of KPMG Somekh Chaikin, Independent Registered Public Accounting
Firm
|
|
|
31.1*
|
Certification
of Principal Executive Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities and Exchange Act of 1934, as
amended
|
|
|
31.2*
|
Certification
of Principal Financial Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities and Exchange Act of 1934, as
amended
|
|
|
32.1*^
|
Certification
of Principal Executive Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350
|
|
|
32.2*^
|
Certification
of Principal Financial Officer required under Rule 13a-14(a) or Rule
15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18
U.S.C. Section 1350
|
|
* 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 9, 2009
|
||
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
Robert
S. Rosenschein
|
|
Chairman
of the Board and Chief
Executive Officer
(Principal
Executive Officer)
|
March
9, 2009
|
|
|
/s/ Steven
Steinberg
Steven
Steinberg
|
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer)
|
March
9, 2009
|
|
|
/s/ Mark
A. Tebbe
Mark
A. Tebbe
|
|
Director
|
March
9, 2009
|
|
|
/s/ Edward
G. Sim
Edward
G. Sim
|
|
Director
|
March
9, 2009
|
|
|
/s/ Yehuda
Sternlicht
Yehuda
Sternlicht
|
|
Director
|
March
9, 2009
|
|
|
/s/ Mark
B. Segall
Mark
B. Segall
|
|
Director
|
March
9, 2009
|
|
|
/s/ Lawrence
S. Kramer
Lawrence
S. Kramer
|
|
Director
|
March
9, 2009
|
|
|
/s/
W. Allen Beasley
W.
Allen Beasley
|
|
Director
|
March
9, 2009
|
|