UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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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
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Commission File Number: 001-34518
Ancestry.com Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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26-1235962
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification
Number)
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360 West 4800 NorthProvo, Utah
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84604
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(Address of Principal Executive
Offices)
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(Zip Code)
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(801) 705-7000
(Registrants telephone
number, including area code)
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, $0.001 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
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 o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
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 registrants 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. þ
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 the definitions 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 þ
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Smaller reporting
company o
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(do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) Yes o No þ
As of June 30, 2009, the last business day of the
registrants most recently completed second quarter, there
was no established public market for the registrants
common stock. The registrants common stock began trading
on the NASDAQ Global Select Market on November 5, 2009.
As of February 18, 2010, there were 42,462,793 shares
of the registrants common stock, par value $0.001,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrants definitive proxy statement for
its 2010 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Annual Report.
Ancestry.com,
Inc.
TABLE OF
CONTENTS
2
PART I
Forward-Looking
Statements
This Annual Report on
Form 10-K
(the Annual Report), including the sections entitled
Business, Risk Factors, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the documents
incorporated by reference in this Annual Report contain
forward-looking statements relating to future events and future
performance. All statements other than those that are purely
historical may be forward-looking statements. We may, in some
cases, use words such as project,
believe, anticipate, plan,
expect, estimate, intend,
should, would, could,
potentially, will or may, or
other words that convey uncertainty of future events or outcomes
to identify these forward-looking statements. Forward-looking
statements in this Annual Report include statements about:
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our future financial performance, including our revenues, cost
of revenues, operating expenses and ability to sustain
profitability;
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our rate of revenue growth;
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our ability to attract and retain subscribers;
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our ability to generate additional revenues on a cost-effective
basis;
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our ability to acquire content and make it available online;
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the success of our promotional programs and new products;
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disruptions in our services;
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our international expansion plans;
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success with respect to any future acquisitions;
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our ability to retain and hire necessary employees;
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our ability to adequately protect our intellectual property;
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the impact of claims or litigation;
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our liquidity and working capital requirements;
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the impact of external market forces; and
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the effect of laws applying to our business, including privacy
laws.
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Although we believe that the assumptions underlying the
forward-looking statements are reasonable, we cannot guarantee
future results, level of activity, performance or achievements.
There are a number of important factors that could cause actual
results to differ materially from the results anticipated by
these forward-looking statements, which statements speak only as
of the date of this Annual Report. These important factors
include those that we discuss in this Annual Report under the
caption Risk Factors and elsewhere. You should read
these factors and the other cautionary statements made in this
Annual Report as being applicable to all related forward-looking
statements wherever they appear in this Annual Report. If one or
more of these factors materialize, or if any underlying
assumptions prove incorrect, our actual results, performance or
achievements may vary materially from any future results,
performance or achievements expressed or implied by these
forward-looking statements. All subsequent written or spoken
forward-looking statements attributable to our company or
persons acting on our behalf are expressly qualified in their
entirety by these cautionary statements. The forward-looking
statements included in this Annual Report are made only as of
the date of this Annual Report, and we undertake no obligation
to publicly update any forward-looking statements, whether as a
result of new information, future events or otherwise, except as
required by law.
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Terminology
In this Annual Report, we use the terms subscriber, registered
user, Ancestry.com Web sites, record and database.
A subscriber is an individual who pays for renewable access to
one of our Ancestry.com Web sites, and a registered user is a
person who has registered on one of our Ancestry.com Web sites,
and includes subscribers. Our operations consist primarily of
our flagship Web site Ancestry.com, which is a part of a global
family of Web sites that includes Ancestry.co.uk,
Ancestry.com.au, Ancestry.ca, Ancestry.de, Ancestry.fr,
Ancestry.it and Ancestry.se. We refer to these Web sites
collectively as the Ancestry.com Web sites.
We use the term record in different ways depending
on the content source. When referring to a number of records in
certain of our company-acquired content collections, such as a
census record, we mean information about each specific person.
For example, a draft card will typically be counted as one
record, as will each line in a census, because each contains
information about a specific individual. When referring to
unstructured data, such as a newspaper, we define each page in
those data sources as a record. When referring to a number of
databases, we mean groups of records we have distinguished as
unique sets based on one or more common characteristics shared
by the records in each set, such as a common time period, place
or subject matter.
Mission
Ancestry.coms mission is to help everyone discover,
preserve and share their family history.
Overview
Ancestry.com is the worlds largest online family history
resource, with more than one million paying subscribers around
the world as of December 31, 2009. We have been a leader in
the family history market for over 20 years and have helped
pioneer the market for online family history research. We
believe that most people have a fundamental desire to understand
who they are and from where they came, and that anyone
interested in discovering, preserving and sharing their family
history is a potential user of Ancestry.com. We strive to make
our service valuable to individuals ranging from the most
committed family historians to those taking their first steps
towards satisfying their curiosity about their family stories.
The foundation of our service is an extensive and unique
collection of billions of historical records that we have
digitized, indexed and put online over the past 13 years.
We have developed efficient and proprietary systems for
digitizing handwritten historical documents, and have
established relationships with national, state and local
government archives, historical societies, religious
institutions and private collectors of historical content around
the world. These digital records and documents, combined with
our proprietary online search technologies and tools, enable our
subscribers to research their family history, build their family
trees and make meaningful discoveries about the lives of their
ancestors.
We have built the worlds largest online community of
people interested in their family histories, and we believe that
this network is highly valuable to our subscribers. Our
community is a large and growing source of user-generated
content uniquely focused on family history. As of
February 10, 2010, our registered users have created over
14 million family trees containing nearly 1.5 billion
profiles. They have uploaded and attached to their trees a
combination of nearly 32 million photographs, scanned
documents and written stories. This growing pool of
user-generated content adds color and context to the family
histories assembled from the digitized historical documents
found on Ancestry.com Web sites. Our registered users also have
attached to their trees over 450 million records from our
company-acquired content collection, a process that is helping
further organize this collection by associating specific records
with people in family trees.
In addition, we continue to deploy tools and technologies to
facilitate social networking and crowd sourcing, a means of
leveraging collaborative efforts. These tools and technologies
are intended to provide our subscribers with an expanding family
history collaboration network in which insights and discoveries
are shared by relatives, distant and close. Our service also
provides a platform from which our subscribers can share their
stories. Subscribers can
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invite family and friends to help build their family trees, add
personal memories and upload photographs and stories of their
own.
We provide ongoing value to our subscribers by regularly adding
new historical content, enhancing our Web sites with new tools
and features and enabling greater collaboration among our users
through the growth of our global community. Our revenues have
increased from $140.3 million in 2005 to
$224.9 million in 2009, a compound annual growth rate of
12.5%. The compound annual growth rate of revenues from our
Ancestry.com Web sites from 2005 to 2009 was approximately 17%.
Growth
Strategy
Our goal is to remain the leading online resource for family
history and to grow our subscriber base in the United States and
around the world by offering a superior value proposition to
anyone interested in learning more about their family history.
Our plan to achieve long-term and sustainable growth is to
increase our subscriber base in the United States and around the
world by serving our loyal base of existing subscribers, by
attracting new subscribers and by expanding the market to new
consumers.
We believe our previous investments in technology and content
have provided us a foundation for a scalable business model that
will help us to increase our margins over the long term and
effectively manage our costs while growing our business.
However, we expect to continue to devote substantial resources
and funds to improving our technologies and service offerings
and acquiring new and relevant content, and also to expanding
awareness of our brand and category through marketing, which may
reduce our margins in the near term.
Ancestry.com
Web sites
Ancestry.com. On Ancestry.com, subscribers can
efficiently search through birth, marriage and death records,
census records, immigration documents, photographs, maps,
military records, personal narratives and newspapers. Our
collection includes the digitized United States Federal Census
available from 1790 to 1930 and over 180 million
immigration records, including passenger lists from ships
arriving at United States ports from 1820 to 1960, including
Ellis Island. Our subscribers can also access records from
specialized databases, such as the approximately
100 million names contained in military records dating from
the seventeenth century to the end of the Vietnam War, our
African-American
records collection, including slave narratives, our Jewish
history collection, including Holocaust survivor lists, and our
Native American collection, including applications for
enrollment in the Five Civilized Tribes. In addition,
subscribers to Ancestry.com have access to a global collection
of records from the United Kingdom, Australia and Canada,
including United Kingdom and Canadian census collections and
baptism, marriage, death and burial records from the London
Metropolitan Archives, as well as records from Germany, France,
Italy, Sweden and China.
Registered users can create family trees and attach their own
records to those trees. Subscribers can search company-acquired
and user-generated content and attach relevant records from our
content collections to individuals in their family trees. Users
have made over 85% of the trees on Ancestry.com public, along
with associated user-generated content, offering many
subscribers a substantial head start in their family history
research by allowing them to populate their own trees with
information collected by registered users with common ancestry.
Our users attached an average of over five million records per
week to their trees and accepted an average of nearly five
million hints per week for the quarter ended December 2009.
Our Member Connect service is a family history collaboration
network that connects subscribers who share common ancestors.
This collaboration network facilitates the sharing of insights
and discoveries among distant and close relatives and creates a
social component to the Ancestry.com subscriber experience.
Subscribers and registered users can also share their family
trees and research with friends and relatives. Users can invite
others to help build their trees and upload user-generated
content of their own. In addition, our users have access to an
online learning center, technical support, educational webinars
and community message boards.
We offer two subscription packages on Ancestry.com,
U.S. Deluxe and World Deluxe, and subscribers primarily
choose annual or monthly subscription periods. Registered users
who are not subscribers can create free family trees online, can
upload family photos, stories and documents to their tree, and
will receive hints to relevant
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records from our content collections. Subscribers to our
U.S. Deluxe package gain unlimited access to the complete
United States collection of records, including the ability to
view images of original records. They also can communicate and
collaborate with other members of the subscriber network. Our
World Deluxe plan includes unlimited access to all of the
content we offer, including the content from our
U.S. Deluxe plan and our global collection of records.
We offer registered users a
14-day free
trial. We charge a subscriber the full period subscription
amount at the beginning of each subscription period. All
subscriptions renew automatically unless cancelled, which can be
done easily online or by telephone. Our primary United States
pricing plans are:
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Product
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Monthly
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Annual
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U.S. Deluxe
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19.95/month
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155.40/year
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World Deluxe
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29.95/month
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299.40/year
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International Ancestry.com Web
sites. Generally, our international Ancestry.com
Web sites are modeled on our United States Ancestry.com Web site
and offer similar services in the local market language,
including family tree creation, collections of digitized
historical records obtained from local market archival sources,
as well as user-generated content. We currently operate
country-specific Ancestry.com Web sites for seven countries, in
addition to the United States the United Kingdom,
Australia, Canada, Germany, France, Italy and Sweden. We offer
country-specific subscriptions, tailored to the local market,
and World Deluxe subscriptions on each of our international
Ancestry.com Web sites.
Other
Products and Web sites
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Family Tree Maker. Family Tree Maker is the
leading family history desktop software on the market, with over
1.4 million units distributed since 2004. Most Family Tree
Maker versions include a limited subscription to the
Ancestry.com Web site.
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Ancestry.com DNA. We sell DNA testing kits that help
people learn more about their family history and ancient
ancestry.
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Ancestry.com Expert Connect. Our Expert Connect product
is a genealogist marketplace that connects people with
professional genealogists around the world.
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Mundia.com. Mundia.com is our global,
multi-language
family history networking service intended for markets in which
we do not have a local presence.
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Jiapu.com. We are investing in the further
development of Jiapu.com, our China Web site focused on family
networking and ancestral family history.
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MyCanvas.com. MyCanvas.com is a digital
publishing platform that allows people to design and order
high-quality customized photo books, calendars and posters using
discoveries made on Ancestry.com.
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myfamily.com. myfamily.com is a family
networking service that provides families with a safe and secure
home on the web where they can share photos, videos,
stories, news, calendars and family history insights.
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Other sites. RootsWeb.com is a free genealogy
community on the Internet. Genealogy.com is a legacy service
that offers a collection of family and local histories, vital
records content and military records, most of which are also
available on Ancestry.com.
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Subscribers
Our subscribers range from the most committed family historians
to those taking their first steps towards satisfying a simple
curiosity about their family story, and we seek to make our
service valuable to both groups. As of December 31, 2009,
we had more than one million subscribers, approximately
two-thirds of whom reside in the United States.
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Marketing
and Advertising
Our marketing efforts are focused on three primary goals:
retention of existing subscribers; conversion of registered
users to subscribers; and acquisition of new subscribers and
promoting our brand.
Retention marketing. Our retention marketing
is focused on establishing and maintaining long-term and
personalized relationships with our subscribers through
on-site
messaging and email, and through our subscriber support center.
We seek to maximize retention and encourage subscribers to
upgrade to premium packages by delivering a superior customer
experience and value. We monitor subscription package mix and
durations, payment processing, cancellation reasons, and overall
subscriber satisfaction.
Conversion marketing. Our conversion marketing
efforts are focused on converting registered users to paying
subscribers through
on-site
messaging, email, targeted offers and compelling product
features like record hinting.
Subscriber acquisition and brand marketing. We
pursue a multi-channel subscriber acquisition and brand
marketing program that includes television advertising, online
display advertising, paid search, search-engine optimization, a
broad affiliate network and public relations. Through our
advertising, we seek to increase brand and category awareness
and to attract new subscribers. We actively manage our media mix
in order to maximize the efficiency of our marketing investment.
Recent
Developments.
As part of our marketing efforts, we have purchased product
integration in a planned United States version of the successful
BBC series Who Do You Think You Are? that will
feature American celebrities. This program is currently
scheduled to be released on NBC primetime television in the
United States in March 2010. Part of our product integration
includes a co-branded Ancestry.com Web site developed in
cooperation with NBC. We believe that the program, if released,
could help increase awareness of the family history category and
our brand, but we do not exercise any control with respect to
its release. We can provide no assurance that the show will not
be delayed or cancelled. If the show were to be delayed or
cancelled, it could delay, reduce or eliminate various expenses
that we currently anticipate incurring in connection with the
show.
Search,
Family Tree and Collaboration Technologies
We have applied substantial resources to develop and maintain
proprietary technologies designed to provide a rewarding
experience and compelling value proposition to our subscribers.
Our technology platform allows our subscribers to access our
content collections, build family trees, collaborate with other
members of our community and share their discoveries with
friends and relatives.
Vertical search engine. Historical documents
can be difficult to search effectively using traditional search
engines because of variations in names, changes in geopolitical
boundaries and other factors. Our proprietary vertical search
engine provides an innovative, technology-driven solution to the
challenges created by the inherent difficulty of searching
historical content. The technology of our vertical search engine
allows our subscribers to successfully search our many
collections for content that they otherwise might not have
located.
Record hinting. Our proprietary record hinting
technology performs a real-time algorithmic analysis of a
users family tree and then suggests new records and other
family trees that might match the users. We believe that
these personalized hints can accelerate our
subscribers research, thereby making their experience more
rewarding.
Content
Process and Technologies
Company content acquisition. We have spent
approximately $85 million to acquire, digitize and index
hundreds of millions of documents. We own most of the images in
our databases, in some cases on a non-exclusive basis, though we
generally do not own the underlying original historical
documents. We also obtain a portion of our content pursuant to
ongoing licensing agreements, primarily in the United Kingdom,
some of which have finite terms. We license a significant amount
of our United Kingdom content from the United Kingdom National
Archives
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under several license agreements that generally have ten year
terms, with varying automatic extension periods. These
agreements with the United Kingdom National Archive expire from
2012 to 2019. The agreements are generally terminable by either
party for breach by the other party and by the United Kingdom
National Archives upon our insolvency or bankruptcy. Some of
these agreements permit the United Kingdom National Archives to
terminate these licenses if we undergo a change of control. We
plan to continue to acquire new content on an ongoing basis to
offer our subscribers additional historical records for their
research.
Digitization. Working with historical
documents is challenging because many source documents are
handwritten or damaged, and many microfilm images are of poor
quality. We have developed proprietary technologies and
processes that have allowed us to efficiently handle and
digitize hundreds of millions of records that vary materially in
format and quality. We digitize content in our headquarters in
Provo, Utah, in the Washington, D.C. area, in London,
England and in approximately 20 distributed locations around the
world.
Indexing. We have invested significant
resources in the indexing of records to make our content
collection much more accessible and searchable for our
subscribers. We outsource a significant portion of our indexing
projects to vendors that use our proprietary tools to transcribe
handwritten documents to create indexes. We own the indexes that
our vendors create.
Operations
Web sites and technology operations. Our Web
sites are hosted on hardware and software co-located at a
third-party facility in Salt Lake City, Utah. We have
established a disaster recovery facility located at a
third-party facility in Denver, Colorado. We have designed our
Web sites to be highly available, secure and cost-effective
using a variety of proprietary software, freely available and
commercially supported tools. We can scale to accommodate
increasing numbers of subscribers by adding relatively
inexpensive industry-standard hardware. We use encryption
technologies and certificates for secure transmission of
personal information between subscribers and our Web sites.
Maintaining the integrity and security of our Web sites is
critical and we have a dedicated security team that promotes
industry best practices and drives compliance with data security
standards.
We devote a substantial portion of our resources to developing
new technologies and features and improving core technologies.
As of December 31, 2009, we employed approximately 110
engineers who are focused on the design and development of new
features and products.
Subscriber services. Our subscriber services
team seeks to ensure that our existing subscribers enjoy a high
degree of satisfaction from our Ancestry.com Web sites and that
registered users find the support they need to become
subscribers. Subscriber services representatives provide
telephone and email support, answer questions about the Web
sites, and help subscribers with their research. We operate
subscriber services from our Provo, Utah headquarters to ensure
that our representatives are integrated with the business and
our programs.
Competition
We face competition in our business from a variety of online and
offline organizations, some of which provide genealogical
records free of charge. We expect competition to increase in the
future. We generally compete on the basis of content, price,
ease of use, technology, brand recognition, breadth of services,
support and the number of network users with whom other users
can collaborate. We believe that we compete favorably with
respect to these factors, and that none of our competitors
offers as broad an array of products and services or as
compelling a value proposition to consumers interested in online
family history research.
Ancestry.com and our similar international Web sites face
competition from:
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FamilySearch, and its Web site FamilySearch.org, a genealogy
organization that is part of The Church of Jesus Christ of
Latter-day
Saints. FamilySearch has an extensive collection of paper and
microfilm records (more than 2.3 million rolls of microfilm
and 180,000 sets of microfiche). FamilySearch has digitized a
large quantity of these records and has published them online at
FamilySearch.org, where it makes them available to the public
for free and through over 4,500 family history centers located
throughout the world. FamilySearch is a well funded organization
and has stated its intention to undertake a massive digitization
project to bring most of its collection online over the next few
years.
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Commercial entities, including online genealogical research
services, library content distributors, search engines and
portals, retailers of books and software related to genealogical
research and family tree creation and family history oriented
social networking Web sites.
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Non-profit entities and organizations, genealogical societies,
governments and agencies that may make vital statistics or other
records available to the public for free.
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We expect our competition to grow and may include other
Internet-based and offline businesses, governments and other
entities. Our current and future competitors may have greater
resources, more well-established brand recognition or more
sophisticated technologies, such as search algorithms, than we
do, or may more easily obtain relevant records in international
markets. Additionally, our current and future competitors may
make historical records available online at no cost or on an
advertising-supported basis rather than a subscription basis.
Our future competitors and their products and services may be
superior to any of our current competition. There has recently
been some consolidation in our industry, and such consolidation
could also increase competition in the future, including
competition with respect to acquisition of content, exclusivity
of content or pricing. To compete effectively, we may need to
expend significant resources on content acquisition, technology
or marketing and advertising. We currently plan to distinguish
ourselves from our competitors on the basis of access to
content, technological leadership and the depth of our
subscriber community.
Intellectual
Property
To protect our proprietary content and intellectual property, we
rely on trademark, copyright, patent and trade secret protection
laws and on contractual agreements with third parties.
Ancestry.com, myfamily.com and Family Tree Maker are among our
registered trademarks. In the United States, we have filed
various trademark applications and patent applications for
certain aspects of our technologies, and we have also filed
trademark applications in certain foreign countries for the
Ancestry.com and other Web site names. Many of our trademarks
contain words or terms having a common usage and, as a result,
may not be protectable under applicable law. Because of this
concern, we have elected not to file applications with respect
to certain of our trademarks, and some of our trademarks for
which we have filed applications may not be protectable. In the
United States, we currently have a number of patents and patents
pending relating to various aspects of our business. We intend
to pursue patent coverage in additional countries to the extent
we believe such coverage is appropriate and cost-efficient. We
cannot be certain that any of our pending or future applications
will be granted. We rely primarily on trade secret and similar
intellectual property laws to protect our search technology,
software products and digitization and indexing processes.
Protection of trade secret and other intellectual property
rights can be uncertain, particularly outside the United States.
We also possess intellectual property rights in aspects of our
digital content databases. However, our digital content
databases are not protected by any registered copyrights or
other registered intellectual property or statutory rights. Our
digital content databases are protected by user agreements that
limit access to and use of our data, and by our proprietary
indexing and search technology that we apply to make our content
searchable. Compliance with use restrictions is difficult to
monitor, and our proprietary rights in our digital content
databases may be more difficult to enforce than other forms of
intellectual property rights.
Our employees, contractors and other third parties with which we
work and who have access to our proprietary content and
confidential information sign agreements that prohibit the
unauthorized disclosure of our proprietary rights, information
and technologies.
Employees
As of December 31, 2009, we had approximately
620 full-time employees and approximately
100 part-time and contingent employees, which include
approximately 130 subscriber services and 140 digital processing
employees. None of our employees is covered by a collective
bargaining agreement, except with respect to a minimal number of
employees to the extent required by the laws of certain foreign
jurisdictions. We have not experienced employment-related work
stoppages and we consider our employee relations to be good.
9
The
Spectrum Investment
We operated as The Generations Network, Inc., which we refer to
as the predecessor, until December 5, 2007. On
December 5, 2007, Generations Holding, Inc., which we refer
to as the successor, acquired The Generations Network, Inc. in
connection with an investment by Spectrum Equity
Investors V, L.P. and certain of its affiliates, which we
refer to collectively as Spectrum. The successor was created for
the sole purpose of acquiring the predecessor and had no prior
operations. The total purchase price for this transaction, which
we refer to as the Spectrum investment, was $354.8 million,
at an effective per share price of $5.40. As a result of the
accounting for the Spectrum investment, our fiscal year 2007 is
divided into a predecessor period from January 1, 2007
through December 5, 2007 and a successor period from
December 6, 2007 through December 31, 2007.
Financial
Information about Segments and Geographic Areas
We report our financial results as a single segment. For
financial information about our segment and our geographic
areas, please refer to Note 14 to the consolidated
financial statements included in this Annual Report, which is
incorporated herein by reference.
Other
Information
Our principal executive offices are located at 360 West
4800 North, Provo, UT 84604, and our telephone number at that
address is
(801) 705-7000.
Our corporate Web site address is
http://corporate.ancestry.com.
The contents of our Web sites are not incorporated in, or
otherwise to be regarded as part of, this Annual Report. We were
originally incorporated in Utah in 1983 under the name Ancestry,
Inc. We changed our name to Ancestry.com, Inc. in July 1998 and
reincorporated in Delaware in November 1998. Our name was
subsequently changed to MyFamily.com, Inc. in November 1999, and
then to The Generations Network, Inc. in November 2006.
In July 2009, to better align our corporate identity with the
premier branding of Ancestry.com, we changed our name to
Ancestry.com Inc. References herein to Ancestry.com,
the company, we, our and
us refer to the operations of Ancestry.com Inc. and
its consolidated subsidiaries in both the predecessor and
successor periods, unless otherwise specified. We are a holding
company, and substantially all of our operations are conducted
by our wholly-owned subsidiary Ancestry.com Operations Inc.,
which we refer to as the operating company, and its subsidiaries.
Our investor relations Web site is located at
http://ir.ancestry.com.
We make available, free of charge, on our investor relations Web
site under Financials/SEC Filings, our Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to these reports as soon as reasonably
practicable after electronically filing or furnishing those
reports to the Securities and Exchange Commission, or SEC.
A wide range of factors could materially affect our
performance. The following factors and other information
included in this Annual Report should be carefully considered.
Although the risk factors described below are the ones
management deems significant, additional risks and uncertainties
not presently known to us or that we presently deem less
significant may also impair our business operations. If any of
the following events actually occur, our business, financial
condition and results of operations could be adversely
affected.
Risks
Related to Our Business
If our
efforts to retain and attract subscribers are not successful,
our revenues will be adversely affected.
We generate substantially all of our revenue from subscriptions
to our services. We must continue to retain existing and attract
new subscribers. If our efforts to satisfy our existing
subscribers are not successful, we may not be able to retain
them, and as a result, our revenues would be adversely affected.
For example, if consumers do not perceive our services to be
reliable, valuable and of high quality, if we fail to regularly
introduce new and improved services, or if we introduce new
services that are not favorably received by the market, we may
not be able to retain existing or attract new subscribers. We
rely on our marketing and advertising efforts, including
television and online and offline performance-based and
fixed-cost programs, to retain existing subscribers and attract
new subscribers. If
10
we are unable to effectively retain existing subscribers and
attract new subscribers, our business, financial condition and
results of operations would be adversely affected.
The relative service levels, pricing and related features of
competitors to our products and services are some of the factors
that may adversely impact our ability to retain existing
subscribers and attract new subscribers. Some of our current
competitors provide genealogical records free of charge. Some
governments or private organizations may make historical records
available online at no cost to consumers and some commercial
entities could choose to make such records available on an
advertising-supported basis rather than a subscription basis. If
consumers are able to satisfy their family history research
needs at no or lower cost, they may not perceive value in our
products and services. If our efforts to satisfy and retain our
existing subscribers are not successful, we may not be able to
continue to attract new subscribers through word-of-mouth
referrals. Further, subscriber growth may decrease as a result
of a decline in interest in family history research. Any of
these factors could cause our subscriber growth rate to fall,
which would adversely impact our business, financial condition
and results of operations.
Our
recent revenue growth rate may not be sustainable, which could
negatively affect our stock price or financial condition and
results of operations.
Our revenues have grown rapidly, increasing from
$140.3 million in 2005 to $224.9 million in 2009,
representing a compound annual growth rate of 12.5%. We may not
be able to sustain our recent growth rate in future periods and
you should not rely on the revenue growth of any prior quarterly
or annual periods as an indication of our future performance.
Additionally, we expect to continue to devote substantial
resources and funds to improving our technologies and product
offerings and acquiring new and relevant content, and also to
expanding awareness of our brand and category through marketing,
which may reduce our margins in the near term. If our margins or
our future growth resulting from our implementation of these
strategies fail to meet investor or analyst expectations, it
could have a negative effect on our stock price. If our growth
rate were to decline significantly or become negative, it could
adversely affect our financial condition and results of
operations.
If we
experience excessive rates of subscriber churn, our revenues and
business will be harmed.
We must continually add new subscribers both to replace
subscribers who choose not to renew their subscriptions and to
grow our business beyond our current subscriber base. We
describe the percentage of subscribers who elect not to renew
their subscriptions as subscriber churn. Subscribers
choose not to renew their subscriptions for many reasons,
including a desire to reduce discretionary spending or a
perception that they do not use the service sufficiently, the
service is a poor value, competitive services provide a better
value or experience, or subscriber service issues are not
satisfactorily resolved. Subscribers may choose not to renew
their subscription at any time prior to the renewal date. If we
are unable to attract new subscribers in numbers greater than
our subscriber churn, our subscriber base will decrease and our
business, financial condition and results of operations will be
adversely affected.
If our subscriber churn increases, we may be required to
increase the rate at which we add new subscribers in order to
maintain and grow our revenues. If excessive numbers of
subscribers cancel our service, we may be required to incur
significantly higher marketing and advertising expenses than we
currently anticipate to replace these subscribers with new
subscribers. A significant increase in our subscriber churn
would have an adverse effect on our business, financial
condition and results of operations.
Because
we recognize revenues from subscriptions to our service over the
term of the subscription, downturns or upturns in subscription
sales may not be immediately reflected in our operating results
and therefore could affect our operating results in later
periods.
We recognize revenues from subscribers ratably over the term of
their subscriptions. Given the mix of annual subscriptions, a
large portion of our revenues for each quarter reflects deferred
revenue from subscription agreements entered into during
previous quarters. Consequently, a decline in new or renewed
subscriptions in any one quarter will not necessarily be fully
reflected in the revenues in that quarter but will negatively
affect our revenues in future quarters. Accordingly, the effect
of significant downturns or upturns in subscription sales or
11
market acceptance of our service, or changes in subscriber
churn, may not fully impact our results of operations until
future periods.
Because
we generate substantially all of our revenue from online family
history resources, particularly in the United States and United
Kingdom, a decline in demand for our services or for online
family history resources in general, and particularly of the
United States and United Kingdom, could cause our revenue
to decline.
We generate substantially all of our revenue from our online
family history services, and we expect that we will continue to
depend upon our online family history services for substantially
all of our revenue in the foreseeable future. Because we depend
on our online family history services, factors such as changes
in consumer preferences for these products may have a
disproportionately greater impact on us than if we offered
multiple services. The market for online family history
resources, and for consumer services in general, is subject to
rapidly changing consumer demand and trends in preferences. If
consumer interest in our online family history services
declines, or if consumer interest in family history in general
declines, we would likely experience a significant loss of
revenue. Some of the potential factors that could affect
interest in and demand for online family history services
include:
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individuals interest in, and their willingness to spend
time and money, conducting family history research;
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availability of discretionary funds;
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awareness of our brand and the family history category;
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the appeal and reliability of our services;
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the price, performance and availability of competing family
history products and services;
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public concern regarding privacy and data security;
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our ability to maintain high levels of customer satisfaction; and
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the rate of growth in online commerce generally.
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In addition, we recognize substantially all of our revenues from
subscribers in the United States, the United Kingdom, and to a
lesser extent, Australia and Canada. Consequently, a decrease of
interest in and demand for online family history services in
these countries could have a disproportionately greater impact
on us than if our geographic mix of revenue was less
concentrated.
A
change in our mix of subscription durations could have a
significant impact on our revenue and churn.
A majority of our subscribers have annual subscriptions. At any
point in time, however, the majority of new subscribers
generally sign up for monthly subscriptions, and may or may not
choose to renew or convert to an annual subscription. We
generally experience higher rates of churn for monthly
subscribers than for annual subscribers. If the percentage of
overall subscribers that are monthly subscribers increases, an
increasing part of our revenue would become dependent on monthly
renewals, and we would likely have greater churn. A shift in mix
between annual and monthly subscriptions to more monthly
subscriptions as our subscriber base broadened has resulted in
higher revenue per subscriber over the last several periods.
This trend may not continue and may result in increased churn.
We continually evaluate the types of subscriptions that are most
appropriate for us and our subscribers. As we make these
evaluations, we may more aggressively market subscriptions that
are shorter than our annual subscriptions. Any material change
in our mix of subscription duration could have a significant
impact on our revenue and churn.
Challenges
in acquiring historical content and making it available online
could adversely affect our ability to retain and expand our
subscriber base, and therefore adversely affect our business,
financial condition and results of operations.
In order to retain and expand our subscriber base, both
domestically and internationally, we must continue to expend
significant resources to acquire significant amounts of
additional historical content, digitize it and make it available
to our subscribers online. We face legal, logistical and
cultural challenges in acquiring new historical content.
Relevant governmental records may be widely dispersed and held
at a national, state or local level.
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Religious and private records are even more widely dispersed.
These problems often pose particular challenges in acquiring
content internationally. For example, content in Germany is
highly dispersed, and legislation in France is particularly
stringent. Desirable content may not be available to us on
favorable terms, or at all, due to competition for a particular
collection, privacy concerns relative to information contained
in a given collection or our lack of negotiating leverage with a
certain content provider. For example, some of our most popular
databases include so-called vital records
content namely, birth, marriage and death records
made available by certain governmental agencies. To help prevent
identity theft, or even terrorist activities, governments may
attempt to restrict the release of all or substantial portions
of their vital records content, and particularly birth records,
to third parties. If these efforts are successful, it may limit
or altogether prevent us from acquiring these types of vital
record content or continuing to make them available online. In
many cases, we will be the first commercial entity that may have
approached the keeper of the records, often a governmental body.
In some cases, we have to lobby for legislation to be changed to
enable government or other bodies to grant us access to records.
While we own most of the images in our database, we generally do
not own the underlying historical documents. If owners of
content have sold or licensed it for digitization purposes on an
exclusive basis to a third party, we would not be able to
acquire this content. The owners of such historical records
generally can allow one or more parties to digitize those
records. If owners of content have sold or licensed the rights
to digitize that content, even on a non-exclusive basis, they
often elect not to sell or license it for digitization purposes
to any other person. Therefore, if one of our competitors
acquires rights to digitize a set of content, even on a
non-exclusive basis, we may be unable to acquire rights to
digitize that content. In some cases, acquisition of content
involves competitive bidding, and we have in the past and may in
the future choose not to bid or may not successfully bid to
acquire content rights. In addition, a number of governmental
bodies and other organizations are interested in making
historical content available for free and owners of historical
records may license or sell their records to such governmental
bodies and organizations in addition to or instead of licensing
or selling their content to us. Our inability to offer vital
records or other valuable content as part of our family history
research databases or the widespread availability of such
content elsewhere at lower cost or for free could result in our
subscription services becoming less valuable to consumers, which
could have an adverse impact on our number of subscribers or
subscriber churn, and therefore on our business, financial
condition and results of operations.
We
depend in part upon third party licenses for some of our
historical content, and a loss of those licenses, or disputes
regarding royalties under these licenses, could adversely affect
our ability to retain and expand our subscriber base, and
therefore adversely affect our revenues, financial condition and
results of operations.
Though we own most of the images in our databases, in some cases
on a non-exclusive basis, we acquire a portion of our content
pursuant to ongoing license agreements. Some of these agreements
have finite terms and we may not be able to renew the agreements
on terms that are advantageous to us or at all. For example, we
license a significant amount of our United Kingdom content from
the United Kingdom National Archives under several license
agreements that generally have ten year terms, with varying
automatic extension periods. These agreements with the United
Kingdom National Archive expire from 2012 to 2019. The
agreements are generally terminable by either party for breach
by the other party and by the United Kingdom National Archives
upon our insolvency or bankruptcy. Some of these agreements
permit the United Kingdom National Archives to terminate these
licenses if we undergo a change of control.
If a current or future license for a significant content
collection were to be terminated, we may not be able to obtain a
new license on terms advantageous to us or at all and we could
be required to remove the relevant content from our Web sites,
either immediately or after some period of time. If a content
provider were to license or sell us content in violation of that
content providers agreements with other parties, we could
be required to remove that content from our Web sites. If we
were required to remove a material amount of content from our
Web sites, as a result of the termination of one or more
licenses or otherwise, it could adversely affect our business
and results of operations. Some of these license agreements
restrict the manner in which we use the applicable content,
which could limit our ability to leverage that content for new
uses as we expand our business. We pay royalties under some of
these license agreements, and the other party to those
royalty-bearing agreements may have a right to audit the
calculation of our royalty payments. If there were to be a
disagreement regarding the calculation of royalty
13
payments, we could be required to make additional payments under
those agreements. We also have indemnification obligations under
many of these agreements. We could experience claims in the
future which, if material, could have a negative impact on our
results of operations and financial condition.
Digitizing
and indexing new content can take a significant amount of time
and expense, and can expose us to risks associated with the loss
or damage of historical documents. Our inability to maintain or
acquire content or make new content available online in a timely
and cost-effective manner, or liability for loss of historical
documents, could have an adverse effect on our business,
financial condition and results of operations.
Digitizing and indexing new historical content can take a
significant amount of time and expense and we generally incur
the expenses related to such content significantly in advance of
the time we can make it available to our subscribers. We have
invested approximately $85 million in content to date and
expect to continue to spend significant resources on content.
Increases in the cost or time required to digitize and index new
content could harm our financial results. In 2009, two
transcription vendors performed substantially all of our data
transcription as measured by cost. We do not have long-term
contracts with any of our transcription vendors. If we were to
replace one of these transcription vendors for any reason, we
would be required to provide extensive training to the new
vendor, which could delay our ability to make our new content
available to our subscribers, and our relationships with the new
transcription vendors may be on financial or other terms less
favorable to us than our existing arrangements. Our inability to
maintain or acquire content or to make new content available
online in a timely and cost-effective manner would have an
adverse effect on our business, financial condition and results
of operations.
In addition, if we acquire content that ultimately generates
only minimal subscriber interest, the cost of acquiring and
processing that content may exceed the incremental revenues
produced by the content, which would adversely affect our
profitability. For example, we took an impairment charge with
respect to content acquired for our China-focused Web site after
we shifted our strategy for that market.
While we are digitizing content, we may be in possession of
valuable and irreplaceable original historical documents. While
we maintain insurance with respect to such documents, any loss
or damage to such documents, while in our possession, could
cause us significant expense and could have a material adverse
effect on our reputation and the potential willingness of
content owners to sell, license or lend their content to us.
We
face competition from a number of different sources, and our
failure to compete effectively with current and future
competitors could adversely affect our ability to retain and
expand our subscriber base, and therefore adversely impact our
revenues, results of operations and financial
condition.
We face competition in our business from a variety of online and
offline organizations, some of which provide genealogical
records free of charge. We expect competition to increase in the
future. We generally compete on the basis of content, price,
technology, ease of use, brand recognition, breadth of products,
service and support, and the number of network users with whom
other users can collaborate.
Ancestry.com and our similar international Web sites face
competition from:
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FamilySearch, and its Web site FamilySearch.org, a genealogy
organization that is part of The Church of Jesus Christ of
Latter-day
Saints. FamilySearch has an extensive collection of paper and
microfilm records (more than 2.3 million rolls of microfilm
and 180,000 sets of microfiche). FamilySearch has digitized a
large quantity of these records and has published them online at
FamilySearch.org, where it makes them available to the public
for free and through over 4,500 family history centers located
throughout the world. FamilySearch is a well funded organization
and has stated its intention to undertake a massive digitization
project to bring most of its collection online over the next few
years.
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Commercial entities, including online genealogical research
services, library content distributors, search engines and
portals, retailers of books and software related to genealogical
research and family tree creation and family history oriented
social networking Web sites.
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Non-profit entities and organizations, genealogical societies,
governments and agencies that may make vital statistics or other
records available to the public for free.
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14
We expect our competition to grow, and our competitors may
include other Internet-based and offline businesses, governments
and other entities. Our current and future competitors may have
greater resources, more well-established brand recognition or
more sophisticated technologies, such as search algorithms, than
we do or may more easily obtain relevant records in
international markets. Additionally, our current and future
competitors may offer new categories of content, products or
services before us, or at lower prices, which may give them a
competitive advantage in attracting subscribers. Our current and
future competitors may make historical records available online
at no cost or on an advertising-supported basis rather than a
subscription basis. Our future competitors and their products
and services may be superior to any of our current competition.
There has recently been some consolidation in our industry, and
such consolidation could also increase competition in the
future, including competition with respect to acquisition of
content, exclusivity of content or pricing. To compete
effectively, we may need to expend significant resources on
content acquisition, technology or marketing and advertising. We
currently plan to distinguish ourselves from our competitors on
the basis of access to content, technological leadership and the
depth of our subscriber community. These efforts may be
expensive and could reduce our margins, which could have a
material adverse effect on our business, financial condition and
results of operations.
Competitive
pricing pressures could cause us to fail to retain existing or
attract new subscribers and harm our revenues and results of
operations.
Demand for our products and services is sensitive to price. Many
external factors, including our marketing, content acquisition
and technology costs and our current and future
competitors pricing and marketing strategies, can
significantly affect our pricing strategies, particularly in
markets outside the United States. Some of our competitors
provide genealogical records free of charge. If we fail to meet
our subscribers pricing expectations, we could fail to
retain existing or attract new subscribers, either of which
would harm our business and results of operations. Changes in
our pricing strategies could have a significant impact on our
revenues, financial condition and results of operations.
Our
growth could strain our personnel, technology and infrastructure
resources, and if we are unable to implement appropriate
controls and procedures to manage our growth, we may not be able
to successfully implement our business plan.
Our growth in operations has placed a significant strain on our
management, administrative, technological, operational and
financial infrastructure. Anticipated future growth, including
growth related to the broadening of our product and service
offerings and our expansion into new geographic areas, will
continue to place similar strains on our personnel, technology
and infrastructure. A sudden increase in our number of
registered users could strain our capacity and result in Web
site performance issues. Our success will depend in part upon
the management ability of our officers with respect to growth
opportunities. To manage the expected growth of our operations,
we will need to continue to improve our operational, financial,
technological and management controls and our reporting systems
and procedures. Additional capital investments will increase our
cost base, which will make it more difficult for us to offset
any future revenue shortfalls by offsetting expense reductions
in the short term. If we fail to successfully manage our growth,
it could adversely affect our business, financial condition and
results of operations.
Any
significant disruption in service on our Web sites or in our
computer systems, which are currently hosted primarily by a
single third-party, could damage our reputation and result in a
loss of subscribers, which would harm our business and operating
results.
Registered users access our service through our Web sites, where
our family history research databases are located, and our
internal billing software and operations are integrated with our
product and service offerings. Our brand, reputation and ability
to attract, retain and serve our subscribers depends upon the
reliable performance of our Web sites, network infrastructure,
content delivery processes and payment systems. We have
experienced interruptions in these systems in the past,
including server failures that temporarily slowed down our Web
sites performance and users access to content, or
made our Web sites inaccessible, and we may experience
interruptions in the future. Interruptions in these systems,
whether due to system failures, computer viruses or physical or
15
electronic break-ins, could affect the security or availability
of our Web sites and prevent our registered users from accessing
our data and using our products and services. Problems with the
reliability or security of our systems may require disclosure to
our lenders and could harm our reputation, and damage to our
reputation and the cost of remedying these problems could
negatively affect our business, financial condition and results
of operations.
Substantially all of our communications, network and computer
hardware used to operate our Web sites are co-located in a
facility in Utah. We do not own or control the operation of this
facility. We have established a disaster recovery facility
located at a third-party facility in Denver, Colorado. Our
systems and operations are vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure,
terrorist attacks, acts of war, electronic and physical
break-ins, computer viruses, earthquakes and similar events. The
occurrence of any of the foregoing events could result in damage
to our systems and hardware or could cause them to fail
completely, and our insurance may not cover such events or may
be insufficient to compensate us for losses that may occur. Our
systems are not completely redundant, so a failure of our system
at one site could result in reduced functionality for our
registered users, and a total failure of our systems at both
sites could cause our Web sites to be inaccessible by our
registered users. Problems faced by our third-party web hosting
provider, with the telecommunications network providers with
whom it contracts or with the systems by which it allocates
capacity among its customers, including us, could adversely
affect the experience of our subscribers. Our third-party web
hosting provider could decide to close its facilities without
adequate notice. In addition, any financial difficulties, such
as bankruptcy reorganization, faced by our third-party web
hosting provider or any of the service providers with whom it
contracts may have negative effects on our business, the nature
and extent of which are difficult to predict. Additionally, if
our third-party web hosting provider is unable to keep up with
our growing needs for capacity, this could have an adverse
effect on our business. Any errors, defects, disruptions or
other performance problems with our services could harm our
reputation and have an adverse effect on our business, financial
condition and results of operations.
Our
operating results depend on numerous factors and may fluctuate
from quarter to quarter, which could make them difficult to
predict.
Our quarterly operating results are tied to certain financial
and operational metrics that have fluctuated in the past and may
fluctuate significantly in the future. As a result, you should
not rely upon our past quarterly operating results as indicators
of future performance. Our operating results depend on numerous
factors, many of which are outside of our control. In addition
to the other risks described in this Risk Factors
section, the following risks could cause our operating results
to fluctuate:
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our ability to retain existing subscribers and attract new
subscribers;
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the mix of annual and monthly subscribers at any given time and
the mix of packages to which they subscribe to;
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timing and amount of costs of new and existing marketing and
advertising efforts;
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timing and amount of operating costs and capital expenditures
relating to expansion of our business, operations and
infrastructure, including content acquisition and international
expansion costs;
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the cost and timing of the development and introduction of new
product and service offerings by us or our competitors;
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downward pressure on the pricing of our subscriptions;
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system failures, security breaches or Web site downtime;
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fluctuations in the usage of our Web sites; and
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fluctuations in foreign currency exchange rates.
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For these or other reasons, the results of any prior quarterly
or annual periods should not be relied upon as indications of
our future performance and our revenue and operating results in
future quarters may differ materially from the expectations of
management or investors.
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We
require a significant amount of cash to service our
indebtedness, which reduces the cash available to finance our
organic growth and strategic acquisitions, alliances and
collaborations. If we fail to grow as a result of limitations on
available cash, it could harm our financial condition and stock
price.
We have a significant amount of indebtedness, as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. Our indebtedness could:
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make us more vulnerable to unfavorable economic conditions;
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make it more difficult to obtain additional financing in the
future for working capital, capital expenditures or other
general corporate purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the markets in which we operate;
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require us to dedicate or reserve a large portion of our cash
flow from operations for making payments on our indebtedness,
which would prevent us from using it for other purposes;
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make us susceptible to fluctuations in market interest rates
that affect the cost of our borrowings to the extent that our
variable rate debt is not covered by interest rate derivative
agreements; and
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make it more difficult to pursue strategic acquisitions,
alliances and collaborations.
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Our existing credit facility contains a number of financial and
operating covenants which could limit our flexibility in
operating our business. For example, our credit facility limits
our capital expenditures, which limits the amount we can spend
on content acquisition, and it limits the amount we can pay when
acquiring companies. These restrictions and covenants, among
other things, limit our ability to: incur additional
indebtedness; make investments; pay dividends or make
distributions to our stockholders; grant liens on our assets;
sell assets; enter into a new or different line of business;
enter into transactions with our affiliates; acquire, merge or
consolidate with other entities or transfer all or substantially
all of our assets; and enter into sale and leaseback
transactions. Our failure to comply with any covenant could
result in a default under the credit facility. Our ability to
service our indebtedness and comply with the covenants will
depend on our future performance, which will be affected by
prevailing economic conditions and financial, business,
regulatory and other factors. Some of these factors are beyond
our control. We believe that, based upon current levels of
operations, we will be able to comply with the covenants in our
credit facility and meet our debt service obligations when due.
Significant assumptions underlie this belief including, among
other things, that we will continue to be successful in
implementing our business strategy and that there will be no
material adverse developments in our business, liquidity or
capital requirements. If we cannot generate sufficient cash flow
from operations to service our indebtedness and to meet our
other obligations and commitments, we might be required to
refinance our debt or to dispose of assets to obtain funds for
such purpose. We cannot assure you that refinancing or asset
dispositions could be effected on a timely basis or on
satisfactory terms, if at all, or would be permitted by the
terms of our credit facility. See Note 6 to our
consolidated financial statements found in this Annual Report
for more information about our credit facility.
Our obligations under the existing credit facility are secured
by collateral, which includes substantially all of our assets,
including our intellectual property. If we are not able to
satisfy our obligations under the credit facility, the creditors
could exercise their rights under the credit facility, which
include taking control of the collateral, including our
intellectual property, which would have a material adverse
effect on our business.
We may
need additional capital, and we cannot be certain that
additional financing will be available. If we fail to obtain
additional financing if needed, it could harm our growth and our
ability to respond to business challenges.
We have funded our operations and capital expenditures primarily
from cash flow from operations during the last five years.
However, in connection with the Spectrum investment, we incurred
$140 million of debt. Although we currently anticipate that
our available funds and cash flow from operations will be
sufficient to meet our cash needs for at least the next
12 months, we may require additional financing in the
future. Our ability to obtain financing will depend, among other
things, on our development efforts, business plans, operating
performance and condition of the capital markets at the time we
seek financing. Additional financing may not be available to us
on
17
favorable terms, or at all, when required. The ongoing financial
stress affecting the banking system and financial markets and
the going concern threats to financial institutions could make
it more difficult for us to obtain additional financing if we
should require it. CIT Group Inc., the parent company of CIT
Lending Services Corporation, or CIT, one of the lenders in the
lending syndicate for the revolving portion of our credit
facility, recently reorganized under Chapter 11 of United
States Bankruptcy Code during 2009, according to public filings.
If CIT or any other of the financial institutions that are in
the syndicate for the revolving portion of our credit facility
were to suffer further financial difficulties or enter
bankruptcy, it could affect our ability to draw down on that
facility. If sufficient funds are not available from our credit
facility, we may seek to raise additional funds through the
issuance of equity, equity-linked or debt securities, although
we cannot be certain that we would be able to issue sufficient
amounts at adequate prices to satisfy our needs. If we are
unable to obtain adequate financing or financing on terms
satisfactory to us when we require it, our ability to service
our outstanding indebtedness, to continue to support our
business growth and to respond to business challenges could be
significantly limited.
If our
marketing and advertising efforts fail to generate additional
revenues on a cost-effective basis, or if we are unable to
manage our marketing and advertising expenses, it could harm our
results of operations and growth.
Our future growth and profitability, as well as the maintenance
and enhancement of our brands, will depend in large part on the
effectiveness and efficiency of our marketing and advertising
expenditures. We use a diverse mix of online and offline
performance-based and fixed-cost marketing and advertising
programs to promote our products and services and we
periodically adjust our mix of marketing and advertising
programs. We have recently experienced price increases in some
of our marketing and advertising channels. Significant increases
in the pricing of one or more of our marketing and advertising
channels would increase our marketing and advertising expense or
cause us to choose less expensive but less effective marketing
and advertising channels. As we implement new marketing and
advertising strategies and phase out older strategies, we may
need to expand into marketing and advertising channels with
significantly higher costs than our current channels, which
could adversely affect our profitability. Further, we may over
time become disproportionately reliant on one channel or
partner, which would limit our marketing and advertising
flexibility and could increase our operating expenses. We may
incur marketing and advertising expenses significantly in
advance of the time we anticipate recognizing revenue associated
with such expenses, and our marketing and advertising
expenditures may not result in increased revenue or generate
sufficient levels of brand awareness. For example, we have
purchased product integration in the planned television show
Who Do You Think You Are? in the United States, but
we may only at a later date, or never, experience an increase in
revenue or brand awareness as a result of such expenditures. If
we are unable to maintain our marketing and advertising channels
on cost-effective terms or replace existing marketing and
advertising channels with similarly effective channels, our
marketing and advertising expenses could increase substantially,
our subscriber levels could be affected adversely, and our
business, financial condition and results of operations may
suffer.
In addition, our expanded marketing efforts may yield fewer new
subscriptions per marketing and advertising dollar than our
strategies to date. We may decide to expand our international
marketing and advertising efforts, which will lead to a
significant increase in our marketing and advertising expenses.
Any of these additional expenses may not result in sufficient
customer growth to offset cost, which would have an adverse
effect on our business, financial condition and results of
operations.
We
cannot predict what impact, if any, the television show
Who Do You Think You Are? will have on our
business.
We have purchased product integration in the planned television
show Who Do You Think You Are? in the United States,
which is currently expected to air in March 2010. In addition,
PBS is airing a television series related to family history and
genealogy. If either of these series, or their combined effects
cause a spike in interest in our core business that results in a
greater number of subscribers for a shorter duration, this would
increase our churn. Our investment in Who Do You Think You
Are? may also cause our subscriber acquisition costs to
increase. In addition, if these shows fail to provide the
benefits that investors and analysts may expect, it could have a
negative effect on our stock price.
18
If we
are unable to improve market recognition of and loyalty to our
brands, or if our reputation were to be harmed, we could lose
subscribers or fail to increase the number of subscribers, which
could harm our revenues, results of operations and financial
condition.
We believe that maintaining and enhancing our Ancestry.com and
other brands is critical to our success. We believe that the
importance of brand recognition and loyalty will only increase
in light of increasing competition in our markets. We plan to
continue to promote our brands, both domestically and
internationally, but there is no guarantee that our selected
strategies will increase the favorable recognition of our
brands. Some of our existing and potential competitors,
including search engines, media companies and government and
religious institutions have well-established brands with greater
brand recognition than we have. Additionally, from time to time,
our subscribers express dissatisfaction with our service,
including, among other things, dissatisfaction with our
auto-renewal and other billing policies, our handling of
personal data and the way our services operate. To the extent
that dissatisfaction with our service is widespread or not
adequately addressed, our brand may be adversely impacted. If
our efforts to promote and maintain our brand are not
successful, our operating results and our ability to attract and
retain subscribers may be adversely affected. In addition, even
if our brand recognition and loyalty increases, this may not
result in increased use of our products and services or higher
revenues. Many of our subscribers are passionate about family
history research, and many of these subscribers participate in
blogs on this topic both on our Web sites and elsewhere. If
actions we take or changes we make to our products upset these
subscribers, their blogging could negatively affect our brand
and reputation.
Online family history research is a relatively new industry and
our operational history in the online family history research
industry is also relatively limited. Consequently, it is
difficult to predict the ultimate size of the industry and the
acceptance by the market of our products and services. Our
business strategy and projections rely on a number of
assumptions, some or all of which may be incorrect. For example,
we believe that consumers will be willing to pay for
subscriptions to our online family history resources,
notwithstanding the fact that some of our current and future
competitors provide such resources free of charge. We cannot
accurately predict whether our products and services will
achieve significant acceptance by potential users in
significantly larger numbers than at present. You should
therefore not rely on our historic growth rates as an indication
of future growth.
Our
business could be adversely affected if our subscribers are not
satisfied with our products and services. If we lose subscribers
or fail to increase the number of subscribers due to
dissatisfaction with our products and services, it could harm
our revenues, results of operations and financial
condition.
Our business depends on our ability to satisfy our subscribers.
Our subscribers satisfaction may be negatively impacted by
factors that are actual or perceived by them, such as
limitations in our technologies, changes in our products and
services, interruptions or slowness in online capacity of our
Web sites, privacy and data security concerns, speed of search
of our online content and relevance of search results, as well
as perceived ease of search, and our automatic subscription
renewal by credit card policy, including any perceptions of
credit card fraud. If we do not handle subscriber complaints
effectively, our brand and reputation may suffer, we may lose
our subscribers confidence, and they may choose not to
renew their subscriptions. Complaints or negative publicity
about our products, services or billing practices could
adversely impact our business, financial condition and results
of operations.
Our
promotional offerings and our introduction of new services may
have unintended effects on the demand for our services, which
could result in diminished revenue visibility.
Many of our promotional offerings involve temporary free access
to our data. By granting temporary free access to many of our
records, and permanent free access to a smaller set of our
records, we may provide sufficient access to some registered
users who are not subscribers to satisfy their family history
needs, and may therefore fail to generate additional revenues as
intended. Additionally, alternative subscriptions with terms of
less than one year, such as monthly subscriptions and
pay-per-view
offerings, may result in fewer annual subscriptions from both
new and existing subscribers, which may result in diminished
revenue visibility. If any of these services or offerings has
the effect of reducing our long-term subscriber base or total
number of subscriptions, our revenues may decrease over time and
our business may suffer.
19
We
face many risks associated with our plans to continue to expand
our international offerings and marketing and advertising
efforts, which could harm our business, financial condition and
results of operations.
In addition to our United States and United Kingdom Web sites,
since 2006, we have launched Web sites directed at Australia,
Canada, Germany, France, Italy, Sweden and China and launched an
initial version of our global Mundia.com Web site in the third
quarter of 2009. In 2009, approximately 34% of subscribers to
our Ancestry.com Web sites, and approximately 25% of our
revenues from subscribers, were from locations outside the
United States. We anticipate that our continuing international
expansion will entail the marketing and advertising of our
products, services and brands, and the development of localized
Web sites. We may not succeed in these efforts and achieve our
subscriber acquisition or other goals. For some international
markets, customer preferences and buying behaviors may be
different, and we may use business models that are different
from our traditional subscription model that provides
company-acquired content to subscribers. Our revenues from new
foreign markets may not exceed the costs of establishing,
marketing and maintaining our international offerings, and
therefore may not be profitable on a sustained basis, if at all.
We will be subject to risks of doing business internationally,
including the following:
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difficulties in developing and marketing our offerings and
brands as a result of distance, language and cultural
differences;
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foreign currency exchange rate fluctuations;
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more stringent consumer and data protection laws;
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local socio-economic and political conditions;
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technical difficulties and costs associated with the
localization of our service offerings;
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strong local competitors;
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lack of experience in certain geographical markets;
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different and conflicting legal and regulatory regimes;
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changes in governmental regulations;
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different and conflicting intellectual property laws;
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difficulties in staffing and managing international operations;
and
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risk of business or user fraud.
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One or more of these factors could harm our business, financial
condition and results of operations.
If we
are unable to continually enhance our products and services and
adapt them to technological changes and subscriber needs, we may
not remain competitive and our business may fail to grow or
decline.
Our business is rapidly changing. To remain competitive, we must
continue to provide relevant content and enhance and improve the
functionality and features of our products and services. If
competitors introduce new solutions embodying new technologies,
our existing products and services may become obsolete. Our
future success will depend, among other things, on our ability
to:
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anticipate demand for new products and services;
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enhance our existing solutions; and
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respond to technological advances on a cost-effective and timely
basis.
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Developing the technologies in our products entails significant
technical and business risks. We may use new technologies
ineffectively, or we may fail to adapt our products and services
to the demands of our subscribers. If we face material delays in
introducing new or enhanced solutions, our subscribers may
forego the use of our solutions in favor of those of our
competitors.
20
Undetected
product or service errors or defects could result in the loss of
revenues, delayed market acceptance of our products or services
or claims against us.
We offer a variety of Internet-based services and a software
product, Family Tree Maker, all of which are complex and
frequently upgraded. Our Internet-based services and software
product may contain undetected errors, defects, failures or
viruses, especially when first introduced or when new versions
or enhancements are released. Despite product testing, our
products, or third party products that we incorporate into ours,
may contain undetected errors, defects or viruses that could,
among other things:
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require us to make extensive changes to our subscription
services or software product, which would increase our expenses;
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expose us to claims for damages;
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require us to incur additional technical support costs;
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cause a negative registered user reaction that could reduce
future sales;
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generate negative publicity regarding us and our subscription
services and software product; or
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result in subscribers delaying their subscription or software
purchase or electing not to renew their subscriptions.
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Any of these occurrences could have a material adverse effect
upon our business, financial condition and results of operations.
Privacy
concerns could require us to incur significant expense and
modify our operations in a manner that could result in
restrictions and prohibitions on our use of certain information,
and therefore harm our business.
As part of our business, we make biographical and historical
data available through our Web sites, we use registered
users personal data for internal purposes and we host Web
sites and message boards, among other things, that contain
content supplied by third parties. In addition, in connection
with our Ancestry.com DNA product, we obtain biological DNA
samples used for genetic testing. For privacy or security
reasons, privacy groups, governmental agencies and individuals
may seek to restrict or prevent our use or publication of
certain biological or historical information pertaining to
individuals, particularly living persons. We will also face
additional privacy issues as we expand into other international
markets, as many nations have privacy protections more stringent
than those in the United States. We have incurred, and will
continue to incur, expenses to comply with privacy and security
standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Increased domestic or
international regulation of data utilization and distribution
practices, including self-regulation, could require us to modify
our operations and incur significant expense, which could have
an adverse effect on our business, financial condition and
results of operations.
Our
possession and use of personal information presents risks and
expenses that could harm our business. Unauthorized disclosure
or manipulation of such data, whether through breach of our
network security or otherwise, could expose us to costly
litigation and damage our reputation.
Maintaining our network security is of critical importance
because our online systems store confidential registered user,
employee and other sensitive data, such as names, addresses,
credit card numbers and other personal information. In
particular, a substantial majority of our subscribers use credit
and debit cards to purchase our products and services. If we or
our processing vendors were to have problems with our billing
software, it could have an adverse effect on our subscriber
satisfaction and could cause one or more of the major credit
card companies to disallow our continued use of their payment
services. In addition, if our billing software fails to work
properly and, as a result, we do not automatically charge our
subscribers credit cards on a timely basis or at all, our
business, financial condition and results of operations could be
adversely affected.
In addition, our online systems store the content that our
registered users upload onto our Web sites, such as family
records and photos. This content is often personally meaningful,
and our registered users may rely on our
21
online system to store digital copies of such content. If we
were to lose such content, if our users private content
were to be publicly available or if third parties were able to
access and manipulate such content, we may face liability and
harm to our brand and reputation.
We and our vendors use commercially available encryption
technology to transmit personal information when taking orders.
We use security and business controls to limit access and use of
personal information, including registered users uploaded
content. However, third parties may be able to circumvent these
security and business measures by developing and deploying
viruses, worms and other malicious software programs that are
designed to attack or attempt to infiltrate our systems and
networks. In addition, employee error, malfeasance or other
errors in the storage, use or transmission of personal
information could result in a breach of registered user or
employee privacy.
If third parties improperly obtain and use the personal
information of our registered users or employees, we may be
required to expend significant resources to resolve these
problems. A major breach of our network security and systems
could have serious negative consequences for our businesses,
including possible fines, penalties and damages, reduced demand
for our products and services, an unwillingness of subscribers
to provide us with their credit card or payment information, an
unwillingness of registered users to upload family records or
photos onto our Web sites, harm to our reputation and brand and
loss of our ability to accept and process subscriber credit card
orders. Similarly, if a well-publicized breach of data security
at any other major consumer Web site were to occur, there could
be a general public loss of confidence in the use of the
Internet for commercial transactions. Any of these events could
have material adverse effects on our business, financial
condition and results of operations.
Any
claims related to activities of registered users and the content
they upload could result in expenses that could harm our results
of operations and financial condition.
Our registered users often upload their own content onto our Web
sites. The terms of use of such content are set forth in the
terms and conditions of our Web sites and a submission agreement
to which registered users must agree when they upload their
content. Disputes or negative publicity about the use of such
content could make members more reluctant to upload personal
content or harm our reputation. We do not review or monitor
content uploaded by our registered users, and could face claims
arising from or liability for making any such content available
on our Web sites. In addition, our collaboration tools and other
features of our site allow registered users to contact each
other. While registered users can choose to remain anonymous in
such communications, registered users may choose to engage with
one another without anonymity. If any such contact were to lead
to fraud or other harm, we may face claims against us and
negative publicity. Litigation to defend these claims or efforts
to counter any negative publicity could be costly and any other
liabilities we incur in connection with any such claims may harm
our business, financial condition and results of operations.
Increases
in credit card processing fees would increase our operating
expenses and adversely affect our results of operations, and the
termination of our relationship with any major credit card
company would have a severe, negative impact on our ability to
collect revenues from subscribers.
The substantial majority of our subscribers pay for our products
and services using credit cards. From time to time, the major
credit card companies or the issuing banks may increase the fees
that they charge for each transaction using their cards. An
increase in those fees would require us to either increase the
prices we charge for our products and services, or suffer a
negative impact on our profitability, either of which could
adversely affect our business, financial condition and results
of operations.
In addition, our credit card fees may be increased by credit
card companies if our chargeback rate or the refund rate exceeds
certain minimum thresholds. If we are unable to maintain our
chargeback rate at acceptable levels, our credit card fees for
chargeback transactions, or for all credit card transactions,
may be increased, and, if the problem significantly worsens,
credit card companies may further increase our fees or terminate
their relationships with us. Any increases in our credit card
fees could adversely affect our results of operations,
particularly if we elect not to raise our subscription rates to
offset the increase. The termination of our ability to process
payments on any major credit or debit card would significantly
impair our ability to operate our business.
22
If
government regulation of the Internet or other areas of our
business changes or if consumer attitudes toward use of the
Internet change, we may need to change the manner in which we
conduct our business in a manner that is less profitable or
incur greater operating expenses, which could harm our results
of operations.
The adoption, modification or interpretation of laws or
regulations relating to the Internet or other areas of our
business could adversely affect the manner in which we conduct
our business or the overall popularity or growth in use of the
Internet. Such laws and regulations may cover automatic
subscription renewal, credit card processing procedures, sales
and other procedures, tariffs, user privacy, data protection,
pricing, content, copyrights, distribution, electronic
contracts, consumer protection, broadband residential Internet
access and the characteristics and quality of services. In
foreign countries, such as countries in Europe, such laws may be
more restrictive than in the United States. It is not clear how
existing laws governing issues such as property ownership, sales
and other taxes, libel and personal privacy apply to the
Internet. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or
legislation, this compliance could cause us to incur additional
expenses, make it more difficult to renew subscriptions
automatically, make it more difficult to attract new subscribers
or otherwise alter our business model. Any of these outcomes
could have a material adverse effect on our business, financial
condition or results of operations.
Our
revenues may be adversely affected if we are required to charge
sales taxes in additional jurisdictions and/or other taxes for
our products and services.
We collect or have imposed upon us sales or other taxes related
to the products and services we sell in certain states and other
jurisdictions. Additional states or one or more countries or
other jurisdictions may seek to impose sales or other tax
collection obligations on us in the future. A successful
assertion by any country, state or other jurisdiction in which
we do business that we should be collecting sales or other taxes
on the sale of our products and services could, among other
things, create significant administrative burdens for us, result
in substantial tax liabilities for past sales, discourage
registered users from purchasing from us or otherwise
substantially harm our business and results of operations.
We
face risk associated with currency exchange rate fluctuations,
which could adversely affect our operating
results.
In 2009, approximately 21% of our total revenues were received,
and approximately 12% of our total expenses were paid, in
currencies other than the United States dollar, such as the
British pound sterling, the Canadian dollar and the Australian
dollar. As a result, we are at risk for exchange rate
fluctuations between such foreign currencies and the United
States dollar, which could affect our results of operations. We
attempt to limit our exposure by paying our operating expenses
incurred in foreign jurisdictions with revenues received in the
applicable currency, but if we do not have enough local currency
to pay all our expenses in that currency, we are exposed to
currency exchange rate risk with respect to those expenses. We
are also exposed to exchange rate risk with respect to our
profits earned in foreign currency. Even if we were to implement
hedging strategies to mitigate foreign currency risk, these
strategies might not eliminate our exposure to foreign exchange
rate fluctuations and would involve costs and risks of their
own, such as ongoing management time and expertise, external
costs to implement the strategies and potential accounting
implications.
If we
acquire any businesses or technologies in the future, they could
prove difficult to integrate, disrupt our ongoing business,
dilute stockholder value or have an adverse effect on our
results of operations.
As part of our business strategy, we may engage in acquisitions
of businesses or technologies to augment our organic or internal
growth. While we have engaged in some acquisitions in the past,
we do not have extensive experience with integrating and
managing acquired businesses or assets. Acquisitions involve
challenges and risks in negotiation, execution, valuation and
integration. Moreover, we may not be able to find suitable
acquisition opportunities on terms that are acceptable to us.
Even if successfully negotiated, closed and integrated, certain
23
acquisitions may not advance our business strategy, may fall
short of expected
return-on-investment
targets or may fail. Any future acquisition could involve
numerous risks including:
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potential disruption of our ongoing business and distraction of
management;
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difficulty integrating the operations and products of the
acquired business;
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use of cash to fund the acquisition or for unanticipated
expenses;
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limited market experience in new businesses;
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exposure to unknown liabilities, including litigation against
the companies we may acquire;
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additional costs due to differences in culture, geographic
locations and duplication of key talent;
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acquisition-related accounting charges affecting our balance
sheet and operations;
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dilution to our current stockholders from the issuance of equity
securities; and
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potential loss of key employees or customers of the acquired
company.
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In the event we enter into any acquisition agreements, closing
of the transactions could be delayed or prevented by regulatory
approval requirements, including antitrust review, or other
conditions. We may not be successful in addressing these risks
or any other problems encountered in connection with any
attempted acquisitions, and we could assume the economic risks
of such failed or unsuccessful acquisitions.
Our
business may be significantly impacted by a change in the
economy, including any resulting effect on consumer
spending.
Our business may be affected by changes in the economy
generally, including any resulting effect on consumer spending
specifically. Our products and services are discretionary
purchases, and consumers may reduce their discretionary spending
on our products and services during an economic downturn such as
the economic downturn experienced during 2008 and 2009. Although
we have not experienced a material increase in subscription
cancellations or a material reduction in subscription renewals,
we may yet experience such an increase or reduction in the
future, especially if employment and personal income do not
improve. Conversely, consumers may spend more time using the
Internet during an economic downturn and may have less time for
our products and services in a period of economic growth. In
addition, media prices may increase in a period of economic
growth, which could significantly increase our marketing and
advertising expenses. As a result, our business, financial
condition and results of operations may be significantly
affected by changes in the economy generally.
The
loss of one or more of our key personnel, or our failure to
attract, assimilate and retain other highly qualified personnel
in the future, could harm our business.
We depend on the continued service and performance of our key
personnel, including Timothy Sullivan, our President and Chief
Executive Officer. We do not maintain key man insurance on any
of our officers or key employees. We also do not have long-term
employment agreements with any of our officers or key employees.
In addition, much of our key technology and systems are
custom-made for our business by our personnel. The loss of key
personnel, including key members of our management team, as well
as certain of our key marketing, sales, product development or
technology personnel, could disrupt our operations and have an
adverse effect on our ability to grow our business.
Several of our key personnel have only recently been employed by
us, and we are still in the process of assimilating and
integrating these personnel into our operations. Our failure to
successfully integrate these key employees into our business
could adversely affect our business.
In addition, to execute our growth plan, we must attract and
retain highly qualified personnel. Competition for these
employees is intense, and we may not be successful in attracting
and retaining qualified personnel. We have from time to time in
the past experienced, and we expect to continue to experience in
the future, difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. Many of the companies
with which we compete for experienced personnel have greater
resources than we have. In addition, in making employment
24
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Accounting principles generally accepted in the United States
relating to the expensing of stock options may discourage us
from granting the size or type of stock option awards that job
candidates may require to join our company. If we fail to
attract new personnel, or fail to retain and motivate our
current personnel, our business and future growth prospects
could be severely harmed.
We are
subject to additional regulatory compliance matters as a result
of becoming a public company, which compliance includes
Section 404 of the Sarbanes-Oxley Act of 2002, and our
management has limited experience managing a public company.
Failure to comply with these regulatory matters could harm our
business.
In November 2009, we became a public company and have incurred
and will continue to incur significant legal, accounting and
other expenses that we did not incur as a private company. Our
management team and other personnel will need to devote a
substantial amount of time to new compliance initiatives and to
meeting the obligations that are associated with being a public
company, and we may not successfully or efficiently manage this
transition. We expect rules and regulations such as the
Sarbanes-Oxley Act of 2002 will increase our legal and finance
compliance costs and make some activities more time-consuming
than in the past. We may need to hire a number of additional
employees with public accounting and disclosure experience in
order to meet our ongoing obligations as a public company.
Furthermore, Section 404 of the Sarbanes-Oxley Act of 2002
requires that our management report on, and our independent
auditors to attest to, the effectiveness of our internal control
structure and procedures for financial reporting in our Annual
Report on
Form 10-K
for the fiscal year ending December 31, 2010.
Section 404 compliance efforts may divert internal
resources and will take a significant amount of time and effort
to complete. We may not be able to successfully complete the
procedures and certification and attestation requirements of
Section 404 by the time we will be required to do so. If we
fail to do so, or if in the future our chief executive officer,
chief financial officer or independent registered public
accounting firm determines that our internal controls over
financial reporting are not effective, we could be subject to
sanctions or investigations by the Nasdaq Stock Market, SEC or
other regulatory authorities. Furthermore, investor perceptions
of our company may suffer, and this could cause a decline in the
market price of our stock. Furthermore, whether or not we comply
with Section 404, any failure of our internal controls
could have a material adverse effect on our stated results of
operations and harm our reputation. If we are unable to
implement necessary procedures or changes effectively or
efficiently, it could harm our operations, financial reporting
or financial results and could result in an adverse opinion on
internal controls from our independent auditors. If we are
unable to retain enough independent directors to our board to
meet the listing standards of the Nasdaq Stock Market by the
deadlines set by the exchange, it could affect our continued
listing on the exchange.
Our
reported financial results may be adversely affected by changes
in accounting principles applicable to us.
Generally accepted accounting principles in the United States
are subject to interpretation by the Financial Accounting
Standards Board, or FASB, the American Institute of Certified
Public Accountants, the SEC and various bodies formed to
promulgate and interpret appropriate accounting principles. A
change in these principles or interpretations could have a
significant effect on our reported financial results, and could
affect the reporting of transactions completed before the
announcement of a change. In addition, the SEC has announced a
multi-year plan that could ultimately lead to the use of
International Financial Reporting Standards by United States
issuers in their SEC filings. Any such change could have a
significant effect on our reported financial results.
Any
expenses or liability resulting from litigation could adversely
affect our results of operations and financial
condition.
From time to time, we may be subject to claims or litigation.
Any such claims or litigation may be time-consuming and costly,
divert management resources, require us to change our products
and services, require us to accept returns of software products,
or have other adverse effects on our business. Any of the
foregoing could have a material adverse effect on our results of
operations and could require us to pay significant monetary
damages. For example, we have recently received a letter from
Shutterfly, Inc., alleging infringement by our MyCanvas.com Web
25
site. Based on our investigation to date, we believe that the
identified claims either are not valid or are not currently
infringed by us and we do not believe that the resolution of
these claims will have a material impact on our financial
condition. While MyCanvas.com revenues have represented a small
percentage of our total revenue, intellectual property
litigation is subject to inherent uncertainties, and there can
be no assurance that the expenses associated with defending any
litigation or the resolution of this dispute would not have a
material adverse impact on our results of operations or cash
flows. In addition, on September 16, 2009, we settled a
claim with respect to the timeliness and accuracy of a content
index we created. The settlement resulted in an expense of
approximately $2.3 million in 2009.
Risks
Related to Intellectual Property
If our
intellectual property and technologies are not adequately
protected to prevent use or appropriation by our competitors,
the value of our brand and other intangible assets may be
diminished, and our business may be adversely
affected.
Our future success and competitive position depend in part on
our ability to protect our proprietary technologies and
intellectual property. We rely and expect to continue to rely on
a combination of confidentiality and license agreements with our
employees, consultants and third parties with whom we have
relationships, as well as trademark, copyright, patent and trade
secret protection laws, to protect our proprietary technologies
and intellectual property. In the United States, we currently
have three patents issued, and we have a number of patents
pending relating to digitization, indexing, storage,
correlation, search and display of content. Ancestry.com,
myfamily.com and Family Tree Maker are among our registered
trademarks. In addition, in the United States, we have filed
various trademark applications for certain aspects of our
technologies, and we have also filed trademark applications in
certain foreign countries for the Ancestry and other Web site
names. Many of our trademarks contain words or terms having a
common usage and, as a result, may not be protectable under
applicable law. Because of this concern, we have elected not to
file applications with respect to certain of our trademarks, and
some of our trademarks for which we have filed applications may
not be protectable. We also possess intellectual property rights
in aspects of our digital content, search technology, software
products and digitization and indexing processes. However, our
digital content is not protected by any registered copyrights or
other registered intellectual property or statutory rights.
Rather, our digital content is protected by user agreements that
limit access to and use of our data, and by our proprietary
indexing and search technology that we apply to make our digital
content searchable. Compliance with use restrictions is
difficult to monitor, and our proprietary rights in our digital
content databases may be more difficult to enforce than other
forms of intellectual property rights.
There can be no assurance that the steps we take will be
adequate to protect our technologies and intellectual property,
that our patent and trademark applications will lead to issued
patents and registered trademarks, that others will not develop
or patent similar or superior technologies, products or
services, or that our patents, trademarks and other intellectual
property will not be challenged, invalidated or circumvented by
others. Furthermore, the intellectual property laws of other
countries at which our Web sites are or may be in the future be
directed may not protect our products and intellectual property
rights to the same extent as the laws of the United States. The
legal standards relating to the validity, enforceability and
scope of protection of intellectual property rights in
Internet-related industries are uncertain and still evolving,
both in the United States and in other countries. In addition,
third parties may knowingly or unknowingly infringe our patents,
trademarks and other intellectual property rights, and
litigation may be necessary to protect and enforce our
intellectual property rights. Any such litigation could be very
costly and could divert management attention and resources. If
the protection of our technologies and intellectual property is
inadequate to prevent use or appropriation by third parties, the
value of our brand and other intangible assets may be diminished
and competitors may be able to more effectively mimic our
subscription services and methods of operations. Any of these
events would have a material adverse effect on our business,
financial condition and results of operations.
We also expect that the more successful we are, the more likely
it will become that competitors will try to develop products
that are similar to ours, which may infringe on our proprietary
rights. It may also be more likely that competitors will claim
that our products and services infringe on their proprietary
rights. If we are unable to protect our proprietary rights or if
third parties independently develop or gain access to our or
similar technologies, our business, revenue, reputation and
competitive position could be harmed.
26
Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary information.
Failure to protect our proprietary information could make it
easier for third parties to compete with our products and harm
our business.
A substantial amount of our tools and technologies are protected
by trade secret laws. In order to protect our proprietary
technologies and processes, we rely in part on security
measures, as well as confidentiality agreements with our
employees, licensees, independent contractors and other
advisors. These measures and agreements may not effectively
prevent disclosure of confidential information, including trade
secrets, and may not provide an adequate remedy in the event of
unauthorized disclosure of confidential information. We could
potentially lose future trade secret protection if any
unauthorized disclosure of such information occurs. In addition,
others may independently discover our trade secrets and
proprietary information, and in such cases we could not assert
any trade secret rights against such parties. Laws regarding
trade secret rights in certain markets in which we operate may
afford little or no protection to our trade secrets. The loss of
trade secret protection could make it easier for third parties
to compete with our products by copying functionality. In
addition, any changes in, or unexpected interpretations of, the
trade secret and other intellectual property laws in any country
in which we operate may compromise our ability to enforce our
trade secret and intellectual property rights. Costly and
time-consuming litigation could be necessary to enforce and
determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely
affect our business, revenue, reputation and competitive
position.
Intellectual
property claims against us could be costly and result in the
loss of significant rights related to, among other things, our
Web sites and marketing and advertising
activities.
Trademark, copyright, patent and other intellectual property
rights are important to us and other companies. Our intellectual
property rights extend to our technologies, business processes
and the content on our Web sites. We use intellectual property
licensed from third parties in merchandising our products and
marketing and advertising our services. From time to time, third
parties may allege that we have violated their intellectual
property rights. If there is a claim against us for
infringement, misappropriation, misuse or other violation of
third party intellectual property rights, and we are unable to
obtain sufficient rights or develop non-infringing intellectual
property or otherwise alter our business practices on a timely
basis, our business and competitive position may be adversely
affected. Many companies are devoting significant resources to
obtaining patents that could potentially affect many aspects of
our business. There are numerous patents that broadly claim
means and methods of conducting business on the Internet. We
have not exhaustively searched patents relevant to our
technologies and business. If we are forced to defend ourselves
against intellectual property infringement claims, whether they
are with or without merit or are determined in our favor, we may
face costly litigation, diversion of technical and management
personnel, limitations on our ability to use our current Web
sites or inability to market or provide our products or
services. As a result of any such dispute, we may have to
develop
non-infringing
technology, pay damages, enter into royalty or licensing
agreements, cease providing certain products or services, adjust
our merchandizing or marketing and advertising activities or
take other actions to resolve the claims. These actions, if
required, may be costly or unavailable on terms acceptable to
us. In addition, many of our co-branding, distribution and other
partnering agreements require us to indemnify our partners for
third-party intellectual property infringement claims, which
could increase the cost to us of an adverse ruling in such an
action.
In addition, as a publisher of online content, we face potential
liability for negligence, copyright, patent or trademark
infringement or other claims based on the nature and content of
data and materials that we publish or distribute. These claims
could potentially arise with respect to both company-acquired
content and user-generated content. Litigation to defend these
claims could be costly and any other liabilities we incur in
connection with the claims may harm our business, financial
condition and results of operations.
If we
are unable to protect our domain names, our reputation and brand
could be affected adversely, which would adversely affect our
subscriber base, and therefore adversely affect our
revenues.
We have registered domain names for Web site destinations that
we use in our business, such as Ancestry.com, Genealogy.com and
myfamily.com. However, if we are unable to maintain our rights
in these domain names, our competitors could capitalize on our
brand recognition by using these domain names for their own
benefit. In addition, our competitors could capitalize on our
brand recognition by using domain names similar to ours. Domain
27
names similar to ours have been registered in the United States
and elsewhere, and in many countries the top-level domain names
ancestry or genealogy are owned by other
parties. Though we own the ancestry.co.uk domain
name in the United Kingdom, we might not be able to, or may
choose not to, acquire or maintain other country-specific
versions of the ancestry and genealogy
domain names. Further, the relationship between regulations
governing domain names and laws protecting trademarks and
similar proprietary rights varies from jurisdiction to
jurisdiction and is unclear in some jurisdictions. We may be
unable to prevent third parties from acquiring and using domain
names that infringe on, are similar to, or otherwise decrease
the value of, our brand or our trademarks or service marks.
Protecting and enforcing our rights in our domain names and
determining the rights of others may require litigation, which
could result in substantial costs and divert management
attention. We may not prevail if any such litigation is
initiated.
Risks
Related to our Corporate Structure
Our
share price may be volatile due to fluctuations in our operating
results and other factors, each of which could cause our stock
price to decline.
Our revenues, expenses and results of operations have fluctuated
in the past and are likely to do so in the future from quarter
to quarter and year to year due to the risk factors described in
this section and the factors described below and elsewhere in
this Annual Report:
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actual or anticipated fluctuations in our key operating metrics,
financial condition and operating results;
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a greater than expected loss of existing subscribers;
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a negative change in one or more of our key metrics;
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actual or anticipated changes in our growth rate;
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issuance of new or updated research or reports by securities
analysts;
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our announcement of actual results for a fiscal period that are
higher or lower than projected or expected results or our
announcement of revenue or earnings guidance that is higher or
lower than expected;
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fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent
trading volume levels of our shares;
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sales or expected sales of additional common stock;
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announcements from, or operating results of, our competitors; or
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general economic and market conditions.
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Furthermore, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest
rate changes or international currency fluctuations, may cause
the market price of shares of our common stock to decline. In
the past, companies that have experienced volatility in the
market price of their stock have been subject to securities
class action litigation. We may be the target of this type of
litigation in the future. Securities litigation against us could
result in substantial costs and divert our managements
attention from other business concerns, which could seriously
harm our business.
If an
insufficient number of securities or industry analysts publish
research or reports about our business, or if they change their
recommendations regarding our stock adversely, our stock price
and trading volume could decline.
The trading of our common stock is influenced by the research
and reports that industry or securities analysts publish about
us or our business. If analysts stop covering us, or if too few
analysts cover us, the trading price of our stock would likely
decrease. If one or more of the analysts who cover us downgrade
our stock, our stock price will
28
likely decline. If one or more of these analysts cease coverage
of our company or fail to regularly publish reports on us, we
could lose visibility in the financial markets, which in turn
could cause our stock price or trading volume to decline
Our
principal stockholder and its affiliates own a majority of our
outstanding common stock, and their interests may not always
coincide with the interests of the other holders of our common
stock.
As of December 31, 2009, Spectrum Equity Investors V,
L.P. and certain of its affiliates beneficially owned in the
aggregate shares representing approximately 55% of our
outstanding voting power. Two persons associated with Spectrum
Equity Investors V, L.P. currently serve on our board of
directors. As a result, Spectrum Equity Investors V, L.P.
and certain of its affiliates effectively control all matters
presented to our stockholders for approval, including election
and removal of our directors and change of control transactions.
The interests of Spectrum Equity Investors V, L.P. and
certain of its affiliates may not always coincide with the
interests of the other holders of our common stock.
Delaware
law and our corporate charter and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that
stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or
changes in our management. For example, our board of directors
has the authority to issue up to five million shares of
preferred stock in one or more series and to fix the powers,
preferences and rights of each series without stockholder
approval. The ability to issue preferred stock could discourage
unsolicited acquisition proposals or make it more difficult for
a third party to gain control of our company, or otherwise could
adversely affect the market price of our common stock. Our
amended and restated certificate of incorporation requires that
any action to be taken by stockholders must be taken at a duly
called meeting of stockholders, which may only be called by our
board of directors, the chairperson of our board of directors or
the chief executive officer, with the concurrence of a majority
of our board of directors, and may not be taken by written
consent. Our amended and restated bylaws also require that any
stockholder proposals or nominations for election to our board
of directors meet specific advance notice requirements and
procedures, which make it more difficult for our stockholders to
make proposals or director nominations. In addition, we have a
classified board of directors with three-year staggered terms,
which could delay the ability of stockholders to change
membership of a majority of our board of directors.
Furthermore, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit or
restrict large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining
with us. These provisions in our certificate of incorporation
and bylaws and under Delaware law could discourage potential
takeover attempts and could reduce the price that investors
might be willing to pay for shares of our common stock in the
future and result in our market price being lower than it would
without these provisions.
Substantial
sales of our common stock by our stockholders, including sales
pursuant to 10b5-1 plans, could depress our stock price
regardless of our operating results.
Sales of substantial amounts of our common stock in the public
market could reduce the prevailing market prices for our common
stock. On November 10, 2009 we completed our initial public
offering of 7.4 million shares of common stock on the
Nasdaq Global Select Market. As of February 18, 2010, we
had approximately 35.0 million additional shares of common
stock outstanding along with options to purchase approximately
6.9 million common shares vested and exercisable that were
subject to
lock-up
agreements executed in connection with our initial public
offering. The
lock-up
agreements related to our initial public offering will expire
with the opening of the securities markets on May 4, 2010,
or depending on the timing of our next earnings release,
announcement of an earnings release or other material event, up
to 18 days thereafter. When the
lock-up
agreements expire, substantially all of our outstanding common
stock will become eligible for sale as will common stock
issuable under vested and exercisable stock options. If our
existing stockholders sell a large number of shares of our
common stock or the public market perceives that existing
stockholders might sell shares of common stock, including sales
pursuant
29
to 10b5-1 plans, the market price of our common stock could
decline significantly. These sales might also make it more
difficult for us to sell equity securities at a time and price
that we deem appropriate.
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Item 1B.
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Unresolved
Staff Comments
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None.
We lease approximately 160,000 square feet of space
worldwide, including approximately 120,000 square feet of
Class A office space for our corporate headquarters in
Provo, Utah, where we employ the majority of our employees. We
believe that the space is adequate for our current needs and
anticipated growth. Our Provo lease expires in April 2016 and we
have the right to extend the lease for an additional five years.
We also maintain various offices worldwide, including facilities
in San Francisco, California and London, England. The
leases for these offices expire at varying times from 2010 to
2012.
Our Web sites are hosted on hardware and software co-located at
a third-party facility in Salt Lake City, Utah. We believe that
our leased space at this facility is both suitable and adequate
for our current development plans and our anticipated growth.
Our lease at this facility expires at the end of 2012, though
each party has the option to terminate the lease at the end of
2011 by giving notice of its intent to do so before the end of
2010.
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Item 3.
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Legal
Proceedings
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In August 2009, we received a letter from counsel to Shutterfly,
Inc., alleging infringement of certain of its patents by our
operation of our MyCanvas.com Web site. If litigation were to
commence, we believe that we have substantive and meritorious
defenses to these claims and would contest any claim vigorously.
In addition, we are party to other legal proceedings arising in
the ordinary course of business and may become subject to
additional proceedings in the future. While management does not
believe that any pending legal claim or proceeding will be
resolved in a manner that would have a material adverse effect
on our business, we cannot assure you of the ultimate outcome of
any legal proceeding or contingency in which we are or may
become involved.
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Item 4.
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Submission
of Matters to a Vote of Securities Holders
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During the fourth quarter of 2009, prior to our initial public
offering, we submitted certain matters to our stockholders for
approval. Certain of our stockholders, acting by written
consent, approved (i) the amendment and restatement of our
certificate of incorporation, to be effective upon the closing
of the initial public offering, and the amendment and
restatement of our bylaws and (ii) a
1-for-2
reverse split of our common stock, effected by the amendment to
the certificate of incorporation in effect at the time of the
stock split.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock has been traded on The Nasdaq Global Select
Market since November 5, 2009 under the symbol
ACOM. The following table sets forth the high and
low sales price for our common stock as reported by The Nasdaq
Global Select Market for the period indicated.
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High
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Low
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Fourth quarter 2009 (beginning November 5, 2009)
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16.32
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12.80
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As of February 18, 2010, we had approximately 76
stockholders of record of our common stock. This does not
include the number of persons whose stock is in nominee or
street name accounts through brokers.
30
Stock
Performance Graph
Notwithstanding any statement to the contrary in any of our
filings with the SEC, the following information shall not be
deemed filed with the SEC or soliciting
material under the Securities Exchange Act of 1934 and
shall not be incorporated by reference into any such filings
irrespective of any general incorporation language contained in
such filing.
The following graph compares, for the period from
November 5, 2009 through December 31, 2009, the total
cumulative stockholder return on our common stock with the total
cumulative return of the NASDAQ Composite Index and the S&P
North American Technology Internet Index. Measurement points are
the closing price on November 5, 2009, the initial trading
day of our common stock, November 30, 2009 and
December 31, 2009. The graph assumes a $100 investment at
the beginning of the period in our common stock, the stocks
represented in the NASDAQ Composite Index and the stocks
represented in the S&P North American Technology Internet
Index, and reinvestment of any dividends. The S&P North
American Technology Internet Index is a modified-capitalization
weighted index of 21 stocks representing the Internet industry,
including Internet content and access providers, Internet
software and services companies and
e-commerce
companies. Historical stock price performance should not be
relied upon as an indication of future stock price performance:
COMPARISON
OF CUMULATIVE TOTAL RETURN OF ANCESTRY.COM INC., NASDAQ
COMPOSITE
INDEX, AND S&P NORTH AMERICAN TECH INTERNET INDEX
ASSUMES $100 INVESTED ON NOV. 05, 2009
ASSUMES ALL DIVIDENDS, IF ANY, REINVESTED
PERIOD ENDED DEC. 31, 2009
Recent
Sales of Unregistered Securities and Use of Proceeds
From January 1, 2009 through November 4, 2009, we
granted to our employees, directors and consultants options to
purchase an aggregate of 1,898,909 shares of our common
stock under the Generations Holding, Inc. 2008 Stock Purchase
and Option Plan at prices ranging from $5.50 to $13.50 per share
for an aggregate purchase price of $13,582,428. On
November 4, 2009, the Generations Holding, Inc. 2008 Stock
Purchase and Option Plan was replaced with the 2009 Stock
Incentive Plan. No options were issued under the 2009 Stock
Incentive Plan during 2009.
From January 1, 2009 through December 31, 2009, our
employees exercised options to purchase 25,250 shares of
our common stock pursuant to options issued under the
MyFamily.com, Inc. 1998 Stock Plan at prices ranging from $0.24
to $4.60 per share for an aggregate purchase price of $69,195.
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From January 1, 2009 through December 31, 2009, our
employees exercised options to purchase 113,191 shares of
our common stock pursuant to options issued under the
MyFamily.com, Inc. 2004 Stock Plan at prices ranging from $4.60
to $4.70 per share for an aggregate purchase price of $521,189.
From January 1, 2009 through December 31, 2009, our
employees exercised options to purchase 5,496 shares of our
common stock pursuant to options issued under the Generations
Holding, Inc. 2008 Stock Purchase and Option Plan at prices
ranging from $5.40 to $5.50 per share for an aggregate purchase
price of $29,928.
No underwriters were involved in the foregoing sales of
securities. The issuances of the securities described above were
deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b) of the
Securities Act. The recipients of securities in each such
transaction represented their intention to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution thereof and appropriate
legends were affixed to the stock certificates and option
agreements issued in such transactions. All recipients had
adequate access, through their relationships with us, to
information about us.
On November 4, 2009, the SEC declared effective our
Registration Statement on
Form S-1
(File
No. 333-160986) for
our initial public offering. The offering commenced immediately
thereafter and was completed on November 10, 2009 at a
price of $13.50 per share. Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith
Incorporated acted as representatives of the several
underwriters.
We registered and sold 4,074,074 shares of common stock for
an aggregate purchase price of $55.0 million. The selling
stockholders registered and sold 3,333,333 shares of common
stock for an aggregate purchase price of $45.0 million. The
net offering proceeds received by us after deducting total
estimated expenses were $47.8 million. Our estimated
expenses incurred of $7.2 million consisted of
$3.8 million in underwriting discounts, fees and
commissions and $3.4 million in other offering expenses. No
payments for such expenses were made directly or indirectly to
any of our officers, directors or their associates, to any
persons owning 10% or more of any class of our equity securities
or to any of our affiliates. We did not receive any proceeds
from the sale of shares of our common stock by the selling
stockholders.
We used $12.5 million of the net proceeds to repay a
portion of the amount outstanding under our credit facility with
CIT Lending Services Corporation, as Administrative Agent, and
certain other financial institutions. We are required to make
payments totaling $28.4 million on our credit facility in
2010, which we expect to pay with cash on hand, including the
net proceeds from our initial public offering. We expect to use
the remainder of the net proceeds for working capital and
general corporate purposes. We may also use a portion of the
proceeds to expand our current business through acquisitions or
investments in other strategic businesses, products or
technologies. We have invested the net proceeds in short-term
interest-bearing, U.S. Government agency securities and
money market funds pending their use as described above.
Issuer
Purchase of Equity Securities
None.
Dividend
Policy
We have never declared or paid any cash dividends on our common
stock. We intend to retain our future earnings, if any, to fund
our growth and therefore we do not anticipate declaring or
paying any cash dividends in the foreseeable future. In
addition, our credit facility prohibits us from paying cash
dividends.
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Item 6.
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Selected
Financial Data
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SELECTED
CONSOLIDATED FINANCIAL DATA
The tables on the following pages set forth the selected
consolidated financial and operating data as of and for the
periods indicated. The selected consolidated statements of
operations data presented below for the years ended
December 31, 2005 and 2006 and the balance sheet data as of
December 31, 2005, 2006 and 2007 have been derived from our
consolidated financial statements, which have been audited by
Ernst & Young LLP, an independent registered public
accounting firm, and which are not included in this Annual
Report. The selected consolidated statements of operations data
presented below for the predecessor period from January 1,
2007 through December 5, 2007, the successor period from
December 6, 2007 through December 31, 2007 and the
years ended December 31, 2008 and 2009 and the balance
sheet data as of December 31, 2008 and 2009 have been
derived from our consolidated financial statements, which have
been audited by Ernst & Young LLP and which are
included in this Annual Report. You should read the selected
consolidated financial data presented on the following pages in
conjunction with our consolidated financial statements and
related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
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Predecessor
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Successor
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Period from
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Period from
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Jan. 1, 2007
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Dec. 6, 2007
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|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
126,031
|
|
|
$
|
137,643
|
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
Product and other revenues
|
|
|
14,228
|
|
|
|
12,909
|
|
|
|
12,269
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
17,195
|
|
Total revenues
|
|
|
140,259
|
|
|
|
150,552
|
|
|
|
153,410
|
|
|
|
12,970
|
|
|
|
197,591
|
|
|
|
224,902
|
|
Total cost of revenues
|
|
|
28,572
|
|
|
|
31,039
|
|
|
|
36,142
|
|
|
|
2,962
|
|
|
|
43,614
|
|
|
|
46,323
|
|
Total operating expenses
|
|
|
99,505
|
|
|
|
108,895
|
|
|
|
106,040
|
|
|
|
10,358
|
|
|
|
138,257
|
|
|
|
146,618
|
|
Income (loss) from operations
|
|
|
12,182
|
|
|
|
10,618
|
|
|
|
11,228
|
|
|
|
(350
|
)
|
|
|
15,720
|
|
|
|
31,961
|
|
Net income (loss)
|
|
|
8,144
|
|
|
|
8,149
|
|
|
|
7,771
|
|
|
|
(1,303
|
)
|
|
|
2,384
|
|
|
|
21,295
|
|
Net income per common share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with the Spectrum investment, we were
recapitalized. As a result, the capital structure of our
predecessor is not comparable to that of the successor.
Accordingly, net income per common share is not comparable or
meaningful for periods prior to 2008 and has not been presented. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
38,113
|
|
|
$
|
43,219
|
|
|
$
|
12,277
|
|
|
$
|
40,121
|
|
|
$
|
100,272
|
|
Total assets
|
|
|
140,126
|
|
|
|
140,640
|
|
|
|
476,212
|
|
|
|
477,975
|
|
|
|
523,348
|
|
Deferred revenues
|
|
|
56,714
|
|
|
|
52,307
|
|
|
|
56,730
|
|
|
|
61,178
|
|
|
|
69,711
|
|
Long-term debt (including current portion)
|
|
|
25,000
|
|
|
|
15,000
|
|
|
|
140,000
|
|
|
|
133,000
|
|
|
|
100,025
|
|
Total liabilities
|
|
|
102,229
|
|
|
|
95,129
|
|
|
|
263,830
|
|
|
|
258,187
|
|
|
|
228,458
|
|
Total stockholders equity
|
|
|
37,897
|
|
|
|
45,511
|
|
|
|
212,382
|
|
|
|
219,788
|
|
|
|
294,890
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)(3)
|
|
$
|
23,513
|
|
|
$
|
30,455
|
|
|
$
|
39,344
|
|
|
$
|
3,755
|
|
|
$
|
62,645
|
|
|
$
|
71,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow(2)(3)
|
|
|
(3,586
|
)
|
|
|
4,212
|
|
|
|
14,025
|
|
|
|
1,774
|
|
|
|
31,712
|
|
|
|
29,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Adjusted EBITDA. We define adjusted EBITDA as net income
(loss) plus net interest (income) expense; income tax expense;
non-cash charges including depreciation, amortization,
impairment of intangible assets and stock-based compensation
expense; other (income) expense and expenses associated with the
Spectrum investment, such as
in-process
research and development and transaction related expenses. |
|
(2) |
|
Free cash flow. We define free cash flow as net income
(loss) plus net interest (income) expense; income tax expense;
non-cash charges including depreciation, amortization,
impairment of intangible assets and stock-based compensation
expense; other (income) expense and expenses associated with the
Spectrum investment, such as in-process research and development
and transaction related expenses, and minus capitalization of
content database costs, capital expenditures and cash paid for
income taxes and interest. |
|
(3) |
|
Income from operations and net income, and therefore adjusted
EBITDA and free cash flow, include an expense related to a
settlement in the third quarter of 2009 of a claim regarding the
timeliness and accuracy of a content index we created. The
settlement resulted in an expense of approximately
$2.3 million in 2009. |
We believe adjusted EBITDA and free cash flow are useful to
investors in evaluating our operating performance because
securities analysts use adjusted EBITDA and free cash flow as
supplemental measures to evaluate the overall operating
performance of companies. Adjusted EBITDA and free cash flow are
financial data that are not calculated in accordance with GAAP.
The table in Item 6 Selected Financial Data in this Annual
Report provides a reconciliation of these non-GAAP financial
measures to net income (loss), the most directly comparable
financial measure calculated and presented in accordance with
GAAP. We prepare adjusted EBITDA and free cash flow to eliminate
the impact of items that we do not consider indicative of our
core operating performance. We encourage you to evaluate these
adjustments and the reasons we consider them appropriate, as
well as the material limitations of non-GAAP measures.
Our management uses adjusted EBITDA and free cash flow as
measures of operating performance; as factors when determining
managements incentive compensation; for planning purposes,
including the preparation of our annual operating budget; to
allocate resources to enhance the financial performance of our
business; to evaluate the effectiveness of our business
strategies; and in communications with our board of directors
concerning our financial performance. Management believes that
the use of adjusted EBITDA and free cash flow provides
consistency and comparability with our past financial
performance, facilitates period to period comparisons of
operations, and also facilitates comparisons with other peer
companies, many of which use similar non-GAAP financial measures
to supplement their GAAP results. Management believes that it is
useful to exclude non-cash charges such as depreciation,
amortization, impairment of intangible assets and stock-based
compensation from adjusted EBITDA and free cash flow because
(i) the amount of such non-cash expenses in any specific
period may not directly correlate to the underlying performance
of our business operations and (ii) such expenses can vary
significantly between periods as a result of new acquisitions,
full amortization of previously acquired tangible and intangible
assets or the timing of new stock-based awards, as the case may
be.
Although adjusted EBITDA and free cash flow are frequently used
by investors and securities analysts in their evaluations of
companies, adjusted EBITDA and free cash flow each have
limitations as an analytical tool, and you should not consider
them in isolation or as a substitute for analysis of our results
of operations as reported under GAAP.
34
Some of these limitations are:
|
|
|
|
|
adjusted EBITDA and free cash flow do not reflect our future
requirements for contractual commitments and adjusted EBITDA
does not reflect our cash expenditures or future requirements
for capital expenditures;
|
|
|
|
adjusted EBITDA and free cash flow do not reflect changes in, or
cash requirements for, our working capital;
|
|
|
|
adjusted EBITDA does not reflect interest income or interest
expense;
|
|
|
|
adjusted EBITDA does not reflect cash requirements for income
taxes;
|
|
|
|
adjusted EBITDA and free cash flow do not reflect the non-cash
component of employee compensation;
|
|
|
|
although depreciation, amortization and impairment of intangible
assets are non-cash charges, the assets being depreciated or
amortized will often have to be replaced in the future, and
adjusted EBITDA and free cash flow do not reflect any cash
requirements for these replacements;
|
|
|
|
adjusted EBITDA and free cash flow do not reflect acquired
in-process research and development charges; and
|
|
|
|
other companies in our industry may calculate adjusted EBITDA or
free cash flow or similarly titled measures differently than we
do, limiting their usefulness as comparative measures.
|
The following table presents a reconciliation of our adjusted
EBITDA and free cash flow to net income (loss), the most
comparable GAAP measure, for each of the periods identified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Reconciliation of adjusted EBITDA and free cash flow to net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,144
|
|
|
$
|
8,149
|
|
|
$
|
7,771
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
21,295
|
|
Interest (income) expense, net
|
|
|
211
|
|
|
|
(1,292
|
)
|
|
|
(1,295
|
)
|
|
|
857
|
|
|
|
11,483
|
|
|
|
5,347
|
|
Income tax expense
|
|
|
5,086
|
|
|
|
4,595
|
|
|
|
5,018
|
|
|
|
103
|
|
|
|
1,845
|
|
|
|
5,340
|
|
Depreciation expense
|
|
|
7,598
|
|
|
|
9,559
|
|
|
|
10,594
|
|
|
|
754
|
|
|
|
10,732
|
|
|
|
10,936
|
|
Amortization expense
|
|
|
4,767
|
|
|
|
6,489
|
|
|
|
7,094
|
|
|
|
1,974
|
|
|
|
30,046
|
|
|
|
23,214
|
|
Stock-based compensation
|
|
|
(1,344
|
)
|
|
|
3,789
|
|
|
|
898
|
|
|
|
77
|
|
|
|
4,672
|
|
|
|
5,474
|
|
Other (income) expense, net
|
|
|
(1,259
|
)
|
|
|
(834
|
)
|
|
|
(266
|
)
|
|
|
(7
|
)
|
|
|
8
|
|
|
|
(21
|
)
|
Impairment of intangible assets and acquired in-process research
and development
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
1,475
|
|
|
|
|
|
Transaction related expenses
|
|
|
|
|
|
|
|
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
23,513
|
|
|
$
|
30,455
|
|
|
$
|
39,344
|
|
|
$
|
3,755
|
|
|
$
|
62,645
|
|
|
$
|
71,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
|
(11,521
|
)
|
|
|
(11,285
|
)
|
|
|
(10,591
|
)
|
|
|
(1,129
|
)
|
|
|
(8,965
|
)
|
|
|
(9,398
|
)
|
Purchase of property and equipment
|
|
|
(11,873
|
)
|
|
|
(10,127
|
)
|
|
|
(10,572
|
)
|
|
|
(852
|
)
|
|
|
(11,621
|
)
|
|
|
(13,362
|
)
|
Cash paid for interest
|
|
|
(1,480
|
)
|
|
|
(1,031
|
)
|
|
|
(756
|
)
|
|
|
|
|
|
|
(10,068
|
)
|
|
|
(7,740
|
)
|
Cash paid for income taxes
|
|
|
(2,225
|
)
|
|
|
(3,800
|
)
|
|
|
(3,400
|
)
|
|
|
|
|
|
|
(279
|
)
|
|
|
(11,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(3,586
|
)
|
|
$
|
4,212
|
|
|
$
|
14,025
|
|
|
$
|
1,774
|
|
|
$
|
31,712
|
|
|
$
|
29,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
You should read the following discussion together with
Item 6 Selected Financial Data and our
consolidated financial statements and the related notes included
elsewhere in this Annual Report. This discussion contains
forward-looking
statements about our business and operations. Our actual results
may differ materially from those we currently anticipate as a
result of many factors, including those we describe under
Risk Factors and elsewhere in this Annual Report.
See Forward-Looking Statements.
Company
Overview
Ancestry.com is the worlds largest online resource for
family history, with more than one million paying subscribers
around the world as of December 31, 2009. Our mission is to
help everyone discover, preserve and share their family history.
Our subscribers use our proprietary online platform, extensive
digital historical record collection, and easy-to-use technology
to research their family histories, build their family trees,
collaborate with other subscribers, upload their own records and
publish and share their stories with their families. We offer
our service on a subscription basis, typically annual or
monthly. These subscribers are our primary source of revenue. We
charge each subscriber the full price for their subscription at
the commencement of their subscription period and at each
renewal date. The predominantly annual commitments of our
subscribers enhance managements near-term visibility on
our revenues and provide working capital benefits, which we
believe enable us to more effectively manage the growth of our
business.
We operated as The Generations Network, Inc., which we refer to
as the predecessor, until December 5, 2007. On
December 5, 2007, Generations Holding, Inc., which we refer
to as the successor, acquired The Generations Network, Inc. in
connection with an investment by Spectrum Equity
Investors V, L.P. and certain of its affiliates. The
successor was created for the sole purpose of acquiring The
Generations Network, Inc. and had no prior operations.
Immediately following that transaction, which we refer to as the
Spectrum investment, Spectrum and certain of its affiliates held
approximately 67% of the outstanding shares of our common stock.
In July 2009, to better align our corporate identity with the
premier branding of Ancestry.com, Generations Holding changed
its name to Ancestry.com Inc. Primarily as a result of the
consummation of our initial public offering in November, 2009,
Spectrums ownership percentage was reduced. Spectrum and
certain of its affiliates now hold approximately 55% of the
outstanding shares of our common stock. As a result of the
accounting for the Spectrum investment, our fiscal year 2007 is
divided into a predecessor period from January 1, 2007
through December 5, 2007 and a successor period from
December 6, 2007 through December 31, 2007.
Our goal is to remain the leading online resource for family
history and to grow our subscriber base in the
United States and around the world by offering a superior
value proposition to anyone interested in learning more about
their family history. We will focus on retaining our loyal base
of existing subscribers, on acquiring new subscribers and on
expanding the market to new consumers.
We believe our previous investments in technology and content
have provided us a foundation for a scalable business model that
will help us to increase our margins over the long term and
effectively manage our costs as our business grows. However, we
expect to continue to devote substantial resources and funds to
improving our technologies and product offerings and acquiring
new and relevant content, and also to expanding awareness of our
brand and category through marketing, which may reduce our
margins in the near term.
Key
Business Metrics
Our management regularly reviews a number of financial and
operating metrics, including the following key operating metrics
to evaluate our business, determine the allocation of resources,
make decisions regarding corporate strategies and evaluate
forward-looking projections. The following key operating metrics
reflect data with respect to the Ancestry.com Web sites and
exclude our other subscription-based Web sites, such as
myfamily.com and Genealogy.com.
|
|
|
|
|
Total subscribers. A subscriber is an
individual who pays for renewable access to one of our
Ancestry.com Web sites. Total subscribers is defined as the
number of subscribers at the end of the relevant period.
|
36
|
|
|
|
|
Monthly churn. Monthly churn is a measure
representing the number of subscribers that cancel in the
quarter divided by the sum of beginning subscribers and
subscriber additions during the quarter. To arrive at monthly
churn, we divide the result by three. Management uses this
measure to determine the health of our subscriber base.
|
|
|
|
Subscriber acquisition cost. Subscriber
acquisition cost is external marketing and advertising expense,
divided by total subscriber additions in the period. Management
uses this metric to determine the efficiency of our marketing
and advertising programs in acquiring new subscribers.
|
|
|
|
Average monthly revenue per
subscriber. Average monthly revenue per
subscriber is total subscription revenues earned in the period
from subscriptions to one of the Ancestry.com Web sites divided
by the average number of subscribers in the period, divided by
the number of months in the period. The average number of
subscribers for the period is calculated by taking the average
of the beginning and ending number of subscribers for the period.
|
A significant number of our renewals occur in the first quarter
of each year. Because we recognize subscription revenues ratably
over the subscription period, this trend generally has not
resulted in a material seasonal impact on our revenues, but may
result in a seasonal effect on one or more of the key business
metrics described above.
The following represents our performance highlights for the
periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Total subscribers
|
|
|
832,193
|
|
|
|
913,683
|
|
|
|
1,066,123
|
|
Subscriber additions(1)
|
|
|
479,663
|
|
|
|
556,045
|
|
|
|
673,991
|
|
Monthly churn(1)
|
|
|
3.5
|
%
|
|
|
4.0
|
%
|
|
|
3.8
|
%
|
Subscriber acquisition cost(1)
|
|
$
|
70.96
|
|
|
$
|
71.99
|
|
|
$
|
72.46
|
|
Average monthly revenue per subscriber(1)
|
|
$
|
14.83
|
|
|
$
|
16.09
|
|
|
$
|
16.55
|
|
|
|
|
(1) |
|
In connection with the Spectrum investment in December 2007, we
were recapitalized. As a result, amounts used to determine these
metrics are based on both the predecessor and successor periods
as it is not meaningful to present these metrics separately for
the two periods in 2007. |
Components
of Consolidated Statements of Operations
Revenues
Subscription revenues. We derive subscription
revenues primarily from providing access to our services via our
various Ancestry.com Web sites. Subscription revenues are
recognized ratably over the subscription period which consists
primarily of annual and monthly subscriptions, net of estimated
cancellations. We typically charge each subscribers credit
card for the full price for their subscription at the
commencement of their subscription period and at each renewal
date (whether annual or monthly), unless they cancel their
subscription before the renewal date. The amount of unrecognized
revenues is recorded in deferred revenue. We have established an
allowance for sales returns based on historical subscription
cancellations. Actual customer subscription cancellations are
charged against the allowance or deferred revenue to the extent
that revenue has not yet been recognized. When people sign up
for trial subscriptions, we automatically charge their credit
card for a subscription at the end of the trial period unless
they cancel before the end of the trial period. Registered users
that accept the offer of a
14-day free
trial are not billed for services until after the
14-day trial
period. Revenue is recognized over the subscription period once
billed. No revenue is recognized or allocated to the
14-day free
trial period. Subscription revenues from our Ancestry.com Web
sites accounted for 95% of the total subscription revenues for
the year ended December 31, 2009. Subscription revenues
also include annual subscriptions to our myfamily.com Web site
and other subscription-based services.
37
A majority of our subscription revenues are derived from
subscribers in the United States. We attribute subscription
revenues by country based on the billing address of the
subscriber, regardless of which of our Web sites the person
subscribes. The following presents subscription revenue by
geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
|
|
|
Period from,
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
United States
|
|
$
|
106,101
|
|
|
$
|
8,633
|
|
|
$
|
134,112
|
|
|
$
|
156,150
|
|
|
|
|
|
United Kingdom
|
|
|
27,181
|
|
|
|
2,321
|
|
|
|
33,223
|
|
|
|
34,402
|
|
|
|
|
|
All other countries
|
|
|
7,859
|
|
|
|
738
|
|
|
|
14,056
|
|
|
|
17,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and other revenues. Product and other
revenues includes sales of desktop software (Family Tree Maker),
vital records certificates, DNA testing (Ancestry.com DNA),
advertising and other products and services. Revenues related to
these products are recognized upon shipment of product or
fulfillment of services, as applicable.
Cost
of Revenues
Cost of subscription revenues. Cost of
subscription revenues consist of amortization of our database
content costs, depreciation expense on web servers and
equipment, credit card processing fees, web hosting costs,
royalty costs on certain content licensed from others,
personnel-related costs for database content support and
subscriber services personnel.
Cost of product and other revenues. Cost of
product and other revenues consist of our direct costs to
purchase the products, shipping costs, credit card processing
fees, personnel-related costs of warehouse personnel, warehouse
storage costs and royalties on products licensed from others.
Personnel-related costs for each category of cost of revenues
and operating expenses include salaries, bonuses,
stock-based
compensation and employee benefit costs.
Operating
Expenses
Technology and development. Technology and
development expenses consist of personnel-related costs incurred
in product development, maintenance and testing of our Web
sites, enhancing our record search and linking technologies,
developing solutions for new product lines, internal information
systems and infrastructure, third-party development, and other
internal-use software systems. Our development costs are
primarily based in the United States and are primarily devoted
to providing accessibility to content and tools for individuals
to do family history research. We expect our investment in
technology and development to increase in 2010 as we invest in
personnel and other resources to further improve our service.
Marketing and advertising. Marketing and
advertising expenses consist primarily of direct expenses
related to television and online advertising and
personnel-related expenses. Marketing and advertising costs are
principally incurred in the United States, United Kingdom,
Australia and Canada. We expect marketing expenses to increase
in absolute dollars, in part due to higher media costs, but to
remain relatively stable in the near future as a percentage of
revenues, except for an increase in marketing expenses in the
first half of 2010 related to product integration on the
U.S. version of the television show Who Do You Think
You Are? which is currently scheduled to be aired in early
March 2010 in primetime on NBC. We do not control the release of
this television show and cannot be sure if or when it will be
released or if it will have any effect on our revenues or
results of operations. If our revenues increase as a result of
interest in Ancestry.com attributable to the airing of this
program, such increase may not be sustainable over time.
General and administrative. General and
administrative expenses consist principally of personnel-related
expenses for our executive, finance, legal, human resources and
other administrative personnel, as well as accounting and legal
professional fees and other general corporate expenses,
including settlement of legal claims.
38
We expect our general and administrative expenses to increase in
2010 due to the compliance costs of being a public company; we
expect our accounting, legal and personnel-related expenses and
directors and officers insurance costs to increase as we
institute and monitor a more comprehensive compliance and board
governance function, maintain and review internal control over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act and prepare and distribute periodic reports
and other materials.
Amortization of acquired intangible
assets. Amortization of acquired intangible
assets is the amortization expense associated with subscriber
relationships and contracts, core technologies, and intangible
assets, including trademarks and tradenames, resulting from the
Spectrum investment.
Transaction related expenses. Transaction
related expenses consist of one-time costs of our predecessor
company associated with the Spectrum investment.
Other
Income (Expense)
Interest expense. Interest expense includes
the interest expense associated with our long-term debt and
amortization of debt-issuance costs. Our interest expense varies
based on the level of debt outstanding and changes in interest
rates.
Interest income. Interest income includes
interest earned on cash and cash equivalents and short-term
investments.
Income tax expense. Income tax expense
consists of federal and state income taxes in the United States
and income taxes in certain foreign jurisdictions.
Critical
Accounting Estimates
Our consolidated financial statements are prepared in accordance
with United States generally accepted accounting principles, or
GAAP. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, costs and
expenses, and related disclosures. These estimates and
assumptions are often based on judgments that we believe to be
reasonable under the circumstances at the time made, but all
such estimates and assumptions are inherently uncertain and
unpredictable. Actual results may differ from those estimates
and assumptions, and it is possible that other professionals,
applying their own judgment to the same facts and circumstances,
could develop and support alternative estimates and assumptions
that would result in material changes to our operating results
and financial condition. We evaluate our estimates and
assumptions on an ongoing basis. Our estimates are based on
historical experience and various other assumptions that we
believe to be reasonable under the circumstances.
We consider the assumptions and estimates associated with
recoverability of intangible assets, the period of amortization
of our database content costs, stock-based compensation and
income taxes to be our critical accounting estimates. For
further information on our significant accounting policies, see
Note 1 to our consolidated financial statements included in
this Annual Report.
Recoverability
of Intangible Assets, Including Goodwill
Intangible assets consist of content database costs, subscriber
relationships and contracts, technologies, trade names and
trademarks, and other intangible assets. Intangible assets
acquired in a business combination are measured at fair value at
the date of acquisition. We amortize all intangible assets,
except for acquired subscriber relationships, on a straight line
basis over their expected lives. Acquired subscriber
relationships were amortized on a straight-line basis prior to
the acquisition of our predecessor and, subsequent to the
acquisition, are amortized based on the rate of attrition of
subscribers used to calculate the fair value of the intangible
asset in the acquisition and purchase price allocation.
We review our indefinite-lived intangible assets for impairment
at least annually or as indicators of impairment exist based on
comparing the fair value of the asset to the carrying value of
the asset in accordance with GAAP. Goodwill is currently our
only indefinite-lived intangible asset. We perform our annual
goodwill impairment test in
39
the fourth quarter. Our goodwill impairment test requires the
use of fair-value techniques, which are inherently subjective.
We are a single reporting unit therefore goodwill is evaluated
on an enterprise basis using the income and market value
approaches. These approaches use estimated future cash flows and
market multiples for revenue and earnings. Estimates are based
on historical experience, anticipated operating activity, and
weighted average cost of capital. Based on our analysis of
goodwill in the fourth quarter of 2008 and 2009, no impairment
was indicated.
We evaluate the recoverability of our long-lived assets in
accordance with GAAP, which requires recognition of impairment
of long-lived assets in the event that the net book value of
such assets exceeds the future undiscounted net cash flows
attributable to such assets. We recognize impairment, if any, in
the period of identification to the extent the carrying amount
of an asset exceeds the fair value of such asset. Based on our
analysis of long-lived assets, we recorded impairment of
approximately $1.5 million for the year ended
December 31, 2008 related to a database content set we were
developing for release in China. The impairment was expensed to
cost of subscription revenues for the year ended
December 31, 2008. No impairment of long-lived assets was
indicated for the year ended December 31, 2009.
Amortization
of Our Content Database Costs
Our content database costs consist of historical information
that has been digitized and indexed to allow subscribers to
search and view our content online. Content database costs
include the costs to acquire or license the historical data,
costs incurred by our employees or by third parties to scan the
content, and costs to have the content keyed and indexed in
order to be searchable. Among the most utilized content in our
databases are the United States and United Kingdom census
records which are ordinarily released by government entities
every ten years. We amortize our content database costs on a
straight-line basis over ten years after the content is released
for viewing on our Web sites.
Stock-Based
Compensation
We have stock-based compensation plans which allow for the
issuance of stock options and restricted stock to employees,
officers, directors, and consultants. To date we have only
issued stock options under these plans. We account for
stock-based compensation by amortizing the fair value of each
stock option over the requisite service period. Fair value of
each award is calculated on the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes model
requires various highly judgmental assumptions including fair
value of the underlying stock, volatility, expected option life,
risk-free interest rate, and expected dividends. As of each
stock option grant date, we reviewed an average of the disclosed
year-end volatility of a group of companies that we considered
peers based on a number of factors including, but not limited
to, similarity to us with respect to industry, business model,
stage of growth, financial risk or other factors, along with
considering the future plans of our company to determine the
appropriate volatility. The expected life was based on our
historical stock option activity. The risk-free interest rate
was determined by reference to the United States Treasury rates
with the remaining term approximating the expected life assumed
at the date of grant. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for
those options expected to vest. We estimate the forfeiture rate
based on our historical experience. To the extent our actual
forfeiture rate is different from our estimate, stock-based
compensation expense is adjusted accordingly. If any of the
assumptions used in the Black-Scholes model change significantly
or actual forfeiture rate is different than our estimate,
stock-based compensation expense may differ materially in the
future from that recorded in the current period.
Prior to November 5, 2009, the date our common stock began
trading on a national exchange, the fair value of common stock
had been determined by the board of directors at each grant date
based on a variety of factors, including arms-length sales
of our common stock, periodic valuations of our common stock,
our financial position, historical financial performance,
projected financial performance, valuations of publicly traded
peer companies and the illiquid nature of common stock. Since
our initial public offering, we determine the fair value of our
common stock based on the closing price of our common stock on
the stock option grant date.
40
Income
taxes
We are subject to income taxes in the United States and several
foreign jurisdictions. Significant judgment is required in
evaluating our uncertain tax positions and determining our
provision for income taxes. GAAP has a two-step approach to
recognizing and measuring uncertain tax positions. The first
step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that
it is more likely than not that the position will be sustained
on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being
realized upon settlement.
Although we believe we have adequately reserved for our
uncertain tax positions, no assurance can be given that the
final tax outcome of these matters will not be different. We
adjust these reserves in light of changing facts and
circumstances, such as the closing of a tax audit, the
refinement of an estimate or changes in tax laws. To the extent
that the final tax outcome of these matters is different than
the amounts recorded, such differences will impact the provision
for income taxes in the period in which such determination is
made. The provision for income taxes includes the impact of
reserve provisions and changes to reserves that are considered
appropriate, as well as the related net interest.
In evaluating our ability to recover our deferred tax assets, in
full or in part, we consider all available positive and negative
evidence, including our past operating results, our forecast of
future market growth, forecasted earnings, future taxable income
and prudent and feasible tax planning strategies. The
assumptions utilized in determining future taxable income
require significant judgment and are consistent with the plans
and estimates we are using to manage the underlying businesses.
We believe it is more likely than not that the deferred tax
assets recorded on our balance sheet will ultimately be
realized. In the event we were to determine that we would not be
able to realize all or part of our net deferred tax assets in
the future, an adjustment to the deferred tax assets would be
charged to earnings in the period in which we make such
determination.
Our future effective tax rates could be adversely affected by
changes in the valuation of our deferred tax assets or
liabilities, or changes in tax laws, regulations, accounting
principles or interpretations thereof. In addition, we are
subject to the continuous examination of our income tax returns
by the Internal Revenue Service and other tax authorities. We
regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our
provision for income taxes.
41
Results
of Operations
The following table sets forth, for the periods presented, our
consolidated statements of operations. In the table below and
throughout this Managements Discussion and Analysis
of Financial Condition and Results of Operations
consolidated statements of operations data for the predecessor
period from January 1, 2007 through December 5, 2007,
the successor period from December 6, 2007 through
December 31, 2007 and the years ended December 31,
2008 and 2009 have been derived from our audited consolidated
financial statements. The information contained in the table
below should be read in conjunction with our consolidated
financial statements and the related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
Product and other revenues
|
|
|
12,269
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
17,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
153,410
|
|
|
|
12,970
|
|
|
|
197,591
|
|
|
|
224,902
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
33,590
|
|
|
|
2,462
|
|
|
|
38,187
|
|
|
|
40,183
|
|
Cost of product and other revenues
|
|
|
2,552
|
|
|
|
500
|
|
|
|
5,427
|
|
|
|
6,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
36,142
|
|
|
|
2,962
|
|
|
|
43,614
|
|
|
|
46,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
117,268
|
|
|
|
10,008
|
|
|
|
153,977
|
|
|
|
178,579
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
31,255
|
|
|
|
3,517
|
|
|
|
33,206
|
|
|
|
36,236
|
|
Marketing and advertising
|
|
|
42,400
|
|
|
|
3,157
|
|
|
|
52,341
|
|
|
|
61,625
|
|
General and administrative
|
|
|
20,723
|
|
|
|
2,142
|
|
|
|
28,931
|
|
|
|
32,540
|
|
Amortization of acquired intangible assets
|
|
|
2,132
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
16,217
|
|
Transaction related expenses
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
106,040
|
|
|
|
10,358
|
|
|
|
138,257
|
|
|
|
146,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
11,228
|
|
|
|
(350
|
)
|
|
|
15,720
|
|
|
|
31,961
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(756
|
)
|
|
|
(1,146
|
)
|
|
|
(12,355
|
)
|
|
|
(6,139
|
)
|
Interest income
|
|
|
2,051
|
|
|
|
289
|
|
|
|
872
|
|
|
|
792
|
|
Other income (expense), net
|
|
|
266
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12,789
|
|
|
|
(1,200
|
)
|
|
|
4,229
|
|
|
|
26,635
|
|
Income tax expense
|
|
|
(5,018
|
)
|
|
|
(103
|
)
|
|
|
(1,845
|
)
|
|
|
(5,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,771
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
21,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with the Spectrum investment, we were
recapitalized. As a result, the capital structure of our
predecessor is not comparable to that of the successor.
Accordingly, net income per common share is not comparable or
meaningful for periods prior to 2008 and has not been presented. |
42
The following table sets forth, for the periods presented, our
consolidated statements of operations as a percentage of total
revenues. The information contained in the table below should be
read in conjunction with the consolidated financial statements
and the related notes in this Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
|
through
|
|
|
through
|
|
|
December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
|
92.0
|
%
|
|
|
90.1
|
%
|
|
|
91.8
|
%
|
|
|
92.4
|
%
|
Product and other revenues
|
|
|
8.0
|
|
|
|
9.9
|
|
|
|
8.2
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
21.9
|
|
|
|
19.0
|
|
|
|
19.3
|
|
|
|
17.9
|
|
Cost of product and other revenues
|
|
|
1.7
|
|
|
|
3.8
|
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
23.6
|
|
|
|
22.8
|
|
|
|
22.1
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
76.4
|
|
|
|
77.2
|
|
|
|
77.9
|
|
|
|
79.4
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
20.4
|
|
|
|
27.1
|
|
|
|
16.8
|
|
|
|
16.1
|
|
Marketing and advertising
|
|
|
27.6
|
|
|
|
24.4
|
|
|
|
26.5
|
|
|
|
27.4
|
|
General and administrative
|
|
|
13.5
|
|
|
|
16.5
|
|
|
|
14.7
|
|
|
|
14.5
|
|
Amortization of acquired intangible assets
|
|
|
1.4
|
|
|
|
11.9
|
|
|
|
12.0
|
|
|
|
7.2
|
|
Transaction related expenses
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
69.1
|
|
|
|
79.9
|
|
|
|
70.0
|
|
|
|
65.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
7.3
|
|
|
|
(2.7
|
)
|
|
|
7.9
|
|
|
|
14.2
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(0.5
|
)
|
|
|
(8.8
|
)
|
|
|
(6.2
|
)
|
|
|
(2.7
|
)
|
Interest income
|
|
|
1.3
|
|
|
|
2.2
|
|
|
|
0.4
|
|
|
|
0.3
|
|
Other income (expense), net
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
(0.0
|
)
|
|
|
(0.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
8.3
|
|
|
|
(9.2
|
)
|
|
|
2.1
|
|
|
|
11.8
|
|
Income tax expense
|
|
|
(3.2
|
)
|
|
|
(0.8
|
)
|
|
|
(0.9
|
)
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
5.1
|
|
|
|
(10.0
|
)
|
|
|
1.2
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31, 2007, 2008 and 2009
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
Product and other revenues
|
|
|
12,269
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
17,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
153,410
|
|
|
$
|
12,970
|
|
|
$
|
197,591
|
|
|
$
|
224,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Subscription
revenues
2009 compared to 2008. The increase in our
subscription revenues of $26.3 million in the year ended
December 31, 2009 as compared to the year ended
December 31, 2008 was primarily the result of an increase
in the number of total subscribers as well as an increase in
average monthly revenue per subscriber on our Ancestry.com Web
sites. Average monthly revenue per subscriber increased due to
both a shift in mix between annual and monthly subscriptions to
more monthly subscriptions, relative to prior year and a shift
in mix from basic packages to premium packages, relative to
prior year. During the year ended December 31, 2009,
changes in foreign currency exchange rates had an unfavorable
impact on subscription revenues. Had average exchange rates
remained the same in the year ended December 31, 2009 as
average exchange rates in effect in the year ended
December 31, 2008, our reported revenues in the year ended
December 31, 2009 would have been approximately 4% higher.
2008 compared to 2007. Subscription revenues
were $181.4 million in the year ended December 31,
2008, compared to $141.1 million for the predecessor period
from January 1, 2007 through December 5, 2007 and
$11.7 million for the successor period from
December 6, 2007 through December 31, 2007. The
increase was primarily the result of an increase in the number
of total subscribers and also to an increase in monthly revenue
per subscriber. A shift in mix between annual and monthly
subscriptions to more monthly subscriptions has resulted in
higher monthly revenue per subscriber in 2008. Foreign currency
exchange rates did not have a material impact on revenues in
2008 compared to revenues in 2007.
Product
and other revenues
2009 compared to 2008. The increase in product
and other revenues of $1.0 million in the year ended
December 31, 2009 as compared to the year ended
December 31, 2008 was primarily due to an increase in
revenues associated with a new release in August 2009 of our
Family Tree Maker desktop software of $1.9 million, the
growth of our vital records products, introduced in the United
Kingdom during August 2008, of $1.3 million and increased
revenues from our MyCanvas.com products of $0.6 million.
These increases were partially offset by decreases in our
royalty revenue of $1.2 million, advertising revenue of
$1.1 million and Ancestry DNA products of $0.6 million.
2008 compared to 2007. Product and other
revenues were $16.2 million in the year ended
December 31, 2008, compared to $12.3 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $1.3 million for the successor
period from December 6, 2007 through December 31,
2007. The increase in our product and other revenues was due to,
among other things, a $2.4 million increase in our DNA
product revenues, a $1.3 million increase in our
advertising services and a $0.7 million increase in sales
of our MyCanvas.com products. This increase was offset by a
$1.6 million decrease in sales of our legacy products
(e.g., CD ROMs, books, posters). Our DNA product was released in
the fourth quarter of 2007.
44
Cost
of Revenues and Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
Product and other revenues
|
|
|
12,269
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
17,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
153,410
|
|
|
|
12,970
|
|
|
|
197,591
|
|
|
|
224,902
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
33,590
|
|
|
|
2,462
|
|
|
|
38,187
|
|
|
|
40,183
|
|
Cost of product and other revenues
|
|
|
2,552
|
|
|
|
500
|
|
|
|
5,427
|
|
|
|
6,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
36,142
|
|
|
|
2,962
|
|
|
|
43,614
|
|
|
|
46,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
117,268
|
|
|
$
|
10,008
|
|
|
$
|
153,977
|
|
|
$
|
178,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage
|
|
|
76.4
|
%
|
|
|
77.2
|
%
|
|
|
77.9
|
%
|
|
|
79.4
|
%
|
Cost of
subscription revenues
2009 compared to 2008. The increase in our
cost of subscription revenues of $2.0 million in the year
ended December 31, 2009 as compared to the year ended
December 31, 2008 was primarily due to a $1.4 million
increase in our web hosting costs, an increase in equipment
related costs of $1.1 million and an increase in
amortization of content costs of $0.7 million. These
increases were partially offset by the absence of impairment of
database content costs in 2009 of $1.5 million as a result
of a change in our strategy for our Chinese content included in
2008.
2008 compared to 2007. Cost of subscription
revenues was $38.2 million in the year ended
December 31, 2008, compared to $33.6 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $2.5 million for the successor
period from December 6, 2007 through December 31,
2007. Cost of subscription revenues increased primarily due to
the impairment of database content costs of $1.5 million in
2008 and an increase in database content amortization, merchant
fees and web hosting costs of $2.1 million. These increases
were partially offset by decreases in personnel-related costs of
$0.9 million and royalty expenses of $0.6 million.
Cost of
product and other revenues
2009 compared to 2008. The increase in our
cost of product revenues of $0.7 million in the year ended
December 31, 2009 as compared to the year ended
December 31, 2008 was primarily a result of the growth and
increased revenues of our vital records products, introduced in
the United Kingdom in August 2008, and our MyCanvas.com
products, which resulted in an increase in cost of product
revenues of $1.0 million. Additionally, shipping costs
increased $0.4 million. These increases were partially
offset by a decrease in costs associated with our DNA products
of $0.5 million.
2008 compared to 2007. Cost of product and
other revenues was $5.4 million in the year ended
December 31, 2008, compared to $2.6 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $0.5 million for the successor
period from December 6, 2007 through December 31,
2007. Cost of product and other revenues increased primarily due
to $2.2 million related to the introduction of our DNA
product and $0.3 million related to the introduction of our
MyCanvas.com products. Cost of product and other revenues as a
percentage of total revenue increased due to our decision to
sell our DNA product at a reduced price.
45
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
$
|
31,255
|
|
|
$
|
3,517
|
|
|
$
|
33,206
|
|
|
$
|
36,236
|
|
Marketing and advertising
|
|
|
42,400
|
|
|
|
3,157
|
|
|
|
52,341
|
|
|
|
61,625
|
|
General and administrative
|
|
|
20,723
|
|
|
|
2,142
|
|
|
|
28,931
|
|
|
|
32,540
|
|
Amortization of acquired intangible assets
|
|
|
2,132
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
16,217
|
|
Transaction expenses
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
106,040
|
|
|
$
|
10,358
|
|
|
$
|
138,257
|
|
|
$
|
146,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
and development
2009 compared to 2008. The increase in
technology and development expenses of $3.0 million in the
year ended December 31, 2009 as compared to the year ended
December 31, 2008 was primarily the result of an increase
in personnel-related expenses resulting from an increase in the
number of technology and development personnel at
December 31, 2009 as compared to December 31, 2008.
2008 compared to 2007. Technology and
development expenses were $33.2 million in the year ended
December 31, 2008, compared to $31.3 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $3.5 million for the successor
period from December 6, 2007 through December 31,
2007. The change in technology and development expenses was
primarily the result of a one-time charge for in-process
research and development of $1.3 million in 2007 related to
the Spectrum investment as well as a decrease in
personnel-related costs of $1.8 million due to a decrease
in development headcount, partially offset by increases in
third-party development expense of $0.9 million to
compensate for the decrease in development headcount and
stock-based compensation of $0.8 million.
Marketing
and advertising
2009 compared to 2008. The increase in
marketing and advertising expenses of $9.3 million in the
year ended December 31, 2009 as compared to the year ended
December 31, 2008 was primarily attributable to a
$8.6 million increase in television and online advertising
in both the domestic and international markets, as well as a
$0.8 million increase in personnel-related expenses
resulting from an increase in the number of marketing and
advertising personnel at December 31, 2009 as compared to
December 31, 2008.
2008 compared to 2007. Marketing and
advertising expenses were $52.3 million in the year ended
December 31, 2008, compared to $42.4 million for the
predecessor period from January 1, 2007 through
December 5, 2007 and $3.2 million for the successor
period from December 6, 2007 through December 31, 2007
The increase was primarily driven by an increase in television
and online advertising in both domestic and international
markets.
General
and administrative
2009 compared to 2008. The increase in general
and administrative expenses of $3.6 million in the year
ended December 31, 2009 as compared to the year ended
December 31, 2008 is primarily the result of a settlement
of a claim related to a content index, which resulted in an
expense of $2.3 million, to increased personnel-related
costs of $1.1 million due to an increase in the number of
general and administrative personnel and to increased outside
services such as consultants, legal services and accounting fees
of $0.9 million. These increases were partially offset by a
change in foreign currency gains and losses of $0.8 million
from a loss of $0.4 million in the year ended
December 31, 2008 to a gain of $0.4 million in the
year ended December 31, 2009.
46
2008 compared to 2007. General and
administrative expenses were $28.9 million in the year
ended December 31, 2008, compared to $20.7 million for
the predecessor period from January 1, 2007 through
December 5, 2007 and $2.1 million for the successor
period from December 6, 2007 through December 31,
2007. The increase was the result of an increase in stock-based
compensation of $2.9 million, driven primarily from new
stock option grants in 2008, an increase in personnel-related
costs of $2.5 million, due to additional administrative
personnel, and increased professional fees of $0.9 million.
Amortization
of acquired intangible assets
2009 compared to 2008. The decrease in
amortization of acquired intangible assets of $7.6 million
in the year ended December 31, 2009 as compared to the year
ended December 31, 2008 was due to the amortization of our
subscriber relationship intangible asset, which is amortized on
an accelerated basis. Subscriber relationships and contracts are
amortized based on an annual turnover rate, or rate of
attrition, of the subscribers that approximates our monthly
churn, resulting in an accelerated basis of amortization. This
is the same rate of attrition that was used to determine the
fair value of the intangible asset at the acquisition date. We
believe that recognizing amortization expense in this pattern
better matches the amortization expense with the revenue
generated from these subscribers. The subscriber relationship
asset was recorded in connection with the Spectrum investment.
2008 compared to 2007. Amortization of
acquired intangibles assets was $23.8 million in the year
ended December 31, 2008, compared to $2.1 million for
the predecessor period from January 1, 2007 through
December 5, 2007 and $1.5 million for the successor
period from December 6, 2007 through December 31,
2007. The change in amortization of acquired intangible assets
is the result of $83.0 million of amortizable intangible
assets from the Spectrum investment in December 2007 being
amortized for a full year in 2008 versus the prior amortizable
intangible assets of $8.2 million being amortized in 2007
along with one month of amortization of the acquired intangible
assets from the Spectrum investment.
Transaction related expenses. In the
predecessor period from January 1, 2007 through
December 5, 2007, we recorded $9.5 million of legal,
accounting and other expenses related to the Spectrum investment.
Other
Income (Expense) and Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor
|
|
|
Period from
|
|
Period from
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
Dec. 6, 2007
|
|
Year Ended
|
|
|
through
|
|
through
|
|
December 31,
|
|
|
Dec. 5, 2007
|
|
Dec. 31, 2007
|
|
2008
|
|
2009
|
|
|
|
|
(In thousands)
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
(756
|
)
|
|
$
|
(1,146
|
)
|
|
$
|
(12,355
|
)
|
|
$
|
(6,139
|
)
|
Interest income
|
|
|
2,051
|
|
|
|
289
|
|
|
|
872
|
|
|
|
792
|
|
Other income (expenses), net
|
|
|
266
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
21
|
|
Income tax expense
|
|
|
(5,018
|
)
|
|
|
(103
|
)
|
|
|
(1,845
|
)
|
|
|
(5,340
|
)
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
39.2
|
%
|
|
|
n/m
|
|
|
|
43.6
|
%
|
|
|
20.0
|
%
|
Interest
expense
2009 compared to 2008. The decrease in
interest expense of $6.2 million in the year ended
December 31, 2009 as compared to the year ended
December 31, 2008 was due to a decrease in our effective
interest rate from 7.4% as of December 31, 2008 to 4.0% as
of December 31, 2009. In addition, we had a lower debt
balance during the year ended December 31, 2009 due to
principal payments made on our credit facility during the year.
2008 compared to 2007. Interest expense was
$12.3 million in the year ended December 31, 2008,
compared to $0.8 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$1.1 million for the successor period from December 6,
2007 through December 31, 2007. The change was a result of
an increased level
47
of long-term debt. In December 2007, in connection with the
Spectrum investment, we entered into a credit facility that
included a term loan of $140 million. Prior to this
arrangement we had $15 million in long-term debt.
Interest
income
2009 compared to 2008. Interest income was
$0.8 million in the year ended December 31, 2009,
compared to $0.9 million in the year ended
December 31, 2008. The change was not significant.
2008 compared to 2007. Interest income was
$0.9 million in the year ended December 31, 2008,
compared to $2.1 million for the predecessor period from
January 1, 2007 through December 5, 2007 and
$0.3 million for the successor period from December 6,
2007 through December 31, 2007. The change was due to a
change in the cash balance during 2008.
Other
income (expense), net
2009 compared to 2008. Other income (expense)
was not significant in either of the years ended
December 31, 2009 or 2008.
2007 compared to 2008. Other income in the
predecessor period from January 1, 2007 through
December 5, 2007 primarily relates to the sale of our
self-publishing subsidiary at a gain. We did not have any
similar events in the year ended December 31, 2008.
Income
tax expense
Income tax expense for the year ended December 31, 2009 was
$5.3 million. Our effective tax rate of 20.0% differed from
the federal statutory rate of 35% principally due to utilization
of net operating losses previously thought to be limited due to
previous ownership changes of (19.4)%, due to foreign income
taxes of 1.4% as a result of net operating losses in foreign
jurisdictions for which no income tax benefit has been
recognized and to other items of 3.0%.
Income tax expense for the year ended December 31, 2008 was
$1.8 million. Our effective tax rate of 43.6% differed from
the federal statutory rate of 35% principally due to state
income taxes of 4.7%, to foreign income taxes of 10.7% as a
result of net operating losses in foreign jurisdictions for
which no income tax benefit has been recognized, to deductible
expenses of (17.1)% associated with the Spectrum investment as
reflected in our federal income tax provision
true-up, to
non-deductible stock-based compensation expenses of 13.7% and to
other items of (3.4)%.
48
Unaudited
Quarterly Results of Operations
The following table presents our unaudited quarterly
consolidated results of operations for the eight quarters ended
December 31, 2009. This unaudited quarterly consolidated
information has been prepared on the same basis as our audited
consolidated financial statements, and, in the opinion of
management, the statement of operations data includes all
adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the results of operations
for these periods. You should read this table in conjunction
with our consolidated financial statements and the related notes
located elsewhere in this Annual Report. The results of
operations for any quarter are not necessarily indicative of the
results of operations for any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
42,807
|
|
|
$
|
44,612
|
|
|
$
|
46,197
|
|
|
$
|
47,775
|
|
|
$
|
49,184
|
|
|
$
|
50,719
|
|
|
$
|
52,603
|
|
|
$
|
55,201
|
|
Product and other revenues
|
|
|
4,234
|
|
|
|
3,431
|
|
|
|
3,877
|
|
|
|
4,658
|
|
|
|
4,049
|
|
|
|
3,854
|
|
|
|
4,384
|
|
|
|
4,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
47,041
|
|
|
|
48,043
|
|
|
|
50,074
|
|
|
|
52,433
|
|
|
|
53,233
|
|
|
|
54,573
|
|
|
|
56,987
|
|
|
|
60,109
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
9,429
|
|
|
|
9,392
|
|
|
|
8,878
|
|
|
|
10,488
|
|
|
|
9,756
|
|
|
|
9,966
|
|
|
|
10,033
|
|
|
|
10,428
|
|
Cost of product and other revenues
|
|
|
940
|
|
|
|
947
|
|
|
|
1,405
|
|
|
|
2,135
|
|
|
|
1,514
|
|
|
|
1,310
|
|
|
|
1,389
|
|
|
|
1,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
10,369
|
|
|
|
10,339
|
|
|
|
10,283
|
|
|
|
12,623
|
|
|
|
11,270
|
|
|
|
11,276
|
|
|
|
11,422
|
|
|
|
12,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
36,672
|
|
|
|
37,704
|
|
|
|
39,791
|
|
|
|
39,810
|
|
|
|
41,963
|
|
|
|
43,297
|
|
|
|
45,565
|
|
|
|
47,754
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
7,736
|
|
|
|
7,909
|
|
|
|
8,060
|
|
|
|
9,501
|
|
|
|
8,856
|
|
|
|
8,692
|
|
|
|
9,142
|
|
|
|
9,546
|
|
Marketing and advertising
|
|
|
11,254
|
|
|
|
13,317
|
|
|
|
12,063
|
|
|
|
15,707
|
|
|
|
14,921
|
|
|
|
15,065
|
|
|
|
14,240
|
|
|
|
17,399
|
|
General and administrative
|
|
|
6,999
|
|
|
|
6,865
|
|
|
|
7,171
|
|
|
|
7,896
|
|
|
|
7,563
|
|
|
|
6,777
|
|
|
|
10,229
|
|
|
|
7,971
|
|
Amortization of acquired intangible assets
|
|
|
5,941
|
|
|
|
5,945
|
|
|
|
5,946
|
|
|
|
5,947
|
|
|
|
4,058
|
|
|
|
4,055
|
|
|
|
4,052
|
|
|
|
4,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
31,930
|
|
|
|
34,036
|
|
|
|
33,240
|
|
|
|
39,051
|
|
|
|
35,398
|
|
|
|
34,589
|
|
|
|
37,663
|
|
|
|
38,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,742
|
|
|
|
3,668
|
|
|
|
6,551
|
|
|
|
759
|
|
|
|
6,565
|
|
|
|
8,708
|
|
|
|
7,902
|
|
|
|
8,786
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,331
|
)
|
|
|
(2,873
|
)
|
|
|
(3,123
|
)
|
|
|
(3,028
|
)
|
|
|
(1,841
|
)
|
|
|
(1,515
|
)
|
|
|
(1,428
|
)
|
|
|
(1,355
|
)
|
Interest income
|
|
|
157
|
|
|
|
274
|
|
|
|
201
|
|
|
|
240
|
|
|
|
131
|
|
|
|
567
|
|
|
|
48
|
|
|
|
46
|
|
Other income (expense), net
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
(19
|
)
|
|
|
10
|
|
|
|
8
|
|
|
|
2
|
|
|
|
4
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
1,571
|
|
|
|
1,067
|
|
|
|
3,610
|
|
|
|
(2,019
|
)
|
|
|
4,863
|
|
|
|
7,762
|
|
|
|
6,526
|
|
|
|
7,484
|
|
Income tax benefit (expense)
|
|
|
(609
|
)
|
|
|
(790
|
)
|
|
|
(1,349
|
)
|
|
|
903
|
|
|
|
(1,360
|
)
|
|
|
(3,082
|
)
|
|
|
(2,485
|
)
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
962
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
(1,116
|
)
|
|
$
|
3,503
|
|
|
$
|
4,680
|
|
|
$
|
4,041
|
|
|
$
|
9,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.09
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.09
|
|
|
$
|
0.12
|
|
|
$
|
0.10
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
38,047
|
|
|
|
38,070
|
|
|
|
38,127
|
|
|
|
38,199
|
|
|
|
38,226
|
|
|
|
38,287
|
|
|
|
38,327
|
|
|
|
40,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
38,428
|
|
|
|
38,500
|
|
|
|
38,584
|
|
|
|
38,757
|
|
|
|
39,139
|
|
|
|
40,159
|
|
|
|
41,059
|
|
|
|
45,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
The following table presents our unaudited quarterly
consolidated results of operations for the eight quarters ended
December 31, 2009 as a percentage of revenues. You should
read this table in conjunction with our consolidated financial
statements and the related notes located elsewhere in this
Annual Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
|
91.0
|
%
|
|
|
92.9
|
%
|
|
|
92.3
|
%
|
|
|
91.1
|
%
|
|
|
92.4
|
%
|
|
|
92.9
|
%
|
|
|
92.3
|
%
|
|
|
91.8
|
%
|
Product and other revenues
|
|
|
9.0
|
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
8.9
|
|
|
|
7.6
|
|
|
|
7.1
|
|
|
|
7.7
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
20.0
|
|
|
|
19.5
|
|
|
|
17.7
|
|
|
|
20.0
|
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
17.6
|
|
|
|
17.4
|
|
Cost of product and other revenues
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.8
|
|
|
|
4.1
|
|
|
|
2.9
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
22.0
|
|
|
|
21.5
|
|
|
|
20.5
|
|
|
|
24.1
|
|
|
|
21.2
|
|
|
|
20.7
|
|
|
|
20.0
|
|
|
|
20.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
78.0
|
|
|
|
78.5
|
|
|
|
79.5
|
|
|
|
75.9
|
|
|
|
78.8
|
|
|
|
79.3
|
|
|
|
80.0
|
|
|
|
79.4
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
16.5
|
|
|
|
16.5
|
|
|
|
16.1
|
|
|
|
18.1
|
|
|
|
16.7
|
|
|
|
15.9
|
|
|
|
16.0
|
|
|
|
15.9
|
|
Marketing and advertising
|
|
|
23.9
|
|
|
|
27.7
|
|
|
|
24.1
|
|
|
|
30.0
|
|
|
|
28.0
|
|
|
|
27.6
|
|
|
|
25.0
|
|
|
|
28.9
|
|
General and administrative
|
|
|
14.9
|
|
|
|
14.3
|
|
|
|
14.3
|
|
|
|
15.1
|
|
|
|
14.2
|
|
|
|
12.4
|
|
|
|
18.0
|
|
|
|
13.3
|
|
Amortization of acquired intangible assets
|
|
|
12.6
|
|
|
|
12.4
|
|
|
|
11.9
|
|
|
|
11.3
|
|
|
|
7.6
|
|
|
|
7.4
|
|
|
|
7.1
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
67.9
|
|
|
|
70.9
|
|
|
|
66.4
|
|
|
|
74.5
|
|
|
|
66.5
|
|
|
|
63.3
|
|
|
|
66.1
|
|
|
|
64.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
10.1
|
|
|
|
7.6
|
|
|
|
13.1
|
|
|
|
1.4
|
|
|
|
12.3
|
|
|
|
16.0
|
|
|
|
13.9
|
|
|
|
14.6
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(7.1
|
)
|
|
|
(6.0
|
)
|
|
|
(6.3
|
)
|
|
|
(5.7
|
)
|
|
|
(3.5
|
)
|
|
|
(2.8
|
)
|
|
|
(2.5
|
)
|
|
|
(2.2
|
)
|
Interest income
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
0.1
|
|
|
|
0.1
|
|
Other income (expense), net
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
3.3
|
|
|
|
2.2
|
|
|
|
7.2
|
|
|
|
(3.8
|
)
|
|
|
9.1
|
|
|
|
14.2
|
|
|
|
11.5
|
|
|
|
12.5
|
|
Income tax benefit (expense)
|
|
|
(1.3
|
)
|
|
|
(1.6
|
)
|
|
|
(2.7
|
)
|
|
|
1.7
|
|
|
|
(2.5
|
)
|
|
|
(5.6
|
)
|
|
|
(4.4
|
)
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.0
|
|
|
|
0.6
|
|
|
|
4.5
|
|
|
|
(2.1
|
)
|
|
|
6.6
|
|
|
|
8.6
|
|
|
|
7.1
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents certain unaudited other data and
other financial data for the eight quarters ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(Dollars in thousands, except subscriber acquisition cost and
average monthly revenue per subscriber)
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,138
|
|
|
$
|
15,036
|
|
|
$
|
17,888
|
|
|
$
|
13,583
|
|
|
$
|
16,504
|
|
|
$
|
18,443
|
|
|
$
|
17,931
|
|
|
$
|
18,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
|
10,119
|
|
|
|
7,736
|
|
|
|
10,163
|
|
|
|
3,694
|
|
|
|
8,048
|
|
|
|
6,704
|
|
|
|
9,096
|
|
|
|
5,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
$
|
18
|
|
|
$
|
22
|
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
29
|
|
|
$
|
32
|
|
|
$
|
17
|
|
|
$
|
18
|
|
Technology and development
|
|
|
187
|
|
|
|
317
|
|
|
|
287
|
|
|
|
341
|
|
|
|
475
|
|
|
|
360
|
|
|
|
388
|
|
|
|
408
|
|
Marketing and advertising
|
|
|
33
|
|
|
|
73
|
|
|
|
74
|
|
|
|
74
|
|
|
|
88
|
|
|
|
81
|
|
|
|
104
|
|
|
|
97
|
|
General and administrative
|
|
|
1,051
|
|
|
|
707
|
|
|
|
720
|
|
|
|
728
|
|
|
|
934
|
|
|
|
804
|
|
|
|
953
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,289
|
|
|
$
|
1,119
|
|
|
$
|
1,101
|
|
|
$
|
1,163
|
|
|
$
|
1,526
|
|
|
$
|
1,277
|
|
|
$
|
1,462
|
|
|
$
|
1,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(Dollars in thousands, except subscriber acquisition cost and
average monthly revenue per subscriber)
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscribers
|
|
|
845,697
|
|
|
|
861,235
|
|
|
|
893,882
|
|
|
|
913,683
|
|
|
|
959,411
|
|
|
|
990,959
|
|
|
|
1,028,180
|
|
|
|
1,066,123
|
|
Subscriber additions
|
|
|
145,755
|
|
|
|
127,035
|
|
|
|
139,486
|
|
|
|
143,769
|
|
|
|
188,561
|
|
|
|
160,394
|
|
|
|
159,795
|
|
|
|
165,241
|
|
Monthly churn
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
|
|
3.6
|
%
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
|
|
3.8
|
%
|
|
|
3.6
|
%
|
|
|
3.6
|
%
|
Subscriber acquisition cost
|
|
$
|
59.95
|
|
|
$
|
83.91
|
|
|
$
|
66.22
|
|
|
$
|
79.26
|
|
|
$
|
62.23
|
|
|
$
|
73.27
|
|
|
$
|
70.55
|
|
|
$
|
85.21
|
|
Average monthly revenue per subscriber
|
|
$
|
15.68
|
|
|
$
|
16.19
|
|
|
$
|
16.33
|
|
|
$
|
16.45
|
|
|
$
|
16.46
|
|
|
$
|
16.42
|
|
|
$
|
16.48
|
|
|
$
|
16.67
|
|
The following table presents a reconciliation of adjusted EBITDA
and free cash flows to net income (loss), the most comparable
GAAP measure, for each of the quarters indicated. For additional
information, please see the discussion of adjusted EBITDA and
free cash flow in Item 6 Selected Consolidated
Financial Data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Reconciliation of adjusted EBITDA and free cash flow to net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
962
|
|
|
$
|
277
|
|
|
$
|
2,261
|
|
|
$
|
(1,116
|
)
|
|
$
|
3,503
|
|
|
$
|
4,680
|
|
|
$
|
4,041
|
|
|
$
|
9,071
|
|
Interest expense, net
|
|
|
3,174
|
|
|
|
2,599
|
|
|
|
2,922
|
|
|
|
2,788
|
|
|
|
1,710
|
|
|
|
948
|
|
|
|
1,380
|
|
|
|
1,309
|
|
Income tax (benefit) expense
|
|
|
609
|
|
|
|
790
|
|
|
|
1,349
|
|
|
|
(903
|
)
|
|
|
1,360
|
|
|
|
3,082
|
|
|
|
2,485
|
|
|
|
(1,587
|
)
|
Depreciation expense
|
|
|
2,708
|
|
|
|
2,712
|
|
|
|
2,733
|
|
|
|
2,579
|
|
|
|
2,643
|
|
|
|
2,687
|
|
|
|
2,762
|
|
|
|
2,844
|
|
Amortization expense
|
|
|
7,399
|
|
|
|
7,537
|
|
|
|
7,503
|
|
|
|
7,607
|
|
|
|
5,770
|
|
|
|
5,771
|
|
|
|
5,805
|
|
|
|
5,868
|
|
Stock-based compensation
|
|
|
1,289
|
|
|
|
1,119
|
|
|
|
1,101
|
|
|
|
1,163
|
|
|
|
1,526
|
|
|
|
1,277
|
|
|
|
1,462
|
|
|
|
1,209
|
|
Other (income) expense, net
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
19
|
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
(7
|
)
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
16,138
|
|
|
$
|
15,036
|
|
|
$
|
17,888
|
|
|
$
|
13,583
|
|
|
$
|
16,504
|
|
|
$
|
18,443
|
|
|
$
|
17,931
|
|
|
$
|
18,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
|
(1,690
|
)
|
|
|
(1,960
|
)
|
|
|
(2,733
|
)
|
|
|
(2,582
|
)
|
|
|
(1,786
|
)
|
|
|
(1,886
|
)
|
|
|
(2,183
|
)
|
|
|
(3,543
|
)
|
Purchase of property and equipment
|
|
|
(2,324
|
)
|
|
|
(2,961
|
)
|
|
|
(2,073
|
)
|
|
|
(4,263
|
)
|
|
|
(2,605
|
)
|
|
|
(3,546
|
)
|
|
|
(1,415
|
)
|
|
|
(5,796
|
)
|
Cash paid for interest
|
|
|
(1,995
|
)
|
|
|
(2,377
|
)
|
|
|
(2,834
|
)
|
|
|
(2,862
|
)
|
|
|
(4,028
|
)
|
|
|
(1,388
|
)
|
|
|
(1,208
|
)
|
|
|
(1,116
|
)
|
Cash paid for income taxes
|
|
|
(10
|
)
|
|
|
(2
|
)
|
|
|
(85
|
)
|
|
|
(182
|
)
|
|
|
(37
|
)
|
|
|
(4,919
|
)
|
|
|
(4,029
|
)
|
|
|
(2,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
10,119
|
|
|
$
|
7,736
|
|
|
$
|
10,163
|
|
|
$
|
3,694
|
|
|
$
|
8,048
|
|
|
$
|
6,704
|
|
|
$
|
9,096
|
|
|
$
|
5,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
On November 4, 2009, the SEC declared effective our
Registration Statement on
Form S-1
(File
No. 333-
160986) for our initial public offering of
7,407,407 shares of our common stock, which included
3,333,333 shares sold by selling stockholders and
4,074,074 shares sold by Ancestry.com at a price of $13.50
per share. We commenced our initial public offering immediately
thereafter and completed the offering on November 10, 2009.
We received net proceeds of $47.8 million from the
offering, after deducting the underwriting discounts and
commissions and offering expenses payable by us. We did not
receive any proceeds from the sale of the shares by the selling
stockholders. Prior to our initial public offering, we had
funded our operations primarily from cash flows from operations
during the last five years. In December 2007, we entered into a
credit facility that included a $140 million term loan to
finance the purchase price of our predecessor in connection with
the Spectrum investment.
As of December 31, 2009, we had $110.3 million of
total liquidity, comprised of $66.9 million in cash and
cash equivalents, $33.3 million in short-term investments
and the ability to borrow $10.0 million under the revolving
portion of our credit facility. Cash and cash equivalents are
comprised of high quality investments including qualified money
market funds. Short-term investments are classified as available
for sale and are held in high
51
quality investments including U.S. government agencies with
maturities of less than a year. Note 1 to our consolidated
financial statements included in this Annual Report describes
further the composition of our cash and cash equivalents and
short-term investments. As of December 31, 2009, our
borrowings under the term loan portion of our credit facility
were $100.0 million.
Our primary uses of cash include operating costs such as
personnel-related expenses, marketing and advertising, payments
related to our long-term debt, capital and database content
costs and web hosting costs. Our future capital requirements may
vary materially from those now planned and will depend on many
factors, including:
|
|
|
|
|
the development of new services;
|
|
|
|
market acceptance of our services;
|
|
|
|
the levels of advertising and promotion required to retain and
acquire subscribers;
|
|
|
|
the launch of additional services and improvement of our
competitive position in the marketplace;
|
|
|
|
the expansion of our development and marketing organizations;
|
|
|
|
the establishment of additional offices in the United States and
worldwide and the building of infrastructure necessary to
support our growth; and
|
|
|
|
|
|
our relationships with suppliers and clients.
|
We have experienced increases in our expenditures in connection
with the growth in our operations and personnel, and we
anticipate that our expenditures will continue to increase in
the future. We expect cash on hand, internally generated cash
flow, and available credit from our credit facility will provide
adequate funds for operating and recurring cash needs (e.g.,
working capital, capital expenditures, and debt repayments) for
at least the next 12 months.
Summary cash flow information for cash and cash equivalents and
short-term investments for the period from January 1, 2007
through December 5, 2007, the period from December 6,
2007 through December 31, 2007, and the years ended
December 31, 2008 and 2009 is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec, 6, 2007
|
|
|
Year Ended
|
|
|
|
through
|
|
|
through
|
|
|
December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used for):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
31,311
|
|
|
$
|
6,222
|
|
|
$
|
55,245
|
|
|
$
|
67,649
|
|
Investing activities
|
|
|
(21,163
|
)
|
|
|
(281,505
|
)
|
|
|
(20,586
|
)
|
|
|
(22,760
|
)
|
Financing activities
|
|
|
(11,615
|
)
|
|
|
245,831
|
|
|
|
(6,814
|
)
|
|
|
15,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents and short-term
investments
|
|
$
|
(1,467
|
)
|
|
$
|
(29,452
|
)
|
|
$
|
27,845
|
|
|
$
|
60,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Analysis
Sources
and uses of cash
Cash and cash equivalents and short-term investments increased
by $60.2 million to $100.3 million in the year ended
December 31, 2009 as compared to an increase of
$27.8 million in the year ended December 31, 2008.
Cash and cash equivalents and short-term investments were
$40.1 million at December 31, 2008 compared to
$12.3 million at December 31, 2007. Cash and cash
equivalents and short-term investments decreased
$1.5 million in the predecessor period from January 1,
2007 through December 5, 2007 and decreased
$29.5 million in the successor period from December 6,
2007 through December 31, 2007. During the three-year
periods, net cash provided by operating activities was used for
debt repayments, investments in capital, content database costs
and the Spectrum investment.
52
Net cash
provided by operating activities
For the year ended December 31, 2009, net cash provided by
operating activities was $67.6 million. Net cash provided
by operating activities consists of net income as adjusted for
non-cash expenses and an increase in our deferred revenue
balance. Net income was $21.3 million for the year ended
December 31, 2009. Non-cash expenses, including
depreciation, amortization of content database costs,
amortization of acquired intangible assets, stock-based
compensation and amortization of deferred financing costs,
totaled $40.5 million for year ended December 31, 2009
for a decrease of $7.3 million from the year ended
December 31, 2008. Additionally, an increase in deferred
revenue of $8.5 million for cash received from subscribers,
but not yet recognized in revenue, contributed to the cash
provided by operating activities. Net cash provided by operating
activities increased $12.4 million in the year ended
December 31, 2009 as compared to the year ended
December 31, 2008. The increase in cash provided by
operating activities was due primarily to an increase in net
income.
For the year ended December 31, 2008, net cash provided by
operating activities was $55.2 million. Net income was
$2.4 million for the year ended December 31, 2008.
Non-cash expenses, including depreciation, amortization of
content database costs, amortization of acquired intangible
assets, stock-based compensation, impairment of content database
costs and amortization of deferred financing costs, totaled
$47.8 million. Additionally, an increase in deferred
revenue of $4.4 million for cash received from subscribers,
but not yet recognized in revenue, contributed to the cash
provided by operating activities. The increase in cash provided
by operating activities in 2008 of $17.7 million was due
primarily to an increase in non-cash amortization of
$21.0 million which had the effect of reducing net income,
without reducing cash.
Net cash
used in investing activities
For the year ended December 31, 2009, net cash used in
investing activities totaled $22.8 million and consisted of
investments in capital equipment and content database costs. Net
cash used in investing activities increased $2.2 million in
the year ended December 31, 2009 as compared to the year
ended December 31, 2008. The increase in net cash used in
investing activities is primarily due to increased purchases of
capital equipment during the year ended December 31, 2009.
For the year ended December 31, 2008, net cash used in
investing activities totaled $20.6 million and consisted of
investments in capital equipment and content database costs.
Acquisition of capital equipment remained relatively constant
and the investment in content database costs modestly declined
between 2008 and 2007. The successor period from
December 6, 2007 through December 31, 2007 included
$279.5 million of cash outflows related to the Spectrum
investment.
Net cash
provided by (used in) financing activities
For the year ended December 31, 2009, net cash provided by
financing activities totaled $15.3 million and consisted
primarily of net proceeds from our initial public offering in
November 2009 and to a lesser extent proceeds from stock option
exercises partially offset by net cash uses of principal
payments on long-term debt and to a lesser extent payments to
repurchase common stock. Net cash provided by financing
activities increased $22.1 million in the year ended
December 31, 2009 as compared to the year ended
December 31, 2008. The increase was due to net proceeds
from the Companys initial public offering of
$47.8 million partially offset by increased debt principal
payments of $26.0 million, which included a
$10.9 million excess cash flow payment that was made in May
2009 and an additional principal payment of $12.5 million
in November 2009 as a result of the initial public offering, in
addition to the regularly scheduled principal payments.
For the year ended December 31, 2008, net cash used in
financing activities totaled $6.8 million and consisted
primarily of principal payments on long-term debt and to a
lesser extent repurchases of common stock, partially offset by
stock option exercises. The successor period from
December 5, 2007 through December 31, 2007 includes
cash inflows of $136.1 million of proceeds from the
issuance of long-term debt and $109.8 million of proceeds
from the issuance of common stock in connection with the
Spectrum investment. Between 2008 and 2007, principal payments
on long-term debt decreased $8 million.
53
Contractual
obligations
The following table summarizes our principal contractual
obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt
|
|
$
|
100,025
|
|
|
$
|
28,416
|
|
|
$
|
71,609
|
|
|
$
|
|
|
|
$
|
|
|
Interest on Long-Term Debt(1)
|
|
|
8,133
|
|
|
|
3,412
|
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
12,129
|
|
|
|
2,420
|
|
|
|
4,285
|
|
|
|
3,213
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations(2)
|
|
$
|
120,287
|
|
|
$
|
34,248
|
|
|
$
|
80,615
|
|
|
$
|
3,213
|
|
|
$
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest on Long-Term Debt represents estimated quarterly
interest payments assuming that interest rates in effect at
December 31, 2009 remain constant and all debt is
outstanding until its due dates. As our long-term debt has
variable interest rates (for example, the interest rate was 7.4%
at December 31, 2008 but was 4.0% as of December 31,
2009), actual payments may vary due to changes in LIBOR and
prime. See Note 6 to our consolidated financial statements
included in this Annual Report for further details. |
|
(2) |
|
Amounts exclude uncertain tax position liability of
$0.6 million, for which timing of payments are not
determinable. |
Outstanding purchase orders, which represent authorizations to
purchase goods and services that are not legally binding, are
not included in contractual obligations. We believe current cash
balances, cash generated by future operating activities, and
cash available under our current credit facility will be
sufficient to meet our contractual cash obligations and other
operating cash requirements in 2010.
Long-term
debt
On December 5, 2007, in connection with the Spectrum
investment, we entered into a credit facility consisting of a
$140.0 million term loan and $10.0 million revolving
commitment. At December 31, 2009, long-term debt
outstanding under our credit facility totaled
$100.0 million. Of the amount outstanding at
December 31, 2009, $28.4 million is due in the next
12 months, which we expect to repay with cash on hand,
including the proceeds from our initial public offering.
The credit facility is repayable in quarterly installments
ranging from $2.3 million to $3.5 million that are due
from March 2010 to September 2012, with a balloon payment of
$49.7 million due in December 2012. Interest on the credit
faculty is variable based on LIBOR, in the case of a Eurodollar
rate loan, or prime, in the case of a base rate loan, plus a
margin based on our consolidated total leverage ratio. The
weighted average effective interest rate for the credit facility
was 4.0% at December 31, 2009. Additionally, the credit
facility is subject to various mandatory prepayment terms
including an excess cash flow calculation performed on an annual
basis. Any voluntary or mandatory prepayments of credit facility
will reduce remaining quarterly installments and balloon
payments on a pro-rata basis. Included in the current portion of
long-term debt on the balance sheet as of December 31, 2009
is approximately $18.6 million that is expected to be paid
in the second quarter as an excess cash flow payment.
The credit facility is secured by all of our present and future
tangible and intangible assets and approximately 65% of the
stock in some of our wholly owned foreign subsidiaries. In
connection with the credit facility, we must maintain certain
financial ratio covenants. Our failure to comply with any such
covenants could result in the credit facility becoming payable
on demand. We were in compliance with these and all other debt
covenants at December 31, 2009. The credit facility
includes a revolving commitment of up to $10.0 million, of
which $10.0 million was available for borrowing at
December 31, 2009. The revolving commitment of the credit
facility expires in December 2012. CIT Group Inc., the parent
company of CIT Lending Services Corporation, one of the lenders
in the lending syndicate for the revolving portion of our credit
facility, recently reorganized under Chapter 11 of United
States Bankruptcy Code during 2009, according to public filings.
If CIT or any other of the financial institutions that are in
the syndicate of the revolving portion of our credit facility
were to suffer further
54
financial difficulties or enter bankruptcy, it could affect our
ability to draw down on the facility. Note 6 to our
consolidated financial statements included in this Annual Report
describes further the terms of the credit facility.
Interest
rate cap contracts
We currently use an interest rate cap to limit the floating rate
of our credit facility at 6% plus the applicable margin. The cap
has a notional amount of $90.0 million and was purchased in
order to mitigate a portion of our exposure to higher interest
rates. The fair value of the interest rate cap was de minimis at
December 31, 2009. If we fail to maintain an interest rate
cap due to counterparty failure or otherwise, it would be an
event of default under our credit facility.
Off-balance
sheet arrangements
We do not engage in transactions that generate relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, as part of our ongoing business. Accordingly,
our operating results, financial condition and cash flows are
not subject to off-balance sheet risks.
Indemnifications
In the ordinary course of business, we enter into contractual
arrangements under which we agree to provide indemnification of
varying scope and terms to business partners and other parties
with respect to certain matters, including, but not limited to,
losses arising out of our breach of such agreements and out of
intellectual property infringement claims made by third parties.
In these circumstances, payment may be conditional on the other
party making a claim pursuant to the procedures specified in the
particular contract. Further, our obligations under these
agreements may be limited in terms of time
and/or
amount, and in some instances, we may have recourse against
third parties for certain payments. In addition, we have
indemnification agreements with our directors and our executive
officers that require us, among other things, to indemnify them
against certain liabilities that may arise by reason of their
status or service as directors or officers. The terms of such
obligations may vary.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or FASB,
issued amended standards for determining whether to consolidate
a variable interest entity. These new standards amend the
evaluation criteria to identify the primary beneficiary of a
variable interest entity and requires ongoing reassessment of
whether an enterprise is the primary beneficiary of the variable
interest entity. The provisions of the new standards are
effective for annual reporting periods beginning after
November 15, 2009 and interim periods within those fiscal
years. The adoption of the new standards will not have an impact
on our consolidated financial position, results of operations
and cash flows.
In June 2009, the FASB issued The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, or the Codification, for financial statements
issued for interim and annual periods ending after
September 15, 2009. The Codification establishes a single
source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP
for SEC registrants. The Codification does not affect our
consolidated financial position, results of operations or cash
flow. Previous references to GAAP standards prior to the
Codification are no longer used in our financial disclosures.
In October 2009, the FASB issued new revenue recognition
standards for arrangements with multiple deliverables. The new
standards permit entities to use managements best estimate
of selling price to value individual deliverables when those
deliverables do not have vendor specific objective evidence of
fair value or when third-party evidence of selling price is not
available. Additionally, these new standards modify the manner
in which the selling price is allocated across the separately
identified deliverables by no longer permitting the residual
method of allocating the selling price. The requirements of
these new standards are to be applied prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010,
55
although early adoption is permitted. The company does not
expect adoption of these standards will have a material impact
on the consolidated financial position, results of operations or
cash flows.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Quantitative
and Qualitative Disclosures about Market Risk
We are exposed to market risks in the ordinary course of our
business. These risks include primarily interest rate and
foreign currency exchange risks.
Our most significant market risk relates to changing interest
rates. As of December 31, 2009, we had outstanding
floating-rate term loan debt under our credit facility of
$100.0 million, $28.4 million of which is current.
Under our credit facility, we were required to maintain one or
more interest rate swap or cap agreements for the aggregate
amount of $90.0 million through December 2010. Accordingly,
we are party to an interest rate cap agreement that effectively
fixes the LIBOR rate on $90.0 million of principal value of
our outstanding term loans at 6%. As of December 31, 2009,
the fair value of the interest rate cap was nominal. This
agreement expires on December 31, 2010. For further
information on the interest rate cap, see Note 6 to our
consolidated financial statements included in this Annual Report.
A hypothetical interest rate change of 1% on our credit facility
would have changed interest incurred for the year ended
December 31, 2009 by $1.2 million. A hypothetical
interest rate change of 1% on our interest rate cap agreement
would not have materially changed the fair value of the interest
rate cap at December 31, 2009.
We have an investment policy with the objective to minimize the
market risk exposure of our cash equivalents and short-term
investments, which are affected by credit quality and movements
in interest rates. This policy focuses on managing liquidity and
preserving principal and earnings.
Our cash equivalents are primarily held for liquidity purposes
and are comprised of high quality investments including
qualified money market funds. Because our cash and cash
equivalents have a relatively short maturity, our
portfolios fair value is relatively insensitive to
interest rate changes. Our short-term investments are classified
as available for sale and are held in high quality investments
including U.S. government agencies with maturities of less
than a year. A change in interest rates of 1% would result in a
change in fair value of these securities of $0.3 million. A
change in interest rates for cash equivalents and short-term
investments of 1% would have a change in interest income of
$1.0 million.
The carrying amount of cash and cash equivalents, short-term
investments, trade receivables and other current assets
approximates fair value due to the short-term maturities of
these instruments. The fair values of all other financial
instruments, including debt, approximate their book values as
the instruments are short-term in nature or contain market rates
of interest.
We have foreign currency risks related to our revenues and
operating expenses denominated in currencies other than the
United States dollar. We pay the majority of our non United
States dollar expenses from revenues earned in the relevant
currency. Our profits earned in foreign currencies may therefore
be subject to foreign currency risk. The volatility of exchange
rates depends on many factors that we cannot forecast with
reliable accuracy. In the event our foreign sales and expenses
increase, our operating results may be more greatly affected by
fluctuations in the exchange rates of the currencies in which we
do business. At this time we do not, but we may in the future,
enter into derivatives or other financial instruments in an
attempt to hedge our foreign currency exchange risk. It is
difficult to predict the impact hedging activities would have on
our results of operations.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements required by Item 8
are submitted as a separate section of this Annual Report
beginning on
page F-1.
See Item 15, Exhibits and Financial Statement
Schedules and the supplementary information under the
caption Quarterly Results of Operations in
Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operation, which
information is incorporated herein by reference.
56
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of the
end of the period covered by this Annual Report. Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of the end of the period covered by
this Annual Report our disclosure controls and procedures were
effective to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and include
controls and procedures designed to ensure that the information
required to be disclosed by us in such reports is accumulated
and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosures.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
and procedures will prevent or detect all error and all fraud.
While our disclosure controls and procedures are designed to
provide reasonable assurance of their effectiveness, because of
the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within Ancestry.com have
been detected.
|
|
(b)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
This Annual Report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of our registered
public accounting firm as permitted in this transition period
under the rules of the SEC for newly public companies.
|
|
(c)
|
Changes
in Internal Control Over Financial Reporting
|
There were no changes in our internal control over financial
reporting that occurred during the quarter ended
December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to our
directors and executive officers, our Audit Committee and its
members and audit committee financial expert is incorporated by
reference from the information contained under the caption
Proposal One: Election of Directors and
elsewhere in the Proxy Statement for our 2010 Annual Meeting of
Stockholders. The information required by this item with respect
to compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, is incorporated by reference from the
information contained under the caption Security Ownership
of Certain Beneficial Owners and Management
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement for our 2010 Annual
Meeting of Stockholders.
57
We have adopted a Code of Business Conduct and Ethics that
applies to all of our executive officers and directors. The Code
of Business Ethics is posted on our Web site. The Internet
address for our Web site is
http://www.ancestry.com,
and the Code of Business Conduct and Ethics may be found as
follows:
1. From our main web page, first click Corporate
Information
2. Next, click on Investor Relations.
3. Next, click on Governance.
4. Finally, click on Code of Business Conduct.
We intend to satisfy the disclosure requirements under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of the
Code of Business Conduct and Ethics that applies to our
principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing
similar functions by posting such information on our Web site,
at the address and location specified above.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item with respect to the
compensation of directors and executive officers is incorporated
by reference from the information contained under the captions
Proposal One: Election of Directors
Compensation of Board of Directors and Executive
Compensation in the Proxy Statement for our 2010 Annual
Meeting of Stockholders. The information required by this item
with respect to the compensation committee interlocks and
insider participation is incorporated by reference from the
information contained under the caption Proposal One:
Election of Directors Compensation Committee
Interlocks and Insider Participation in the Proxy
Statement for our 2010 Annual Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Equity
Compensation Plan Information
The following table provides information as of December 31,
2009 with respect to the shares of our common stock that may be
issued under existing equity compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C
|
|
|
A
|
|
B
|
|
Number of Securities Remaining
|
|
|
Number of Securities to be
|
|
Weighted Average
|
|
Available for Future Issuance
|
|
|
Issued Upon exercise of
|
|
Exercise Price of
|
|
Under Equity Compensation
|
|
|
Outstanding Options,
|
|
Outstanding Options,
|
|
Plans (Excluding Securities
|
Plan Category
|
|
Warrants and Rights
|
|
Warrants and Rights
|
|
Reflected in Column A)
|
|
Equity compensation plans approved by security holders
|
|
|
10,373,290
|
(1)
|
|
$
|
5.29
|
|
|
|
2,120,146
|
(2)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,373,290
|
|
|
$
|
5.29
|
|
|
|
2,120,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of awards granted under the 2009 Stock Incentive Plan,
the Generations Holding, Inc. 2008 Stock Purchase and Option
Plan, the MyFamily.com, Inc. 2004 Stock Plan, the MyFamily.com,
Inc. Executive Stock Plan and the MyFamily.com, Inc. 1998 Stock
Plan. |
|
(2) |
|
The 2009 Stock Incentive Plan is subject to automatic annual
increase on the first day of each fiscal year beginning in 2010
and thereafter by a number of shares of common stock equal to 4%
of the number of outstanding shares of common stock on the last
day of the immediately preceding fiscal year, or such lesser
number of shares of common stock prescribed by the Board of
Directors with respect to a particular calendar year. It is also
subject to increase by the number of shares that cease to be
subject to awards under the other |
58
|
|
|
|
|
option and incentive plans (other than by reason of exercise or
settlement of the awards to the extent they are exercised for or
settled in vested and non-forfeitable shares of common stock). |
The information required by this item with respect to the
security ownership of certain beneficial owners and the security
ownership of directors and executive officers is incorporated by
reference from the information contained under the caption
Security Ownership of Certain Beneficial Owners and
Management in the Proxy Statement for our 2010 Annual
Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this item with respect to certain
relationships and related transactions is incorporated by
reference from information contained under the caption
Related Party Transactions in the Proxy Statement
for our 2010 Annual Meeting of Stockholders. The information
required by this item with respect to director independence is
incorporated by reference from information contained under the
caption Proposal One: Election of
Directors Director Independence in the Proxy
Statement for our 2010 Annual Meeting of Stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from the information under the caption
Proposal Two: Ratification of the Appointment of Our
Independent Registered Public Accounting Firm in the Proxy
Statement for our 2010 Annual Meeting of Stockholders.
59
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
Annual Report.:
(1) Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
The financial statement schedules are omitted as they are either
not applicable or the information required is presented in the
financial statements and notes thereto.
(3) Exhibits are incorporated by reference or are filed
with this Annual Report as indicated below (numbered in
accordance with Item 601 of
Regulation S-K).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
S-1/A
|
|
333-160986
|
|
Nov. 2, 2009
|
|
|
3
|
.2
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws
|
|
S-1/A
|
|
333-160986
|
|
Oct. 20, 2009
|
|
|
3
|
.2
|
|
|
|
4
|
.1
|
|
Form of Common Stock Certificate
|
|
S-1/A
|
|
333-160986
|
|
Oct. 6, 2009
|
|
|
4
|
.1
|
|
|
|
10
|
.1
|
|
MyFamily.com, Inc. 1998 Stock Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.1
|
|
|
|
10
|
.2
|
|
MyFamily.com, Inc. 2004 Stock Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.2
|
|
|
|
10
|
.3
|
|
MyFamily.com, Inc. Executive Stock Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.3
|
|
|
|
10
|
.4
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.4
|
|
|
|
10
|
.5
|
|
Ancestry.com Inc. 2009 Stock Incentive Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.5
|
|
|
|
10
|
.6
|
|
MyFamily.com, Inc. 1998 Stock Plan Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.6
|
|
|
|
10
|
.7
|
|
MyFamily.com, Inc. 2004 Stock Plan Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.7
|
|
|
|
10
|
.8
|
|
MyFamily.com, Inc. Executive Stock Plan Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.8
|
|
|
|
10
|
.9
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.9
|
|
|
|
10
|
.10
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement for
Non-U.S.
Employees.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.10
|
|
|
|
10
|
.11
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Restricted Stock Units.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.11
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.12
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Nonqualified Stock Option.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.12
|
|
|
|
10
|
.13
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Incentive Stock Options.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.13
|
|
|
|
10
|
.14
|
|
Registration Rights Agreement, by and among Generations Holding,
Inc., certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.14
|
|
|
|
10
|
.15
|
|
Stockholders Agreement, by and among Generations Holding, Inc.,
certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.15
|
|
|
|
10
|
.16
|
|
Credit and Guaranty Agreement, by and among The Generations
Network, Inc., certain guarantors and certain lending parties,
dated December 7, 2007.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.16
|
|
|
|
10
|
.17
|
|
First Amendment to Credit and Guaranty Agreement, dated
March 31, 2008.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.17
|
|
|
|
10
|
.18
|
|
Second Amendment to Credit and Guaranty Agreement, dated
July 16, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.18
|
|
|
|
10
|
.19
|
|
Form of Indemnification Agreement to be entered into with each
director and executive officer.
|
|
S-1/A
|
|
333-160986
|
|
Oct. 20, 2009
|
|
|
10
|
.19
|
|
|
|
10
|
.20
|
|
Employment Letter by and between Timothy Sullivan and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.20
|
|
|
|
10
|
.21
|
|
Employment Letter by and between Howard Hochhauser and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.21
|
|
|
|
10
|
.22
|
|
Employment Letter by and between Joshua Hanna and Ancestry.com
Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.22
|
|
|
|
10
|
.23
|
|
Employment Letter by and between David Rinn and Ancestry.com
Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.23
|
|
|
|
10
|
.24
|
|
Employment Letter by and between William Stern and Ancestry.com
Inc., dated June 29, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.24
|
|
|
|
10
|
.25
|
|
Employment Letter by and between Christopher Tracy and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.25
|
|
|
|
10
|
.26
|
|
Employment Letter by and between Andrew Wait and Ancestry.com
Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.26
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.27
|
|
Employment Letter by and between Michael Wolfgramm and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.27
|
|
|
|
10
|
.28
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Nonqualified Stock Options for
Non-Employee
Directors.
|
|
S-1/A
|
|
333-160986
|
|
Nov. 2, 2009
|
|
|
10
|
.28
|
|
|
|
10
|
.29
|
|
Generations Holdings, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement for non-employee Directors.
|
|
S-1/A
|
|
333-160986
|
|
Nov. 2, 2009
|
|
|
10
|
.29
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
* |
|
These certifications are not deemed filed with the SEC and are
not to be incorporated by reference in any filing we make under
the Securities Act of 1933 or the Securities Exchange Act of
1934, irrespective of any general incorporation language in any
filings. |
|
|
|
Indicates a management contract or compensatory plan |
62
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Ancestry.com Inc.
We have audited the accompanying consolidated balance sheets of
Ancestry.com Inc. and subsidiaries as of December 31, 2008
and 2009, and the related consolidated statements of operations,
stockholders equity, and cash flows for the period from
January 1, 2007 through December 5, 2007
(predecessor), the period from December 6, 2007 through
December 31, 2007 (successor) and the years ended
December 31, 2008 and 2009. These financial statements are
the responsibility of the companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Ancestry.com Inc. and subsidiaries as of
December 31, 2008 and 2009, and the consolidated results of
their operations and their cash flows for the period from
January 1, 2007 through December 5, 2007
(predecessor), the period from December 6, 2007 through
December 31, 2007 (successor) and the years ended
December 31, 2008 and 2009, in conformity with
U.S. generally accepted accounting principles.
Salt Lake City, Utah
February 26, 2010
F-2
ANCESTRY.COM
INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,121
|
|
|
$
|
66,941
|
|
Restricted cash
|
|
|
6,572
|
|
|
|
2,181
|
|
Short-term investments
|
|
|
|
|
|
|
33,331
|
|
Accounts receivable, net of allowances of $394 and $472 at
December 31, 2008 and 2009, respectively
|
|
|
5,155
|
|
|
|
5,860
|
|
Income tax receivable
|
|
|
3,089
|
|
|
|
2,017
|
|
Deferred income taxes
|
|
|
7,582
|
|
|
|
8,797
|
|
Prepaid expenses and other current assets
|
|
|
3,674
|
|
|
|
5,380
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
66,193
|
|
|
|
124,507
|
|
Property and equipment, net
|
|
|
17,004
|
|
|
|
19,430
|
|
Content database costs, net
|
|
|
47,244
|
|
|
|
49,650
|
|
Intangible assets, net
|
|
|
57,701
|
|
|
|
41,484
|
|
Goodwill
|
|
|
285,466
|
|
|
|
285,466
|
|
Other assets
|
|
|
4,367
|
|
|
|
2,811
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
477,975
|
|
|
$
|
523,348
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,827
|
|
|
$
|
6,877
|
|
Accrued expenses
|
|
|
19,536
|
|
|
|
18,850
|
|
Escrow liability
|
|
|
5,682
|
|
|
|
1,763
|
|
Deferred revenues
|
|
|
61,178
|
|
|
|
69,711
|
|
Current portion of long-term debt
|
|
|
21,457
|
|
|
|
28,416
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
112,680
|
|
|
|
125,617
|
|
Long-term debt, less current portion
|
|
|
111,543
|
|
|
|
71,609
|
|
Deferred income taxes
|
|
|
33,710
|
|
|
|
30,117
|
|
Other long-term liabilities
|
|
|
254
|
|
|
|
1,115
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
258,187
|
|
|
|
228,458
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 175,000,000 shares
authorized; 38,216,510 and 42,416,330 shares issued and
outstanding at December 31, 2008 and 2009, respectively
|
|
|
38
|
|
|
|
42
|
|
Additional paid-in capital
|
|
|
218,669
|
|
|
|
272,513
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
|
(41
|
)
|
Retained earnings
|
|
|
1,081
|
|
|
|
22,376
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
219,788
|
|
|
|
294,890
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
477,975
|
|
|
$
|
523,348
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-3
ANCESTRY.COM
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
Product and other revenues
|
|
|
12,269
|
|
|
|
1,278
|
|
|
|
16,200
|
|
|
|
17,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
153,410
|
|
|
|
12,970
|
|
|
|
197,591
|
|
|
|
224,902
|
|
Costs of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of subscription revenues
|
|
|
33,590
|
|
|
|
2,462
|
|
|
|
38,187
|
|
|
|
40,183
|
|
Cost of product and other revenues
|
|
|
2,552
|
|
|
|
500
|
|
|
|
5,427
|
|
|
|
6,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
36,142
|
|
|
|
2,962
|
|
|
|
43,614
|
|
|
|
46,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
117,268
|
|
|
|
10,008
|
|
|
|
153,977
|
|
|
|
178,579
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and development
|
|
|
31,255
|
|
|
|
3,517
|
|
|
|
33,206
|
|
|
|
36,236
|
|
Marketing and advertising
|
|
|
42,400
|
|
|
|
3,157
|
|
|
|
52,341
|
|
|
|
61,625
|
|
General and administrative
|
|
|
20,723
|
|
|
|
2,142
|
|
|
|
28,931
|
|
|
|
32,540
|
|
Amortization of acquired intangible assets
|
|
|
2,132
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
16,217
|
|
Transaction related expenses
|
|
|
9,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
106,040
|
|
|
|
10,358
|
|
|
|
138,257
|
|
|
|
146,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
11,228
|
|
|
|
(350
|
)
|
|
|
15,720
|
|
|
|
31,961
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(756
|
)
|
|
|
(1,146
|
)
|
|
|
(12,355
|
)
|
|
|
(6,139
|
)
|
Interest income
|
|
|
2,051
|
|
|
|
289
|
|
|
|
872
|
|
|
|
792
|
|
Other income (expense), net
|
|
|
266
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
12,789
|
|
|
|
(1,200
|
)
|
|
|
4,229
|
|
|
|
26,635
|
|
Income tax expense
|
|
|
(5,018
|
)
|
|
|
(103
|
)
|
|
|
(1,845
|
)
|
|
|
(5,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,771
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
21,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.06
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
38,112,782
|
|
|
|
38,930,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
38,529,270
|
|
|
|
41,532,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-4
ANCESTRY.COM
INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 5, 2007
|
|
|
62,406,411
|
|
|
$
|
62
|
|
|
|
34,340,389
|
|
|
$
|
34
|
|
|
$
|
135,103
|
|
|
$
|
(30
|
)
|
|
$
|
(77,624
|
)
|
|
$
|
57,545
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Elimination of the predecessor equity structure
|
|
|
(62,406,411
|
)
|
|
|
(62
|
)
|
|
|
(34,340,389
|
)
|
|
|
(34
|
)
|
|
|
(135,103
|
)
|
|
|
30
|
|
|
|
77,624
|
|
|
|
(57,545
|
)
|
Investment in the predecessor
|
|
|
|
|
|
|
|
|
|
|
38,045,312
|
|
|
|
38
|
|
|
|
213,569
|
|
|
|
|
|
|
|
|
|
|
|
213,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 6, 2007
|
|
|
|
|
|
$
|
|
|
|
|
38,045,312
|
|
|
$
|
38
|
|
|
$
|
213,569
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
213,607
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,303
|
)
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
38,045,312
|
|
|
$
|
38
|
|
|
$
|
213,646
|
|
|
$
|
1
|
|
|
$
|
(1,303
|
)
|
|
$
|
212,382
|
|
Exercise of stock options, net
|
|
|
|
|
|
|
|
|
|
|
194,948
|
|
|
|
|
|
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
654
|
|
Write-off of deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,634
|
|
|
|
|
|
|
|
|
|
|
|
4,634
|
|
Stock option adjustments affecting goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
Repurchase of common stock and stock awards
|
|
|
|
|
|
|
|
|
|
|
(23,750
|
)
|
|
|
|
|
|
|
(468
|
)
|
|
|
|
|
|
|
|
|
|
|
(468
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,384
|
|
|
|
2,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
38,216,510
|
|
|
$
|
38
|
|
|
$
|
218,669
|
|
|
$
|
|
|
|
$
|
1,081
|
|
|
$
|
219,788
|
|
Exercise of stock options, net
|
|
|
|
|
|
|
|
|
|
|
143,937
|
|
|
|
|
|
|
|
620
|
|
|
|
|
|
|
|
|
|
|
|
620
|
|
Issuance of common stock, net of costs
|
|
|
|
|
|
|
|
|
|
|
4,074,061
|
|
|
|
4
|
|
|
|
47,754
|
|
|
|
|
|
|
|
|
|
|
|
47,758
|
|
Income tax benefit from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,525
|
|
|
|
|
|
|
|
|
|
|
|
5,525
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(18,178
|
)
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on short-term investments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
(41
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,295
|
|
|
|
21,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
42,416,330
|
|
|
$
|
42
|
|
|
$
|
272,513
|
|
|
$
|
(41
|
)
|
|
$
|
22,376
|
|
|
$
|
294,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-5
ANCESTRY.COM
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,771
|
|
|
$
|
(1,303
|
)
|
|
$
|
2,384
|
|
|
$
|
21,295
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,594
|
|
|
|
754
|
|
|
|
10,732
|
|
|
|
10,936
|
|
Amortization of content
|
|
|
4,973
|
|
|
|
432
|
|
|
|
6,267
|
|
|
|
6,997
|
|
Amortization of intangible assets
|
|
|
2,121
|
|
|
|
1,542
|
|
|
|
23,779
|
|
|
|
16,217
|
|
Amortization of deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
871
|
|
|
|
862
|
|
Impairment of content databases
|
|
|
|
|
|
|
|
|
|
|
1,475
|
|
|
|
|
|
Deferred gain on sale-leaseback
|
|
|
(591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
449
|
|
|
|
336
|
|
|
|
1,653
|
|
|
|
(4,763
|
)
|
Stock-based compensation expense
|
|
|
898
|
|
|
|
77
|
|
|
|
4,672
|
|
|
|
5,474
|
|
In-process research and development acquired
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(325
|
)
|
|
|
(1,116
|
)
|
|
|
(389
|
)
|
|
|
(705
|
)
|
Restricted cash
|
|
|
(208
|
)
|
|
|
16
|
|
|
|
2,643
|
|
|
|
472
|
|
Prepaid expenses and other assets
|
|
|
(310
|
)
|
|
|
(279
|
)
|
|
|
(1,732
|
)
|
|
|
(1,012
|
)
|
Income tax receivable
|
|
|
(176
|
)
|
|
|
77
|
|
|
|
93
|
|
|
|
1,072
|
|
Accounts payable and accrued expenses
|
|
|
148
|
|
|
|
5,040
|
|
|
|
(1,004
|
)
|
|
|
1,410
|
|
Deferred revenues
|
|
|
5,849
|
|
|
|
(1,426
|
)
|
|
|
4,448
|
|
|
|
8,533
|
|
Other long-term liabilities
|
|
|
118
|
|
|
|
772
|
|
|
|
(647
|
)
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
31,311
|
|
|
|
6,222
|
|
|
|
55,245
|
|
|
|
67,649
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of content database costs
|
|
|
(10,591
|
)
|
|
|
(1,129
|
)
|
|
|
(8,965
|
)
|
|
|
(9,398
|
)
|
Purchases of property and equipment
|
|
|
(10,572
|
)
|
|
|
(852
|
)
|
|
|
(11,621
|
)
|
|
|
(13,362
|
)
|
Purchases of short-term investments
|
|
|
(44,995
|
)
|
|
|
|
|
|
|
|
|
|
|
(33,372
|
)
|
Proceeds from sale and maturity of short-term investments
|
|
|
75,980
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
Net cash used in acquisition of the predecessor, including
transaction costs
|
|
|
|
|
|
|
(279,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
9,822
|
|
|
|
(281,505
|
)
|
|
|
(20,224
|
)
|
|
|
(56,132
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,681
|
|
|
|
|
|
|
|
654
|
|
|
|
620
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,758
|
|
Principal payments on debt
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
(7,000
|
)
|
|
|
(32,975
|
)
|
Proceeds from issuance of debt, net
|
|
|
|
|
|
|
136,082
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock in connection with
acquisition of the predecessor
|
|
|
|
|
|
|
109,749
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(468
|
)
|
|
|
(100
|
)
|
Reduction in income taxes payable as a result of stock option
exercises
|
|
|
1,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(11,615
|
)
|
|
|
245,831
|
|
|
|
(6,814
|
)
|
|
|
15,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
29,518
|
|
|
|
(29,452
|
)
|
|
|
28,207
|
|
|
|
26,820
|
|
Cash and cash equivalents at beginning of period
|
|
|
11,848
|
|
|
|
41,366
|
|
|
|
11,914
|
|
|
|
40,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
41,366
|
|
|
$
|
11,914
|
|
|
$
|
40,121
|
|
|
$
|
66,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
756
|
|
|
$
|
|
|
|
$
|
10,068
|
|
|
$
|
7,740
|
|
Cash paid for income taxes
|
|
|
3,400
|
|
|
|
|
|
|
|
279
|
|
|
|
11,472
|
|
Supplemental disclosures of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash exchange of equity instruments in acquisition of the
predecessor
|
|
|
|
|
|
|
103,858
|
|
|
|
|
|
|
|
|
|
Unrealized loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
Capitalization of stock-based compensation
|
|
|
3
|
|
|
|
|
|
|
|
9
|
|
|
|
5
|
|
See accompanying notes to consolidated financial statements
F-6
ANCESTRY.COM
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Ancestry.com Inc. is an online family history resource that
derives revenue from providing access to digitized historical
records on a subscription basis. Ancestry, Inc. (the
predecessor) was originally incorporated in Utah in
1983. The predecessor changed its name to Ancestry.com, Inc. in
July 1998 and was reincorporated in Delaware in November 1998.
The predecessors name was changed to MyFamily.com, Inc. in
November 1999 and again in November 2006 to The Generations
Network, Inc. On December 5, 2007, the predecessor was
acquired by Generations Holding, Inc. (Generations
Holding). The company refers to operations of
both the predecessor and the successor periods. Generations
Holding was created for the sole purpose of acquiring The
Generations Network, Inc. and had no prior operations. In July
2009, to better align our corporate identity with the premiere
branding of Ancestry.com, Generations Holding changed its name
to Ancestry.com Inc. (Ancestry, our, or
the successor).
Ancestry is a holding company, and substantially all its
operations are conducted by its wholly-owned subsidiary,
Ancestry.com Operations Inc. and its subsidiaries. The company
derives subscription revenues from providing access to its
services via the companys various Web sites. The company
also offers other products including software, self-publishing
products and advertising services.
Basis
of Presentation
As a result of the acquisition of the predecessor, the recorded
assets, liabilities and stockholders equity reflected in
the financial statements prior to and subsequent to the
transaction date are not necessarily comparable. Periods through
December 5, 2007 reflect the accounts and activity of the
predecessor. Periods from December 6, 2007 reflect the
accounts of the successor. The consolidated statements of
changes in stockholders equity reflect the initial
capitalization of Generations Holding, on the date of the
acquisition of the predecessor. The consolidated financial
statements include the accounts of the company and its wholly
owned subsidiaries and a variable interest entity
(VIE). All significant intercompany accounts and
transactions have been eliminated in consolidation. VIEs are
generally entities that lack sufficient equity to finance their
activities without additional financial support from other
parties or whose equity holders lack adequate decision making
ability. VIEs with which the company is involved are evaluated
to determine the primary beneficiary of the risks and rewards of
the VIE. The primary beneficiary is required to consolidate the
VIEs for financial reporting purposes.
As part of the companys strategic efforts in China and in
order to comply with certain Peoples Republic of China
(PRC) laws relating to foreign entities
ownership of Internet content providers in the PRC, a Hong Kong
wholly-owned subsidiary of the company provided PRC nationals
funding to initially capitalize Beijing Generations Internet
Information Services Co., Ltd. (BGIIS) and continues
to provide PRC nationals additional funding to operate that
entity. BGIIS operates to provide content into the PRC. Without
continued financial support from Ancestry, BGIIS has no means to
generate cash flows sufficient to remain a going concern. The
company has concluded that it is the primary beneficiary of
BGIIS and therefore the company has consolidated the financial
statements of BGIIS as a VIE of the company. BGIIS is not
significant to the financial position, results of operations, or
cash flows of the consolidated company. At December 31,
2009, BGIIS had net assets of approximately $0.1 million.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in the
United States (GAAP) requires management to make
estimates and assumptions that affect the amounts reported and
disclosed in the financial statements and accompanying notes.
Actual results could differ materially from these estimates.
The company evaluates its estimates continually to determine
their appropriateness, including determination of the fair value
of acquired intangible assets and goodwill, the estimated useful
lives of the companys intangible
F-7
assets, determination of fair value of stock options, income
taxes, and allowances for sales returns and uncollectible
accounts receivable. The company bases its estimates on
historical experience and on various assumptions that are
believed to be reasonable, the results of which form the basis
for the amounts recorded within the consolidated financial
statements.
Revenue
Recognition and Cost of Revenues
In general, the company recognizes revenue related to
subscriptions, product sales and advertising when
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered
to the customer, (iii) the fee is fixed or determinable,
and (iv) collectability is reasonably assured. Where
arrangements have multiple elements, revenue is allocated to the
elements based on a relative fair value method and revenue is
recognized based on the companys policy for each
respective element.
The company derives subscription revenues by providing access to
its online historical databases, its private family Web sites,
and its magazine. Subscription revenues are recognized ratably
over the subscription period, ranging from one month to one
year, net of estimated cancellations. Subscription fees are
collected primarily from credit cards through the companys
Web sites at the beginning of the subscription period. Deferred
revenues represent the amounts received in advance of the
subscription period.
Revenues are also generated from product sales of desktop
software, vital records certificates, DNA testing, books,
stand-alone magazines, self-publishing products, other printed
materials, advertising sold to third parties for display in the
companys magazines and Web sites and access to our family
history content on a
pay-per-view
basis. Sales of desktop software sold directly from the
companys Web site are recognized upon shipment, net of
estimated returns, provided that collectability is reasonably
assured and there are no significant performance obligations.
Sales of desktop software sold in the retail channel contains
multiple elements including a subscription to access our online
content. Revenue is allocated to the elements based on their
relative fair value. The elements fair value is determined by
vendor specific objective evidence (VSOE) for the
sale of each element on a standalone basis. The subscription
element is recognized over its estimated subscription period and
other product elements are recognized upon sale of the product.
Product and other revenues are recognized upon shipment of the
product. Advertising revenues are recognized when the magazine
is shipped or based on the number of online impressions
delivered. Shipping fees billed to customers are included in
product and other revenues, and related shipping costs are
included in cost of product and other revenues.
Cost of subscription revenues consists of amortization of
capitalized content database costs, depreciation of web servers,
credit card processing fees, Web site hosting costs, royalty
costs on certain content licensed from others, personnel-related
payroll costs of content database support employees and customer
support employees.
Cost of product and other revenues consist of direct costs of
product goods sold, shipping costs, credit card processing fees,
personnel-related costs of product warehouse personnel,
warehouse storage costs and royalties on products licensed from
others.
The company has established an allowance for sales returns based
on historical subscription cancellations and product returns.
Actual customer subscription cancellations and product returns
are charged against the allowance or deferred revenue to the
extent that revenue has not yet been recognized. This reserve
has been reflected as a reduction of accounts receivable and
revenue. In certain sales transactions, the company is required
to collect and remit sales taxes. The company accounts for sales
tax on a net basis and such sales taxes are not included in
revenues on the consolidated statements of operations.
F-8
The following table summarizes the combined activity for the
allowance for sales returns and the allowance for bad debt (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from Jan. 1,
|
|
|
Period from
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
2007 through
|
|
|
Dec. 6, 2007 through
|
|
|
Dec. 31,
|
|
|
Dec. 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
Balance at beginning of period
|
|
$
|
371
|
|
|
$
|
401
|
|
|
$
|
270
|
|
|
$
|
394
|
|
Provision
|
|
|
1,132
|
|
|
|
5
|
|
|
|
1,531
|
|
|
|
1,472
|
|
Write-offs
|
|
|
(1,102
|
)
|
|
|
(136
|
)
|
|
|
(1,407
|
)
|
|
|
(1,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
401
|
|
|
$
|
270
|
|
|
$
|
394
|
|
|
$
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
Risks and Concentrations
Financial instruments that potentially subject the company to
credit risk consist principally of cash equivalents, short-term
investments and accounts receivable. Cash equivalents are
comprised of money market accounts. Short-term investments at
December 31, 2009 consisted of investments in
U.S. government agency securities. Accounts receivable are
unsecured and include receivables from businesses and individual
customers. No one customer accounted for more than 10% of the
companys revenues during the period from January 1,
2007 through December 5, 2007, the period from
December 6, 2007 through December 31, 2007 and the
years ended December 31, 2008 and 2009. One customer
accounted for 19% of accounts receivable at December 31,
2008 and two customers accounted for 19% and 13% of accounts
receivable at December 31, 2009. The customers that account
for more than 10% of the companys accounts receivable
balances, which are not material as a percentage of revenues,
are businesses with extended payment terms that are responsible
for the sale of various company services and products.
Cash
and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments
with original maturities of three months or less.
Restricted
Cash
Restricted cash consists principally of cash held in escrow from
acquisitions and cash held in an escrow account as collateral
for the companys credit card processor.
Short-Term
Investments
The company determines the appropriate classification of its
investments at the time of purchase and re-evaluates such
designations as of each balance sheet date. All investments and
cash equivalents in the portfolio are classified as
available-for-sale
and are stated at fair market value, with all the associated
unrealized gains and losses reported as a component of
accumulated other comprehensive income (loss). The amortized
cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and
accretion are included in interest income. Realized gains and
losses are included in interest income. The cost of securities
sold is based on the specific identification method. The company
may or may not at a point in time hold securities with stated
maturities greater than one year until maturity. The company
considers these investments as liquid resources available for
current operations when and if needed and therefore would
classify them as current assets unless specifically indentified
as an investment to be held to maturity.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and are
non-interest-bearing. Accounts receivable consists of credit
card charges authorized but not fully processed by the
companys credit card processors and receivables from
businesses resulting from the sale of product, advertising and
earned royalties or revenue share arrangements. The company
maintains an allowance for doubtful accounts to reserve for
potential uncollectible receivables. Allowances are made based
upon a specific review of all significant outstanding invoices.
For those invoices not specifically reserved,
F-9
allowances are provided based upon a percentage of aged
outstanding invoices. In determining these percentages, the
company analyzes its historical collection experience and
current economic trends.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
calculated using the straight-line method over the estimated
useful lives of the assets. The estimated useful lives are three
years for computer equipment, purchased software, and furniture
and fixtures. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the
assets, generally five years. Repairs and maintenance costs are
expensed as incurred. Major renewals and improvements that
extend the useful lives of existing assets are capitalized and
depreciated over their estimated useful lives.
Inventory
Net inventory was $0.3 million and $0.1 million at
December 31, 2008 and 2009, respectively. Inventory is
included in prepaid expenses and other current assets on the
consolidated balance sheets. Inventory consists primarily of
packaged software, books, DNA testing kits and other printed
materials. Inventory is classified as finished goods and is
stated at the lower of cost or market. Cost is determined using
the
first-in,
first-out method. The company maintains an allowance for excess
and obsolete inventory based on historical product sales and
current inventory levels.
Content
Database Costs
Content database costs include the costs to acquire or license
the historical data, costs incurred by our employees or by third
parties to scan the content, and costs to have the content keyed
and indexed in order to be searchable. Among the most utilized
content in the companys databases are the United States
and United Kingdom census records which are ordinarily released
by government entities every ten years. The company amortizes
content database costs on a straight-line basis over ten years
after the content is released for viewing on the companys
Web sites. Costs to renew or extend the term of licensed content
databases are expensed as incurred.
Software
Development Costs
Software development costs associated with software to be sold,
leased, or otherwise marketed are expensed as incurred until
technological feasibility, defined as a working model or
prototype, has been established, at which time such costs are
capitalized until the product is available for general release
to customers. To date, costs incurred between the completion of
a working model and the point at which the product is ready for
general release have been insignificant. Accordingly, the
company has charged all such costs to technology and development
in the period incurred.
Internal and external software development costs associated with
the development of software for internal use are expensed during
the preliminary project stage and capitalized during the
application development stage. The company has capitalized a
minor amount of costs associated with software developed for
internal use. The costs associated with minor enhancements to
internal use software are expensed to technology and development
in the period incurred.
Impairment
of Long-Lived Assets
The company reviews property and equipment and intangible assets
with finite lives for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amounts of an asset
or asset group to future undiscounted cash flows the asset or
asset group is expected to generate. If assets are determined to
be impaired, the impairment to be recognized equals the amount
by which the carrying value of the asset or group of assets
exceeds its fair market value. During the year ended
December 31, 2008, as a result of a change in the
companys content strategy in China, the company recorded
an impairment charge of $1.5 million on its capitalized
Chinese content. The impairment is recorded in cost of
subscription revenues on the statement of operations. There was
no impairment loss recognized in the year ended
December 31, 2009.
F-10
Goodwill
and Other Intangible Assets
Goodwill represents the excess of the purchase price in a
business combination over the fair value of the net tangible and
intangible assets acquired. Goodwill and intangible assets with
indefinite lives are not amortized but rather tested for
impairment at least annually or sooner whenever events or
changes in circumstances indicate that they may be impaired.
Goodwill is the only indefinite lived asset of the company. The
company evaluates its goodwill for impairment annually in the
fourth quarter or when indicators of impairment exist.
Impairment is recognized when the carrying value of goodwill
exceeds the fair value of the reporting unit. As the
consolidated company represents a single reporting unit, the
goodwill carrying value is compared to the enterprise value as a
whole. The annual evaluation of the companys goodwill
resulted in no impairment loss for the years ended
December 31, 2008 and 2009.
Intangible assets with definite lives are amortized over their
estimated useful lives and reviewed for impairment whenever
events or changes in circumstances indicate an assets
carrying value may not be recoverable. The company is currently
amortizing its acquired intangible assets with definite lives on
a straight-line basis over periods ranging from 1 to
10 years except subscriber relationships and contracts
which are amortized on an accelerated basis from 6 to
8 years. Subscriber relationships and contracts are
amortized based on an annual turnover rate, or rate of
attrition, of the subscribers resulting in an accelerated basis
of amortization. This is the same rate of attrition that was
used to determine the fair value of the intangible assets at the
acquisition date.
Income
Taxes
The company uses the asset and liability method of accounting
for income taxes. 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 when it is
more likely than not that some or all of the deferred tax assets
may not be realized.
The company adopted changes issued by the Financial Accounting
Standards Board (FASB) which prescribed a
recognition threshold and measurement attribute for financial
statement recognition and measurement of an uncertain tax
position taken or expected to be taken in a tax return. Under
the guidance, an uncertain income tax position must be
recognized at the largest amount that is more-likely-than-not to
be sustained upon audit by the relevant taxing authority. The
guidance also provides guidance for de-recognition,
classification, interest and penalties, and accounting in
interim periods.
Comprehensive
Income (Loss)
For the period from January 1, 2007 through
December 5, 2007, the period from December 6, 2007
through December 31, 2007, and the years ended
December 31, 2008 and 2009, accumulated other comprehensive
income (loss) includes unrealized gains and losses on short-term
available-for-sale
investments.
The companys results of operations and cash flows are
subject to fluctuations due to changes in foreign currency
exchange rates. The functional currency of the companys
international subsidiaries is the U.S. dollar. The
financial statements of these subsidiaries are translated into
U.S. dollars using period-end or historical rates of
exchange for assets and liabilities and average rates of
exchange for the period for revenues and expenses.
Net foreign currency transaction and translation gains and
(losses) are included in general and administrative expense in
the accompanying consolidated statements of operations and were
approximately $(0.5) million, $0.1 million, $(0.4),
and $0.4 million for the period from January 1, 2007
through December 5, 2007, the period from December 6,
2007 through December 31, 2007, and the years ended
December 31, 2008 and 2009, respectively.
F-11
Stock-Based
Compensation
The company has stock-based compensation plans which allow for
the issuance of stock options and restricted stock to employees,
officers, directors, and consultants. To date the company has
only issued stock options under these plans. The company
amortizes the calculated fair value of all options expected to
vest to stock-based compensation expense on a straight line
basis over the requisite service period. Option fair value is
determined on the date of grant using the Black-Scholes
option-pricing model, which requires several estimates. In
addition, the company estimates expected forfeitures at the
grant date in order to determine the options expected to vest.
There may be adjustments in future periods for actual
forfeitures that differ from what was expected at grant date.
Options issued to non-employees are expensed during the period
that services are provided by the non-employees. Fair value of
the stock-based compensation is measured using the stock price
and other assumptions as of the earlier of the date at which a
commitment for performance by the non-employee to earn the
equity instrument is reached or the non-employees
performance is complete.
Advertising
Advertising costs are expensed as incurred. Total advertising
expenses for the period from January 1, 2007 through
December 5, 2007, the period from December 6, 2007
through December 31, 2007, and the years ended
December 31, 2008 and 2009 were approximately
$25.2 million, $1.4 million, $34.0 million and
$43.6 million, respectively.
Research
and Development
All expenditures for research and development are charged to
technology and development expense as incurred.
Net
Income Per Common Share
Basic net income per share is computed using the
weighted-average number of outstanding shares of common stock
during the period. Diluted net income per share is computed
using the weighted-average number of outstanding shares of
common stock and, when dilutive, potential common shares
outstanding during the period. Potential common shares consist
primarily of incremental shares issuable upon the assumed
exercise of stock options and warrants to purchase common stock
using the treasury stock method. A reconciliation of the
numerator and the denominator used in the calculation of basic
and diluted earnings per share is as follows (in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Basic net income per common share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,384
|
|
|
$
|
21,295
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
38,113
|
|
|
|
38,930
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.06
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,384
|
|
|
$
|
21,295
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
38,113
|
|
|
|
38,930
|
|
Dilutive stock options
|
|
|
416
|
|
|
|
2,603
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of diluted common shares
|
|
|
38,529
|
|
|
|
41,533
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.06
|
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
|
F-12
For the years ended December 31, 2008 and 2009,
5.1 million, and 1.3 million shares subject to stock
options were excluded from the diluted calculation as their
inclusion would have been anti-dilutive.
As a result of the acquisition of the predecessor, the capital
structure of the predecessor is not comparable to that of the
successor. Accordingly net income per common share for the 2007
predecessor and successor periods is not comparable or
meaningful and therefore is not presented.
Recent
Accounting Pronouncements
In June 2009, the FASB issued amended standards for determining
whether to consolidate a variable interest entity. These new
standards amend the evaluation criteria to identify the primary
beneficiary of a VIE and requires ongoing reassessment of
whether an enterprise is the primary beneficiary of the VIE. The
provisions of the new standards are effective for annual
reporting periods beginning after November 15, 2009 and
interim periods within those fiscal years. The adoption of the
new standards will not have an impact on the companys
consolidated financial position, results of operations and cash
flows.
In June 2009, the FASB issued The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles (the Codification) for financial
statements issued for interim and annual periods ending after
September 15, 2009. The Codification establishes a single
source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification does not affect the companys
consolidated financial position, results of operations or cash
flow. Previous references to GAAP standards prior to the
Codification are no longer used in the companys financial
disclosures.
In October 2009, the FASB issued new revenue recognition
standards for arrangements with multiple deliverables. The new
standards permit entities to use managements best estimate
of selling price to value individual deliverables when those
deliverables do not have vendor specific objective evidence of
fair value or when third-party evidence of selling price is not
available. Additionally, these new standards modify the manner
in which the selling price is allocated across the separately
identified deliverables by no longer permitting the residual
method of allocating the selling price. The requirements of
these new standards are to be applied prospectively for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, although early
adoption is permitted. The company does not expect adoption of
these standards will have a material impact on the consolidated
financial position, results of operations or cash flows.
|
|
2.
|
CASH,
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
|
Cash, cash equivalents and short-term investments consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Cash
|
|
$
|
26,616
|
|
|
$
|
5,159
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
13,505
|
|
|
|
61,782
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
40,121
|
|
|
$
|
66,941
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
U.S. agency securities
|
|
$
|
|
|
|
$
|
33,331
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized gains and losses on short-term investments were
not significant at December 31, 2008 and 2009. Gross
realized gains and losses were not significant for the period
from January 1, 2007 through December 5, 2007, the
period from December 6, 2007 through December 31, 2007
and the years ended December 31, 2008 and 2009. As of
December 31, 2009, all U.S. agency securities were in
an unrealized loss position and have been in a loss position for
less than one year.
F-13
The company designates all short-term investments as
available-for-sale.
At December 31, 2009 the company did not hold any
investments with maturities greater than one year.
|
|
3.
|
ACQUISITIONS
AND DISPOSITIONS
|
As discussed in Note 1, Generations Holding acquired all
the outstanding stock of the predecessor in December 2007 for a
total purchase price of approximately $354.8 million. The
acquisition has been accounted for as a purchase of the
predecessors business in accordance with GAAP. The
purchase price consisted of the following (in thousands):
|
|
|
|
|
Cash paid (net of predecessor cash used of $28,712)
|
|
$
|
249,132
|
|
Fair value of successor common stock issued to predecessor
stockholders
|
|
|
95,695
|
|
Transaction costs
|
|
|
1,764
|
|
Fair value of stock options exchanged
|
|
|
8,163
|
|
|
|
|
|
|
Total
|
|
$
|
354,754
|
|
|
|
|
|
|
Cash of $15.3 million was placed in escrow for a period of
twelve months from the acquisition date to partially satisfy any
potential loss contingencies that existed at the acquisition
date, including a breach of any representations or warranties by
the predecessor. The escrow amount has been included in the
purchase price. The fair value of the stock options
(5,740,207 shares underlying the stock options) issued in
exchange for stock options in the predecessor was estimated
using the Black-Scholes option-pricing model utilizing the
following assumptions:
|
|
|
|
|
Risk-free interest rate
|
|
|
2.90
|
%
|
Expected term (in years)
|
|
|
2.0
|
|
Expected stock price volatility
|
|
|
65
|
%
|
Expected dividend yield
|
|
|
|
|
F-14
The total purchase price of $354.8 million was allocated to
the acquired tangible and identifiable intangible assets and
assumed liabilities based on their estimated fair values at the
acquisition date. The excess of the purchase price over the
allocated fair value for tangible and identifiable intangible
assets was recorded as goodwill. As a result of this
transaction, Spectrum Equity Investors V., L.P. and certain of
its affiliates acquired approximately 67% of the companys
outstanding shares. Spectrum and its affiliates objective
is to invest in and build leading companies in the information
services, media and related growth sectors. Generations Holding
acquired the predecessor at a premium (i.e., goodwill) over the
fair value of the net tangible and identified intangible assets
acquired because Spectrum and its affiliates, together with the
other investors in the transaction, believed in the future
growth and prospects of the company and Spectrum believed that
obtaining control of the company would contribute toward the
achievement of its objective of investing in and building
leading companies in the information services, media and related
growth sectors. The allocation of the purchase price was as
follows (in thousands):
|
|
|
|
|
Assets acquired:
|
|
|
|
|
Cash and cash equivalents, restricted cash and investments
|
|
$
|
19,338
|
|
Other current assets
|
|
|
10,483
|
|
Property and equipment
|
|
|
16,017
|
|
Other assets
|
|
|
213
|
|
Acquired intangible assets:
|
|
|
|
|
Capitalized content
|
|
|
45,337
|
|
Subscriber relationships and contracts
|
|
|
35,600
|
|
Core technology
|
|
|
21,700
|
|
Trade name and trademarks
|
|
|
25,700
|
|
In-process technology
|
|
|
1,300
|
|
Goodwill
|
|
|
285,019
|
|
|
|
|
|
|
Total assets
|
|
|
460,707
|
|
Liabilities assumed:
|
|
|
|
|
Deferred revenues
|
|
|
(58,156
|
)
|
Current liabilities
|
|
|
(22,816
|
)
|
Long-term liabilities
|
|
|
(24,981
|
)
|
|
|
|
|
|
Total net assets acquired
|
|
$
|
354,754
|
|
|
|
|
|
|
For tax purposes, the transaction was treated as a stock
acquisition. As a result, assets and liabilities were not
adjusted to fair value for tax purposes. Deductible goodwill of
$18.4 million consists of tax basis goodwill that existed
prior to the transaction, and has been carried over to the
successor.
The company allocated $1.3 million of the purchase price in
the transaction to an in-process research and development
(IPR&D) project that had not yet reached
technological feasibility and has no future alternative use. The
amount allocated to IPR&D has been recorded within
technology and development costs in the companys statement
of operations for the successor period from December 6,
2007 through December 31, 2007. The companys
IPR&D project focuses on search technologies. The valuation
of the project was based on an income approach which discounts
the future net cash flows attributable to the project to
determine the current value.
In June 2007 the company approved a management incentive plan to
provide bonus payments totaling $5.0 million to certain
company executives in the event of a change of control
transaction. Pursuant to the transaction in December 2007,
executives were paid all but approximately $0.3 million,
which was held in escrow and paid out after the one year escrow
period. The company also incurred an additional
$4.5 million of seller costs associated with the
acquisition. The total costs of $9.5 million were expensed
as incurred. In 2008, the company adjusted goodwill by
$0.4 million due to actual expenses incurred being
different than estimates.
At December 31, 2008 and 2009, the company had a liability
of $5.7 million and $1.6 million to be paid to former
stockholders as remaining escrow payments and to former
stockholders who have not submitted the documentation required
for disbursement of funds from the acquisition.
F-15
|
|
4.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
December 31,
|
|
|
|
Lives
|
|
|
2008
|
|
|
2009
|
|
|
Computer equipment
|
|
|
3 years
|
|
|
$
|
21,234
|
|
|
$
|
29,657
|
|
Purchased and internal use software
|
|
|
3 years
|
|
|
|
5,623
|
|
|
|
9,993
|
|
Furniture and fixtures
|
|
|
3 years
|
|
|
|
1,023
|
|
|
|
1,092
|
|
Leasehold improvements
|
|
|
5 years
|
|
|
|
610
|
|
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,490
|
|
|
|
41,513
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(11,486
|
)
|
|
|
(22,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,004
|
|
|
$
|
19,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
INTANGIBLE
ASSETS AND CONTENT DATABASE COSTS
|
The changes in the carrying amounts of goodwill during the year
ended December 31, 2008, were as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
285,019
|
|
Adjustments related to 2007 acquisition
|
|
|
447
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
285,466
|
|
|
|
|
|
|
Intangible assets and content database costs consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
December 31,
|
|
|
|
Lives
|
|
|
2008
|
|
|
2009
|
|
|
Subscriber relationships and contracts
|
|
|
6-8 years
|
|
|
$
|
35,600
|
|
|
$
|
35,600
|
|
Core technology
|
|
|
4-5 years
|
|
|
|
21,700
|
|
|
|
21,700
|
|
Trademarks and trade names
|
|
|
6 years
|
|
|
|
25,700
|
|
|
|
25,700
|
|
Other intangible assets
|
|
|
1 year
|
|
|
|
22
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,022
|
|
|
|
83,022
|
|
Accumulated amortization
|
|
|
|
|
|
|
(25,321
|
)
|
|
|
(41,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
|
|
|
|
$
|
57,701
|
|
|
$
|
41,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized content database costs
|
|
|
10 years
|
|
|
$
|
46,122
|
|
|
$
|
54,863
|
|
Capitalized content database costs not yet placed in service
|
|
|
|
|
|
|
7,793
|
|
|
|
8,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,915
|
|
|
|
63,318
|
|
Accumulated amortization
|
|
|
|
|
|
|
(6,671
|
)
|
|
|
(13,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net content database costs
|
|
|
|
|
|
$
|
47,244
|
|
|
$
|
49,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core technology, trademarks and trade names, other intangible
assets and content database costs are amortized using the
straight-line method over their estimated periods of benefit.
Subscriber relationships and contracts are amortized based on an
annual turnover rate, or rate of attrition, of the subscribers
resulting in an accelerated basis of amortization. The weighted
average amortization period for the definite-lived intangible
assets acquired was 7.1 and 7.3 years for the years ended
December 31, 2008 and 2009, respectively.
As of December 31, 2009, amortization of content database
costs is expected to be $7.0 million, $6.6 million,
$6.3 million, $5.5 million, and $4.6 million for
the years ending December 31, 2010, 2011, 2012, 2013, and
2014 respectively. As of December 31, 2009, amortization of
acquired intangible assets is expected to be $14.7 million,
$13.1 million, $7.3 million $6.2 million and
$0.1 million for the years ending December 31, 2010,
2011, 2012, 2013
F-16
and 2014, respectively. The amortization expense associated with
acquired intangible assets is classified as amortization of
acquired intangible assets in the consolidated statements of
operations.
On December 5, 2007, in connection with the acquisition of
predecessor, the company entered into a secured credit facility
with a number of financial institutions for borrowings up to
$150.0 million including a term loan commitment of
$140.0 million (the Term Loan) and revolving
commitment of up to $10.0 million which can be in the form
of a swingline loan, a revolving loan
and/or a
letter of credit (the Revolving Loans and the Term
Loan collectively are the Credit Facility or
Debt). The company borrowed $140.0 million of
the Term Loan to fund the acquisition. No amounts were
outstanding under the Revolving Loans as of December 31,
2008 and 2009. A loan under the Credit Facility may be in the
form of a (1) base rate loan that bears interest at the
higher of (a) the Federal Funds Rate plus
1/2
of 1%, or (b) the rate of interest in effect as publicly
announced by JPMorgan Chase Bank as its prime rate,
plus a margin of 2.75% or 3.50% based on the companys
consolidated total leverage ratio; or (2) Eurodollar rate
loan that bears interest based on LIBOR plus a margin of 3.75%
to 4.50% based on the companys consolidated total leverage
ratio. The weighted average effective interest rate of the
Credit Facility at December 31, 2008 and 2009 was 7.4% and
4.0%, respectively.
The company is obligated to make quarterly accrued interest and
principal payments on the Term Loan. The principal payments
escalate each fiscal year until the Term Loan matures on
December 5, 2012. The Revolving Loans, if any, are also due
on December 5, 2012. In addition to paying interest on the
Credit Facility, the company pays a commitment fee of 0.50% per
annum to the lenders under the Revolving Loans for the
unutilized commitment. The fee is calculated based on the daily
unutilized commitment and is due quarterly. The company can
terminate or reduce the Revolving Loan commitment at any time
without a termination fee.
The Credit Facility is subject to various mandatory prepayment
terms which include prepayments as a result of certain equity
issuances and prepayments of excess cash, if any, based on a
calculation performed on an annual basis. Included in the
current portion of long-term debt on the balance sheet at
December 31, 2008 is $10.9 million, which was paid in
May 2009 as an excess cash payment in accordance with the terms
of the Credit Facility. In November 2009, the company prepaid
$12.5 million in principal as a mandatory prepayment in
connection with the companys initial public offering.
Included in the current portion of long-term debt on the balance
sheet at December 31, 2009 is $18.6 million due in May
2010 as an excess cash payment. Mandatory prepayments are
applied to Revolving Loans, if any, prior to the outstanding
principal on the Term Loan. The Credit Facility is secured by
all of the present and future tangible and intangible assets of
the company and approximately 65% of the companys stock in
certain of its wholly owned foreign subsidiaries. Foreign
subsidiaries do not guarantee the outstanding Debt. In
connection with the Credit Facility, the company must maintain
certain financial ratio covenants, minimum earnings before
interest, depreciation, amortization, taxes and other
specifically excluded costs and maintain capital and content
expenditures below set maximum levels. As of December 31,
2008 and 2009 the company was in compliance with all debt
covenants.
Debt financing costs of $3.9 million were incurred in
connection with the Credit Facility. These costs are deferred in
other long-term assets on the balance sheet and are being
amortized to interest expense over the period of the Term Loan.
At December 31, 2009, the unamortized debt financing costs
were $2.3 million.
The company uses an interest rate cap agreement to cap the
floating (base) rate of its Credit Facility. In December 2007,
the company entered into an interest rate cap agreement with a
financial institution that participates in the Credit Facility.
The interest rate cap has a notional amount of
$90.0 million of the companys outstanding floating
rate debt of $140.0 million and was purchased in order to
mitigate a portion of the companys exposure to variable
rate interest payments. The company paid $0.1 million for a
6% interest rate cap which expires on December 31, 2010.
The interest rate cap does not qualify for hedge accounting
under current accounting guidance as such, the fair value of the
interest rate cap is recorded as an asset in the financial
statements and changes in fair value are recorded in interest
expense. At December 31, 2008 and 2009 the fair value of
the interest rate cap was de minimis.
On November 1, 2006, the company renegotiated the terms of
its previous revolving line of credit with a financial
institution for up to $25 million, due upon maturity at
September 1, 2009; interest accrued monthly at
F-17
percentages above or below prime or LIBOR based on quarterly
debt ratios; interest was payable monthly for the prime portion
and quarterly for the LIBOR portion. The line was secured by all
the assets of the company and approximately 65% of the
companys stock in certain of its wholly owned foreign
subsidiaries. On December 5, 2007, in connection with the
acquisition of predecessor the revolving line of credit of
$15.0 million plus accrued interest of approximately
$0.1 million was paid in full and the revolving line of
credit was terminated.
As of December 31, 2009, the companys Term Loan had
two tranches of $87.5 million and $12.5 million
outstanding in
3-month
LIBOR at 0.25% plus a margin. Under the Credit Facility, the
3-month
LIBOR tranches and related interest rates reset in March 2010.
Components of long-term debt were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Term loan
|
|
$
|
133,000
|
|
|
$
|
100,025
|
|
Current portion of long-term debt
|
|
|
(21,457
|
)
|
|
|
(28,416
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
111,543
|
|
|
$
|
71,609
|
|
|
|
|
|
|
|
|
|
|
Future contractual maturities of the long-term debt at
December 31, 2009 were as follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
28,416
|
|
2011
|
|
|
11,550
|
|
2012
|
|
|
60,059
|
|
|
|
|
|
|
|
|
$
|
100,025
|
|
|
|
|
|
|
Common
Stock
The companys Board of Directors and stockholders approved
a 1-for-2
reverse stock split of the Companys common stock and an
increase in the authorized common stock from 100 million to
175 million in October, 2009. An amendment to the amended
and restated certificate of incorporation was filed on
October 30, 2009 affecting the
1-for-2
reverse stock split and the increase in authorized stock. All
common share and per share amounts retroactively reflect the
reverse stock split and change in authorized common stock.
On November 4, 2009, the SEC declared effective the
Companys Registration Statement on
Form S-1
for an initial public offering. The offering commenced
immediately thereafter and was completed on November 10,
2009 at a price of $13.50 per share. The company registered and
sold 4,074,074 shares of common stock for an aggregate
purchase price of $55.0 million. The net offering proceeds
received by us after deducting total estimated expenses were
$47.8 million. The companys estimated expenses
incurred of $7.2 million consisted of $3.8 million in
underwriting discounts, fees and commissions and
$3.4 million in other offering expenses.
Preferred
Stock
The company has authorized 5,000,000 shares of preferred
stock that is issuable in series. At December 31, 2008 and
2009, the company has not issued or designated any series or
preferences associated with the preferred stock.
Warrants
In connection with entering into an interactive service
agreement with a vendor in May 2002, the company issued a
warrant to purchase shares of the companys common stock.
In March of 2004, the warrant was amended to provide for a
purchase of 121,176 shares of common stock at an exercise
price of $1.4412 per share. The warrant was exercised in May
2007 in a cashless conversion with 84,019 shares of common
stock issued.
F-18
In connection with obtaining a term loan with a financial
institution in May 2003, the company issued a warrant to
purchase 57,157 shares of common stock at approximately
$0.5248 per share. The warrant was exercised in a cashless
conversion on December 5, 2007 with 51,602 shares of
common stock issued.
In July 2009, the Board of Directors approved the 2009 Stock
Incentive Plan (the 2009 Plan). The 2009 Plan was
effective upon the consummation of the companys initial
public offering, on November 10, 2009. As of
December 31, 2009, 2,120,146 options were available to be
granted under the 2009 Plan; however no stock options were
granted under the 2009 Stock Plan. The 2009 Stock Plan is
subject to automatic annual increase on the first day of each
fiscal year beginning in 2010 and thereafter by a number of
shares of common stock equal to 4% of the number of outstanding
shares of common stock on the last day of the immediately
preceding fiscal year, or such lesser number of shares of common
stock prescribed by the Board of Directors with respect to a
particular calendar year. It is also subject to increase by the
number of shares that cease to be subject to awards under the
other option and incentive plans (other than by reason of
exercise or settlement of the awards to the extent they are
exercised for or settled in vested and non-forfeitable shares of
common stock). In March 2008, the Board of Directors of the
company approved and adopted the Generations Holding, Inc. Stock
Purchase and Option Plan (the 2008 Plan). In
conjunction with the acquisition of the predecessor, the company
issued replacement options to acquire common stock of the
successor in exchange for all issued and outstanding options of
the predecessor with the same option grant prices and terms
including all terms outlined in the 1998 Stock Option Plan as
amended in 2002 (the 1998 Plan), the Executive Stock
Plan (ESP) and the 2004 Stock Option Plan (the
2004 Plan). Holders of stock options pursuant to the
1998 and the ESP Plans along with various employees with change
of control provisions in their individual grants under the 2004
Plan received twelve months of vesting acceleration upon the
acquisition of predecessor. Under these plans the company has
reserved 12,493,436 shares of common stock for future
issuance as of December 31, 2009. The company has no
intentions to issue additional stock options under the 1998
Plan, ESP, 2004 Plan or 2008 Plan.
All options granted pursuant to the 1998 Plan, ESP, the 2004
Plan, the 2008 Plan and the 2009 Plan have a term not greater
than ten years from the date of grant. Options issued generally
vest ratably over four years (25% one year after the grant date
and at a rate of
1/48
per month thereafter). Options generally commence vesting upon
the date of hire or date of grant. The plans allow for the
exercise of options using shares of the companys common
stock that have been held for more than six months. The shares
used to satisfy option exercise prices are netted against option
exercises on the statements of stockholders equity. Prior
to the companys initial public offering, the company
retained a right of first refusal to purchase shares obtained
from the exercise of stock options under stock option plans when
presented with a bona fide offer to acquire the stock from a
third party. The company has exercised its right of first
refusal depending on cash availability and the price obtained
from the bona fide third party offer.
All the plans provide for stock options to be granted to
employees, officers, directors and consultants. A summary of all
the plans stock option activity for the years ended
December 31, 2007, 2008, and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Shares
|
|
Price
|
|
Outstanding at beginning of year
|
|
|
7,279,863
|
|
|
$
|
3.74
|
|
|
|
5,712,204
|
|
|
$
|
4.42
|
|
|
|
8,822,526
|
|
|
$
|
4.88
|
|
Granted
|
|
|
352,750
|
|
|
|
4.70
|
|
|
|
4,188,121
|
|
|
|
5.42
|
|
|
|
1,898,909
|
|
|
|
7.15
|
|
Exercised
|
|
|
(1,496,513
|
)
|
|
|
1.12
|
|
|
|
(194,948
|
)
|
|
|
3.34
|
|
|
|
(143,937
|
)
|
|
|
4.31
|
|
Canceled
|
|
|
(423,896
|
)
|
|
|
4.66
|
|
|
|
(882,851
|
)
|
|
|
4.78
|
|
|
|
(204,208
|
)
|
|
|
5.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
5,712,204
|
|
|
|
4.42
|
|
|
|
8,822,526
|
|
|
|
4.88
|
|
|
|
10,373,290
|
|
|
|
5.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
3,429,111
|
|
|
|
4.30
|
|
|
|
3,996,892
|
|
|
|
4.39
|
|
|
|
6,298,343
|
|
|
|
4.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
4,279,793
|
|
|
|
4.36
|
|
|
|
8,370,492
|
|
|
|
4.86
|
|
|
|
10,181,408
|
|
|
|
5.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
The company estimates the fair value of each option on the date
of grant using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires several estimates
including an estimate of the fair value of common stock. Prior
to November 5, 2009, the date the companys common
stock began trading on a national exchange, the fair value of
common stock had been determined by the Board of Directors at
each grant date based on a variety of factors, including
arms-length sales of the companys common stock,
periodic valuations of the companys common stock, the
companys financial position, historical financial
performance, projected financial performance, valuations of
publicly traded peer companies and the illiquid nature of the
common stock. Since the companys initial public offering,
the fair value of the companys common stock is determined
based on the closing price of the common stock on the stock
option grant date. The weighted average grant date fair value of
options granted during the years ended December 31, 2007,
2008 and 2009 and was $2.50, $2.22, and $3.14, respectively. The
expected term of the options is based on historical analysis of
the companys option lives. The company calculated its
expected volatility based on the volatilities of a peer group of
publicly traded companies. The risk-free interest rate of the
option is based on the U.S. Treasury rate for the expected
term of the option at the time of grant. The following weighted
average assumptions were used in the calculations for the years
ended December 31, 2007, 2008 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Expected volatility
|
|
|
65
|
%
|
|
|
50
|
%
|
|
|
50
|
%
|
Expected term (in years)
|
|
|
4.0
|
|
|
|
4.0
|
|
|
|
4.2
|
|
Weighted average risk-free interest rate
|
|
|
4.7
|
%
|
|
|
2.3
|
%
|
|
|
1.9
|
%
|
Weighted average fair value of the underlying common stock
|
|
$
|
4.70
|
|
|
$
|
5.42
|
|
|
$
|
7.15
|
|
Expected dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008 and 2009, the company had
$8.6 million and $9.6 million, respectively, of total
unrecognized compensation expense, net of estimated forfeitures.
The unrecognized compensation expense is expected to be
recognized over a weighted average period of 2.6 years.
Under accounting guidance for recording stock-based compensation
expense, forfeitures are to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The company estimates
forfeiture rates based on historical forfeitures of its stock
options. The fair value of options vested during 2009 was
$5.7 million. The weighted average remaining contractual
life of options outstanding at December 31, 2009 was
7.1 years. The total intrinsic value of options outstanding
as of December 31, 2008 and 2009 was $5.5 million, and
$90.5 million, respectively. The total intrinsic value of
options exercisable as of December 31, 2008 and 2009 was
$4.4 million and $58.6 million, respectively. The
total intrinsic value of options exercised during the period
from January 1, 2007 through December 5, 2007, the
period from December 6, 2007 through December 31, 2007
and the years ended December 31, 2008 and 2009 was,
$6.2 million, $0, $0.4 million, and $0.4 million,
respectively.
Stock-based compensation was included in the following income
statement captions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
|
through
|
|
|
through
|
|
|
December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
Cost of subscription revenues
|
|
$
|
73
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
96
|
|
Technology and development
|
|
|
260
|
|
|
|
23
|
|
|
|
1,132
|
|
|
|
1,631
|
|
Marketing and advertising
|
|
|
279
|
|
|
|
27
|
|
|
|
254
|
|
|
|
370
|
|
General and administrative
|
|
|
286
|
|
|
|
24
|
|
|
|
3,206
|
|
|
|
3,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
898
|
|
|
$
|
77
|
|
|
$
|
4,672
|
|
|
$
|
5,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company committed to issue fully vested stock options with
an exercise price equal to the fair value of the underlying
common stock at the date of grant for recruiting services
performed by a third party in 2008. The company recorded an
estimated $0.1 million of expense in 2008 based on the
Black-Scholes option-pricing model. The expense was classified
as technology and development expenses on the statement of
operations and as stock-
F-20
based compensation on the statement of cash flows. When the
option was issued in 2009, the company recorded the issuance in
the statement of stockholders equity.
|
|
9.
|
EMPLOYEE
BENEFIT PLANS
|
The company offers a savings plan (the 401(k) Plan)
that qualifies as a deferred compensation plan under
Section 401(k) of the Internal Revenue Code. Under the
401(k) Plan, employees can contribute a percentage of their
compensation not to exceed maximum annual federal limits. The
401(k) Plan also allows for discretionary employer
contributions. Effective January 1, 2008, the company
increased the employer matching contributions from 65% to 70% of
all employee contributions made, with a maximum annual
contribution of $2,100 per participant. The employees
contributions are fully vested, and the companys matching
contributions vest on an annual basis over a
48-month
period, beginning on the employees hire date. The
companys contributions were $0.6 million, de minimis,
$0.7 million, and $0.8 million for the period from
January 1, 2007 through December 5, 2007, the period
from December 6, 2007 through December 31, 2007, and
the years ended December 31, 2008 and 2009, respectively.
The company has a medical and vision benefit plan covering
full-time employees of the company and their dependents. The
plan is a partially self-funded plan under which participant
claims are obligations of the plan. The plan is funded through
employer and employee contributions at a level sufficient to pay
for the benefits provided by the plan. The companys
contributions to the plan were $3.0 million, de minimis,
$2.6 million, and $3.5 million for the period from
January 1, 2007 through December 5, 2007, the period
from December 6, 2007 through December 31, 2007, and
the years ended December 31, 2008 and 2009, respectively.
The plan maintains individual and aggregate stop loss insurance
policies on the medical portion of the plan of $0.2 million
and approximately $4.5 million, respectively, to mitigate
losses. Balances for the incurred but not yet reported claims,
including reported but unpaid claims at December 31, 2008
and 2009, were $0.6 million and $0.5 million,
respectively. The company estimates claims incurred but not yet
reported each month based on its historical experience, and the
company adjusts its accrual to meet the estimated liability.
|
|
10.
|
RELATED-PARTY
TRANSACTIONS
|
The company has an exclusive license and service agreement
related to its DNA product with an affiliated company of one of
its investors. The investors ownership is not material to
the overall equity of the company.
Income (loss) before income taxes consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
|
through
|
|
|
through
|
|
|
December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
12,159
|
|
|
$
|
(1,266
|
)
|
|
$
|
4,336
|
|
|
$
|
26,374
|
|
Foreign
|
|
|
630
|
|
|
|
66
|
|
|
|
(107
|
)
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,789
|
|
|
$
|
(1,200
|
)
|
|
$
|
4,229
|
|
|
$
|
26,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
The income tax (benefit) provision consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
|
through
|
|
|
through
|
|
|
December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
Current income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,210
|
|
|
$
|
441
|
|
|
$
|
|
|
|
$
|
8,577
|
|
State
|
|
|
(173
|
)
|
|
|
1
|
|
|
|
3
|
|
|
|
1,095
|
|
Foreign
|
|
|
180
|
|
|
|
16
|
|
|
|
414
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,217
|
|
|
|
458
|
|
|
|
417
|
|
|
|
10,148
|
|
Deferred income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
246
|
|
|
|
(355
|
)
|
|
|
1,238
|
|
|
|
(4,086
|
)
|
State
|
|
|
555
|
|
|
|
|
|
|
|
190
|
|
|
|
(722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
801
|
|
|
|
(355
|
)
|
|
|
1,428
|
|
|
|
(4,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
5,018
|
|
|
$
|
103
|
|
|
$
|
1,845
|
|
|
$
|
5,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the company recognized a tax
benefit for net operating loss carryforwards of
$4.9 million and $0.3 million for federal and state
purposes, respectively. The company also recognized a benefit of
$0.8 million to tax expense due to changes in state
apportionment factors resulting from enacted legislation
Total income tax expense differs from the amounts computed by
applying the U.S. federal income tax rate of 35% to income
before income tax expense as a result of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
Year Ended
|
|
|
|
through
|
|
|
through
|
|
|
December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
Computed expected tax expense
|
|
$
|
4,476
|
|
|
$
|
(420
|
)
|
|
$
|
1,480
|
|
|
$
|
9,322
|
|
State income taxes, net of federal tax effect
|
|
|
266
|
|
|
|
189
|
|
|
|
199
|
|
|
|
602
|
|
Foreign income taxes
|
|
|
(41
|
)
|
|
|
(7
|
)
|
|
|
452
|
|
|
|
385
|
|
Recognition of net operating loss carryforwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,168
|
)
|
Tax exempt municipal interest
|
|
|
(410
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
Non-deductible acquisition costs
|
|
|
1,024
|
|
|
|
|
|
|
|
(725
|
)
|
|
|
|
|
Other
|
|
|
(297
|
)
|
|
|
372
|
|
|
|
439
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
5,018
|
|
|
$
|
103
|
|
|
$
|
1,845
|
|
|
$
|
5,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
$
|
925
|
|
|
$
|
2,124
|
|
Net operating loss carryforwards U.S.
|
|
|
4,943
|
|
|
|
5,911
|
|
Net operation loss carryforwards Foreign
|
|
|
201
|
|
|
|
488
|
|
Investment in subsidiary
|
|
|
498
|
|
|
|
|
|
Other accruals and reserves
|
|
|
1,378
|
|
|
|
1,472
|
|
Valuation allowance
|
|
|
(201
|
)
|
|
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
7,744
|
|
|
|
9,507
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(31,394
|
)
|
|
|
(26,300
|
)
|
Content in process
|
|
|
(2,071
|
)
|
|
|
(2,161
|
)
|
Depreciation differences
|
|
|
(373
|
)
|
|
|
(2,098
|
)
|
Other accruals and reserves
|
|
|
(34
|
)
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(33,872
|
)
|
|
|
(30,827
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(26,128
|
)
|
|
$
|
(21,320
|
)
|
|
|
|
|
|
|
|
|
|
In assessing whether deferred tax assets will be realized,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. Management believes that
it is more likely than not the company will realize the benefits
of these deductible differences, except for the foreign net
operating losses and has determined that a valuation allowance
is necessary for the foreign net operation losses only.
The company had net operating loss carryforwards of
approximately $27.0 million for state and $2.1 million
for foreign income tax purposes. The state and foreign net
operating carryforwards will expire at various dates beginning
in 2013.
The company provides U.S. income taxes on the earnings of
foreign subsidiaries unless the subsidiaries earnings are
considered permanently reinvested outside the U.S. To the
extent that the foreign earnings previously treated as
permanently reinvested are repatriated, the company would incur
income tax expense on such repatriation, net of any available
deductions and foreign tax credits. As of December 31,
2009, unremitted earnings that are considered to be permanently
invested outside the U.S., and on which no deferred taxes have
been provided, is approximately $0.9 million. The
unrecognized deferred tax liability for these earnings was
approximately $0.3 million.
The total amount of gross unrecognized tax benefits, was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Gross unrecognized tax benefits as of January 1,
|
|
$
|
543
|
|
|
$
|
543
|
|
Decreases related to tax positions taken in prior years
|
|
|
|
|
|
|
(543
|
)
|
Increases related to tax positions taken in current year
|
|
|
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at December 31,
|
|
$
|
543
|
|
|
$
|
563
|
|
|
|
|
|
|
|
|
|
|
If recognized, the unrecognized tax benefit would not have a
significant impact on the companys effective tax rate. The
companys policy is to recognize interest and penalties
related to unrecognized tax benefits as income tax expense.
Accrued interest and penalties related to unrecognized tax
benefits were insignificant as of December 31,
F-23
2008 and were $0.1 million as of December 31, 2009.
The company believes it is reasonably possible that the total
unrecognized tax benefits will increase within 12 months of
the reporting date; however the company is not currently able to
quantify the amount of such change.
The company files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. With
few exceptions, the company is no longer subject to
U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years prior to 1996.
|
|
12.
|
FAIR
VALUE MEASUREMENTS
|
Effective January 1, 2008, the company adopted changes made
to GAAP for fair value. Fair value is based on 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. In order to increase consistency and
comparability in fair value measurements, the new accounting
guidance establishes a fair value hierarchy that prioritizes
observable and unobservable inputs used to measure fair value
into three broad levels. These levels, in order of highest
priority to lowest priority, are described below:
Level 1: Quoted prices (unadjusted) in
active markets that are accessible at the measurement date for
assets or liabilities.
Level 2: Observable prices that are based
on inputs not quoted on active markets, but corroborated by
market data.
Level 3: Unobservable inputs are used
when little or no market data is available.
Our cash equivalents and short-term investments are classified
within Level 1 and out interest rate cap is classified
Level 2 due to readily available market prices or
alternative pricing sources utilizing market observable inputs.
The following table summarizes the financial instruments of the
company at fair value based on the valuation approach applied to
each class of security as of December 31, 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting
|
|
|
|
|
|
|
Date Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
13,505
|
|
|
$
|
13,505
|
|
|
$
|
|
|
|
$
|
|
|
Interest rate cap
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,507
|
|
|
$
|
13,505
|
|
|
$
|
2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the financial instruments of the
company at fair value based on the valuation approach applied to
each class of security as of December 31, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at Reporting
|
|
|
|
|
|
|
Date Using
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Balance at
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
61,782
|
|
|
$
|
61,782
|
|
|
$
|
|
|
|
$
|
|
|
Short-term investments
|
|
|
33,331
|
|
|
|
33,331
|
|
|
|
|
|
|
|
|
|
Interest rate cap
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
95,114
|
|
|
$
|
95,113
|
|
|
$
|
1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
The carrying amounts reported in the financial statements for
accounts receivable and accounts payable approximate their fair
values because of the immediate or short-term maturities of
these financial instruments. The carrying value of long-term
debt approximates fair value based on interest rates currently
available to the company for debt with similar terms, at
December 31, 2008 and 2009.
|
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
The company has entered into noncancelable operating leases for
facilities and certain equipment. Rent expense for operating
leases with escalating lease payment terms is recognized on a
straight-line basis over the lives of the related leases.
The following is a schedule by year of future minimum lease
payments of noncancelable operating leases at December 31,
2009 (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2010
|
|
$
|
2,420
|
|
2011
|
|
|
2,305
|
|
2012
|
|
|
1,980
|
|
2013
|
|
|
1,591
|
|
2014
|
|
|
1,622
|
|
Thereafter
|
|
|
2,211
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
12,129
|
|
|
|
|
|
|
Rental expense for operating leases was approximately
$2.4 million, $0.2 million, $2.2 million, and
$2.4 million for the period from January 1, 2007
through December 5, 2007, the period from December 6,
2007 through December 31, 2007, and the years ended
December 31, 2008 and 2009, respectively. The company
exited one of its leased facilities in May 2007 and was not able
to sublease the facility and did not believe it would have been
able to sublease the facility for the remaining lease term. As a
result, the company recorded $0.6 million in the period
from January 1, 2007 through December 5, 2007 as rent
expense for the remaining minimum payments required until the
first option to terminate the lease agreement plus an early
termination fee. In October 2008, the company was able to exit
the lease prior to the first option date to terminate the lease
as the lessor found a new lessee, $0.1 million of remaining
lease termination liability was released at that time. The
company leases a portion of its facilities to third parties
under noncancelable lease arrangements. Lease payments received
for the period from January 1, 2007 through
December 5, 2007, the period from December 6, 2007
through December 31, 2007, the years ended
December 31, 2008 and 2009 were de minimis.
The company has entered into agreements with certain vendors
requiring the company to make royalty payments based on
specified future product sales or relative online page views.
Products include certain books, proprietary genealogical
information, content databases, and a search engine placed on CD
ROMs. Royalty expenses were $2.0 million,
$0.2 million, $1.4 million, and $1.4 million for
the period from January 1, 2007 through December 5,
2007, the period from December 6, 2007 through
December 31, 2007, and the years ended December 31,
2008 and 2009, respectively. Royalty expenses are included as a
cost of subscription revenues and cost of product revenues in
the accompanying statements of operations.
On May 1, 2006 the company entered into a sale-leaseback
transaction with a third party in which the company sold its
corporate office building for $18.6 million. As a result of
the sale-leaseback the company was recognizing the gain on the
sale of the building of $5.9 million as a reduction of rent
expense over the term of the new lease agreement. The
unrecognized amount was recorded as a deferred gain on
sale-leaseback and was stated as a liability on the consolidated
balance sheet as of December 31, 2006. The company entered
into a
10-year
operating lease as part of the transaction with estimated annual
lease payments beginning at approximately $1.4 million and
increasing 2% per annum. As a result of the acquisition as
discussed in Note 1, the deferred gain was eliminated and
is no longer being offset against rent expense.
F-25
The company is involved in various legal proceedings that have
arisen in the ordinary course of business. While the ultimate
results of these matters cannot be predicted with certainty,
management does not expect them to have a material adverse
effect on the financial position and results of operations or
liquidity of the company.
|
|
14.
|
GEOGRAPHIC
INFORMATION
|
Operating segments are defined as components of an enterprise
for which separate financial information is available and
evaluated regularly by the chief operating decision-maker, or
decision making group, in deciding how to allocate resources and
in assessing performance. For the period from January 1,
2007 through December 5, 2007, the period from
December 6, 2007 through December 31, 2007, and the
years ended December 31, 2008 and 2009, the company was
organized as, and operated in, one reportable segment. The chief
operating decision maker, or decision making group, review
financial information on a consolidated basis, accompanied by
disaggregated information of subscription revenue by geographic
region for purposes of allocating resources and evaluating
performance. The companys foreign offices conduct
marketing and support activities. Subscription revenues were
attributed by geographic location based on the location of the
customer. The companys assets were primarily located in
the United States and not allocated to any specific region.
The following presents subscription revenue by geographic region
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
Successor
|
|
|
|
Period from
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
Jan. 1, 2007
|
|
|
Dec. 6, 2007
|
|
|
|
|
|
|
|
|
|
through
|
|
|
through
|
|
|
Year Ended December 31,
|
|
|
|
Dec. 5, 2007
|
|
|
Dec. 31, 2007
|
|
|
2008
|
|
|
2009
|
|
|
United States
|
|
$
|
106,101
|
|
|
$
|
8,633
|
|
|
$
|
134,112
|
|
|
$
|
156,150
|
|
United Kingdom
|
|
|
27,181
|
|
|
|
2,321
|
|
|
|
33,223
|
|
|
|
34,402
|
|
All other countries
|
|
|
7,859
|
|
|
|
738
|
|
|
|
14,056
|
|
|
|
17,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total subscription revenues
|
|
$
|
141,141
|
|
|
$
|
11,692
|
|
|
$
|
181,391
|
|
|
$
|
207,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluated subsequent events through February 26, 2010 in
connection with the Annual Report on
Form 10-K
filed with the SEC.
F-26
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.
Dated: February 26, 2010
Ancestry.com Inc.
Timothy Sullivan
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this Annual Report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Timothy
Sullivan
Timothy
Sullivan
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Howard
Hochhauser
Howard
Hochhauser
|
|
Chief Financial Officer (Principal Financial and Accounting
Officer)
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Victor
Parker
Victor
Parker
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Benjamin
Spero
Benjamin
Spero
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Charles
M. Boesenberg
Charles
M. Boesenberg
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ David
Goldberg
David
Goldberg
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Elizabeth
Nelson
Elizabeth
Nelson
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
/s/ Thomas
Layton
Thomas
Layton
|
|
Director
|
|
February 26, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation
|
|
S-1/A
|
|
333-160986
|
|
Nov. 2, 2009
|
|
|
3
|
.2
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws
|
|
S-1/A
|
|
333-160986
|
|
Oct. 20, 2009
|
|
|
3
|
.2
|
|
|
|
4
|
.1
|
|
Form of Common Stock Certificate
|
|
S-1/A
|
|
333-160986
|
|
Oct. 6, 2009
|
|
|
4
|
.1
|
|
|
|
10
|
.1
|
|
MyFamily.com, Inc. 1998 Stock Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.1
|
|
|
|
10
|
.2
|
|
MyFamily.com, Inc. 2004 Stock Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.2
|
|
|
|
10
|
.3
|
|
MyFamily.com, Inc. Executive Stock Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.3
|
|
|
|
10
|
.4
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.4
|
|
|
|
10
|
.5
|
|
Ancestry.com Inc. 2009 Stock Incentive Plan.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.5
|
|
|
|
10
|
.6
|
|
MyFamily.com, Inc. 1998 Stock Plan Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.6
|
|
|
|
10
|
.7
|
|
MyFamily.com, Inc. 2004 Stock Plan Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.7
|
|
|
|
10
|
.8
|
|
MyFamily.com, Inc. Executive Stock Plan Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.8
|
|
|
|
10
|
.9
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.9
|
|
|
|
10
|
.10
|
|
Generations Holding, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement for
Non-U.S.
Employees.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.10
|
|
|
|
10
|
.11
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Restricted Stock Units.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.11
|
|
|
|
10
|
.12
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Nonqualified Stock Option.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.12
|
|
|
|
10
|
.13
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Incentive Stock Options.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.13
|
|
|
|
10
|
.14
|
|
Registration Rights Agreement, by and among Generations Holding,
Inc., certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.14
|
|
|
|
10
|
.15
|
|
Stockholders Agreement, by and among Generations Holding, Inc.,
certain Spectrum Group Stockholders and certain Other
Stockholders, dated December 5, 2007.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.15
|
|
|
|
10
|
.16
|
|
Credit and Guaranty Agreement, by and among The Generations
Network, Inc., certain guarantors and certain lending parties,
dated December 7, 2007.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.16
|
|
|
|
10
|
.17
|
|
First Amendment to Credit and Guaranty Agreement, dated
March 31, 2008.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.17
|
|
|
|
10
|
.18
|
|
Second Amendment to Credit and Guaranty Agreement, dated
July 16, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
|
|
|
|
|
|
Exhibit
|
|
Filed
|
Number
|
|
Exhibit Description
|
|
Form
|
|
File No.
|
|
Filing Date
|
|
Number
|
|
Herewith
|
|
|
10
|
.19
|
|
Form of Indemnification Agreement to be entered into with each
director and executive officer.
|
|
S-1/A
|
|
333-160986
|
|
Oct. 20, 2009
|
|
|
10
|
.19
|
|
|
|
10
|
.20
|
|
Employment Letter by and between Timothy Sullivan and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.20
|
|
|
|
10
|
.21
|
|
Employment Letter by and between Howard Hochhauser and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.21
|
|
|
|
10
|
.22
|
|
Employment Letter by and between Joshua Hanna and Ancestry.com
Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.22
|
|
|
|
10
|
.23
|
|
Employment Letter by and between David Rinn and Ancestry.com
Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.23
|
|
|
|
10
|
.24
|
|
Employment Letter by and between William Stern and Ancestry.com
Inc., dated June 29, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.24
|
|
|
|
10
|
.25
|
|
Employment Letter by and between Christopher Tracy and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.25
|
|
|
|
10
|
.26
|
|
Employment Letter by and between Andrew Wait and Ancestry.com
Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.26
|
|
|
|
10
|
.27
|
|
Employment Letter by and between Michael Wolfgramm and
Ancestry.com Inc., dated July 20, 2009.
|
|
S-1/A
|
|
333-160986
|
|
Sept. 15, 2009
|
|
|
10
|
.27
|
|
|
|
10
|
.28
|
|
Ancestry.com Inc. Form of Grant Notice for 2009 Stock Incentive
Plan Nonqualified Stock Options for
Non-Employee
Directors.
|
|
S-1/A
|
|
333-160986
|
|
Nov. 2, 2009
|
|
|
10
|
.28
|
|
|
|
10
|
.29
|
|
Generations Holdings, Inc. 2008 Stock Purchase and Option Plan
Stock Option Agreement for non-employee Directors.
|
|
S-1/A
|
|
333-160986
|
|
Nov. 2, 2009
|
|
|
10
|
.29
|
|
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.1*
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
* |
|
These certifications are not deemed filed with the SEC and are
not to be incorporated by reference in any filing we make under
the Securities Act of 1933 or the Securities Exchange Act of
1934, irrespective of any general incorporation language in any
filings. |
|
|
|
Indicates a management contract or compensatory plan |