TimesLines, Inc v. Facebook, Inc.

Filing 84

MEMORANDUM by Facebook, Inc. in Opposition to motion for miscellaneous relief 76 from the Protective Order (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C)(Willsey, Peter)

Exhibit C

FACEBOOK INC

FORM 10-K
(Annual Report)

Filed 02/01/13 for the Period Ending 12/31/12

Address
Telephone
CIK
Symbol
SIC Code
Industry
Sector

1601 WILLOW ROAD
MENLO PARK, CA 94025
650-618-7714
0001326801
FB
7370 - Computer Programming, Data Processing, And
Computer Services
Technology

http://www.edgar-online.com
© Copyright 2013, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Year Ended December 31,
2012

2011

Revenue
Costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative
Total costs and expenses
Income from operations
Interest and other income (expense), net:
Interest expense
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to participating securities

$

5,089

Net income attributable to Class A and Class B common stockholders
Earnings per share attributable to Class A and Class B common stockholders:

$

(51)
7
494
441
53
21
32

$
$

$

1,364
1,399
896
892
4,551
538

$

Basic
Diluted
Weighted average shares used to compute earnings per share attributable to Class A
and Class B common stockholders:

2010

3,711

$

1,974

860
388
393
314
1,955
1,756

493
144
167
138
942
1,032

$

(42)
(19)
1,695
695
1,000
332
668

$

(22)
(2)
1,008
402
606
234
372

0.02

$

0.52

$

0.34

0.01

$

0.46

$

0.28

$

$

Basic

2,006

1,294

1,107

Diluted

2,166

1,508

1,414

Share-based compensation expense included in costs and expenses:
Cost of revenue
Research and development
Marketing and sales
General and administrative

$

$

Total share-based compensation expense

88
843
306
335
1,572

See Accompanying Notes to Consolidated Financial Statements.
61

$

$

9
114
37
57
217

$

$

—
9
2
9
20

FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)

Year Ended December 31,
2012

2011

Net income
Other comprehensive income (loss):
Foreign currency translation adjustment
Unrealized gain on available-for-sale investments, net of tax
Unrealized loss on derivative, net of tax

$

53

$

1,000

Comprehensive income

$

9
1
(2)
61 $

—
—
—
1,000

See Accompanying Notes to Consolidated Financial Statements.
62

2010

$

606

$

(6)
—
—
600

FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
Class A and
Class B
Common Stock

Convertible
Preferred Stock
Shares

Balances at December 31, 2009

Amount

543

$

Shares

Par Value

615

1,070

$

—

Additional
Paid-In
Capital

$

253

Accumulated
Other
Comprehensive

Total
Stockholders'
Retained
Earnings

(Loss) Income

$

—

$

—

Equity

$

868

Issuance of common stock, net of issuance costs

—

—

24

—

500

—

—

500

Issuance of common stock for cash upon exercise of stock
options
Issuance of common stock related to acquisitions

—

—

70

—

6

—

—

6

—

—

6

—

60

—

—

60

Conversion of Series A preferred stock to common stock

(2)

—

2

—

—

—

—

—

—

—

—

—

3

—

—

3

—

—

—

—

17

—

—

17

—

—

—

—

1

—

—

1

—

—

—

—

107

—

—

107

Reclassification of option liability to additional paid-in
capital
Share-based compensation, related to employee share-based
awards
Share-based compensation, related to nonemployee sharebased awards
Excess tax benefit from share-based award activity, net of
deferred tax impact
Other comprehensive loss

Issuance of common stock for cash upon exercise of stock
options
Issuance of common stock to nonemployees for past
services
Issuance of common stock related to acquisitions
Exercise of preferred stock warrants

—

—

—

(6)

—

(6)

—

—

—

—

—

606

606

615

1,172

—

947

(6)

606

2,162

—

—

48

—

998

—

—

998

—

—

102

—

28

—

—

28

—

—

—

—

3

—

—

3

—

—

2

—

58

—

—

58

8

Issuance of common stock, net of issuance costs

—

541

Balances at December 31, 2010

—
—

Net income

—

—

—

—

—

—

—

(6)

—

6

—

—

—

—

—
217

Conversion of Series B & C preferred stock to common
stock
Share-based compensation, related to employee share-based
awards
Excess tax benefit from share-based award activity

—

—

—

—

217

—

—

—

—

—

—

433

—

—

433

Net income

—

—

—

—

—

—

1,000

1,000

543

615

1,330

—

2,684

(6)

1,606

4,899

—

—

180

—

6,760

—

—

6,760

—

—

135

—

17

—

—

17

—

—

—

—

1

—

—

1

—

—

26

—

274

—

—

274

Balances at December 31, 2011
Issuance of common stock, net of issuance costs
Issuance of common stock for cash upon exercise of stock
options
Issuance of common stock to nonemployees for past
services
Issuance of common stock related to acquisitions
Issuance of common stock for settlement of restricted stock
units (RSUs)
Shares withheld related to net share settlement of RSUs
Conversion of Series A, B, C, D & E preferred stock to
common stock
Share-based compensation, related to employee share-based
awards
Excess tax benefit from share-based award activity

—

—

279

—

—

—

—

—

—

—

(123)

—

(2,862)

—

—

(2,862)

(543)

(615)

545

—

615

—

—

—

—

—

—

—

1,572

—

—

1,572

—

—

—

—

1,033

—

—

1,033

Other comprehensive income

—

—

—

—

—

8

—

8

Net income

—

Balances at December 31, 2012

—

—
$

—

—

2,372

—
$

—

—
$

10,094

See Accompanying Notes to Consolidated Financial Statements.
63

—
$

2

53
$

1,659

53
$

11,755

FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2012

Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Loss on write-off of equipment
Share-based compensation
Deferred income taxes
Tax benefit from share-based award activity
Excess tax benefit from share-based award activity
Changes in assets and liabilities:
Accounts receivable
Income tax refundable
Prepaid expenses and other current assets
Other assets
Accounts payable
Platform partners payable
Accrued expenses and other current liabilities
Deferred revenue and deposits
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property and equipment
Purchases of marketable securities
Sales of marketable securities
Maturities of marketable securities
Investments in non-marketable equity securities
Acquisitions of businesses, net of cash acquired, and purchases of intangible and other
assets
Change in restricted cash and deposits
Net cash used in investing activities
Cash flows from financing activities
Net proceeds from issuance of common stock
Taxes paid related to net share settlement of equity awards
Proceeds from exercise of stock options
Proceeds from long-term debt, net of issuance cost
Repayment of long-term debt
Proceeds from sale and lease-back transactions
Principal payments on capital lease obligations
Excess tax benefit from share-based award activity
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

$

2011

53

$

1,000

2010

$

606

649
15
1,572
(186)
1,033
(1,033)

139
3
20
23
115
(115)

(170)
(451)
(14)
2
1
(2)
160
(60)
43
1,612

(174)
—
(24)
(5)
6
96
37
49
50
1,549

(209)
—
(38)
(6)
12
75
20
37
16
698

(1,235)
(10,307)
2,100
3,333
(2)
(911)

(606)
(3,025)
113
516
(3)
(24)

(293)
—
—
—
—
(22)

(2)
(7,024)

$

323
4
217
(30)
433
(433)

6
(3,023)

(9)
(324)

6,760
(2,862)
17
1,496
—
205
(366)
1,033
6,283
1
872
1,512
2,384 $

See Accompanying Notes to Consolidated Financial Statements.

998
—
28
—
(250)
170
(181)
433
1,198
3
(273)
1,785
1,512 $

500
—
6
250
—
—
(90)
115
781
(3)
1,152
633
1,785

64

FACEBOOK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2012

2011

2010

Supplemental cash flow data
Cash paid during the period for:
Interest

$

38

$

28

$

23

Income taxes, net

$

53

$

197

$

261

Net change in accounts payable and accrued expenses and other current liabilities
related to property and equipment additions
Property and equipment acquired under capital leases

$

(40)

$

135

$

47

$

340

$

473

$

217

Fair value of shares issued related to acquisitions of businesses and other assets

$

274

$

58

$

60

Non-cash investing and financing activities:

See Accompanying Notes to Consolidated Financial Statements.

65

FACEBOOK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization and Description of Business
Facebook was incorporated in Delaware in July 2004. Our mission is to make the world more open and connected. We build products that support
our mission by providing utility to Facebook users, Platform developers, and marketers. We generate substantially all of our revenue from advertising
and from fees associated with our Payments infrastructure that enables users to purchase virtual and digital goods from our Platform developers.
Basis of Presentation
We prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP). The consolidated
financial statements include the accounts of Facebook, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been
eliminated.
Use of Estimates
Conformity with GAAP requires the use of estimates and judgments that affect the reported amounts in the consolidated financial statements and
accompanying notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are not readily
apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions that we believe are
reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including, but not limited to, those related to
revenue recognition, collectability of accounts receivable, contingent liabilities, fair value of share-based awards, fair value of financial instruments, fair
value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, and income taxes. These estimates are
based on management's knowledge about current events and expectations about actions we may undertake in the future. Actual results could differ
materially from those estimates.
Reclassifications
We have reclassified certain prior period amounts within our consolidated statements of income and cash flows to conform to our current year
presentation. These reclassifications did not affect previously reported revenue, total costs and expenses, income from operations, net income in the
consolidated statements of income, or net cash provided by operating activities in the consolidated statements of cash flows.
Revenue Recognition
We generate substantially all of our revenue from advertising and payment processing fees. We recognize revenue once all of the following
criteria have been met:
•

persuasive evidence of an arrangement exists;

•

delivery of Facebook's obligations to our customer has occurred;

•

the price is fixed or determinable; and

•

collectability of the related receivable is reasonably assured.

Revenue for the years ended December 31, 2012 , 2011 , and 2010 consists of the following (in millions):
Year Ended December 31,
2012

Advertising
Payments and other fees

$

Total revenue

$

2011

4,279
810
5,089

$
$

2010

3,154
557
3,711

$
$

1,868
106
1,974

Advertising
Advertising revenue is generated by displaying ad products on the Facebook website or mobile app and third-party affiliated websites or mobile
apps. The arrangements are evidenced by either online acceptance of terms and conditions or contracts that stipulate
66

the types of advertising to be delivered, the timing and the pricing. Marketers pay for ad products either directly or through their relationships with
advertising agencies, based on the number of impressions delivered or the number of clicks made by our users. The typical term of an advertising
arrangement is approximately 30 days with billing generally occurring after the delivery of the advertisement.
We recognize revenue from the delivery of click-based ads in the period in which a user clicks on the content. We recognize revenue from the
display of impression-based ads in the contracted period in which the impressions are delivered. Impressions are considered delivered when an ad is
displayed to users.
Payments and Other Fees
We enable Payments from our users to our Platform developers. Our users can transact and make payments on the Facebook Platform by using
credit cards, PayPal or other payment methods available on our website. The primary method for users to transact with the developers on the Facebook
Platform is via the purchase of our virtual currency, which enables our users to purchase virtual and digital goods in games and apps. Upon the initial
sale of our virtual currency, we record consideration received from a user as a deposit.
When a user engages in a payment transaction utilizing our virtual currency for the purchase of a virtual or digital good from a Platform
developer, we reduce the user's virtual currency balance by the price of the purchase, which is a price that is solely determined by the Platform
developer. We remit to the Platform developer an amount that is based on the total amount of virtual currency redeemed less the processing fee that we
charge the Platform developer for the transaction. Our revenue is the net amount of the transaction, representing our processing fee for the service
performed. We record revenue on a net basis as we do not consider ourselves to be the principal in the sale of the virtual or digital good to the user.
Our Payments terms and conditions provide for a 30-day claim period subsequent to a Payments transaction during which the customer may
dispute the virtual or digital goods transaction. Through the third quarter of 2012, we had deferred recognition of Payments revenue until the expiration
of this period as we were unable to make reasonable and reliable estimates of future refunds or chargebacks arising during this claim period, due to lack
of historical transactional information. Beginning in the fourth quarter of 2012, we had 24 months of historical transactional information which enabled
us to estimate future refunds and chargebacks. Accordingly, in the fourth quarter of 2012, we recorded all Payments revenues at the time of the purchase
of the related virtual or digital goods, net of estimated refunds or chargebacks. This change resulted in a one-time increase in Payments revenue in the
fourth quarter of 2012 of approximately $66 million as we recognized revenue from four months of transactions.
Other fees, which includes user Promoted Posts and, to a lesser extent, Facebook Gifts, have not been material in all periods presented in our
financial statements.
Revenue is recognized net of applicable sales and other taxes.
Cost of Revenue
Our cost of revenue consists primarily of expenses associated with the delivery and distribution of our products. These include expenses related to
the operation of our data centers such as facility and server equipment depreciation, facility and server equipment rent expense, energy and bandwidth
costs, support and maintenance costs, and salaries, benefits and share-based compensation for certain personnel on our operations teams. Cost of revenue
also includes credit card and other transaction fees related to processing customer transactions.
Share-based Compensation
We account for share-based employee compensation plans under the fair value recognition and measurement provisions of GAAP. Those
provisions require all share-based payments to employees, including grants of stock options and RSUs, to be measured based on the grant-date fair value
of the awards, with the resulting expense generally recognized in our consolidated statements of income over the period during which the employee is
required to perform service in exchange for the award.
Prior to January 1, 2011, we granted RSUs (Pre-2011 RSUs) under our 2005 Stock Plan to our employees and members of our board of directors
that vested upon the satisfaction of both a service condition and a liquidity condition. The service condition for the majority of these awards is satisfied
over four years . The liquidity condition was satisfied six months after our initial public offering (IPO) in May 2012. The vesting condition that was
satisfied six months following our IPO did not affect the expense attribution period for the RSUs for which the service condition has been met as of the
date of our IPO. This six-month period was not a substantive service condition and, accordingly, beginning on the effectiveness of our IPO in May 2012,
we recognized cumulative share-based compensation expense for the portion of the RSUs that had met the service condition, following the accelerated
attribution method (net of estimated forfeitures). In the year ended December 31, 2012 , we recognized $1.04 billion of share-based compensation
expense related to our Pre-2011 RSUs. Refer to Note 11 Stockholders' Equity for disclosure with respect to the settlement of the Pre-2011 RSUs.
RSUs granted on or after January 1, 2011 (Post-2011 RSUs) under our 2005 Stock Plan or 2012 Equity Incentive Plan (2012 Plan)are not subject
to a liquidity condition in order to vest, and compensation expense related to these grants is based on the grant date fair
67

value of the RSUs and is recognized on a straight-line basis over the applicable service period. The majority of Post-2011 RSUs are earned over a
service period of four to five years , and vested shares will be settled beginning in 2013.
Share-based compensation expense is recorded net of estimated forfeitures in our consolidated statements of income and as such, only those
share-based awards that we expect to vest are recorded. We estimate the forfeiture rate based on historical forfeitures of equity awards and adjust the
rate to reflect changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.
We have historically issued unvested restricted shares to employee stockholders of certain acquired companies. As these awards are generally
subject to continued post-acquisition employment, we have accounted for them as post-acquisition share-based compensation expense. We recognize
compensation expense equal to the grant date fair value of the common stock on a straight-line basis over the employee's required service period.
During the years ended December 31, 2012 , 2011 , and 2010 , we realized tax benefits from share-based award activity of $1.03 billion , $433
million and $115 million , respectively. These amounts reflect the extent that the total reduction to our income tax liability from share-based award
activity was greater than the amount of the deferred tax assets that we had previously recorded in anticipation of these benefits. These amounts are the
aggregate of the individual transactions in which the reduction to our income tax liability was greater than the deferred tax assets that we recorded,
reduced by any individual transactions in which the reduction to our income tax liability was less than the deferred tax assets that were recorded. These
net amounts were recorded as an adjustment to stockholders' equity in each period, as an increase to cash flows from operating activities, and were not
recognized in our consolidated statements of income.
The tax benefits realized from share-based award activity of $1.03 billion relate to both the reduction of current year income tax liabilities and the
expected refund of $451 million from income tax loss carrybacks to 2010 and 2011.
In addition, we reported excess tax benefits that decreased our cash flows from operating activities and increased our cash flows from financing
activities for the years ended December 31, 2012 , 2011 , and 2010 , by $1.03 billion , $433 million , $115 million , respectively. The amounts of these
excess tax benefits reflect the total of the individual transactions in which the reduction to our income tax liability was greater than the deferred tax
assets that were recorded, but were not reduced by any of the individual transactions in which the reduction to our income tax liability was less than the
deferred tax assets that were recorded.
Income Taxes
We recognize income taxes under the asset and liability method. We recognize deferred income tax assets and liabilities for the expected future
consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. These differences are measured using the
enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the
effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date.
We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. We
consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of
future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the position. We make adjustments to these reserves when facts and circumstances
change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of any reserves that are
considered appropriate, as well as the related net interest and penalties.
Advertising Expense
Advertising costs are expensed when incurred and are included in marketing and sales expenses in the accompanying consolidated statements of
income. We incurred advertising expenses of $67 million , $28 million , and $8 million for the years ended December 31, 2012 , 2011 , and 2010 ,
respectively.
Cash and Cash Equivalents, and Marketable Securities
Cash and cash equivalents primarily consist of cash on deposit with banks and investments in money market funds, and U.S. government and U.S.
government agency securities with maturities of 90 days or less from the date of purchase.
We hold investments in marketable securities, consisting of U.S. government and U.S. government agency securities . We classify our marketable
securities as available-for-sale investments in our current assets because they represent investments of cash available for current operations. Our
available-for-sale investments are carried at estimated fair value with any unrealized gains and losses, net of taxes, included in accumulated other
comprehensive income/(loss) in stockholders' equity. Unrealized losses are charged against other
68