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EXCEL - IDEA: XBRL DOCUMENT - CONVERSANT, INC.Financial_Report.xls
EX-31.1 - EXHIBIT 31.1 - CONVERSANT, INC.a2014q310qex311.htm
EX-32.1 - EXHIBIT 32.1 - CONVERSANT, INC.a2014q310qex321.htm
EX-31.2 - EXHIBIT 31.2 - CONVERSANT, INC.a2014q310qex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
OR
 
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
 
CONVERSANT, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0495335
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
30699 RUSSELL RANCH ROAD, SUITE 250
WESTLAKE VILLAGE, CALIFORNIA 91362
(Address of principal executive offices, including zip code)
 
(818) 575-4500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 x 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 x
 
Accelerated filer o
Non-accelerated filer o
 
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 x
 
The number of shares of the registrant’s common stock outstanding as of October 31, 2014 was 64,444,183.



CONVERSANT, INC.
INDEX TO FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
Certification of CEO - Sarbanes-Oxley Act Section 302
 
Certification of CFO - Sarbanes-Oxley Act Section 302
 
Certification of CEO and CFO - Sarbanes-Oxley Act Section 906

2


PART I. FINANCIAL INFORMATION 

ITEM 1. FINANCIAL STATEMENTS

CONVERSANT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
September 30, 2014
 
December 31, 2013
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
66,051

 
$
81,319

Accounts receivable, net
132,838

 
148,738

Prepaid expenses and other current assets
9,023

 
9,897

Income taxes receivable
26,228

 
7,057

Deferred tax assets, current portion
6,056

 
1,556

Current assets held for sale

 
32,802

Total current assets
240,196

 
281,369

Assets held for sale, less current portion

 
55,642

Property and equipment, net
27,421

 
28,006

Goodwill
402,254

 
388,922

Intangible assets acquired in business combinations, net
39,586

 
48,501

Deferred tax assets, less current portion
331

 
12,422

Other assets
2,027

 
2,913

TOTAL ASSETS
$
711,815

 
$
817,775

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Accounts payable and accrued expenses
$
108,015

 
$
126,472

Other current liabilities
6,691

 
4,057

Liabilities related to assets held for sale

 
7,646

Total current liabilities
114,706

 
138,175

Income taxes payable, less current portion
23,342

 
24,050

Deferred tax liabilities, less current portion
4,818

 
855

Borrowings under credit agreement
55,000

 
140,000

Other non-current liabilities
9,372

 
8,740

Liabilities related to assets held for sale, less current portion

 
1,058

TOTAL LIABILITIES
207,238

 
312,878

 
 
 
 
Commitments and contingencies (Note 10)


 


 
 
 
 
STOCKHOLDERS’ EQUITY:
 

 
 

Convertible preferred stock, $0.001 par value; 20,000,000 shares authorized; no shares issued or outstanding at September 30, 2014 and December 31, 2013

 

Common stock, $0.001 par value; 500,000,000 shares authorized; 64,344,772 and 66,828,670 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
64

 
67

Additional paid-in capital
458,414

 
461,822

Accumulated other comprehensive loss
(10,125
)
 
(2,722
)
Retained earnings
56,224

 
45,730

Total stockholders’ equity
504,577

 
504,897

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
711,815

 
$
817,775


See accompanying Notes to Condensed Consolidated Financial Statements

3


CONVERSANT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Revenue
$
138,313

 
$
134,101

 
$
421,606

 
$
396,678

Cost of revenue
47,893

 
42,928

 
142,448

 
127,141

Gross profit
90,420

 
91,173

 
279,158

 
269,537

 
 
 
 
 
 
 
 
Operating expenses:
 

 
 

 
 

 
 

Sales and marketing
24,964

 
21,700

 
77,421

 
64,143

General and administrative
23,636

 
15,097

 
57,124

 
45,585

Technology
17,582

 
14,124

 
50,719

 
41,706

Amortization of intangible assets acquired in business combinations
3,606

 
3,550

 
11,750

 
10,650

Total operating expenses
69,788

 
54,471

 
197,014

 
162,084

Income from operations
20,632

 
36,702

 
82,144

 
107,453

Interest and other income (expense), net
1,135

 
(152
)
 
1,399

 
(24,022
)
Income before income taxes
21,767

 
36,550

 
83,543

 
83,431

Income tax expense
11,887

 
14,456

 
36,584

 
31,921

Net income from continuing operations
9,880

 
22,094

 
46,959

 
51,510

Discontinued operations (Note 5):
 
 
 
 
 
 
 
Net (loss) income from discontinued operations

 
(4,103
)
 
155

 
2,353

Gain on sale, net of tax

 

 
34,895

 
2,286

Net income
9,880

 
17,991

 
82,009

 
56,149

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
(5,211
)
 
4,796

 
(7,403
)
 
1,716

Total comprehensive income
$
4,669

 
$
22,787

 
$
74,606

 
$
57,865

 
 
 
 
 
 
 
 
Basic net income per common share from:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.31

 
$
0.71

 
$
0.69

Discontinued operations
$

 
$
(0.06
)
 
$
0.54

 
$
0.06

Net income
$
0.15

 
$
0.25

 
$
1.25

 
$
0.76

 
 
 
 
 
 
 
 
Diluted net income per common share from:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.30

 
$
0.70

 
$
0.68

Discontinued operations
$

 
$
(0.06
)
 
$
0.52

 
$
0.06

Net income
$
0.15

 
$
0.25

 
$
1.22

 
$
0.74

 
 
 
 
 
 
 
 
Weighted-average shares used to calculate net income per common share:
 

 
 

 
 
 
 
Basic
64,198

 
71,649

 
65,691

 
74,261

Diluted
65,585

 
73,322

 
67,160

 
76,085

 
See accompanying Notes to Condensed Consolidated Financial Statements


4


CONVERSANT, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except share data)
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2013

 

 
66,828,670

 
$
67

 
$
461,822

 
$
(2,722
)
 
$
45,730

 
$
504,897

Non-cash, stock-based compensation

 

 

 

 
15,076

 

 

 
15,076

Shares issued in connection with employee
   stock programs

 

 
1,608,141

 
1

 
6,576

 

 

 
6,577

Tax benefit from employee stock transactions

 

 

 

 
3,424

 

 

 
3,424

Repurchase and retirement of common stock

 

 
(4,092,039
)
 
(4
)
 
(28,484
)
 

 
(71,515
)
 
(100,003
)
Net income

 

 

 

 

 

 
82,009

 
82,009

Foreign currency translation

 

 

 

 

 
(7,403
)
 

 
(7,403
)
Balance at September 30, 2014

 

 
64,344,772

 
$
64

 
$
458,414

 
$
(10,125
)
 
$
56,224

 
$
504,577

 
See accompanying Notes to Condensed Consolidated Financial Statements


5


CONVERSANT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months
Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 

 
 

Net income
$
82,009

 
$
56,149

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Loss on note receivable

 
22,556

Depreciation and amortization
28,564

 
29,086

Non-cash, stock-based compensation
15,076

 
14,950

Provision for doubtful accounts and sales credits
2,093

 
2,718

Gain on sale of business, net of tax
(34,895
)
 
(2,286
)
Amortization of discount on note receivable

 
(570
)
Deferred income taxes
(5,226
)
 
10,398

Tax benefit from stock-based awards
3,424

 
4,056

Excess tax benefit from stock-based awards
(4,133
)
 
(4,216
)
Changes in operating assets and liabilities, net of effects of business acquisition
23,222

 
(18,382
)
Net cash provided by operating activities
110,134

 
114,459

 
 
 
 
Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(9,953
)
 
(12,203
)
Principal payments received on note receivable

 
7,460

Proceeds from the sale of business, net of cash divested
72,813

 

Payments for acquisition, net of cash acquired
(24,286
)
 

Net cash provided by (used in) investing activities
38,574

 
(4,743
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Proceeds from borrowings under credit agreement
205,000

 
155,799

Repayments under credit agreement
(290,000
)
 
(105,000
)
Repurchases and retirement of common stock
(100,003
)
 
(223,824
)
Proceeds from shares issued under employee stock programs
6,577

 
8,479

Excess tax benefit from stock-based awards
4,133

 
4,216

Net cash used in financing activities
(174,293
)
 
(160,330
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(4,616
)
 
1,031

Effect on cash and cash equivalents from discontinued operations
14,933

 
3,702

Net decrease in cash and cash equivalents
(15,268
)
 
(45,881
)
Cash and cash equivalents, beginning of period
81,319

 
100,403

Cash and cash equivalents, end of period
$
66,051

 
$
54,522

 
See accompanying Notes to Condensed Consolidated Financial Statements

6


CONVERSANT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    THE COMPANY AND BASIS OF PRESENTATION
Recent Developments
Merger Agreement
On September 11, 2014, Conversant, Inc. (“Conversant” or the “Company”), Alliance Data Systems Corporation (“Alliance Data”) and Amber Sub LLC (“Merger Sub”) entered into an Agreement and Plan of Merger pursuant to which Alliance Data, a leading global provider of data-driven marketing and loyalty solutions, will purchase Conversant. The proposed transaction is discussed in more detail in Note 16.
Shareholder Lawsuits
The Company is currently facing pending stockholder class action litigation relating to our potential acquisition by Alliance Data. There are currently three pending lawsuits in the Superior Court of the State of California in Los Angeles County and one pending consolidated action in the Court of Chancery of the State of Delaware. Each lawsuit alleges that members of the Conversant board of directors breached their fiduciary duties in connection with the proposed sale of Conversant to Alliance Data. These lawsuits are discussed in more detail in Note 10.
Company Overview
Conversant and its subsidiaries offer a comprehensive range of digital marketing services across its Affiliate Marketing and Media segments. The Company's services help marketers achieve a variety of strategic objectives, including customer relationship management, new customer acquisition and branding. The Company changed its name from ValueClick, Inc. to Conversant, Inc. on February 3, 2014.
In periods prior to the third quarter of 2013, the Company derived its revenue from three business segments: Affiliate Marketing, Media and Owned & Operated Websites. In the third quarter of 2013, the Company's board of directors approved a plan to sell the Company's Owned & Operated Websites business segment. As a result of this plan and subsequent sale of this business in the first quarter of 2014, the Owned & Operated Websites segment met the definition of a business held for sale at December 31, 2013. The results of operations for the Owned & Operated Websites segment have been excluded from continuing operations for all periods herein and reported as discontinued operations. See Note 5 for additional information on this divestiture. With this divestiture, the Company now operates in two business segments: Affiliate Marketing and Media. All prior period segment information herein has been recast to conform to this presentation.
AFFILIATE MARKETING - Conversant's Affiliate Marketing segment, which operates under the "CJ Affiliate by Conversant'' brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates. Advertisers upload their offers onto the Company's platform, making them available for placement by affiliates. Affiliates apply to join the advertiser's program, and upon acceptance, affiliates select and place the advertiser's offers on their websites or mobile websites, in email campaigns or in search listings. These links are served and tracked by the Company's platform. As a result, when a consumer clicks on one of the affiliate's links and makes an online purchase or completes an agreed-upon action on the advertiser's website or mobile website, the transaction is automatically tracked and recorded. The Company collects commissions due from advertisers and disburses these commission payments to thousands of individual affiliates each month. The Company's technology and service offerings enable marketers to execute their own affiliate marketing programs without the expense of building and maintaining their own in-house technical infrastructure and resources.
The Company's Affiliate Marketing segment principally generates revenue from variable commissions paid to the Company by advertisers, which are based on a percentage of commissions advertisers pay to affiliates, or on a percentage of transaction revenue generated from the advertising programs managed by the Company's affiliate marketing platform. The commission payments advertisers pay to the Company are separate from the commission payments advertisers pay to affiliates. The Company does not receive any portion of affiliate publisher commissions, and the Company does not generally generate revenue directly from affiliates.

7


MEDIA - Conversant'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 mobile applications. The company's platform enables marketers to deliver personalized and individualized communications, and is designed for flexibility based on each brand’s specific needs. The level of personalization, data integration, creative development, cross-channel delivery, and measurement sophistication are tailored for each individual client.
On February 6, 2014, the Company acquired SET Media, a digital video technology company. SET Media strengthens the Company's technology offerings and adds unique video targeting and brand safety capabilities to its personalization platform. SET Media is included in the Company's Media segment. See Note 4 for additional information on this acquisition.
Basis of Presentation and Use of Estimates
The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. As permitted by the Securities and Exchange Commission (“SEC”) under Rule 10-01 of Regulation S-X, the accompanying condensed consolidated financial statements and related notes have been condensed and do not contain certain information that may be included in Conversant's annual consolidated financial statements and notes thereto. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in Conversant's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 3, 2014. The December 31, 2013 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including, but not limited to, those related to: i) the allowance for doubtful accounts and sales credits; ii) the fair value of the Company's debt; iii) the valuation of equity instruments granted by the Company; iv) the value assigned to, recoverability and estimated useful lives of, goodwill and intangible assets acquired in business combinations; v) the Company's income tax expense, its deferred tax assets and liabilities and any valuation allowances recorded against deferred tax assets; and vi) the recognition and disclosure of contingent liabilities. These estimates and assumptions are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances. Actual results may differ from these estimates and assumptions.
2.    RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, which clarifies the principles used to recognize revenue for all entities. Revenue recognition under this standard will depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The guidance is effective January 1, 2017 and early adoption is not permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial position, results of operations and cash flows.

In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, which changes the criteria for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations that have, or will have, a major effect on the organization’s operations and financial results should be presented as discontinued operations. Additionally, the guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments in ASU No. 2014-08 will be applied prospectively to annual periods beginning on or after December 15, 2014, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its financial position, results of operations and cash flows.

    

8


In July 2013, the FASB determined that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss carryforward or other tax credit carryforward when settlement in this manner is available under applicable tax law. This guidance is effective for the Company's interim and annual periods beginning January 1, 2014. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.

In March 2013, the FASB issued new accounting guidance clarifying the accounting for the release of cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity.  The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.

In February 2013, the FASB issued a final rule related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on the face of their financial statements or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. The new accounting rules were effective for the Company on January 1, 2013. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations or cash flows.

3.    STOCK-BASED COMPENSATION
 In the three-month periods ended September 30, 2014 and 2013, the Company recognized stock-based compensation of $5.5 million and $4.7 million, respectively. In the nine-month periods ended September 30, 2014 and 2013, the Company recognized stock-based compensation of $15.1 million and $14.1 million, respectively.
The following table summarizes, by statement of comprehensive income line item, the impact of stock-based compensation and the related income tax benefits recognized in the three- and nine-month periods ended September 30, 2014 and 2013 (in thousands):
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
Sales and marketing
$
1,430

 
$
1,254

 
$
3,962

 
$
3,801

General and administrative
2,646

 
2,335

 
7,036

 
6,893

Technology
1,423

 
1,126

 
4,078

 
3,371

Total stock-based compensation
5,499

 
4,715

 
15,076

 
14,065

Related income tax benefits
(2,355
)
 
(1,941
)
 
(6,101
)
 
(5,949
)
Stock-based compensation, net of tax benefits
$
3,144

 
$
2,774

 
$
8,975

 
$
8,116

4.    RECENT BUSINESS COMBINATION

On February 6, 2014, the Company completed the acquisition of SET Media, a digital video technology company. Under the terms of the agreement, the Company acquired all outstanding equity interests in SET Media for total cash consideration of $24.6 million. The Company also assumed 52,000 unvested options to purchase shares of Conversant common stock valued at $0.9 million. The fair value of the assumed unvested stock options will be expensed over the future service period.

SET Media strengthens the Company's technology offerings and adds unique video targeting and brand safety capabilities to its personalization platform. These factors contributed to a purchase price in excess of the fair value of SET Media's net tangible and intangible assets acquired, and, as a result, the Company has recorded goodwill in connection with this transaction. The results of SET Media's operations are included in the Company's consolidated financial statements beginning on February 6, 2014.

The preliminary allocation of the purchase price (based upon preliminary valuation assumptions that may change upon completion of the Company's analysis) to the assets acquired and liabilities assumed, based on their estimated fair values, resulted in $13.4 million in goodwill, $10.1 million in amortizable intangible assets, including $8.1 million of developed technology with a useful life of four years, $5.0 million in deferred tax assets and $4.0 million in deferred tax liabilities. The Company does not expect any goodwill to be tax deductible. This acquisition is not considered material for purposes of further disclosure.

9


5.    DISCONTINUED OPERATIONS
 
On January 10, 2014, the Company completed the disposition of its Owned & Operated Websites segment. The proceeds from the sale consisted of gross cash consideration of $80.0 million, and $74.8 million net of cash divested. The company incurred $2.0 million in transaction costs in connection with the divestiture. The divestiture generated a pre-tax gain of $7.0 million in the first quarter of 2014, which includes a $1.4 million reclassification adjustment relating to the foreign currency translation amounts previously included in other comprehensive income, and a $34.2 million gain net of income taxes due to a tax benefit of $27.2 million realized upon the sale due primarily to tax deductible goodwill. In the second quarter of 2014, the Company recorded an additional $1.3 million pre-tax gain, and $0.7 million gain net of income taxes, as a result of working capital adjustments defined in the sale agreement.
The assets and liabilities of the Owned & Operated Websites segment were classified as held for sale as of December 31, 2013, and the historical results of operations of the Owned & Operated Websites segment are treated as discontinued operations herein. The Company determined that its Owned & Operated Websites segment met the definition of an asset held for sale in the third quarter of 2013.
The following amounts related to the Owned & Operated Websites segment for the three- and nine-month periods ended September 30, 2013, were derived from historical financial information. All amounts have been segregated from continuing operations and reported in discontinued operations (in thousands):
 
Three Months
Ended
September 30, 2013
 
Nine Months
Ended
September 30, 2013
Revenue
$
28,872

 
$
91,489

 
 
 
 
Income from discontinued operations before income taxes
$
3,805

 
$
13,016

Income tax expense
7,908

 
10,857

Net income from discontinued operations
$
(4,103
)
 
$
2,159

The components of assets and liabilities held for sale at December 31, 2013 are as follows (in thousands):
 
December 31, 2013
Current assets held for sale:
 
Cash and cash equivalents
$
14,933

Receivables, net
15,113

Other current assets
2,756

 
$
32,802

Assets held for sale, less current portion:
 
Property and equipment, net
$
1,554

Goodwill
45,878

Intangible assets acquired in business combinations
7,798

Other assets
412

 
$
55,642

Current liabilities related to assets held for sale:
 
Accounts payable and accrued expenses
$
7,242

Other current liabilities
404

 
$
7,646

Liabilities related to assets held for sale, less current portion:
 
Deferred tax liabilities
$
1,058

Other non-current liabilities

 
$
1,058


10


6.    GOODWILL AND INTANGIBLE ASSETS
As a result of the Company's sale of its Owned & Operated Websites businesses as described in Note 1, the Company's reporting units now consist of the Affiliate Marketing, Enterprise (formerly named Dotomi) and Media operating segments as of September 30, 2014. The changes in the carrying amount of goodwill, by reporting unit, for the nine-month period ended September 30, 2014, were as follows (in thousands): 
 
Affiliate
Marketing
 
Enterprise
 
Media
 
Total
Balance at December 31, 2013
$
30,657

 
206,861

 
$
151,404

 
$
388,922

Foreign currency translation adjustments
(60
)
 

 
(27
)
 
(87
)
Acquisition

 

 
13,419

 
13,419

Balance at September 30, 2014
$
30,597

 
$
206,861

 
$
164,796

 
$
402,254

        
Goodwill, accumulated impairment losses and the net carrying amount of goodwill, by reporting unit, as of September 30, 2014, and December 31, 2013, were as follows (in thousands): 
 
Affiliate
Marketing
 
Enterprise
 
Media
 
Total
September 30, 2014
 
 
 
 
 
 
 
Goodwill
$
30,597

 
$
206,861

 
$
276,796

 
$
514,254

Accumulated impairment losses

 

 
(112,000
)
 
(112,000
)
Goodwill, net
$
30,597

 
$
206,861

 
$
164,796

 
$
402,254

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Goodwill
$
30,657

 
$
206,861

 
$
263,404

 
$
500,922

Accumulated impairment losses

 

 
(112,000
)
 
(112,000
)
Goodwill, net
$
30,657

 
$
206,861

 
$
151,404

 
$
388,922

The gross balance, accumulated amortization and net carrying amount of the Company’s intangible assets as of September 30, 2014, and December 31, 2013, were as follows (in thousands): 
 
Gross
Balance
 
Accumulated
Amortization
 
Net Carrying
Amount
September 30, 2014
 

 
 

 
 

Customer, affiliate and advertiser relationships
$
96,970

 
$
(71,221
)
 
$
25,749

Trademarks, trade names and domain names
7,847

 
(7,578
)
 
269

Developed technologies
39,870

 
(26,862
)
 
13,008

Non-competition agreements
840

 
$
(280
)
 
560

Total intangible assets
$
145,527

 
$
(105,941
)
 
$
39,586

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
Customer, affiliate and advertiser relationships
$
95,810

 
$
(60,799
)
 
$
35,011

Trademarks, trade names and domain names
11,873

 
(10,555
)
 
1,318

Developed technologies
31,770

 
(19,598
)
 
12,172

Total intangible assets
$
139,453

 
$
(90,952
)
 
$
48,501

The following table summarizes, by consolidated statement of comprehensive income line item, the impact of amortization expense recognized for the three- and nine-month periods ended September 30, 2014 and 2013 (in thousands):
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
Amortization of acquired developed technologies included in consolidated cost of revenue
$
2,478

 
$
1,986

 
$
7,265

 
$
5,957

Amortization of acquired intangible assets included in consolidated operating expenses
3,606

 
3,550

 
11,750

 
10,650

Total
$
6,084

 
$
5,536

 
$
19,015

 
$
16,607


11


Estimated intangible asset amortization expense for the remainder of 2014, the succeeding four years and thereafter is as follows (in thousands):
 
Amortization included in:
 
Cost of revenue
 
Operating expenses
 
Total
Three months ending December 31, 2014
$
2,478

 
$
3,606

 
$
6,084

2015
6,311

 
14,425

 
20,736

2016
2,025

 
8,378

 
10,403

2017
2,025

 
44

 
2,069

2018
169

 
44

 
213

Thereafter

 
81

 
81

Total
$
13,008

 
$
26,578

 
$
39,586

7.    ACCOUNTS RECEIVABLE
 
Accounts receivable are stated net of an allowance for doubtful accounts and sales credits of $5.5 million at September 30, 2014, and $6.9 million at December 31, 2013. No customers accounted for more than 10% of the accounts receivable balance at September 30, 2014, or December 31, 2013.
 
8.    PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2014, and December 31, 2013 (in thousands):
 
September 30, 2014
 
December 31, 2013
Computer equipment and purchased software
$
63,611

 
$
55,965

Furniture and equipment
8,102

 
7,837

Leasehold improvements
10,720

 
10,660

Property and equipment, gross
82,433

 
74,462

Less: accumulated depreciation and leasehold
   amortization
(55,012
)
 
(46,456
)
Total property and equipment, net
$
27,421

 
$
28,006

9.    FAIR VALUE MEASUREMENT
 
The accounting guidance for fair value measurements defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. The accounting guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as fair value measured based on observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as fair value measured based on observable inputs other than the quoted prices included within Level 1 that are observable, either directly or indirectly; and Level 3, defined as fair value measured based on unobservable inputs for which there is little or no market data, therefore requiring the reporting entity to develop its own assumptions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
As of September 30, 2014, and December 31, 2013, the carrying amounts of net accounts receivable, and accounts payable and accrued expenses approximate fair value due to their short-term nature. The carrying amount of cash equivalents, which consist of money market accounts, approximate fair value using level 1 inputs. Based on borrowing rates that are available to the Company for loans with similar terms and consideration of the Company’s credit risk, the carrying value of the Company's debt approximates its fair value and is a Level 2 measurement within the fair value hierarchy.

12


10.    COMMITMENTS AND CONTINGENCIES
 
The Company is currently facing pending stockholder class action litigation relating to our potential acquisition by Alliance Data, which was publicly announced on September 11, 2014. There are currently three pending lawsuits in the Superior Court of the State of California in Los Angeles County and one pending consolidated action in the Court of Chancery of the State of Delaware. 
 
On September 12, 2014, a putative stockholder class action complaint, captioned Palkon v. Conversant, Inc., et al., No. 56-2014-00457860-CU-BT-VTA (Superior Court, Ventura County), was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary in the Superior Court of the State of California in Ventura County. On October 7, 2014, the plaintiff in the Palkon action filed a request for voluntary dismissal. The court issued an order granting the request and dismissing the action on October 21, 2014. Additionally, on September 16, 2014, a second putative stockholder class action complaint, captioned Leinoff v. Conversant, Inc., et al., No. BC-557818 (Superior Court, Los Angeles County), was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary in the Superior Court of the State of California in Los Angeles County. An amended complaint was filed in Leinoff on October 21, 2014. On September 19, 2014, a third putative stockholder class action complaint, captioned Blaze v. Conversant, Inc., et al., No. BC-558100 (Superior Court, Los Angeles County), was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary, also in the Superior Court of the State of California in Los Angeles County. The plaintiff in the Los Angeles County Blaze action filed a request for voluntary dismissal on October 17, 2014. The court issued an order granting the request and dismissing the action on October 29, 2014. On September 26, 2014, a fourth putative class action stockholder complaint, captioned Feliciano v. Buzby, et al., C.A. No. 10174-VCN (Chancery Court, Delaware) was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary in the Court of Chancery of the State of Delaware. An amended complaint was filed in Feliciano on October 9, 2014. On September 30, 2014, a fifth putative stockholder class action complaint, captioned Naclerio v. Conversant, Inc., et al., No. BC559187 (Superior Court, Los Angeles County) was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary, in the Superior Court of the State of California in Los Angeles County. On October 3, 2014, a sixth putative stockholder class action complaint, captioned Hoffman v. Conversant, Inc., et al., No. BC559660 (Superior Court, Los Angeles County) was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary, also in the Superior Court of the State of California in Los Angeles County. On October 17, 2014, a seventh putative stockholder class action complaint, captioned Blaze v. Conversant, Inc. et al., C.A. No. 10253-VCN (Chancery Court, Delaware), was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary, also in the Court of Chancery of the State of Delaware. Also on October 17, 2014, an eighth putative stockholder class action complaint, captioned Joyce v. Conversant, Inc. et al., C.A. No. 10254-VCN (Chancery Court, Delaware), was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary in the Court of Chancery of the State of Delaware. On October 22, 2014, the plaintiff in Joyce filed a motion to expedite proceedings. On October 30, 2014, an order was entered consolidating the Delaware actions into a consolidated action captioned In re Conversant, Inc. Stockholder Litigation, C.A. No. 10174-VCN (Chancery Court, Delaware), and appointing Plaintiffs’ co-lead counsel and liaison counsel for the consolidated action.
 
Each lawsuit alleges that members of the Conversant board of directors breached their fiduciary duties in connection with the proposed sale of Conversant to Alliance Data. Each complaint also alleges that Conversant, Alliance Data and the Merger Subsidiary aided and abetted the alleged breach of fiduciary duty. The Delaware consolidated action and the amended complaint in Leinoff also include claims regarding alleged misrepresentations and omissions made in Conversant’s preliminary proxy statement. The complaints seek, among other things, injunctive relief and other equitable relief, in addition to unspecified fees and costs. The Company believes these lawsuits are without merit and intends to defend itself against each of them vigorously.

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. In October 2014, the Company received a notice of a claim for indemnification from IAC Search, LLC /InterActiveCorp related to its January 2014 acquisition of the Company’s Owned & Operated Websites segment. The Company believes that this claim is without merit and intends to defend itself vigorously. The Company is not currently a party to any material legal proceedings, except as discussed above, nor is the Company aware of any pending or threatened litigation that is reasonably possible to have a material adverse effect on the Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.


13


11.    INCOME TAXES
 
As of December 31, 2013, the Company recorded a liability of $18.7 million for unrecognized tax benefits. During the three-month period ended September 30, 2014, the Company’s liability for unrecognized tax benefits increased by $2.0 million in respect of prior years’ tax positions and decreased by $1.0 million primarily as a result of the expiration of certain statutes of limitations. During the nine-month period ended September 30, 2014, the Company’s liability for unrecognized tax benefits increased by $2.0 million in respect of prior years’ tax positions, increased by $0.5 million as a result of income tax positions taken during the period, decreased by $1.0 million primarily as a result of the expiration of certain statutes of limitations, decreased by $0.3 million as a result of tax settlements, and, in the first quarter of 2014, $0.3 million of unrecognized tax benefits were removed related to the completion of the sale of the Owned & Operated Websites segment, resulting in a total liability for unrecognized tax benefits at September 30, 2014, of $19.6 million. If these tax benefits are recognized in future periods, the liability for unrecognized tax benefits would be recorded as a reduction to income tax expense. Facts and circumstances could arise in the twelve-month period following September 30, 2014, that could cause the Company to reduce the liability for unrecognized tax benefits, including, but not limited to, settlement of income tax positions or expiration of statutes of limitations. Because the ultimate resolution of uncertain tax positions depends on many factors and assumptions, the Company is not able to estimate the range of potential changes in the liability for unrecognized tax benefits or the timing of such changes.
 
The Company’s policy is to recognize interest and penalties expense, if any, related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2013, the Company had recorded an accrual of $9.7 million for interest and penalties related to unrecognized tax benefits. During the three-month periods ended September 30, 2014 and 2013, the Company recognized $2.0 million and $0.4 million in gross interest and penalties, respectively, partially offset by a reversal of prior accrued interest and penalties of $0.1 million in each of these periods as a result of the expiration of certain statutes of limitations. During the nine-month periods ended September 30, 2014 and 2013, the Company recognized $2.5 million and $1.1 million in gross interest and penalties, respectively, partially offset by a reversal of prior year accrued interest and penalties in each of these periods of $0.1 million as a result of the expiration of certain statutes of limitations. For the nine-month period ended September 30, 2014, gross interest and penalties expense accrued by the Company were also partially offset by $0.1 million in interest paid relating to the settlement of tax positions and $0.2 million of accrued interest that was removed related to the completion of the sale of the Owned & Operated Websites segment, resulting in an accrual for interest and penalties related to unrecognized tax benefits of $11.8 million at September 30, 2014. The accrual for interest and penalties related to unrecognized tax benefits is included in non-current income taxes payable balance on the accompanying condensed consolidated balance sheet.
 
The Company’s uncertain tax positions are related to tax years that remain subject to examination by the relevant tax authorities. These include the 2009 and 2011 through 2013 tax years for federal purposes, 2004 through 2013 tax years for various state jurisdictions, and 2004 through 2013 tax years for various foreign jurisdictions. The Company is currently under audit examination by the Internal Revenue Service for the 2007 tax year, and in various state and foreign jurisdictions for various tax years. The Company is currently disputing an assessment from the French tax authorities relating to corporate income taxes and value added taxes associated with certain prior years. In the three-month period ended September 30, 2014, the Company recorded a reserve of approximately $3.7 million related to this matter.
 
12.    STOCKHOLDERS’ EQUITY
 
In September 2001, the Company’s board of directors authorized a stock repurchase program (the “Program”) to allow for the repurchase of shares of the Company’s 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, 2013, the Company’s board of directors authorized a total of $1.0 billion for repurchases under the Program and the Company had repurchased a total of 80.9 million shares of its common stock for approximately $926.8 million. During the three-month period ended September 30, 2014, the Company's board of directors authorized $150.0 million for additional repurchases under the Program. During the three- and nine-month periods ended September 30, 2014, the Company repurchased 0.8 million shares for $18.9 million and 4.1 million shares for $99.9 million, respectively. As of September 30, 2014, up to an additional $150.1 million of the Company’s capital was available to be used to repurchase shares of the Company’s outstanding common stock under the Program.

Repurchases have been funded from available working capital and borrowings under the Company's 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 the Company, and the Company may discontinue repurchases at any time that management or the Company’s board of directors determines additional repurchases are not warranted. The amounts authorized by the Company’s board of directors exclude broker commissions.

14


13.    NET INCOME PER COMMON SHARE
 
The following table sets forth the computation of basic and diluted net income per common share for the periods indicated (in thousands, except per share data): 
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
9,880

 
$
17,991

 
$
82,009

 
$
56,149

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding - basic
64,198

 
71,649

 
65,691

 
74,261

Dilutive effect of employee stock-based awards
1,387

 
1,673

 
1,469

 
1,824

Number of shares used to compute net income per common
   share - diluted
65,585

 
73,322

 
67,160

 
76,085

 
 
 
 
 
 
 
 
Net income per common share:
 

 
 

 
 
 
 
Basic
$
0.15

 
$
0.25

 
$
1.25

 
$
0.76

Diluted
$
0.15

 
$
0.25

 
$
1.22

 
$
0.74

Employee stock-based awards totaling 125,000 shares during the three-month period ended September 30, 2013 were excluded from the computation of diluted net income per common share because their effect would have been anti-dilutive under the treasury stock method. For the nine-month periods ended September 30, 2014 and 2013, the number of anti-dilutive shares excluded from the diluted net income per common share computation was 2,000 and 64,000, respectively.
14.    CREDIT AGREEMENT
 
On August 19, 2013, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Facility"), which amended and restated the Company's previous credit facility in its entirety. The amended Credit Facility consists of a revolving loan commitment of $400.0 million, with a Company option to increase the total revolving loan commitment to $500.0 million subject to certain conditions. The expiration date under the amended Credit Facility was extended to August 19, 2018. Borrowings under the facility bear interest at either (i) the Base Rate, which is equal to the highest of (a) the administrative agent's prime rate, (b) the federal funds rate plus 1.50% and (c) the one month reserve adjusted daily London Interbank Offered Rate ("LIBOR") plus 1.50%, or (ii) LIBOR, in each case plus an applicable margin as in effect at each interest calculation date. The applicable margin in effect from time to time is based on the Company’s total leverage ratio. The applicable margins range from 1.25% to 1.75% for LIBOR loans and from 0.25% to 0.75% for Base Rate loans.

Certain of the Company's domestic subsidiaries have guaranteed the obligations of the Company and all future domestic subsidiaries of the Company also are required to guarantee the obligations of the Company under the Credit Facility. The Company's obligations are collateralized by a lien on substantially all of its present and future assets pursuant to a separate security agreement (the "Security Agreement"). In addition, the obligations of each subsidiary guarantor are collateralized by a lien on substantially all of such subsidiary’s present and future assets pursuant to a separate guaranty agreement (the "Guaranty Agreement"). The subsidiary guarantees and the collateral under the Security Agreement are subject to release upon fulfillment of certain conditions specified in the Credit Facility, Security Agreement and the Guaranty Agreement.
 
The Credit Facility is available to be used by the Company to, among other things, fund its working capital needs and for other general corporate purposes, including acquisitions and stock repurchases. The Company pays a commitment fee on the unused portion of the revolving loan commitment amount up to a maximum of 0.30% based on the Company’s total leverage ratio. The agreement also defines customary events of default such as failure to pay interest or principal when due, material inaccuracy of representations or warranties, bankruptcy events, change of control, a material adverse change in financial condition or operations, or a default of covenant. Upon the occurrence of an event of default, the principal and accrued interest under the Credit Facility then outstanding may be declared due and payable. At September 30, 2014, there was $55 million outstanding under the revolving loan commitment.
 
The Company has provided various representations and agreed to certain financial covenants including a total leverage ratio, a fixed charge coverage ratio and a minimum unrestricted, unencumbered liquid assets requirement. At September 30, 2014, and December 31, 2013, the Company was in compliance with all of the covenants required by its Credit Facility.
 

15


15.    SEGMENTS, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
 
The Company derives its revenue from two business segments: Affiliate Marketing and Media. These business segments are presented on a worldwide basis. Prior to the third quarter of 2013, the Company operated in a third segment, Owned & Operated Websites. However, in the third quarter of 2013, the Company's board of directors approved a plan to sell the Owned & Operated Websites business segment. As a result of this plan and subsequent sale of this business in the first quarter of 2014, the Owned & Operated Websites segment met the definition of a business held for sale at December 31, 2013, and also met the reporting requirements to be reported as discontinued operations. Accordingly, the results of operations for the Owned & Operated Websites segment have been excluded from continuing operations for all periods herein and reported as discontinued operations.

The following table provides revenue and segment income from operations for each of the Company’s two business segments. The Company accounts for inter-segment revenue as if the revenue was derived from third parties, that is, at current market prices. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and 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 the Company's 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 the Company’s executive, finance, legal, corporate governance, human resources, and facilities organizations; fees for professional service providers including audit, tax and Sarbanes-Oxley compliance; certain legal fees not directly attributable to a business segment; insurance; acquisition related costs; and, other corporate expenses. 
 
Revenue
 
Segment Income
from Operations
 
Three Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Affiliate Marketing
$
39,190

 
$
38,872

 
$
23,009

 
$
23,606

Media
99,123

 
95,254

 
25,613

 
30,242

Inter-segment revenue

 
(25
)
 

 

Total
$
138,313

 
$
134,101

 
$
48,622

 
$
53,848

 
 
 
 
 
 
 
 
 
Revenue
 
Segment Income
from Operations
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Affiliate Marketing
$
122,286

 
$
113,805

 
$
73,876

 
$
69,115

Media
299,333

 
283,000

 
76,821

 
89,537

Inter-segment revenue
(13
)
 
(127
)
 

 

Total
$
421,606

 
$
396,678

 
$
150,697

 
$
158,652

 
A reconciliation of total segment income from operations to consolidated income from operations is as follows for each period (in thousands): 
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
Segment income from operations
$
48,622

 
$
53,848

 
$
150,697

 
$
158,652

Corporate expenses
(16,407
)
 
(6,895
)
 
(34,462
)
 
(20,527
)
Stock-based compensation
(5,499
)
 
(4,715
)
 
(15,076
)
 
(14,065
)
Amortization of acquired developed technology included in consolidated cost of revenue
(2,478
)
 
(1,986
)
 
(7,265
)
 
(5,957
)
Amortization of acquired intangible assets included in consolidated operating expenses
(3,606
)
 
(3,550
)
 
(11,750
)
 
(10,650
)
Consolidated income from operations
$
20,632

 
$
36,702

 
$
82,144

 
$
107,453



16


Depreciation and leasehold amortization expense included in the determination of segment income from operations as presented above for the Affiliate Marketing and Media segments is as follows for each period (in thousands):
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
Affiliate Marketing
$
318

 
$
363

 
$
1,010

 
$
1,030

Media
2,575

 
2,572

 
7,493

 
7,353

Corporate
375

 
297

 
1,037

 
857

Total
$
3,268

 
$
3,232

 
$
9,540

 
$
9,240

 
The Company’s continuing operations are domiciled in the United States with operations internationally in Europe, South Africa and China through wholly-owned subsidiaries. Revenue is attributed to a geographic region based upon the country from which the customer relationship is maintained.
 
The Company’s geographic information was as follows (in thousands): 
 
Revenue
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
United States
$
127,930

 
$
123,172

 
$
387,419

 
$
362,870

International
10,454

 
11,087

 
34,457

 
34,302

Inter-regional eliminations
(71
)
 
(158
)
 
(270
)
 
(494
)
Total
$
138,313

 
$
134,101

 
$
421,606

 
$
396,678

 
 
 
 
 
 
 
 
 
Income from Operations
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
United States
$
20,851

 
$
35,853

 
$
80,978

 
$
103,810

International
(219
)
 
849

 
1,166

 
3,643

Total
$
20,632

 
$
36,702

 
$
82,144

 
$
107,453

 
For the three- and nine-month periods ended September 30, 2014 and 2013, no customer comprised more than 10% of total revenue from continuing operations.
 
16.    MERGER AGREEMENT WITH ALLIANCE DATA SYSTEMS
On September 11, 2014, Conversant entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alliance Data and Merger Sub. The Merger Agreement provides for the merger of Conversant with and into Merger Sub, with Merger Sub continuing as the surviving company and a direct wholly-owned subsidiary of Alliance Data (the “Merger”).
 
Subject to the terms and conditions of the Merger Agreement, holders of Conversant common stock will receive, for each share of Conversant common stock entitled to the Merger consideration, consideration valued at $35.00 per share, or approximately $2.3 billion in the aggregate (based on the closing price of Alliance Data common stock on September 11, 2014). Each outstanding share of Conversant common stock will be exchanged in the Merger for consideration consisting of (i) 0.07037 shares of Alliance Data common stock and (ii) an amount in cash such that (based on the 15-day volume weighted average price of Alliance Data common stock as of the close of business on the second business day prior to closing (the “Closing VWAP”)), the total consideration per share equals $35.00 (together, the “Standard Merger Consideration”), with a final mix of consideration being determined following the determination of the Closing VWAP. However, the maximum amount of cash Alliance Data will pay per share of Conversant common stock will not exceed $18.62 and the minimum amount of cash Alliance Data will pay per share of Conversant common stock will not be less than $14.98 (the “Collar Range”).
In the event that the maximum or minimum cash amount is reached, the amount of cash per share (i.e. either $18.62 or $14.98) and the stock exchange ratio of 0.07037 would remain fixed at these levels and the value received by Conversant shareholders would float below or above $35.00 respectively outside of the Collar Range. 

17


As an alternative to the Standard Merger Consideration, Conversant stockholders may instead elect to receive, for each share of Conversant common stock, all stock or all cash consideration, subject to pro ration amongst electing stockholders such that the aggregate amount of cash paid and the aggregate number of shares of Alliance Data common stock issued in the Merger is the same that would be paid and issued if each share of Conversant common stock had been converted into the Standard Merger Consideration. As long as Alliance Data common stock consists of 40% or more in the aggregate of the merger consideration as valued at one day prior to closing, the stock consideration is expected to be tax free to Conversant stockholders.
The respective Boards of Directors of Alliance Data and Conversant have unanimously approved the Merger Agreement, and the Board of Directors of Conversant has agreed to recommend that the Conversant stockholders adopt the Merger Agreement, subject to certain exceptions set forth in the Merger Agreement.
The Merger Agreement contains customary representations, warranties and covenants made by each of Conversant, Alliance Data and Merger Sub. Conversant may not solicit competing acquisition proposals, or, subject to certain exceptions with respect to unsolicited proposals, engage in discussions concerning, or provide confidential information in connection with, any alternative business combinations. Conversant is required to keep Alliance Data promptly and reasonably informed of all unsolicited alternative business combination proposals. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain circumstances, including in connection with the acceptance of an alternative transaction or a material breach of the no-shop covenants, Conversant may be required to pay Alliance Data a termination fee equal to $65 million.
Completion of the Merger is subject to customary conditions, including approval of the Merger by Conversant stockholders and listing of the shares of Alliance Data common stock to be issued in the Merger on the New York Stock Exchange.

18


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
This report contains forward-looking statements, including statements about the anticipated acquisition of Conversant by Alliance Data, based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The section entitled “Risk Factors” in this Form 10-Q and similar discussions in our Annual Report on Form 10-K for the year ended December 31, 2013, and in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the other information in this report, and in our other filings with the SEC, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that discuss our business in greater detail and advise interested parties of certain risks, uncertainties and other factors that may affect our business, results of operations or financial condition.
IMPORTANT INFORMATION FOR INVESTORS AND STOCKHOLDERS
 
This communication shall not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended. This communication may be deemed to be solicitation material in respect of the proposed merger between Conversant and a subsidiary of Alliance Data.
 
In connection with the proposed merger, Alliance Data filed with the SEC a registration statement on Form S-4 (File No. 333-199128) containing a proxy statement/prospectus. The registration statement has been declared effective by the SEC and the definitive proxy statement/prospectus is being delivered to stockholders of Conversant. SECURITY HOLDERS OF CONVERSANT ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT/PROSPECTUS (INCLUDING ALL AMENDMENTS AND SUPPLEMENTS THERETO) AND OTHER DOCUMENTS RELATING TO THE MERGER THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. Investors and security holders can obtain copies of the registration statement and proxy statement/prospectus and other documents filed with the SEC by Alliance Data and Conversant, without charge, through the website maintained by the SEC at http://www.sec.gov. Copies of documents filed with the SEC by Alliance Data will be made available free of charge on Alliance Data's website at www.alliancedata.com. Copies of documents filed with the SEC by Conversant will be made available free of charge on Conversant's website at www.conversantmedia.com.
 
PARTICIPANTS IN THE SOLICITATION
 
Alliance Data and Conversant and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the holders of Conversant common stock in respect of the proposed transaction. Information about Alliance Data's directors and executive officers is set forth in the proxy statement for Alliance Data's 2014 Annual Meeting of Stockholders, which was filed with the SEC on April 21, 2014. Information about Conversant's directors and executive officers is set forth in the proxy statement for Conversant's 2014 Annual Meeting of Stockholders, which was filed with the SEC on March 28, 2014. Additional information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, through securities holdings or otherwise, is contained in the proxy statement/prospectus and other relevant materials filed with the SEC regarding the proposed merger. Investors should read the joint proxy statement/prospectus carefully before making any voting or investment decisions.  You may obtain free copies of these documents from Alliance Data or Conversant using the sources indicated above.


19


OVERVIEW
Conversant, Inc. and its subsidiaries (collectively "Conversant" or the "Company" or in the first person, "we", "us" and "our") offer a comprehensive range of digital marketing services across our Affiliate Marketing and Media segments. Our services help marketers achieve a variety of strategic objectives, including customer relationship management, new customer acquisition and branding. We changed our name from ValueClick, Inc. to Conversant, Inc. on February 3, 2014 to highlight our capabilities in personalized digital marketing and its focus on helping marketers engage in conversations with their target audiences.
In periods prior to the third quarter of 2013, we derived our revenue from three business segments: Affiliate Marketing, Media and Owned & Operated Websites. In the third quarter of 2013, our board of directors approved a plan to sell the Owned & Operated Websites business segment. As a result of this plan and subsequent sale of this business in the first quarter of 2014, the Owned & Operated Websites segment met the definition of a business held for sale at December 31, 2013. The results of operations for the Owned & Operated Websites segment have been excluded from continuing operations for all periods herein and reported as discontinued operations. See Note 5 to our condensed consolidated financial statements included herein for additional information on this divestiture. With this divestiture, we now operate in two business segments: Affiliate Marketing and Media. All prior period segment information herein has been recast to conform to this presentation.
AFFILIATE MARKETING - Conversant's Affiliate Marketing segment, which operates under the "CJ Affiliate by Conversant'' brand name, provides the technology, network and customer service that, in combination, enable advertisers to create their own fully-commissioned online sales force comprised of third-party website publishers, also known as affiliates. Advertisers upload their offers onto our platform, making them available for placement by affiliates. Affiliates apply to join the advertiser's program, and upon acceptance, affiliates select and place the advertiser's offers on their websites or mobile websites, in email campaigns or in search listings. These links are served and tracked by our platform. As a result, when a consumer clicks on one of the affiliate's links and makes an online purchase or completes an agreed-upon action on the advertiser's website or mobile website, the transaction is automatically tracked and recorded. We collect commissions due from advertisers and disburse these commission payments to thousands of individual affiliates each month. Our leading technology and service offerings enable marketers to execute their own affiliate marketing programs without the expense of building and maintaining their own in-house technical infrastructure and resources.
Our Affiliate Marketing segment principally generates revenue from variable commissions paid to us by advertisers, which are based on a percentage of commissions advertisers pay to affiliates, or on a percentage of transaction revenue generated from the advertising programs managed by our affiliate marketing platform. The commission payments advertisers pay to us are separate from the commission payments advertisers pay to affiliates. We do not receive any portion of affiliate publisher commissions, and we generally do not generate revenue directly from affiliates.
MEDIA - Conversant'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 mobile applications. Our platform enables marketers to deliver personalized and individualized communications, and is designed for flexibility based on each brand’s specific needs. The level of personalization, data integration, creative development, cross-channel delivery, and measurement sophistication are tailored for each individual client.
On February 6, 2014, we acquired SET Media, a digital video technology company. SET Media strengthens our technology offerings and adds unique video targeting and brand safety capabilities to our personalization platform. SET Media is included in our Media segment, and its results of operations are included in our consolidated financial statements beginning on the date of acquisition. See Note 4 to our condensed consolidated financial statements included herein for additional information on this acquisition.
On September 11, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alliance Data Systems Corporation (“Alliance Data”) and Amber Sub LLC (“Merger Sub”), a direct wholly owned subsidiary of Alliance. The Merger Agreement provides for us to merge with and into Merger Sub, with Merger Sub continuing as the surviving company and a direct wholly-owned subsidiary of Alliance Data (the “Merger”). Subject to the terms and conditions of the Merger Agreement, holders of Conversant common stock will receive consideration valued at $35.00 per share in the Merger. See Note 16 in the accompanying condensed consolidated financial statements for additional information related to this acquisition.

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SEGMENT OPERATING RESULTS
The following table provides revenue, cost of revenue, gross profit, operating expenses, and income from operations information for our two business segments. Segment income from operations, as shown below, is the performance measure used by management to assess segment performance and excludes the effects of: stock-based compensation, amortization of intangible assets and corporate expenses. 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 and Sarbanes-Oxley compliance; certain legal fees not directly attributable to a business segment; insurance; acquisition related costs; 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.
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
 
 
 
 
Affiliate Marketing:
 

 
 

 
 
 
 
Revenue
$
39,190

 
$
38,872

 
$
122,286

 
$
113,805

Cost of revenue
4,691

 
4,491

 
13,827

 
13,579

Gross profit
34,499

 
34,381

 
108,459

 
100,226

Operating expenses
11,490

 
10,775

 
34,583

 
31,111

Segment income from operations
$
23,009

 
$
23,606

 
$
73,876

 
$
69,115

Media:
 

 
 

 
 
 
 
Revenue
$
99,123

 
$
95,254

 
$
299,333

 
$
283,000

Cost of revenue
40,724

 
36,458

 
121,350

 
107,674

Gross profit
58,399

 
58,796

 
177,983

 
175,326

Operating expenses
32,786

 
28,554

 
101,162

 
85,789

Segment income from operations
$
25,613

 
$
30,242

 
$
76,821

 
$
89,537

Reconciliation of segment income from operations to
   consolidated income from operations:
 

 
 

 
 
 
 
Total segment income from operations
$
48,622

 
$
53,848

 
$
150,697

 
$
158,652

Corporate expenses
(16,407
)
 
(6,895
)
 
(34,462
)
 
(20,527
)
Stock-based compensation
(5,499
)
 
(4,715
)
 
(15,076
)
 
(14,065
)
Amortization of acquired developed technology included in consolidated cost of revenue
(2,478
)
 
(1,986
)
 
(7,265
)
 
(5,957
)
Amortization of intangible assets included in consolidated operating expenses
(3,606
)
 
(3,550
)
 
(11,750
)
 
(10,650
)
Consolidated income from operations
$
20,632

 
$
36,702

 
$
82,144

 
$
107,453

Reconciliation of segment revenue to consolidated
   revenue:
 
 
 

 
 
 
 
Affiliate Marketing
$
39,190

 
$
38,872

 
$
122,286

 
$
113,805

Media
99,123

 
95,254

 
299,333

 
283,000

Inter-segment eliminations

 
(25
)
 
(13
)
 
(127
)
Consolidated revenue
$
138,313

 
$
134,101

 
$
421,606

 
$
396,678


RESULTS OF OPERATIONS—THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2014 COMPARED TO SEPTEMBER 30, 2013
 
Revenue.   Consolidated revenue for the three-month period ended September 30, 2014 was $138.3 million compared to $134.1 million for the same period in 2013, representing a 3.1% increase.

 Affiliate Marketing segment revenue was relatively consistent at $39.2 million for the three-month period ended September 30, 2014, compared to $38.9 million in the same period in 2013.

Media segment revenue increased 4.1% to $99.1 million for the three-month period ended September 30, 2014, compared to $95.3 million for the same period in 2013. Revenue growth was driven by our mobile and video products.
  

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Cost of Revenue and Gross Profit.   Cost of revenue includes the cost of sourcing advertising inventory to run our clients' campaigns, certain labor costs that are directly related to revenue-producing activities, Internet access costs, amortization of developed technology acquired in business combinations, and depreciation on revenue-producing technologies.

Our consolidated cost of revenue was $47.9 million for the three-month period ended September 30, 2014, compared to $42.9 million for the same period in 2013, an increase of 11.6%. Our consolidated gross margin decreased to 65.4% from 68.0% for the three-month periods ended September 30, 2014 and 2013, respectively.
 
Cost of revenue for the Affiliate Marketing segment increased to $4.7 million for the three-month period ended September 30, 2014 compared to $4.5 million for the three-month period ended September 30, 2013, respectively. Our Affiliate Marketing gross margin remained relatively consistent at 88.0% for the three-month period ended September 30, 2014, compared to 88.4% for the same period in 2013.
 
Cost of revenue for the Media segment increased $4.3 million, or 11.7%, to $40.7 million for the three-month period ended September 30, 2014, compared to $36.5 million for the same period in 2013. Our Media segment gross margin decreased to 58.9% for the three-month period ended September 30, 2014, compared to 61.7% for the same period in 2013. The decrease in our Media segment gross margin in the current year period was primarily due to revenue mix, with our relatively lower gross margin products (mobile and video) having the highest percentage revenue growth and our relatively highest gross margin product (ad serving) being down as compared to the year ago period.
  
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.

Total sales and marketing expenses for the three-month period ended September 30, 2014, were $25.0 million compared to $21.7 million for the same period in 2013, an increase of 15.0%. The increase was primarily due to increased marketing related costs including those associated with the rebranding of our European operations in the current quarter, higher costs as a result of increased headcount in our sales and marketing organizations and the inclusion of SET Media beginning February 6, 2014. Our sales and marketing expenses as a percentage of revenue were 18.0% for the three-month period ended September 30, 2014, compared to 16.2% for the same period in 2013. We currently expect our sales and marketing expenses in the remainder of 2014 to be higher than the comparable periods in 2013.
 
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 $23.6 million for the three-month period ended September 30, 2014, compared to $15.1 million for the same period in 2013, an increase of $8.5 million. This increase was primarily due to approximately $6.6 million in expenses incurred related to the pending merger with Alliance Data, as well as higher stock-based compensation expense in the current year period as described below. As a percentage of revenue, general and administrative expenses increased to 17.1% for the three-month period ended September 30, 2014, compared to 11.3% for the year-ago period.
 
Technology.   Technology expenses include costs associated with the maintenance and ongoing development of our technology platforms, including compensation and employee benefits for our engineering departments, as well as costs for contracted technology services and supplies. Technology expenses for the three-month period ended September 30, 2014, increased to $17.6 million, or 12.7% of revenue, compared to $14.1 million, or 10.5% of revenue, for the same period in 2013, an increase of 24.5%. The increase was primarily due to higher costs as a result of increased headcount in our technology organization and the inclusion of SET Media beginning February 6, 2014.
 
Segment Income from Operations.   Affiliate Marketing segment income from operations for the three-month period ended September 30, 2014, decreased 2.5% to $23.0 million from $23.6 million in the same period of the prior year, and represented 58.7% and 60.7% of Affiliate Marketing segment revenue in these respective periods. The decrease in this segment's operating income margin from the year ago period is primarily due to higher operating expenses in the current year associated with higher headcount.

 

22


Media segment income from operations for the three-month period ended September 30, 2014, decreased 15.3% to $25.6 million from $30.2 million in the same period of the prior year, and represented 25.8% and 31.7% of Media segment revenue in these respective periods. Media segment operating income margin decreased from the prior year due primarily to higher operating expenses in the current year related to increased headcount and marketing spend, and the inclusion of SET Media in 2014, which is currently operating at a loss and is expected to operate at a loss in the quarter ending December 31, 2014.
 
Stock-Based Compensation.   Stock-based compensation for the three-month periods ended September 30, 2014 increased to $5.5 million compared to $4.7 million for the same period of the prior year. The increase in the current year is due to expense related to new stock awards granted during 2014. We currently anticipate stock-based compensation of approximately $5.5 million and $20.5 million for the quarter and full year ending December 31, 2014, respectively. 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 awards, fluctuations in the market value of our common stock, modifications to our existing stock award programs, additions of new stock-based compensation programs, or other factors.
 
Amortization of Intangible Assets.   Amortization of developed technologies acquired in business combinations, included in Cost of revenue, for the three-month period ended September 30, 2014, was $2.5 million compared to $2.0 million in the year ago quarter. The increase is due to the acquisition of SET Media. Amortization of all remaining intangible assets, included in Amortization of intangible assets acquired in business combinations, was consistent at $3.6 million for the three-month periods ended September 30, 2014 and 2013. We currently anticipate total amortization expense, including those recorded in Cost of revenue, of approximately $25.1 million for the year ending December 31, 2014.
 
Interest and Other Income (Expense), Net. Interest and other income (expense), net increased to $1.1 million in income for the three-month period ended September 30, 2014, compared to $0.2 million in expense for the same period in 2013, primarily due to an increase in foreign exchange gains in the current year.

 Income Tax Expense. For the three-month periods ended September 30, 2014 and 2013, we recorded income tax expense of $11.9 million and $14.5 million, respectively. The effective income tax rates for the three-month periods ended September 30, 2014 and 2013, were 54.6% and 39.6%, respectively. The increase in the effective tax rate in the current year period is primarily due to a reserve recorded associated with a tax dispute with a foreign tax jurisdiction and the presumed non-deductibility of a portion of the transaction expenses associated with the pending acquisition.

RESULTS OF OPERATIONS—NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2014 COMPARED TO SEPTEMBER 30, 2013

Revenue. Consolidated revenue for the nine-month period ended September 30, 2014, was $421.6 million compared to $396.7 million for the same period in 2013, an increase of $24.9 million, or 6.3%.

Affiliate Marketing segment revenue increased to $122.3 million for the nine-month period ended September 30, 2014, compared to $113.8 million in the same period in 2013. This increase of $8.5 million, or 7.5%, was attributable primarily to new client wins which contributed to stronger growth in the first and second quarters of 2014.

Media segment revenue increased to $299.3 million for the nine-month period ended September 30, 2014, compared to $283.0 million for the same period in 2013, an increase of $16.3 million, or 5.8%. Revenue growth was driven by our mobile and video products.

Cost of Revenue and Gross Profit. Our consolidated cost of revenue was $142.4 million for the nine-month period ended September 30, 2014, compared to $127.1 million for the same period in 2013, resulting in a gross margin of 66.2% and 67.9%, respectively.

Cost of revenue for the Affiliate Marketing segment increased slightly to $13.8 million for the nine-month periods ended September 30, 2014 compared to $13.6 million for the same period in the prior year. Our Affiliate Marketing gross margin remained relatively consistent at 88.7% for the nine-month period ending September 30, 2014, compared to 88.1% for the same period in 2013.


23


Cost of revenue for the Media segment increased $13.7 million, or 12.7%, to $121.4 million for the nine-month period ended September 30, 2014, compared to $107.7 million for the same period in 2013. Our Media segment gross margin decreased to 59.5% for the nine-month period ended September 30, 2014, compared to 62.0% for the same period in 2013. The decrease in our Media segment gross margin in the current year period was primarily due to revenue mix, with our relatively lower gross margin products (mobile and video) having the highest percentage revenue growth and our relatively highest gross margin product (ad serving) being down as compared to the year ago period.

Operating Expenses:

Sales and Marketing. Total sales and marketing expenses for the nine-month period ended September 30, 2014, were $77.4 million compared to $64.1 million for the same period in 2013, an increase of $13.3 million, or 20.7%. The increase was primarily due to marketing related costs associated with our corporate rebranding in the first quarter of 2014, our rebranding of our European operations, higher costs as a result of increased headcount in our sales and marketing organizations, and the inclusion of SET Media beginning February 6, 2014. Our sales and marketing expenses as a percentage of revenue increased to 18.4% for the nine-month period ended September 30, 2014, compared to 16.2% for the same period in 2013.

General and Administrative. General and administrative expenses increased to $57.1 million, or 13.5% of revenue, for the nine-month period ended September 30, 2014, compared to $45.6 million, or 11.5% of revenue, for the same period in 2013, an increase of $11.5 million, or 25.3%. The increase was primarily due to approximately $6.6 million in expenses incurred related to the pending merger with Alliance Data and to overall growth in our business.

Technology. Technology expenses for the nine-month period ended September 30, 2014, increased to $50.7 million, or 12.0% of revenue, compared to $41.7 million, or 10.5% of revenue, for the same period in 2013, an increase of $9.0 million, or 21.6%. The increase was primarily due to higher costs as a result of increased headcount in our technology organization and the inclusion of SET Media beginning February 6, 2014.

Segment Income from Operations. Affiliate Marketing segment income from operations for the nine-month period ended September 30, 2014, increased 6.9%, or $4.8 million, to $73.9 million, from $69.1 million in the same period of the prior year, and represented 60.4% and 60.7% of Affiliate Marketing segment revenue in these respective periods. The increase in segment income from operations was due primarily to the higher revenue described above.

Media segment income from operations for the nine-month period ended September 30, 2014, decreased 14.2%, or $12.7 million, to $76.8 million from $89.5 million in the same period of the prior year, and represented 25.7% and 31.6% of Media segment revenue in these respective periods. Media segment operating income margin decreased from the prior year due to higher operating expenses in the current year related to increased headcount and marketing spend, and the inclusion of SET Media beginning February 6, 2014.

Stock-Based Compensation. Stock-based compensation for the nine-month period ended September 30, 2014, increased to $15.1 million compared to $14.1 million for the same period in 2013. The increase in the current year is due to expense related to new stock awards granted during 2014.

Amortization of Intangible Assets. Amortization of developed technologies acquired in business combinations, included in Cost of revenue, was $7.3 million for the nine-month period ended September 30, 2014, compared to $6.0 million in the year ago period. Amortization of all remaining intangible assets, included in Amortization of intangible assets acquired in business combinations, increased to $11.8 million for the nine-month period ended September 30, 2014, compared to $10.7 million for the same period in 2013. The increase in amortization of intangible assets is due to the acquisition of SET Media and the accelerated amortization of certain tradenames in connection with our rebranding in the first quarter of 2014.

Interest and Other Income (Expense), Net. Interest and other income (expense), net was income of $1.4 million for the nine-month period ended September 30, 2014, compared to an expense of $24.0 million for the same period in 2013. The increase was primarily due to the $22.6 million write-down of a note receivable in the second quarter of 2013.

Income Tax Expense. For the nine-month period ended September 30, 2014, we recorded income tax expense of $36.6 million compared to $31.9 million for the same period in 2013. The increase in the effective income tax rate to 43.8% for the nine-month period ended September 30, 2014, from 38.3% in the same period of the prior year is primarily due to a reserve recorded associated with a tax dispute with a foreign tax jurisdiction and the presumed non-deductibility of a portion of the transaction expenses associated with the pending acquisition.


24


Adjusted EBITDA as a Non-GAAP Financial Performance Measure

In evaluating our business, we consider earnings from continuing operations before interest, income taxes, depreciation, amortization, stock-based compensation, 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 and cash equivalents, note receivable, and borrowings, and the costs associated with income tax expense, capital investments, stock-based compensation expense, and acquisitions, 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.

The following is a reconciliation of net income from continuing operations to Adjusted EBITDA for the three-month periods ended September 30, 2014 and 2013 (in thousands):
 
Three Months
Ended September 30,
 
Nine Months
Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income from continuing operations
$
9,880

 
$
22,094

 
$
46,959

 
$
51,510

Interest and other (income) expense, net
(1,135
)
 
152

 
(1,399
)
 
24,022

Income tax expense
11,887

 
14,456

 
36,584

 
31,921

Amortization of acquired developed technology included in cost of revenue
2,478

 
1,986

 
7,265

 
5,957

Amortization of acquired intangible assets included in operating expenses
3,606

 
3,550

 
11,750

 
10,650

Depreciation and leasehold amortization
3,268

 
3,232

 
9,540

 
9,240

Stock-based compensation
5,499

 
4,715

 
15,076

 
14,065

Acquisition-related costs
6,613

 

 
6,613

 

Adjusted EBITDA
$
42,096

 
$
50,185

 
$
132,388

 
$
147,365


Adjusted EBITDA for the three-month period ended September 30, 2014, decreased to $42.1 million from $50.2 million for the same period in 2013, representing a decrease of $8.1 million, or 16.1%. Adjusted EBITDA for the nine-month period ended September 30, 2014, decreased to $132.4 million from $147.4 million for the same period in 2013, representing a decrease of $15.0 million, or 10.2%. The decrease in both periods is due to the decreased operating income in our Media segment as described above as well as higher corporate expenses, including a portion of the marketing costs associated with the our rebranding.

Liquidity and Capital Resources
 
We have financed our operations, our stock repurchases and our cash acquisitions primarily through working capital generated from operations and borrowings under our credit facility. At September 30, 2014, our cash and cash equivalents balances totaled $66.1 million, of which $57.3 million was denominated in foreign currencies and held by our foreign subsidiaries. A majority of the cash held abroad could be repatriated to the U.S. but, under current law, may be subject to U.S. federal income taxes (subject to an adjustment for foreign tax credits).
 
Net cash provided by operating activities decreased to $110.1 million for the nine months ended September 30, 2014, compared to $114.5 million in the same period of 2013. The decrease is due to the inclusion in the year ago period of the Owned & Operated Websites segment which was divested in the first quarter of 2014 partially offset by positive working capital changes in the current year period.
 
Net cash provided by investing activities of $38.6 million for the nine-month period ended September 30, 2014, was primarily due to net proceeds of $72.8 million received from the sale of the Owned & Operated Websites segment in the first quarter of 2014, offset partially by the use of $24.3 million for the acquisition of SET Media and $10.0 million for equipment purchases. Net cash used in investing activities of $4.7 million in the nine-month period ended September 30, 2013, was due to the use of $12.2 million for equipment purchases, offset partially by payments received on a note receivable of $7.5 million

25



Net cash used in financing activities of $174.3 million for the nine months ended September 30, 2014, was primarily due to net repayments under our credit facility of $85.0 million and stock repurchases of $100.0 million, offset by $6.6 million in proceeds received from shares issued under our employee stock programs and $4.1 million in excess tax benefits from exercises of stock-based awards. Net cash used in financing activities of $160.3 million for the nine months ended September 30, 2013, was primarily due to stock repurchases of $223.8 million, offset partially by proceeds from borrowings under our credit facility of $50.8 million, proceeds received from shares issued under our employee stock programs of $8.5 million and $4.2 million in excess tax benefits from exercises of stock-based awards.
Credit Facility
On August 19, 2013, we entered into a Second Amended and Restated Credit Agreement (the "Credit Facility"), which replaced our previous credit facility. The Credit Facility consists of a revolving loan commitment of $400 million, with an option to increase the total revolving loan commitment to $500 million subject to certain conditions. The Credit Facility expires on August 19, 2018. Availability under the Credit Facility is subject to our meeting certain financial and non-financial covenants, as more fully described in Note 14 to our condensed consolidated financial statements included herein. The Credit Facility provides us with additional financial flexibility for pursuing acquisitions, repurchasing our common stock and general corporate purposes. At September 30, 2014, there was $55 million outstanding under the Credit Facility.
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, 2013, our board of directors authorized a total of $1.0 billion for repurchases under the Program and we had repurchased a total of 80.9 million shares of our common stock for approximately $926.8 million. During the three-month period ended September 30, 2014, the Company's board of directors authorized $150.0 million for additional repurchases under the Program. During the three- and nine-month periods ended September 30, 2014, we repurchased 0.8 million shares for $18.9 million and 4.1 million shares for $99.9 million, respectively. As of September 30, 2014, up to an additional $150.1 million of our capital was available to be used to repurchase shares of our outstanding common stock under the Program.
 
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
Other than the stockholder class action litigation associated with our potential acquisition by Alliance as more fully described in Item 1. of Part III, there were no significant changes to our commitments and contingencies during the three- and nine-month periods ended September 30, 2014.
 
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.

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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 under the current or any replacement line of credit, or through other debt instruments. 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;
the extent of dislocations in the credit markets in the United States;
the timing and outcome of examinations by tax authorities;
our stock repurchase program; and
our relationships with our advertiser customers and publisher partners.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and 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, stock-based compensation, income taxes, goodwill and other intangible assets, debt, and contingencies and litigation. We base our estimates and assumptions on historical experience and on various other estimates and assumptions that we believe 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.
 
There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Recently Issued Accounting Standards

Refer to Note 2 to our condensed consolidated financial statements for a discussion of new accounting pronouncements.

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ITEM 3. 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 exposure to interest rate risk primarily results from changes in the one-month London Interbank Offered Rate ("LIBOR"), which is the benchmark interest rate for most borrowings under our credit facility. If the one-month LIBOR rate were to double and our outstanding balance remained at $55 million, our interest expense would increase by approximately $0.1 million over the next year.
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 and Euros. The effect of foreign currency exchange rate fluctuations for the three-month periods ended September 30, 2014 and 2013, was not material to the consolidated results of operations. 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 an estimated reduction of revenue of approximately $4.6 million, an estimated reduction of income before income taxes of approximately $0.5 million and an estimated reduction of consolidated net assets of approximately $6.7 million.
While we perform certain economic hedging activities related to exposures associated with certain intercompany balances with our foreign subsidiaries, we do not hedge all of the foreign exchange related exposures faced by our operations. Accordingly, we may experience economic loss and a negative impact on earnings, cash flows or equity as a result of foreign currency exchange rate fluctuations. As of September 30, 2014, we had $75.7 million in total current assets, including $57.3 million in cash and cash equivalents, and $11.5 million in total current liabilities denominated in foreign currencies, predominantly British Pounds and Euros. 
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 4. CONTROLS AND PROCEDURES 

(a)
Evaluation of Disclosure Controls and Procedures 

As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”), Rules 13a-15(e) and 15d-15(e)) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.

(b)
Changes in Internal Control over Financial Reporting 

Additionally, our Chief Executive Officer and Chief Financial Officer have determined that there have been no changes to our internal control over financial reporting during the three-month period ended September 30, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION AND SIGNATURES
 
ITEM 1. LEGAL PROCEEDINGS
 
The Company is currently facing pending stockholder class action litigation relating to our potential acquisition by Alliance Data Systems Corporation (“Alliance Data”), which was publicly announced on September 11, 2014. There are currently three pending lawsuits in the Superior Court of the State of California in Los Angeles County and one pending consolidated action in the Court of Chancery of the State of Delaware. 
 
On September 12, 2014, a putative stockholder class action complaint, captioned Palkon v. Conversant, Inc., et al., No. 56-2014-00457860-CU-BT-VTA (Superior Court, Ventura County), was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary in the Superior Court of the State of California in Ventura County. On October 7, 2014, the plaintiff in the Palkon action filed a request for voluntary dismissal. The court issued an order granting the request and dismissing the action on October 21, 2014. Additionally, on September 16, 2014, a second putative stockholder class action complaint, captioned Leinoff v. Conversant, Inc., et al., No. BC-557818 (Superior Court, Los Angeles County), was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary in the Superior Court of the State of California in Los Angeles County. An amended complaint was filed in Leinoff on October 21, 2014. On September 19, 2014, a third putative stockholder class action complaint, captioned Blaze v. Conversant, Inc., et al., No. BC-558100 (Superior Court, Los Angeles County), was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary, also in the Superior Court of the State of California in Los Angeles County. The plaintiff in the Los Angeles County Blaze action filed a request for voluntary dismissal on October 17, 2014. The court issued an order granting the request and dismissing the action on October 29, 2014. On September 26, 2014, a fourth putative class action stockholder complaint, captioned Feliciano v. Buzby, et al., C.A. No. 10174-VCN (Chancery Court, Delaware) was filed against Conversant, Conversant’s directors, Alliance Data and the Merger Subsidiary in the Court of Chancery of the State of Delaware. An amended complaint was filed in Feliciano on October 9, 2014. On September 30, 2014, a fifth putative stockholder class action complaint, captioned Naclerio v. Conversant, Inc., et al., No. BC559187 (Superior Court, Los Angeles County) was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary, in the Superior Court of the State of California in Los Angeles County. On October 3, 2014, a sixth putative stockholder class action complaint, captioned Hoffman v. Conversant, Inc., et al., No. BC559660 (Superior Court, Los Angeles County) was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary, also in the Superior Court of the State of California in Los Angeles County. On October 17, 2014, a seventh putative stockholder class action complaint, captioned Blaze v. Conversant, Inc. et al., C.A. No. 10253-VCN (Chancery Court, Delaware), was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary, also in the Court of Chancery of the State of Delaware. Also on October 17, 2014, an eighth putative stockholder class action complaint, captioned Joyce v. Conversant, Inc. et al., C.A. No. 10254-VCN (Chancery Court, Delaware), was filed against Conversant, Conversant’s directors, Alliance Data, and the Merger Subsidiary in the Court of Chancery of the State of Delaware. On October 22, 2014, the plaintiff in Joyce filed a motion to expedite proceedings. On October 30, 2014, an order was entered consolidating the Delaware actions into a consolidated action captioned In re Conversant, Inc. Stockholder Litigation, C.A. No. 10174-VCN (Chancery Court, Delaware), and appointing Plaintiffs’ co-lead counsel and liaison counsel for the consolidated action.
 
Each lawsuit alleges that members of the Conversant board of directors breached their fiduciary duties in connection with the proposed sale of Conversant to Alliance Data. Each complaint also alleges that Conversant, Alliance Data and the Merger Subsidiary aided and abetted the alleged breach of fiduciary duty. The Delaware consolidated action and the amended complaint in Leinoff also include claims regarding alleged misrepresentations and omissions made in Conversant’s preliminary proxy statement. The complaints seek, among other things, injunctive relief and other equitable relief, in addition to unspecified fees and costs. The Company believes these lawsuits are without merit and intends to defend itself against each of them vigorously.

From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. In October 2014, the the Company received a notice of claim for indemnification from IAC Search, LLC/InterActiveCorp related to its January 2014 acquisition of the Company’s Owned & Operated Websites segment.  The Company believes that this claim is without merit and intends to defend itself vigorously. The Company is not currently a party to any material legal proceedings, except as discussed above, nor is the Company aware of any pending or threatened litigation that is reasonably possible to have a material adverse effect on the Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.


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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-Q 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-Q. 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.
 
THE FAILURE TO COMPLETE THE PROPOSED MERGER WITH ALLIANCE DATA COULD ADVERSELY AFFECT OUR BUSINESS.

On September 11, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Alliance Data Systems Corporation (“Alliance Data”) and Amber Sub LLC (“Merger Sub”), a direct wholly owned subsidiary of Alliance Data. The Merger Agreement provides for the merger of Conversant with and into Merger Sub, with Merger Sub continuing as the surviving company and a direct wholly-owned subsidiary of Alliance Data (the “Merger”). The Merger is subject to customary closing conditions, including approval by Conversant stockholders and listing of the shares of Alliance Data common stock to be issued in the Merger on the New York Stock Exchange. There is no assurance that the Merger with Alliance Data will occur. If the proposed Merger is not completed, the share price of our common stock may drop to the extent that the current market price of our common stock reflects an assumption that a Merger will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of up to $65 million if we do not consummate the Merger with Alliance Data. Further, a failed transaction could result in major disruptions to our business, and any such disruptions could continue or accelerate in the event the Merger is not consummated. There can be no assurance that our business or our financial condition would not be adversely affected, as compared to the condition prior to the announcement of the Merger, as a result of the announcement or if the Merger is not consummated. While we currently expect the transaction to close in the fourth quarter of 2014, we cannot provide assurance that the transaction will be ultimately consummated.

OUR PROFITABILITY MAY NOT REMAIN AT CURRENT LEVELS.
 
We face risks that could prevent us from maintaining or growing our current profitability levels in future periods. These risks include, but are not limited to, our ability to:
match our revenue growth with our growth in operating expenses;
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 and acquire such advertising space at prices that allow us to maintain our gross margin profile;
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 digital advertisers' marketing needs and policies, and the technologies used to generate digital 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 advertising filtering software.

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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 INVENTORY AND OUR GROWTH COULD BE IMPEDED IF WE FAIL TO ACQUIRE NEW ADVERTISING INVENTORY.
 
Our success depends in part on our ability to successfully access advertising inventory available on ad exchanges and through ad network optimization service providers as well as through direct relationships with website publishers and mobile application developers. The partners that we work with to access advertising inventory are not bound by long-term contracts that ensure us a consistent supply of advertising inventory. In addition, our partners can change the amount of inventory they make available to us at any time. If a partner decides not to make advertising inventory available to us, we may not be able to replace this advertising inventory with advertising inventory from other sources that have comparable traffic patterns and user demographics quickly enough to fulfill our advertisers' requests. This would result in lost revenue.

We expect that our advertiser customers' requirements will become more sophisticated as the digital channel continues to mature as an advertising medium. If we fail to manage our existing advertising inventory effectively to meet our advertiser customers' changing requirements, our revenue could decline.
 
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.

OUR COMPANY AND PRODUCT LINE REBRANDING FROM VALUECLICK, INC. TO CONVERSANT, INC. IN THE FIRST QUARTER OF 2014 MAY NOT BE SUCCESSFUL AND COULD NEGATIVELY IMPACT OUR OPERATING RESULTS
 
In the first quarter of 2014, we completed a domestic rebranding of the previous name of the Company, ValueClick, Inc. into Conversant, Inc. We also rebranded our products (including Dotomi, Greystripe, Mediaplex, and ValueClick Media) as Conversant. We completed the rebranding of our international operations in the third quarter of 2014. This corporate and product rebranding may not have the desired impact of increasing market awareness of our product offerings and may result in confusion amongst current and prospective customers and vendors. In addition to the general business risk associated with the rebranding, we incurred significant marketing, legal and IT expenses in the first three quarters of 2014.
 

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IF THE TECHNOLOGY THAT WE CURRENTLY USE TO TARGET THE DELIVERY OF ONLINE ADVERTISEMENTS AND TO PREVENT FRAUD 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 and mobile users have when they see advertisements, advertising campaign reporting, website reporting and to monitor and prevent fraudulent activity. 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. 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.
 
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.


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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 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; Illinois; 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 and Europe;
our ability to integrate our product offerings, technology platforms and organization while minimizing disruption to ongoing business requirements;
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 advertising space we have access to;
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;
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 or changes in the pricing policies for digital advertising generally;
changes in the regulatory environment, including regulation of digital advertising, that may negatively impact our marketing practices;

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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.
 
OUR INTERNATIONAL OPERATIONS SUBJECT US TO ADDITIONAL RISKS AND UNCERTAINTIES AND WE MAY NOT BE SUCCESSFUL WITH OUR STRATEGY TO EXPAND SUCH OPERATIONS.
 
We operate, through wholly-owned subsidiaries or divisions, in various countries within Europe and Asia. Our international operations present 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 international operations also subject us to additional foreign currency exchange rate risks. 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 income tax or Value Added Tax consequences;
difficulties and costs of staffing and managing foreign operations;
political and economic instability; and
tariffs and other trade barriers.

Our failure to address these risks adequately could materially and adversely affect our business, revenue, results of operations, cash flows and financial condition.
 

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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.
 
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 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 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. Microsoft's Internet Explorer 10 and 11 offer DNT by default. In addition, Mozilla Firefox has announced a plan to block third-party cookies by default. These features offered or planned by Microsoft and Mozilla, 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 bills that have been introduced addressing online privacy. In addition to proposed legislation, members of Congress have repeatedly called for the online advertising industry to adopt DNT. These bills and self-regulatory actions, 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.

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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. In addition, there is a new European Union Data Protection Regulation that may take effect in the future that may further inhibit our ability to collect consumer information and target users based on this data. The European Union has not yet set an official implementation date for this regulation. 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.
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. Some of these fluctuations were caused by general market conditions and some resulted when our performance did not meet expectations. 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. Accordingly, 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 have been involved in this type of litigation in the past. Litigation of this type is often expensive and diverts management's attention and resources.
 

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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. Since 2011, many other states, including California, Georgia, and Pennsylvania, have also passed similar regulations or have proposed similar regulations. Since their inception, these tax regulations have not had a material impact on the revenue generated by our Affiliate Marketing segment. We are unable to determine the impact if additional states or the federal government adopt similar requirements.

WE MAY BE REQUIRED TO RECORD A SIGNIFICANT CHARGE TO EARNINGS IF OUR GOODWILL OR AMORTIZABLE INTANGIBLE ASSETS BECOME IMPAIRED.
 
As of September 30, 2014, we have $402.3 million and $39.6 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 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, 2014. 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 11 to our consolidated financial statements, we have recorded significant income tax liabilities. The preparation of our condensed 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 various jurisdictions and, in the event that we are not able to successfully defend our position, we may incur significant additional income tax, sales tax or value added 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. We are currently disputing a tax assessment made by the French tax authorities as it relates to corporate income taxes and value added taxes. We have recorded a reserve related to this dispute for an amount that we believe is adequate. However, it is reasonably possible that resolution with the French tax authorities could result in an adjustment to our tax position.
 
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, 2013. 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.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(c) Purchases of Equity Securities — The table below summarizes our repurchases of common stock during the three months ended September 30, 2014
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
July 1, 2014 through July 31, 2014
 
777,588

 
$
24.35

 
777,588

 
$
150.1
 million
 
 
 
 
 
 
 
 
 
August 1, 2014 through August 31, 2014
 

 
$

 

 
$
150.1
 million
 
 
 
 
 
 
 
 
 
September 1, 2014 through September 30, 2014
 

 
$

 

 
$
150.1
 million
 
 
 
 
 
 
 
 
 
Total
 
777,588

 
$
24.35

 
777,588

 
$
150.1
 million
____________________
(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, 2013, our board of directors authorized a total of $1.0 billion for repurchases under the Program and we had repurchased a total of 80.9 million shares of our common stock for approximately $926.8 million. During the three-month period ended September 30, 2014, the Company's board of directors authorized $150.0 million for additional repurchases under the Program. During the three- and nine-month periods ended September 30, 2014, we repurchased 0.8 million shares for $18.9 million and 4.1 million shares for $99.9 million, respectively. As of September 30, 2014, up to an additional $150.1 million of our capital was available to be used to repurchase shares of our outstanding common stock under the Program.

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 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. MINE SAFETY DISCLOSURES
    
None.
 
ITEM 5. OTHER INFORMATION
 
None.
 

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ITEM 6. EXHIBITS
 
(a)           Exhibits:
 
Exhibit
Number
 
Exhibit
Description
 
 
 
2.1(1)
 
Agreement and Plan of Merger, dated as of September 11, 2014 by and among Alliance Data Systems Corporation, Conversant, Inc. and Amber Sub LLC.
 
 
 
10.1(2)
 
Voting Agreement, dated as of September 11, 2014 by and among Alliance Data Systems Corporation and executive officers and directors of Conversant, Inc.
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
(1
)
 
Incorporated by reference to Exhibit 2.1 to the current report on Form 8-K filed by Conversant on
September 11, 2014.
(2
)
 
Incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed by Conversant on
September 11, 2014.
*

 
XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.


39


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
CONVERSANT, INC. (Registrant)
 
 
 
 
 
 
 
 
 
 
By:
/s/ JOHN PITSTICK
 
 
 
John Pitstick
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial and Accounting Officer)
Dated:
November 7, 2014
 
 

40