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Digital River
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
NAN North American Nickel 11,204
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NMFC New Mountain Finance 0
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OXSQ Oxford Square Capital 0
NTG Natco Group 0
CNTF China Techfaith Wireless Communication Technology 0
DRIV 2014-09-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 driv-20140930ex311439f15.htm
EX-31.2 driv-20140930ex31244e362.htm
EX-32.1 driv-20140930ex3218473fb.htm
EX-32.2 driv-20140930ex322faa7c5.htm

Digital River Earnings 2014-09-30

DRIV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 driv-20140930x10q.htm 10-Q driv_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2014

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM         TO        

 

Commission file number 000-24643

 

DIGITAL RIVER, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

DELAWARE

 

41-1901640

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

10380 BREN ROAD WEST
MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)

 

(952) 253-1234
(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2). See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

 

 

 

 

Large accelerated filer  

 

Accelerated filer  

 

Non-accelerated filer  

 

Smaller reporting company  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

The number of shares of common stock outstanding at October 1, 2014, was 31,888,021 shares.

 

 

 


 

DIGITAL RIVER, INC.

Form 10-Q

Index

 

September 30, 2014

 

 

PART I. 

FINANCIAL INFORMATION

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17 

 

 

 

Item 3. 

Qualitative and Quantitative Disclosure about Market Risk

24 

 

 

 

Item 4. 

Controls and Procedures

26 

 

 

 

PART II. 

OTHER INFORMATION

27 

 

 

 

Item 1. 

Legal Proceedings

27 

 

 

 

Item 1A. 

Risk Factors

27 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

45 

 

 

 

Item 3. 

Defaults Upon Senior Securities

45 

 

 

 

Item 4. 

Mine Safety Disclosure

45 

 

 

 

Item 5. 

Other Information

45 

 

 

 

Item 6. 

Exhibits

45 

 

 

 

SIGNATURES 

46 

 

 

 

EXHIBIT INDEX 

47 

 

 

1

 


 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

DIGITAL RIVER, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

(Unaudited)

 

 

 

 

September 30,

 

December 31,

 

2014

 

2013

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

$

233,405 

 

$

483,868 

Short-term investments

 

152,424 

 

 

115,652 

Accounts receivable, net of allowance of $3,062 and $3,206

 

64,667 

 

 

70,865 

Deferred tax assets

 

1,455 

 

 

1,479 

Prepaid expenses and other

 

24,916 

 

 

27,878 

Total current assets

 

476,867 

 

 

699,742 

 

 

 

 

 

 

Property and equipment, net

 

47,386 

 

 

53,770 

Goodwill

 

133,638 

 

 

139,318 

Intangible assets, net

 

21,565 

 

 

29,217 

Long-term investments

 

52,965 

 

 

56,023 

Deferred income taxes

 

1,078 

 

 

1,037 

Other assets

 

879 

 

 

2,067 

TOTAL ASSETS

$

734,378 

 

$

981,174 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable

$

168,010 

 

$

187,635 

Accrued payroll

 

15,468 

 

 

20,058 

Deferred revenue

 

4,522 

 

 

6,904 

Other current liabilities

 

42,169 

 

 

55,899 

Total current liabilities

 

230,169 

 

 

270,496 

 

 

 

 

 

 

NON-CURRENT LIABILITIES

 

 

 

 

 

Senior convertible notes 

 

135,180 

 

 

295,795 

Other liabilities

 

12,454 

 

 

21,452 

Total non-current liabilities

 

147,634 

 

 

317,247 

TOTAL LIABILITIES

 

377,803 

 

 

587,743 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued or outstanding

 

 -

 

 

 -

Common stock, $.01 par value; 120,000,000 shares authorized; 50,709,661 and 50,074,977 shares issued

 

507 

 

 

501 

Treasury stock at cost; 18,821,640 and 16,910,883 shares

 

(456,696)

 

 

(424,416)

Additional paid-in capital

 

775,704 

 

 

761,560 

Retained earnings

 

42,590 

 

 

51,254 

Accumulated other comprehensive income (loss)

 

(5,530)

 

 

4,532 

Total stockholders’ equity

 

356,575 

 

 

393,431 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

734,378 

 

$

981,174 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

2

 


 

DIGITAL RIVER, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

Revenue

$

88,835 

 

$

87,260 

 

$

274,028 

 

$

288,444 

Costs and expenses (exclusive of depreciation and amortization expense shown separately below):

 

 

 

 

 

 

 

 

 

 

 

Direct cost of services

 

18,304 

 

 

16,205 

 

 

53,275 

 

 

55,272 

Network and infrastructure

 

13,775 

 

 

14,648 

 

 

41,712 

 

 

44,049 

Sales and marketing

 

25,060 

 

 

25,013 

 

 

73,585 

 

 

80,415 

Product research and development

 

18,297 

 

 

18,108 

 

 

55,220 

 

 

52,967 

General and administrative

 

10,669 

 

 

12,011 

 

 

35,310 

 

 

44,040 

Goodwill impairment

 

 -

 

 

 -

 

 

 -

 

 

21,249 

Depreciation and amortization

 

6,601 

 

 

5,682 

 

 

19,469 

 

 

15,748 

Amortization of acquisition-related intangibles

 

2,038 

 

 

2,149 

 

 

6,395 

 

 

6,360 

Total costs and expenses

 

94,744 

 

 

93,816 

 

 

284,966 

 

 

320,100 

Income (loss) from operations

 

(5,909)

 

 

(6,556)

 

 

(10,938)

 

 

(31,656)

Interest income

 

469 

 

 

553 

 

 

1,735 

 

 

1,929 

Interest expense

 

(890)

 

 

(1,941)

 

 

(3,387)

 

 

(5,884)

Other income (expense), net

 

2,063 

 

 

(297)

 

 

1,859 

 

 

16,717 

Loss on extinguishment of debt

 

 -

 

 

 -

 

 

(5,605)

 

 

 -

Income (loss) from continuing operations before income taxes

 

(4,267)

 

 

(8,241)

 

 

(16,336)

 

 

(18,894)

Income tax expense (benefit)

 

(8,278)

 

 

(645)

 

 

(7,355)

 

 

(408)

Income (loss) from continuing operations

 

4,011 

 

 

(7,596)

 

 

(8,981)

 

 

(18,486)

Income (loss) from discontinued operations, net of tax

 

143 

 

 

(4,891)

 

 

317 

 

 

(6,238)

Net income (loss)

$

4,154 

 

$

(12,487)

 

$

(8,664)

 

$

(24,724)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share - basic:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.14 

 

$

(0.24)

 

$

(0.30)

 

$

(0.57)

Income (loss) from discontinued operations

 

 -

 

 

(0.16)

 

 

0.01 

 

 

(0.19)

Net income (loss) per share - basic

$

0.14 

 

$

(0.40)

 

$

(0.29)

 

$

(0.76)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per share - diluted:

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

$

0.13 

 

$

(0.24)

 

$

(0.30)

 

$

(0.57)

Income (loss) from discontinued operations

 

0.01 

 

 

(0.16)

 

 

0.01 

 

 

(0.19)

Net income (loss) per share - diluted

$

0.14 

 

$

(0.40)

 

$

(0.29)

 

$

(0.76)

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculation - basic

 

29,665 

 

 

31,487 

 

 

30,050 

 

 

32,435 

Shares used in per share calculation - diluted

 

30,126 

 

 

31,487 

 

 

30,050 

 

 

32,435 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

3

 


 

 

DIGITAL RIVER, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

Net income (loss)

$

4,154 

 

$

(12,487)

 

$

(8,664)

 

$

(24,724)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized foreign exchange gain (loss) on the revaluation of investments in foreign subsidiaries

 

(9,857)

 

 

8,749 

 

 

(10,876)

 

 

524 

Unrealized gain (loss) on investments

 

(107)

 

 

292 

 

 

666 

 

 

3,389 

Tax benefit (expense)

 

437 

 

 

1,053 

 

 

148 

 

 

 -

Other comprehensive income (loss)

 

(9,527)

 

 

10,094 

 

 

(10,062)

 

 

3,913 

Comprehensive income (loss)

$

(5,373)

 

$

(2,393)

 

$

(18,726)

 

$

(20,811)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

DIGITAL RIVER, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30,

 

2014

   

2013

OPERATING ACTIVITIES

 

 

 

Net income (loss)

$

(8,664)

 

$

(24,724)

Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities:

 

 

 

 

 

Loss (gain) on disposal of discontinued operations

 

(317)

 

 

2,110 

Amortization of acquisition-related intangibles

 

6,395 

 

 

6,360 

Provision for doubtful accounts

 

599 

 

 

1,400 

Depreciation and amortization

 

19,469 

 

 

15,831 

Impairment of goodwill

 

 -

 

 

21,249 

Debt issuance cost amortization

 

730 

 

 

1,278 

Amortization of investment premiums

 

1,111 

 

 

2,246 

Loss (gain) on disposal of equipment

 

(358)

 

 

121 

Gain on sale of investment

 

(2,209)

 

 

(17,526)

Loss on extinguishment of debt

 

5,605 

 

 

 -

Stock-based compensation expense

 

13,239 

 

 

16,295 

Deferred and other income taxes

 

120 

 

 

1,715 

Change in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Accounts receivable

 

3,600 

 

 

(2,856)

Prepaid and other assets

 

380 

 

 

5,940 

Accounts payable

 

(12,816)

 

 

(65,721)

Deferred revenue

 

(2,735)

 

 

(4,321)

Income tax payable

 

(9,630)

 

 

(2,151)

Other current liabilities

 

(6,320)

 

 

(2,801)

Net cash provided by (used in) operating activities

 

8,199 

 

 

(45,555)

INVESTING ACTIVITIES

 

 

 

 

 

Purchases of investments

 

(185,180)

 

 

(53,243)

Sales of investments

 

151,834 

 

 

90,891 

Cash received (paid) for cost method investments

 

1,551 

 

 

39,636 

Cash paid for acquisitions, net of cash received

 

 -

 

 

(55,843)

Proceeds from sale of equipment

 

532 

 

 

20 

Purchases of equipment and capitalized software

 

(13,612)

 

 

(15,662)

Net cash provided by (used in) investing activities

 

(44,875)

 

 

5,799 

FINANCING ACTIVITIES

 

 

 

 

 

Repurchase of senior convertible notes

 

(173,298)

 

 

(5,354)

Exercise of stock options

 

 -

 

 

1,273 

Sales of common stock under employee stock purchase plan

 

1,015 

 

 

1,183 

Repurchase of common stock

 

(28,260)

 

 

(43,950)

Repurchase of restricted stock to satisfy tax withholding obligation

 

(4,124)

 

 

(4,328)

Net cash provided by (used in) financing activities

 

(204,667)

 

 

(51,176)

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(9,120)

 

 

6,143 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(250,463)

 

 

(84,789)

CASH AND CASH EQUIVALENTS, beginning of period

 

483,868 

 

 

542,851 

CASH AND CASH EQUIVALENTS, end of period

$

233,405 

 

$

458,062 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES

 

 

 

 

 

Cash paid for interest on senior convertible notes

$

2,509 

 

$

3,123 

Cash paid for income taxes

$

3,663 

 

$

3,373 

 

 

See accompanying notes to consolidated financial statements.

 

5

 


 

1. BASIS OF PRESENTATION

 

The unaudited consolidated financial statements of Digital River, Inc. and our wholly owned subsidiaries (we, our, Digital River, or the Company) included herein have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information, and, accordingly, do not include all financial information and footnotes normally required for a complete set of financial statements.  These consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission.

 

The unaudited consolidated statements reflect all adjustments, including normal recurring adjustments, which in our opinion are necessary to fairly state our consolidated financial position, results of operations and cash flows for the periods presented.  The results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2014, due to seasonality and other factors.  The December 31, 2013, information was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

 

Summary of Significant Accounting Policies

 

A detailed description of our significant accounting policies can be found in our most recent Annual Report filed on Form 10-K for the fiscal year ended December 31, 2013.  There were no material changes in significant accounting policies during the quarter ended September 30, 2014.

 

Recent Accounting Pronouncements

 

ASU 2014-09 – Revenue from Contracts with Customers:  In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, which revises revenue recognition guidance in order to create a single standard that is intended to improve comparability over a range of industries, companies and geographic areas. The ASU is effective for reporting periods beginning after December 15, 2016, and will be applied retrospectively. We are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements.

 

ASU 2013-11 - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists:  In July 2013, the FASB issued ASU 2013-11, which requires an entity to present unrecognized tax benefits as a reduction of the deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, if net settlement is required or expected. To the extent that net settlement is not required or expected, the unrecognized tax benefit must be presented as a liability. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU No. 2013-11 is effective for reporting periods beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. We adopted the new guidance in ASU 2013-11 as of the period ended March 31, 2014, and its adoption did not have a material impact on our Consolidated Financial Statements.

 

We have determined that all other recently issued accounting standards will not have a material impact on our Consolidated Financial Statements, or do not apply to our operations.

 

 

6

 


 

2. NET INCOME (LOSS) PER SHARE

 

The following table summarizes the computation of basic and diluted net income (loss) per share from continuing operations (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2014

 

2013

 

 

2014

 

2013

Income (loss) from continuing operations per share - basic

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations - basic

 

$

4,011 

 

$

(7,596)

 

 

$

(8,981)

 

$

(18,486)

Weighted average shares outstanding - basic

 

 

29,665 

 

 

31,487 

 

 

 

30,050 

 

 

32,435 

Income (loss) from continuing operations per share - basic

 

$

0.14 

 

$

(0.24)

 

 

$

(0.30)

 

$

(0.57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations per share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations - basic

 

$

4,011 

 

$

(7,596)

 

 

$

(8,981)

 

$

(18,486)

Exclude: Interest expense and amortized financing cost of convertible senior notes, net of tax benefit

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

Income (loss) from continuing operations - diluted

 

$

4,011 

 

$

(7,596)

 

 

$

(8,981)

 

$

(18,486)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

29,665 

 

 

31,487 

 

 

 

30,050 

 

 

32,435 

Dilutive impact of non-vested stock and options outstanding

 

 

461 

 

 

 -

 

 

 

 -

 

 

 -

Dilutive impact of 2004 senior convertible notes

 

 

 -

 

 

 -

 

 

 

 -

 

 

 -

Weighted average shares outstanding - diluted

 

 

30,126 

 

 

31,487 

 

 

 

30,050 

 

 

32,435 

Income (loss) from continuing operations per share - diluted

 

$

0.13 

 

$

(0.24)

 

 

$

(0.30)

 

$

(0.57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incremental shares of 544,629 for the three months ended September 30, 2013, and 492,244 and 313,695 incremental shares for the nine months ended September 30, 2014 and 2013, respectively, related to dilutive securities were not included in the diluted net income (loss) per share calculation because the Company reported a loss for these periods.  Incremental shares related to dilutive securities have an anti-dilutive impact on net income (loss) per share when a net loss is reported and therefore are not included in the calculation.

 

Options to purchase 377,235 and 589,943 shares for the three months ended September 30, 2014 and 2013, respectively, and 377,235 and 589,943 shares for the nine months ended September 30, 2014 and 2013 were not included in the computation of diluted net income (loss) per share because their effect on diluted net income (loss) per share would have been anti-dilutive.

 

Our remaining 2004 senior convertible notes were repurchased in the second quarter of 2014.  Prior to the repurchase, the unissued shares underlying our 2004 senior convertible notes, 199,828 weighted average shares for the three months ended September 30, 2013, and weighted average shares of 583 and 199,828 for the nine months ended September 30, 2014 and 2013, respectively, were excluded for the purposes of calculating diluted net income (loss) per share, because their effect on diluted net income (loss) per share would have been anti-dilutive. 

 

The unissued shares underlying our 2010 senior convertible notes, 2,751,414 and 6,019,607 weighted average shares for the three months ended September 30, 2014 and 2013, respectively, and 3,499,945 and 6,070,600 weighted average shares for the nine months ended September 30, 2014 and 2013, respectively, were excluded for the purpose of calculating diluted net income (loss) per share, because their effect on diluted net income (loss) per share would have been anti-dilutive.

7

 


 

 

3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Comprehensive income (loss) includes revenues, expenses, and gains and losses that are excluded from net earnings under GAAP. Items of comprehensive income (loss) are unrealized gains and losses on investments and foreign currency translation adjustments which are added to net income (loss) to compute comprehensive income (loss). Comprehensive income (loss) related to cumulative translation adjustments has no tax expense or benefit as these funds are indefinitely invested.

 

The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax, by component for the periods ended September 30, 2014 and 2013, (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

Unrealized gain (loss) on investments

 

Total

Balance as of December 31, 2013

 

$

3,720 

 

$

812 

 

$

4,532 

Other comprehensive income (loss) before reclassifications

 

 

(10,876)

 

 

810 

 

 

(10,066)

Reclassified adjustment for net loss included in net income (loss)

 

 

 -

 

 

 

 

Net current period other comprehensive income (loss)

 

 

(10,876)

 

 

814 

 

 

(10,062)

Balance as of September 30, 2014

 

$

(7,156)

 

$

1,626 

 

$

(5,530)

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

 

$

2,565 

 

$

(5,735)

 

$

(3,170)

Other comprehensive income (loss) before reclassifications

 

 

524 

 

 

3,393 

 

 

3,917 

Reclassified adjustment for net gain included in net income (loss)

 

 

 -

 

 

(4)

 

 

(4)

Net current period other comprehensive income (loss)

 

 

524 

 

 

3,389 

 

 

3,913 

Balance as of September 30, 2013

 

$

3,089 

 

$

(2,346)

 

$

743 

 

 

 

 

 

 

 

 

 

 

 

The following table shows the gross amounts reclassified from accumulated other comprehensive income (loss) into the Consolidated Statements of Operations and the associated financial statement line item, for the periods ended September 30, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

Reclassification out of accumulated other comprehensive income

 

Financial statement line item

 

Three Months Ended

 

Nine Months Ended

 

Realized gains (losses) on investments

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

$

 -

 

$

(7)

 

 

 

 

Income tax benefit (expense)

 

 

 -

 

 

 

 

 

 

Net income (loss)

 

$

 -

 

$

(4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4. FAIR VALUE MEASUREMENTS

 

Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three categories:

 

Level 1 — Observable inputs such as quoted prices in active markets;

 

8

 


 

Level 2 — Other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly, including:

 

·

Quoted prices for similar assets or liabilities in active markets;

·

Quoted prices for identical or similar assets in less active markets than Level 1 investments;

·

Inputs other than quoted prices that are observable for assets or liabilities; and

·

Inputs that are derived principally from or corroborated by other observable market data.

 

Level 3 — Unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimate of market participant assumptions.

 

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

 

The following table sets forth by level within the fair value hierarchy, our financial assets that were accounted for at fair value on a recurring basis at September 30, 2014 and December 31, 2013, (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

Total

 

Level 1

 

Level 2

 

Level 3

Balance as of September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

233,405 

 

$

233,405 

 

$

 -

 

$

 -

Restricted cash

 

2,025 

 

 

2,025 

 

 

 -

 

 

 -

Certificate of deposit

 

1,500 

 

 

1,500 

 

 

 

 

 

 

U.S. government sponsored entities

 

999 

 

 

 -

 

 

999 

 

 

 -

Corporate bonds

 

129,343 

 

 

129,343 

 

 

 -

 

 

 -

Asset backed securities

 

20,560 

 

 

 -

 

 

20,560 

 

 

 -

Market basis equity investments

 

2,455 

 

 

2,455 

 

 

 -

 

 

 -

Auction rate securities

 

39,102 

 

 

 -

 

 

 -

 

 

39,102 

Total assets measured at fair value

$

429,389 

 

$

368,728 

 

$

21,559 

 

$

39,102 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

483,868 

 

$

483,868 

 

$

 -

 

$

 -

Restricted cash

 

3,560 

 

 

3,560 

 

 

 -

 

 

 -

Commercial paper

 

9,992 

 

 

9,992 

 

 

 -

 

 

 -

U.S. government sponsored entities

 

4,000 

 

 

 -

 

 

4,000 

 

 

 -

Corporate bonds

 

101,660 

 

 

101,660 

 

 

 -

 

 

 -

Market basis equity investments

 

3,549 

 

 

3,549 

 

 

 -

 

 

 -

Auction rate securities

 

41,993 

 

 

 -

 

 

 -

 

 

41,993 

Total assets measured at fair value

$

648,622 

 

$

602,629 

 

$

4,000 

 

$

41,993 

 

 

 

 

 

 

 

 

 

 

 

 

 

The assets held at September 30, 2014 and December 31, 2013 had no transfers between levels of the hierarchy during the respective periods then ended.

 

9

 


 

The following table is a reconciliation of assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 inputs) (in thousands):

 

 

 

 

 

 

 

Fair Value Measurements Using

 

Significant Unobservable Inputs

 

(Level 3)

 

Auction rate securities

Balance as of December 31, 2012

$

37,001 

Total unrealized gains (losses) included in other comprehensive income

 

5,092 

Settlements

 

(100)

Balance as of December 31, 2013

$

41,993 

Total unrealized gains (losses) included in other comprehensive income

 

2,109 

Settlements

 

(5,000)

Balance as of September 30, 2014

$

39,102 

 

 

 

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument. There have been no changes in the valuation techniques used by the Company to fair value our financial instruments:

 

Cash and Cash equivalents.  Consist of cash on hand in bank deposits, highly liquid investments and money market accounts. The fair value was measured using quoted market prices and is classified as Level 1.  The carrying amount approximates fair value.

 

Restricted Cash.  Consist of cash and cash equivalents that are held in escrow accounts and restricted by agreements with third parties for a particular purpose.  The carrying amount approximates fair value and is classified as Level 1.

 

Certificate of deposits. Consist of bank deposits with a carrying amount that approximates fair value and is classified as Level 1.  Maturity dates within one year.

 

Commercial Paper. Consist of primarily high grade commercial paper.  The fair value of these investments was measured using quoted market prices and is classified as Level 1.  As of December 31, 2013, the contractual maturities of these investments were within one year.

 

U.S government sponsored entities.  Consist of Fannie Mae, Freddie Mac and Federal Home Loan Bank investment grade bonds that are traded in less active markets than Level 1 investments.  The fair value of these bonds is classified as Level 2.  The contractual maturities of these investments are within four years.

 

Corporate Bonds.  Consist of investment grade corporate bonds that trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The fair value of these bonds was measured using quoted market prices and is classified as Level 1. The contractual maturities of these investments are within three years.

 

Asset Backed Securities.    Consist of securities backed by automobile loan receivables that are traded in less active markets than our Level 1 investments. The fair value is classified as Level 2. The contractual maturity of these investments is within six years.

 

Market Basis Equity Investments. Consist of available-for-sale equity securities that trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis.  The fair value of these investments was measured using quoted market prices and is classified as Level 1.

 

10

 


 

Auction Rate Securities.  As of September 30, 2014, we held $40.7 million of Auction Rate Securities (ARS) at par value which we have recorded at $39.1 million fair value. As of December 31, 2013, we held $45.7 million of ARS at par value which was recorded at $42.0 million fair value.  As of September 30, 2014 the ARS are 105142% over-collateralized and the underlying student loans are guaranteed by the U.S. government.

 

Due to the illiquid market conditions, the fair value of our ARS is recorded at a discount to par value of $1.6 million, or 4.0%, as of September 30, 2014.  This reduction from par value is considered temporary and is recorded in “Accumulated other comprehensive income (loss)”.  The temporary reduction from par value recorded in “Accumulated other comprehensive income (loss)” was $3.7 million, 8.2%, as of December 31, 2013.  For the three months ended September 30, 2014 and 2013, we recorded unrealized gains on our ARS of $0.2 million and $0.1 million, respectively.  For the nine months ended September 30, 2014 and 2013, we recorded unrealized gains on our ARS of $2.1 million and $3.3 million.  Unrealized gains on our ARS are recorded in “Unrealized gain (loss) on investments” in our Consolidated Statements of Comprehensive Income (Loss). 

 

In evaluating our ARS portfolio, we note sustained performance of our securities, strong parity levels, observed market redemption activity, continued receipt of interest and penalty payments, and an increase in fair value at September 30, 2014 compared to December 31, 2013. As we expect to receive all contractual cash flows, we do not believe the unrealized losses to be credit related.  We continue to believe that we will be able to liquidate at par over time. We also anticipate we will have sufficient cash flow from operations to execute our business strategy and fund our operational needs.  We do not intend to sell, or believe we will be required to sell, these investments prior to recovery of their amortized cost basis.  Accordingly, we treated the fair value decline as temporary.

 

The discounted cash flow model we used to value these securities included the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

2014

 

2013

Unobservable inputs

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption period (in years)

 

 

 

 

 

 

 

 

 

 

 

Credit ratings

 

 

 

A- to AAA

 

 

 

 

 

BB+ to AAA

 

 

 

Penalty coupon rate

 

1.0 

%

to

1.5 

%

 

1.0 

%

to

1.5 

%

 

Weighted average annualized yield

 

 

 

 

1.1 

%

 

 

 

 

1.6 

%

 

Risk adjusted discount rate

 

4.3 

%

to

5.1 

%

 

4.7 

%

to

7.8 

%

 

 

Management makes estimates and assumptions about the ARS, which can be sensitive to changes and effect the determination of fair value.  An increase in the length of redemption period or an increase in the discount rate assumption would decrease our fair value.  Also, a decrease in the securities’ credit ratings would decrease our fair value.

 

The portfolio had a weighted average maturity of 30.1 years at September 30, 2014, and 29.8 years as of December 31, 2013.

 

We classify our ARS as Level 3 long-term investments until we receive a call or partial call on the securities.  As of September 30, 2014 and December 31, 2013, our entire ARS portfolio was classified as Level 3 long-term investments. During the quarter ended September 30, 2014, we settled $5.0 million of ARS due to a call at par.  During the year ended December 31, 2013, we settled $0.1 million of ARS due to a partial call at par. The amount of Level 3 assets as a percentage of total assets measured at fair value on a recurring basis was 9.1% and 6.5% as of September 30, 2014 and December 31, 2013, respectively.

 

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances

11

 


 

like evidence of impairment.  For the three and nine months ended September 30, 2014 and 2013, other than the goodwill impairment recorded during the first quarter of 2013, as further discussed in Note 6 — Goodwill, we had no significant fair value adjustments of assets or liabilities on a nonrecurring basis subsequent to their initial recognition.  The inputs used in goodwill impairment fair value calculations fall within Level 3 inputs due to the significant unobservable inputs used to determine fair value.

 

 

5.  INVESTMENTS

 

As of September 30, 2014 and December 31, 2013, our available-for-sale securities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized Losses

 

 

 

Maturities/Reset Dates

 

 

 

    

Gross Unrealized

    

Less than 12

    

Greater than 12

    

 

    

Less than 12

    

Greater than 12

 

 

Cost

 

Gains

 

Months

 

Months

 

Fair Value

 

Months

 

Months

Balance as of September 30, 2014

  

 

 

 

 

 

  

 

 

 

 

  

 

 

 

 

 

 

  

 

Certificate of deposit

$

1,500 

 

$

 -

 

$

 -

 

$

 -

 

$

1,500 

 

$

1,500 

 

$

 -

U.S. government sponsored entities

 

1,000 

 

 

 -

 

 

(1)

 

 

 -

 

 

999 

 

 

 -

 

 

999 

Corporate bonds

 

129,395 

 

 

85 

 

 

(137)

 

 

 -

 

 

129,343 

 

 

56,532 

 

 

72,811 

Market basis equity investments

 

1,563 

 

 

895 

 

 

(3)

 

 

 -

 

 

2,455 

 

 

 -

 

 

2,455 

Asset backed securities

 

20,563 

 

 

20 

 

 

(23)

 

 

 -

 

 

20,560 

 

 

 -

 

 

20,560 

Auction rate securities

 

40,725 

 

 

 -

 

 

 -

 

 

(1,623)

 

 

39,102 

 

 

 -

 

 

39,102 

Total available-for-sale securities

$

194,746 

 

$

1,000 

 

$

(164)

 

$

(1,623)

 

$

193,959 

 

$

58,032 

 

$

135,927 

Balance as of December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

$

9,992 

 

$

 -

$

 

 -

 

$

 -

 

$

9,992 

 

$

9,992 

 

$

 -

U.S. government sponsored entities

 

4,000 

 

 

 -

 

 

 -

 

 

 -

 

 

4,000 

 

 

 -

 

 

4,000 

Corporate bonds

 

101,400 

 

 

281 

 

 

(21)

 

 

 -

 

 

101,660 

 

 

58,280 

 

 

43,380 

Market basis equity investments

 

1,668 

 

 

1,881 

 

 

 -

 

 

 -

 

 

3,549 

 

 

 -

 

 

3,549 

Auction rate securities

 

45,725 

 

 

 -

 

 

 -

 

 

(3,732)

 

 

41,993 

 

 

 -

 

 

41,993 

Total available-for-sale securities

$

162,785 

 

$

2,162 

 

$

(21)

 

$

(3,732)

 

$

161,194 

 

$

68,272 

 

$

92,922 

 

We consider the fair value decline of our investments to be temporary, as we do not intend to sell the investments and it is not likely that we will be required to sell the investments before recovery of their amortized cost basis.  See Note 4 — Fair Value Measurements, for further discussion regarding the fair value of ARS.  Temporary, unrealized, gains and losses on available for sale securities are recorded in “Accumulated other comprehensive income (loss)” within our Consolidated Balance Sheets.

 

Realized gains or losses on investments are recorded in our Consolidated Statements of Operations within “Other income (expense), net”.  Upon the sale of a security classified as available for sale, the amount reclassified out of “Accumulated other comprehensive income (loss)” into earnings is based on the specific identification method.

 

As of September 30, 2014 and December 31, 2013, the balance of our cost method equity investment was $11.4 million and $10.5 million, respectively, which is included in “Long-term investments” in our Consolidated Balance Sheets.  During the first quarter of 2014, we invested an additional $0.6 million and converted a note receivable of $0.3 million into shares in our cost method equity investment.  We have not estimated the fair value of

12

 


 

our cost method equity investment as of September 30, 2014 as we are not aware of any facts or circumstances that would indicate a decline in the fair value of this investment below its carrying value.

 

During the first quarter of 2013, we sold a cost method equity investment to a third party and recorded a gain of $11.1 million. During the second quarter of 2013, we received additional funds based on our sales agreement and as a result we recorded an additional gain of $6.5 million.  In the third quarter of 2014, we received the third of four anticipated payments under the sales agreement and recorded a gain of $2.2 million.  All gains related to this cost basis investment have been recorded in “Other income (expense), net” in our Consolidated Statements of Operations.   The fourth and final payment under the sales agreement is due in the third quarter of 2017 and we may receive up to $0.9 million of additional sale proceeds at that time.  We have concluded that these additional funds represent contingent gains and have not accounted for them in our consolidated financial statements in accordance with U.S. GAAP.

 

6.  GOODWILL

 

In the fourth quarter 2012, we determined our goodwill was impaired and recorded a preliminary non-cash pretax goodwill impairment charge.  During the first quarter of 2013, we completed our goodwill impairment analysis and recorded an additional non-cash pretax goodwill impairment charge of $21.2 million relating to our single reporting unit. The tax benefit associated with the first quarter impairment was offset by our tax valuation allowance.  As previously disclosed, a blended income and market approach was used to determine the applicable impairment changes.  The application of goodwill impairment tests is a level 3 fair value measurement and requires management judgment for many of the inputs.  Goodwill impairment charges are included as a separate operating expense line item, “Goodwill impairment” within Continuing Operations in our Consolidated Statements of Operations.

 

7.  STOCK-BASED COMPENSATION

 

The following table summarizes stock-based compensation expense recognized related to employee stock options, restricted and performance stock awards and employee stock purchases (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2014

 

2013

 

2014

 

2013

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

Direct cost of services

$

38 

 

$

35 

 

$

122 

 

$

124 

Network and infrastructure

 

380 

 

 

341 

 

 

1,127 

 

 

1,083 

Sales and marketing

 

1,452 

 

 

1,718 

 

 

4,029 

 

 

5,349 

Product research and development

 

849 

 

 

782 

 

 

2,570 

 

 

2,553 

General and administrative

 

1,866 

 

 

1,465 

 

 

5,391 

 

 

7,186 

Stock-based compensation included in costs and expenses

$

4,585 

 

$

4,341 

 

$

13,239 

 

$

16,295 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 


 

8. INCOME TAXES

 

The provision (benefit) for income taxes from continuing operations is composed of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,