SEC Filings

6-K
AVG TECHNOLOGIES N.V. filed this Form 6-K on 11/15/2012
Entire Document
 
Form 6-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

November 15, 2012

Commission File Number: 001-35408

 

 

AVG TECHNOLOGIES N.V.

 

 

Gatwickstraat 9-39

1043 GL Amsterdam

The Netherlands

(Address of principal executive offices)

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  x            Form 40-F  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ¨

 

 

 


Table of Contents

Table of Contents

Item

1. AVG Technologies N.V. Unaudited Condensed Consolidated Interim Financial Statements as of September 30, 2012


Table of Contents

Item 1

INDEX TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

     Page  

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2011 and September 30,  2012

     F-2   

Unaudited Condensed Consolidated Interim Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2012

     F-3   

Unaudited Condensed Consolidated Interim Statement of Shareholders’ Deficit for the nine months ended September 30, 2012

     F-4   

Unaudited Condensed Consolidated Interim Statements of Cash Flows for the nine months ended September  30, 2011 and 2012

     F-5   

Notes to Unaudited Condensed Consolidated Interim Financial Statements

     F-6   

 

F-1


Table of Contents

AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in thousands of U.S. Dollars)

 

     December 31, 2011     September 30, 2012  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 60,740      $ 86,703   

Trade accounts receivable, net

     25,363        34,993   

Inventories

     883        932   

Deferred income taxes

     18,394        18,394   

Prepaid expenses

     3,975        4,841   

Prepaid share issuance cost

     6,820        —     

Other current assets

     6,363        7,153   
  

 

 

   

 

 

 

Total current assets

     122,538        153,016   
  

 

 

   

 

 

 

Property and equipment, net

     12,436        12,303   

Deferred income taxes

     59,750        56,770   

Intangible assets, net

     35,035        36,850   

Goodwill

     71,367        72,277   

Investment in equity affiliate

     511        333   

Investments

     9,750        9,750   

Other assets

     248        2,510   
  

 

 

   

 

 

 

Total assets

   $ 311,635      $ 343,809   
  

 

 

   

 

 

 

LIABILITIES, PREFERRED SHARES AND SHAREHOLDERS’ DEFICIT

    

Current liabilities:

    

Accounts payable

   $ 11,035      $ 9,983   

Accrued compensation and benefits

     15,941        18,876   

Accrued expenses and other current liabilities

     30,878        27,298   

Current portion of long-term debt

     41,125        18,700   

Income taxes payable

     4,161        3,361   

Deferred revenue

     120,269        131,361   
  

 

 

   

 

 

 

Total current liabilities

     223,409        209,579   
  

 

 

   

 

 

 

Long-term debt, less current portion

     184,315        134,202   

Deferred revenue, less current portion

     30,839        30,844   

Other non-current liabilities

     3,397        3,646   
  

 

 

   

 

 

 

Total liabilities

     441,960        378,271   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Class D preferred shares

     191,954        —     

Shareholders’ deficit:

    

Ordinary shares

     476        722   

Additional paid-in capital (Distributions in excess of capital)

     (388,225     (136,341

Treasury shares

     —          (3,869

Accumulated other comprehensive loss

     (6,324     (5,129

Retained earnings

     71,794        110,155   
  

 

 

   

 

 

 

Total shareholders’ deficit

     (322,279     (34,462
  

 

 

   

 

 

 

Total liabilities, preferred shares and shareholders’ deficit

   $ 311,635      $ 343,809   
  

 

 

   

 

 

 

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

 

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AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(Expressed in thousands of U.S. Dollars – except for share data and per share data)

 

     Three Months Ended     Nine Months Ended  
     September 30,
2011
    September 30,
2012
    September 30,
2011
    September 30,
2012
 

Revenue:

        

Subscription

   $ 43,942      $ 49,226      $ 130,071      $ 143,210   

Platform-derived

     27,228        46,027        68,022        117,551   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     71,170        95,253        198,093        260,761   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue:

        

Subscription

     5,832        5,794        17,287        19,597   

Platform-derived

     3,352        9,548        6,517        20,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     9,184        15,342        23,804        39,811   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     61,986        79,911        174,289        220,950   

Operating expenses:

        

Sales and marketing

     19,190        22,298        53,904        63,710   

Research and development

     8,835        11,833        24,478        38,981   

General and administrative

     18,332        16,784        35,984        48,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     46,357        50,915        114,366        151,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     15,629        28,996        59,923        69,671   

Other income (expense):

        

Interest income

     19        26        38        91   

Interest and finance costs

     (5,211     (5,914     (11,319     (15,842

Other, net

     (343     (495     (997     (1,981
  

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

     (5,535     (6,383     (12,278     (17,732
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and loss from investment in equity affiliate

     10,094        22,613        47,645        51,939   

Benefit (provision) for income taxes

     (3,373     (3,581     52,212        (10,845

Loss from investment in equity affiliate

     (61     (69     (180     (178
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,660      $ 18,963      $ 99,677      $ 40,916   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Foreign currency translation gain (loss)

   $ (2,242   $ 723      $ (2,910   $ 1,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (2,242     723        (2,910     1,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,418      $ 19,686      $ 96,767      $ 42,111   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,660      $ 18,963      $ 99,677      $ 40,916   

Preferred share dividends

     (1,802     —          (5,406     (753

Distributed and undistributed earnings to participating securities

     (1,214     —          (27,513     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to ordinary shareholders – basic

   $ 3,644      $ 18,963      $ 66,758      $ 40,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to ordinary shareholders – basic

   $ 3,644      $ 18,963      $ 66,758      $ 40,163   

Net income available to ordinary shareholders – diluted

   $ 3,644      $ 18,963      $ 66,758      $ 40,916   

Earnings per ordinary share – basic

   $ 0.10      $ 0.35      $ 1.85      $ 0.77   

Earnings per ordinary share – diluted

   $ 0.09      $ 0.35      $ 1.72      $ 0.75   

Weighted-average shares outstanding – basic

     36,000,000        54,232,743        36,000,000        51,850,912   

Weighted-average shares outstanding – diluted

     39,137,695        54,710,323        38,837,773        54,231,072   

Cash dividends declared per ordinary share

   $ —        $ —        $ 4.53      $ —     

Cash dividends declared per preferred share

   $ 0.15      $ —        $ 4.98      $ 0.21   

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

 

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AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF SHAREHOLDERS’ DEFICIT

(Expressed in thousands of U.S. Dollars – except for share data)

 

    Class D
Preferred Shares
         Ordinary Shares  
           Class A     Class B1     Class B2     Class E  
    Shares     Amount          Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount  

Balances, January 1, 2012

    12,000,000      $ 191,954            16,200,000      $ 212        9,316,224      $ 125        3,283,776      $ 44        7,200,000      $ 95   

Net income

    —          —              —          —          —          —          —          —          —          —     

Other comprehensive income:

                       

Foreign currency translation gain

    —          —              —          —          —          —          —          —          —          —     

Other comprehensive income

    —          —              —          —          —          —          —          —          —          —     

Conversion of preferred shares and Class A, B1, B2 and E shares to ordinary shares

    (12,000,000     (191,954         (16,200,000     (212     (9,316,224     (125     (3,283,776     (44     (7,200,000     (95

Share proceeds

    —          —              —          —          —          —          —          —          —          —     

Share issuance costs (net of income tax benefit of $966)

    —          —              —          —          —          —          —          —          —          —     

Exercise of share options

    —          —              —          —          —          —          —          —          —          —     

Cash dividends declared and paid on preferred shares

    —          —              —          —          —          —          —          —          —          —     

Repurchase of own shares

    —          —              —          —          —          —          —          —          —          —     

Share-based compensation, net of repurchases and liability awards

    —          —              —          —          —          —          —          —          —          —     
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, September 30, 2012

    —        $ —              —        $ —          —        $ —          —        $ —          —        $ —     
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Ordinary Shares      Treasury shares    

Additional Paid-

in Capital
(Distributions in

    Accumulated Other
Comprehensive
    Retained     Total
Shareholders’
 
     Shares      Amount      Shares     Amount     Excess of Capital)     Income (Loss)     Earnings     Deficit  

Balances, January 1, 2012

     —         $ —           —        $ —        $ (388,225   $ (6,324   $ 71,794      $ (322,279

Net income

     —           —           —          —          —          —          40,916        40,916   

Other comprehensive income:

                  

Foreign currency translation gain

     —           —           —          —          —          1,195        —          1,195   
              

 

 

     

 

 

 

Other comprehensive income

     —           —           —          —          —          1,195        —          1,195   

Conversion of preferred shares and Class A, B1, B2 and E shares to ordinary shares

     48,000,000         639         —          —          191,791        —          —          191,954   

Share proceeds

     4,000,000         52         —          —          63,948        —          —          64,000   

Share issuance costs (net of income tax benefit of $966)

     —           —           —          —          (12,039         (12,039

Exercise of share options

     2,385,951         31         —          —          990        —          —          1,021   

Cash dividends declared and paid on preferred shares

     —           —           —          —          —          —          (2,555     (2,555

Repurchase of own shares

     —           —           (370,925     (3,869     —          —          —          (3,869

Share-based compensation, net of repurchases and liability awards

     —              —          —          7,194        —          —          7,194   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, September 30, 2012

     54,385,951       $ 722         (370,925   $ (3,869   $ (136,341   $ (5,129   $ 110,155      $ (34,462
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

 

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AVG TECHNOLOGIES N.V.

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(Expressed in thousands of U.S. Dollars)

 

     Nine Months Ended September 30,  
     2011     2012  

OPERATING ACTIVITIES:

    

Net income

   $ 99,677      $ 40,916   

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

    

Depreciation and amortization

     7,943        12,652   

Share-based compensation

     3,012        10,753   

Deferred income taxes

     (51,997     3,487   

Change in the fair value of contingent consideration liabilities

     (401     (332

Amortization of financing costs and loan discount

     1,402        3,512   

Loss from investment in equity affiliate

     180        178   

Loss (gain) on sale of property and equipment

     232        (50

Net change in assets and liabilities, excluding effects of acquisitions:

    

Trade accounts receivable, net

     5,496        (8,629

Inventories

     (125     (42

Accounts payable and accrued liabilities

     1,377        8,089   

Accrued compensation and benefits

     299        488   

Deferred revenue

     3,037        9,540   

Income taxes payable

     949        (803

Other assets

     (7,907     (1,468

Other liabilities

     (458     (184
  

 

 

   

 

 

 

Net cash provided by operating activities

     62,716        78,107   

INVESTING ACTIVITIES:

    

Purchase of property and equipment and intangible assets

     (7,753     (10,264

Proceeds from sale of property and equipment

     100        83   

Cash payments for acquisitions, net of cash acquired

     (38,899     (4,447
  

 

 

   

 

 

 

Net cash used in investing activities

     (46,552     (14,628

FINANCING ACTIVITIES:

    

Payment of contingent consideration

     (2,784     (11,240

Payment of deferred purchase consideration

     —          (1,900

Proceeds from long-term debt, net of discount

     230,285        —     

Debt issuance costs

     (6,581     —     

Proceeds from issuance of ordinary shares

     —          64,000   

Share issuance costs

     —          (8,302

Proceeds from exercise of share options

     —          347   

Excess tax benefit

     —          674   

Repayment of principal on long-term borrowings

     (1,125     (76,050

Decrease (increase) in restricted cash

     1,333        (527

Dividends paid

     (228,091     (2,555

Repurchase of own shares

     —          (3,869

Repurchases of share options from employees

     —          (1,022
  

 

 

   

 

 

 

Net cash provided by financing activities

     (6,963     (40,444

Effect of exchange rate fluctuations on cash and cash equivalents

     941        2,928   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     10,142        25,963   

Beginning cash and cash equivalents

     63,146        60,740   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 73,288      $ 86,703   
  

 

 

   

 

 

 

Supplemental cash flow disclosures:

    

Income taxes paid

   $ 4,702      $ 6,028   

Interest paid

   $ 9,022      $ 12,715   

Supplemental non-cash disclosures:

    

Issuance of ordinary shares on conversion of Class D preferred shares

   $ —        $ 191,954   

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

 

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AVG TECHNOLOGIES N.V.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(Expressed in thousands of U.S. Dollars – except for share data and per share data, unless otherwise stated)

Note 1.    Organization and Basis of Presentation and Business

Organization and basis of presentation

The accompanying condensed consolidated interim financial statements include the financial statements of AVG Technologies N.V. and its wholly owned subsidiaries (collectively, the “Company” or “AVG”).

These condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.

The accompanying condensed consolidated interim balance sheet as of September 30, 2012, the condensed consolidated interim statements of comprehensive income for the three and nine months ended September 30, 2011 and 2012, the condensed consolidated interim statements of cash flows for the nine months ended September 30, 2011 and 2012 and the condensed consolidated interim statement of shareholders’ deficit for the nine months ended September 30, 2012 are unaudited.

The December 31, 2011 condensed consolidated balance sheet included herein was derived from the Company’s audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP for complete financial statements. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for each of the three years in the period ended December 31, 2011.

The unaudited condensed consolidated interim financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements and, in the opinion of management, reflect all adjustments of a normal recurring nature considered necessary to present fairly the Company’s financial position as of September 30, 2012 and results of its operations for the three and nine months ended September 30, 2011 and 2012, and cash flows for the nine months ended September 30, 2011 and 2012. The interim results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Business

The Company is primarily engaged in the development and sale of internet security software and online service solutions that are mostly branded under the “AVG” name.

As of September 30, 2012, AVG Technologies N.V. had the same direct and indirect subsidiaries as described in the Company’s audited consolidated financial statements for the financial year ended December 31, 2011 except for the following:

 

   

OpenInstall, Inc. – incorporated in California, United States, which was acquired in January 2012;

 

   

AVG Technologies AU Pty Ltd. – incorporated in Australia, which was set up by the Company in August 2012.

Note 2.    Summary of Significant Accounting Policies

There have been no changes in the Company’s significant accounting policies for the nine months ended September 30, 2012 as compared to the significant accounting policies described in the Company’s audited consolidated financial statements for the financial year ended December 31, 2011.

 

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Note 3.    Acquisitions

2012 acquisitions

Purchase of OpenInstall, Inc.

On January 13, 2012, AVG Technologies USA, Inc. acquired 100% of the outstanding shares of OpenInstall, Inc. (“OpenInstall”), a technology company based in the United States that provides a cloud-based software installation platform that allows for more efficient distribution of software products, provides related analytics and is complementary to AVG’s secure search, performance optimization and other software offerings. The results of operations from the acquired business were included in the Condensed Consolidated Interim Statements of Comprehensive Income from the date of acquisition. Supplemental pro forma information for OpenInstall was not material to the Company’s financial results and was therefore not included. The Company recorded acquisition-related transaction costs of $514, which were included in General and administrative expenses.

The net assets acquired in the transaction, and the goodwill arising from it, were provisionally determined as follows:

 

Net assets(1)

   $ 1,221   

Intangible assets(2)

     3,265   

Goodwill(3)

     1,163   
  

 

 

 

Total purchase consideration

   $ 5,649   
  

 

 

 

 

(1) 

Net assets included property and equipment of $19, deferred tax assets of $1,179 and net working capital of $23. The cash acquired in the transaction totaled $102.

(2) 

Intangible assets included developed technology of $3,200 and domain names of $65, which are amortized over their estimated useful lives of 5 and 8 years respectively.

(3) 

Goodwill is tax deductible. The goodwill resulted primarily from the Company’s expectation of synergies from the integration of OpenInstall technology with the Company’s existing solutions.

 

Components of consideration:

  

Cash consideration paid

   $ 4,049   

Deferred purchase consideration(4)

     1,600   
  

 

 

 
   $ 5,649   
  

 

 

 

 

(4) 

The purchase consideration was deferred for the period of 12 months after the acquisition date.

At the time of acquisition the Company also entered into employment agreements with certain employee shareholders of OpenInstall, which include retention and incentive compensation arrangements for up to $22.5 million of payments contingent upon achieving certain profit targets over three years, with additional compensation consisting of $2.5 million in cash over two years. Such payments are accounted for as compensation expense in the periods earned. During the three and nine months ended September 30, 2012, the Company recorded compensation expense of $791 and $2,018 respectively, which was included in Research and development expenses.

Purchase of Crossloop Inc.

On July 6, 2012, the Company acquired the assets of Crossloop Inc. (“Crossloop”), a Delaware corporation engaged in the business of offering software applications for desktop sharing and connecting computer users with service providers. The results of operations from the acquired Crossloop business were included in the consolidated statements of comprehensive income from the date of acquisition. Supplemental pro forma information for Crossloop was not material to the Company’s financial results and was therefore not included. For the nine months ended September 30, 2012, the Company recorded acquisition-related transaction costs of $145, which were included in General and administrative expenses.

 

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The net assets acquired in the transaction were provisionally determined as follows:

 

Net assets

   $ 2   

Intangible assets(1)

     598   

Goodwill

     —     
  

 

 

 

Total purchase consideration

   $ 600   
  

 

 

 

 

(1) 

Intangible assets included developed technology of $598, which is amortized over its estimated useful life of 5 years.

 

Components of consideration:

  

Cash consideration paid

   $ 500   

Cash consideration expected to be paid in earn-out payment (2)

     100   
  

 

 

 
   $ 600   
  

 

 

 

 

(2) 

The earn-out payment is contingent upon achievement of certain milestones on or before October 1, 2012 and the fulfillment of some contractual conditions. As of the date of issuance of these condensed consolidated interim financial statements, the earn-out payment was pending final confirmation with regard to the fulfillment of these contractual conditions.

Note 4.    Goodwill

The changes in the carrying amount of goodwill are as follows:

 

     Total  

Net balance as of January 1, 2012

   $ 71,367   

Goodwill acquired through acquisitions(1)

     1,163   

Effects of foreign currency exchange

     (253
  

 

 

 

Net balance as of September 30, 2012(2)

   $ 72,277   
  

 

 

 

 

(1) 

See Note 3 for acquisitions completed in the nine months ended September 30, 2012.

(2) 

There were no accumulated goodwill impairment losses as of September 30, 2012.

As of September 30, 2012, goodwill totaling $34,962 has been pledged as collateral to secure the long term debt (Note 7).

 

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Note 5.    Intangible Assets

 

     December 31, 2011  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Weighted-
Average
Remaining
Useful Life
 

Customer relationships

   $ 11,697       $ (3,792   $ 7,905         4.0 years   

Developed technology

     24,607         (10,601     14,006         4.0 years   

Software

     9,272         (4,623     4,649         2.5 years   

Brand and domain names and other intangibles

     9,450         (1,278     8,172         7.5 years   

Indefinite-lived trade names and other intangibles

     303         —          303         Indefinite   
  

 

 

    

 

 

   

 

 

    

Total

   $ 55,329       $ (20,294   $ 35,035      
  

 

 

    

 

 

   

 

 

    

 

     September 30, 2012  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
     Weighted-
Average
Remaining
Useful Life
 

Customer relationships

   $ 11,773       $ (5,623   $ 6,150         3.5 years   

Developed technology

     25,080         (10,739     14,341         3.5 years   

Software

     15,392         (6,725     8,667         3.0 years   

Brand and domain names and other intangibles

     9,478         (2,089     7,389         7.0 years   

Indefinite-lived trade names and other intangibles

     303         —          303         Indefinite   
  

 

 

    

 

 

   

 

 

    

Total

   $ 62,026       $ (25,176   $ 36,850      
  

 

 

    

 

 

   

 

 

    

As of September 30, 2012, intangible assets with a carrying value of $19,266 have been pledged as collateral to secure the long term debt (Note 7).

Amortization expense was $1,512 and $2,713 in the three month period ended September 30, 2011 and 2012, respectively and $4,074 and $8,027 in the nine months ended September 30, 2011 and 2012, respectively.

The changes in the carrying amount of intangible assets are as follows:

 

     Total  

Net balance as of January 1, 2012

   $ 35,035   

Additions(1)

     5,988   

Acquisitions through business combinations(2)

     3,863   

Disposals

     (5

Amortization charge

     (8,027

Effects of foreign currency exchange on cost

     201   

Effects of foreign currency exchange on amortization

     (205
  

 

 

 

Net balance as of September 30, 2012

   $ 36,850   
  

 

 

 

 

(1) 

The major additions relate to the new customer relationship management system.

(2) 

See Note 3 for acquisitions completed in the nine months ended September 30, 2012.

 

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Total future amortization expense for intangible assets that have definite lives, based upon the Company’s existing intangible assets and their current estimated useful lives as of September 30, 2012, is estimated as follows:

 

Remainder of financial year 2012

   $ 2,837   

2013

     10,704   

2014

     9,372   

2015

     6,827   

2016

     3,897   

Thereafter

     2,912   
  

 

 

 

Total

   $ 36,547   
  

 

 

 

Note 6.    Related party transactions

On December 2, 2011, AVG entered into a consultancy agreement with Czech Value Participations I Inc. (“CVP1”), effective as of February 1, 2011, under which Robert Cohen, a contractor to CVP1, managing partner of Benson Oak Capital and former observer of the Company’s supervisory board, advises the Company with respect to corporate development, including mergers and acquisitions policy and activities. Mr. Cohen has certain powers to direct Orangefield Trust B.V., the managing director of Grisoft Holdings B.V., a major shareholder of the Company, on how to vote the shares in AVG held of record by Grisoft Holdings B.V. Under the consultancy agreement, which was terminated in June 2012, the Company paid CVP1 approximately $19 per month plus a service success fee. The total fee, including the service success fee, for services rendered in the three and nine months ended September 30, 2012 was nil and $236, respectively and was recorded in General and administrative expenses. At September 30, 2012, the fee owed to CVP1 amounted to $124 and was included in Accrued expenses and other current liabilities.

On August 2, 2011, the Company entered into an agreement with Zbang It Ltd. (“Zbang”) pursuant to which the Company granted to Zbang an unsecured loan of a principal amount of $500. The Company owns a 34.35% interest in Zbang, which is disclosed as Investment in equity affiliate. The loan agreement was amended on February 26, 2012, and the principal amount of the loan provided increased to $680. A second amendment to the loan agreement dated May 18, 2012 increased the loan amount to $1,180, of which $980 has been provided at September 30, 2012. All other terms and conditions included in the agreement dated August 2, 2011 remained the same. The loan bears interest at an annual rate of 5%. The balance of the loan at September 30, 2012, including accrued interest, of $1,018 was included in Other assets, as repayment is not expected in the short term.

Note 7.    Debt

Credit facility

On March 15, 2011, the Company entered into a credit agreement with a group of financial institutions (the “Credit Facility”). The Credit Facility provides a $235 million loan that is unconditionally and irrevocably guaranteed, jointly and severally, by certain AVG Technologies N.V. subsidiaries and is further secured by certain tangible and intangible assets of the Company and its subsidiaries with covenants obliging the Company to pledge new assets over a certain threshold. The Credit Facility bears interest at an adjusted LIBOR rate plus 6.0% with a LIBOR floor of 1.5%. Interest on the loan is payable quarterly in arrears. The Credit Facility contains financial covenants, measured at the end of each quarter, including a covenant to maintain a specified consolidated leverage ratio and interest coverage ratio (as defined in the Credit Facility). Additionally, the Credit Facility contains affirmative covenants, including covenants regarding the payment of taxes, maintenance of insurance, reporting requirements and compliance with applicable laws. The Credit Facility contains negative covenants, among other things, limiting the Company’s ability to incur debt, make acquisitions, make certain restricted payments and sell assets. The events of default under the Credit Facility include payment defaults, cross defaults with certain other indebtedness, breaches of covenants, judgment defaults, bankruptcy events and the occurrence of a change in control (as defined in the Credit Facility). As of September 30, 2012, the Company was in compliance with all required covenants.

The Credit Facility was fully drawn down with net cash proceeds of $223,754 received after deducting the issuance costs of $11,246, which included an original issue discount, financing arrangement fees and legal fees, and making payments for other direct and incremental costs related to the Credit Facility. The proceeds AVG Technologies N.V. received were used to pay dividends to the Company’s shareholders.

 

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In connection with certain amendments made to the Credit Facility, the Company paid fees to the lenders of $423 in 2011. These fees are being amortized as an adjustment of interest expense over the remaining term of the Credit Facility using the interest method.

The amount of long-term debt under the Credit Facility shown in the accompanying Condensed Consolidated Interim Balance Sheet is analyzed as follows:

 

     September 30, 2012  

Principal

   $ 235,000   

Principal repaid

     (76,050

Unamortized deferred financing costs

     (6,048
  

 

 

 

Total debt

     152,902   

Less current portion

     (18,700
  

 

 

 

Non-current portion

   $ 134,202   
  

 

 

 

The Credit Facility terminates on March 15, 2016, on which date all outstanding principal, together with accrued interest, will be due and payable. The Company may prepay any amounts outstanding under the Credit Facility and terminate the Credit Facility at any time, without premium or penalty, subject to reimbursement of certain costs.

On August 16 and on September 17, 2012 the Company made voluntary prepayments of the principal in the amounts of $20,000 and $22,000, respectively. Pursuant to the terms of the Credit Facility the prepayments were applied proportionally to decrease future scheduled principal payments. As a result of the early settlement, the Company accelerated recognition of deferred financing costs of $1,547, which was recognized in Interest and finance costs.

Under the Credit Facility, the Company may also elect to request the establishment of one or more new term loan commitments in an aggregate principal amount not in excess of $100,000 (incremental term loan) provided certain conditions and financial covenants are met. Such new commitments are available at the discretion of the lenders. With the exception of the weighted average life to maturity, maturity date and the yield thereof (each of which as defined in the Credit Facility), the terms and the provisions of the incremental loan, if the incremental loan is established in the future, shall be substantially identical to those described above related to the $235,000 loan.

The Credit Facility is secured by certain tangible, intangible, and current assets of the Company with covenants obliging the Company to also pledge new assets over a certain threshold. The collateral granted by the borrower and certain of its subsidiaries includes present and future pledges, mortgages, first priority floating and fixed charges and security interests with respect to, but not limited to, equity rights, shares and related rights (ownership interests), fixed assets, intellectual property rights (trademarks, domains and patents), intercompany and trade receivables, goodwill, bank accounts, insurance claims and commercial claims. In addition to the pledging of goodwill (Note 4) and intangible assets (Note 5), as of September 30, 2012, cash amounting to $81,579, property and equipment with a carrying value of $5,185 and accounts receivable amounting $30,975 have been pledged as collateral to secure the Company’s long term debt.

As of September 30, 2012, the mandatory principal payments under the credit facility are as follows:

 

Remainder of financial year 2012

   $ 4,675   

2013

     18,700   

2014

     18,700   

2015

     18,700   

2016

     98,175   
  

 

 

 

Total

   $ 158,950   
  

 

 

 

 

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Note 8.    Fair Value Measurements

The Company measures and reports its derivative instruments and contingent purchase consideration liabilities at fair value. Fair value is defined as an exit price that would be received for the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value measurements as follows:

 

   

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

   

Level 2: Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

   

Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

Assets and liabilities measured and recorded at fair value on a recurring basis

The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy:

 

     December 31, 2011  
     Level 1      Level 2      Level 3      Total  

Assets

           

Foreign currency contracts (1)

   $ —         $ 161       $ —         $ 161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ —         $ 161       $ —         $ 161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent purchase consideration liabilities (2)

   $ —         $ —         $ 12,835       $ 12,835   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ —         $ —         $ 12,835       $ 12,835   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2012  
     Level 1      Level 2      Level 3      Total  

Assets

           

Foreign currency contracts (1)

   $ —         $ 231       $ —         $ 231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value

   $ —         $ 231       $ —         $ 231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent purchase consideration liabilities (2)

   $ —         $ —         $ 894       $ 894   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value

   $ —         $ —         $ 894       $ 894   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Contract fair values are determined based on quoted prices for similar assets in active markets using inputs such as currency rates and forward points.

(2) 

The fair values of the contingent purchase consideration liabilities were determined for each arrangement individually. The fair value is determined using the income approach with significant inputs that are not observable in the market. Key assumptions include discount rates consistent with the level of risk of achievement and probability adjusted financial projections. The expected outcomes are recorded at net present value, which requires adjustment over the life of the instruments for changes in risks and probabilities.

 

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The following table sets forth a summary of changes in the value of the Company’s Level 3 financial liabilities:

 

     Three Months Ended     Nine Months Ended  
     September 30,
2011
    September 30,
2012
    September 30,
2011
    September 30,
2012
 

Fair value - beginning of period

   $ 2,709      $ 12,829      $ 3,159      $ 12,835   

Additions due to acquisitions

     10,590        100        11,779        100   

Change in fair value of Level 3 liabilities (3)

     (576     (600     (401     (332

Effects of foreign currency exchange

     (632     (195     (717     (469

Payments of contingent consideration

     —          (11,240     (1,729     (11,240
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value - end of period

   $ 12,091      $ 894      $ 12,091      $ 894   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(3) 

The change in fair value of the contingent purchase consideration liabilities, which was included in General and administrative expenses, is due to the passage of time and changes in the probability of achievement used to develop the estimate.

The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable reported in the Condensed Consolidated Interim Balance Sheet approximate their respective fair values because of the short term nature of these accounts. The fair value of the Company’s investment in Scene as of September 30, 2012 was estimated at $9,750. The Company classified its investment in Scene as Level 3, as unobservable inputs that were significant to the fair value measurement were used in the valuation of the investment. The fair value of the investment was determined using the market approach which includes the use of multiples of earnings derived from comparable software companies to Scene. The valuation also takes into account other variables such as Scene’s capital structure, terms of the investment including put and call options. The fair value of long-term debt as of September 30, 2012 was $156,963 as compared to its carrying amount of $152,902 (Note 7). The fair value of long-term debt was estimated through Level 2 of the fair value hierarchy (average quoted price in the over-the counter-market). In the previous periods the Company estimated the fair value of long-term debt using a discounted cash flow model, based on the rates currently available for debt with similar terms and remaining maturities. The Company believes the change in valuation technique will improve the quality of the disclosures.

Note 9.    Consolidated Balance Sheet Detail

Other assets

Other assets consist of the following:

 

     December 31,
2011
     September 30,
2012
 

Loan provided to Zbang

   $ —         $ 1,018   

Prepayments

     38         904   

Restricted cash

     —           385   

Deposits (office lease)

     210         203   
  

 

 

    

 

 

 

Total other assets

   $ 248       $ 2,510   
  

 

 

    

 

 

 

 

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Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

 

     December 31,
2011
     September 30,
2012
 

Accrued legal and professional fees

   $ 4,707       $ 6,234   

Accrued marketing

     2,552         3,414   

Accrued communication services

     514         541   

Accrued rent and service costs

     671         1,397   

Accrued license fees

     908         1,600   

Accrued interest

     832         285   

Accrued sale commissions, rebates and discounts

     2,006         4,259   

Accrued customer support fees

     910         1,989   

Accrued electronic sales provider fees

     336         731   

Other accrued expenses

     1,799         2,181   

VAT liability

     1,126         2,447   

Deferred purchase consideration

     1,911         1,600   

Contingent purchase consideration

     12,606         620   
  

 

 

    

 

 

 

Total accrued expenses and other current liabilities

   $ 30,878       $ 27,298   
  

 

 

    

 

 

 

Note 10.    Other Income (Expense), Net

Other income (expense), net is comprised of the following:

 

    Three Months Ended     Nine Months Ended  
    September 30,
2011
    September 30,
2012
    September 30,
2011
    September 30,
2012
 

Interest income

  $ 19      $ 26      $ 38      $ 91   

Interest on long-term debt

  $ (4,513   $ (3,683   $ (9,805   $ (12,168

Amortization of financing costs and loan discount

    (659     (2,179     (1,402     (3,512

Bank charges and other finance costs

    (39     (52     (112     (162
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest and finance costs

  $ (5,211   $ (5,914   $ (11,319   $ (15,842

Foreign currency exchange transaction gains (losses), net

  $ 44      $ (368   $ (1,113   $ (2,408

Foreign currency contract gains (losses), net

    (386     (129     114        86   

Dividend income

    —          —          —          339   

Other, net

    (1     2        2        2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

  $ (5,535   $ (6,383   $ (12,278   $ (17,732
 

 

 

   

 

 

   

 

 

   

 

 

 

Note 11.    Commitments and Contingencies

Lease commitments

The Company leases its facilities and certain equipment under operating leases that expire at various dates through 2022. Some of the leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives. Rent expense is recognized on a straight-line basis over the lease term. Rent expense was $1,207 and $2,056 in the three months ended September 30, 2011 and 2012, respectively and $3,016 and $4,835 in the nine months ended September 30, 2011 and 2012, respectively.

 

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The following is a schedule by years of minimum future rentals on non-cancelable operating leases as of September 30, 2012:

 

Remainder of financial year 2012

   $ 1,455   

2013

     4,948   

2014

     4,485   

2015

     3,503   

2016

     1,823   

Thereafter

     4,764   
  

 

 

 

Total minimum future lease payments

   $ 20,978   
  

 

 

 

Purchase obligations

The Company has purchase obligations that are associated with agreements for purchases of goods or services. Management believes that cancellation of these contracts is unlikely and thus the Company expects to make future cash payments according to the contract terms.

The following is a schedule by years of purchase obligations as of September 30, 2012:

 

Remainder of financial year 2012

   $ 873   

2013

     147   

2014

     4   

2015

     3   

2016

     —     
  

 

 

 

Total minimum future purchase obligations

   $ 1,027   
  

 

 

 

Other Commitments

In connection with the Company’s business combinations, the Company has agreed to pay certain additional amounts contingent upon the achievement of certain revenue targets and other milestones or upon the continued employment with the Company of certain employees of the acquired entities. The Company recognized such compensation expense of $3,222 and $889 during the three months ended September 30, 2011 and 2012, respectively and $4,469 and $2,314 during the nine months ended September 30, 2011 and 2012, respectively. As of September 30, 2012, the Company estimated that future compensation expense and contingent payments of up to $4,234 may be recognized in the Statement of Comprehensive Income pursuant to these business combination agreements.

Litigation contingencies

The Company is involved in legal proceedings and claims in the ordinary course of business. While the outcome of these matters is currently not determinable, the final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s financial condition or results of operations.

Note 12.    Geographic and Major Customer Information

The Company operates in one reportable segment. Revenues are attributed to countries based on the location of the Company’s channel partners as well as direct customers of the Company.

 

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The following table represents revenue attributed to countries based on the location of the customer:

 

     Three Months Ended      Nine Months Ended  
     September 30,
2011
     September 30,
2012
     September 30,
2011
     September 30,
2012
 

Revenue:

           

United States

   $ 37,454       $ 47,693       $ 109,495       $ 132,468   

United Kingdom

     12,089         14,774         32,327         41,977   

Other foreign countries(1)

     21,627         32,786         56,271         86,316   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,170       $ 95,253       $ 198,093       $ 260,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

No individual country represented more than 10% of the respective totals.

The following table represents revenue attributed to regions based on the location of the customer:

 

     Three Months Ended      Nine Months Ended  
     September 30,
2011
     September 30,
2012
     September 30,
2011
     September 30,
2012
 

Revenue:

           

Americas

   $ 41,731       $ 53,810       $ 120,852       $ 149,016   

EMEA

     25,751         36,299         67,275         97,570   

Asia Pacific

     3,688         5,144         9,966         14,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 71,170       $ 95,253       $ 198,093       $ 260,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below lists the Company’s property and equipment, net of accumulated depreciation, by country.

 

     December 31,
2011
     September 30,
2012
 

Property and equipment:

     

Czech Republic

   $ 7,385       $ 7,618   

United States

     2,874         2,368   

Other foreign countries(1)

     2,177         2,317   
  

 

 

    

 

 

 

Total

   $ 12,436       $ 12,303   
  

 

 

    

 

 

 

 

(1) 

No individual country represented more than 10% of the respective totals.

The table below lists the Company’s property and equipment, net of accumulated depreciation, by region.

 

     December 31,
2011
     September 30,
2012
 

Property and equipment:

     

Americas

   $ 2,874       $ 2,368   

EMEA

     9,462         9,849   

Asia Pacific

     100         86   
  

 

 

    

 

 

 

Total

   $ 12,436       $ 12,303   
  

 

 

    

 

 

 

Significant customers

Revenues derived from one significant business partner comprise 36% and 48% of total revenues in the three ended September 30, 2011 and 2012, respectively and 25% and 44% in the nine months ended September 30, 2011 and 2012, respectively.

 

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Note 13.    Ordinary and Preferred Shares

Ordinary shares

The Company’s authorized, issued and outstanding ordinary shares consist of the following:

 

     December 31, 2011  
     Shares
Authorized
     Shares
Issued
     Shares
Outstanding
     Par
value
 

Class A shares (“Class A shares”)

     50,437,500         16,200,000         16,200,000       $ 212   

Class B1 shares (“Class B1 shares”)

     37,828,125         9,316,224         9,316,224         125   

Class B2 shares (“Class B2 shares”)

     12,609,375         3,283,776         3,283,776         44   

Class C shares (“Class C shares”)

     11,250,000         —           —           —     

Class E shares (“Class E shares”)

     50,437,500         7,200,000         7,200,000         95   

Ordinary shares

     50,437,500         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     213,000,000         36,000,000         36,000,000       $ 476   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2012  
     Shares
Authorized
     Shares
Issued
     Shares
Outstanding
     Par
value
 

Ordinary shares

     120,000,000         54,385,951         54,015,026       $ 722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     120,000,000         54,385,951         54,015,026       $ 722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Treasury shares

On August 24, 2012 the Company repurchased 370,925 of its own ordinary shares for $ 3,869 and holds them in treasury with the intention to re-issue them in the future.

Preferred shares

As of December 31, 2011, the Company classified its 12,000,000 Class D preferred shares outside of shareholders’ equity (deficit) because the shares contained certain redemption features that were not solely within the Company’s control. The 12,000,000 Class D preferred shares were converted into 12,000,000 ordinary shares upon the closing of the Company’s initial public offering as described below.

The Company’s authorized, issued and outstanding preferred shares consist of the following:

 

     December 31, 2011  
     Shares
Authorized
     Shares
Issued
     Shares
Outstanding
     Carrying
value
 

Class D preferred shares

     12,000,000         12,000,000         12,000,000       $ 191,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     12,000,000         12,000,000         12,000,000       $ 191,954   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2012  
     Shares
Authorized
     Shares
Issued
     Shares
Outstanding
     Carrying
value
 

Preferred shares

     120,000,000         —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     120,000,000         —           —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Initial public offering

AVG publicly filed its initial Form F-1 with the SEC on January 13, 2012 and on February 7, 2012 closed its initial public offering of 8,000,000 ordinary shares at an offering price of $16.00 per share. AVG offered 4,000,000 ordinary shares and the selling shareholders offered 4,000,000 ordinary shares. AVG did not receive any proceeds from the sale of the ordinary shares by the selling shareholders other than the proceeds from options which were exercised by certain selling shareholders in connection with the initial public offering. The initial public offering resulted in net proceeds to AVG of $51,961, after deducting underwriting discounts, commissions and offering expenses paid by AVG. The right that was granted to the underwriters to purchase up to 1,200,000 ordinary shares from certain of the selling shareholders within 30 days of the initial public offering to cover over-allotments was not exercised.

Costs of $12,039 directly associated with the initial public offering have been recorded as a reduction of the proceeds received in determining the amount to be recorded in additional paid-in capital. These costs were capitalized and recorded as prepaid share issuance cost prior to the closing of the initial public offering.

On February 7, 2012, upon the closing of the initial public offering, the Company’s Articles of Association were amended and restated in their entirety. As a result of this amendment, the authorized capital of the Company changed to Euro 2,400,000 (prior to the amendment Euro 2,250,000). The authorized capital is comprised of 240,000,000 shares with a nominal value of Euro 0.01 per share and is divided into 120,000,000 ordinary shares and 120,000,000 preferred shares.

Upon the closing of the initial public offering, class A, B1, B2 and E shares were automatically converted into 36,000,000 ordinary shares with all special rights associated with the existing classes of shares ceasing to be applicable. Class D preferred shares were converted into 12,000,000 ordinary shares, with all special rights associated with Class D preferred shares ceasing to be applicable. In connection with this conversion, the accrued and unpaid dividends on Class D preferred shares of $2,555 were paid in cash. The Class D preferred shares carrying value was reclassified from the mezzanine section of the balance sheet to shareholders’ deficit.

On February 7, 2012, the Company issued 2,382,591 ordinary shares as a result of the exercise of the same number of share options.

Upon the exercise of the same number of share options, the Company issued 1,920 and 1,440 ordinary shares on May 15, 2012 and June 6, 2012, respectively.

Note 14.    Share-Based Compensation

The following table sets forth the total share-based compensation expense under the 2009 Option Plan as amended and the share-based compensation expense related to the shares of AVG that the former owners of TuneUp Software GmbH (“TuneUp”), a company acquired by AVG in 2011, will receive subject to their continued employment with the Company and other vesting conditions recognized in the Condensed Consolidated Interim Statements of Comprehensive Income.

 

     Three Months Ended     Nine Months Ended  
     September 30,
2011
    September 30,
2012
    September 30,
2011
     September 30,
2012
 

Cost of revenue

   $ 5      $ (12   $ 17       $ 1   

Sales and marketing

     (586     582        614         1,687   

Research and development

     222        214        1,019         1,274   

General and administrative

     1,548        1,943        1,362         7,791   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 1,189      $ 2,727      $ 3,012       $ 10,753   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Share options

Compensation costs related to employee share option grants are based on the fair value of the options on the date of grant, net of estimated forfeitures. Management estimates the forfeiture rate based on analysis of actual forfeitures and management will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience. The impact from a forfeiture rate adjustment will be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated by management, the Company may be required to record adjustments to share-based compensation expense in future periods. Compensation costs on share based awards with graded vesting are recognized on an accelerated basis as though each separately vesting portion of the award was, in substance, a separate award.

As of September 30, 2012, the total compensation cost related to unvested share options granted to employees not yet recognized was $6,794 net of estimated forfeitures. This cost will be amortized to expense over a weighted average remaining period of 1.76 years and will be adjusted for subsequent changes in estimated forfeitures.

The following table summarizes the options granted in the nine months ended September 30, 2012, with their exercise prices, the fair value of ordinary shares as of the applicable grant date, and the intrinsic value, if any:

 

Grant Date    Number of
Options Granted
     Exercise Price      Ordinary Shares
Fair Value Per

Share at Grant
Date
     Intrinsic
Value
 

January 10, 2012

     226,667       $ 23.50       $ 23.50       $ —     

February 7, 2012

     1,340,684       $ 16.00       $ 16.00       $ —     

April 1, 2012

     29,000       $ 14.93       $ 14.93       $ —     

May 14, 2012

     269,000       $ 14.15       $ 14.15       $ —     

The weighted-average grant date fair value (per share) was $5.40. During the nine months ended September 30, 2012, 2,385,951 share options were exercised, 37,440 share options were repurchased, 111,884 share options expired and 250,061 share options were forfeited.

Shares issuable to TuneUp former owners

As part of the acquisition of TuneUp, the former owners of TuneUp will receive shares of AVG with a total value of Euro 11.5 million subject to their continued employment with the Company and other vesting conditions. The Company recognizes the expense relating to these shares over a four-year vesting period. The Company recognized compensation expense of $1,052 and $1,421 during the three months ended September 30, 2011 and 2012, respectively, and $1,052 and $5,309, during the nine months ended September 30, 2011 and 2012, respectively, which was included in General and administrative expenses. As of September 30, 2012, total unrecognized share-based compensation expense relating to the unvested shares was $6,591. This amount is expected to be recognized over a remaining period of 2.9 years.

Note 15.    Income Taxes

Income taxes for the three and nine months ended September 30, 2011 and 2012 have been determined by applying the effective tax rate for the year estimated as of the balance sheet date to the pre-tax result for the period, in accordance with guidance set out in ASC 740-270, “Interim Reporting—Income Taxes”. Based on current tax laws and expected operating results for the full fiscal year, the Company’s forecasted annual effective tax rate for 2012 is 17.2 percent. Unusual and/or infrequent items which may cause significant variations in the customary relationship between income tax expense and income before income taxes are not included in the estimated effective tax rate and are accounted for separately in the period in which they occur.

The Company’s forecasted annual effective tax rate continues to be lower than the statutory tax rate in the Netherlands primarily as a result of favorable tax rates in foreign jurisdictions as well as favorable tax rates agreed with the Dutch tax authorities for the Company’s operations in the Netherlands.

 

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Table of Contents

The Company recorded income tax expense of $3,373 (33.6 percent effective tax rate) and an income tax benefit of $52,212 during the three and nine months ended September 30, 2011, respectively. The Company recorded income tax expense of $3,581 (15.9 percent effective tax rate) and $10,845 (21.0 percent effective tax rate) during the three and nine months ended September 30, 2012, respectively.

The primary reason for the difference in the effective tax rates between 2011 and 2012 is a favorable tax ruling obtained from the Dutch tax authorities on June 1, 2011 on the application of the innovation box regime for the Dutch fiscal unity. The benefit recognized in 2011 primarily relates to the recognition of a deferred tax asset for the additional tax depreciation on certain assets permitted by the ruling.

Additional differences in the effective tax rates between 2011 and 2012 were due to changes in the mix of jurisdictional earnings, nondeductible stock option expense, and minor discrete items relating to prior period adjustments and assessments on realizability of deferred tax assets.

Note 16.    Earnings Per Share

In accordance with ASC 260 “Earnings Per Share”, basic earnings available to ordinary shareholders per share is computed based on the weighted-average number of ordinary shares outstanding during each period. Diluted earnings available to ordinary shareholders per share is computed based on the weighted-average number of ordinary shares outstanding during each period, plus potential ordinary shares considered outstanding during the period, as long as the inclusion of such shares is not anti-dilutive. Potential ordinary shares consist of the incremental ordinary shares issuable upon the exercise of share options (using the treasury shares method), incremental shares issuable upon subscription of AVG shares by TuneUp former owners (using the treasury shares method) and ordinary shares issuable upon the conversion of the Company’s Class D preferred shares to ordinary shares (using the if-converted method).

For the three and nine months ended September 30, 2011, the Company applied the two-class method when computing its earnings per share, which requires that net income per share for each class of share (ordinary shares and preferred shares) be calculated assuming 100% of the Company’s net income is distributed as dividends to each class of share based on their contractual rights. Class D preferred shareholders had the right to participate with ordinary shareholders in dividends and unallocated income. Since the conversion of Class D preferred shares to ordinary shares on February 7, 2012, the Company has only one class of securities that participate in dividends. Therefore the two-class method is not applicable for computing the earnings per share for the three and nine months ended September 30, 2012.

The following table sets forth the computation of basic and diluted earnings per ordinary share:

 

     Three Months Ended      Nine Months Ended  
     September 30,
2011
    September 30,
2012
     September 30,
2011
    September 30,
2012
 

Numerator:

         

Net income

   $ 6,660      $ 18,963       $ 99,677      $ 40,916   

Preferred share dividends

     (1,802     —           (5,406     (753

Distributed and undistributed earnings to participating securities

     (1,214     —           (27,513     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to ordinary shareholders – basic

   $ 3,644      $ 18,963       $ 66,758      $ 40,163   
  

 

 

   

 

 

    

 

 

   

 

 

 

Preferred share dividends

     —          —           —          753   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to ordinary shareholders – diluted

   $ 3,644      $ 18,963       $ 66,758      $ 40,916   
  

 

 

   

 

 

    

 

 

   

 

 

 

Denominator:

         

Weighted-average ordinary shares outstanding – basic

     36,000,000        54,232,743         36,000,000        51,850,912   

Potential ordinary shares

     3,137,695        477,580         2,837,773        2,380,160   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted-average ordinary shares outstanding – diluted

     39,137,695        54,710,323         38,837,773        54,231,072   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per ordinary share – basic

   $ 0.10      $ 0.35       $ 1.85      $ 0.77   

Earnings per ordinary share – diluted

   $ 0.09      $ 0.35       $ 1.72      $ 0.75   

 

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The following securities that could potentially dilute basic earnings per share in the future have been excluded from the above computation of earnings per share as their inclusion would have been anti-dilutive.

 

     September 30,
2011
     September 30,
2012
 

Class D preferred shares

     12,000,000         —     

Options to purchase ordinary shares

     438,303         3,061,402   
  

 

 

    

 

 

 

Anti-dilutive shares

     12,438,303         3,061,402   
  

 

 

    

 

 

 

Note 17.    Subsequent Events

On October 1, 2012, AVG Technologies AU Pty Ltd and AVG eCOMMERCE CY Limited entered into an asset purchase agreement to acquire certain assets and liabilities and the on-going distribution activities of AVG products in the Australian and Pacific region from AVG (AU/NZ) PTY LTD, Avalanche Technology Group Pty Ltd and Coreen Investments Pty Ltd (collectively, “Avalanche”). The purchase price consideration was estimated at approximately $12 million and included cash consideration of $7.5 million and contingent cash consideration up to $4.5 million. The payment of contingent cash consideration is dependent upon achievement of certain milestones. The Company is in the process of evaluating the fair value of the purchase price, assets acquired and liabilities assumed. The results of operations from the acquired Avalanche business will be included in the annual consolidated financial statements of comprehensive income from the date of acquisition. Supplemental pro forma information for Avalanche was not material to the Company’s financial results and was therefore not included. The Company incurred acquisition-related transaction costs of $209 which will be recorded in General and administrative expenses.

 

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Table of Contents

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.

 

    AVG TECHNOLOGIES N.V.
Date: November 15, 2012     By:  

/s/ John Little

      Name: John Little
      Title:   Chief Financial Officer and Managing Director