10-K 1 a2012q4vclk10k.htm 10-K 2012 Q4 VCLK 10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-K
(Mark One)
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2012
or
o
 
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 000-30135
____________________________________________________________________________
VALUECLICK, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 
77-0495335
(I.R.S. Employer Identification No.)
30699 RUSSELL RANCH ROAD, SUITE 250
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive offices, including zip code)
Registrant's Telephone Number, Including Area Code: (818) 575-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: NONE.
____________________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
(Do not check if a
smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of June 29, 2012, which was the last business day of the registrant's most recently completed second fiscal quarter, the approximate aggregate market value of voting stock held by non-affiliates of the registrant was $1,157,219,130 (based upon the closing price for shares of the registrant's Common Stock as reported by the NASDAQ Global Select Market as of that date). As of February 22, 2013, there were 75,722,172 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2013 Annual Meeting of the Stockholders (the "Proxy Statement"), to be filed within 120 days of the end of the fiscal year ended December 31, 2012, are incorporated by reference in Part III hereof.





VALUECLICK, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CERTIFICATION OF CEO—Sarbanes-Oxley Act Section 302
 
 
 
CERTIFICATION OF CFO—Sarbanes-Oxley Act Section 302
 
 
 
CERTIFICATION OF CEO—Sarbanes-Oxley Act Section 906
 
 
 
CERTIFICATION OF CFO—Sarbanes-Oxley Act Section 906
 
 
This annual report on Form 10-K ("Report"), including information incorporated herein by reference, contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to expectations concerning matters that are not historical facts. Words such as "projects," "believes," "anticipates," "will," "estimate," "plans," "expects," "intends," and similar words and expressions are intended to identify forward-looking statements. Although we believe that such forward-looking statements are reasonable, we cannot assure you that such expectations will prove to be correct. Important language regarding factors which could cause actual results to differ materially from such expectations are disclosed in this Report, including without limitation under the caption "Risk Factors" beginning on page 7 of this Report and in the other documents we file, from time to time, with the Securities and Exchange Commission, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. All forward-looking statements attributable to ValueClick, Inc. are expressly qualified in their entirety by such language. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.




PART I.
ITEM 1.    BUSINESS
OVERVIEW
ValueClick is one of the world's largest and most comprehensive digital marketing services companies. Our customers include direct marketers, brand advertisers and the advertising agencies that service these groups. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales. We also offer technology infrastructure tools and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. The broad range of products and services that we provide enables our customers to address all aspects of the digital marketing process, including strategic planning, ad creation and optimization, media sourcing, and sophisticated reporting and analytics.
We generate the audiences for our advertisers' campaigns through a unique combination of: proprietary networks of third-party websites, ad exchanges, ad network optimization providers, spot buys with large publishers, search engines, and websites that we own and operate in several key verticals. Our sophisticated data management platform harnesses the large amount of anonymous data that is generated by our businesses, and we utilize this data, along with our technology platforms and marketing expertise, to deliver measurable performance for our customers.

In periods prior to the second quarter of 2012, we derived our revenue from four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. With the continued evolution of our products and services and changes to our internal reporting structure, we reassessed our operating and reportable segments in the second quarter of 2012 and determined that our Mediaplex business, which previously comprised the Technology segment, no longer met the definition of an operating segment. As such, our Mediaplex business is now included in the Media operating segment. With this change, we now operate in three business segments: Affiliate Marketing, Media and Owned & Operated Websites, which are described in more detail below. All prior period segment information herein has been recast to conform to this presentation. For information regarding the operating performance and total assets of these segments, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 17 to our December 31, 2012 consolidated financial statements included herein.
AFFILIATE MARKETING SEGMENT
Our Affiliate Marketing segment services, outlined below, are offered through our wholly-owned subsidiary Commission Junction. Through the combination of: a large-scale pay-for-performance model built on our proprietary technology platforms; marketing expertise; and a large, quality advertising network, our Affiliate Marketing business enables advertisers to develop their own fully-commissioned online sales force comprised of third-party affiliate publishers. We believe we are the largest provider of affiliate marketing services.
In affiliate marketing, a publisher joins an advertiser's affiliate marketing program and agrees to distribute the advertiser's offers in exchange for commissions on leads or sales generated. The publisher places the advertiser's display ads or text links on their website, in email campaigns, or in search listings, and receives a commission from the advertiser only when a visitor takes an agreed-upon action, such as making a purchase on the advertiser's website.
Our Affiliate Marketing services are offered on a hosted basis to enable marketers to execute their own affiliate marketing programs without the expense of building and maintaining their own in-house technical infrastructure and resources.
CJ Marketplace
To facilitate our advertiser customers' recruitment of affiliate publishers, we manage CJ Marketplace, an advertising network dedicated to our affiliate marketing business. Advertisers upload their offers onto CJ Marketplace, making them available for placement by affiliates. Affiliates apply to join the advertiser's program, and upon acceptance, select and place the advertiser's offers on their websites, in email campaigns or in search listings. These links are served and tracked by Commission Junction. When a visitor clicks on one of the affiliate's links and then makes an online purchase or completes an agreed-upon action on the advertiser's website, that transaction is tracked and recorded by Commission Junction.



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CJ Marketplace provides an open environment whereby affiliates can quickly view payment and conversion statistics to assess the effectiveness of every advertiser relationship and advertisement, and advertisers can quickly gauge the quality and potential of every affiliate relationship in the marketplace, allowing them to maximize the performance and scale of their online advertising campaigns.
Affiliate Marketing revenues are principally driven by variable compensation that is based on either a percentage of commissions paid to affiliates or on a percentage of transaction revenue generated from the programs managed with our affiliate marketing platforms.
In addition to the transaction-related revenue streams, we also receive monthly service fees from our advertiser customers who elect to utilize our Program Management service offerings. With these services, we assume full responsibility for all aspects of managing the advertiser's program, including planning, affiliate recruitment, program review and management, and program administration.
MEDIA SEGMENT
ValueClick's Media segment provides a comprehensive suite of digital marketing services and tailored programs that help marketers create and increase awareness for their products and brands, attract visitors and generate leads and sales through the Internet and on mobile devices. With the inclusion of our Mediaplex business beginning in the second quarter of 2012 as discussed above, the Media segment also offers technology infrastructure tools and consultative services that enable marketers to implement and manage their online marketing programs across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. Mediaplex is also beginning to offer traditional media services in addition to its prior role as a technology provider.
We have aggregated thousands of online publishers and mobile application developers, and we supplement the inventory available from these sources with our ability to acquire inventory by bidding on a real-time basis through ad exchanges and other channels. We utilize our proprietary technology and data platforms and apply our industry expertise to deliver our customers' display and mobile ad campaigns across the various inventory sources to which we have access. With traditional banner ads, interstitials, text links, and other online ad units, our technology maximizes the impact of marketing campaigns by identifying the most effective placement for each type of campaign. We also execute a wide variety of rich media applications, including in-stream and in-banner video ads, providing even greater visual and auditory impact for a marketer's online display advertising campaigns.
Marketers can reach targeted online users on a large scale, using a variety of online display and mobile ad units across our entire network of publishers, any of 21 standard channels of online content within the network, customized content channels, or a select number of websites where we are authorized to sell inventory on a single-site basis. Audiences can be further targeted based on the demographic and psychographic composition of sites within the network and technical information such as geographic location, browser type, connection speed, ISP, or top-level domain (.com, .edu, etc.). We also manage vertically-focused networks in the areas of pharma/healthcare (AdRx Media), home and garden (Modern Living Media) and motherhood (Mom's Media). In addition, our behavioral targeting capabilities allow marketers to retarget users who have recently visited their sites or display highly relevant ads based on anonymous profiles that we develop based on consumers' recent online behavior such as web browsing and interaction with ads across our network.
With over 13,900 active online publisher sites in the U.S. and approximately 18,500 worldwide, our display advertising network reached 176 million unique visitors, or 80% of the U.S. internet audience in December 2012, according to data published by comScore, Inc.
We offer multiple pricing models designed around maximizing our customers' return on investment. Our display and mobile advertising placements are offered on several pricing models including: cost-per-thousand-impression ("CPM"), whereby our customers pay based on the number of times the target audience is exposed to the advertisement; cost-per-click ("CPC"), whereby payment is triggered only when an interested individual clicks on our customer's advertisement; and cost-per-action ("CPA"), whereby payment is triggered only when a specific, pre-defined action is performed by an online consumer.
The benefits that our customers enjoy in display and other Web advertising include, but are not limited to: flexible pricing models; the ability to target and reach significant numbers of online consumers in a way that complements media buys on portals and other large websites; and the ability to improve online and mobile advertising performance while the campaigns are still running by optimizing at site, placement and creative levels, based on both response to ads and the resulting conversions.



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Publishers and application developers in our display and mobile advertising networks enjoy efficient and effective monetization of their advertising inventory, including: representation by our direct sales teams in major U.S. and European media markets; participation in large-scale advertiser and advertising agency campaigns they may not be able to access on their own; enhanced monetization through our campaign optimization technology; and, settlement services to facilitate payments to publishers for the inventory utilized by the advertisers. Through our proprietary publisher interface, publishers can control their participation in campaigns as well as their minimum acceptable level of revenue on an effective-CPM basis.
OWNED & OPERATED WEBSITES SEGMENT
Our Owned & Operated Websites segment services are offered through a number of transaction-focused branded websites including Pricerunner, Smarter.com, Couponmountain.com, and Investopedia.com. In 2009, we also launched a limited number of content websites in key online verticals such as healthcare, finance, travel, home and garden, education, and business services.
The Pricerunner comparison shopping destination websites operate in the United Kingdom, Sweden, Germany, France, Denmark, and Austria. The Smarter.com and Couponmountain.com websites operate primarily in the United States and, to a lesser extent, Japan, South Korea and China. The Pricerunner and Smarter.com websites enable consumers to research and compare products from among thousands of online and/or offline merchants using our proprietary technologies. We gather product and merchant data and organize it into comprehensive catalogs on our destination websites, along with relevant consumer and professional reviews. The Couponmountain.com website allows consumers to locate coupons and deals related to products and services that may be of interest to them. The Investopedia.com website provides information on a broad range of financial and investment topics, including a proprietary dictionary of financial terms, and our other vertical content websites offer consumers information and reference material across a variety of topics. Our services in these areas are free for consumers, and we generate revenue in one of three ways: on a CPC basis for traffic delivered to the customers' websites from listings on our websites; on a CPA basis when a consumer completes a purchase or other specific event; and on a CPM basis for display advertising shown on our websites.
Owned & Operated Websites Segment Divestiture
Our Owned & Operated Websites Segment previously included Search123, ValueClick's self-service paid search offering that operated primarily in Europe. Search123 was divested in September 2012. This divestiture is discussed more fully in Note 4 to our consolidated financial statements contained in this annual report.
INTERNATIONAL OPERATIONS
We currently conduct international operations through wholly-owned subsidiaries throughout Europe, and in Canada, China, South Korea, Japan, and South Africa.
In August 1999, we commenced operations in the European market with ValueClick Europe Ltd., a wholly-owned subsidiary of ValueClick, Inc., based in the United Kingdom. Since then we have expanded in Europe, Asia and Africa by opening wholly-owned subsidiaries in Paris, France; Munich, Germany; Madrid, Spain; Dublin, Ireland; Hong Kong, China; and Durban, South Africa. In 2004, we acquired Pricerunner, which has operations in Sweden, the United Kingdom, Germany, France, and Denmark. In 2007, we acquired MeziMedia, which has operations in the United States, China, Japan, and South Korea. In August 2010, we acquired Investopedia, which has operations in Canada. Employees in our international subsidiaries totaled 451 as of December 31, 2012. For additional information regarding our international operations, see Note 17 to our consolidated financial statements contained in this annual report on Form 10-K.
TECHNOLOGY PLATFORMS
Our proprietary applications are constructed from established, readily available technologies. Some of the basic components that our products are built on come from leading software and hardware providers such as Oracle, Dell, NetApp, Citrix, and Cisco while some components are constructed from leading Open Source initiatives such as Apache Web Server, MySQL, Java, Perl, PHP, Hadoop, and Linux. By striking the proper balance between using commercially available software and Open Source software, our technology expenditures are directed toward enhancing and maintaining our technology platforms while minimizing our technology costs.



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We build high-performance, availability and reliability into our product offerings. We safeguard against the potential for service interruptions by engineering fail-safe controls into our critical software components. ValueClick delivers its solutions from a variety of geographic locations within the United States, Europe and China. ValueClick applications are monitored 24 hours a day, 365 days a year by specialized monitoring systems, which engage engineers as necessary.
SALES, MARKETING AND CUSTOMER SERVICE
We market our products and services primarily through direct marketing, print advertising and online advertising throughout the year. We also market them through the ValueClick properties' websites, trade show participation and other media events. In addition, we actively pursue public relations programs to promote our brands, products and services to potential network publishers and advertiser customers, as well as to industry analysts.
Customers
We sell our products and services to a variety of advertisers, advertising agencies and traffic distribution partners. Our Media and Affiliate Marketing segment revenues are generated from thousands of customers, and there are no significant customer concentrations in these segments. Our Owned & Operated Websites segment has a significant customer that comprises a large portion of its revenue. A loss of, or reduction of revenue from, this significant customer could have a significant negative impact on the revenue of this segment.
Competition
We face intense competition in the Internet advertising market. We expect that this competition will continue to intensify in the future as a result of industry consolidation, the continuing maturation of the industry and low barriers to entry. We compete with a diverse and large pool of advertising, media and Internet companies.
Our ability to compete depends upon several factors, including the following:
our continued ability to aggregate large networks of quality publishers and application developers efficiently;
our continued ability to effectively acquire online inventory from ad exchanges;
the timing and market acceptance of new solutions and enhancements to existing solutions developed by us;
our customer service and support efforts;
our sales and marketing efforts;
the ease of use, performance, price, and reliability of solutions provided by us; and
our ability to remain price competitive while maintaining our operating margins.
Additional competitive factors include, but are not limited to, our: reputation, knowledge of the advertising market, geographical coverage, relationships with customers, technological capability, and quality and breadth of products and services.
Seasonality and Cyclicality
We believe that our business is subject to seasonal fluctuations, with the calendar fourth quarter generally being our strongest. Expenditures by advertisers and advertising agencies vary in cycles and tend to reflect the overall economic conditions, as well as budgeting and buying patterns.



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INTELLECTUAL PROPERTY RIGHTS
We currently rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We have registered the trademark "ValueClick" in the United States, European Union, Australia, Canada, China, Japan, and New Zealand. We currently have five pending U.S. patent applications. In addition, we have been granted twelve U.S. patents. We do not know if our current patent applications or any future patent application will result in a patent being issued within the scope of the claims we seek, if at all, or whether any patents we may have or may receive will be challenged or invalidated. Although patents are only one component of the protection of intellectual property rights, if our patent applications are denied, it may result in increased competition and the development of products substantially similar to our own. In addition, it is difficult to monitor unauthorized use of technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States, and our competitors may independently develop technology similar to our own. We will continue to assess appropriate occasions for seeking patent and other intellectual property protections for those aspects of our technology that we believe constitute innovations providing significant competitive advantages.
CORPORATE HISTORY AND RECENT ACQUISITIONS
We commenced operations in 1998 and completed our initial public offering of common stock on March 30, 2000. Our common stock is publicly traded and is reported on the NASDAQ Global Select Market under the symbol "VCLK." We have acquired 17 companies (five of which were subsequently divested) since our inception, including the following three acquisitions in the past three years.
Dotomi, Inc. On August 31, 2011, we completed the acquisition of Dotomi, Inc. ("Dotomi"), a leading provider of data-driven, intelligent display media for major retailers. Dotomi's offering enables advertisers to re-market to their existing customers through customized display ad campaigns. Dotomi's end-to-end solution manages the campaign strategy, creative development, media buys and campaign optimization, and campaign analytics. Under the terms of the agreement, we acquired all outstanding equity interests in Dotomi for total consideration of $288.1 million, consisting of cash consideration of $171.8 million, 7.1 million shares of our stock valued at $109.4 million, and the assumption of approximately 0.5 million shares of fully vested stock options valued at $6.9 million. Dotomi provided us with a unique set of data-driven targeting capabilities combined with expertise in brand strategy and creative development.
Greystripe, Inc. On April 21, 2011, we completed the acquisition of Greystripe, Inc. ("Greystripe"), a brand-focused mobile advertising network with expertise in ads delivered on smartphone applications. Under the terms of the agreement, we acquired all outstanding equity interests in Greystripe for cash consideration of $70.6 million. Greystripe provided us with immediate scale in the U.S. mobile advertising market.
Investopedia.com. On August 3, 2010, we completed the acquisition of Investopedia.com ("Investopedia"), a leading financial information and investing education website. Under the terms of the agreement, we acquired the assets and assumed certain liabilities of Investopedia for an aggregate purchase price of $41.7 million. Investopedia provides consumers with a library of financial terms, articles, tutorials, and investing education tools.
PRIVACY
We use anonymous and non-personally identifiable information, in accordance with our privacy policies, for purposes that include, without limitation, tailoring advertisements and website content to a Web user's interests. We use "cookies," along with other technologies, as set forth in our privacy policies, for purposes that include, without limitation, improving the experience Web users have when they see Web advertisements, advertising campaign reporting, and website reporting. In certain limited cases, we may collect personally identifiable information on a permitted basis. We store this personally identifiable data securely and do not use the data without the permission of the Web user.
Please refer to the section entitled "Government Enforcement Actions, Changes in Government Regulation, Technical Proposals and Industry Standards, Including, But Not Limited To, Spyware, Privacy and Email Matters, Could Decrease Demand For Our Products and Services and Increase Our Costs of Doing Business" in Item 1A "Risk Factors" of this annual report on Form 10-K for further details about our compliance with privacy regulations.



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EMPLOYEES
As of December 31, 2012, we had 1,111 employees in the U.S. and 451 employees in our international locations. None of these employees are covered by collective bargaining agreements. Management believes that our relations with our employees are good.
EXECUTIVE OFFICERS
See Part III, Item 10 "Directors and Executive Officers of the Registrant" of this annual report on Form 10-K for information about executive officers of the registrant.
WEBSITE ACCESS TO OUR PERIODIC SEC REPORTS
Our primary Internet address is www.valueclick.com. We make our Securities and Exchange Commission ("SEC") periodic reports (Forms 10-Q and Forms 10-K) and current reports (Forms 8-K), and amendments to these reports, available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.
Materials we file with the SEC may be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy and information statements, and other information regarding our company that we file electronically with the SEC.
CODE OF ETHICS AND BUSINESS CONDUCT
We have adopted a Code of Ethics and Business Conduct (the "Code") for our principal executive, financial and accounting, and other officers, and our directors, employees, agents, and consultants. The Code is publicly available on our website at www.valueclick.com under the heading "Corporate Governance" in the Investor Relations section. Among other things, the Code addresses such issues as conflicts of interest, corporate opportunities, confidentiality, fair dealing, protection and proper use of company assets, compliance with applicable laws (including insider trading laws), and reporting of illegal or unethical behavior.
Within the Code, ValueClick has established an accounting ethics complaint procedure for all of its employees, directors, agents and consultants. The complaint procedure is for any of these persons who may have concerns regarding accounting, internal accounting controls and auditing matters. We treat all complaints submitted through this process confidentially and with the utmost professionalism. In addition, we have established an anonymous online and telephone hotline through a secure third party so that employees can report fraud and/or serious financial reporting issues anonymously and without the fear of retaliation. We do not, and will not, condone any retaliation of any kind against an employee who comes forward with an ethical concern or complaint.



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ITEM 1A. RISK FACTORS
 
You should carefully consider the following risks before you decide to buy shares of our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties, including those risks set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below, may also adversely impact and impair our business. If any of the following risks actually occur, our business, results of operations or financial condition would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our stock.

This report on Form 10-K contains forward-looking statements based on the current expectations, assumptions, estimates, and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in this section and elsewhere in this report on Form 10-K. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
OUR PROFITABILITY MAY NOT REMAIN AT CURRENT LEVELS.
 
We face risks that could prevent us from achieving our current profitability levels in future periods. These risks include, but are not limited to, our ability to:
 
adapt our products, services and cost structure to changing macroeconomic conditions;

maintain and increase our inventory of advertising space on publisher websites, ad exchanges and other sources;

maintain and increase the number of advertisers that use our products and services;

continue to expand the number of products and services we offer and the capacity of our systems;

adapt to changes in Web advertisers' marketing needs and policies, and the technologies used to generate Web advertisements;

respond to challenges presented by the large and increasing number of competitors in the industry;

respond to challenges presented by the continuing consolidation within our industry;

adapt to changes in legislation, taxation or regulation regarding Internet usage, advertising and e-commerce; and

adapt to changes in technology related to online advertising filtering software.

If we are unsuccessful in addressing these or other risks and uncertainties, our business, results of operations and financial condition could be materially and adversely affected.
 
OUR REVENUE COULD DECLINE IF WE FAIL TO EFFECTIVELY MANAGE OUR EXISTING ADVERTISING SPACE AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW ADVERTISING SPACE.
 
Our success depends in part on our ability to effectively manage our existing advertising space as well as successfully access advertising space available on ad exchanges and through ad network optimization service providers. The Web publishers that list their unsold advertising space with us are not bound by long-term contracts that ensure us a consistent supply of advertising space, which we refer to as inventory. In addition, Web publishers can change the amount of inventory they make available to us at any time. If a Web publisher decides not to make advertising space from its websites available to us, we may not be able to replace this advertising space with advertising space from other Web publishers that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers' requests. This would result in lost revenue.




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We expect that our advertiser customers' requirements will become more sophisticated as the Web continues to mature as an advertising medium. If we fail to manage our existing advertising space effectively to meet our advertiser customers' changing requirements, our revenue could decline. Our growth depends, in part, on our ability to expand our advertising inventory within our networks and to have access to new sources of advertising inventory such as ad exchanges. To attract new customers, we must maintain a consistent supply of attractive advertising space. Our success relies in part on expanding our advertising inventory by selectively adding new Web publishers to our networks that offer attractive demographics, innovative and quality content and growing Web user traffic and email volume. Our ability to attract new Web publishers to our networks and to retain Web publishers currently in our networks will depend on various factors, some of which are beyond our control. These factors include, but are not limited to: our ability to introduce new and innovative products and services, our ability to efficiently manage our existing advertising inventory, our pricing policies, and the cost-efficiency to Web publishers and email list owners of outsourcing their advertising sales. In addition, the number of competing intermediaries that purchase advertising inventory from Web publishers continues to increase. We cannot assure you that the size of our advertising inventory will increase or remain constant in the future.
 
OUR OWNED & OPERATED WEBSITES SEGMENT REVENUE IS SUBJECT TO CUSTOMER CONCENTRATION RISKS. THE LOSS OF THIS CUSTOMER COULD SIGNIFICANTLY AND NEGATIVELY IMPACT THE REVENUE AND PROFITABILITY LEVELS OF THIS SEGMENT.
 
Our Owned & Operated Websites business generates revenue through a combination of: sponsored search listings placed on our destination websites, merchant relationships, affiliate marketing networks and display advertising. The largest component of revenue in our Owned & Operated Websites segment is generated via sponsored search listings from Google. Factors that could cause this relationship to cease or become significantly reduced in scale include, but are not limited to: the non-renewal of our distribution agreement; the determination by Google that consumer traffic received from us does not meet their quality standards (in other words, the traffic is not converting at appropriate rates); and changes in the competitive environment, such as industry consolidation. If our relationship with Google were to cease or become significantly reduced in scale, the revenue and profitability levels of our Owned & Operated Websites segment could be significantly and negatively impacted.

CHANGES IN HOW WE GENERATE ONLINE CONSUMER TRAFFIC FOR OUR DESTINATION WEBSITES COULD NEGATIVELY IMPACT OUR ABILITY TO MAINTAIN OR GROW THE REVENUE AND PROFITABILITY LEVELS OF OUR OWNED & OPERATED WEBSITES SEGMENT.
 
We generate online consumer traffic for our destination websites using various methods, including: search engine marketing (SEM), search engine optimization (SEO), organic traffic, email campaigns, in-text ad networks and distribution agreements with other website publishers. The current revenue and profitability levels of our Owned & Operated Websites segment are dependent upon our continued ability to use a combination of these methods to generate online consumer traffic to our websites in a cost-efficient manner. Our SEM and SEO techniques have been developed to work with the existing search algorithms utilized by the major search engines. The major search engines frequently modify their search algorithms. Future changes in these search algorithms could change the mix of the methods we use to generate online consumer traffic for our destination websites and could negatively impact our ability to generate such traffic in a cost-efficient manner, which could result in a significant reduction to the revenue and profitability of our Owned & Operated Websites segment. There can be no assurances that we will be able to maintain the current mix of online consumer traffic sources for our destination websites or that we will be able to modify our SEM and SEO techniques to address any future search algorithm changes made by the major search engines. In addition, in the fourth quarter of 2011 we began to decrease the amount of traffic that we drive to our destination websites via certain paid traffic sources as these tend to provide a lower relative margin than other traffic sources within our Owned & Operated Websites segment. This decrease in paid traffic has had a negative impact on the revenue we generated in our Owned & Operated Websites segment in 2012 as compared to 2011. However, these changes did not have a significant impact on our overall profitability.




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WE MAY FACE INTELLECTUAL PROPERTY ACTIONS THAT ARE COSTLY OR COULD HINDER OR PREVENT OUR ABILITY TO DELIVER OUR PRODUCTS AND SERVICES.
 
We may be subject to legal actions alleging intellectual property infringement (including patent infringement), unfair competition or similar claims against us. Companies may apply for or be awarded patents or have other intellectual property rights covering aspects of our technologies or businesses.  Defending ourselves against intellectual property infringement or similar claims is expensive and diverts management's attention.
 
IF THE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINE ADVERTISEMENTS AND TO PREVENT FRAUD ON OUR NETWORKS IS RESTRICTED OR BECOMES SUBJECT TO REGULATION, OUR EXPENSES COULD INCREASE AND WE COULD LOSE CUSTOMERS OR ADVERTISING INVENTORY.
 
Websites typically place small files of non-personalized (or "anonymous") information, commonly known as cookies, on an Internet user's hard drive. Cookies generally collect information about users on a non-personalized basis to enable websites to provide users with a more customized experience. Cookie information is passed to the website through an Internet user's browser software. We currently use cookies, along with other technologies, as set forth in our privacy policies, for purposes that include, without limitation, improving the experience Web users have when they see Web advertisements, advertising campaign reporting, website reporting and to monitor and prevent fraudulent activity on our networks. Most currently available Internet browsers allow Internet users to modify their browser settings to prevent cookies from being stored on their hard drive, and some users currently do so. Internet users can also delete cookies from their hard drives at any time. Some Internet commentators and privacy advocates have suggested limiting or eliminating the use of cookies, and legislation has been introduced in some jurisdictions to regulate the use of cookie technology. The effectiveness of our technology could be limited by any reduction or limitation in the use of cookies. If the use or effectiveness of cookies were limited, we expect that we would need to switch to other technologies to gather demographic and behavioral information. While such technologies currently exist, they may be less effective than cookies. We also expect that we would need to develop or acquire other technology to monitor and prevent fraudulent activity on our networks. Replacement of cookies could require reengineering time and resources, might not be completed in time to avoid losing customers or advertising inventory, and might not be commercially feasible. Our use of cookie technology or any other technologies designed to collect Internet usage information may subject us to litigation or investigations in the future. Any litigation or government action against us could be costly and time consuming, could require us to change our business practices and could divert management's attention.
  
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD HARM OUR BUSINESS.
 
Our success depends in part on the retention of personnel critical to our combined business operations due to, for example, unique technical skills, management expertise or key business relationships. We may be unable to retain existing management, finance, engineering, sales, customer support, and operations personnel that are critical to the success of our company, which may result in disruption of operations, loss of key business relationships, information, expertise or know-how, unanticipated additional recruitment and training costs, and diminished anticipated benefits of acquisitions, including loss of revenue and profitability.
 
Our future success is substantially dependent on the continued service of our key senior management. Our employment agreements with our key personnel are short-term and on an at-will basis. We do not have key-person insurance on any of our employees. The loss of the services of any member of our senior management team, or of any other key employees, could divert management's time and attention, increase our expenses and adversely affect our ability to conduct our business efficiently. Our future success also depends on our continuing ability to attract, retain and motivate highly skilled employees. We may be unable to retain our key employees or attract, retain and motivate other highly qualified employees in the future. We have experienced difficulty from time to time in attracting or retaining the personnel necessary to support the growth of our business, and may experience similar difficulties in the future.
 



9



DELAWARE LAW CONTAINS ANTI-TAKEOVER PROVISIONS THAT COULD DETER TAKEOVER ATTEMPTS THAT COULD BE BENEFICIAL TO OUR STOCKHOLDERS.
 
Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without our board of directors' consent, for at least three years from the date they first hold 15% or more of the voting stock.

SYSTEM FAILURES COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, WHICH COULD CAUSE US TO LOSE CUSTOMERS OR ADVERTISING INVENTORY.
 
Our success depends on the continuing and uninterrupted performance of our systems. Sustained or repeated system failures that interrupt our ability to provide services to customers, including failures affecting our ability to deliver advertisements quickly and accurately and to process visitors' responses to advertisements, would reduce significantly the attractiveness of our solutions to advertisers and Web publishers. Our business, results of operations and financial condition could also be materially and adversely affected by any systems damage or failure that impacts data integrity or interrupts or delays our operations. Our computer systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages and natural disasters. We lease data center space in various locations in northern and southern California; Virginia; Stockholm, Sweden; and Shanghai, China. Therefore, any of the above factors affecting any of these areas could substantially harm our business. Despite the precautions taken, unanticipated problems affecting our systems could cause interruptions in the delivery of our solutions in the future and our ability to provide a record of past transactions. Our data centers and systems incorporate varying degrees of redundancy. All data centers and systems may not automatically switch over to their redundant counterpart. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures in our systems.

A BREACH OF OUR SECURITY SYSTEMS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

Despite network security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Accidental or willful security breaches or other unauthorized access by third parties to our facilities or our information systems or the existence of computer viruses in our data or software could expose us to a risk of information loss and misappropriation of proprietary and confidential information. Any theft or misuse of such information could result in, among other things, unfavorable publicity, damage to our reputation, difficulty in marketing our products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial obligations for liabilities and damages related to the theft or misuse of such information, any of which could have a material adverse effect on our business, profitability and financial condition. Since the techniques used to obtain unauthorized access or to sabotage systems change frequently and are often not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

IT MAY BE DIFFICULT TO PREDICT OUR FINANCIAL PERFORMANCE BECAUSE OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE.
 
Our revenue and operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are beyond our control. You should not rely on period-to-period comparisons of our results of operations as an indication of our future performance. Our results of operations have fallen below the expectations of market analysts and our own forecasts in the past and may also do so in some future periods. If this happens, the market price of our common stock may fall significantly. The factors that may affect our quarterly operating results include, but are not limited to, the following:
 
macroeconomic conditions in the United States, Europe and Asia;

fluctuations in demand for our advertising solutions or changes in customer contracts;

fluctuations in click, lead, action, impression, and conversion rates;

fluctuations in the amount of available advertising space, or views, on our networks;



10




the timing and amount of sales and marketing expenses incurred to attract new advertisers;

fluctuations in sales of different types of advertising; for example, the amount of advertising sold at higher rates rather than lower rates;

fluctuations in the cost of online advertising;

seasonal patterns in Internet advertisers' spending;

fluctuations in our stock price which may impact the amount of stock-based compensation we are required to record;

changes in our pricing and publisher compensation policies, the pricing and publisher compensation policies of our competitors, the pricing and publisher compensation policies of our advertiser customers, or the pricing policies for advertising on the Internet generally;

changes in the regulatory environment, including regulation of advertising on the Internet, that may negatively impact our marketing practices;

possible impairments of the recorded amounts of goodwill, intangible assets, or other long-lived assets;

the timing and amount of expenses associated with litigation, regulatory investigations or restructuring activities, including settlement costs and regulatory penalties assessed related to government enforcement actions;

the adoption of new accounting pronouncements, or new interpretations of existing accounting pronouncements, that impact the manner in which we account for, measure or disclose our results of operations, financial position or other financial measures;

the loss of, or a significant reduction in business from, large customers resulting from, among other factors, the exercise of a cancellation clause within a contract, the non-renewal of a contract or an advertising insertion order, or shifting business to a competitor when the lack of an exclusivity clause exists;

fluctuations in levels of professional services fees or the incurrence of non-recurring costs;

deterioration in the credit quality of our accounts receivable and an increase in the related provision;

changes in tax laws or our interpretation of tax laws, changes in our effective income tax rate or the settlement of certain tax positions with tax authorities as a result of a tax audit; and

costs related to acquisitions of technologies or businesses.

Expenditures by advertisers also tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. Any decline in the economic prospects of advertisers or the economy generally may alter advertisers' current or prospective spending priorities, or may increase the time it takes us to close sales with advertisers, and could materially and adversely affect our business, results of operations, cash flows and financial condition.
 



11



OUR EXPANDING INTERNATIONAL OPERATIONS SUBJECT US TO ADDITIONAL RISKS AND UNCERTAINTIES AND WE MAY NOT BE SUCCESSFUL WITH OUR STRATEGY TO CONTINUE TO EXPAND SUCH OPERATIONS.
 
We initiated operations, through wholly-owned subsidiaries or divisions, in the United Kingdom in 1999; France and Germany in 2000; Sweden in 2004; Japan and China in 2007; Spain and Ireland in 2008; South Korea, South Africa and Canada in 2010; and Denmark in 2012. Our international expansion and the integration of international operations present unique challenges and risks to our company, and require management attention. Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international jurisdictions and could interfere with our ability to offer our products and services to one or more countries or expose us or our employees to fines and penalties. These laws and regulations include, but are not limited to, content requirements, tax laws, data privacy and filtering requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials, such as the U.K. Bribery Act. Violations of these laws and regulations could result in monetary damages, criminal sanctions against us, our officers, or our employees, and prohibitions on the conduct of our business. Our continued international expansion also subjects us to additional foreign currency exchange rate risks and will require additional management attention and resources. We cannot assure you that we will be successful in our international expansion. Our international operations and expansion subject us to other inherent risks, including, but not limited to:
 
the impact of recessions in economies outside of the United States;

changes in and differences between regulatory requirements between countries;

U.S. and foreign export restrictions, including export controls relating to encryption technologies;

reduced protection for and enforcement of intellectual property rights in some countries;

potentially adverse tax consequences;

difficulties and costs of staffing and managing foreign operations;

political and economic instability;

tariffs and other trade barriers; and

seasonal reductions in business activity.

Our failure to address these risks adequately could materially and adversely affect our business, revenue, results of operations, cash flows and financial condition.
 
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM UNAUTHORIZED USE, WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND SERVICES, WEAKEN OUR COMPETITIVE POSITION AND REDUCE OUR REVENUE.
 
Our success depends in large part on our proprietary technologies. In addition, we believe that our trademarks are key to identifying and differentiating our products and services from those of our competitors. We may be required to spend significant resources to monitor and police our intellectual property rights. If we fail to successfully enforce our intellectual property rights, the value of our products and services could be diminished and our competitive position may suffer.
 
We rely on a combination of copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Third-party software providers could copy or otherwise obtain and use our technologies without authorization or develop similar technologies independently, which may infringe upon our proprietary rights. We may not be able to detect infringement and may lose competitive position in the market before we do so. In addition, competitors may design around our technologies or develop competing technologies. Intellectual property protection may also be unavailable or limited in some foreign countries.
 



12



We generally enter into confidentiality or license agreements with our employees, consultants, vendors, customers, and corporate partners, and generally control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, unauthorized parties may attempt to disclose, obtain or use our products and services or technologies. Our precautions may not prevent misappropriation of our products, services or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States.
 
GOVERNMENT ENFORCEMENT ACTIONS, CHANGES IN GOVERNMENT REGULATION, TECHNICAL PROPOSALS AND INDUSTRY STANDARDS, INCLUDING, BUT NOT LIMITED TO, SPYWARE, PRIVACY AND EMAIL MATTERS, COULD DECREASE DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASE OUR COSTS OF DOING BUSINESS.
Laws and regulations that apply to Internet communications, commerce and advertising are becoming more prevalent. These regulations could affect the costs of communicating on the Web and could adversely affect the demand for our advertising solutions or otherwise harm our business, results of operations and financial condition. The United States Congress has enacted Internet legislation regarding children's privacy, copyrights, sending of commercial email (e.g., the Federal CAN-SPAM Act of 2003), and taxation. The United States Congress has passed legislation regarding spyware (i.e., H.R. 964, the "Spy Act of 2007") and the New York Attorney General's office has also pursued enforcement actions against companies in this industry. In addition, on December 1, 2010, the FTC issued its long-awaited staff report criticizing industry self-regulatory efforts as too slow and lacking adequate protections for consumers and emphasizing a need for simplified notice, choice and transparency to the consumer of the collection, use and sharing of their data. The FTC suggests various methods and measures, including an implementation of a "Do Not Track" ("DNT") mechanism - likely a persistent setting on consumers' browsers-that consumers can choose whether to allow the tracking of their online searching and browsing activities. As a result of the report, some of the browser makers have been working on their own do-not-track technical solutions, notably Microsoft Internet Explorer, Mozilla Firefox, Apple Safari and Google Chrome. Microsoft's Internet Explorer 9 ("IE9") offers a tracking protection feature that doesn't allow for tracking by allowing Internet users to download tracking protection block lists which consequently block any third-party domain included in such block lists from serving content. In addition, Microsoft's Internet Explorer 10 (“IE10”) is currently scheduled to offer DNT by default. These features of IE9 and IE10, if widely deployed and adopted, may adversely affect our ability to grow our company, maintain our current revenues and profitability, serve and monetize content, and utilize our behavioral targeting platform. Legislatively on the federal and state level, there have been a number of House bills that have been introduced addressing online privacy. These bills, if passed, could hinder growth in the use of the Web generally and adversely affect our business. Other laws and regulations have been adopted and may be adopted in the future, and may address issues such as user privacy, spyware, "do not email" lists, pricing, intellectual property ownership and infringement, copyright, trademark, trade secret, export of encryption technology, acceptable content, search terms, lead generation, behavioral targeting, taxation, and quality of products and services. Such measures could decrease the acceptance of the Web as a communications, commercial and advertising medium. We have policies to prohibit abusive Internet behavior, including prohibiting the use of spam and spyware by our Web publisher partners.
WE COULD BE SUBJECT TO LEGAL CLAIMS, GOVERNMENT ENFORCEMENT ACTIONS AND DAMAGE TO OUR REPUTATION AND HELD LIABLE FOR OUR OR OUR CUSTOMERS' FAILURE TO COMPLY WITH FEDERAL, STATE AND FOREIGN LAWS, REGULATIONS OR POLICIES GOVERNING CONSUMER PRIVACY, WHICH COULD MATERIALLY HARM OUR BUSINESS.
Recent growing public concern regarding privacy and the collection, distribution and use of information about Internet users has led to increased federal, state and foreign scrutiny and legislative and regulatory activity concerning data collection and use practices. The United States Congress and the State of California currently have pending legislation regarding privacy and data security measures, as detailed in the above previous paragraph. Any failure by us to comply with applicable federal, state and foreign laws and the requirements of regulatory authorities may result in, among other things, indemnification liability to our customers and the advertising agencies we work with, administrative enforcement actions and fines, class action lawsuits, cease and desist orders, and civil and criminal liability. Recently, class action lawsuits have been filed alleging violations of privacy laws by ISPs. The European Union's directive addressing data privacy limits our ability to collect and use information regarding Internet users. These restrictions may limit our ability to target advertising in most European countries. Our failure to comply with these or other federal, state or foreign laws could result in liability and materially harm our business.



13



In addition to government activity, privacy advocacy groups and the technology and direct marketing industries are considering various new, additional or different self-regulatory standards. This focus, and any legislation, regulations or standards promulgated, may impact us adversely. Governments, trade associations and industry self-regulatory groups may enact more burdensome laws, regulations and guidelines, including consumer privacy laws, affecting our customers and us. Since many of the proposed laws or regulations are just being developed, and a consensus on privacy and data usage has not been reached, we cannot yet determine the impact these proposed laws or regulations may have on our business. However, if the gathering of profiling information were to be curtailed, Internet advertising would be less effective, which would reduce demand for Internet advertising and harm our business.
Third parties may bring class action lawsuits against us relating to online privacy and data collection. We disclose our information collection and dissemination policies, and we may be subject to claims if we act or are perceived to act inconsistently with these published policies. Any claims or inquiries could be costly and divert management's attention, and the outcome of such claims could harm our reputation and our business.
Our customers are also subject to various federal and state laws concerning the collection and use of information regarding individuals. These laws include the Children's Online Privacy Protection Act, the Federal Drivers Privacy Protection Act of 1994, the privacy provisions of the Gramm-Leach-Bliley Act, the Federal CAN-SPAM Act of 2003, as well as other laws that govern the collection and use of consumer credit information. We cannot assure you that our customers are currently in compliance, or will remain in compliance, with these laws and their own privacy policies. We may be held liable if our customers use our technologies in a manner that is not in compliance with these laws or their own stated privacy policies.
 
OUR STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.
 
Our common stock has been publicly traded since March 30, 2000. The market price of our common stock has been subject to significant fluctuations since the date of our initial public offering. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of technology and Internet-based companies. As a result, the market price of our common stock may materially decline, regardless of our operating performance. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. We were involved in this type of litigation, which arose shortly after our stock price dropped significantly during the third quarter of 2007. Litigation of this type is often expensive and diverts management's attention and resources.
 
SEVERAL STATES HAVE IMPLEMENTED OR PROPOSED REGULATIONS THAT IMPOSE SALES TAX ON CERTAIN E-COMMERCE TRANSACTIONS INVOLVING THE USE OF AFFILIATE MARKETING PROGRAMS.
 
In 2008, the state of New York implemented regulations that require advertisers to collect and remit sales taxes on sales made to residents of New York if the affiliate/publisher that facilitated that sale is a New York-based entity. In early 2011 and mid-2011, the states of Illinois and California, respectively, also passed similar regulations. In addition, several other states have proposed similar regulations, although many of the regulations proposed by these other states have not passed. The New York and Illinois sales tax requirements have not had a material impact on our Affiliate Marketing segment results of operations. The California regulation was adopted on September 15, 2012. Since its inception, the California regulation has not had a material impact on the revenue generated by our Affiliate Marketing segment. We are unable to determine the impact if additional states adopt similar requirements.
IF OUR NOTE RECEIVABLE BECOMES UNCOLLECTIBLE, WE WOULD BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS.
As more fully described in Note 4 to our consolidated financial statements, we sold our Web Clients business on February 1, 2010 in exchange for a note receivable with a fair market value of $32.8 million. The carrying amount of the note receivable at December 31, 2012 is $29.4 million. If this note receivable were to become uncollectible, we would be required to take a charge against earnings for the amount of the note that becomes uncollectible. This may have an adverse impact on our results of operations.




14



WE MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS IF OUR GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED.
 
As of December 31, 2012, we have $434.5 million and $81.8 million of goodwill and amortizable intangible assets, respectively. We perform our annual impairment analysis of goodwill as of December 31 of each year, or sooner if we determine there are indicators of impairment, in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Under GAAP, the impairment analysis of goodwill must be based on estimated fair values. The determination of fair values requires assumptions and estimates of many critical factors, including, but not limited to: expected operating results; macroeconomic conditions; our stock price; earnings multiples implied in acquisitions in the online marketing industry; industry analyst expectations; and the discount rates used in the discounted cash flow analysis. We are required to perform our next goodwill impairment analysis at December 31, 2013.  If our business performance deteriorates due to macroeconomic conditions or company-specific issues, or our stock price experiences significant declines, we may be required to record additional impairment charges in the future.
 
We are also required under GAAP to review our amortizable intangible assets for impairment whenever events and circumstances indicate that the carrying value of such assets may not be recoverable. We may be required to record a significant charge to earnings in a period in which any impairment of our goodwill or amortizable intangible assets is determined.

WE MAY INCUR LIABILITIES TO TAX AUTHORITIES IN EXCESS OF AMOUNTS THAT HAVE BEEN ACCRUED WHICH MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
 
As more fully described in Note 9 to our consolidated financial statements, we have recorded significant income tax liabilities. The preparation of our consolidated financial statements requires estimates of the amount of income tax that will become payable in each of the jurisdictions in which we operate, as well as in jurisdictions in which we do not operate but may have tax nexus given the complexities associated with various state tax regulations. We may be challenged by the taxing authorities in these various jurisdictions and, in the event that we are not able to successfully defend our position, we may incur significant additional income tax liabilities and related interest and penalties which may have an adverse impact on our results of operations and financial condition. In addition, if income tax regulations in the United States were to change such that we were no longer able to defer taxation of our international income, our income tax expense and financial position would be adversely impacted.
 
IF WE FAIL TO MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD AND OUR BUSINESS MAY BE HARMED AND OUR STOCK PRICE MAY BE ADVERSELY IMPACTED.
 
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 requires management to evaluate and assess the effectiveness of our internal control over financial reporting. We determined that our internal control over financial reporting was effective as of December 31, 2012. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot assure you that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.



15



ITEM 1B.    UNRESOLVED STAFF COMMENTS
None.
ITEM 2.    PROPERTIES
As of December 31, 2012, we leased facilities at the following locations (including square-feet):
Westlake Village, California (41,500 square-feet)
San Francisco, California (31,700 square-feet)
Santa Barbara, California (28,350 square-feet)
Chicago, Illinois (80,050 square-feet)
Shanghai, China (23,300 square-feet)
New York, New York (17,700 square-feet)
Westborough, Massachusetts (15,800 square-feet)
Edmonton, Alberta, Canada (11,700 square-feet)
London, England (10,900 square-feet)
Los Angeles, California (9,000 square-feet)
We also lease small office space and facilities in: Monrovia, California; Redwood City, California; Atlanta, Georgia; Minneapolis, Minnesota; Toronto, Canada; Paris, France; Munich, Germany; Dublin, Ireland; Madrid, Spain; Stockholm, Sweden; Durban, South Africa; Seoul, Korea; Hong Kong, China; and, Tokyo, Japan. In addition, we use third-party co-location facilities that house our Web servers in: Sunnyvale, California; San Jose, California; El Segundo, California; Santa Clara, California; Ashburn, Virginia; Oak Brook, Illinois; Stockholm, Sweden; and Shanghai, China. For additional information regarding our obligations under leases, see Note 16 to our consolidated financial statements included in this annual report on Form 10-K.
ITEM 3.    LEGAL PROCEEDINGS
From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, we may receive letters alleging infringement of patent or other intellectual property rights. We are not currently a party to any material legal proceedings nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
ITEM 4.    MINE SAFETY DISCLOSURES
Not applicable.



16



PART II.
ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has traded on the NASDAQ Global Select Market (including its predecessor markets) under the symbol "VCLK" since our initial public offering on March 30, 2000. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market. On February 22, 2013, the last sale price of our common stock reported by the NASDAQ Global Select Market was $27.52 per share.
 
 
Price Range of Common Stock
 
 
High
 
Low
Fiscal Year Ended December 31, 2012:
 
 
 
 
Fourth Quarter
 
$
19.81

 
$
16.48

Third Quarter
 
$
17.55

 
$
15.31

Second Quarter
 
$
21.60

 
$
14.10

First Quarter
 
$
21.29

 
$
16.20

 
 
 
Price Range of Common Stock
 
 
High
 
Low
Fiscal Year Ended December 31, 2011:
 
 
 
 
Fourth Quarter
 
$
18.34

 
$
14.76

Third Quarter
 
$
19.20

 
$
13.35

Second Quarter
 
$
19.73

 
$
14.30

First Quarter
 
$
17.20

 
$
13.65

Stockholders
As of December 31, 2012, there were 483 stockholders of record who held shares of our common stock.

Dividend Policy
We have not declared or paid any cash dividends on our capital stock since our inception, and we have no immediate plans to begin paying a cash dividend.




17



Stockholder Return Performance Graph
Set forth below is a graph comparing the cumulative total stockholder return of $100 invested in our common stock on December 31, 2007 through December 31, 2012 relative to the cumulative total return of $100 invested in the NASDAQ Composite Index and the RDG Internet Composite Index calculated similarly for the same period.



18



Issuer Purchases of Equity Securities
The table below summarized our common stock repurchases during the three months ended December 31, 2012 (dollar amounts, except per share data, are in millions).
Period
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share(2)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
October 1, 2012 through October 31, 2012
 
100

 
$
16.02

 
100

 
$
91.3

November 1, 2012 through November 30, 2012
 
112,976

 
17.49

 
112,976

 
89.3

December 1, 2012 through December 31, 2012
 

 

 

 
89.3

Total
 
113,076

 
$
17.49

 
113,076

 
$
89.3

(1)
In September 2001, our board of directors authorized a stock repurchase program (the "Program") to allow for the repurchase of shares of our common stock at prevailing market prices in the open market or through unsolicited negotiated transactions. Since the inception of the Program and through December 31, 2011, our board of directors authorized a total of $633.3 million for repurchases under the Program and we repurchased a total of 64.4 million shares of our common stock for approximately $592.5 million. In 2012, our board of directors authorized an additional $159.2 million for repurchases under the Program. During the year ended December 31, 2012, we repurchased 6.6 million shares for $110.7 million, leaving up to an additional $89.3 million of our capital to be used to repurchase shares of our outstanding common stock under the Program as of December 31, 2012. Repurchases have been funded from available working capital and borrowings under our credit facility, and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by us, and we may discontinue repurchases at any time that management or our board of directors determines additional repurchases are not warranted. The amounts authorized by our board of directors exclude broker commissions.
(2)
Includes commissions paid.
ITEM 6.    SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to our consolidated statements of comprehensive income for the years ended December 31, 2012, 2011 and 2010 and with respect to our consolidated balance sheets as of December 31, 2012 and 2011 have been derived from the audited consolidated financial statements of ValueClick which are included elsewhere herein. The consolidated statement of operations data for the years ended December 31, 2009 and 2008 and the consolidated balance sheet data as of December 31, 2010, 2009 and 2008 have been derived from our consolidated financial statements not included herein, and as recast for discontinued operations and the reclassification of certain costs and expenses as described more fully in Note 1 to our consolidated financial statements contained elsewhere in this Annual Report. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with both Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this annual report on Form 10-K, and the consolidated financial statements and the notes to those consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data" of this annual report on Form 10-K.



19




CONSOLIDATED STATEMENT OF OPERATIONS DATA(1)
 
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(in thousands, except per share data)
Revenue
 
$
660,878

 
$
528,753

 
$
409,883

 
$
405,082

 
$
437,001

Cost of revenue(3)
 
249,259

 
221,403

 
177,064

 
176,308

 
195,028

Gross profit(3)
 
411,619

 
307,350

 
232,819

 
228,774

 
241,973

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Sales and marketing(2)(3)
 
85,470

 
64,976

 
44,886

 
52,616

 
74,982

General and administrative(2)
 
81,050

 
58,517

 
51,455

 
59,074

 
87,775

Technology(2)
 
66,324

 
49,060

 
34,805

 
24,925

 
31,058

Amortization of acquired intangible assets(3)
 
22,420

 
16,646

 
13,089

 
13,128

 
14,335

Impairment of goodwill and intangible assets
 

 

 

 

 
269,500

Total operating expenses(3)
 
255,264

 
189,199

 
144,235

 
149,743

 
477,650

Income (loss) from operations
 
156,355

 
118,151

 
88,584

 
79,031

 
(235,677
)
Interest and other income, net
 
1,151

 
4,666

 
2,204

 
302

 
2,451

Income (loss) before income taxes
 
157,506

 
122,817

 
90,788

 
79,333

 
(233,226
)
Income tax expense (benefit)
 
61,575

 
28,627

 
13,628

 
20,968

 
(34,971
)
Net income (loss) from continuing operations
 
95,931

 
94,190

 
77,160

 
58,365

 
(198,255
)
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of tax
 
4,805

 
6,940

 
3,310

 
10,251

 
(20,841
)
Gain on disposition, net of tax
 
980

 

 
10,040

 

 
4,984

Net income (loss) from discontinued operations
 
5,785

 
6,940

 
13,350

 
10,251

 
(15,857
)
Net income (loss)
 
$
101,716

 
$
101,130

 
$
90,510

 
$
68,616

 
$
(214,112
)
Basic net income (loss) per common share
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.24

 
$
1.17

 
$
0.95

 
$
0.67

 
$
(2.15
)
Discontinued operations
 
$
0.07

 
$
0.09

 
$
0.16

 
$
0.12

 
$
(0.17
)
Net income (loss)
 
$
1.32

 
$
1.26

 
$
1.11

 
$
0.79

 
$
(2.32
)
Diluted net income (loss) per common share
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.22

 
$
1.16

 
$
0.94

 
$
0.67

 
$
(2.15
)
Discontinued operations
 
$
0.07

 
$
0.09

 
$
0.16

 
$
0.12

 
$
(0.17
)
Net income (loss)
 
$
1.29

 
$
1.24

 
$
1.10

 
$
0.79

 
$
(2.32
)
Weighted-average shares used to calculate basic net income (loss) per common share
 
77,342

 
80,323

 
81,615

 
86,716

 
92,325

Weighted-average shares used to calculate diluted net income (loss) per common share
 
78,898

 
81,489

 
82,334

 
87,210

 
92,325

_________________________
(1)
The amounts included in the Consolidated Statement of Operations Data for the years presented reflect the following acquisitions from their effective dates:
Acquisitions
 
Date
Dotomi
 
August 2011
Greystripe
 
April 2011
Investopedia
 
August 2010

The results of operations of the following dispositions and disposal groups are reflected in discontinued operations for all periods:
Dispositions
 
Date
Search123
 
September 2012
Web Marketing Holdings, LLC ("Web Clients")
 
February 2010
Mediaplex Systems
 
October 2008
E-Babylon, Inc.
 
October 2008



20




(2)
Includes stock-based compensation for the following periods (in thousands):
 
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2010
 
2009
 
2008
Sales and marketing
 
$
4,918

 
$
3,320

 
$
1,280

 
$
1,907

 
$
15,621

General and administrative
 
11,492

 
7,829

 
5,815

 
6,034

 
30,620

Technology
 
5,357

 
2,873

 
849

 
928

 
1,925

Total
 
$
21,767

 
$
14,022

 
$
7,944

 
$
8,869

 
$
48,166


(3)
Includes the reclassification of traffic acquisition costs from sales and marketing expense and amortization of acquired developed technology and websites from operating expenses to cost of revenue for the following periods (see Note 1 to our consolidated financial statements contained in this annual report for further information regarding these reclassifications)(in thousands):
 
 
For the Year Ended December 31,
 
 
2011
 
2010
 
2009
 
2008
Traffic acquisition costs
 
$
54,051

 
$
66,532

 
$
64,738

 
$
60,225

Amortization of acquired developed technology and websites
 
9,633

 
7,522

 
6,675

 
7,398

Total
 
$
63,684

 
$
74,054

 
$
71,413

 
$
67,623


Consolidated Balance Sheet Data
 
 
As of December 31,
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(in thousands)
Cash, cash equivalents and marketable securities
 
$
136,638

 
$
116,676

 
$
197,317

 
$
180,523

 
$
150,412

Working capital
 
$
168,860

 
$
135,317

 
$
199,267

 
$
160,531

 
$
77,183

Total assets
 
$
899,696

 
$
880,711

 
$
613,567

 
$
566,562

 
$
603,279

Total non-current liabilities
 
$
166,590

 
$
181,702

 
$
37,668

 
$
61,669

 
$
73,195

Total stockholders' equity
 
$
590,705

 
$
563,393

 
$
472,641

 
$
406,489

 
$
353,479


Adjusted-EBITDA as a Non-GAAP Performance Measure
In evaluating our business, we consider earnings from continuing operations before interest, income taxes, depreciation, amortization, stock-based compensation, goodwill impairment charges, and acquisition related costs ("Adjusted-EBITDA"), a non-GAAP financial measure, as a key indicator of financial operating performance and as a measure of the ability to generate cash for operational activities and future capital expenditures. We use Adjusted-EBITDA in evaluating the overall performance of our business operations. We believe that this measure may also be useful to investors because it eliminates the effects of period-to-period changes in income from interest on our cash equivalents, note receivable and borrowings, and the costs associated with income tax expense, capital investments, acquisitions, and stock-based compensation which are not directly attributable to the underlying performance of our continuing business operations. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under U.S. Generally Accepted Accounting Principles ("GAAP"), or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted-EBITDA is a non-GAAP measure, it may not necessarily be comparable to similarly titled measures employed by other companies.



21



The following is a reconciliation of net income (loss) from continuing operations to Adjusted-EBITDA:
 
For the Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(in thousands)
Net income (loss) from continuing operations
$
95,931

 
$
94,190

 
$
77,160

 
$
58,365

 
$
(198,255
)
Interest and other income, net
(1,151
)
 
(4,666
)
 
(2,204
)
 
(302
)
 
(2,451
)
Income tax expense (benefit)
61,575

 
28,627

 
13,628

 
20,968

 
(34,971
)
Amortization of acquired developed technology and
websites included in cost of revenue
9,995

 
9,633

 
7,522

 
6,675

 
7,398

Amortization of acquired intangible assets
   included in operating expenses
22,420

 
16,646

 
13,089

 
13,128

 
14,335

Depreciation and leasehold amortization
11,723

 
7,914

 
6,430

 
7,387

 
8,344

Stock-based compensation
21,767

 
14,022

 
7,944

 
8,869

 
48,166

Impairment of goodwill and intangible assets

 

 

 

 
269,500

Acquisition related costs

 
412

 

 

 

Adjusted-EBITDA
$
222,260

 
$
166,778

 
$
123,569

 
$
115,090

 
$
112,066




22



Quarterly Results
The following table sets forth certain selected financial information for our eight most recent fiscal quarters. In the opinion of our management, this unaudited financial information has been prepared on the same basis as the audited financial statements, and includes all adjustments, consisting only of normal recurring adjustments, necessary to fairly state this information when read in conjunction with our consolidated financial statements and the related notes contained elsewhere herein. These operating results are not necessarily indicative of results of any future period.
 
For the Three-Month Period Ended
 
Dec. 31,
2012
 
Sept. 30,
2012
 
Jun. 30,
2012
 
Mar. 31,
2012
 
Dec. 31,
2011
 
Sept. 30,
2011
 
Jun. 30,
2011
 
Mar. 31,
2011
 
(in thousands, except per share data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
199,577

 
$
160,884

 
$
153,985

 
$
146,432

 
$
175,437

 
$
127,916

 
$
116,579

 
$
108,821

Cost of revenue(2)
71,054

 
63,143

 
60,377

 
54,685

 
69,357

 
54,399

 
50,813

 
46,834

Gross profit(2)
128,523

 
97,741

 
93,608

 
91,747

 
106,080

 
73,517

 
65,766

 
61,987

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales and marketing(1)(2)
22,806

 
21,088

 
20,649

 
20,927

 
22,002

 
16,534

 
14,036

 
12,404

General and administrative(1)
21,782

 
20,177

 
19,519

 
19,572

 
18,171

 
14,834

 
13,219

 
12,293

Technology(1)
16,900

 
16,457

 
16,887

 
16,080

 
15,551

 
12,592

 
10,796

 
10,121

Amortization of acquired intangible assets(2)
3,993

 
5,782

 
6,321

 
6,324

 
6,327

 
4,222

 
3,389

 
2,708

Total operating expenses(2)
65,481

 
63,504

 
63,376

 
62,903

 
62,051

 
48,182

 
41,440

 
37,526

Income from operations
63,042

 
34,237

 
30,232

 
28,844

 
44,029

 
25,335

 
24,326

 
24,461

Interest and other income (expense), net
(768
)
 
193

 
1,497

 
229

 
1,434

 
2,167

 
657

 
408

Income before income taxes
62,274

 
34,430

 
31,729

 
29,073

 
45,463

 
27,502

 
24,983

 
24,869

Income tax expense (benefit)
26,146

 
13,526

 
13,028

 
8,875

 
17,441

 
(8,546
)
 
9,934

 
9,798

Net income from continuing operations
36,128

 
20,904

 
18,701

 
20,198

 
28,022

 
36,048

 
15,049

 
15,071

Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of tax(1)
151

 
1,646

 
1,635

 
1,373

 
1,355

 
1,862

 
1,932

 
1,791

Gain on disposition, net of tax

 
980

 

 

 

 

 

 

Net income from discontinued operations
151

 
2,626

 
1,635

 
1,373

 
1,355

 
1,862

 
1,932

 
1,791

Net income
$
36,279

 
$
23,530

 
$
20,336

 
$
21,571

 
$
29,377

 
$
37,910

 
$
16,981

 
$
16,862

Basic net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.48

 
$
0.28

 
$
0.24

 
$
0.25

 
$
0.34

 
$
0.45

 
$
0.19

 
$
0.19

Discontinued operations
$

 
$
0.03

 
$
0.02

 
$
0.02

 
$
0.02

 
$
0.02

 
$
0.02

 
$
0.02

Net income
$
0.48

 
$
0.31

 
$
0.26

 
$
0.27

 
$
0.36

 
$
0.47

 
$
0.22

 
$
0.21

Diluted net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
0.47

 
$
0.27

 
$
0.23

 
$
0.25

 
$
0.34

 
$
0.44

 
$
0.19

 
$
0.18

Discontinued operations
$

 
$
0.03

 
$
0.02

 
$
0.02

 
$
0.02

 
$
0.02

 
$
0.02

 
$
0.02

Net income
$
0.47

 
$
0.31

 
$
0.25

 
$
0.26

 
$
0.35

 
$
0.47

 
$
0.21

 
$
0.21

Other Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted-EBITDA(3)
$
77,135

 
$
51,184

 
$
47,580

 
$
46,361

 
$
61,085

 
$
37,896

 
$
34,816

 
$
32,981

______________________________________
(1)
Includes stock-based compensation for the following periods (in thousands):
 
For the Three-Month Period Ended
 
Dec. 31,
2012
 
Sept. 30,
2012
 
Jun. 30,
2012
 
Mar. 31,
2012
 
Dec. 31,
2011
 
Sept. 30,
2011
 
Jun. 30,
2011
 
Mar. 31,
2011
Sales and marketing
$
1,039

 
$
1,283

 
$
942

 
$
1,654

 
$
1,675

 
$
826

 
$
533

 
$
286

General and administrative
2,342

 
2,904

 
3,220

 
3,026

 
2,663

 
2,077

 
1,676

 
1,413

Technology
996

 
1,369

 
1,586

 
1,406

 
1,438

 
812

 
405

 
218

Total
$
4,377

 
$
5,556

 
$
5,748

 
$
6,086

 
$
5,776

 
$
3,715

 
$
2,614

 
$
1,917





23



(2)
Includes the reclassification of traffic acquisition costs from sales and marketing expense and amortization of acquired developed technology and websites from operating expenses to cost of revenue for the following periods (see Note 1 to our consolidated financial statements contained in this annual report for further information regarding these reclassifications):
 
 
 
Dec. 31,
2011
 
Sept. 30,
2011
 
Jun. 30,
2011
 
Mar. 31,
2011
 
 
Traffic acquisition costs
$
11,776

 
$
11,764

 
$
13,594

 
$
16,917

Amortization of acquired developed technology and websites
$
2,498

 
$
2,197

 
$
2,758

 
$
2,180

Total
$
14,274

 
$
13,961

 
$
16,352

 
$
19,097


(3)
The following is a reconciliation of quarterly net income from continuing operations to Adjusted-EBITDA:
 
For the Three-Month Period Ended
 
Dec. 31,
2012
 
Sept. 30,
2012
 
Jun. 30,
2012
 
Mar. 31,
2012
 
Dec. 31,
2011
 
Sept. 30,
2011
 
Jun. 30,
2011
 
Mar. 31,
2011
 
(in thousands)
Net income from continuing operations
$
36,128

 
$
20,904

 
$
18,701

 
$
20,198

 
$
28,022

 
$
36,048

 
$
15,049

 
$
15,071

Interest and other expense (income), net
768

 
(193
)
 
(1,497
)
 
(229
)
 
(1,434
)
 
(2,167
)
 
(657
)
 
(408
)
Income tax expense (benefit)
26,146

 
13,526

 
13,028

 
8,875

 
17,441

 
(8,546
)
 
9,934

 
9,798

Amortization of acquired developed
   technology and websites included in
cost of revenue
2,491

 
2,519

 
2,492

 
2,493

 
2,498

 
2,197

 
2,758

 
2,180

Amortization of acquired intangible
   assets included in operating expenses
3,993

 
5,782

 
6,321

 
6,324

 
6,327

 
4,222

 
3,389

 
2,708

Depreciation and leasehold amortization
3,232

 
3,090

 
2,787

 
2,614

 
2,455

 
2,015

 
1,729

 
1,715

Stock-based compensation
4,377

 
5,556

 
5,748

 
6,086

 
5,776

 
3,715

 
2,614

 
1,917

Acquisition related costs

 

 

 

 

 
412

 

 

Adjusted-EBITDA
$
77,135

 
$
51,184

 
$
47,580

 
$
46,361

 
$
61,085

 
$
37,896

 
$
34,816

 
$
32,981






24



ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this annual report on Form 10-K beginning on page F-1.
The following discussion contains forward-looking statements based on the current expectations, assumptions, estimates, and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements as a result of certain factors, as more fully described in Item 1A "Risk Factors" and elsewhere in this annual report on Form 10-K. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Overview
ValueClick is one of the world's largest and most comprehensive digital marketing services companies. Our customers include direct marketers, brand advertisers and the advertising agencies that service these groups. We offer a suite of products and services that enable marketers to engage with their current and potential customers online and through mobile devices to increase brand awareness and generate leads and sales. We also offer technology infrastructure tools and services that enable marketers to implement and manage their online advertising across multiple channels including display, email, paid search, natural search, on-site, offline, and affiliate. The broad range of products and services that we provide enables our customers to address all aspects of the digital marketing process, including strategic planning, ad creation and optimization, media sourcing, and sophisticated reporting and analytics.
In 2011, we acquired Dotomi, Inc. ("Dotomi"), completed on August 31, 2011, and Greystripe, Inc. ("Greystripe"), completed on April 21, 2011. On August 3, 2010, we completed the acquisition of Investopedia.com ("Investopedia"). The results of operations of Dotomi, Greystripe and Investopedia have been included in our consolidated results of operations beginning September 1, 2011, April 22, 2011 and August 4, 2010, respectively. Note 3 to our consolidated financial statements included in this annual report on Form 10-K provides unaudited pro forma revenue, net income and basic and diluted net income per common share for the year ended December 31, 2011 and 2010 as if the acquisition of Dotomi occurred as of January 1, 2010. The results of operations of Greystripe and Investopedia were immaterial to our consolidated financial statements for the periods prior to their acquisition and have therefore been excluded from our pro forma disclosure herein.
In September 2012, we completed the disposition of our Search123 business. In February 2010, we completed the disposition of our Web Clients subsidiary. The results of operations of Search123 and Web Clients have been classified as discontinued operations in our consolidated financial statements. All current year and prior year financial information discussed herein pertains to the remaining continuing operations.
In periods prior to the second quarter of 2012, we derived our revenue from four business segments: Affiliate Marketing, Media, Owned & Operated Websites, and Technology. With the continued evolution of our products and services (including elements of shared computing infrastructure and overlapping services), and changes to our internal reporting structure, we reassessed our operating and reportable segments in the second quarter of 2012 and determined that our Mediaplex business, which previously comprised the Technology segment, no longer met the definition of an operating segment. Our Mediaplex business is now included in the Media operating segment. With this change, we now operate in three business segments: Affiliate Marketing, Media and Owned & Operated Websites, which are described in more detail below. All prior period segment information herein has been recast to conform to this presentation. Each of our three business segments is described in Item 1 "Business" of this annual report on Form 10-K.
Our operations and financial performance depend on general economic conditions. The economies in which we primarily operate have experienced, and could continue to experience, an economic downturn due to various factors including: challenges in worldwide credit markets, slower economic activity, decreased consumer confidence, high consumer debt levels and unemployment rates, and other adverse business conditions. Such fluctuations in these economies could cause, among other things, deterioration and continued decline in business and consumer spending, reductions in our customers' advertising budgets, and a decrease in demand for the types of online marketing services we provide or the products our customers offer.



25



These factors have negatively impacted our revenue levels in the past and could continue to negatively impact our business in the future.
The following table provides revenue, gross profit, operating expenses, and income from operations information for each of our three business segments. Segment income from operations, as shown below, excludes the effects of stock-based compensation, amortization of intangible assets and corporate expenses, as these items are excluded from the segment performance measures utilized by our chief operating decision maker in evaluating the performance of the segments. Corporate expenses consist of those costs not directly attributable to a business segment, and include: salaries and benefits for our executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax, Sarbanes-Oxley compliance, acquisition related costs, and certain legal matters; insurance; and other corporate expenses. A reconciliation of segment income from operations to consolidated income from operations and a reconciliation of segment revenue to consolidated revenue are also provided in the following table.
 
 
For the Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Affiliate Marketing Segment
 
 
 
 
 
 
Revenue
 
$
149,527

 
$
139,409

 
$
124,126

Cost of revenue
 
17,546

 
17,125

 
17,215

Gross profit
 
131,981

 
122,284

 
106,911

Operating expenses
 
40,631

 
37,711

 
37,359

Segment income from operations
 
$
91,350

 
$
84,573

 
$
69,552

Media Segment
 
 
 
 
 
 
Revenue
 
$
390,635

 
$
261,324

 
$
169,041

Cost of revenue
 
152,197

 
113,763

 
77,168

Gross profit
 
238,438

 
147,561

 
91,873

Operating expenses
 
118,233

 
72,984

 
41,650

Segment income from operations
 
$
120,205

 
$
74,577

 
$
50,223

Owned & Operated Websites Segment
 
 
 
 
 
 
Revenue
 
$
121,058

 
$
128,419

 
$
117,630

Cost of revenue
 
69,678

 
81,118

 
75,847

Gross profit
 
51,380

 
47,301

 
41,783

Operating expenses
 
23,337

 
21,468

 
17,756

Segment income from operations
 
$
28,043

 
$
25,833

 
$
24,027

Reconciliation of segment income from operations to consolidated
   income from operations:
 
 
 
 
 
 
Total segment income from operations
 
$
239,598

 
$
184,983

 
$
143,802

Corporate expenses
 
(29,061
)
 
(26,531
)
 
(26,663
)
Stock-based compensation
 
(21,767
)
 
(14,022
)
 
(7,944
)
Amortization of acquired intangible assets included in consolidated
   cost of revenue
 
(9,995
)
 
(9,633
)
 
(7,522
)
Amortization of acquired intangible assets included in consolidated
   operating expenses
 
(22,420
)
 
(16,646
)
 
(13,089
)
Consolidated income from operations
 
$
156,355

 
$
118,151

 
$
88,584

Reconciliation of segment revenue to consolidated revenue:
 
 
 
 
 
 
Affiliate Marketing
 
$
149,527

 
$
139,409

 
$
124,126

Media
 
390,635

 
261,324

 
169,041

Owned & Operated Websites
 
121,058

 
128,419

 
117,630

Inter-segment eliminations
 
(342
)
 
(399
)
 
(914
)
Consolidated revenue
 
$
660,878

 
$
528,753

 
$
409,883




26



RESULTS OF OPERATIONS—Fiscal Years Ended December 31, 2012 and 2011
Revenue.    Consolidated revenue for the year ended December 31, 2012 was $660.9 million, representing a 25.0% increase from the prior year total of $528.8 million.
Affiliate Marketing segment revenue increased to $149.5 million for the year ended December 31, 2012 compared to $139.4 million in 2011. This increase of $10.1 million, or 7.3%, was attributable to growth in our domestic operations, partially offset by a decrease in revenue from our international operations. Our domestic growth was due to an increase in the number of customers and an increase in transaction volumes associated with existing customers. Changes in our pricing or the average order value of transactions closed on our network did not have a significant impact on Affiliate Marketing revenue in the year ended December 31, 2012.
Media segment revenue increased to $390.6 million for the year ended December 31, 2012 compared to $261.3 million for 2011. This increase was primarily attributable to the inclusion of a full year of results from Dotomi and Greystripe, which we acquired on August 31, 2011 and April 21, 2011, respectively, and growth in these businesses in 2012.
Owned & Operated Websites segment revenue decreased to $121.1 million for the year ended December 31, 2012 compared to $128.4 million in 2011. The decrease of $7.4 million, or 5.7%, was primarily attributable to our de-emphasizing certain lower margin traffic acquisition strategies in 2012. Our Owned & Operated Websites segment revenue is concentrated with one major customer, Google. A loss of, or reduction of revenue from, this customer could have a significant negative impact on the revenue and profitability of this segment and the company.
Cost of Revenue and Gross Profit.    Cost of revenue includes payments to website publishers, payments to search engines for driving consumer traffic to our owned and operated websites, certain labor costs that are directly related to revenue-producing activities, Internet access costs, amortization of developed technology and websites acquired in business combinations, and depreciation on revenue-producing technologies.
Costs associated with payments to search engines for driving consumer traffic to our owned and operated websites were, prior to the fourth quarter of 2011, classified in operating expenses in the Sales and marketing expense line item. In the fourth quarter of 2011, we began classifying these costs in Cost of revenue. Additionally, we corrected the accounting classification of the amortization of developed technologies and websites acquired in business combinations by including it in Cost of revenue beginning in the fourth quarter of 2011. These reclassifications are more fully described in Note 1 to our consolidated financial statements. Amortization related to developed technologies and websites acquired in business combinations was previously recorded in operating expenses in the Amortization of intangible assets acquired in business combinations line item. All periods presented in the Consolidated Statements of Comprehensive Income included herein are presented using the new classifications.
Consolidated cost of revenue was $249.3 million for the year ended December 31, 2012 compared to $221.4 million in 2011, an increase of $27.9 million, or 12.6%. Our consolidated gross margin increased to 62.3% for the year ended December 31, 2012 compared to 58.1% for the year ended December 31, 2011.
Cost of revenue for the Affiliate Marketing segment was $17.5 million for the year ended December 31, 2012 compared to $17.1 million in 2011. Our Affiliate Marketing segment gross margin remained relatively consistent at 88.3% for the year ended December 31, 2012 compared to 87.7% for the same period in 2011.
Cost of revenue for the Media segment increased to $152.2 million for the year ended December 31, 2012 compared to $113.8 million in 2011. Our Media segment gross margin increased to 61.0% for the year ended December 31, 2012 compared to 56.5% for the same period in 2011. The increase in Media segment gross margin resulted primarily from the inclusion of a full year results of Dotomi which was acquired on August 31, 2011. Excluding the impact of Dotomi, our Media segment gross margins were consistent with the year ago period.
Cost of revenue for the Owned & Operated Websites segment was $69.7 million for the year ended December 31, 2012 compared to $81.1 million in 2011. Our Owned & Operated Websites segment gross margin increased to 42.4% for the year ended December 31, 2012 compared to 36.8% in 2011. The decrease in cost of revenue, and related increase in gross margin, was due to our de-emphasizing certain lower margin traffic acquisition strategies as discussed above.



27



Operating Expenses:
Sales and Marketing.    Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials. Sales and marketing expenses for the year ended December 31, 2012 were $85.5 million compared to $65.0 million in 2011, an increase of $20.5 million, or 31.5%. Sales and marketing expenses increased primarily due to the growth in our businesses as described above and the inclusion of a full year of results from Dotomi and Greystripe. Our sales and marketing expenses as a percentage of revenue increased slightly to 12.9% for the year ended December 31, 2012 compared to 12.3% in 2011.
General and Administrative.    General and administrative expenses consist primarily of facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt expense, and other general overhead costs. General and administrative expenses increased to $81.1 million for the year ended December 31, 2012 compared to $58.5 million in 2011, an increase of $22.5 million, or 38.5%. General and administrative expenses increased primarily due to the inclusion of a full year of results from Dotomi and Greystripe and higher stock-based compensation expense as described below. As a percentage of revenue, our general and administrative expenses increased to 12.3% for the year ended December 31, 2012 compared to 11.1% in 2011.
Technology.    Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms and network development, including compensation and employee benefits for our engineering and network operations departments, as well as costs for contracted services and supplies. Technology expenses for the year ended December 31, 2012 were $66.3 million compared to $49.1 million in 2011, an increase of $17.3 million, or 35.2%. The increase in technology expenses was primarily due to the growth in our businesses as described above and the inclusion of a full year of results from Dotomi and Greystripe. Our technology expenses as a percentage of revenue increased slightly to 10.0% for the year ended December 31, 2012 compared to 9.3% in 2011.
Segment Income from Operations.    Affiliate Marketing segment income from operations for the year ended December 31, 2012 increased 8.0%, or $6.8 million, to $91.4 million, from $84.6 million in the prior year, and represented 61.1% and 60.7% of Affiliate Marketing segment revenue in these respective periods. The increase in Affiliate Marketing segment income from operations was primarily attributable to the higher revenue as described above.
Media segment income from operations for the year ended December 31, 2012 increased 61.2%, or $45.6 million, to $120.2 million, from $74.6 million in the prior year, due to the higher revenue and gross margin as described above. Media segment operating income margin increased to 30.8% for the year ended December 31, 2012 compared to 28.5% in 2011.
Owned & Operated Websites segment income from operations for the year ended December 31, 2012 increased to $28.0 million, from $25.8 million in the prior year, due to the higher gross margin as described above. Owned & Operated Websites segment operating income margin increased to 23.2% for the year ended December 31, 2012 compared to 20.1% in 2011.
Stock-Based Compensation.    Stock-based compensation for the year ended December 31, 2012 was $21.8 million compared to $14.0 million in 2011. The increase of $7.7 million was primarily due to unvested equity awards assumed in the acquisitions of Dotomi and Greystripe as well as new equity awards granted throughout 2012 and 2011. We currently expect our stock-based compensation expense in 2013 to be in the range of $21 million to $23 million. Such amounts may change as a result of higher or lower than anticipated equity award grants to new and existing employees, differences between actual and estimated forfeitures of stock options and restricted stock, fluctuations in the market value of our common stock, modifications to our existing stock option programs, additions of new stock-based compensation programs, or other factors.
Amortization of Acquired Intangible Assets.    Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue, for the year ended December 31, 2012 was $10.0 million compared to $9.6 million in 2011. Amortization of all remaining acquired intangible assets, included in Amortization of acquired intangible assets, for the year ended December 31, 2012 was $22.4 million compared to $16.6 million in 2011. The increases in amortization expense compared to the prior year are primarily due to the addition of certain intangible assets arising from the acquisitions of Dotomi, and Greystripe.
We currently anticipate total amortization of intangible assets of approximately $24.9 million for the year ending December 31, 2013, with approximately $9.4 million of this amount being recorded in Cost of revenue and approximately $15.5 million being recorded in operating expenses. Such amounts may change as a result of any future acquisitions.



28



Interest and Other Income, net.    Interest and other income, net, consists principally of interest earned on our note receivable, foreign currency exchange gains or losses and interest expense associated with our credit facility. Interest and other income, net was $1.2 million for 2012 compared to $4.7 million for the same period in 2011. This was due to additional interest expense on borrowings under our credit facility in 2011, offset partially by an increase in foreign exchange gains.
Income Tax Expense.    For the years ended December 31, 2012 and 2011, we recorded income tax expense of $61.6 million and $28.6 million, respectively. Our effective income tax rate for the year ended December 31, 2012 increased to 39.1% from 23.3% for the year ended December 31, 2011. In both 2012 and 2011, we recognized tax benefits related to the reversal of contingency reserves due to the expiration of certain statutes of limitations. The tax benefit realized in 2012 of $2.6 million was lower than the $19.5 million tax benefit we recognized in 2011, resulting in the higher effective tax rate for 2012. We currently expect our effective tax rate to be approximately 40.0% in the year ending December 31, 2013.
Adjusted-EBITDA.    Adjusted-EBITDA for the year ended December 31, 2012 increased to $222.3 million from $166.8 million for the same period in 2011, representing an increase of $55.5 million, or 33.3%. The increase is due to the increased operating income in all of our segments as described above.
RESULTS OF OPERATIONS—Fiscal Years Ended December 31, 2011 and 2010
Revenue.    Consolidated revenue for the year ended December 31, 2011 was $528.8 million, representing a 29.0% increase from the prior year total of $409.9 million.
Affiliate Marketing segment revenue increased to $139.4 million for the year ended December 31, 2011 compared to $124.1 million in 2010. This increase of $15.3 million, or 12.3%, was attributable to our domestic operations and was due to an increase in the number of customers and an increase in transaction volumes associated with existing customers. Changes in our pricing or the average order value of transactions closed on our network did not have a significant impact on Affiliate Marketing revenue in the year ended December 31, 2011.
Media segment revenue increased to $261.3 million for the year ended December 31, 2011 compared to $169.0 million for 2010. This increase was attributable to: (a) the acquisitions of Dotomi and Greystripe, which we acquired on August 31, 2011 and April 21, 2011, respectively, and together contributed approximately $60.8 million of revenue in 2011; (b) growth in our historical display advertising business as a result of our larger sales organization, new product offerings and a strong display advertising market in the United States in 2011; and (c) new ad serving customers and higher volumes of ad serving, particularly in our international operations.
Owned & Operated Websites segment revenue increased to $128.4 million for the year ended December 31, 2011 compared to $117.6 million in 2010. The increase of $10.8 million, or 9.2%, was primarily attributable to increased volume in our Pricerunner.com businesses in Europe and the inclusion of a full year of results from Investopedia, which we acquired on August 3, 2010.
Cost of Revenue and Gross Profit.    Including the cost reclassifications discussed more fully above, consolidated cost of revenue was $221.4 million for the year ended December 31, 2011 compared to $177.1 million in 2010, an increase of $44.3 million, or 25.0%. Our consolidated gross margin increased to 58.1% for the year ended December 31, 2011 compared to 56.8% for the year ended December 31, 2010.
Cost of revenue for the Affiliate Marketing segment was $17.1 million for the year ended December 31, 2011 compared to $17.2 million in 2010. Our Affiliate Marketing segment gross margin remained relatively consistent at 87.7% for the year ended December 31, 2011 compared to 86.1% for the same period in 2010.
Cost of revenue for the Media segment increased to $113.8 million for the year ended December 31, 2011 compared to $77.2 million in 2010. Our Media segment gross margin increased to 56.5% for the year ended December 31, 2011 compared to 54.3% for the same period in 2010. The increase in Media segment gross margin resulted primarily from the inclusion of the relatively higher gross margin Dotomi business. Excluding the impact of Dotomi, our Media segment gross margin was consistent with the year ago period.
Cost of revenue for the Owned & Operated Websites segment was $81.1 million for the year ended December 31, 2011 compared to $75.8 million in 2010. The increase in cost of revenue was due to the higher revenue described above. Our Owned & Operated Websites segment gross margin remained relatively consistent at 36.8% for the year ended December 31, 2011 compared to 35.5% in 2010.



29



Operating Expenses:
Sales and Marketing.    Sales and marketing expenses consist primarily of compensation and employee benefits of sales and marketing and related support teams, certain advertising costs, travel, trade shows, and marketing materials. Sales and marketing expenses for the year ended December 31, 2011 were $65.0 million compared to $44.9 million in 2010, an increase of $20.1 million, or 44.8%. Sales and marketing expenses increased primarily due to the growth in our businesses as described above and the acquisitions of Dotomi and Greystripe. Our sales and marketing expenses as a percentage of revenue increased to 12.3% for the year ended December 31, 2011 compared to 11.0% in 2010 due to increased compensation as a result of increased headcount.
General and Administrative.    General and administrative expenses consist primarily of facilities costs, executive and administrative compensation and employee benefits, depreciation, professional services fees, insurance costs, bad debt expense, and other general overhead costs. General and administrative expenses increased to $58.5 million for the year ended December 31, 2011 compared to $51.5 million in 2010, an increase of $7.1 million, or 13.7%. General and administrative expenses increased primarily due to the acquisitions of Dotomi and Greystripe and higher stock-based compensation expense as described below. However, our general and administrative expenses as a percentage of revenue decreased to 11.1% for the year ended December 31, 2011 compared to 12.6% in 2010 as our corporate expenses remained relatively flat despite the growth in our revenue.
Technology.    Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms and network development, including compensation and employee benefits for our engineering and network operations departments, as well as costs for contracted services and supplies. Technology expenses for the year ended December 31, 2011 were $49.1 million compared to $34.8 million in 2010, an increase of $14.3 million, or 41.0%. The increase in technology expenses was primarily due to the growth in our businesses as described above and the acquisitions of Dotomi and Greystripe. Our technology expenses as a percentage of revenue increased slightly to 9.3% for the year ended December 31, 2011 compared to 8.5% in 2010.
Segment Income from Operations.    Affiliate Marketing segment income from operations for the year ended December 31, 2011 increased 21.6%, or $15.0 million, to $84.6 million, from $69.6 million in the prior year, and represented 60.7% and 56.0% of Affiliate Marketing segment revenue in these respective periods. The increase in Affiliate Marketing segment income from operations and operating income margin was primarily attributable to the operating leverage associated with the higher revenue as described above.
Media segment income from operations for the year ended December 31, 2011 increased 48.5%, or $24.4 million, to $74.6 million, from $50.2 million in the prior year, due to the higher revenue as described above. Media segment operating income margin remained relatively flat at 28.5% and 29.7% of Media segment revenue in these respective periods.
Owned & Operated Websites segment income from operations for the year ended December 31, 2011 increased to $25.8 million, from $24.0 million in the prior year, due to the higher revenue described above. Owned & Operated Websites segment operating income margin remained remained relatively flat at 20.1% and 20.4% of Owned & Operated Websites segment revenue in these respective periods.
Stock-Based Compensation.    Stock-based compensation for the year ended December 31, 2011 was $14.0 million compared to $7.9 million in 2010. The increase of $6.1 million was primarily due to unvested equity awards assumed in the acquisitions of Dotomi and Greystripe as well as new equity awards granted during the year ended December 31, 2012.
Amortization of Acquired Intangible Assets.    Amortization of developed technologies and websites acquired in business combinations, included in Cost of revenue, for the year ended December 31, 2011 was $9.6 million compared to $7.5 million in 2010. Amortization of all remaining acquired intangible assets, included in Amortization of acquired intangible assets, for the year ended December 31, 2011 was $16.6 million compared to $13.1 million in 2010. The increases in amortization expense compared to the prior year were primarily due to the addition of certain intangible assets arising from the acquisitions of Dotomi, Greystripe and Investopedia, offset partially by certain intangible assets from an earlier acquisition that became fully amortized.
 



30



Interest and Other Income, net.    Interest and other income, net, consists principally of interest earned on our note receivable, foreign currency exchange gains or losses, interest expense associated with our credit facility, and in 2010, gains and losses on sales of marketable securities. Interest and other income, net was $4.7 million for 2011 compared to $2.2 million for the same period in 2010. In 2010, we realized $2.8 million in losses on sales of auction rate securities, which was the primary reason for the increase in net interest and other income from 2010 to 2011. Excluding the impact of those losses, interest and other income, net decreased slightly. This was due to additional interest expense on new borrowings under our credit facility in 2011, offset partially by an increase in foreign exchange gains.
Income Tax Expense.    For the years ended December 31, 2011 and 2010, we recorded income tax expense of $28.6 million and $13.6 million, respectively. Our effective income tax rate for the year ended December 31, 2011 increased to 23.3% from 15.0% for the year ended December 31, 2010. In both 2011 and 2010, we recognized tax benefits related to the reversal of contingency reserves due to the expiration of certain statutes of limitations. The tax benefit realized in 2011 of $19.5 million was lower than the $24.9 million tax benefit we recognized in 2010, resulting in the higher effective tax rate for 2011.
Adjusted-EBITDA.    Adjusted-EBITDA for the year ended December 31, 2011 increased to $166.8 million from $123.6 million for the same period in 2010, representing an increase of $43.2 million, or 35.0%. The increase is primarily due to increased operating income in our Affiliate Marketing and Media segments as described above.
Liquidity and Capital Resources
We have financed our operations, our stock repurchases and our cash acquisitions primarily through cash generated from operations and borrowings under our credit facility. At December 31, 2012, our cash and cash equivalents balance totaled $136.6 million, including $77.8 million of cash and cash equivalents held by our international subsidiaries.
Net cash provided by operating activities totaled $156.1 million for the year ended December 31, 2012 compared to $114.9 million in 2011 and $96.9 million in 2010. The increase in net cash provided by operating activities of $41.1 million from 2011 to 2012 was due to an increase in net income before non-cash items and the impact of positive working capital changes. The increase in net cash provided by operating activities of $18.0 million from 2010 to 2011 was primarily due to an increase in net income before non-cash items, offset partially by the impact of negative working capital changes.
Net cash used in investing activities for the year ended December 31, 2012 of $13.5 million was due to purchases of property and equipment of $17.5 million, offset by $4.2 million in principal payments received on our note receivable. Net cash used in investing activities for the year ended December 31, 2011 of $221.0 million was due to the use of $216.5 million for acquisitions, including net cash payments of $68.9 million for Greystripe and $147.6 million for Dotomi, and net purchases of property and equipment of $11.2 million, offset by $3.0 million in proceeds from the sale of marketable securities and $3.7 million in principal payments received on our note receivable. Net cash used in investing activities for the year ended December 31, 2010 of $24.7 million was the result of the use of $41.7 million used to acquire Investopedia and net purchases of property and equipment of $7.4 million, offset by proceeds from the maturity and sale of marketable securities of $21.8 million and $2.7 million in principal payments received on our note receivable.
Net cash used in financing activities for the year ended December 31, 2012 of $125.3 million was primarily due to common stock repurchases of $110.8 million and net payments under our credit agreement of $25.0 million, offset partially by proceeds from shares issued under employee stock programs of $7.2 million and excess tax benefits from the exercise of stock-based awards of $3.3 million. Net cash provided by financing activities for the year ended December 31, 2011 of $31.8 million was primarily due to net borrowings under our credit agreement of $167.5 million and proceeds from shares issued under employee stock programs of $6.9 million, offset by the use of $145.0 million to repurchase common stock under our stock repurchase program. Net cash used in financing activities for the year ended December 31, 2010 of $33.8 million was primarily attributable to the use of $38.6 million to repurchase common stock under our stock repurchase program, offset partially by proceeds from shares issued under employee stock programs of $4.2 million.



31



Credit Facility
On August 19, 2011, we entered into an Amended and Restated Credit Agreement (the "Credit Facility"), which replaced our previous $100.0 million line of credit. The Credit Facility originally consisted of a revolving loan commitment of $150.0 million and a term loan of $50.0 million, with an option to increase the total revolving loan commitment to $200.0 million subject to certain conditions. On June 29, 2012, we entered into a Commitment Increase Agreement to increase the total revolving loan commitment under the Credit Facility to $200.0 million. The term loan is payable in quarterly installments of $2.5 million per quarter. The Credit Facility expires on August 19, 2016. Availability under the Credit Facility is subject to our meeting certain financial and non-financial covenants, as more fully described in Note 15 to our Consolidated Financial Statements included herein. The revolving loan commitment provides us with additional financial flexibility for pursuing acquisitions, repurchasing our common stock and general corporate purposes. At December 31, 2012, there was $37.5 million outstanding on the term loan. In addition, $105.0 million was outstanding under the revolving loan commitment, resulting in $142.5 million outstanding under our Credit Facility at December 31, 2012. At December 31, 2011, we had a total outstanding balance under our Credit Facility of $167.5 million, consisting of $47.5 million outstanding on the term loan and $120.0 million outstanding under the revolving loan.
Stock Repurchase Program
In September 2001, our board of directors authorized a stock repurchase program (the "Program") to allow for the repurchase of shares of our common stock at prevailing market prices in the open market or through unsolicited negotiated transactions. Since the inception of the Program and through December 31, 2011, our board of directors authorized a total of $633.3 million for repurchases under the Program and we repurchased a total of 64.4 million shares of our common stock for approximately $592.5 million. In 2012, our board of directors authorized an additional $159.2 million for repurchases under the Program. During the year ended December 31, 2012, we repurchased 6.6 million shares for $110.7 million, leaving up to an additional $89.3 million of our capital to be used to repurchase shares of our outstanding common stock under the Program as of December 31, 2012.
Repurchases have been funded from available working capital and borrowings under our Credit Facility, and all shares have been retired subsequent to their repurchase. There is no guarantee as to the exact number of shares that will be repurchased by us, and we may discontinue repurchases at any time that management or our board of directors determines additional repurchases are not warranted. The amounts authorized by our board of directors exclude broker commissions.
Commitments and Contingencies
Contractual obligations at December 31, 2012 are as follows (in thousands):
 
 
Payments due by period
 
 
Total
 
Less than
1 year
 
1 to less
than
3 years
 
3 to less
than
5 years
 
More than
5 years
 
Other
Operating leases(1)
 
$
45,233

 
$
7,835

 
$
15,419

 
$
10,792

 
$
11,187

 
$

Purchase obligations(2)
 
4,043

 
2,671

 
1,369

 
3

 

 

Liability for unrecognized tax benefits(3)
 
19,700

 

 

 

 

 
19,700

Borrowings under Credit Facility(4)
 
142,500

 
10,000

 
20,000

 
112,500

 

 

Total contractual obligations
 
$
211,476

 
$
20,506

 
$
36,788

 
$
123,295

 
$
11,187

 
$
19,700

(1)
The non-cancelable operating lease obligations shown in the table have not been reduced by minimum non-cancelable sublease rentals aggregating $714,000. We remain secondarily liable under these leases in the event that any sublessee defaults under the sublease terms. We do not currently believe that material payments will be required as a result of the secondary liability provisions of the primary lease agreements.
(2)
Purchase obligations include agreements to purchase goods or services that are enforceable, legally binding and specify all significant terms. Purchase obligations exclude agreements that are cancelable without penalty.
(3)
Please refer to Note 9 to the consolidated financial statements for a description of the liability for unrecognized tax benefits. As more fully described in Note 9, because the ultimate resolution of this unrecognized tax benefit depends on many factors and assumptions, we are not able to estimate the timing of any payments that may result from this liability.



32



(4)
Includes payments on the principal borrowings under our Credit Facility. Please refer to Note 15 to the consolidated financial statements for a description of the Credit Facility.
Other commercial commitments as of December 31, 2012 are as follows (in thousands):
 
 
Other Commercial Commitments
 
 
Total
 
Less than
1 year
 
1 to less
than
3 years
 
3 to less
than
5 years
 
More than
5 years
Standby letters of credit
 
$
501

 
$

 
$
290

 
$
211

 
$

The standby letters of credit are maintained pursuant to certain of our lease agreements and remain in effect at declining levels through the terms of the related leases.
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third-parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and certain of our officers, employees and former officers, directors and employees of acquired companies, in certain circumstances.
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.
Capital Resources
We believe that the combination of our existing cash and cash equivalents, our Credit Facility and our expected future cash flows from operations will provide us with sufficient liquidity to fund our operations and capital requirements for at least the next twelve months.
However, it is possible that we may need or elect to raise additional funds to fund our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling more stock to the public or to selected investors, or by borrowing, whether under the existing Credit Facility or a new facility. In addition, even though we may not need additional funds, we may still elect to sell additional equity securities for other reasons. We cannot assure you that we will be able to obtain additional funds on commercially favorable terms, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders may be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock.
Although we believe we have sufficient capital to fund our activities for at least the next twelve months, our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:
the macroeconomic environment;
the market acceptance of our products and services;
the levels of promotion and advertising that will be required to launch our new products and services and achieve and maintain a competitive position in the marketplace;
our business, product, capital expenditures and technology plans, and product and technology roadmaps;
capital improvements to new and existing facilities;
technological advances;
our competitors' responses to our products and services;
our pursuit of strategic transactions, including mergers and acquisitions;
our stock repurchase program; and
our relationships with our advertiser customers and publisher partners.



33



Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and assumptions, including, but not limited to, those related to revenue recognition, allowance for doubtful accounts and sales credits, investments, income taxes, goodwill and other intangible assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.
We apply the following critical accounting policies in the preparation of our consolidated financial statements:
Revenue Recognition.  We recognize revenue when the following criteria have been met: persuasive evidence of an arrangement exists, no significant Company obligations remain, collection of the related receivable is reasonably assured, and the fees are fixed or determinable. To date, our agreements have not required a guaranteed minimum number of click-throughs or actions.
Revenue for our Affiliate Marketing segment is generated primarily from: commission fees earned from transactions, including product sales made by our advertiser customers, occurring on our affiliate marketing networks; fixed monthly fees from program management services; and, to a lesser extent, implementation fees. Commission fee revenue from transactions on our affiliate marketing networks are recognized on a net basis as we act as an agent in these transactions and the payments to publishers are the contractual obligation of the advertiser customers. Commission fee revenue is recognized in the period that our advertiser customer generates a sale or other agreed-upon action on our affiliate marketing network, provided that no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. Program management services fees revenue is recognized over the contractual service period, provided no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. Implementation fee revenue is recognized over the estimated customer lives, provided no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable.
Our Media and Owned & Operated Websites segment revenue is recognized in the period that the advertising impressions, click-throughs or actions occur, when lead-based information is delivered or, for our Mediaplex business where revenue is generated primarily from fixed or transaction volume-based monthly fees, in the period that we make our technologies available to our customers on an application services provider ("ASP") basis, provided that no significant Company obligations remain, collection of the resulting receivable is reasonably assured, and the fees are fixed or determinable. We act as a principal in Media and Owned & Operated Websites segment transactions in that we are the primary obligor to the advertiser customer. In accordance with GAAP, revenue is recognized in our Media and Owned & Operated Websites segments on a gross basis, and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.
Deferred revenue consists primarily of the unrecognized portion of implementation fee revenue for our Affiliate Marketing segment. Prepayments and amounts on deposit from customers are classified as an advertiser deposit liability which is classified under accounts payable and accrued expenses in our consolidated balance sheets.
We estimate a provision for sales returns which is recorded as a reduction to revenue. The provision for sales returns reflects an estimate of commission based fee reversals related to product returns from consumers of our Affiliate Marketing customers. In determining the estimate for sales returns, we rely upon historical data, contract information and other factors. The estimated provision for sales returns can vary from actual results. More or less product may be returned from consumers of our Affiliate Marketing customers as compared to what was estimated. These factors and unanticipated changes in the economic and industry environment could make the provision for sales returns estimates differ from actual returns.



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Allowance for Doubtful Accounts and Sales Credits.  We estimate our allowance for doubtful accounts using two methods. First, we evaluate specific accounts where information indicates our customers may have an inability to meet financial obligations, such as due to bankruptcy, and receivable amounts outstanding for an extended period beyond contractual terms. In these cases, we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated and adjusted as additional information is received. Second, an allowance is established for all customers based on a range of loss percentages applied to receivables aging categories based upon our historical collections and write-off experience. The amounts calculated from each of these methods are analyzed to determine the total amount of the allowance for doubtful accounts. We also estimate an allowance for sales credits based upon our historical sales credits experience. Historically, actual bad debt write-offs and sales credits have not significantly differed from our estimates. However, factors including higher than expected default rates or sales credits may result in future write-offs that are greater than our estimates.
As of December 31, 2012, we recorded an allowance for doubtful accounts and sales credits of $6.2 million, which represents an allowance percentage of 4.0% of our gross accounts receivable balance of $154.8 million. If our assumptions and estimates regarding the ultimate collectability of our outstanding accounts receivable balances and/or our sales credits changed to warrant a 100 basis point increase in the ending allowance percentage, the result would be an increase in the December 31, 2012 allowance for doubtful accounts and sales credits of approximately $1.5 million and a corresponding decrease in our operating income for the year then ended.
Income Taxes.  We use the asset and liability method of accounting for income taxes. Under this method, income tax expense or benefit is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity's financial statements or tax returns. We make judgments, assumptions and estimates to determine our income tax expense and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our judgments, assumptions and estimates relative to the income tax expense take into account enacted tax laws, our interpretation of tax laws and possible outcomes of audits if and when conducted by tax authorities. Changes in tax laws or our interpretation of tax laws and the resolution of tax audits, if and when conducted by tax authorities, could significantly impact the amount of income tax expense in our consolidated financial statements.
As of December 31, 2012, we have gross deferred tax assets of $59.6 million, relating to net operating loss carryforwards, goodwill impairment and certain other temporary differences. As of December 31, 2012, based upon both positive and negative evidence available, we have determined it is more likely than not that certain deferred tax assets primarily relating to capital loss carryforwards and net operating loss carryforwards in various jurisdictions may not be realizable. Accordingly, we have recorded a valuation allowance of $3.0 million against these deferred tax assets as of December 31, 2012. Should we determine in the future that we will be able to realize these deferred tax assets, or not be able to realize all or part of our remaining net deferred tax assets recorded as of December 31, 2012, an adjustment to the net deferred tax assets would impact net income in the period such determination was made.
In addition to our deferred tax assets, management is required to make judgments and assumptions related to our uncertain tax positions. As further described in Note 9 to the consolidated financial statements, as of December 31, 2012 we have recorded a liability for uncertain tax positions of $19.7 million. The ultimate resolutions of these uncertain tax positions may take several years. Such resolutions could result in additional tax payments by us to the applicable tax jurisdiction(s). If the ultimate resolutions of any of our uncertain tax positions results in either (a) an additional tax payment that is lower than our liability recorded for such uncertain tax position or (b) no additional tax payment, then we would record a reduction to our liability for uncertain tax positions and a corresponding decrease to our income tax expense in the period such resolution is achieved. Accordingly, a resolution of one or more of our uncertain tax positions in any given period could have a material impact to our reported net income for such period. However, because the ultimate resolution of our uncertain tax positions depends on many factors and assumptions, we are not able to estimate the range of potential changes in our liability for uncertain tax positions or the timing of such changes.





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Goodwill and Other Intangible Assets.  As of December 31, 2012, we had goodwill and other intangible assets with net balances of $434.5 million and $81.8 million, respectively. Goodwill is tested for impairment at the reporting unit level on an annual basis as of December 31 or between annual tests whenever facts and circumstances indicate that goodwill might be impaired. As of December 31, 2012, our reporting units consisted of the Affiliate Marketing, Media, Dotomi, and Owned & Operated Websites operating segments. Application of the goodwill impairment test requires certain estimates and assumptions, including the identification of reporting units, assigning assets and liabilities to reporting units, and determining the fair value of each reporting unit. We have determined the fair value of each reporting unit using a discounted cash flow approach, giving consideration to the market valuation approach.
As a result of our 2012 annual goodwill impairment test, no goodwill impairment was recorded as the estimated fair value of each reporting unit exceeded the carrying value. Based on our 2012 impairment testing, there would have to be significant unfavorable changes to our estimates and assumptions for an impairment to exist.
In addition to the accounting for goodwill as described above, we amortize other intangible assets over their estimated economic useful lives. We record an impairment charge on these assets when we determine that their carrying value may not be recoverable. In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the intangible assets exceeds the fair market value of the intangible assets. Our estimates of future cash flows attributable to our other intangible assets require significant judgments and assumptions, including anticipated industry and economic conditions. Different assumptions and judgments could materially affect the calculation of the fair value of any individual other intangible assets which could lead to impairment. No impairment was identified in 2012 or 2011 related to intangible assets associated with our continuing operations.
Contingencies and Litigation.  We evaluate contingent liabilities including threatened or pending litigation in accordance with GAAP and record accruals when the outcome of these matters is deemed probable and the liability is reasonably estimable. We make these assessments based on the specific facts and circumstances of each matter.

Recently Issued Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board ("FASB") issued amendments to the goodwill and indefinite-lived intangible assets impairment guidance which provides an option for companies to not calculate the fair value of an indefinite-lived intangible asset unless the entity determines, based on qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 (early adoption is permitted). The implementation of this amended accounting guidance is not expected to have a material impact on our consolidated financial position and results of operations.

In September 2011, the FASB issued amendments to the goodwill impairment guidance which provides an option for companies to use a qualitative approach to test goodwill for impairment if certain conditions are met. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The implementation of this amended accounting guidance did not have a material impact on our consolidated financial position and results of operations.

In June 2011, the FASB issued authoritative guidance related to the presentation of other comprehensive income. The guidance requires companies to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This guidance eliminated the option to report other comprehensive income and its components in the statement of stockholders' equity. This standard became effective for interim and annual periods beginning after December 15, 2011 and requires retrospective application. Also, in December 2011, the FASB indefinitely deferred the requirement for entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented.




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In May 2011, the FASB issued new accounting guidance that amended some fair value measurement principles and disclosure requirements. The new guidance states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. This guidance became effective for financial statements issued for interim or annual reporting periods ending on or after December 15, 2011. The adoption of this guidance did not have a significant impact on our financial position or results of operations.
Inflation
Inflation was not a material factor in either revenue or operating expenses during the fiscal years ended December 31, 2012, 2011 and 2010.
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to fluctuations in interest rates, which impact the amount of interest we must pay on our outstanding debt, and the amount of interest income we earn on our cash equivalents. Our outstanding debt consists of two components, a five-year term loan and a revolving line of credit, and currently bears interest at one-month London Interbank Offered Rate ("LIBOR") plus a margin of 1.50%. We have entered into an interest rate swap to fix the interest rate that we pay on the term loan at 0.91% above the applicable LIBOR margin, which is currently 1.50%. The interest we pay on the revolving component of our debt is subject to fluctuations in the one-month LIBOR rate. If the one-month LIBOR rate were to double and our outstanding balance remained at $105 million, our interest expense would increase by approximately $0.3 million over the next year.
We do not believe that our current investment activities subject us to significant interest rate risks that could have a material impact on our financial position or results of operations.
Foreign Currency Risk
We transact business in various foreign countries and are thus subject to exposure from adverse movements in foreign currency exchange rates. This exposure is primarily related to revenue and operating expenses of our foreign subsidiaries, which denominate their transactions primarily in British Pounds, Euros, Swedish Kronor, Japanese Yen, and Chinese Yuan Renminbi. The effect of foreign currency exchange rate fluctuations for the years ended December 31, 2012, 2011 and 2010 was not material to our consolidated results of operations. We enter into foreign currency exchange forward contracts to hedge certain of our exposures to currency exchange rate fluctuations related to short-term intercompany balances. There were no material gains or losses in 2012, 2011 or 2010 associated with the requirement to mark-to-market our short-term intercompany balances or with our hedging activities.
In the future, if there were an adverse change of 10% in overall foreign currency exchange rates over an entire year, the result of translations would be a reduction of revenue of approximately $11.5 million, a reduction of income before income taxes of approximately $2.2 million and a reduction of net assets, excluding intercompany balances, of approximately $12.1 million. As of December 31, 2012, we had $105.4 million in total current assets, including $77.8 million in cash and cash equivalents, and $17.1 million in total current liabilities denominated in foreign currencies, predominantly British Pounds, Euros and Swedish Kronor.
Our international business is subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign currency exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in these or other factors.
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, schedules and supplementary data, as listed under Item 15, appear in a separate section of this annual report on Form 10-K beginning on page F-1.



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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.    CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
In connection with the preparation of this annual report on Form 10-K as of December 31, 2012, an evaluation was performed under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, the Company's CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of December 31, 2012 to provide reasonable assurance that the information required to be disclosed by it in reports or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to management, including the Company's CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:
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