NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
QuinStreet, Inc. (the Company) is an online performance marketing company. The Company was incorporated in
California on April 16, 1999 and reincorporated in Delaware on December 31, 2009. The Company provides vertically oriented customer acquisition programs for its clients. The Company also provides hosted solutions for direct selling
companies. The corporate headquarters are located in Foster City, California, with additional offices throughout the United States, Brazil and India.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. These estimates are based
on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenue from two
sources: Direct Marketing Services (DMS) and Direct Selling Services (DSS). DMS revenue, which constituted more than 99% in fiscal year 2013, 2012 and 2011, is derived from fees which are earned through the delivery of
qualified leads, clicks, calls, customers and, to a lesser extent, display advertisements (impressions). The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectability is reasonably assured. Delivery is deemed to have occurred at the time a qualified lead, click, call, customer or impression is delivered to the client provided that no significant obligations remain.
The Company allocates revenue in an arrangement using the estimated selling price (ESP) of deliverables if it does not have
vendor-specific objective evidence (VSOE) of selling price based on historical stand-alone sales or third-party evidence (TPE) of selling price. Due to the unique nature of some of its multiple deliverable revenue
arrangements, the Company may not be able to establish selling prices based on historical stand-alone sales or third party evidence, therefore the Company may use its best estimate to establish selling prices for these arrangements under the new
standard. The Company establishes best estimates within a range of selling prices considering multiple factors including, but not limited to, class of client, size of transaction, available media inventory, pricing strategies and market conditions.
The Company believes the use of the best estimate of selling price allows revenue recognition in a manner consistent with the underlying economics of the transaction.
From time to time, the Company may agree to credit a client for certain leads, clicks, calls, customers or impressions if they fail to meet the contractual or other guidelines of a particular client. The
Company has established a sales reserve based on historical experience. To date, such credits have been within managements expectations.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For a portion of its revenue, the Company has agreements with providers of online media
or traffic, publishers, used in the generation of leads, clicks, calls and customers. The Company receives a fee from its clients and pays a fee to publishers as a portion of revenue generated or on a cost per lead, cost per click or cost per
thousand impressions basis. The Company is the primary obligor in the transaction. As a result, the fees paid by the Companys clients are recognized as revenue and the fees paid to its publishers are included in cost of revenue.
DSS revenue, which constituted less than 1% in fiscal year 2013, 2012 and 2011, comprises (i) set-up and professional services fees
and (ii) usage fees. Set-up and professional service fees that do not provide stand-alone value to a client are recognized over the contractual term of the agreement or the expected client relationship period, whichever is longer, effective
when the application reaches the go-live date. The Company defines the go-live date as the date when the application enters into a production environment or all essential functionalities have been delivered. Usage fees are
recognized on a monthly basis as earned.
Deferred revenue is comprised of contractual billings in excess of recognized
revenue and payments received in advance of revenue recognition.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and
cash equivalents, marketable securities and accounts receivable. The Companys investment portfolio consists of liquid high-quality fixed income US government or municipal securities, certificates of deposit with financial institutions and
money market funds. Cash and certificates of deposit are deposited with financial institutions that management believes are creditworthy. To date, the Company has not experienced any losses on its investment portfolio.
The Companys accounts receivable are derived from clients located principally in the United States. The Company performs ongoing
credit evaluation of its clients, does not require collateral, and maintains allowances for potential credit losses on client accounts when deemed necessary. No client accounted for 10% or more of net accounts receivable or net revenue for either
fiscal year 2013 or 2012.
Fair Value of Financial Instruments
The Companys financial instruments consist principally of cash equivalents, marketable securities, accounts receivable, accounts
payable, acquisition-related promissory notes, an interest rate swap, short term payables, and a term loan. The fair value of the Companys cash equivalents is determined based on quoted prices in active markets for identical assets for its
money market funds; and quoted prices for similar instruments in active markets for its U.S municipal securities and certificates of deposits that mature within 90 days. The recorded values of the Companys accounts receivable and accounts
payable approximate their current fair values due to the relatively short-term nature of these accounts. The fair value of acquisition-related promissory notes and short term payables approximate their recorded amounts as the interest rates on
similar financing arrangements available to the Company at June 30, 2013 approximate the interest rates implied when these acquisition-related promissory notes and short term payables were originally issued and recorded. The fair value of the
interest rate swap is based upon fair value quotes from the issuing bank and the Company assesses the quotes for reasonableness by comparing them to the present values of expected cash flows. The present value approach is based on observable market
interest rate curves that are commensurate with the terms of the interest rate swaps. The carrying value represents the fair value of the swaps, as adjusted for any non-performance risk associated with the Company at June 30, 2013. The Company
believes that the fair value of the term loan approximates its recorded amount at June 30, 2013 as the interest rate on the term loan is variable and is based on market interest rates and after consideration of default and credit risk.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Cash
equivalents consist primarily of money market funds, municipal securities and certificates of deposit with original maturities of three months or less.
Property and Equipment
Property and equipment are stated at cost
less accumulated depreciation and amortization, and are depreciated on a straight-line basis over the estimated useful lives of the assets, as follows:
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Furniture and fixtures
|
|
3 to 5 years
|
Leasehold improvements
|
|
the shorter of the lease term or the estimated useful lives of the improvements
|
Internal Software Development Costs
The Company incurs costs to develop software for internal use. The Company expenses all costs that relate to the planning and
post-implementation phases of development as product development expense. Costs incurred in the development phase are capitalized and amortized over the products estimated useful life if the product is expected to have a useful life beyond six
months. Costs associated with repair or maintenance of existing sites or the developments of website content are included in cost of revenue in the accompanying statements of operations. The Companys policy is to amortize capitalized internal
software development costs on a product-by-product basis using the straight-line method over the estimated economic life of the application, which is generally two years. The Company capitalized $2.5 million, $1.9 million, and $1.8 million in fiscal
years 2013, 2012 and 2011. Amortization of internal software development costs is reflected in cost of revenue.
Goodwill
Goodwill is tested for impairment at the reporting unit level on an annual basis and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Application
of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of reporting units include estimating future cash flows and determining appropriate discount rates, growth rates, an appropriate control premium and other assumptions. Changes in these
estimates and assumptions could materially affect the determination of fair value for each reporting unit which could trigger impairment.
The Company has determined that DMS and DSS constitute two separate reporting units. The Companys public market capitalization sustained a decline after December 31, 2012, to a value below the
net book carrying value of its equity. As a result, the Company determined that this triggered the necessity to conduct an interim goodwill impairment test.
The Company first tested the long-lived assets related to the DMS reporting unit as of December 31, 2012 and, based on the undiscounted cash flows, determined that these assets were not impaired.
Additionally, a two-step process was then required to test goodwill impairment. To estimate the fair value for step one, the Company utilized a combination of income and market approaches evenly weighted to estimate the fair value of the reporting
units. The income approach involves discounting future estimated cash flows. The discount rate used is
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the value-weighted average of the reporting units estimated cost of equity and debt (cost of capital) derived using, both known and estimated, customary market metrics. The
Company performed sensitivity tests with respect to growth rates and discount rates used in the income approach. In applying the market approach, valuation multiples are derived from historical and projected operating data of selected peer
companies; evaluated and adjusted, if necessary, based on the Companys strengths and weaknesses relative to the selected peer companies; and applied to the appropriate historical and/or projected operating data to arrive at a fair value.
The Company completed step one of the impairment analysis for each of its reporting units and concluded that, as of
December 31, 2012, the fair value of its DMS reporting unit was below its carrying value, including goodwill. As such, step two of the impairment test was initiated to determine the amount of the impairment by comparing the implied fair value
of the reporting units goodwill with its carrying value. The Company recorded an estimated goodwill impairment charge of $92.4 million in the second quarter of fiscal year 2013. The Company completed the second step of the goodwill impairment
test as described above in the third quarter of fiscal year 2013. The completion of this second step did not result in an adjustment to the goodwill impairment charge previously recorded in the second quarter of fiscal year 2013.
The Company re-evaluated goodwill for impairment as part of its annual impairment test during the quarter ending June 30, 2013 and
determined that there was no indicator of additional impairment for either the DMS or DSS reporting units.
Long-Lived
Assets
The Company evaluates long-lived assets, such as property and equipment and purchased intangible assets with
finite lives, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company applies judgment when assessing the fair value of the assets based on the undiscounted future
cash flows the assets are expected to generate and recognizes an impairment loss if estimated undiscounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than
the carrying value of the asset. When the Company identifies an impairment, it reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market
values. As mentioned in the Goodwill section above, the Companys public market capitalization sustained a decline after December 31, 2012, to a value below the net book carrying value of its equity. As such, the Company tested its
long-lived assets related to the DMS reporting unit as of December 31, 2012 and, based on the undiscounted cash flows, determined that these assets were not impaired. The Company re-evaluated its long-lived assets for impairment as part of its
annual impairment test during the quarter ending June 30, 2013 and determined that there was no indicator of impairment.
Advertising Costs
The Company expenses advertising costs as they are incurred. The Company did not incur any advertising costs for fiscal year 2013. Advertising costs were $0.2 million for both fiscal years 2012 and 2011.
Income Taxes
The Company accounts for income taxes using an asset and liability approach to record deferred taxes. The Companys deferred income tax assets represent temporary differences between the financial
statement carrying amount and the tax basis of existing assets and liabilities that will result in deductible amounts in future years. Based on estimates, the carrying value of the Companys net deferred tax assets assumes that it is more
likely than not that the Company will be able to generate sufficient future taxable income in the respective tax jurisdictions. The Companys judgments regarding future profitability may change due to future market conditions, changes in
U.S. or international tax laws and other factors.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Foreign Currency Translation
The Companys foreign operations are subject to exchange rate fluctuations. The majority of the Companys sales and expenses are
denominated in U.S. dollars. The functional currency for the majority of the Companys foreign subsidiaries is the U.S. dollar. For these subsidiaries, assets and liabilities denominated in foreign currency are remeasured into
U.S. dollars at current exchange rates for monetary assets and liabilities and historical exchange rates for nonmonetary assets and liabilities. Net revenue, cost of revenue and expenses are generally remeasured at average exchange rates in
effect during each period. Gains and losses from foreign currency remeasurement are included in other income (expense), net. Certain foreign subsidiaries designate the local currency as their functional currency. For those subsidiaries, the assets
and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the period. The foreign currency translation adjustments are included
in accumulated other comprehensive loss as a separate component of stockholders equity. Foreign currency transaction gains or losses are recorded in other income (expense), net and were not material for any period presented.
Comprehensive Income
Comprehensive income consists of two components, net (loss) income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under GAAP
are recorded as an element of stockholders equity but are excluded from net (loss) income. The Companys comprehensive income (loss) and accumulated other comprehensive loss consists of foreign currency translation adjustments from those
subsidiaries not using the U.S. dollar as their functional currency, unrealized gains and losses on marketable securities categorized as available-for-sale and unrealized gains and losses on the interest rate swap. Total accumulated other
comprehensive loss is displayed as a separate component of stockholders equity.
Derivative Instrument
During the third quarter of fiscal year 2012, the Company entered into an interest rate swap agreement to hedge the
interest rate exposure relating to its borrowing under its term loan. The Company does not speculate using derivative instruments. The Company entered into this derivative instrument arrangement solely for the purpose of risk management.
The current and noncurrent portion of the interest rate swap is recorded in accrued liabilities and other liabilities, noncurrent,
respectively, on the consolidated balance sheets at fair value based upon quoted market prices. Changes in the fair value of this interest rate swap are recorded in other comprehensive income (loss) because the Company has designated the swap as a
cash flow hedge. Gains or losses on the interest rate swap as reported in other comprehensive income (loss) are classified to interest expense in the period the hedged item affects earnings. If the term loan ceases to exist, any associated amounts
reported in other comprehensive income (loss) are reclassified to earnings at that time. Any hedge ineffectiveness is recognized immediately in earnings in the current period. Refer to Note 9, Debt, for additional information regarding the
Companys credit facility and interest rate swap.
Loss Contingencies
The Company is subject to the possibility of various loss contingencies arising in the ordinary course of business. Management considers
the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that
an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to its management to determine whether such accruals should be adjusted and
whether new accruals are required.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
From time to time, the Company is involved in disputes, litigation and other legal
actions. The Company records a charge equal to at least the minimum estimated liability for a loss contingency only when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates
that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (ii) the range of loss can be reasonably estimated. The actual liability in any such matters may be materially
different from the Companys estimates, which could result in the need to adjust the liability and record additional expenses.
Stock-Based Compensation
The Company measures and records the
expense related to stock-based transactions based on the fair values of stock-based payment awards, as determined on the date of grant. To estimate the fair value of stock options, the Company selected the Black-Scholes option pricing model. In
applying the Black-Scholes option pricing model, the Companys determination of the fair value of the stock option is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not
limited to, the Companys expected stock price volatility over the term of the stock options and the employees actual and projected stock option exercise and pre-vesting employment termination behaviors. The fair value of restricted stock
units is determined based on the closing price of the Companys common stock on the date of grant.
For awards with
graded vesting the Company recognizes stock-based compensation expense over the requisite service period using the straight-line method, based on awards ultimately expected to vest. The Company estimates future forfeitures at the date of grant and
revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Refer to Note 11, Stock Benefit Plans, for additional information regarding stock-based compensation.
401(k) Savings Plan
The Company sponsors a 401(k) defined contribution plan covering all U.S. employees. There were no employer contributions under this plan for fiscal years 2013, 2012 or 2011.
Recent Accounting Pronouncements
In September 2011, the FASB issued an update to the accounting standard for goodwill. The revised standard update allows entities to use a qualitative approach to test goodwill for impairment. It permits
an entity to first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the
two-step goodwill impairment test. The Company adopted this accounting standard update during the second quarter of fiscal 2013 as a result of its market capitalization sustaining a significant decline subsequent to the quarterly period ended
December 31, 2012. The Company determined that it was more-likely-than-not that the fair value of one of its reporting units was less than the carrying amount. As a result, the two-step impairment test related to goodwill was performed as of
December 31, 2012. Refer to Note 2, Summary of Significant Accounting Policies, for additional information regarding the two-step impairment test related to goodwill.
In July 2012, the FASB issued an update to the accounting standard for intangibles. The revised standard update allows entities to use a qualitative approach to test indefinite-lived intangible assets for
impairment. It permits an entity to first perform a qualitative assessment to determine whether it is more-likely-than-not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is
the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. The
Company plans to adopt this accounting standard update by the fourth quarter of fiscal 2014 and does not believe that the adoption will have a material effect on the Companys consolidated financial statements.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2013, the FASB issued an update to the accounting standard for accumulated
other comprehensive income (loss). The revised standard update requires entities to present information about significant items reclassified out of accumulated other comprehensive income (loss) by component either on the face of the statement where
net (loss) income is presented or as a separate disclosure in the notes to the financial statements. This accounting standard update will become effective for the Company in the first quarter of fiscal year 2014.
In July 2013, the FASB issued a new accounting standard update on the financial presentation of unrecognized tax benefits. The new
guidance provides that a liability related to an unrecognized tax benefit would be presented as reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required
or expected in the event the uncertain tax position is disallowed. The new guidance becomes effective July 1, 2015 for the Company and it should be applied prospectively to unrecognized tax benefits that exist at the effective date, although
retrospective application is permitted. The Company is currently assessing the impacts of this new guidance.
3. Net (Loss) Income Attributable to Common Stockholders and Net (Loss) Income per Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of shares of
common stock outstanding during the period. Diluted net (loss) income per share is computed by using the weighted-average number of shares of common stock outstanding, including potential dilutive shares of common stock assuming the dilutive effect
of outstanding stock options and restricted stock units using the treasury stock method.
The following table presents the
calculation of basic and diluted net (loss) income per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands, except
per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(67,372
|
)
|
|
$
|
13,001
|
|
|
$
|
27,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing basic net (loss) income per share
|
|
|
42,816
|
|
|
|
45,846
|
|
|
|
46,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing basic net (loss) income per share
|
|
|
42,816
|
|
|
|
45,846
|
|
|
|
46,222
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
1,004
|
|
|
|
2,845
|
|
Restricted stock units
|
|
|
|
|
|
|
9
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in computing diluted net (loss) income per share
|
|
|
42,816
|
|
|
|
46,859
|
|
|
|
49,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.57
|
)
|
|
$
|
0.28
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
(1)
|
|
$
|
(1.57
|
)
|
|
$
|
0.28
|
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities excluded from weighted average shares used in computing diluted net (loss) income per share because the effect would
have been anti-dilutive:
(2)
|
|
|
9,417
|
|
|
|
6,749
|
|
|
|
2,689
|
|
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1)
|
Diluted EPS does not reflect any potential common stock relating to stock options or restricted stock units due to net loss incurred for the year ended
June 30, 2013. The assumed issuance of any additional shares would be anti-dilutive.
|
(2)
|
These weighted shares relate to anti-dilutive stock options and restricted stock units as calculated using the treasury stock method and could be
dilutive in the future.
|
4. Fair Value Measurements and Marketable Securities
Fair Value Measurements
Fair value is defined as the price that would be received on sale of an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the
measurement date. The FASB has established a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entitys
own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to
unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under the guidance for fair value measurement are described below:
Level 1 Inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Pricing inputs are based upon quoted prices in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement date. The valuations are based on quoted prices of the underlying security that are readily and regularly available in an active market, and accordingly, a significant degree of
judgment is not required. As of June 30, 2013 and 2012, the Company used Level 1 assumptions for its money market funds.
Level 2 Pricing inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. As of June 30, 2013 and 2012, the Company
used Level 2 assumptions for its U.S. municipal securities, certificates of deposits, acquisition-related promissory notes, term loan, and interest rate swap.
Level 3 Pricing inputs are generally unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the investment. The inputs into the
determination of fair value require managements judgment or estimation of assumptions that market participants would use in pricing the assets or liabilities. The fair values are therefore determined using model-based techniques that include
option pricing models, discounted cash flow models, and similar techniques. As of June 30, 2013 and 2012, the Company did not have any Level 3 financial assets or liabilities.
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys financial assets and liabilities as of June 30, 2013 and 2012
were categorized as follows in the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2013 Using
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. municipal securities
|
|
$
|
|
|
|
$
|
25,544
|
|
|
$
|
25,544
|
|
Certificates of deposit
|
|
|
|
|
|
|
16,923
|
|
|
|
16,923
|
|
Money market funds
|
|
|
38,465
|
|
|
|
|
|
|
|
38,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,465
|
|
|
$
|
42,467
|
|
|
$
|
80,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related promissory notes
(1)
|
|
$
|
|
|
|
$
|
3,875
|
|
|
$
|
3,875
|
|
Term loan
(1)
|
|
|
|
|
|
|
88,802
|
|
|
|
88,802
|
|
Interest rate swap
|
|
|
|
|
|
|
655
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
93,332
|
|
|
$
|
93,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2012 Using
|
|
|
|
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. municipal securities
|
|
$
|
|
|
|
$
|
30,861
|
|
|
$
|
30,861
|
|
Certificates of deposit
|
|
|
|
|
|
|
11,470
|
|
|
|
11,470
|
|
Money market funds
|
|
|
21,458
|
|
|
|
|
|
|
|
21,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,458
|
|
|
$
|
42,331
|
|
|
$
|
63,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related promissory notes
(1)
|
|
$
|
|
|
|
$
|
12,215
|
|
|
$
|
12,215
|
|
Term loan
(1)
|
|
|
|
|
|
|
95,381
|
|
|
|
95,381
|
|
Interest rate swap
|
|
|
|
|
|
|
1,138
|
|
|
|
1,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
108,734
|
|
|
$
|
108,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These liabilities
are carried at historical cost on the Companys consolidated balance sheet.
|
Marketable Securities
All liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Investments with maturities greater than three months at the date of purchase are
classified as marketable securities. The Companys marketable securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and
reevaluates the available-for-sale designation as of each balance sheet date. Available-for-sale securities are carried at fair value, with unrealized gains and losses, net of tax, reported as a component of stockholders equity.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes unrealized gains and losses related to available-for-sale
securities held by the Company as of June 30, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
|
|
Gross
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U.S. municipal securities
|
|
$
|
25,538
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
25,544
|
|
Certificates of deposit
|
|
|
16,945
|
|
|
|
|
|
|
|
22
|
|
|
|
16,923
|
|
Money market funds
|
|
|
38,465
|
|
|
|
|
|
|
|
|
|
|
|
38,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,948
|
|
|
$
|
6
|
|
|
$
|
22
|
|
|
$
|
80,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012
|
|
|
|
Gross
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U.S. municipal securities
|
|
$
|
30,851
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
30,861
|
|
Certificates of deposit
|
|
|
11,480
|
|
|
|
|
|
|
|
10
|
|
|
|
11,470
|
|
Money market funds
|
|
|
21,458
|
|
|
|
|
|
|
|
|
|
|
|
21,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,789
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
63,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Balance Sheet Components
Accounts Receivable, Net
Accounts receivable, net are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Accounts receivable
|
|
$
|
40,417
|
|
|
$
|
55,637
|
|
Less: Allowance for doubtful accounts
|
|
|
(264
|
)
|
|
|
(424
|
)
|
Less: Allowance for sales returns
|
|
|
(1,762
|
)
|
|
|
(2,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,391
|
|
|
$
|
52,830
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
Property and equipment, net is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Computer equipment
|
|
$
|
12,293
|
|
|
$
|
10,862
|
|
Software
|
|
|
9,145
|
|
|
|
7,116
|
|
Furniture and fixtures
|
|
|
2,780
|
|
|
|
2,725
|
|
Leasehold improvements
|
|
|
1,862
|
|
|
|
1,891
|
|
Internal software development costs
|
|
|
21,108
|
|
|
|
18,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,188
|
|
|
|
41,191
|
|
Less: Accumulated depreciation and amortization
|
|
|
(37,481
|
)
|
|
|
(32,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,707
|
|
|
$
|
8,755
|
|
|
|
|
|
|
|
|
|
|
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation expense was $3.3 million, $3.3 million and $3.6 million for fiscal years
2013, 2012 and 2011. Amortization expense related to internal software development costs was $2.2 million, $1.9 million and $1.5 million for fiscal years 2013, 2012 and 2011.
Accrued liabilities
Accrued liabilities are comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Accrued media costs
|
|
$
|
14,657
|
|
|
$
|
15,485
|
|
Accrued compensation and related expenses and taxes payable
|
|
|
8,179
|
|
|
|
9,096
|
|
Accrued professional service and other business expenses
|
|
|
8,067
|
|
|
|
4,881
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
30,903
|
|
|
$
|
29,462
|
|
|
|
|
|
|
|
|
|
|
6. Acquisitions
Acquisitions in Fiscal Year 2013
The Company did not complete any acquisitions during fiscal year 2013.
Acquisitions in Fiscal Year 2012
Acquisition of Ziff Davis Enterprise
On February 3, 2012, the
Company acquired certain assets of Ziff Davis Enterprise from Enterprise Media Group, Inc., a New York-based online media and marketing company in the business-to-business technology market, for $17.3 million in cash, to broaden its registered user
database and brand name in the business-to-business technology market. The results of the acquired assets of Ziff Davis Enterprise have been included in the consolidated financial statements since the acquisition date.
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
17,270
|
|
|
|
|
|
|
The asset acquisition was accounted for as a purchase business combination. The Company allocated the
purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill
is deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
|
Estimated
Useful
Life
|
|
|
Liabilities assumed
|
|
$
|
(255
|
)
|
|
|
Customer/publisher/advertiser relationships
|
|
|
4,120
|
|
|
5 years
|
Content
|
|
|
500
|
|
|
2 years
|
Website/trade/domain names
|
|
|
4,630
|
|
|
5 years
|
Registered user database
|
|
|
6,320
|
|
|
3 years
|
Goodwill
|
|
|
1,955
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
17,270
|
|
|
|
|
|
|
|
|
|
|
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of NarrowCast Group, LLC (IT Business Edge or
ITBE)
On August 25, 2011, the Company acquired 100% of the outstanding equity interests of ITBE, in
exchange for $24.0 million in cash, to broaden its registered user database and media access in the business-to-business technology market. The results of ITBEs operations have been included in the consolidated financial statements since the
acquisition date.
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
23,961
|
|
|
|
|
|
|
The ITBE acquisition was accounted for as a purchase business combination. The Company allocated the
purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill
is deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
|
Estimated
Useful
Life
|
|
|
Tangible assets acquired
|
|
$
|
3,597
|
|
|
|
Liabilities assumed
|
|
|
(1,868
|
)
|
|
|
Customer/publisher/advertiser relationships
|
|
|
3,230
|
|
|
5 years
|
Content
|
|
|
420
|
|
|
2 years
|
Website/trade/domain names
|
|
|
2,220
|
|
|
5 years
|
Registered user database
|
|
|
4,220
|
|
|
3 years
|
Noncompete agreements
|
|
|
100
|
|
|
3 years
|
Goodwill
|
|
|
12,042
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
23,961
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions in Fiscal Year 2012
During fiscal year 2012, in addition to the acquisition of certain assets of Ziff Davis Enterprise, and the acquisition of ITBE, the
Company also acquired operations from eleven other online publishing businesses in exchange for an aggregate of $14.6 million in cash, $3.1 million in non-interest-bearing, promissory notes payable over a period of two years, secured by the assets
acquired in respect to which the notes were issued and $2.1 million in non-interest-bearing, unsecured promissory notes payable over a period of one year. The Company also recorded $4.6 million in earn-out payments related to a prior period
acquisition as an addition to goodwill. The aggregate purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
Cash
|
|
$
|
14,620
|
|
Fair value of debt (net of $99 of imputed interest)
|
|
|
9,696
|
|
|
|
|
|
|
|
|
$
|
24,316
|
|
|
|
|
|
|
The acquisitions were accounted for as purchase business combinations. In each of the acquisitions, the
Company allocated the purchase price to identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
deductible for tax purposes. The following table summarizes the preliminary allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of
the date of the acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
|
Estimated
Useful
Life
|
|
|
Customer/publisher/advertiser relationships
|
|
$
|
435
|
|
|
3-5 years
|
Content
|
|
|
4,540
|
|
|
2-5 years
|
Website/trade/domain names
|
|
|
1,250
|
|
|
4-8 years
|
Acquired technology and other
|
|
|
561
|
|
|
4-5 years
|
Noncompete agreements
|
|
|
87
|
|
|
1-3.5 years
|
Goodwill
|
|
|
17,443
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
24,316
|
|
|
|
|
|
|
|
|
|
|
Acquisitions in Fiscal Year 2011
Acquisition of CarInsurance.com
On November 5, 2010, the Company acquired 100% of the outstanding shares of CarInsurance.com, Inc., a Florida-based online insurance business, and certain of its affiliated companies, in exchange for
$49.7 million in cash paid upon closing of the acquisition. The results of CarInsurance.coms operations have been included in the consolidated financial statements since the acquisition date. The Company acquired CarInsurance.com for its
capacity to generate online visitors in the financial services market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
49,655
|
|
|
|
|
|
|
The CarInsruance.com acquisition was accounted for as a purchase business combination. The Company
allocated the purchase price to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill.
The goodwill is deductible for tax purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
|
Estimated
Useful
Life
|
|
|
Tangible assets acquired
|
|
$
|
661
|
|
|
|
Liabilities assumed
|
|
|
(807
|
)
|
|
|
Advertiser relationships
|
|
|
260
|
|
|
6-7 years
|
Content
|
|
|
16,130
|
|
|
7 years
|
Website/trade/domain names
|
|
|
4,350
|
|
|
10 years
|
Acquired technology and others
|
|
|
3,000
|
|
|
2-4 years
|
Noncompete agreements
|
|
|
40
|
|
|
4 years
|
Goodwill
|
|
|
26,021
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
49,655
|
|
|
|
|
|
|
|
|
|
|
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of Insurance.com
On July 26, 2010, the Company acquired the website business of Insurance.com, from Insurance.com Group, Inc., an Ohio-based online
insurance business, in exchange for $33.0 million in cash paid upon closing of the acquisition and the issuance of a $2.6 million non-interest-bearing, unsecured promissory note payable in one installment on the second anniversary of the acquisition
date. The results of Insurance.coms operations have been included in the consolidated financial statements since the acquisition date. The Company acquired Insurance.com for its capacity to generate online visitors in the financial services
market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
33,000
|
|
Fair value of debt (net of $157 of imputed interest)
|
|
|
2,483
|
|
|
|
|
|
|
|
|
$
|
35,483
|
|
|
|
|
|
|
The Insurance.com acquisition was accounted for as a purchase business combination. The Company allocated
the purchase price to tangible assets and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. The goodwill is deductible for tax
purposes. The following table summarizes the allocation of the purchase price and the estimated useful lives of the identifiable intangible assets acquired as of the date of the acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
|
Estimated
Useful
Life
|
|
|
Tangible assets acquired
|
|
$
|
1,204
|
|
|
|
Advertiser relationships
|
|
|
2,120
|
|
|
7 years
|
Content
|
|
|
4,290
|
|
|
4 years
|
Website/trade/domain names
|
|
|
2,940
|
|
|
10 years
|
Acquired technology and others
|
|
|
5,530
|
|
|
2-4 years
|
Noncompete agreements
|
|
|
60
|
|
|
5 years
|
Goodwill
|
|
|
19,339
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
35,483
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions in Fiscal Year 2011
During fiscal year 2011, in addition to the acquisitions of CarInsurance.com and Insurance.com, the Company acquired operations from 13
other online publishing businesses in exchange for $4.7 million in cash paid upon closing of the acquisitions and $0.9 million in non-interest-bearing, unsecured promissory notes payable over a period of time ranging from one to three years. The
Company also recorded $4.5 million in earn-out payments related to a prior period acquisition as addition to goodwill. The aggregate purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(in thousands)
|
|
Cash
|
|
$
|
9,222
|
|
Fair value of debt (net of $36 of imputed interest)
|
|
|
828
|
|
|
|
|
|
|
|
|
$
|
10,050
|
|
|
|
|
|
|
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The acquisitions were accounted for as purchase business combinations. In each of the
acquisitions, the Company allocated the purchase price to identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair value was recorded as goodwill. Goodwill deductible for
tax purposes is $7.9 million. The following table summarizes the allocation of the purchase prices of these other acquisitions and the estimated useful lives of the identifiable intangible assets acquired as of the respective dates of these
acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
|
Estimated
Useful
Life
|
|
|
Customer/publisher relationships
|
|
$
|
233
|
|
|
3-5 years
|
Content
|
|
|
1,274
|
|
|
3-5 years
|
Website/trade/domain names
|
|
|
541
|
|
|
4-5 years
|
Noncompete agreements
|
|
|
88
|
|
|
1-3 years
|
Goodwill
|
|
|
7,914
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
10,050
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Financial Information (unaudited)
The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and other
companies that were acquired since the beginning of fiscal year 2012. The pro forma financial information includes the business combination accounting effects resulting from these acquisitions including amortization charges from acquired intangible
assets and the related tax effects as though the aforementioned companies were acquired as of the beginning of fiscal year 2012. There were no acquisitions during fiscal year 2013; as such the results of operations for the Companys
acquisitions are included in the results of operations for the Company for fiscal year 2013. The unaudited pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that
would have been achieved if the acquisitions had taken place at the beginning of fiscal year 2012.
|
|
|
|
|
|
|
Fiscal Year Ended
June
30, 2012
|
|
|
|
(in thousands)
|
|
Net revenue
|
|
$
|
378,895
|
|
Net (loss) income
|
|
|
13,608
|
|
Basic net (loss) income per share
|
|
$
|
0.30
|
|
Diluted net (loss) income per share
|
|
$
|
0.29
|
|
7. Intangible Assets, Net and Goodwill
Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Customer/publisher/advertiser relationships
|
|
$
|
37,035
|
|
|
$
|
(28,321
|
)
|
|
$
|
8,714
|
|
|
$
|
37,045
|
|
|
$
|
(23,017
|
)
|
|
$
|
14,028
|
|
Content
|
|
|
62,028
|
|
|
|
(43,054
|
)
|
|
|
18,974
|
|
|
|
62,076
|
|
|
|
(34,430
|
)
|
|
|
27,646
|
|
Website/trade/domain names
|
|
|
31,597
|
|
|
|
(17,403
|
)
|
|
|
14,194
|
|
|
|
31,615
|
|
|
|
(12,815
|
)
|
|
|
18,800
|
|
Acquired technology and others
|
|
|
36,425
|
|
|
|
(27,821
|
)
|
|
|
8,604
|
|
|
|
31,477
|
|
|
|
(19,507
|
)
|
|
|
11,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,085
|
|
|
$
|
(116,599
|
)
|
|
$
|
50,486
|
|
|
$
|
162,213
|
|
|
$
|
(89,769
|
)
|
|
$
|
72,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization of intangible assets was $26.8 million, $26.0 million and $22.2 million for
fiscal years 2013, 2012 and 2011.
The Company licensed certain patents for $4.9 million during the second quarter of fiscal
year 2013, and these patents and related short term payables are recorded in other intangible assets, net and accrued liabilities, respectively, on the condensed consolidated balance sheet. Based on the Companys analysis, using a relief from
royalty method, the Company determined that a portion of the license fee for these patents represents the cumulative cost relating to prior years. As such, the Company recorded $2.4 million as a charge to cost of revenue during the second quarter of
fiscal year 2013. The remaining amount will be amortized over the remaining life of the patents.
Amortization expense for the
Companys acquisition-related intangible assets as of June 30, 2013 for each of the next five years and thereafter is as follows (in thousands):
|
|
|
|
|
Year Ending June 30,
|
|
|
|
2014
|
|
$
|
19,525
|
|
2015
|
|
|
12,329
|
|
2016
|
|
|
8,764
|
|
2017
|
|
|
6,043
|
|
2018
|
|
|
2,199
|
|
Thereafter
|
|
|
1,626
|
|
|
|
|
|
|
|
|
$
|
50,486
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill for fiscal years 2013 and 2012 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
|
DSS
|
|
|
Total
|
|
Balance at June 30, 2011
|
|
$
|
210,625
|
|
|
$
|
1,231
|
|
|
$
|
211,856
|
|
Additions
|
|
|
31,440
|
|
|
|
|
|
|
|
31,440
|
|
Other
|
|
|
(247
|
)
|
|
|
|
|
|
|
(247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2012
|
|
$
|
241,818
|
|
|
$
|
1,231
|
|
|
$
|
243,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(243
|
)
|
|
|
|
|
|
|
(243
|
)
|
Impairment
|
|
|
(92,350
|
)
|
|
|
|
|
|
|
(92,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
149,225
|
|
|
$
|
1,231
|
|
|
$
|
150,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The additions to goodwill relate to the Companys acquisitions as described in Note 6,
Acquisitions, and primarily reflect the value of the synergies expected to be generated from combining the Companys technology and know-how with the acquired businesses access to online visitors. Any change in goodwill amounts resulting
from foreign currency translation are presented as Other in the above table. The impairment charge recorded during fiscal year 2013 is described in Note 2, Summary of Significant Accounting Policies.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Income Taxes
The components of (loss) income before income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
US
|
|
$
|
(89,087
|
)
|
|
$
|
23,957
|
|
|
$
|
44,270
|
|
Foreign
|
|
|
(4,886
|
)
|
|
|
175
|
|
|
|
831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(93,973
|
)
|
|
$
|
24,132
|
|
|
$
|
45,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the (benefit from) provision for taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,388
|
|
|
$
|
10,417
|
|
|
$
|
18,581
|
|
State
|
|
|
577
|
|
|
|
413
|
|
|
|
2,741
|
|
Foreign
|
|
|
365
|
|
|
|
291
|
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision for income taxes
|
|
|
4,330
|
|
|
|
11,121
|
|
|
|
21,508
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(29,763
|
)
|
|
$
|
(719
|
)
|
|
$
|
(3,260
|
)
|
State
|
|
|
(1,249
|
)
|
|
|
664
|
|
|
|
(324
|
)
|
Foreign
|
|
|
81
|
|
|
|
65
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit from) provision for income taxes
|
|
|
(30,931
|
)
|
|
|
10
|
|
|
|
(3,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(26,601
|
)
|
|
$
|
11,131
|
|
|
$
|
17,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reconciliation between the statutory federal income tax and the Companys effective tax rates as
a percentage of income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
States taxes, net of federal benefit
|
|
|
0.9
|
%
|
|
|
3.7
|
%
|
|
|
3.2
|
%
|
Foreign rate differential
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
(1.7
|
)%
|
|
|
8.2
|
%
|
|
|
2.8
|
%
|
Change in valuation allowance
|
|
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
Impairment of goodwill
|
|
|
(4.6
|
)%
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.8
|
%
|
|
|
(0.8
|
)%
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
28.3
|
%
|
|
|
46.1
|
%
|
|
|
39.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the current and long-term deferred tax assets, net are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
June
30,
|
|
|
|
2013
|
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
|
Reserves and accruals
|
|
$
|
2,883
|
|
|
$
|
5,432
|
|
Stock options
|
|
|
2,647
|
|
|
|
2,044
|
|
Deferred revenue
|
|
|
95
|
|
|
|
35
|
|
Other
|
|
|
1,128
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
$
|
6,753
|
|
|
$
|
7,665
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Reserves and accruals
|
|
$
|
2,067
|
|
|
$
|
|
|
Stock options
|
|
|
7,942
|
|
|
|
6,131
|
|
Intangible assets
|
|
|
32,669
|
|
|
|
3,442
|
|
Fixed assets
|
|
|
(1,442
|
)
|
|
|
(1,626
|
)
|
Foreign
|
|
|
|
|
|
|
6
|
|
Other
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets
|
|
|
41,236
|
|
|
|
8,446
|
|
Valuation allowance
|
|
|
(947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets, net
|
|
$
|
40,289
|
|
|
$
|
8,446
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
$
|
47,042
|
|
|
$
|
16,111
|
|
|
|
|
|
|
|
|
|
|
Management periodically evaluates the realizability of the deferred tax assets and recognizes the tax
benefit only as reassessment demonstrates that they are realizable. At such time, if it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be adjusted. Based on the history of
losses and the continued investment in the India operations, it is more likely than not the deferred tax assets will not be realized in the foreseeable future. As of June 30, 2013, the Company determined that a valuation allowance of $0.9
million is required on the deferred tax assets of the India subsidiary.
As of June 30, 2013, the Company had no operating
loss carry-forwards for federal or state income tax purposes. The Company has California research and development tax credit carry-forwards of approximately $1.0 million to offset future state taxable income. The state research and development tax
credit carry-forwards do not have an expiration date and may be carried forward indefinitely.
United States federal income
taxes have not been provided for the $1.8 million of cumulative undistributed earnings of the Companys foreign subsidiaries as of June 30, 2013. The Companys present intention is that such undistributed earnings be permanently
reinvested offshore, with the exception of the undistributed earnings of its Canadian subsidiary. The Company would be subject to additional United States taxes if these earnings were repatriated. The amount of the unrecognized deferred income tax
liability related to these earnings is not practical to estimate.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance at the beginning of the year
|
|
$
|
2,436
|
|
|
$
|
2,312
|
|
|
$
|
2,014
|
|
Gross increases - current period tax positions
|
|
|
389
|
|
|
|
351
|
|
|
|
493
|
|
Gross increases - prior period tax positions
|
|
|
132
|
|
|
|
|
|
|
|
|
|
Reductions as a result of lapsed statute of limitations
|
|
|
(265
|
)
|
|
|
(227
|
)
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
2,692
|
|
|
$
|
2,436
|
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to include interest and penalties related to unrecognized tax benefits
within the Companys benefit from (provision for) income taxes. As of June 30, 2013, the Company has accrued $0.7 million for interest and penalties related to the unrecognized tax benefits. The balance of unrecognized tax benefits and the
related interest and penalties is recorded as a noncurrent liability on the Companys consolidated balance sheet.
As of
June 30, 2013, unrecognized tax benefits of $2.7 million, if recognized, would affect the Companys effective tax rate. The Company does not anticipate that the amount of existing unrecognized tax benefits will significantly increase or
decrease within the next 12 months.
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 before 2008. The Company files income tax returns in the United States, various U.S. states and certain foreign jurisdictions. As of June 30, 2013, the tax years 2010 through 2012 remain
open in the U.S., the tax years 2008 through 2012 remain open in the various state jurisdictions, and the tax years 2008 through 2012 remain open in various foreign jurisdictions.
9. Debt
Promissory Notes
The Company did not issue any promissory notes in fiscal year 2013. During fiscal years 2012 and 2011, the Company issued total promissory notes for the acquisition of businesses of $5.1 million and $3.3
million net of imputed interest amounts of $0.1 million and $0.2 million. All of the promissory notes are non-interest-bearing. For these notes, interest was imputed such that the notes carry an interest rate commensurate with that available to the
Company in the market for similar debt instruments. Accretion of promissory notes of $0.1 million, $0.3 million and $0.5 million was recorded as interest expense during fiscal years 2013, 2012 and 2011. Certain of the promissory notes are
collateralized by the assets acquired with respect to which the notes were issued.
Credit Facility
In November 2011, the Company entered into the Second Amended and Restated Revolving Credit and Term Loan Agreement (Second Loan
Agreement) with Comerica Bank (the Bank), the administrative agent and lead arranger. The Second Loan Agreement consists of a $100.0 million five-year term loan, with annual principal amortization of 5%, 10%, 15%, 20% and 50%, and
a $200.0 million five-year revolving credit line.
On February 15, 2013, the Company entered into the First Amendment to
Credit Agreement and Amendment to Guaranty (First Amendment to the Second Loan Agreement) with the Bank to, among other things: (1) amend the definition of adjusted EBITDA, effective as of December 31, 2012, to exclude
extraordinary or non-recurring non-cash expenses of losses including, without limitation, goodwill impairments,
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and any extraordinary or non-recurring cash expenses in an aggregate amount not to exceed $5.0 million for the life of the Second Loan Agreement; and (2) reduce the $200.0 million five-year
revolving credit line portion of the facility to $100.0 million, effective as of February 15, 2013.
Borrowings under the
Second Loan Agreement are secured by substantially all of the Companys assets. Interest is payable at specified margins above either the Eurodollar Margin or the Prime Rate. The interest rate varies based upon the ratio of funded debt to
adjusted EBITDA and ranges from Eurodollar Margin + 1.625% to 2.375% or Prime + 1.00% for the revolving credit line and from Eurodollar Margin + 2.00% to 2.75% or Prime + 1.00% for the term loan. Adjusted EBITDA is defined as net (loss)
income less benefit from (provision for) taxes, depreciation expense, amortization expense, stock-based compensation expense, interest and other income (expense), acquisition costs for business combinations, extraordinary or non-recurring cash
expenses in an aggregate amount not to exceed $5.0 million for the list of this Second Loan Agreement. The revolving credit line requires an annual facility fee of 0.375% of the revolving credit line capacity.
The Second Loan Agreement expires in November 2016. The credit facility agreement restricts the Companys ability to raise
additional debt financing and pay dividends, and also requires the Company to comply with other nonfinancial covenants. In addition, the Company is required to maintain financial ratios computed as follows:
1. A minimum fixed charge coverage ratio of 1.15:1, calculated as the ratio of: (i) trailing twelve months of
adjusted EBITDA to (ii) the sum of capital expenditures, net cash interest expense, cash taxes, cash dividends and trailing twelve months payments of indebtedness. Payment of unsecured indebtedness is excluded to the degree that sufficient
unused revolving credit line exists such that the relevant debt payment could be made from the credit facility.
2. A maximum funded debt to adjusted EBITDA ratio of 3:1, calculated as the ratio of: (i) the sum of all
obligations owed to lending institutions, the face amount of any letters of credit, indebtedness owed in connection with acquisition-related notes and indebtedness owed in connection with capital lease obligations to (ii) trailing twelve months
of adjusted EBITDA.
The Company was in compliance with the covenants of the Second Loan Agreement, as amended by the First
Amendment, as of June 30, 2013. The Company was in compliance with the covenants of the Second Loan Agreement as of June 30, 2012.
Upfront arrangement fees incurred in connection with the First Amendment totaled $0.2 million and were deferred and will be amortized over the remaining term of the arrangement. In connection with the
reduction of the revolving credit line capacity, during the third quarter of fiscal 2013 the Company accelerated amortization of approximately $0.7 million of unamortized deferred upfront costs.
As of June 30, 2013 and June 30, 2012, $90.0 million and $97.5 million were outstanding under the term loan. There were no
outstanding balances under the revolving credit line as of June 30, 2013 or 2012.
Interest Rate Swap
As discussed in the derivative instrument section in Note 2, Summary of Significant Accounting Policies, the Company entered into an
interest rate swap to reduce its exposure to the financial impact of changing interest rates under its term debt. The swap encompasses the principal balances scheduled to be outstanding as of January 1, 2014 and thereafter, such principal
amount totaling $85.0 million in January, 2014 and amortizing to $35.0 million in November 2016. The effective date of the swap is April 9, 2012 with a maturity date of November 4, 2016. At June 30, 2013, the Company had approximately
$85.0 million of notional amount outstanding in the swap agreement that exchanges a variable interest rate base (Eurodollar margin) for a fixed interest rate of 0.97% over the term of the agreement. This interest rate swap is designated as a cash
flow hedge of the interest rate risk attributable to forecasted variable interest payments. The effective portion of the fair value gains or losses on this swap are included as a component of accumulated other comprehensive loss.
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At June 30, 2013, the fair value of the interest rate swap liability was $0.7
million, of which $0.6 million was classified in current accrued liabilities and $0.1 million was classified as noncurrent other liabilities, and the hedge effective portion of the interest rate swap was $0.7 million.
Debt Maturities
The maturities of debt as of June 30, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
Promissory
Notes
|
|
|
Credit
Facility
|
|
2014
|
|
$
|
3,364
|
|
|
$
|
12,500
|
|
2015
|
|
|
560
|
|
|
|
17,500
|
|
2016
|
|
|
50
|
|
|
|
20,000
|
|
2017
|
|
|
|
|
|
|
40,000
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
|
90,000
|
|
Less: imputed interest and unamortized discounts
|
|
|
(99
|
)
|
|
|
(1,198
|
)
|
Less: current portion
|
|
|
(3,286
|
)
|
|
|
(12,142
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent portion of debt
|
|
$
|
589
|
|
|
$
|
76,660
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit
The Company has a $0.4 million letter of credit agreement with a financial institution that is used as collateral for fidelity bonds placed with an insurance company and a $0.5 million letter of credit
agreement with a financial institution that is used as collateral for the Companys corporate headquarters operating lease. The letters of credit automatically renew annually without amendment unless cancelled by the financial
institutions within 30 days of the annual expiration date.
10. Commitments and Contingencies
Leases
The Company leases office space and equipment under non-cancelable operating leases with various expiration dates through fiscal year 2018. Rent expense for fiscal years 2013, 2012 and 2011 was $3.4
million, $3.4 million and $3.3 million. The Company recognizes rent expense on a straight-line basis over the lease period and accrues for rent expense incurred but not paid.
Future annual minimum lease payments under all noncancelable operating leases as of June 30, 2013 were as follows (in thousands):
|
|
|
|
|
Year Ending June 30,
|
|
Operating
Leases
|
|
2014
|
|
$
|
3,556
|
|
2015
|
|
|
3,310
|
|
2016
|
|
|
3,191
|
|
2017
|
|
|
2,748
|
|
2018
|
|
|
2,792
|
|
Thereafter
|
|
|
936
|
|
|
|
|
|
|
|
|
$
|
16,533
|
|
|
|
|
|
|
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2010, the Company entered into a lease agreement for its corporate
headquarters located at 950 Tower Lane, Foster City, California. The term of the lease began on November 1, 2010 and expires on October 31, 2018. The Company has the option to extend the term of the lease twice by one additional year.
The monthly base rent was abated for the first year of the lease, was $0.1 million in the second year and is $0.2 million in the current lease year. In the following years the monthly base rent will increase approximately 3% annually.
Guarantor Arrangements
The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Companys request in such
capacity. The term of the indemnification period is for the officer or directors lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the
Company has a director and officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid under certain circumstances and subject to deductibles and exclusions. As a result of its insurance
policy coverage, the Company believes the estimated fair value of these indemnification agreements is not material. Accordingly, the Company had no liabilities recorded for these agreements as of June 30, 2013 and June 30, 2012.
In the ordinary course of its business, the Company from time to time enters into standard indemnification provisions in its
agreements with its clients. Pursuant to these provisions, the Company may be obligated to indemnify its clients for certain losses suffered or incurred, including losses arising from violations of applicable law by the Company or by its third-party
publishers, losses arising from actions or omissions of the Company or its third party publishers, and for third-party claims that a Company product infringed upon a third partys intellectual property rights. Where applicable, the Company
generally limits its liabilities under such indemnities. Subject to these limitations, the term of such indemnity provisions is generally coterminous with the corresponding agreements but in some cases survives for a short period of time after
termination of the agreement.
The potential amount of future payments to defend lawsuits or settle indemnified claims under
these indemnification provisions is generally limited and the Company believes the estimated fair value of these indemnity provisions is not material, and accordingly, the Company had no liabilities recorded for these agreements as of June 30,
2013 and 2012.
Litigation
In November 2012, the Company entered into a confidential Settlement and Release Agreement (SRA) with LendingTree, LLC (Lending Tree), under which the Company and its wholly owned
subsidiaries and Lending Tree mutually released the claims against each other and the Company and its wholly owned subsidiaries licensed two of Lending Trees patents. Lending Tree and the Company filed a Stipulation of Dismissal Without
Prejudice with the United States District Court, Western Division of North Carolina, Charlotte Division on November 26, 2012. The court issued an Order of Dismissal Without Prejudice on January 3, 2013.
In December 2012, Internet Patents Corporation (IPC) filed a patent infringement lawsuit against the Company in the United
States District Court for the Northern District of California, seeking a judgment that the Company had infringed a patent held by IPC. The Company received the related summons and complaint from IPC in March 2013. On May 3, 2013, the Company
filed a Motion to Dismiss with the Court, which is scheduled to be heard in October 2013. While the Company denies IPCs claims, there can be no assurance that the Company will prevail in this matter, and any adverse ruling may have a
significant impact on its business and operating results. In addition, regardless of the outcome of the matter, the Company may incur significant legal
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fees defending the action until it is resolved. There is a reasonable possibility that a loss may be incurred, however, an estimate of the loss or potential range of loss, if any, associated with
the litigation cannot be made as of the filing date of this annual report.
In August 2011, the attorneys general of a number
of states sent a letter of inquiry regarding marketing services that the Company provides to for-profit schools. The marketing services at issue relate to the Companys websites, such as www.gibill.com, www.armystudyguide.com, and others, whose
intended audience comprises service members and veterans of the United States military. The attorneys general expressed concerns that the websites could mislead consumers into believing that the websites are affiliated with the government or that
the featured schools are the only ones that accept scholastic subsidies (such as through the GI Bill) from service members and veterans and may thus violate the consumer protection laws of the respective States. Subsequently, the attorneys general
initiated a civil investigative demand, requesting information about the Companys marketing, pricing structure, business relationships, and financial data with respect to the for-profit schools that appear on www.gibill.com and similar
websites. In June 2012, the Company entered into an Assurance of Voluntary Compliance agreement (the Agreement) with the attorneys general. Under the Agreement, the Company donated the URL GIBill.com to the United States
Department of Veterans Affairs. The Company also agreed to pay a total of $2.5 million to the settling states to reimburse them for the cost of the investigation and negotiating process, and further agreed to provide expanded disclosures on other
military-oriented and education-related websites. The Company believes it is in material compliance with the terms of the Agreement as of June 30, 2013.
11. Stock Benefit Plans
Stock-Based Compensation
In fiscal years 2013, 2012 and 2011, the Company recorded stock-based compensation expense of $12.0 million, $13.0 million, and $14.0 million resulting in the recognition of related excess tax
benefits (loss) of $0.1 million, $0.7 million and $7.3 million. The Company included as part of cash flows from financing activities a gross benefit of tax deductions of $0.2 million, $0.2 million and $7.5 million in fiscal
years 2013, 2012 and 2011 related to stock-based compensation.
Stock Incentive Plans
In November 2009, the Companys board of directors adopted the 2010 Equity Incentive Plan (the 2010 Incentive Plan)
and the Companys stockholders approved the 2010 Incentive Plan in January 2010. The 2010 Incentive Plan became effective upon the completion of the IPO of the Companys common stock in February 2010. Awards granted after January 2008
but before the adoption of the 2010 Incentive Plan continue to be governed by the terms of the 2008 Equity Incentive Plan (the 2008 Plan). All outstanding stock awards granted before January 2008 continue to be governed by the terms of
the Companys amended and restated 1999 Equity Incentive Plan (the 1999 Plan).
The 2010 Incentive Plan
provides for the grant of incentive stock options (ISOs), nonstatutory stock options (NQSOs), restricted stock, restricted stock units, stock appreciation rights, performance-based stock awards and other forms of equity
compensation, as well as for the grant of performance cash awards. The Company may issue ISOs only to its employees. NQSOs and all other awards may be granted to employees, including officers, nonemployee directors and consultants.
To date, the Company has issued only ISOs, NQSOs and restricted stock units under the 2010 Incentive Plan. ISOs and NQSOs are generally
granted to employees with an exercise price equal to the market price of the Companys common stock at the date of grant. Stock options granted to employees generally have a contractual term of seven years and vest over four years of continuous
service, with 25 percent of the stock options vesting on the one-year anniversary of the date of grant and the remaining 75 percent vesting in equal monthly installments over the three year period thereafter. Restricted stock units granted
to employees prior to fiscal year
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2013 generally vest over five years of continuous service, with 15 percent of the restricted stock units vesting on the one-year anniversary of the date of grant, 60 percent vesting in equal
quarterly installments over the following three years and the remaining 25 percent vesting in equal quarterly installments over the last year of the vesting period. Restricted stock units granted to employees starting in fiscal year 2013
generally vest over four years of continuous service, with 25 percent of the restricted stock units vesting on the one-year anniversary of the date of grant and 6.25% vesting quarterly thereafter for the next 12 quarters.
An aggregate of 7,066,183 shares of the Companys common stock were reserved for issuance under the 2010 Incentive Plan as of
June 30, 2013, and this amount will be increased by any outstanding stock awards that expire or terminate for any reason prior to their exercise or settlement. The number of shares of the Companys common stock reserved for issuance is
increased annually through July 1, 2019 by up to five percent of the total number of shares of the Companys common stock outstanding on the last day of the preceding fiscal year. The maximum number of shares that may be issued under the
2010 Incentive Plan is 30,000,000. There were 4,274,528 shares available for issuance under the 2010 Incentive Plan as of June 30, 2013.
In November 2009, the Companys board of directors adopted the 2010 Non-Employee Directors Stock Award Plan (the Directors Plan) and the stockholders approved the
Directors Plan in January 2010. The Directors Plan became effective upon the completion of the Companys IPO. The Directors Plan provides for the automatic grant of NQSOs and restricted stock units to non-employee directors
and also provides for the discretionary grant of NQSOs and restricted stock units. Stock options granted to new non-employee directors vest in equal monthly installments over four years; annual grants to existing directors vest in equal monthly
installments over one year and the initial and annual RSU grants vest quarterly over a period of four years.
An aggregate of
1,170,000 shares of the Companys common stock were reserved for issuance under the Directors Plan as of June 30, 2013. This amount is increased annually, by the sum of 200,000 shares and the aggregate number of shares of
the Companys common stock subject to awards granted under the Directors Plan during the immediately preceding fiscal year. There were 763,873 shares available for issuance under the Directors Plan as of June 30, 2013.
Valuation Assumptions
The Company estimates the fair value of stock option awards at the date of grant using the Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair value of the
common stock as of the date of grant. The Company calculates the weighted average expected life of options using the simplified method pursuant to the accounting guidance for share-based payments as it does not have sufficient historical exercise
experience. Since the Company does not have extensive trading history, the Company estimates the expected volatility of its common stock based primarily on its historical volatility and partially on the historical volatility of comparable public
companies over the stock options expected term. The Company has no history or expectation of paying dividends on its common stock. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected
term of the stock options.
The weighted average Black-Scholes model assumptions and the weighted average grant date fair
value of employee stock options in fiscal years 2013, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Expected term (in years)
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
4.6
|
|
Expected volatility
|
|
|
54
|
%
|
|
|
55
|
%
|
|
|
54
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free interest rate
|
|
|
0.7
|
%
|
|
|
1.1
|
%
|
|
|
1.7
|
%
|
Grant date fair value
|
|
$
|
3.82
|
|
|
$
|
5.31
|
|
|
$
|
7.81
|
|
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of restricted stock units is determined based on the closing price of the
Companys common stock on the grant date.
Compensation expense is amortized net of estimated forfeitures on a
straight-line basis over the requisite service period of the stock-based compensation awards.
Stock Option Award
Activity
The following table summarizes the stock option award activity under the Plans from June 30, 2011 to
June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at June 30, 2011
|
|
|
9,348,535
|
|
|
$
|
10.73
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,634,850
|
|
|
|
11.39
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(525,995
|
)
|
|
|
8.93
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,120,227
|
)
|
|
|
12.91
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(624,847
|
)
|
|
|
12.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2012
|
|
|
9,712,316
|
|
|
$
|
10.62
|
|
|
|
4.09
|
|
|
$
|
6,731,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,450,662
|
|
|
|
8.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(120,508
|
)
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(612,138
|
)
|
|
|
10.87
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(390,882
|
)
|
|
|
12.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
10,039,450
|
|
|
$
|
10.31
|
|
|
|
3.39
|
|
|
$
|
5,693,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected-to-vest at June 30, 2013
(1)
|
|
|
9,407,471
|
|
|
$
|
10.25
|
|
|
|
3.26
|
|
|
$
|
5,513,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 2013
|
|
|
7,799,327
|
|
|
$
|
10.21
|
|
|
|
2.77
|
|
|
$
|
4,907,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The expected-to-vest options are the result of applying the pre-vesting forfeiture assumption to total outstanding options.
|
The following table summarizes additional information regarding outstanding and exercisable stock options
at June 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range or Exercise Prices
|
|
Number of Shares
|
|
|
Weighted
Average
Remaining
Contractual Term
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$2.00-$6.38
|
|
|
1,299,055
|
|
|
|
1.65
|
|
|
$
|
5.05
|
|
|
|
1,209,055
|
|
|
$
|
4.98
|
|
$6.59-$9.00
|
|
|
802,695
|
|
|
|
4.51
|
|
|
$
|
7.37
|
|
|
|
499,566
|
|
|
$
|
7.69
|
|
$9.01-9.01
|
|
|
1,908,672
|
|
|
|
2.91
|
|
|
$
|
9.01
|
|
|
|
1,863,528
|
|
|
$
|
9.01
|
|
$9.40-$9.64
|
|
|
1,149,242
|
|
|
|
5.23
|
|
|
$
|
9.58
|
|
|
|
296,742
|
|
|
$
|
9.40
|
|
$9.81-$9.91
|
|
|
97,705
|
|
|
|
3.35
|
|
|
$
|
9.90
|
|
|
|
87,590
|
|
|
$
|
9.91
|
|
$10.28-$10.28
|
|
|
1,687,714
|
|
|
|
1.65
|
|
|
$
|
10.28
|
|
|
|
1,687,672
|
|
|
$
|
10.28
|
|
$10.34-$11.26
|
|
|
440,624
|
|
|
|
4.07
|
|
|
$
|
10.85
|
|
|
|
422,987
|
|
|
$
|
10.84
|
|
$11.67-$11.67
|
|
|
1,313,816
|
|
|
|
4.96
|
|
|
$
|
11.67
|
|
|
|
619,606
|
|
|
$
|
11.67
|
|
$12.43-$19.00
|
|
|
1,139,927
|
|
|
|
3.83
|
|
|
$
|
17.44
|
|
|
|
991,748
|
|
|
$
|
17.58
|
|
$22.51-$22.51
|
|
|
200,000
|
|
|
|
4.58
|
|
|
$
|
22.51
|
|
|
|
120,833
|
|
|
$
|
22.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.00-$22.51
|
|
|
10,039,450
|
|
|
|
3.39
|
|
|
$
|
10.31
|
|
|
|
7,799,327
|
|
|
$
|
10.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the total intrinsic value, the cash received and the
actual tax benefit of all options exercised during fiscal years 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Intrinsic value
|
|
$
|
423
|
|
|
$
|
1,197
|
|
|
$
|
25,795
|
|
Cash received
|
|
|
457
|
|
|
|
4,697
|
|
|
|
16,967
|
|
Tax benefit
|
|
|
113
|
|
|
|
511
|
|
|
|
9,612
|
|
As of June 30, 2013, there was $10.0 million of total unrecognized compensation expense related to
unvested stock options which is expected to be recognized over a weighted average period of 2.48 years.
Restricted
Stock Unit Activity
The following table summarizes the restricted stock unit activity under the Plans from
June 30, 2011 to June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at June 30, 2011
|
|
|
404,760
|
|
|
$
|
14.29
|
|
|
|
2.13
|
|
|
$
|
5,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
214,749
|
|
|
|
11.37
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(99,471
|
)
|
|
|
10.92
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(140,483
|
)
|
|
|
13.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2012
|
|
|
379,555
|
|
|
$
|
13.76
|
|
|
|
1.95
|
|
|
$
|
3,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,658,613
|
|
|
|
8.75
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(87,578
|
)
|
|
|
6.95
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(290,381
|
)
|
|
|
10.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
1,660,209
|
|
|
$
|
9.70
|
|
|
|
1.47
|
|
|
$
|
14,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013, there was $11.4 million of total unrecognized compensation expense related to
restricted stock units which is expected to be recognized over a weighted average period of 3.14 years.
12. Stockholders Equity
Stock Repurchases
On November 3, 2011, the Board of Directors authorized a stock repurchase program allowing the Company to repurchase up to $50.0 million of its outstanding shares of its common stock. During fiscal
year 2012, the Company repurchased 4,753,919 shares of its common stock for a total of $45.0 million. The Company completed its repurchase program during the first quarter of fiscal year 2013, purchasing 509,565 shares of its common stock for $5.0
million. The Company repurchased an aggregate of 5,263,484 shares of its common stock at a weighted average price of $9.50 per share. Repurchases under this program took place in the open market and were made under a Rule 10b5-1 plan.
Retirement of Treasury Stock
During the fiscal year ended 2013, the Company retired 638,365 shares of treasury stock, with a carrying value of approximately $6.2 million. These retired shares are now included in the Companys
pool of authorized but unissued shares. The retired treasury stock was initially recorded using the cost method. The Companys
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accounting policy upon the retirement of treasury stock is to deduct its par value from common stock, reduce additional paid-in capital by the amount recorded in additional paid-in capital when
the stock was originally issued and any remaining excess of cost as a deduction from retained earnings.
During the fiscal
year ended 2012, the Company retired 6,802,571 shares of treasury stock, with a carrying value of approximately $51.7 million. These retired shares are now included in the Companys pool of authorized but unissued shares. The retired treasury
stock was initially recorded using the cost method. The Companys accounting policy upon the formal retirement of treasury stock is to deduct its par value from common stock, reduce additional paid-in capital by the amount recorded in
additional paid-in capital when the stock was originally issued and any remaining amount as a deduction from retained earnings.
13. Related Party Transactions
Katrina Boydon, the sister of Bronwyn Syiek, the Companys President, served as the Companys Vice President
of Content and Compliance until August 15, 2013. In fiscal years 2013, 2012 and 2011, Ms. Boydon received a base salary of $230,000, $214,000 and $203,000 per year and a bonus payout of $40,000, $60,000 and $69,000. In fiscal years 2013
and 2012, Ms. Boydon was granted options to purchase an aggregate of 22,500 shares and 40,000 shares of the Companys common stock. From July 1, 2013 through August 15, 2013 Ms. Boydon received compensation of $61,000
for her services.
From March 2009 through January 2012, Rian Valenti, the son of Doug Valenti, the Companys Chief
Executive Officer and Chairman, served as a client strategy and development senior manager. In fiscal years 2012 and 2011, Mr. Rian Valenti received a base salary of $41,000 and $62,000 per year and a commission payout of $28,000 and $32,000.
In fiscal year 2012 and 2011, Mr. Rian Valenti was granted 1,250 restricted stock units and 750 restricted stock units of the Companys common stock.
In fiscal year 2012, the Companys president, Bronwyn Syiek, informed QuinStreet that she desired to start a company using her own resources that would develop and offer websites serving local
community groups. The Company had previously explored a similar business opportunity and had concluded that the opportunity was not consistent with its business direction and did not address a sufficiently large market to justify further investment.
Accordingly, the Company had discontinued its investment in this business opportunity in fiscal year 2011. During the time that the Company considered this business opportunity and tested the market with a product offering, Ms. Syiek, within
the scope of her employment by QuinStreet, gained certain know-how about the community-based website business. In January 2012, Ms. Syieks proposal to pursue the business opportunity herself was presented to the Companys Board of
Directors for their consideration under the Companys Related Person Transactions Policy. The Board of Directors, with Mr. Valenti and Ms. Syiek abstaining, concluded that Ms. Syieks proposal did not present a conflict of
interest and directed management to negotiate agreements to document the arrangement. On August 23, 2012, the Company, Ms. Syiek and TownB Corporation, a company founded and substantially owned by Ms. Syiek, entered into a License and
Investment Agreement pursuant to which QuinStreet provided TownB with a license to Ms. Syieks community-based website business know-how and QuinStreet received a 15% ownership interest in TownB, preemptive rights to maintain its ownership
level and a right of first refusal in the event that Ms. Syiek chooses to sell her shares or TownB should be sold. Other than the know-how held by Ms. Syiek, no other Company intellectual property has been licensed to TownB or
Ms. Syiek. The Company believes that both the know-how licensed, and the minority interest and associated rights in TownB that the Company received, have nominal fair market value.
On April 22, 2013, the Company entered into an agreement (the Transition Agreement) with Bronwyn Syiek, the
Companys President, which provides for the transition and conclusion of Ms. Syieks employment with the Company. Pursuant to the Transition Agreement, Ms. Syiek will continue to work full time as the Companys President at
her current base salary through September 30, 2013. Ms. Syiek was eligible for, and received, a bonus for fiscal year 2013. From October 1, 2013 until April 1, 2014, Ms. Syiek will continue to
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
serve as the Companys President and work part time at her current base salary but will not be eligible for a bonus for fiscal year 2014. Ms. Syiek or the Company may terminate her
employment at any time, for any reason, subject to a maximum severance payment of two months of base salary. The terms of the Transition Agreement are contingent on Ms. Syiek signing a release agreement. If Ms. Syieks employment is
not terminated before April 1, 2014, and provided that Ms. Syiek signs a release agreement, Ms. Syiek may enter into a 12-month consulting agreement with the Company, in consideration for which her Continuous Service (as
defined in the Companys 2010 Equity Incentive Plan) would continue for certain of her equity awards. Ms. Syiek or the Company could terminate the consulting agreement at any time and for any reason during the consulting period.
Ms. Syiek would not receive cash compensation under the consulting agreement.
14. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available
that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Companys chief operating decision maker is its chief executive officer. The
Companys chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about operating segments, including net sales and operating income before depreciation, amortization and stock-based
compensation expense.
The Company determined its operating segments to be DMS, which derives revenue from fees earned through
the delivery of qualified leads, clicks, calls, customers and, to a lesser extent, impressions, and DSS, which derives revenue from the sale of direct selling services through a hosted solution. The Companys reportable and operating segments
consist of DMS and DSS. The accounting policies of the two reportable and operating segments are the same as those described in Note 2, Summary of Significant Accounting Policies.
The Company evaluates the performance of its operating segments based on operating income before depreciation, amortization and
stock-based compensation expense.
The Company does not allocate all of its assets, or its depreciation and amortization
expense, stock-based compensation expense, interest income, interest expense and income tax expense by segment. Accordingly, the Company does not report such information.
Summarized information by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
$
|
304,085
|
|
|
$
|
369,023
|
|
|
$
|
401,703
|
|
DSS
|
|
|
1,016
|
|
|
|
1,445
|
|
|
|
1,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
305,101
|
|
|
|
370,468
|
|
|
|
403,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before depreciation, amortization, stock-based compensation expense, and goodwill
impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
|
47,316
|
|
|
|
71,840
|
|
|
|
89,590
|
|
DSS
|
|
|
556
|
|
|
|
808
|
|
|
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income before depreciation, amortization, stock-based compensation expense, and goodwill
impairment
|
|
|
47,872
|
|
|
|
72,648
|
|
|
|
90,311
|
|
Depreciation and amortization
|
|
|
(32,325
|
)
|
|
|
(31,150
|
)
|
|
|
(27,272
|
)
|
Stock-based compensation expense
|
|
|
(12,016
|
)
|
|
|
(12,996
|
)
|
|
|
(13,950
|
)
|
Impairment of goodwill
|
|
|
(92,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating (loss) income
|
|
$
|
(88,819
|
)
|
|
$
|
28,502
|
|
|
$
|
49,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables set forth net revenue and long-lived assets by geographic area (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
302,178
|
|
|
$
|
369,081
|
|
|
$
|
401,673
|
|
International
|
|
|
2,923
|
|
|
|
1,387
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
305,101
|
|
|
$
|
370,468
|
|
|
$
|
403,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
9,502
|
|
|
$
|
8,493
|
|
International
|
|
|
205
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
9,707
|
|
|
$
|
8,755
|
|
|
|
|
|
|
|
|
|
|
86