e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
INTERSECTIONS INC.
(Exact name of registrant as specified in the charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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54-1956515
(I.R.S. Employer
Identification Number) |
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3901 Stonecroft Boulevard,
Chantilly, Virginia
(Address of principal executive office)
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20151
(Zip Code) |
(703) 488-6100
(Registrants telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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( Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the last practicable date:
As of August 6, 2010 there were 18,808,280 shares of common stock, $0.01 par value, issued and
17,741,864 shares outstanding, with 1,066,416 shares of treasury stock.
Form 10-Q
June 30, 2010
Table of Contents
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenue |
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$ |
98,872 |
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$ |
90,317 |
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$ |
195,461 |
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$ |
177,586 |
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Operating expenses: |
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Marketing |
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12,684 |
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15,346 |
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29,787 |
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30,375 |
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Commissions |
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29,809 |
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26,785 |
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60,604 |
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52,650 |
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Cost of revenue |
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25,544 |
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25,848 |
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51,720 |
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51,384 |
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General and administrative |
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17,533 |
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18,552 |
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35,105 |
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35,230 |
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Impairment |
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5,949 |
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6,163 |
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Depreciation |
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2,163 |
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1,962 |
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4,471 |
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4,112 |
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Amortization |
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1,877 |
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2,174 |
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4,176 |
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4,582 |
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Total operating expenses |
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89,610 |
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96,616 |
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185,863 |
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184,496 |
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Income (loss) from operations |
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9,262 |
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(6,299 |
) |
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9,598 |
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(6,910 |
) |
Interest income |
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6 |
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98 |
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11 |
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142 |
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Interest expense |
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(560 |
) |
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(288 |
) |
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(1,198 |
) |
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(437 |
) |
Other (expense) income, net |
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(23 |
) |
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919 |
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(472 |
) |
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473 |
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Income (loss) before income taxes and noncontrolling interest |
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8,685 |
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(5,570 |
) |
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7,939 |
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(6,732 |
) |
Income tax expense |
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(3,509 |
) |
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(205 |
) |
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(3,831 |
) |
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(864 |
) |
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Net income (loss) |
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5,176 |
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(5,775 |
) |
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4,108 |
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(7,596 |
) |
Net loss attributable to noncontrolling interest |
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3,116 |
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4,380 |
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Net income (loss) attributable to Intersections, Inc. |
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$ |
5,176 |
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$ |
(2,659 |
) |
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$ |
4,108 |
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$ |
(3,216 |
) |
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Net income (loss) per share basic |
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$ |
0.29 |
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$ |
(0.15 |
) |
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$ |
0.23 |
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$ |
(0.18 |
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Net income (loss) per share diluted |
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$ |
0.29 |
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$ |
(0.15 |
) |
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$ |
0.23 |
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$ |
(0.18 |
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Weighted average common shares outstanding basic |
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17,683 |
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17,486 |
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17,652 |
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17,437 |
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Weighted average common shares outstanding diluted |
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18,128 |
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17,486 |
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18,004 |
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17,437 |
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See Notes to Condensed Consolidated Financial Statements
3
INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
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June 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
28,962 |
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$ |
12,394 |
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Short-term investments |
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4,994 |
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4,995 |
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Accounts receivable, net of allowance for doubtful accounts $264 (2010) and $374 (2009) |
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24,676 |
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25,111 |
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Prepaid expenses and other current assets |
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5,667 |
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5,182 |
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Income tax receivable |
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1,925 |
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2,460 |
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Deferred subscription solicitation costs |
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29,797 |
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34,256 |
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Total current assets |
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96,021 |
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84,398 |
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PROPERTY AND EQUIPMENT, net |
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16,645 |
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17,802 |
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DEFERRED TAX ASSET, net |
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6,922 |
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3,700 |
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LONG-TERM INVESTMENT |
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4,327 |
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3,327 |
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GOODWILL |
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46,939 |
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46,939 |
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INTANGIBLE ASSETS, net |
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17,437 |
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21,613 |
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OTHER ASSETS |
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7,677 |
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14,392 |
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TOTAL ASSETS |
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$ |
195,968 |
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$ |
192,171 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Current portion of long-term debt |
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$ |
7,000 |
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$ |
7,000 |
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Capital leases, current portion |
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1,091 |
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1,028 |
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Accounts payable |
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5,396 |
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9,168 |
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Accrued expenses and other current liabilities |
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18,654 |
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17,255 |
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Accrued payroll and employee benefits |
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4,128 |
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2,782 |
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Commissions payable |
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940 |
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2,044 |
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Deferred revenue |
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5,021 |
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5,202 |
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Deferred tax liability, net, current portion |
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15,327 |
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14,879 |
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Total current liabilities |
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57,557 |
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59,358 |
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LONG-TERM DEBT |
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27,960 |
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31,393 |
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OBLIGATIONS UNDER CAPITAL LEASE, less current portion |
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1,309 |
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1,681 |
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OTHER LONG-TERM LIABILITIES |
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6,687 |
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3,332 |
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TOTAL LIABILITIES |
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93,513 |
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95,764 |
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COMMITMENTS AND CONTINGENCIES (see notes 12 and 14) |
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STOCKHOLDERS EQUITY: |
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Common stock at $.01 par value; shares authorized, 50,000; shares issued, 18,812
(2010) and 18,662 (2009); shares outstanding, 17,745 (2010) and 17,595 (2009) |
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188 |
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187 |
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Additional paid-in capital |
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106,129 |
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104,810 |
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Treasury stock, 1,067 shares at cost in 2010 and 2009 |
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(9,516 |
) |
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(9,516 |
) |
Retained earnings |
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6,135 |
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2,027 |
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Accumulated other comprehensive (loss) income: |
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Cash flow hedge |
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(677 |
) |
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(856 |
) |
Other |
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196 |
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(245 |
) |
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TOTAL STOCKHOLDERS EQUITY |
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102,455 |
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|
96,407 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
195,968 |
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$ |
192,171 |
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See Notes to Condensed Consolidated Financial Statements
4
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Year Ended December 31, 2009 and the Six Months Ended June 30, 2010
(in thousands)
(unaudited)
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Common |
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Additional |
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Stock |
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Other |
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Intersections Inc. |
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Total |
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Stock |
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Paid-in |
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Income |
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Retained |
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Comprehensive |
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Stockholders |
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Noncontrolling |
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Stockholders |
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Shares |
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Amount |
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Capital |
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Shares |
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(Loss) |
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Earnings |
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Income (Loss) |
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Equity |
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Interest |
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Equity |
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(In thousands) |
|
BALANCE, DECEMBER 31, 2008 |
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18,383 |
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|
$ |
184 |
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|
$ |
103,544 |
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|
|
1,067 |
|
|
$ |
(9,516 |
) |
|
$ |
8,380 |
|
|
$ |
(1,153 |
) |
|
$ |
101,439 |
|
|
$ |
1,013 |
|
|
$ |
102,452 |
|
|
|
|
|
|
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|
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|
|
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|
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|
Issuance of common stock upon exercise of stock options and vesting of restricted stock units |
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|
279 |
|
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|
3 |
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|
(670 |
) |
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|
|
|
|
|
|
|
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|
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|
|
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|
(667 |
) |
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|
|
(667 |
) |
Share based compensation |
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|
|
|
|
|
|
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|
4,556 |
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|
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|
|
|
|
|
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|
4,556 |
|
|
|
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|
4,556 |
|
Tax deficiency of stock options exercised and vesting of restricted stock units |
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|
|
|
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|
|
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(87 |
) |
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|
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|
|
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|
|
|
|
|
|
|
|
|
(87 |
) |
|
|
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|
(87 |
) |
Release of uncertain tax benefits |
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|
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|
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|
526 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
526 |
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|
|
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|
|
|
526 |
|
Purchase of noncontrolling interest |
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|
(3,059 |
) |
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|
|
|
|
|
|
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|
|
(200 |
) |
|
|
(3,259 |
) |
|
|
3,658 |
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|
|
399 |
|
Net loss |
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
(6,353 |
) |
|
|
|
|
|
|
(6,353 |
) |
|
|
(4,380 |
) |
|
|
(10,733 |
) |
Foreign currency translation adjustments |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(155 |
) |
|
|
(155 |
) |
|
|
(291 |
) |
|
|
(446 |
) |
Cash flow hedge |
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407 |
|
|
|
407 |
|
|
|
|
|
|
|
407 |
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|
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|
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|
Comprehensive Loss |
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
(5,032 |
) |
|
|
(1,013 |
) |
|
|
(6,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
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|
BALANCE, DECEMBER 31, 2009 |
|
|
18,662 |
|
|
$ |
187 |
|
|
$ |
104,810 |
|
|
|
1,067 |
|
|
$ |
(9,516 |
) |
|
$ |
2,027 |
|
|
$ |
(1,101 |
) |
|
$ |
96,407 |
|
|
$ |
|
|
|
$ |
96,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon vesting of restricted stock units |
|
|
150 |
|
|
|
1 |
|
|
|
(1,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,257 |
) |
|
|
|
|
|
|
(1,257 |
) |
Share based compensation |
|
|
|
|
|
|
|
|
|
|
2,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,785 |
|
|
|
|
|
|
|
2,785 |
|
Tax deficiency upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
(208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(208 |
) |
|
|
|
|
|
|
(208 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,108 |
|
|
|
|
|
|
|
4,108 |
|
|
|
|
|
|
|
4,108 |
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441 |
|
|
|
441 |
|
|
|
|
|
|
|
441 |
|
Cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
179 |
|
|
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,048 |
|
|
|
|
|
|
|
6048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JUNE 30, 2010 |
|
|
18,812 |
|
|
$ |
188 |
|
|
$ |
106,129 |
|
|
|
1,067 |
|
|
$ |
(9,516 |
) |
|
$ |
6,135 |
|
|
$ |
(481 |
) |
|
$ |
102,455 |
|
|
$ |
|
|
|
$ |
102,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Net income (loss) |
|
$ |
4,108 |
|
|
$ |
(7,596 |
) |
Adjustments to reconcile net income (loss) to cash flows provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
4,472 |
|
|
|
4,109 |
|
Amortization |
|
|
4,176 |
|
|
|
4,582 |
|
Loss on disposal of fixed assets |
|
|
|
|
|
|
63 |
|
Amortization of debt issuance cost |
|
|
34 |
|
|
|
44 |
|
Provision for doubtful accounts |
|
|
(164 |
) |
|
|
9 |
|
Share based compensation |
|
|
2,785 |
|
|
|
2,037 |
|
Amortization of deferred subscription solicitation costs |
|
|
31,996 |
|
|
|
32,569 |
|
Goodwill impairment charges |
|
|
|
|
|
|
6,163 |
|
Foreign currency transaction losses (gains), net |
|
|
506 |
|
|
|
(829 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
507 |
|
|
|
3,423 |
|
Prepaid expenses and other current assets |
|
|
(501 |
) |
|
|
851 |
|
Income tax receivable |
|
|
743 |
|
|
|
4,328 |
|
Deferred subscription solicitation costs |
|
|
(26,027 |
) |
|
|
(36,706 |
) |
Other assets |
|
|
5,203 |
|
|
|
(2,228 |
) |
Tax deficiency upon vesting of restricted stock units |
|
|
(208 |
) |
|
|
(425 |
) |
Accounts payable |
|
|
(3,386 |
) |
|
|
(2,948 |
) |
Accrued expenses and other current liabilities |
|
|
1,227 |
|
|
|
3,305 |
|
Accrued payroll and employee benefits |
|
|
1,352 |
|
|
|
(1,540 |
) |
Commissions payable |
|
|
(1,104 |
) |
|
|
574 |
|
Deferred revenue |
|
|
(182 |
) |
|
|
329 |
|
Deferred income tax, net |
|
|
(2,773 |
) |
|
|
2,375 |
|
Other long-term liabilities |
|
|
3,498 |
|
|
|
(1,340 |
) |
|
|
|
|
|
|
|
Cash flows provided by operating activities |
|
|
26,262 |
|
|
|
11,149 |
|
|
|
|
|
|
|
|
CASH FLOWS USED IN INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of additional interest in long-term investment |
|
|
(1,000 |
) |
|
|
|
|
Acquisition of property and equipment |
|
|
(3,251 |
) |
|
|
(3,548 |
) |
Proceeds from sale of property and equipment |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
(4,251 |
) |
|
|
(3,532 |
) |
|
|
|
|
|
|
|
CASH FLOWS USED IN FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayments under credit agreement |
|
|
(3,500 |
) |
|
|
(3,500 |
) |
Tax deficiency upon vesting of restricted stock units |
|
|
(208 |
) |
|
|
(425 |
) |
Capital lease payments |
|
|
(478 |
) |
|
|
(288 |
) |
Cash proceeds from stock options exercised |
|
|
|
|
|
|
1 |
|
Cash distribution on vesting of restricted stock units |
|
|
(970 |
) |
|
|
|
|
Withholding tax payment on vesting of restricted stock units |
|
|
(284 |
) |
|
|
(362 |
) |
|
|
|
|
|
|
|
Cash flows used in financing activities |
|
|
(5,440 |
) |
|
|
(4,574 |
) |
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH |
|
|
(3 |
) |
|
|
151 |
|
|
|
|
|
|
|
|
INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
16,568 |
|
|
|
3,194 |
|
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
12,394 |
|
|
|
10,762 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
28,962 |
|
|
$ |
13,956 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
613 |
|
|
$ |
823 |
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
3,183 |
|
|
$ |
593 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Equipment obtained under capital lease |
|
$ |
170 |
|
|
$ |
1,089 |
|
|
|
|
|
|
|
|
Equipment additions accrued but not paid |
|
$ |
488 |
|
|
$ |
462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
6
INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business
We offer consumers a variety of consumer protection services and other consumer products and
services primarily on a subscription basis. Our services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information. Through our subsidiary, Intersections Insurance Services, Inc. (IISI), we offer a
portfolio of services to include consumer discounts on healthcare, home and auto related expenses,
access to professional financial and legal information, and life, accidental death and disability
insurance products. Our consumer products and services are offered through relationships with
clients, including many of the largest financial institutions in the United States and Canada, and
clients in other industries.
In addition, we also offer our services directly to consumers. We conduct our consumer direct
marketing primarily through the Internet, television, radio and other mass media. We also may
market through other channels, including direct mail, outbound telemarketing, inbound telemarketing
and email.
Through our subsidiary, Screening International Holdings, LLC (SIH), we provide personnel
and vendor background screening services to businesses worldwide. In May 2006, we created Screening
International, LLC (SI) with Control Risks Group, Ltd., (CRG), a company based in the UK, by
combining our subsidiary, American Background Information Services, Inc. (ABI) with CRGs
background screening division. Prior to July 1, 2009, we owned 55% of SI and had the right to
designate a majority of the five-member board of directors. CRG owned 45% of SI. As further
described in Note 18, on July 1, 2009, we and CRG agreed to terminate the existing ownership
agreement, we acquired CRGs ownership interest in Screening International, LLC, and we formed SIH,
our wholly owned subsidiary, which became the sole owner of SI. As further described in Note 21
on July 19, 2010, we and SIH entered into a membership interest purchase agreement with Sterling
Infosystems, Inc. (Sterling), pursuant to which SIH sold, and Sterling acquired, 100% of the
membership interests of SI for an aggregate purchase price of $15.0 million in cash plus
adjustments for working capital and other items. SIH is not an operating subsidiary, and our
background screening services ceased upon the sale of SI.
We have four reportable segments through the period ended June 30, 2010. Our Consumer Products
and Services segment includes our consumer protection and other consumer products and services.
This segment consists of identity theft management tools, services from our relationship with a
third party that administers referrals for identity theft to major banking institutions and breach
response services, membership product offerings and other subscription based services such as life
and accidental death insurance. Our Online Brand Protection segment includes corporate brand
protection provided by Net Enforcers, Inc. (Net Enforcers) and our Bail Bonds Industry Solutions
segment includes the software management solutions for the bail bond industry provided by Captira
Analytical, LLC (Captira Analytical). In addition, until the sale of SI on July 19, 2010, our
Background Screening segment included the personnel and vendor background screening services
provided by SI.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by
us in accordance with accounting principles generally accepted in the United States of America
(U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission. They
include the accounts of the company and our subsidiaries. Our decision to consolidate an entity is
based on our direct and indirect majority interest in the entity. All significant intercompany
transactions have been eliminated. The condensed consolidated results of operations for the interim
periods are not necessarily indicative of results for the full year.
These condensed consolidated financial statements do not include all the information or notes
necessary for a complete presentation and, accordingly, should be read in conjunction with our
audited consolidated financial statements and accompanying notes for the year ended December 31,
2009, as filed in our Annual Report on Form 10-K.
7
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Goodwill, Identifiable Intangibles and Other Long Lived Assets
We record, as goodwill, the excess of the purchase price over the fair value of the
identifiable net assets acquired in purchase transactions. We review our goodwill for impairment
annually and follow the two step process. We test goodwill annually as of October 31, or more
frequently if indicators of impairment exist. Goodwill has been assigned to our reporting units for
purposes of impairment testing. As of June 30, 2010, goodwill of $43.2 million and $3.7 million
resided in our Consumer Products and Services and Background Screening reporting units,
respectively.
A significant amount of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include, among others (a) a significant decline in our expected
future cash flows; (b) a sustained, significant decline in our stock price and market
capitalization; (c) a significant adverse change in legal factors or in the business climate; (d)
unanticipated competition; (e) the testing for recoverability of a significant asset group within a
reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a
significant impact on the recoverability of these assets and could have a material impact on our
condensed consolidated financial statements.
The goodwill impairment test involves a two-step process. The first step is a comparison of
each reporting units fair value to its carrying value. We estimate fair value using the best
information available, using a combined income (discounted cash flow) valuation model and market
based approach. The market approach measures the value of an entity through an analysis of recent
sales or offerings of comparable companies. The income approach measures the value of the reporting
units by the present values of its economic benefits. These benefits can include revenue and cost
savings. Value indications are developed by discounting expected cash flows to their present value
at a rate of return that incorporates the risk-free rate for use of funds, trends within the
industry, and risks associated with particular investments of similar type and quality as of the
valuation date.
The estimated fair value of our reporting units is dependent on several significant
assumptions, including our earnings projections, and cost of capital (discount rate). The
projections use managements best estimates of economic and market conditions over the projected
period including business plans, growth rates in sales, costs, estimates of future expected changes
in operating margins and cash expenditures. Other significant estimates and assumptions include
terminal value growth rates, future estimates of capital expenditures and changes in future working
capital requirements. There are inherent uncertainties related to these factors and managements
judgment in applying each to the analysis of the recoverability of goodwill.
We estimate fair value giving consideration to both the income and market approaches.
Consideration is given to the line of business and operating performance of the entities being
valued relative to those of actual transactions, potentially subject to corresponding economic,
environmental, and political factors considered to be reasonable investment alternatives.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the
reporting unit is not impaired and the second step of the impairment test is not necessary. If the
carrying value of the reporting unit exceeds its estimated fair value, then the second step of the
goodwill impairment test must be performed. The second step of the goodwill impairment test
compares the implied fair value of the reporting units goodwill with its goodwill carrying value
to measure the amount of impairment charge, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In
other words, the estimated fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of that reporting unit was the
purchase price paid. If the carrying value of the reporting units goodwill exceeds the implied
fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.
We reviewed all impairment indicators with regards to goodwill and we concluded that for the
three and six months ended June 30, 2010, there were no adverse changes in these indicators which would cause a need for
an interim goodwill impairment analysis. Therefore, we were not required to perform a goodwill
analysis during the second quarter of 2010.
8
Due to the deterioration in the general economic environment and decline in our market
capitalization through June 30, 2009, we concluded a triggering event had occurred indicating
potential impairment in our Background Screening reporting unit. We determined, in the first step
of our goodwill impairment analysis performed as of June 30, 2009, that goodwill in the Background
Screening reporting unit was impaired. The goodwill impairment test involves a two-step process.
The first step is a comparison of each reporting units fair value to its carrying value. We
calculated the value of our reporting units by utilizing an income and market based approach. The
value under the income approach is developed by discounting the projected future cash flows to
present value. The reporting units discounted cash flows require significant management judgment
with respect to revenue, earnings, capital expenditures and the selection and use of an appropriate
discount rate. The discounted cash flows are based on our annual business plan or other forecasted
results. Discount rates reflect market-based estimates of the risks associated with the projected
cash flows directly resulting from the use of those assets in operations. However, the comparison
of the values calculated using the income and market based approach to our market capitalization
resulted in a value significantly in excess of our market capitalization. We therefore
proportionally allocated the market capitalization, including a reasonable control premium, to the
reporting units to determine the implied fair value of the reporting units. The carrying value of
our Background Screening reporting unit exceeded its implied fair value based on this analysis as
of June 30, 2009, which resulted in an impairment of goodwill in our Background Screening reporting
unit.
The second step of the impairment test required us to allocate the fair value of the reporting
unit derived in the first step to the fair value of the reporting units net assets. Goodwill was
written down to its implied fair value for our Background Screening reporting unit. For the three
months ended June 30, 2009, we recorded an impairment charge of $5.9 million in our Background
Screening reporting unit.
In addition, during the three months ended March 31, 2009, we finalized our calculation for
the second step of our goodwill impairment test, in which the first step was performed during the
year ended December 31, 2008. Based on the finalization of this second step, we recorded an
additional impairment charge of $214 thousand in our Background Screening reporting unit in the
three months ended March 31, 2009.
We will continue to monitor our market capitalization, along with other operational
performance measures and general economic conditions. A downward trend in one or more of these
factors could cause us to reduce the estimated fair value of our reporting units and recognize a
corresponding impairment of our goodwill in connection with a future goodwill impairment test.
Our Consumer Products and Services reporting unit has $43.2 million of remaining goodwill as
of June 30, 2010. Our Background Screening reporting unit had $3.7 million of goodwill remaining as
of June 30, 2010. We may not be able to take sufficient cost containment actions to maintain our
current operating margins in the future. In addition, due to the concentration of our significant
clients in the financial industry, any significant impact to a contract held by a major client may
have an effect on future revenue which could lead to additional impairment charges.
We review long-lived assets, including finite-lived intangible assets, property and equipment
and other long term assets, for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be fully recoverable. Significant judgments in this
area involve determining whether a triggering event has occurred and determining the future cash
flows for assets involved. In conducting our analysis, we compared the undiscounted cash flows
expected to be generated from the long-lived assets to the related net book values. If the
undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be
impaired. If the net book value exceeds the undiscounted cash flows, an impairment charge is
measured and recognized. An impairment charge is measured as the difference between the net book
value and the fair value of the long-lived assets. Fair value is estimated by discounting the
future cash flows associated with these assets.
Intangible assets subject to amortization include trademarks and customer, marketing and
technology related intangibles. Such intangible assets, excluding customer related intangibles, are
amortized on a straight-line basis over their estimated useful lives, which are generally three to
ten years. Customer related intangible assets are amortized on either a straight-line or
accelerated basis, dependent upon the pattern in which the economic benefits of the intangible
asset are consumed or otherwise used up.
During the three and six months ended June 30, 2010 and 2009, there were no adverse changes in
our long-lived assets, which would cause a need for an impairment analysis. Therefore, we were not
required to perform an analysis of our long-lived assets in the three or six months ended June 30,
2010 and 2009.
Revenue Recognition
We recognize revenue on 1) identity theft, credit management and background screening
services, 2) accidental death insurance
and 3) other membership products.
9
Our products and services are offered to consumers primarily on a monthly subscription basis.
Subscription fees are generally billed directly to the subscribers credit card, mortgage bill or
demand deposit accounts. The prices to subscribers of various configurations of our products and
services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become
familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues
are recognized until applicable trial periods are completed.
Identity Theft and Credit Management Services
We recognize revenue from our services when: a) persuasive evidence of arrangement exists as
we maintain signed contracts with all of our large financial institution customers and paper and
electronic confirmations with individual purchases, b) delivery has occurred once the product is
transmitted over the internet, c) the sellers price to the buyer is fixed as sales are generally
based on contract or list prices and payments from large financial institutions are collected
within 30 days with no significant write-offs, and d) collectability is reasonably assured as
individual customers pay by credit card which has limited our risk of non-collection. Revenue for
monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions
with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by
the subscriber, deferred subscription fees are recorded when billed and amortized as subscription
fee revenue on a straight-line basis over the subscription period, generally one year. We also
generate revenue through a collaborative arrangement which involves joint marketing and servicing
activities. We recognize our share of revenues and expenses from this arrangement.
Revenue for annual subscription fees must be deferred if the subscriber has the right to
cancel the service. Annual subscriptions include subscribers with full refund provisions at any
time during the subscription period and pro-rata refund provisions. Revenue related to annual
subscription with full refund provisions is recognized on the expiration of these refund
provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a
pro rata share of revenue earned. An allowance for discretionary subscription refunds is
established based on our actual experience.
We also provide services for which certain financial institution clients are the primary
obligors directly to their customers. Revenue from these arrangements is recognized when earned,
which is at the time we provide the service, generally on a monthly basis.
We generally record revenue on a gross basis in the amount that we bill the subscriber when
our arrangements with financial institution clients provide for us to serve as the primary obligor
in the transaction, we have latitude in establishing price and we bear the risk of physical loss of
inventory and credit risk for the amount billed to the subscriber. We generally record revenue in
the amount that we bill our financial institution clients, and not the amount billed to their
customers, when our financial institution client is the primary obligor, establishes price to the
customer and bears the credit risk.
Accidental Death Insurance and Other Membership Products
We recognize revenue from our services when: a) persuasive evidence of arrangement exists as
we maintain paper and electronic confirmations with individual purchases, b) delivery has occurred
at the completion of a product trial period, c) the sellers price to the buyer is fixed as the
price of the product is agreed to by the customer as a condition of the sales transaction which
established the sales arrangement, and d) collectability is reasonably assured as evidenced by our
collection of revenue through the monthly mortgage payments of our customers or through checking
account debits to our customers accounts. Revenues from insurance contracts are recognized when
earned. Marketing of our insurance products generally involves a trial period during which time the
product is made available at no cost to the customer. No revenues are recognized until applicable
trial periods are completed.
For insurance products, we record revenue on a net basis as we perform as an agent or broker
for the insurance products without assuming the risks of ownership of the insurance products. For
membership products, we generally record revenue on a gross basis as we serve as the primary
obligor in the transactions, have latitude in establishing price and bear credit risk for the
amount billed to the subscriber.
We participate in agency relationships with insurance carriers that underwrite insurance
products offered by us. Accordingly, insurance premiums collected from customers and remitted to
insurance carriers are excluded from our revenues and operating expenses. Insurance premiums
collected but not remitted to insurance carriers as of June 30, 2010 and December 31, 2009 were
$1.3 million and $1.5 million, respectively, and are included in accrued expenses and other current
liabilities in our condensed consolidated
balance sheet.
10
Other Monthly Subscription Products
We generate revenue from other types of subscription based products provided from our Online
Brand Protection and Bail Bonds Industry Solutions segments. We recognize revenue from online brand
protection and brand monitoring services, offered by Net Enforcers, on a monthly basis and from
providing management service solutions, offered by Captira Analytical, on a monthly subscription
basis.
Deferred Subscription Solicitation and Advertising
Our deferred subscription solicitation costs consist of subscription acquisition costs,
including telemarketing, web-based marketing expenses and direct mail such as printing and postage.
We expense advertising costs the first time advertising takes place, except for direct-response
marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response
marketing costs, which are amortized on a cost pool basis over the period during which the future
benefits are expected to be received, but no more than 12 months. The recoverability of amounts
capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date by
comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future
benefit expected to result directly from such advertising costs. Probable remaining future benefit
is estimated based upon historical subscriber patterns, and represents net revenues less costs to
earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct
our contractual cost to service that subscriber from the known sales price. We then apply the
future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in
the future to arrive at the total probable future benefit. In estimating the number of subscribers
we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber
patterns maintained by us that show attrition rates by client, product and marketing channel. The
total probable future benefit is then compared to the costs of a given marketing campaign (i.e.,
cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to
be recoverable. If direct response advertising costs were to exceed the estimated probable
remaining future benefit, an adjustment would be made to the deferred subscription costs to the
extent of any shortfall.
Commission Costs
Commissions that relate to annual subscriptions with full refund provisions and monthly
subscriptions are expensed when incurred, unless we are entitled to a refund of the commissions. If
annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a
full refund of the previously paid commission for those annual subscriptions with a full refund
provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual
subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions
with full commission refund provisions are deferred until the earlier of expiration of the refund
privileges or cancellation. Once the refund privileges have expired, the commission costs are
recognized ratably in the same pattern that the related revenue is recognized. Commissions that
relate to annual subscriptions with pro-rata refund provisions are deferred and charged to
operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt
of the refunded commission from our client, we record a reduction to the deferred commission.
We have prepaid commission agreements with some of our clients. Under these agreements, we pay
a commission on new subscribers in lieu of or reduction in ongoing commission payments. We amortize
these prepaid commissions, on an accelerated basis, over a period of time not to exceed three
years, which is the average expected life of customers. The short-term portion of the prepaid
commissions are shown in deferred subscription solicitation costs in our condensed consolidated
balance sheet. The long-term portion of the prepaid commissions are shown in other assets in our
condensed consolidated balance sheet. Amortization is included in commission expense in our
condensed consolidated statement of operations.
Share Based Compensation
We use the Black-Scholes option-pricing model to value all options and the straight-line
method to amortize this fair value as compensation cost over the requisite service period. The fair
value of each option granted has been estimated as of the date of grant with the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
67.8 |
% |
|
|
55.4 |
% |
Risk-free interest rate |
|
|
2.8 |
% |
|
|
2.0 |
% |
Expected life of options |
|
6.2 years |
|
|
6.2 years |
|
11
Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield
as an input. We have not issued dividends in the past. As such, the dividend yield used in our
valuations for the three and six months ended June 30, 2010 and 2009 were zero.
Expected Volatility. The expected volatility of the options granted was estimated based upon
our historical share price volatility as well as the average volatility of comparable public
companies. We will continue to review our estimate in the future.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury
notes was used to extrapolate an average risk-free interest rate based on the expected term of the
underlying grants.
Expected Term. The expected term of options granted during the six months ended June 30, 2010
and 2009 was determined under the simplified calculation ((vesting term + original contractual
term)/2). For the majority of grants valued during the six months ended June 30, 2010 and 2009, the
options had graded vesting over 4 years (equal vesting of options annually) and the contractual
term was 10 years.
In addition, we estimate forfeitures based on historical option and restricted stock unit
activity on a grant by grant basis. We may make changes to that estimate throughout the vesting
period based on actual activity.
Income Taxes
We account for income taxes under the applicable provisions of U.S. GAAP, which requires an
asset and liability approach to financial accounting and reporting for income taxes. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. If necessary, deferred tax assets are reduced by a valuation allowance to an
amount that is determined to be more likely than not recoverable.
Accounting for income taxes in interim periods provides that at the end of each interim period
we are required to make our best estimate of the consolidated effective tax rate expected to be
applicable for our full calendar year. The rate so determined shall be used in providing for income
taxes on a consolidated current year-to-date basis. Further, the rate is reviewed, if necessary, as
of the end of each successive interim period during the year to our best estimate of our annual
effective tax rate.
We believe that our tax positions comply with applicable tax law. As a matter of course, we
may be audited by various taxing authorities and these audits may result in proposed assessments
where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. We may recognize the tax benefit from an uncertain tax
position only if 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. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement.
In addition to the amount of tax resulting from applying the estimated effective tax rate to
pretax income, we included certain items, treated as discrete events, to arrive at an estimated
overall tax amount for the six months ended June 30, 2010. See
Note 16 for additional information.
3. Accounting Standards Updates
Accounting Standards Updates Recently Adopted
In June 2009, an update was made to Consolidation Consolidation of Variable Interest
Entities, to replace the calculation for determining which entities, if any, have a controlling
financial interest in a variable interest entity (VIE) from a quantitative risk based
calculation, to a qualitative approach that focuses on identifying which entities have the power to
direct the activities that most significantly impact the VIEs economic performance and the
obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update
requires an ongoing assessment as to whether an entity is the primary beneficiary of a VIE,
modifies the presentation of consolidated VIE assets and liabilities, and requires additional
disclosures about a companys involvement in VIEs.
12
This update is effective for annual periods beginning after November 15, 2009, for interim
periods within the first annual reporting period and for interim and annual periods thereafter.
Earlier application is prohibited. We have adopted the provisions of this update as of January 1,
2010 and there was no material impact to our condensed consolidated financial statements.
In February 2010, an update was made to Subsequent Events. This update removes the
requirement for a public filer to disclose a date in both issued and revised financial statements.
This update is effective upon issuance of the final update, except for the use of the issued date
for conduit debt obligators. That amendment is effective for interim or annual periods ending after
June 15, 2010. We have adopted the provisions of this update as of March 31, 2010 and there was no
material impact to our condensed consolidated financial statements.
In March 2010, an update was made to Derivatives and Hedging. This update provides
clarification and related additional examples to improve financial reporting by resolving potential
ambiguity about the breadth of the embedded credit derivative scope exception. This update is
effective for each reporting entity at the beginning of the first fiscal quarter beginning after
June 15, 2010. We have adopted the provisions of this update as of June 30, 2010 and there was no
material impact to our condensed consolidated financial statements.
In April 2010, an update was made to Revenue Recognition Milestone Method. This update
provides amendments to provide guidance on the criteria that should be met for determining whether
the milestone method of revenue recognition is appropriate. A vendor can recognize consideration
that is contingent upon achievement of a milestone in its entirety as revenue in the period in
which the milestone is achieved only if the milestone meets all criteria to be considered
substantive. This update is effective on a prospective basis for milestones achieved in fiscal
years, and interim periods within those years, beginning on or after June 15, 2010. Earlier
adoption is permitted. We have adopted the provisions of this update as of June 30, 2010 and there
was no material impact to our condensed consolidated financial statements.
Accounting Standards Updates Not Yet Effective
In October 2009, an update was made to Revenue Recognition Multiple-Deliverable Revenue
Arrangements. This update amends the criteria in Multiple-Element Arrangements for separating
consideration in multiple-deliverable arrangements and replaces the term fair value in the revenue
allocation guidance with selling price to clarify that the allocation of revenue is based on
entity-specific assumptions rather than assumptions of a marketplace participant. This update
establishes a selling price hierarchy for determining the selling price of a deliverable,
eliminates the residual method of allocation and significantly expands the disclosures related to a
vendors multiple-deliverable revenue arrangements. This update is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010. We will adopt the provisions of this update and do not anticipate a material impact to
our condensed consolidated financial statements.
In October 2009, an update was made to Software Certain Revenue Arrangements That Include
Software Elements. This update changes the accounting model for revenue arrangements that include
both tangible products and software elements. This update removed tangible products containing
software components and nonsoftware components that function together to deliver the tangible
products essential functionality from the scope of the software revenue guidance in
Software-Revenue Recognition. This update also provides guidance on how a vendor should allocate
arrangement consideration to deliverables in an arrangement that includes both tangible products
and software, how to allocate arrangement consideration when an arrangement includes deliverables
both included and excluded from the scope of software revenue guidance and provides additional
disclosure requirements. This update is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010. We will adopt the provisions of this update and do not anticipate a material
impact to our condensed consolidated financial statements.
In January 2010, an update was made to Fair Value Measurements and Disclosures. This update
requires new disclosures of transfers in and out of Levels 1 and 2 and of activity in Level 3 fair
value measurements. The update also clarifies the existing disclosures for levels of disaggregation
and about inputs and valuation techniques. This update is effective for interim and annual
reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value measurements,
which are effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. We will adopt the provisions of this update and do not anticipate a
material impact to our condensed consolidated financial statements.
In April 2010, an update was made to Compensation Stock Compensation". This update
provides amendments to clarify that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of
13
the entitys equity securities trades should not be considered to contain a condition that is
not a market, performance, or service condition. Therefore, an entity would classify such an award
as a liability if it otherwise qualifies as equity. This update is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier
adoption is permitted. We will adopt the provisions of this update and do not anticipate a material
impact to our condensed consolidated financial statements.
4. Net Income (Loss) Per Common Share
Basic and diluted income (loss) per share is determined in accordance with the applicable
provisions of U.S. GAAP. Basic income (loss) per common share is computed using the weighted
average number of shares of common stock outstanding for the period. Diluted income (loss) per
share is computed using the weighted average number of shares of common stock, adjusted for the
dilutive effect of potential common stock. Potential common stock, computed using the treasury
stock method or the if-converted method, includes the potential exercise of stock options under our
share-based employee compensation plans, our restricted stock units and warrants.
For the three and six months ended June 30, 2010, options to purchase 4.7 million shares of
common stock, respectively, have been excluded from the computation of diluted income per share as
their effect would be anti-dilutive. For the three and six months ended June 30, 2009, options to
purchase 5.8 million shares of common stock, respectively, have been excluded from the computation
of diluted loss per share as their effect would be anti-dilutive. These shares could dilute
earnings per share in the future.
A reconciliation of basic income (loss) per common share to diluted income (loss) per common
share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except |
|
|
(In thousands, except |
|
|
|
per share data) |
|
|
per share data) |
|
Net income (loss) available to common
shareholders basic and diluted |
|
$ |
5,176 |
|
|
$ |
(2,659 |
) |
|
$ |
4,108 |
|
|
$ |
(3,216 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
17,683 |
|
|
|
17,486 |
|
|
|
17,652 |
|
|
|
17,437 |
|
Dilutive effect of common stock equivalents |
|
|
445 |
|
|
|
|
|
|
|
352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
18,128 |
|
|
|
17,486 |
|
|
|
18,004 |
|
|
|
17,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.29 |
|
|
$ |
(0.15 |
) |
|
$ |
0.23 |
|
|
$ |
(0.18 |
) |
Diluted |
|
$ |
0.29 |
|
|
$ |
(0.15 |
) |
|
$ |
0.23 |
|
|
$ |
(0.18 |
) |
5. Fair Value Measurement
Our cash and any investment instruments are classified within Level 1 or Level 2 of the fair
value hierarchy as they are valued using quoted market prices, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price transparency. The types of instruments
valued based on quoted market prices in active markets are primarily U.S. government and agency
securities and money market securities. Such instruments are generally classified within Level 1 of
the fair value hierarchy.
The principal market where we execute our interest swap contracts is the retail market in an
over-the-counter environment with a relatively high level of price transparency. The market
participants usually are large money center banks and regional banks. These contracts are typically
classified within Level 2 of the fair value hierarchy.
The fair value of our instruments measured on a recurring basis at June 30, 2010 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
|
Quoted Prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
June 30, |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury bills |
|
$ |
4,994 |
|
|
$ |
4,994 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
|
677 |
|
|
|
|
|
|
|
677 |
|
|
|
|
|
14
The fair value of our instruments measured on a recurring basis at December 31, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date using: |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
other |
|
|
Significant |
|
|
|
|
|
|
|
Identical Assets |
|
|
Observable |
|
|
Unobservable |
|
|
|
December 31, 2009 |
|
|
(Level 1) |
|
|
Inputs (Level 2) |
|
|
Inputs (Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury bills |
|
$ |
4,995 |
|
|
$ |
4,995 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
|
856 |
|
|
|
|
|
|
|
856 |
|
|
|
|
|
For financial instruments such as cash and cash equivalents, short-term government debt
instruments, trade accounts receivables, notes payable, leases payable, accounts payable and
short-term and long-term debt, we consider the recorded value of the financial instruments to
approximate the fair value based on the liquidity of these financial instruments.
6. Deferred Subscription Solicitation and Commission Costs
Total deferred subscription solicitation costs included in the accompanying condensed
consolidated balance sheet as of June 30, 2010 and December 31, 2009 was $35.6 million and $41.6 million, respectively. The
long-term portion of the deferred subscription solicitation costs are reported in other assets in
our condensed consolidated balance sheet and include $5.9 million and $7.4 million as of June 30,
2010 and December 31, 2009, respectively. Included in the current portion of the deferred
subscription solicitation costs is the current portion of prepaid commissions which were $9.7
million and $11.5 million as of June 30, 2010 and December 31, 2009, respectively. Amortization of
deferred subscription solicitation and commission costs, which are included in either marketing or
commissions expense in our condensed consolidated statements of operations, for the three months
ended June 30, 2010 and 2009 were $14.0 million and $16.2 million, respectively. Amortization of
deferred subscription solicitation and commission costs for the six months ended June 30, 2010 and
2009 were $32.0 and $32.6, respectively. Marketing costs, which are included in marketing expenses
in our condensed consolidated statements of operations, as they did not meet the criteria for
deferral, for the three months ended June 30, 2010 and 2009, were $1.3 and $3.1 million
respectively. Marketing costs expensed as incurred related to marketing for the six months ended
June 30, 2010 and 2009 were $6.1 million and $6.4 million, respectively.
7. Long-Term Investments
Our long-term investment consists of an investment in equity shares of a privately held
company. During the three months ended March 31, 2010, we paid $1.0 million in cash for an
additional preferred stock investment in White Sky, Inc. (White Sky), a privately held company in
California. White Sky provides smart card-based software solutions to safeguard consumers against
identity theft and online crime when they bank, shop and invest online. We own less than 20% of
White Sky. The investment is accounted for at cost in our condensed consolidated balance sheet. As
of June 30, 2010, no indicators of impairment were identified.
In addition to the investment, we amended a commercial agreement with White Sky to receive
exclusivity on the sale of its ID Vault products. The amended strategic commercial agreement allows
us to include these products and services as part of our comprehensive identity theft protection
services to consumers. The amendment also modified our future royalty payments to White Sky in
exchange for certain exclusivity on the sale of its ID Vault products.
8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Carrying |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
|
|
|
Amount at |
|
|
|
Carrying |
|
|
Impairment |
|
|
Amount at |
|
|
|
|
|
|
June 30, |
|
|
|
Amount |
|
|
Losses |
|
|
January 1, 2010 |
|
|
Impairment |
|
|
2010 |
|
Consumer Products and Services |
|
$ |
43,235 |
|
|
$ |
|
|
|
$ |
43,235 |
|
|
$ |
|
|
|
$ |
43,235 |
|
Background Screening |
|
|
23,583 |
|
|
|
(19,879 |
) |
|
|
3,704 |
|
|
|
|
|
|
|
3,704 |
|
Online Brand Protection |
|
|
11,242 |
|
|
|
(11,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Bail Bonds Industry Solutions |
|
|
1,390 |
|
|
|
(1,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
79,450 |
|
|
$ |
(32,511 |
) |
|
$ |
46,939 |
|
|
$ |
|
|
|
$ |
46,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Carrying |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
|
|
|
Amount at |
|
|
|
Carrying |
|
|
Impairment |
|
|
Amount at |
|
|
|
|
|
|
December 31, |
|
|
|
Amount |
|
|
Losses |
|
|
January 1, 2009 |
|
|
Impairment |
|
|
2009 |
|
Consumer Products and Services |
|
$ |
43,235 |
|
|
$ |
|
|
|
$ |
43,235 |
|
|
$ |
|
|
|
$ |
43,235 |
|
Background Screening |
|
|
23,583 |
|
|
|
(13,716 |
) |
|
|
9,867 |
|
|
|
(6,163 |
) |
|
|
3,704 |
|
Online Brand Protection |
|
|
11,242 |
|
|
|
(11,242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Bail Bonds Industry Solutions |
|
|
1,390 |
|
|
|
(1,390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
79,450 |
|
|
$ |
(26,348 |
) |
|
$ |
53,102 |
|
|
$ |
(6,163 |
) |
|
$ |
46,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The goodwill impairment test involves a two-step process. The first step is a comparison of
each reporting units fair value to its carrying value. We calculated the value of our reporting
units by utilizing an income and market based approach. The value under the income approach is
developed by discounting the projected future cash flows to present value. The reporting units
discounted cash flows require significant management judgment with respect to revenue, earnings,
capital expenditures and the selection and use of an appropriate discount rate. The discounted cash
flows are based on our annual business plan or other forecasted results. Discount rates reflect
market-based estimates of the risks associated with the projected cash flows directly resulting
from the use of those assets in operations. However, the comparison of the values calculated using
the income and market based approach to our market capitalization resulted in a value significantly
in excess of our market capitalization. We therefore proportionally allocated the market
capitalization, including a reasonable control premium, to the reporting units to determine the
implied fair value of the reporting units. The carrying value of our Background Screening reporting
unit exceeded its implied fair value based on this analysis as of June 30, 2009, which resulted in
an impairment of goodwill in our Background Screening reporting unit.
The second step of the impairment test required us to allocate the implied fair value of the
reporting unit derived in the first step to the fair value of the reporting units net assets.
Goodwill was written down to its implied fair value for our Background Screening reporting unit.
For the three months ended June 30, 2009 we recorded an impairment charge of $5.9 million in our
Background Screening reporting.
In addition, during the three months ended March 31, 2009, we finalized the second step of our
goodwill impairment test, in which the first step was performed during the year ended December 31,
2008. Based on the finalization of this second step, we recorded an additional impairment charge of
$214 thousand in our Background Screening reporting unit in the three months ended March 31, 2009.
We reviewed all impairment indicators with regards to goodwill and we concluded that for the
three and six months ended June 30, 2010, there were no adverse changes in these indicators which would cause a need for
an interim goodwill impairment analysis. Therefore, we were not required to perform a goodwill
analysis during the second quarter of 2010.
Our intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer related |
|
$ |
40,857 |
|
|
$ |
(23,866 |
) |
|
$ |
16,991 |
|
Marketing related |
|
|
3,553 |
|
|
|
(3,407 |
) |
|
|
146 |
|
Technology related |
|
|
2,796 |
|
|
|
(2,496 |
) |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
$ |
47,206 |
|
|
$ |
(29,769 |
) |
|
$ |
17,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer related |
|
$ |
40,857 |
|
|
$ |
(19,913 |
) |
|
$ |
20,944 |
|
Marketing related |
|
|
3,553 |
|
|
|
(3,335 |
) |
|
|
218 |
|
Technology related |
|
|
2,796 |
|
|
|
(2,345 |
) |
|
|
451 |
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
$ |
47,206 |
|
|
$ |
(25,593 |
) |
|
$ |
21,613 |
|
|
|
|
|
|
|
|
|
|
|
16
During the year ended December 31, 2009, we recorded an impairment of $947 thousand
related to certain intangible assets. We have adjusted the gross carrying amount and accumulated
amortization to reflect this impairment. Intangible assets are amortized over a period of three to
ten years. For the three and six months ended June 30, 2010, we incurred aggregate amortization
expense of $1.9 million and $4.2 million, respectively, which was included in amortization expense
in our condensed consolidated statement of operations. For the three and six months ended June 30,
2009, we incurred aggregate amortization expense of $2.2 million and $4.6 million, respectively,
which was included in amortization expense in our condensed consolidated statement of operations.
We estimate that we will have the following amortization expense for the future periods indicated
below (in thousands):
|
|
|
|
|
For the remaining six months ending December 31, 2010 |
|
$ |
2,540 |
|
For the years ending December 31: |
|
|
|
|
2011 |
|
|
3,828 |
|
2012 |
|
|
3,542 |
|
2013 |
|
|
3,483 |
|
2014 |
|
|
3,437 |
|
Thereafter |
|
|
607 |
|
|
|
|
|
|
|
$ |
17,437 |
|
|
|
|
|
9. Other Assets
The components of our other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Prepaid royalty payments |
|
$ |
75 |
|
|
$ |
75 |
|
Prepaid contracts |
|
|
220 |
|
|
|
1,341 |
|
Prepaid commissions |
|
|
5,852 |
|
|
|
7,362 |
|
Other |
|
|
1,530 |
|
|
|
5,614 |
|
|
|
|
|
|
|
|
|
|
$ |
7,677 |
|
|
$ |
14,392 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010, the decrease in other assets is primarily related
to a trade receivable from an ongoing marketing arrangement and a decrease in prepaid commissions.
10. Accrued Expenses and Other Current Liabilities
The components of our accrued expenses and other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Accrued marketing |
|
$ |
2,627 |
|
|
$ |
3,614 |
|
Accrued cost of sales, including credit bureau costs |
|
|
5,685 |
|
|
|
5,764 |
|
Accrued general and administrative expense and professional fees |
|
|
4,331 |
|
|
|
4,191 |
|
Insurance premiums |
|
|
1,299 |
|
|
|
1,473 |
|
Other |
|
|
4,712 |
|
|
|
2,213 |
|
|
|
|
|
|
|
|
|
|
$ |
18,654 |
|
|
$ |
17,255 |
|
|
|
|
|
|
|
|
11. Accrued Payroll and Employee Benefits
The components of our accrued payroll and employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Accrued payroll |
|
$ |
2,324 |
|
|
$ |
415 |
|
Accrued benefits |
|
|
1,804 |
|
|
|
2,364 |
|
Other |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
$ |
4,128 |
|
|
$ |
2,782 |
|
|
|
|
|
|
|
|
17
12. Commitments and Contingencies
Leases
We have entered into long-term operating lease agreements for office space and capital leases
for fixed assets. The minimum fixed commitments related to all noncancellable leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Capital |
|
|
|
Leases |
|
|
Leases |
|
|
|
(In thousands) |
|
For the remaining six months ending December 31, 2010 |
|
$ |
1,211 |
|
|
$ |
663 |
|
For the years ending December 31: |
|
|
|
|
|
|
|
|
2011 |
|
|
2,046 |
|
|
|
1,149 |
|
2012 |
|
|
2,143 |
|
|
|
715 |
|
2013 |
|
|
2,380 |
|
|
|
78 |
|
2014 |
|
|
2,001 |
|
|
|
|
|
2015 |
|
|
2,081 |
|
|
|
|
|
Thereafter |
|
|
7,951 |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
19,813 |
|
|
|
2,605 |
|
|
|
|
|
|
|
|
|
Less: amount representing interest |
|
|
|
|
|
|
(205 |
) |
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
|
|
|
|
2,400 |
|
Less: current obligation |
|
|
|
|
|
|
(1,091 |
) |
|
|
|
|
|
|
|
|
Long term obligations under capital lease |
|
|
|
|
|
$ |
1,309 |
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010 we entered into additional capital lease agreements
for approximately $170 thousand. We recorded the lease liability at the fair market value of the
underlying assets on our condensed consolidated balance sheet.
In the six months ended June 30, 2010, we financed certain software development costs. These
costs did not meet the criteria for capitalization under U.S. GAAP. Amounts owed under this
arrangement as of June 30, 2010 are $212 thousand and $258 thousand and are included in accrued
expenses and other current liabilities and other long-term liabilities, respectively, in our
condensed consolidated financial statements. The minimum fixed commitments related to this
arrangement are as follows (in thousands):
|
|
|
|
|
For the remaining six months ending December 31, 2010 |
|
$ |
104 |
|
For the years ending December 31: |
|
|
|
|
2011 |
|
|
221 |
|
2012 |
|
|
136 |
|
2013 |
|
|
9 |
|
|
|
|
|
Long term obligations under arrangement |
|
$ |
470 |
|
|
|
|
|
We entered into an agreement with a related party who is a provider of identity theft products
under which we are required to pay non-refundable minimum payments totaling $1.5 million during the
year ended December 31, 2010, in exchange for exclusivity.
Rental expenses included in general and administrative expenses were $856 thousand and $1.8
million for the three and six months ended June 30, 2010, respectively. Rental expenses included in
general and administrative expenses were $636 thousand and $1.3 million for the three and six
months ended June 30, 2009, respectively. The increase in rental expenses is due to the increase in
rent as a result of our relocation to a new building facility.
Legal Proceedings
On May 27, 2009, we filed a complaint in the U.S. District Court for the Eastern District of
Virginia against Joseph C. Loomis and Jenni M. Loomis in connection with our stock purchase
agreement to purchase all of Net Enforcers, Inc.s (NEI) stock in November 2007 (the Virginia
Litigation). We alleged, among other things, that Mr. Loomis committed securities fraud, breached
the stock purchase agreement, and breached his fiduciary duties to the company. The complaint also
seeks a declaration that NEI is not in breach of its employment agreement with Mr. Loomis and that,
following NEIs termination of Mr. Loomis for cause, NEIs obligations pursuant to the agreement
were terminated. In addition to a judgment rescinding the stock purchase agreement and return of
the entire purchase price we had paid, we are seeking unspecified compensatory, consequential and
punitive damages, among other relief. On July 2, 2009, Mr. Loomis filed a motion to dismiss certain
of our claims. On July 24, 2009, Mr. Loomis motion to dismiss
18
our claims was denied in its entirety. Mr. Loomis also asserted counterclaims for an
unspecified amount not less than $10,350,000, alleging that NEI breached the employment agreement
by terminating him without cause and breached the stock purchase agreement by preventing him from
running NEI in such a way as to earn certain earn-out amounts. On January 14, 2010, we settled all
claims with Mr. Loomis and his sister, co-defendant Jenni Loomis. On January 26, 2010, prior to
final documentation of the settlement and transfer of the funds, Mr. Loomis filed for bankruptcy in
the United States Bankruptcy Court for the District of Arizona (the Bankruptcy Court). The
Virginia litigation thus was automatically stayed as related to Mr. Loomis. In furtherance of our
efforts to enforce the settlement agreement, we obtained a stay of the case as related to Jenni
Loomis as well. On April 22, 2010, the Bankruptcy Court granted our motion to modify the stay so
that we may seek a declaration from the U.S. District Court for the Eastern District of Virginia
that the settlement is enforceable.
On September 11, 2009, a putative class action complaint was filed against Intersections,
Inc., Intersections Insurance Services Inc., Loeb Holding Corp., Bank of America of America, NA,
Banc of America Insurance Services, Inc., American International Group, Inc., National Union Fire
Insurance Company of Pittsburgh, PA, and Global Contact Services, LLC, in the U.S. District Court
for the Southern District of Texas. The complaint alleges various claims based on telemarketing of
an accidental death and disability program. The defendants each have filed a motion to dismiss the
plaintiffs claims, and the motions are pending. We believe we have meritorious and complete
defenses to the plaintiffs claims. We believe, however, that it is too early in the litigation to
form an opinion as to the likelihood of success in defeating the claims.
On February 16, 2010, a putative class action complaint was filed against Intersections, Inc.,
Bank of America Corporation, and FIA Card Services, N.A., in the U.S. District Court for the
Northern District of California. The complaint alleges various claims based on the provision of
identity protection services to the named plaintiff. We believe we have meritorious and complete
defenses to the plaintiffs claims but believe that it is too early in the litigation to form an
opinion as to the likelihood of success in defeating the claims. Defendants filed answers to the
complaint on May 24, 2010.
13. Other Long-Term Liabilities
The components of our other long-term liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Deferred rent |
|
$ |
1,962 |
|
|
$ |
1,129 |
|
Uncertain tax positions, interest and penalties not recognized |
|
|
3,784 |
|
|
|
224 |
|
Interest rate swaps |
|
|
677 |
|
|
|
856 |
|
Accrued general and administrative expenses |
|
|
257 |
|
|
|
352 |
|
Other |
|
|
7 |
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
$ |
6,687 |
|
|
$ |
3,332 |
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010, we recorded a liability for an uncertain tax position in
a foreign jurisdiction of $3.6 million, including interest and penalties.
14. Debt and Other Financing
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Term loan |
|
$ |
11,083 |
|
|
$ |
14,583 |
|
Revolving line of credit |
|
|
23,000 |
|
|
|
23,000 |
|
Note payable to CRG: $1.4 million face amount,
noninterest bearing, due in three annual
payments of $467 thousand beginning June 30,
2012 (less unamortized discount, based on an
imputed interest rate of 16%, of $523 thousand
and $590 thousand at June 30, 2010 and December
31, 2009, respectively) |
|
|
877 |
|
|
|
810 |
|
|
|
|
|
|
|
|
|
|
|
34,960 |
|
|
|
38,393 |
|
Less current portion |
|
|
(7,000 |
) |
|
|
(7,000 |
) |
|
|
|
|
|
|
|
Total long term debt |
|
$ |
27,960 |
|
|
$ |
31,393 |
|
|
|
|
|
|
|
|
On July 3, 2006 we negotiated bank financing in the amount of $40 million (the Credit
Agreement). Under terms of the Credit Agreement, we were granted a $25 million line of credit and
a term loan of $15 million with interest at 1.00-1.75 percent over LIBOR. On January 31, 2008, we
amended the Credit Agreement in order to increase the term loan facility to $28 million. The
amended term
19
loan is payable in monthly installments of $583 thousand, plus interest. Substantially all our
assets and a pledge by us of stock and membership interests we hold in certain subsidiaries are
pledged as collateral to these loans. In addition, pursuant to the amendment, our subsidiaries
Captira and Net Enforcers were added as co-borrowers under the Credit Agreement. The amendment
provides that the maturity date for the revolving credit facility and the term loan facility under
the Credit Agreement will be December 31, 2011. In July 2009, we entered into a third amendment to
the Credit Agreement. The amendment related to the termination and ongoing operations of SI,
including the formation of a new domestic subsidiary Screening International Holdings, LLC (SIH),
the parent of SI, neither of which will join in the Credit Agreement as a co-borrower, and to
clarify other matters related to the termination of our joint ownership agreement with CRG and the
ongoing operations of SIH. We also formed Intersections Business Services, LLC, to provide services
to our Background Screening, Online Brand Protection and Bail Bonds Industry Solutions segments,
and which joined in the Credit Agreement as a co-borrower. On March 11, 2010, we entered into a
fourth amendment to the Credit Agreement. The amendment increased our interest rate by one percent
at each pricing level such that the interest rate now ranges from 2.00% to 2.75% over LIBOR. In
addition, the amendment increased our ability to invest additional funds into Screening
International, as well as required a portion of the proceeds from any disposition of that entity to
be paid to Bank of America, N.A. As of June 30, 2010, the outstanding rate was 1.4% and the
principal balance was $34.1 million. See Note 21 for further information.
The Credit Agreement contains certain customary covenants, including among other things
covenants that limit or restrict the incurrence of liens; the making of investments including at
SIH and its subsidiaries; the incurrence of certain indebtedness; mergers, dissolutions,
liquidation, or consolidations; acquisitions (other than certain permitted acquisitions); sales of
substantially all of our or any co-borrowers assets; the declaration of certain dividends or
distributions; transactions with affiliates (other than co-borrowers under the Credit Agreement)
other than on fair and reasonable terms; and the creation or acquisition of any direct or indirect
subsidiary of ours that is not a domestic subsidiary unless such subsidiary becomes a guarantor. We
are also required to maintain compliance with certain financial covenants which includes our
consolidated leverage ratios, consolidated fixed charge coverage ratios as well as customary
covenants, representations and warranties, funding conditions and events of default. We are
currently in compliance with all such covenants.
As further described in Note 15, we entered into interest rate swap transactions on our term
loan and revolving line of credit that converts our variable-rate debt to fixed-rate debt.
As further described in Note 19 on July 1, 2009, we and CRG agreed to terminate our existing
ownership agreement in SI and we acquired CRGs 45% ownership interest in SI, resulting in SI
becoming our wholly-owned subsidiary. As part of the termination, a $900 thousand demand loan
between SI and CRG was forgiven and a non-interest bearing $1.4 million note was issued by SIH to
CRG. The note matures in five years and requires equal annual payments by SIH of $467 thousand due
on June 30, 2012, 2013 and 2014. The note was recorded at fair value, which was $748 thousand, as
of July 1, 2009. Interest is being accrued monthly using a 16% imputed interest rate in accordance
with U.S. GAAP. For the three and six months ended June 30, 2010, $34 thousand and $67 thousand,
respectively, of interest was accrued on the note. The principal balance was $877 thousand and $810
thousand as of June 30, 2010 and December 31, 2009 respectively. See Note 21 for further
information regarding the disposition of this note.
Aggregate maturities are as follows (in thousands):
|
|
|
|
|
For the twelve month period ending June 30, |
|
|
|
|
2011 |
|
$ |
7,000 |
|
2012 |
|
|
27,550 |
|
2013 |
|
|
467 |
|
2014 |
|
|
467 |
|
|
|
|
|
Total |
|
$ |
35,484 |
|
|
|
|
|
15. Derivative Financial Instruments
Risk Management Strategy
We maintain an interest rate risk management strategy that incorporates the use of derivative
instruments to minimize the economic effect of interest rate changes. In 2008, we entered into
certain interest rate swap transactions that convert our variable-rate long-term debt to fixed-rate
debt. Our interest rate swaps are related to variable interest rate risk exposure associated with
our long-term debt and are intended to manage this risk. As of June 30, 2010, the interest rate
swaps on our outstanding term loan amount and a portion of our outstanding revolving line of credit
have notional amounts of $12.3 million and $10.0 million, respectively. The swaps
20
modify our interest rate exposure by effectively converting the variable rate on our term loan
(0.4% at June 30, 2010) to a fixed rate of 3.2% per annum through December 2011 and on our
revolving line of credit (0.4% at June 30, 2010) to a fixed rate of 3.4% per annum through December
2011. The notional amount of the term loan interest rate swap amortizes on a monthly basis through
December 2011 and the notional amount of the line of credit interest rate swap amortized from $15.0
million to $10.0 million through March 31, 2009 and terminates in December 2011. We use the monthly
LIBOR interest rate and have the intent and ability to continue to use this rate on our hedged
borrowings. Accordingly, we do not recognize any ineffectiveness on the swaps. For the three and
six months ended June 30, 2010 and 2009, there was no material ineffective portion of the hedge and
therefore, no impact to our condensed consolidated statements of operations.
Although we use derivatives to minimize interest rate risk, the use of derivatives does expose
us to both market and credit risk. Market risk is the chance of financial loss resulting from
changes in interest rates. Credit risk is the risk that our counterparty will not perform its
obligations under the contracts and it is limited to the loss of fair value gain in a derivative
that the counterparty owes us. We are currently in a liability position to the counterparty and,
therefore, have limited credit risk exposure to the counterparty. The counterparty to our
derivative agreements is a major financial institution for which we continually monitor its
position and credit ratings. We do not anticipate nonperformance by this financial institution.
Summary of Derivative Financial Statement Impact
As of June 30, 2010 and December 31, 2009 our interest rate contracts had a fair value of $677
thousand and $856 thousand, respectively, which is included in other long-term liabilities in our
condensed consolidated balance sheet. The following table summarizes the impact of derivative
instruments in our condensed consolidated statement of operations.
The Effect of Derivative Instruments on the Statement of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified from |
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) |
|
|
Accumulated OCI into |
|
Derivative in SFAS |
|
Amount of Gain or (Loss) |
|
|
Reclassified from |
|
|
Income (Ineffective |
|
No. 133 Cash Flow |
|
Recognized in OCI on |
|
|
Accumulated OCI into |
|
|
Portion and Amount |
|
Hedge Relationships |
|
Derivative (Effective |
|
|
Income (Effective |
|
|
Excluded from |
|
Three Months Ended |
|
Portion) |
|
|
Portion) |
|
|
Effectiveness Testing) |
|
June 30, |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
In thousands of dollars |
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
122 |
|
|
$ |
271 |
|
|
$ |
(174 |
) |
|
$ |
(216 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
122 |
|
|
$ |
271 |
|
|
$ |
(174 |
)(1) |
|
$ |
(216 |
)(1) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified from |
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) |
|
|
Accumulated OCI into |
|
Derivative in SFAS |
|
Amount of Gain or (Loss) |
|
|
Reclassified from |
|
|
Income (Ineffective |
|
No. 133 Cash Flow |
|
Recognized in OCI on |
|
|
Accumulated OCI into |
|
|
Portion and Amount |
|
Hedge Relationships |
|
Derivative (Effective |
|
|
Income (Effective |
|
|
Excluded from |
|
Six Months Ended |
|
Portion) |
|
|
Portion) |
|
|
Effectiveness Testing) |
|
June 30, |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
In thousands of dollars |
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
$ |
179 |
|
|
$ |
304 |
|
|
$ |
(356 |
) |
|
$ |
(461 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
179 |
|
|
$ |
304 |
|
|
$ |
(356 |
)(1) |
|
$ |
(461 |
)(1) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Gain or (Loss) Reclassified from Accumulated OCI into income for the effective portion of the
cash flow hedge is recorded in interest expense in our condensed consolidated statement of
operations. |
16. Income Taxes
Our consolidated effective tax rate for the three months ended June 30, 2010 and 2009 was
40.4% and (3.7%), respectively. Our consolidated effective tax rate for the six months ended June
30, 2010 and 2009 was 48.3% and (12.8%), respectively. The change is primarily due to an increase
in book income and the utilization of domestic operating losses incurred in the Background
Screening segment due to the acquisition of the remaining non-controlling interest in this segment
in the year ended December 31, 2009. As of June 30, 2010, we continued to have a valuation
allowance against the foreign deferred tax assets of the Background Screening
segment.
21
In addition, the liability increased by approximately $3.2 million primarily related to an
uncertain tax position in a foreign jurisdiction in the six months ended June 30, 2010. This
liability is recorded in other long-term liabilities in our condensed consolidated balance sheet.
We record income tax penalties related to uncertain tax positions as part of our income tax expense
in our condensed consolidated financial statements. We record interest expense related to uncertain
tax positions as part of interest expense in our condensed consolidated financial statements. In
the three months ended June 30, 2010, we recorded interest of $24 thousand primarily due to the
uncertain tax position in a foreign jurisdiction. In the six months ended June 30, 2010, we
recorded penalties of $219 thousand and interest of $210 thousand primarily due to the uncertain
tax position in a foreign jurisdiction. The penalties and interest, net of federal benefit,
increased the effective tax rate in the three and six months ended June 30, 2010.
17. Stockholders Equity
Share Repurchase
On April 25, 2005, our Board of Directors authorized a share repurchase program under which we
can repurchase up to $20 million of our outstanding shares of common stock from time to time,
depending on market conditions, share price and other factors. The repurchases may be made on the
open market, in block trades, through privately negotiated transactions or otherwise, and the
program may be suspended or discontinued at any time. We did not repurchase shares in the three and
six months ended June 30, 2010 and 2009. See Note 22 for
further information on the share repurchase program.
Share Based Compensation
On August 24, 1999, the Board of Directors and stockholders approved the 1999 Stock Option
Plan (the 1999 Plan). The active period for this plan expired on August 24, 2009. The number of
shares of common stock that have been issued under the 1999 Plan could not exceed 4.2 million
shares pursuant to an amendment to the plan executed in November 2001. As of June 30, 2010, there
were 525 thousand shares outstanding. Individual awards under the 1999 Plan took the form of
incentive stock options and nonqualified stock options.
On March 12, 2004 and May 5, 2004, the Board of Directors and stockholders, respectively,
approved the 2004 Stock Option Plan (the 2004 Plan) to be effective immediately prior to the
consummation of the initial public offering. The 2004 Plan provides for the authorization to issue
2.8 million shares of common stock, of which 136 thousand shares are remaining to issue. As of June
30, 2010, we also have 136 thousand shares outstanding. Individual awards under the 2004 Plan may
take the form of incentive stock options and nonqualified stock options. Option awards are
generally granted with an exercise price equal to the market price of our stock at the date of
grant; those option awards generally vest over three and four years of continuous service and have
ten year contractual terms.
On March 8, 2006 and May 24, 2006, the Board of Directors and stockholders, respectively,
approved the 2006 Stock Incentive Plan (the 2006 Plan). The number of shares of common stock that
may be issued under the 2006 Plan may not exceed 5.1 million shares pursuant to an amendment to the
plan executed in May 2009. As of June 30, 2010, we have 924 thousand shares or restricted stock
units remaining to issue and options to purchase 4.1 million shares and restricted stock units
outstanding. Individual awards under the 2006 Plan may take the form of incentive stock options,
nonqualified stock options, restricted stock awards and/or restricted stock units. These awards
generally vest over four years of continuous service.
The Compensation Committee administers the Plans, selects the individuals who will receive
awards and establishes the terms and conditions of those awards. Shares of common stock subject to
awards that have expired, terminated, or been canceled or forfeited are available for issuance or
use in connection with future awards.
The 1999 Plan active period expired on August 24, 2009, the 2004 Plan will remain in effect
until May 5, 2014, and the 2006 Plan will remain in effect until March 7, 2016, unless terminated
by the Board of Directors.
Stock Options
Total share-based compensation expense recognized for stock options, which is included in
general and administrative expense in our condensed consolidated statement of operations, for the
three months ended June 30, 2010 and 2009 was $590 thousand and $563 thousand, respectively. Total
share-based compensation expense recognized for stock options, which is included in general and
22
administrative expense in our condensed consolidated statement of operations, for the six
months ended June 30, 2010 and 2009 was $1.2 million and $1.0 million, respectively.
The following table summarizes our stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Remaining |
|
|
|
Number of |
|
|
Exercise |
|
|
Aggregate |
|
|
Contractual |
|
|
|
Shares |
|
|
Price |
|
|
Intrinsic Value |
|
|
Term |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
(In years) |
|
Outstanding at December 31, 2009 |
|
|
3,806,052 |
|
|
$ |
6.49 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
719,335 |
|
|
|
4.32 |
|
|
|
|
|
|
|
|
|
Canceled and Forfeited |
|
|
(174,135 |
) |
|
|
6.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
4,351,252 |
|
|
$ |
6.14 |
|
|
$ |
1,653 |
|
|
|
7.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010 |
|
|
1,494,474 |
|
|
$ |
8.70 |
|
|
$ |
420 |
|
|
|
5.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted during the three months ended June 30, 2010. The weighted
average grant date fair value of options granted, based on the Black-Scholes method, during the
three months ended June 30, 2009 was $1.23. The weighted average grant date fair value of options
granted, based on the Black-Scholes method, during the six months ended June 30, 2010 and 2009 was
$2.75 and $1.76, respectively.
For options exercised, intrinsic value is calculated as the difference between the market
price on the date of exercise and the exercise price. There were no options exercised in the three
and six months ended June 30, 2010 and 2009.
As of June 30, 2010, there was $6.8 million of total unrecognized compensation cost related to
nonvested stock option arrangements granted under the Plans. That cost is expected to be recognized
over a weighted-average period of 2.9 years.
Restricted Stock Units
Total share based compensation recognized for restricted stock units, which is included in
general and administrative expense in our condensed consolidated statement of operations, for the
three months ended June 30, 2010 and 2009 was $775 thousand and $507 thousand, respectively. Total
share based compensation recognized for restricted stock units for the six months ended June 30,
2010 and 2009 was $1.6 million and $1.0 million, respectively.
The following table summarizes our restricted stock unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Weighted-Average |
|
|
Remaining |
|
|
|
Number of |
|
|
Grant Date |
|
|
Contractual |
|
|
|
RSUs |
|
|
Fair Value |
|
|
Life |
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
Outstanding at December 31, 2009 |
|
|
1,562,108 |
|
|
$ |
4.32 |
|
|
|
|
|
Granted |
|
|
1,010,205 |
|
|
|
4.32 |
|
|
|
|
|
Canceled |
|
|
(236,801 |
) |
|
|
4.55 |
|
|
|
|
|
Vested |
|
|
(372,938 |
) |
|
|
5.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
1,962,574 |
|
|
$ |
4.61 |
|
|
|
3.05 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, there was $7.8 million of total unrecognized compensation cost related to
unvested restricted stock units compensation arrangements granted under the Plans. That cost is
expected to be recognized over a weighted-average period of 2.8 years.
In the three months ended March 31, 2010, two restricted stock unit grants, at the vesting
date, were paid in cash rather that stock, to recipients at our election. Total cash paid was $970
thousand, which did not exceed the fair value on the settlement date.
18. Related Party Transactions
We have a minority investment in White Sky, Inc. (White Sky) and a commercial agreement
to incorporate and market their product into our fraud and identity theft protection product
offerings. For the three months ended June 30, 2010 and 2009, there was
23
$375 thousand and $441 thousand, respectively, included in cost of revenue in our
condensed consolidated statement of operations related to royalties for exclusivity and product
costs. For the six months ended June 30, 2010 and 2009, there was $926 thousand and $613 thousand,
respectively, included in cost of revenue in our condensed consolidated statement of operations
related to royalties for exclusivity and product costs.
19. Transfers from Noncontrolling Interest
On July 1, 2009, we and CRG terminated our May 15, 2006 ownership agreement pursuant to which
we established and operated SI. In connection with the termination, we formed SIH, which purchased
from CRG (a) all of CRGs equity in SI and (b) all of SIs indebtedness (with an aggregate
principal amount and accrued interest of $1.0 million) and certain payables (with a value of $125
thousand (based on current currency conversion rates)) to CRG. SIH paid the purchase price for this
equity and indebtedness by delivery of a promissory note in favor of CRG with a principal amount of
$1.4 million, accruing no interest and maturing in five years, with equal principal repayments due
on June 30, 2012, June 30, 2013 and June 30, 2014. See Note 21 for further detail on the
disposition of SI and the note payable with CRG.
Changes in a parents ownership interest in which the parent retains its controlling financial
interest in its subsidiary are accounted for as an equity transaction. The carrying amount of the
noncontrolling interest was adjusted to reflect the change in our ownership interest in SIH. The
difference between the fair value of the consideration received or paid and the amount by which the
noncontrolling interest were adjusted were recognized in our stockholders equity. As a result of
the transaction, we reclassified the noncontrolling interest to stockholders equity in our
condensed consolidated financial statements.
20. Segment and Geographic Information
We have four reportable segments through the period ended June 30, 2010. In 2009, we changed
our segment reporting by realigning a portion of our Other segment into the Consumer Products and
Services segment. Our Consumer Products and Services segment includes our consumer protection and
other consumer products and services. This segment consists of identity theft management tools,
services from our relationship with a third party that administers referrals for identity theft to
major banking institutions and breach response services, membership product offerings and other
subscription based services such as life and accidental death insurance. Our Online Brand
Protection segment includes corporate brand protection provided by Net Enforcers. Our Bail Bonds
Industry Solutions segment includes the software management solutions for the bail bond industry
provided by Captira Analytical. In addition, until the sale of SI on July 19, 2010, our Background
Screening segment included the personnel and vendor background screening services provided by SI.
We have recasted the results of our business segment data for the three and six months ended
June 30, 2009 into the new operating segments for comparability with current presentation. The
following table sets forth segment information for the three and six months ended June 30, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
Bail Bonds |
|
|
|
|
|
|
Products |
|
|
Background |
|
|
Online Brand |
|
|
Industry |
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Protection |
|
|
Solutions |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
91,507 |
|
|
$ |
6,746 |
|
|
$ |
496 |
|
|
$ |
123 |
|
|
$ |
98,872 |
|
Depreciation |
|
|
1,955 |
|
|
|
203 |
|
|
|
5 |
|
|
|
|
|
|
|
2,163 |
|
Amortization |
|
|
1,870 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
1,877 |
|
Income (loss) before income taxes
and noncontrolling interest |
|
$ |
8,561 |
|
|
$ |
593 |
|
|
$ |
(94 |
) |
|
$ |
(375 |
) |
|
$ |
8,685 |
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
85,182 |
|
|
$ |
4,511 |
|
|
$ |
520 |
|
|
$ |
104 |
|
|
$ |
90,317 |
|
Goodwill impairment charges |
|
|
|
|
|
|
5,949 |
|
|
|
|
|
|
|
|
|
|
|
5,949 |
|
Depreciation |
|
|
1,734 |
|
|
|
218 |
|
|
|
2 |
|
|
|
8 |
|
|
|
1,962 |
|
Amortization |
|
|
1,934 |
|
|
|
116 |
|
|
|
17 |
|
|
|
107 |
|
|
|
2,174 |
|
Income (loss) before income taxes
and noncontrolling interest |
|
$ |
3,308 |
|
|
$ |
(6,785 |
) |
|
$ |
(1,586 |
) |
|
$ |
(507 |
) |
|
$ |
(5,570 |
) |
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
182,425 |
|
|
$ |
11,846 |
|
|
$ |
959 |
|
|
$ |
231 |
|
|
$ |
195,461 |
|
Depreciation |
|
|
4,046 |
|
|
|
415 |
|
|
|
10 |
|
|
|
|
|
|
|
4,471 |
|
Amortization |
|
|
4,162 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
4,176 |
|
Income (loss) before income taxes
and noncontrolling interest |
|
$ |
9,351 |
|
|
$ |
(239 |
) |
|
$ |
(402 |
) |
|
$ |
(771 |
) |
|
$ |
7,939 |
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
167,346 |
|
|
$ |
8,945 |
|
|
$ |
1,120 |
|
|
$ |
175 |
|
|
$ |
177,586 |
|
Goodwill impairment charges |
|
|
|
|
|
|
6,163 |
|
|
|
|
|
|
|
|
|
|
|
6,163 |
|
Depreciation |
|
|
3,660 |
|
|
|
435 |
|
|
|
4 |
|
|
|
13 |
|
|
|
4,112 |
|
Amortization |
|
|
4,092 |
|
|
|
243 |
|
|
|
34 |
|
|
|
213 |
|
|
|
4,582 |
|
Income (loss) before income taxes
and noncontrolling interest |
|
$ |
5,482 |
|
|
$ |
(9,476 |
) |
|
$ |
(1,709 |
) |
|
$ |
(1,029 |
) |
|
$ |
(6,732 |
) |
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
Bail Bonds |
|
|
|
|
|
|
Products |
|
|
Background |
|
|
Online Brand |
|
|
Industry |
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Protection |
|
|
Solutions |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
14,548 |
|
|
$ |
2,035 |
|
|
$ |
28 |
|
|
$ |
34 |
|
|
$ |
16,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
163,565 |
|
|
$ |
17,098 |
|
|
$ |
11,757 |
|
|
$ |
3,548 |
|
|
$ |
195,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
15,553 |
|
|
$ |
2,212 |
|
|
$ |
37 |
|
|
$ |
|
|
|
$ |
17,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
|
$ |
165,995 |
|
|
$ |
14,016 |
|
|
$ |
9,210 |
|
|
$ |
2,950 |
|
|
$ |
192,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information concerning the revenues and total assets of principal geographic areas are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
United Kingdom |
|
Other |
|
Consolidated |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2010
|
|
$ |
96,961 |
|
|
$ |
1,729 |
|
|
$ |
182 |
|
|
$ |
98,872 |
|
For the three months ended June 30, 2009
|
|
|
89,274 |
|
|
|
981 |
|
|
|
62 |
|
|
|
90,317 |
|
For the six months ended June 30, 2010
|
|
|
192,303 |
|
|
|
2,846 |
|
|
|
312 |
|
|
|
195,461 |
|
For the six months ended June 30, 2009
|
|
|
175,451 |
|
|
|
2,024 |
|
|
|
111 |
|
|
|
177,586 |
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
$ |
190,349 |
|
|
$ |
5,385 |
|
|
$ |
234 |
|
|
$ |
195,968 |
|
As of December 31, 2009
|
|
|
187,040 |
|
|
|
5,029 |
|
|
|
102 |
|
|
|
192,171 |
|
21. Discontinued Operations
On July 19, 2010 we and SIH, entered into a membership interest purchase agreement with
Sterling Infosystems, Inc., pursuant to which SIH sold, and Sterling acquired, 100% of
the membership interests of SI for an aggregate purchase price of $15.0 million in cash plus
adjustments for working capital and other items. SIH is not an operating subsidiary and our
background screening services ceased upon the sale of SI. The sale is subject to customary
representations, warranties, indemnifications, escrow and a further post-closing working capital
adjustment.
We evaluated the segment disposal for classification as held for sale under U.S. GAAP. We do
not believe we met all the criteria required for held for sale classification or discontinued
operations as of the balance sheet date. At the balance sheet date, management could not fully
commit to sell the subsidiary without a formal Board of Director approval providing authorization
to execute the transaction. This formal authorization to execute the transaction occurred after
June 30, 2010. Our corporate governance policies require Board of Directors approval to
completely commit and execute a sale of a long-lived asset, such as a subsidiary.
The carrying value for SI, as of June 30, 2010, was ($2.4) million. We expect to recognize a
gain on the disposition of our subsidiary in the third quarter of 2010.
As a result of the sale, we remitted $1.4 million in full payment of a note payable entered
into between SIH and CRG in 2009. We believe the payment of this note payable will result in a
loss from debt extinguishment as the note payable is recorded at fair value under U.S. GAAP. We
plan to record this loss from debt extinguishment and present the segment as held for sale and
discontinued operations in the third quarter of 2010.
22. Subsequent Events
On July 1, 2010 we entered into additional capital lease agreements for fixed assets of
approximately $3.6 million. We will record the lease liability at the fair market value of the
underlying assets in our condensed consolidated balance sheet.
On July 30, 2010, as a result of the proceeds received from the disposition of SI, we prepaid
the remaining balance and accrued interest on the term loan under our Credit Agreement of
approximately $11.2 million. We are currently evaluating the impact, if any, the prepayment has on
the accounting for the respective interest rate swap.
25
On August 12, 2010, we announced a cash dividend of $.15 per share on our common stock, payable on
September 10, 2010 to stockholders of record as of August 31, 2010.
On August 12, 2010, we announced that our Board of Directors had increased the authorized
amount under our existing share repurchase program to a total of $30.0 million of our common
shares. This represents an increase of approximately
$10.0 million with approximately $20.5
million remaining in the program. Repurchase under the program may be made in open market or
privately negotiated transactions or otherwise, from time to time, depending on market conditions.
|
|
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Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward Looking Statements
Certain written and oral statements made by or on our behalf may constitute forward-looking
statements as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases
such as should result, are expected to, we anticipate, we estimate, we project, or
similar expressions are intended to identify forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to differ materially
from those expressed in any forward-looking statements. These risks and uncertainties include, but
are not limited to, those disclosed in our Annual Report on Form 10-K for the year ended December
31, 2009 filed on March 16, 2010, and our quarterly and current reports filed with the Securities
and Exchange Commission and the following important factors: demand for our services, general
economic conditions, including the effects of the recession in the U.S. and the worldwide economic
slowdown, recent disruptions to the credit and financial markets in the U.S. and worldwide,
economic conditions specific to our financial institutions clients, product development,
maintaining acceptable margins, maintaining secure systems, ability to control costs, the impact of
federal, state and local regulatory requirements on our business, specifically the consumer credit
market, the impact of competition, ability to continue our long-term business strategy including
growth through acquisition, ability to attract and retain qualified personnel and the uncertainty
of economic conditions in general.
Readers are cautioned not to place undue reliance on forward-looking statements, since the
statements speak only as of the date that they are made, and we undertake no obligation to publicly
update these statements based on events that may occur after the date of this report.
Overview
We have four reportable segments through the period ended June 30, 2010: Consumer Products and
Services, Background Screening, Online Brand Protection and Bail Bonds Industry Solutions. In 2009,
we changed our segment reporting by realigning a portion of our Other segment into the Consumer
Products and Services segment. Our Consumer Products and Services segment includes our consumer
protection and other consumer products and services. This segment consists of identity theft
management tools, services from our relationship with a third party that administers referrals for
identity theft to major banking institutions and breach response services, membership product
offerings and other subscription based services such as life and accidental death insurance. Our
Online Brand Protection segment includes corporate brand protection provided by Net Enforcers. Our
Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond
industry provided by Captira Analytical. In addition, until the sale of SI on July 19, 2010, our
Background Screening segment included the personnel and vendor background screening services
provided by SI.
On August 12, 2010, we announced that our Board of Directors had increased the authorized
amount under our existing share repurchase program to a total of $30.0 million of our common
shares. This represents an increase of approximately
$10.0 million with approximately $20.5
million remaining in the program. Repurchase under the program may be made in open market or
privately negotiated transactions or otherwise, from time to time, depending on market conditions.
Consumer Products and Services
We offer consumers a variety of consumer protection services and other consumer products and
services primarily on a subscription basis. Our services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information. Through our subsidiary, Intersections Insurance Services, we offer a portfolio of
services to include consumer discounts on healthcare, home, and auto related expenses, access to
professional financial and legal information, and life, accidental death and disability insurance
products. Our consumer services are offered through relationships with clients, including many of
the largest financial institutions in the United States and Canada, and clients in other
industries.
Our products and services are marketed to customers of our clients, and often are branded and
tailored to meet our clients specifications. Our clients are principally credit card, direct
deposit or mortgage issuing financial institutions, including many of the largest financial
institutions in the United States and Canada. With certain of our financial institution clients, we
have broadened our marketing efforts to access demand deposit accounts. Our financial institution
clients currently account for the majority of our existing subscriber base. We also are continuing
to augment our client base through relationships with insurance companies, mortgage companies,
brokerage companies, associations, travel companies, retail companies, web and technology companies
and other service providers with significant market presence and brand loyalty.
With our clients, our services are marketed to potential subscribers through a variety of
marketing channels, including direct mail, outbound telemarketing, inbound telemarketing, inbound
customer service and account activation calls, email, mass media and the Internet. Our marketing
arrangements with our clients sometimes call for us to fund and manage marketing activity. The mix
between our company-funded and client-funded marketing programs varies from year to year based upon
our and our clients strategies.
26
We conduct our consumer direct marketing primarily through the Internet and broadcast media.
We also may market through other channels, including direct mail, outbound telemarketing, inbound
telemarketing and email. We expect to continue our investment in marketing in 2010 in our direct to
consumer business.
Our client arrangements are distinguished from one another by the allocation between us and
the client of the economic risk and reward of the marketing campaigns. The general characteristics
of each arrangement are described below, although the arrangements with particular clients may
contain unique characteristics:
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|
|
Direct marketing arrangements: Under direct marketing arrangements, we bear most of the
new subscriber marketing costs and pay our client a commission for revenue derived from
subscribers. These commissions could be payable upfront in a lump sum on a per subscriber
basis for the subscribers enrollment, periodically over the life of a subscriber, or
through a combination of both. These arrangements generally result in negative cash flow
over the first several months after a program is launched due to the upfront nature of the
marketing investments. In some arrangements, we pay the client a service fee for access to
the clients customers or billing of the subscribers by the client, and we may reimburse the
client for certain of its out-of-pocket marketing costs incurred in obtaining the
subscriber. |
|
|
|
|
Indirect marketing arrangements: Under indirect marketing arrangements, our client bears
the marketing expense and pays us a service fee or percentage of the revenue. Because the
subscriber acquisition cost is borne by our client under these arrangements, our revenue per
subscriber is typically lower than that under direct marketing arrangements. Indirect
marketing arrangements generally provide positive cash flow earlier than direct arrangements
and the ability to obtain subscribers and utilize marketing channels that the clients
otherwise may not make available. |
|
|
|
|
Shared marketing arrangements: Under shared marketing arrangements, marketing expenses
are shared by us and the client in various proportions, and we may pay a commission to or
receive a service fee from the client. Revenue generally is split relative to the investment
made by our client and us. |
The classification of a client relationship as direct, indirect or shared is based on whether
we or the client pay the marketing expenses. Our accounting policies for revenue recognition,
however, are not based on the classification of a client arrangement as direct, indirect or shared.
We look to the specific client arrangement to determine the appropriate revenue recognition policy,
as discussed in detail in Note 2 to our condensed consolidated financial statements.
Our typical contracts for direct marketing arrangements, and some indirect and shared
marketing arrangements, provide that, after termination of the contract, we may continue to provide
our services to existing subscribers, for periods ranging from two years to no specific termination
period, under the economic arrangements that existed at the time of termination. Under certain of
our agreements, however, including most indirect marketing arrangements and some shared marketing
arrangements, the clients may require us to cease providing services under existing subscriptions.
Clients under some contracts may also require us to cease providing services to their customers
under existing subscriptions if the contract is terminated for material breach by us.
The following table details other selected subscriber and financial data.
Other Data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Subscribers at beginning of period |
|
|
4,238 |
|
|
|
4,536 |
|
|
|
4,301 |
|
|
|
4,730 |
|
New subscribers indirect |
|
|
191 |
|
|
|
241 |
|
|
|
420 |
|
|
|
451 |
|
New subscribers direct (1) |
|
|
293 |
|
|
|
572 |
|
|
|
765 |
|
|
|
1,121 |
|
Cancelled subscribers within first 90 days of subscription |
|
|
(203 |
) |
|
|
(244 |
) |
|
|
(443 |
) |
|
|
(460 |
) |
Cancelled subscribers after first 90 days of subscription |
|
|
(412 |
) |
|
|
(638 |
) |
|
|
(936 |
) |
|
|
(1,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscribers at end of period |
|
|
4,107 |
|
|
|
4,467 |
|
|
|
4,107 |
|
|
|
4,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
98,872 |
|
|
$ |
90,317 |
|
|
$ |
195,461 |
|
|
$ |
177,586 |
|
Revenue from transactional sales |
|
|
(7,938 |
) |
|
|
(5,624 |
) |
|
|
(13,874 |
) |
|
|
(11,405 |
) |
Revenue from lost/stolen credit card registry |
|
|
(7 |
) |
|
|
(17 |
) |
|
|
(16 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue |
|
$ |
90,927 |
|
|
$ |
84,676 |
|
|
$ |
181,571 |
|
|
$ |
166,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
$ |
42,493 |
|
|
$ |
42,131 |
|
|
$ |
90,391 |
|
|
$ |
83,025 |
|
Commissions paid on transactional sales |
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
Commissions paid on lost/stolen credit card registry |
|
|
(22 |
) |
|
|
(18 |
) |
|
|
(34 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions associated with subscription revenue |
|
$ |
42,471 |
|
|
$ |
42,112 |
|
|
$ |
90,356 |
|
|
$ |
82,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We classify subscribers from shared marketing arrangements with direct marketing
arrangements. |
27
Subscription revenue, net of marketing and commissions associated with subscription revenue,
is a non-GAAP financial measure that we believe is important to investors and one that we utilize
in managing our business as subscription revenue normalizes the effect of changes in the mix of
indirect and direct marketing arrangements.
Background Screening
Through our subsidiary, Screening International, we provided a variety of risk management
tools for the purpose of personnel and vendor background screening services, including criminal
background checks, driving records, employment verification and reference checks, drug testing and
credit history checks to businesses worldwide. Our background screening services integrated data
from various automated sources throughout the world, additional manual research findings from
employees and subcontractors, and internal business logic that assists in decision making. Our
background screening services were generally sold to corporate clients under contractual
arrangements with individual per unit prices for specific service specifications. Due to
substantial differences in both service specifications and associated data acquisition costs, prices
for our background screening services varied significantly among clients and geographies.
Our clients included leading US, UK and global companies in such areas as manufacturing,
staffing and recruiting agencies, financial services, retail and transportation. Our clients were
primarily located in the US and the UK. Several of our clients have operations in other countries,
and use our services in connection with those operations. We had other clients in various
countries, and expected the number of these clients to increase as we developed our global
background screening business. Because we serviced the majority of our clients through our
operations in the US and the UK, we considered those two locations to be the sources of our
business for purposes of allocating revenue on a geographic basis.
We generally marketed our background screening services to businesses through an internal
sales force. Our services were offered to businesses on a local or global basis. Prices for our
services varied based upon complexity of the services offered, the cost of performing these
services and competitive factors. Control Risks Group, Ltd, our former business partner, provided
marketing assistance and services and licensed certain trademarks to Screening International, under
which our services were branded in certain geographic areas.
On July 19, 2010 we and SIH, entered into a membership interest purchase agreement with
Sterling Infosystems, Inc. (Sterling), pursuant to which SIH sold, and Sterling acquired, 100% of
the membership interests of SI for an aggregate purchase price of $15.0 million in cash plus
adjustments for working capital and other items. SIH is not an operating subsidiary and our
background screening services ceased upon the sale of SI. The sale is subject to customary
representations, warranties, indemnifications, escrow and a further post-closing working capital
adjustment.
Online Brand Protection
Through our subsidiary, Net Enforcers, we provide online brand protection services including
online channel monitoring, auction monitoring, forum, blog and newsgroup monitoring and other
services. Net Enforcers services include the use of technology and operations staff to search the
Internet for instances of our clients brands and/or specific products, categorize each instance as
potentially threatening to our clients based upon client provided criteria, and report our findings
back to our clients. Net Enforcers also offers additional value added services to assist our
clients to take actions to remediate perceived threats detected online. Net Enforcers services are
typically priced as monthly subscriptions for a defined set of monitoring services, as well as per
transaction charges for value added communications services. Prices for our services vary based
upon the specific configuration of services purchased by each client and range from several hundred
dollars per month to tens of thousands of dollars per month.
Bail Bonds Industry Solutions
Through our subsidiary, Captira Analytical, we provide automated service solutions for the
bail bonds industry. These services include accounting, reporting, and decision making tools which
allow bail bondsmen, general agents and sureties to run their offices more efficiently, to exercise
greater operational and financial control over their businesses, and to make better underwriting
decisions. We believe Captira Analyticals services are the only fully integrated suite of bail
bonds management applications of comparable scope available in the marketplace today. Captira
Analyticals services are sold to retail bail bondsman on a per seat license basis plus
additional one-time or recurring charges for various optional services. Captira Analytical has also
developed a suite of services
28
for bail bonds insurance companies, general agents and sureties which are also sold on either
a transactional or recurring revenue basis. As Captira Analyticals business model is relatively
new, pricing and service configurations are subject to change at any time.
Critical Accounting Policies
Management Estimates
In preparing our condensed consolidated financial statements, we make estimates and
assumptions that can have a significant impact on our financial position and results of operations.
The application of our critical accounting policies requires an evaluation of a number of complex
criteria and significant accounting judgments by us. In applying those policies, our management
uses its judgment to determine the appropriate assumptions to be used in the determination of
certain estimates. Actual results may differ significantly from these estimates under different
assumptions, judgments or conditions. We have identified the following policies as critical to our
business operations and the understanding of our results of operations. For further information on
our critical and other accounting policies, see Note 2 to our condensed consolidated financial
statements.
Goodwill, Identifiable Intangibles and Other Long Lived Assets
We record, as goodwill, the excess of the purchase price over the fair value of the
identifiable net assets acquired in purchase transactions. We review our goodwill for impairment
annually and follow the two step process. We test goodwill annually as of October 31, or more
frequently if indicators of impairment exist. Goodwill has been assigned to our reporting units for
purposes of impairment testing. As of June 30, 2010, goodwill of $43.2 million and $3.7 million
resided in our Consumer Products and Services and Background Screening reporting units,
respectively.
A significant amount of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include, among others (a) a significant decline in our expected
future cash flows; (b) a sustained, significant decline in our stock price and market
capitalization; (c) a significant adverse change in legal factors or in the business climate; (d)
unanticipated competition; (e) the testing for recoverability of a significant asset group within a
reporting unit; and (f) slower growth rates. Any adverse change in these factors could have a
significant impact on the recoverability of these assets and could have a material impact on our
condensed consolidated financial statements.
The goodwill impairment test involves a two-step process. The first step is a comparison of
each reporting units fair value to its carrying value. We estimate fair value using the best
information available, using a combined income (discounted cash flow) valuation model and market
based approach. The market approach measures the value of an entity through an analysis of recent
sales or offerings of comparable companies. The income approach measures the value of the reporting
units by the present values of its economic benefits. These benefits can include revenue and cost
savings. Value indications are developed by discounting expected cash flows to their present value
at a rate of return that incorporates the risk-free rate for use of funds, trends within the
industry, and risks associated with particular investments of similar type and quality as of the
valuation date.
The estimated fair value of our reporting units is dependent on several significant
assumptions, including our earnings projections, and cost of capital (discount rate). The
projections use managements best estimates of economic and market conditions over the projected
period including business plans, growth rates in sales, costs, estimates of future expected changes
in operating margins and cash expenditures. Other significant estimates and assumptions include
terminal value growth rates, future estimates of capital expenditures and changes in future working
capital requirements. There are inherent uncertainties related to these factors and managements
judgment in applying each to the analysis of the recoverability of goodwill.
We estimate fair value giving consideration to both the income and market approaches.
Consideration is given to the line of business and operating performance of the entities being
valued relative to those of actual transactions, potentially subject to corresponding economic,
environmental, and political factors considered to be reasonable investment alternatives.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the
reporting unit is not impaired and the second step of the impairment test is not necessary. If the
carrying value of the reporting unit exceeds its estimated fair value, then the second step of the
goodwill impairment test must be performed. The second step of the goodwill impairment test
compares the implied fair value of the reporting units goodwill with its goodwill carrying value
to measure the amount of impairment charge, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In
other words, the estimated fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of that reporting
29
unit was the purchase price paid. If the carrying value of the reporting units goodwill
exceeds the implied fair value of that goodwill, an impairment charge is recognized in an amount
equal to that excess.
We reviewed all impairment indicators with regards to goodwill and we concluded that for the
three and six months ended
June 30, 2010, there were no adverse changes in these indicators which would cause a need for
an interim goodwill impairment analysis. Therefore, we were not required to perform a goodwill
analysis during the second quarter of 2010.
Due to the deterioration in the general economic environment and decline in our market
capitalization through June 30, 2009, we concluded a triggering event had occurred indicating
potential impairment in our Background Screening reporting unit. We determined, in the first step
of our goodwill impairment analysis performed as of June 30, 2009, that goodwill in the Background
Screening reporting unit was impaired. The goodwill impairment test involves a two-step process.
The first step is a comparison of each reporting units fair value to its carrying value. We
calculated the value of our reporting units by utilizing an income and market based approach. The
value under the income approach is developed by discounting the projected future cash flows to
present value. The reporting units discounted cash flows require significant management judgment
with respect to revenue, earnings, capital expenditures and the selection and use of an appropriate
discount rate. The discounted cash flows are based on our annual business plan or other forecasted
results. Discount rates reflect market-based estimates of the risks associated with the projected
cash flows directly resulting from the use of those assets in operations. However, the comparison
of the values calculated using the income and market based approach to our market capitalization
resulted in a value significantly in excess of our market capitalization. We therefore
proportionally allocated the market capitalization, including a reasonable control premium, to the
reporting units to determine the implied fair value of the reporting units. The carrying value of
our Background Screening reporting unit exceeded its implied fair value based on this analysis as
of June 30, 2009, which resulted in an impairment of goodwill in our Background Screening reporting
unit.
The second step of the impairment test required us to allocate the fair value of the reporting
unit derived in the first step to the fair value of the reporting units net assets. Goodwill was
written down to its implied fair value for our Background Screening reporting unit. For the three
months ended June 30, 2009 we recorded an impairment charge of $5.9 million in our Background
Screening reporting unit.
In addition, during the three months ended March 31, 2009, we finalized our calculation for
the second step of our goodwill impairment test, in which the first step was performed during the
year ended December 31, 2008. Based on the finalization of this second step, we recorded an
additional impairment charge of $214 thousand in our Background Screening reporting unit in the
three months ended March 31, 2009.
We will continue to monitor our market capitalization, along with other operational
performance measures and general economic conditions. A downward trend in one or more of these
factors could cause us to reduce the estimated fair value of our reporting units and recognize a
corresponding impairment of our goodwill in connection with a future goodwill impairment test.
Our Consumer Products and Services reporting unit has $43.2 million of remaining goodwill as
of June 30, 2010. Our Background Screening reporting unit had $3.7 million of goodwill remaining as
of June 30, 2010. We may not be able to take sufficient cost containment actions to maintain our
current operating margins in the future. In addition, due to the concentration of our significant
clients in the financial industry, any significant impact to a contract held by a major client may
have an effect on future revenue which could lead to additional impairment charges.
We review long-lived assets, including finite-lived intangible assets, property and equipment
and other long term assets, for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be fully recoverable. Significant judgments in this
area involve determining whether a triggering event has occurred and determining the future cash
flows for assets involved. In conducting our analysis, we compared the undiscounted cash flows
expected to be generated from the long-lived assets to the related net book values. If the
undiscounted cash flows exceed the net book value, the long-lived assets are considered not to be
impaired. If the net book value exceeds the undiscounted cash flows, an impairment charge is
measured and recognized. An impairment charge is measured as the difference between the net book
value and the fair value of the long-lived assets. Fair value is estimated by discounting the
future cash flows associated with these assets.
Intangible assets subject to amortization include trademarks and customer, marketing and
technology related intangibles. Such intangible assets, excluding customer related intangibles, are
amortized on a straight-line basis over their estimated useful lives, which are generally three to
ten years. Customer related intangible assets are amortized on either a straight-line or
accelerated basis, dependent upon the pattern in which the economic benefits of the intangible
asset are consumed or otherwise used up.
30
During the three and six months ended June 30, 2010 and 2009, there were no adverse changes in
our long-lived assets, which would cause a need for an impairment analysis. Therefore, we were not
required to perform an analysis of our long-lived assets in the three or six months ended June 30,
2010 and 2009.
Revenue Recognition
We recognize revenue on 1) identity theft, credit management and background screening
services, 2) accidental death insurance and 3) other membership products.
Our products and services are offered to consumers primarily on a monthly subscription basis.
Subscription fees are generally billed directly to the subscribers credit card, mortgage bill or
demand deposit accounts. The prices to subscribers of various configurations of our products and
services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become
familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues
are recognized until applicable trial periods are completed.
Identity Theft and Credit Management Services
We recognize revenue from our services when: a) persuasive evidence of arrangement exists as
we maintain signed contracts with all of our large financial institution customers and paper and
electronic confirmations with individual purchases, b) delivery has occurred once the product is
transmitted over the internet, c) the sellers price to the buyer is fixed as sales are generally
based on contract or list prices and payments from large financial institutions are collected
within 30 days with no significant write-offs, and d) collectability is reasonably assured as
individual customers pay by credit card which has limited our risk of non-collection. Revenue for
monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions
with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by
the subscriber, deferred subscription fees are recorded when billed and amortized as subscription
fee revenue on a straight-line basis over the subscription period, generally one year. We also
generate revenue through a collaborative arrangement which involves joint marketing and servicing
activities. We recognize our share of revenues and expenses from this arrangement.
Revenue for annual subscription fees must be deferred if the subscriber has the right to
cancel the service. Annual subscriptions include subscribers with full refund provisions at any
time during the subscription period and pro-rata refund provisions. Revenue related to annual
subscription with full refund provisions is recognized on the expiration of these refund
provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a
pro rata share of revenue earned. An allowance for discretionary subscription refunds is
established based on our actual experience.
We also provide services for which certain financial institution clients are the primary
obligors directly to their customers. Revenue from these arrangements is recognized when earned,
which is at the time we provide the service, generally on a monthly basis.
We generally record revenue on a gross basis in the amount that we bill the subscriber when
our arrangements with financial institution clients provide for us to serve as the primary obligor
in the transaction, we have latitude in establishing price and we bear the risk of physical loss of
inventory and credit risk for the amount billed to the subscriber. We generally record revenue in
the amount that we bill our financial institution clients, and not the amount billed to their
customers, when our financial institution client is the primary obligor, establishes price to the
customer and bears the credit risk.
Accidental Death Insurance and Other Membership Products
We recognize revenue from our services when: a) persuasive evidence of arrangement exists as
we maintain paper and electronic confirmations with individual purchases, b) delivery has occurred
at the completion of a product trial period, c) the sellers price to the buyer is fixed as the
price of the product is agreed to by the customer as a condition of the sales transaction which
established the sales arrangement, and d) collectability is reasonably assured as evidenced by our
collection of revenue through the monthly mortgage payments of our customers or through checking
account debits to our customers accounts. Revenues from insurance contracts are recognized when
earned. Marketing of our insurance products generally involves a trial period during which time the
product is made available at no cost to the customer. No revenues are recognized until applicable
trial periods are completed.
For insurance products, we record revenue on a net basis as we perform as an agent or broker
for the insurance products without assuming the risks of ownership of the insurance products. For
membership products, we generally record revenue on a gross basis as we serve as the primary
obligor in the transactions, have latitude in establishing price and bear credit risk for the
amount billed to the
subscriber.
31
We participate in agency relationships with insurance carriers that underwrite insurance
products offered by us. Accordingly, insurance premiums collected from customers and remitted to
insurance carriers are excluded from our revenues and operating expenses. Insurance premiums
collected but not remitted to insurance carriers as of June 30, 2010 and December 31, 2009 were
$1.3 million and $1.5 million, respectively, and are included in accrued expenses and other current
liabilities in our condensed consolidated balance sheet.
Other Monthly Subscription Products
We generate revenue from other types of subscription based products provided from our Online
Brand Protection and Bail Bonds Industry Solutions segments. We recognize revenue from online brand
protection and brand monitoring services, offered by Net Enforcers, on a monthly basis and from
providing management service solutions, offered by Captira Analytical, on a monthly subscription
basis.
Deferred Subscription Solicitation and Advertising
Our deferred subscription solicitation costs consist of subscription acquisition costs,
including telemarketing, web-based marketing expenses and direct mail such as printing and postage.
We expense advertising costs the first time advertising takes place, except for direct-response
marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response
marketing costs, which are amortized on a cost pool basis over the period during which the future
benefits are expected to be received, but no more than 12 months. The recoverability of amounts
capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date by
comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future
benefit expected to result directly from such advertising costs. Probable remaining future benefit
is estimated based upon historical subscriber patterns, and represents net revenues less costs to
earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct
our contractual cost to service that subscriber from the known sales price. We then apply the
future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in
the future to arrive at the total probable future benefit. In estimating the number of subscribers
we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber
patterns maintained by us that show attrition rates by client, product and marketing channel. The
total probable future benefit is then compared to the costs of a given marketing campaign (i.e.,
cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to
be recoverable. If direct response advertising costs were to exceed the estimated probable
remaining future benefit, an adjustment would be made to the deferred subscription costs to the
extent of any shortfall.
Commission Costs
Commissions that relate to annual subscriptions with full refund provisions and monthly
subscriptions are expensed when incurred, unless we are entitled to a refund of the commissions. If
annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a
full refund of the previously paid commission for those annual subscriptions with a full refund
provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual
subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions
with full commission refund provisions are deferred until the earlier of expiration of the refund
privileges or cancellation. Once the refund privileges have expired, the commission costs are
recognized ratably in the same pattern that the related revenue is recognized. Commissions that
relate to annual subscriptions with pro-rata refund provisions are deferred and charged to
operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt
of the refunded commission from our client, we record a reduction to the deferred commission.
We have prepaid commission agreements with some of our clients. Under these agreements, we pay
a commission on new subscribers in lieu of or reduction in ongoing commission payments. We amortize
these prepaid commissions, on an accelerated basis, over a period of time not to exceed three
years, which is the average expected life of customers. The short-term portion of the prepaid
commissions are shown in deferred subscription solicitation costs in our condensed consolidated
balance sheet. The long-term portion of the prepaid commissions are shown in other assets in our
condensed consolidated balance sheet. Amortization is included in commission expense in our
condensed consolidated statement of operations.
Share Based Compensation
We use the Black-Scholes option-pricing model to value all options and the straight-line
method to amortize this fair value as compensation cost over the requisite service period. The fair
value of each option granted has been estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted-average assumptions:
32
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
67.8 |
% |
|
|
55.4 |
% |
Risk-free interest rate |
|
|
2.8 |
% |
|
|
2.0 |
% |
Expected life of options |
|
6.2 years |
|
|
6.2 years |
|
Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield
as an input. We have not issued dividends in the past. As such, the dividend yield used in our
valuations for the three and six months ended June 30, 2010 and 2009 were zero.
Expected Volatility. The expected volatility of the options granted was estimated based upon
our historical share price volatility, as well as the average volatility of comparable public
companies. We will continue to review our estimate in the future.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury
notes was used to extrapolate an average risk-free interest rate based on the expected term of the
underlying grants.
Expected Term. The expected term of options granted during the six months ended June 30, 2010
and 2009 was determined under the simplified calculation ((vesting term + original contractual
term)/2). For the majority of grants valued during the six months ended June 30, 2010 and 2009, the
options had graded vesting over 4 years (equal vesting of options annually) and the contractual
term was 10 years.
In addition, we estimate forfeitures based on historical option and restricted stock unit
activity on a grant by grant basis. We may make changes to that estimate throughout the vesting
period based on actual activity.
Income Taxes
We account for income taxes under the applicable provisions of U.S. GAAP, which requires an
asset and liability approach to financial accounting and reporting for income taxes. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. If necessary, deferred tax assets are reduced by a valuation allowance to an
amount that is determined to be more likely than not recoverable.
Accounting for income taxes in interim periods provides that at the end of each interim period
we are required to make our best estimate of the consolidated effective tax rate expected to be
applicable for our full calendar year. The rate so determined shall be used in providing for income
taxes on a consolidated current year-to-date basis. Further, the rate is reviewed, if necessary, as
of the end of each successive interim period during the year to our best estimate of our annual
effective tax rate.
We believe that our tax positions comply with applicable tax law. As a matter of course, we
may be audited by various taxing authorities and these audits may result in proposed assessments
where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. We may recognize the tax benefit from an uncertain tax
position only if 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. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement.
In addition to the amount of tax resulting from applying the estimated effective tax rate to
pretax income, we included certain items, treated as discrete events, to arrive at an estimated
overall tax amount for the six months ended June 30, 2010. See Note 16 for additional information.
Accounting Standards Updates
Accounting Standards Updates Recently Adopted
33
In June 2009, an update was made to Consolidation Consolidation of Variable Interest
Entities, to replace the calculation for determining which entities, if any, have a controlling
financial interest in a variable interest entity (VIE) from a quantitative risk based
calculation, to a qualitative approach that focuses on identifying which entities have the power to
direct the activities that most significantly impact the VIEs economic performance and the
obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update
requires an ongoing assessment as to whether an entity is the primary beneficiary of a VIE,
modifies the presentation of consolidated VIE assets and liabilities, and requires additional
disclosures about a companys involvement in VIEs. This update is effective for annual periods
beginning after November 15, 2009, for interim periods within the first annual reporting period and
for interim and annual periods thereafter. Earlier application is prohibited. We have adopted the
provisions of this update as of January 1, 2010 and there was no material impact to our condensed
consolidated financial statements.
In February 2010, an update was made to Subsequent Events. This update removes the
requirement for a public filer to disclose a date in both issued and revised financial statements.
This update is effective upon issuance of the final update, except for the use of the issued date
for conduit debt obligators. That amendment is effective for interim or annual periods ending after
June 15, 2010. We have adopted the provisions of this update as of March 31, 2010 and there was no
material impact to our condensed consolidated financial statements.
In March 2010, an update was made to Derivatives and Hedging. This update provides
clarification and related additional examples to improve financial reporting by resolving potential
ambiguity about the breadth of the embedded credit derivative scope exception. This update is
effective for each reporting entity at the beginning of the first fiscal quarter beginning after
June 15, 2010. We have adopted the provisions of this update as of June 30, 2010 and there was no
material impact to our condensed consolidated financial statements.
In April 2010, an update was made to Revenue Recognition Milestone Method. This update
provides amendments to provide guidance on the criteria that should be met for determining whether
the milestone method of revenue recognition is appropriate. A vendor can recognize consideration
that is contingent upon achievement of a milestone in its entirety as revenue in the period in
which the milestone is achieved only if the milestone meets all criteria to be considered
substantive. This update is effective on a prospective basis for milestones achieved in fiscal
years, and interim periods within those years, beginning on or after June 15, 2010. Earlier
adoption is permitted. We have adopted the provisions of this update as of June 30, 2010 and there
was no material impact to our condensed consolidated financial statements.
Accounting Standards Updates Not Yet Effective
In October 2009, an update was made to Revenue Recognition Multiple-Deliverable Revenue
Arrangements. This update amends the criteria in Multiple-Element Arrangements for separating
consideration in multiple-deliverable arrangements and replaces the term fair value in the revenue
allocation guidance with selling price to clarify that the allocation of revenue is based on
entity-specific assumptions rather than assumptions of a marketplace participant. This update
establishes a selling price hierarchy for determining the selling price of a deliverable,
eliminates the residual method of allocation and significantly expands the disclosures related to a
vendors multiple-deliverable revenue arrangements. This update is effective prospectively for
revenue arrangements entered into or materially modified in fiscal years beginning on or after June
15, 2010. We will adopt the provisions of this update and do not anticipate a material impact to
our condensed consolidated financial statements.
In October 2009, an update was made to Software Certain Revenue Arrangements That Include
Software Elements. This update changes the accounting model for revenue arrangements that include
both tangible products and software elements. This update removed tangible products containing
software components and nonsoftware components that function together to deliver the tangible
products essential functionality from the scope of the software revenue guidance in
Software-Revenue Recognition. This update also provides guidance on how a vendor should allocate
arrangement consideration to deliverables in an arrangement that includes both tangible products
and software, how to allocate arrangement consideration when an arrangement includes deliverables
both included and excluded from the scope of software revenue guidance and provides additional
disclosure requirements. This update is effective prospectively for revenue arrangements entered
into or materially modified in fiscal years beginning on or after June 15, 2010. We will adopt the provisions of this update and do not anticipate a material
impact to our condensed consolidated financial statements.
In January 2010, an update was made to Fair Value Measurements and Disclosures. This update
requires new disclosures of transfers in and out of Levels 1 and 2 and of activity in Level 3 fair
value measurements. The update also clarifies the existing disclosures for levels of disaggregation
and about inputs and valuation techniques. This update is effective for interim and annual
reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value measurements,
which are effective for fiscal years beginning after December 15, 2010,
34
and for interim periods within those fiscal years. We will adopt the provisions of this update
and do not anticipate a material impact to our condensed consolidated financial statements.
In April 2010, an update was made to Compensation Stock Compensation". This update provides
amendments to clarify that an employee share-based payment award with an exercise price denominated
in the currency of a market in which a substantial portion of the entitys equity securities trades
should not be considered to contain a condition that is not a market, performance, or service
condition. Therefore, an entity would classify such an award as a liability if it otherwise
qualifies as equity. This update is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. We will adopt
the provisions of this update and do not anticipate a material impact to our condensed consolidated
financial statements.
Results of Operations
We have four reportable segments through the period ended June 30, 2010. In 2009, we changed
our segment reporting by realigning a portion of our Other segment into the Consumer Products and
Services segment. Our Consumer Products and Services segment includes our consumer protection and
other consumer products and services. This segment consists of identity theft management tools,
services from our relationship with a third party that administers referrals for identity theft to
major banking institutions and breach response services, membership product offerings and other
subscription based services such as life and accidental death insurance. Our Online Brand
Protection segment includes corporate brand protection provided by Net Enforcers. Our Bail Bonds
Industry Solutions segment includes the software management solutions for the bail bond industry
provided by Captira Analytical. In addition, until the sale of SI on July 19, 2010, our Background
Screening segment included the personnel and vendor background screening services provided by SI.
Three Months Ended June 30, 2010 vs. Three Months Ended June 30, 2009 (in thousands):
The condensed consolidated results of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
|
|
|
|
|
|
Bail Bonds |
|
|
|
|
|
|
and |
|
|
Background |
|
|
Online Brand |
|
|
Industry |
|
|
|
|
|
|
Services |
|
|
Screening |
|
|
Protection |
|
|
Solutions |
|
|
Consolidated |
|
Three Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
91,507 |
|
|
$ |
6,746 |
|
|
$ |
496 |
|
|
$ |
123 |
|
|
$ |
98,872 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
12,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,684 |
|
Commissions |
|
|
29,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,809 |
|
Cost of revenue |
|
|
21,755 |
|
|
|
3,634 |
|
|
|
143 |
|
|
|
12 |
|
|
|
25,544 |
|
General and administrative |
|
|
14,323 |
|
|
|
2,289 |
|
|
|
435 |
|
|
|
486 |
|
|
|
17,533 |
|
Depreciation |
|
|
1,955 |
|
|
|
203 |
|
|
|
5 |
|
|
|
|
|
|
|
2,163 |
|
Amortization |
|
|
1,870 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
1,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
82,396 |
|
|
|
6,126 |
|
|
|
590 |
|
|
|
498 |
|
|
|
89,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
9,111 |
|
|
$ |
620 |
|
|
$ |
(94 |
) |
|
$ |
(375 |
) |
|
$ |
9,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
85,182 |
|
|
$ |
4,511 |
|
|
$ |
520 |
|
|
$ |
104 |
|
|
$ |
90,317 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
15,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,346 |
|
Commissions |
|
|
26,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,785 |
|
Cost of revenue |
|
|
22,581 |
|
|
|
2,997 |
|
|
|
228 |
|
|
|
42 |
|
|
|
25,848 |
|
General and administrative |
|
|
13,425 |
|
|
|
2,814 |
|
|
|
1,858 |
|
|
|
455 |
|
|
|
18,552 |
|
Impairment |
|
|
|
|
|
|
5,949 |
|
|
|
|
|
|
|
|
|
|
|
5,949 |
|
Depreciation |
|
|
1,734 |
|
|
|
218 |
|
|
|
2 |
|
|
|
8 |
|
|
|
1,962 |
|
Amortization |
|
|
1,934 |
|
|
|
116 |
|
|
|
17 |
|
|
|
107 |
|
|
|
2,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
81,805 |
|
|
|
12,094 |
|
|
|
2,105 |
|
|
|
612 |
|
|
|
96,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
3,377 |
|
|
$ |
(7,583 |
) |
|
$ |
(1,585 |
) |
|
$ |
(508 |
) |
|
$ |
(6,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Consumer Products and Services Segment
OVERVIEW
Our income from operations in our Consumer Products and Services segment increased in the
three months ended June 30, 2010 as compared to the three months ended June 30, 2009. This is primarily due to
growth in revenue from existing clients, decreased marketing expenses in our direct subscription
and direct to consumer business, partially offset by increased commissions on as a result of
increased sales in our ongoing direct subscriber base. Our subscription revenue (see Other Data)
increased to $90.9 million from $84.7 million in the comparable period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
91,507 |
|
|
$ |
85,182 |
|
|
$ |
6,325 |
|
|
|
7.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
12,684 |
|
|
|
15,346 |
|
|
|
(2,662 |
) |
|
|
(17.4 |
)% |
Commissions |
|
|
29,809 |
|
|
|
26,785 |
|
|
|
3,024 |
|
|
|
11.3 |
% |
Cost of revenue |
|
|
21,755 |
|
|
|
22,581 |
|
|
|
(826 |
) |
|
|
(3.7 |
)% |
General and administrative |
|
|
14,323 |
|
|
|
13,425 |
|
|
|
898 |
|
|
|
6.7 |
% |
Depreciation |
|
|
1,955 |
|
|
|
1,734 |
|
|
|
221 |
|
|
|
12.8 |
% |
Amortization |
|
|
1,870 |
|
|
|
1,934 |
|
|
|
(64 |
) |
|
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
82,396 |
|
|
|
81,805 |
|
|
|
591 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
9,111 |
|
|
$ |
3,377 |
|
|
$ |
5,734 |
|
|
|
169.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase in revenue is primarily the result of growth in revenue from existing
clients, the increase in the ratio of revenue from direct marketing arrangements to revenue from
indirect subscribers and increased revenue from our direct to consumer business. The growth in
revenue from existing clients is primarily from new and ongoing subscribers converting to higher
priced product offerings. The percentage of revenue from direct marketing arrangements, in which we
recognize the gross amount billed to the subscriber, has increased to 88.8% for the three months
ended June 30, 2010 from 87.2% in the three months ended
June 30, 2009.
Total subscriber additions for the three months ended June 30, 2010 were 484 thousand compared
to 813 thousand in the three months ended June 30, 2009.
The table below shows the percentage of subscribers generated from direct marketing
arrangements:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Percentage of subscribers from direct marketing arrangements to total subscribers |
|
|
60.8 |
% |
|
|
58.7 |
% |
Percentage of new subscribers acquired from direct marketing arrangements to total
new subscribers acquired |
|
|
60.5 |
% |
|
|
70.4 |
% |
Percentage of revenue from direct marketing arrangements to total subscription revenue |
|
|
88.8 |
% |
|
|
87.2 |
% |
Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including
radio, television, telemarketing, web-based marketing and direct mail expenses such as printing and
postage. Marketing expense decreased 17.4% to $12.7 million for the three months ended June 30,
2010 from $15.3 million for the three months ended June 30, 2009. The decrease is primarily a
result of a decrease in marketing for our direct to consumer business and marketing for our direct
subscription business with existing clients. Amortization of deferred subscription solicitation
costs related to marketing for the three months ended June 30, 2010 and 2009 were
36
$11.4 million and $12.3 million, respectively. Marketing costs expensed as incurred for the
three months ended June 30, 2010 and 2009 were $1.3 million and $3.1 million, respectively, as a
result of a decrease in marketing expenses related to broadcast media, which do not meet the
criteria for capitalization, for our direct to consumer business.
As a percentage of revenue, marketing expenses decreased to 13.9% for the three months ended
June 30, 2010 from 18.0% for the three months ended June 30, 2009.
Commissions Expenses. Commission expenses consist of commissions paid to our clients.
Commission expenses increased 11.3% to $29.8 million for the three months ended June 30, 2010 from
$26.8 million for the three months ended June 30, 2009. The increase is related to an increase in
sales and subscribers from our direct marketing arrangements with existing clients, as well as an
increase in the effective commission rate.
As a percentage of revenue, commission expenses increased to 32.6% for the three months ended
June 30, 2010 from 31.4% for the three months ended June 30, 2009, primarily due to the increased
proportion of revenue from direct marketing arrangements with ongoing clients.
Cost of Revenue. Cost of revenue consists of the costs of operating our customer service and
information processing centers, data costs, and billing costs for subscribers and one-time
transactional sales. Cost of revenue decreased 3.7% to $21.8 million for the three months ended
June 30, 2010 from $22.6 million for the three months ended June 30, 2009. The decrease in cost of
revenue is primarily the result of reduced data and fulfillment costs required to support new
members of $1.1 million, partially offset by higher data costs required to support the ongoing
subscriber base.
As a percentage of revenue, cost of revenue decreased to 23.8% for the three months ended June
30, 2010 compared to 26.5% for the three months ended June 30, 2009, as a result of an increase in
the ratio of revenue from direct marketing arrangements.
General and Administrative Expenses. General and administrative expenses consist of personnel
and facilities expenses associated with our executive, sales, marketing, information technology,
finance, program and account management functions. General and administrative expenses increased
6.7% to $14.3 million for the three months ended June 30, 2010 from $13.4 million for the three
months ended June 30, 2009. The increase in general and administrative expenses is primarily
related to increased payroll costs.
Total share based compensation expense for the three months ended June 30, 2010 and 2009 was
$1.4 million and $1.1 million, respectively.
As a percentage of revenue, general and administrative expenses remained unchanged at 15.7%
for the three months ended June 30, 2010 and 15.7% for the three months ended June 30, 2009.
Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our
fixed assets and capitalized software. Depreciation expense increased for the three months ended
June 30, 2010 compared to the three months ended June 30, 2009, primarily due to additional assets placed in service.
As a percentage of revenue, depreciation expenses increased to 2.1% for the three months ended
June 30, 2010 from 2.0% for the three months ended June 30, 2009.
Amortization. Amortization expenses consist primarily of the amortization of our intangible
assets. Amortization decreased for the three months ended June 30, 2010 compared to the three
months ended June 30, 2009.
As a percentage of revenue, amortization expenses decreased to 2.0% for the three months ended
June 30, 2010 from 2.3% for the three months ended June 30, 2009.
Background Screening Segment
Our Background Screening segment consisted of the personnel and vendor background screening
services provided by SI. On July 19, 2010 we and SIH, entered into a membership interest purchase
agreement with Sterling Infosystems, Inc. (Sterling), pursuant to which SIH sold, and Sterling
acquired, 100% of the membership interests of SI for an aggregate purchase price of $15.0 million
in cash plus adjustments for working capital and other items. SIH is not an operating subsidiary
and our background screening services ceased upon the sale of SI.
37
OVERVIEW
In our Background Screening segment we had income from operations in the three months ended
June 30, 2010 as compared to a loss from operations in the three months ended June 30, 2009. This
is primarily due to the effects of a goodwill impairment in the three months ended June 30, 2009 and increased
revenue. Volume of background screens has increased 120.5% in the three months ended June 30, 2010
from the three months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
6,746 |
|
|
$ |
4,511 |
|
|
$ |
2,235 |
|
|
|
49.5 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
3,634 |
|
|
|
2,997 |
|
|
|
637 |
|
|
|
21.3 |
% |
General and administrative |
|
|
2,289 |
|
|
|
2,814 |
|
|
|
(525 |
) |
|
|
(18.7 |
)% |
Impairment |
|
|
|
|
|
|
5,949 |
|
|
|
(5,949 |
) |
|
|
(100.0 |
)% |
Depreciation |
|
|
203 |
|
|
|
218 |
|
|
|
(15 |
) |
|
|
(6.9 |
)% |
Amortization |
|
|
|
|
|
|
116 |
|
|
|
(116 |
) |
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
6,126 |
|
|
|
12,094 |
|
|
|
(5,968 |
) |
|
|
49.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
620 |
|
|
$ |
(7,583 |
) |
|
$ |
8,203 |
|
|
|
108.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue increased 49.5% to $6.7 million for the three months ended June 30, 2010 from
$4.5 million for the three months ended June 30, 2009. The increase in revenue is primarily
attributable to increases in volume from all operations, which increased domestic revenue by $1.4
million and UK revenue of $749 thousand.
Cost of Revenue. Cost of revenue consists of the costs to fulfill background screens and is
composed of direct labor costs, consultant costs, database fees and access fees. Cost of revenue
increased 21.3% to $3.6 million for the three months ended June 30, 2010 from $3.0 million for the three months ended June 30, 2009. The increase is due
to increased database and other data fees, due to increases in volume, of $547 thousand and
increased domestic labor costs of $200 thousand. The increases are partially offset by labor
reductions in the UK of $93 thousand.
As a percentage of revenue, cost of revenue was 53.9% for the three months ended June 30, 2010
compared to 66.4% for the three months ended June 30, 2009
General and Administrative Expenses. General and administrative expenses consist of personnel
and facilities expenses associated with our sales, marketing, information technology, finance, and
account management functions. General and administrative expenses decreased 18.7% to $2.3 million
for the three months ended June 30, 2010 from $2.8 million
for the three months ended June 30, 2009. The decrease in general and administrative expenses is primarily attributable
to cost reduction initiatives of $377 thousand and reductions in payroll costs of $144 thousand.
As a percentage of revenue, general and administrative expenses decreased to 33.9% for the
year ended June 30, 2010 from 62.4% for the year ended June 30, 2009.
Impairment. Due to the deterioration in the general economic environment and the decline in
our market capitalization at June 30, 2009, we concluded a triggering event had occurred indicating
potential impairment in the Background Screening reporting unit as of June 30, 2009. For the three
months ended June 30, 2009, we recorded an impairment charge of $5.9 million in our Background
Screening reporting unit.
We reviewed all impairment indicators with regards to goodwill and we concluded that for the
three months ended June 30, 2010, there were no adverse changes in these indicators which would cause a need for
an interim goodwill impairment analysis. Therefore, we were not required to perform a goodwill
analysis during the second quarter of 2010.
Online Brand Protection Segment
Our loss from operations in our Online Brand Protection segment decreased for the three months
ended June 30, 2010 as compared to the three months year ended June 30, 2009 primarily due to
reductions in general and administrative costs from ongoing litigation and regulatory compliance
issues.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
496 |
|
|
$ |
520 |
|
|
$ |
(24 |
) |
|
|
(4.6 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
143 |
|
|
|
228 |
|
|
|
(85 |
) |
|
|
(37.3 |
)% |
General and administrative |
|
|
435 |
|
|
|
1,858 |
|
|
|
(1,423 |
) |
|
|
(76.6 |
)% |
Depreciation |
|
|
5 |
|
|
|
2 |
|
|
|
3 |
|
|
|
150.0 |
% |
Amortization |
|
|
7 |
|
|
|
17 |
|
|
|
(10 |
) |
|
|
(58.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
590 |
|
|
|
2,105 |
|
|
|
(1,515 |
) |
|
|
72.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(94 |
) |
|
$ |
(1,585 |
) |
|
$ |
1,491 |
|
|
|
94.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue decreased $24 thousand for the three months ended June 30, 2010 compared to
the three months ended June 30, 2009.
Cost of Revenue. Cost of revenue consists of the costs of operating our customer service and
information processing centers, data costs and billing costs for subscribers. Cost of revenue
decreased by $85 thousand for the three months ended June 30, 2010 compared to the three months
ended June 30, 2009, primarily due to the reductions in direct labor costs.
As a percentage of revenue, cost of revenue was 28.8% for the three months ended June 30, 2010
compared to 43.9% for the three months ended June 30, 2009.
General and Administrative Expenses. General and administrative expenses consist of personnel
and facilities expenses associated with our sales, marketing, information technology, finance, and
program and account functions. General and administrative expenses primarily decreased due to a
reduction in legal fees associated with our ongoing litigation and regulatory compliance issues.
As a percentage of revenue, general and administrative expenses decreased to 87.7% for the
three months ended June 30, 2010 from 357.3% for the three months ended June 30, 2009.
Bail Bonds Industry Solutions Segment
Our loss from operations in our Bail Bonds Industry Solutions Segment decreased for the three
months ended June 30, 2010 as compared to the three months ended June 30, 2009. The decrease in
loss from operations is driven by slight growth in revenue and decreased amortization expense. The
general economic slowdown has impacted revenue growth, along with slower growth for this early
stage business in a new market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
123 |
|
|
$ |
104 |
|
|
$ |
19 |
|
|
|
18.3 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
12 |
|
|
|
42 |
|
|
|
(30 |
) |
|
|
(71.4 |
)% |
General and administrative |
|
|
486 |
|
|
|
455 |
|
|
|
31 |
|
|
|
6.8 |
% |
Depreciation |
|
|
|
|
|
|
8 |
|
|
|
(8 |
) |
|
|
(100.0 |
)% |
Amortization |
|
|
|
|
|
|
107 |
|
|
|
(107 |
) |
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
498 |
|
|
|
612 |
|
|
|
(114 |
) |
|
|
18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(375 |
) |
|
$ |
(508 |
) |
|
$ |
133 |
|
|
|
26.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue increased $19 thousand for the three months ended June 30, 2010 as compared
to the three months ended June 30, 2009.
Cost of Revenue. Cost of revenue consists of monitoring and credit bureau expenses. Cost of
revenue decreased from the three months ended June 30, 2010 to the three months ended June 30,
2009.
As a percentage of revenue, cost of revenue was 9.8% for the three months ended June 30, 2010
compared to 40.4% for the three months ended June 30, 2009.
General and Administrative Expenses. General and administrative expenses consist of personnel
and facilities expenses associated with our executive, sales, marketing, information technology,
finance, and program and account functions. Our general and
39
administrative expenses increased $31 thousand for the three months ended June 30, 2010
compared to the three months ended June 30, 2009.
Amortization. Amortization expenses consist primarily of the amortization of our intangible
assets. Amortization decreased for the three months ended June 30, 2010 compared to the three
months ended June 30, 2009. This was due to impairment of amortizable intangible assets in late
2009.
Six Months Ended June 30, 2010 vs. Six Months Ended June 30, 2009 (in thousands):
The condensed consolidated results of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
|
|
|
|
|
|
|
|
Bail Bonds |
|
|
|
|
|
|
and |
|
|
Background |
|
|
Online Brand |
|
|
Industry |
|
|
|
|
|
|
Services |
|
|
Screening |
|
|
Protection |
|
|
Solutions |
|
|
Consolidated |
|
Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
182,425 |
|
|
$ |
11,846 |
|
|
$ |
959 |
|
|
$ |
231 |
|
|
$ |
195,461 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
29,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,787 |
|
Commissions |
|
|
60,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,604 |
|
Cost of revenue |
|
|
44,740 |
|
|
|
6,640 |
|
|
|
305 |
|
|
|
35 |
|
|
|
51,720 |
|
General and administrative |
|
|
28,562 |
|
|
|
4,543 |
|
|
|
1,033 |
|
|
|
967 |
|
|
|
35,105 |
|
Depreciation |
|
|
4,046 |
|
|
|
415 |
|
|
|
10 |
|
|
|
|
|
|
|
4,471 |
|
Amortization |
|
|
4,162 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
4,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
171,901 |
|
|
|
11,598 |
|
|
|
1,362 |
|
|
|
1,002 |
|
|
|
185,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
10,524 |
|
|
$ |
248 |
|
|
$ |
(403 |
) |
|
$ |
(771 |
) |
|
$ |
9,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
167,346 |
|
|
$ |
8,945 |
|
|
$ |
1,120 |
|
|
$ |
175 |
|
|
$ |
177,586 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
30,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,375 |
|
Commissions |
|
|
52,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,650 |
|
Cost of revenue |
|
|
44,696 |
|
|
|
6,151 |
|
|
|
440 |
|
|
|
97 |
|
|
|
51,384 |
|
General and administrative |
|
|
25,945 |
|
|
|
6,054 |
|
|
|
2,350 |
|
|
|
881 |
|
|
|
35,230 |
|
Impairment |
|
|
|
|
|
|
6,163 |
|
|
|
|
|
|
|
|
|
|
|
6,163 |
|
Depreciation |
|
|
3,660 |
|
|
|
435 |
|
|
|
4 |
|
|
|
13 |
|
|
|
4,112 |
|
Amortization |
|
|
4,092 |
|
|
|
243 |
|
|
|
34 |
|
|
|
213 |
|
|
|
4,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
161,418 |
|
|
|
19,046 |
|
|
|
2,828 |
|
|
|
1,204 |
|
|
|
184,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
5,928 |
|
|
$ |
(10,101 |
) |
|
$ |
(1,708 |
) |
|
$ |
(1,029 |
) |
|
$ |
(6,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products and Services Segment
OVERVIEW
Our income from operations in our Consumer Products and Services segment increased in the six
months ended June 30, 2010 as compared to the six months ended June 30, 2009. This is primarily due to
growth in revenue from existing clients partially offset by increased commissions as a result of
increased sales in our ongoing direct subscriber base and increased general and administrative
expenses. Our subscription revenue (see Other Data) increased to $181.6 million from $166.2 million
in the comparable period.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
182,425 |
|
|
$ |
167,346 |
|
|
$ |
15,079 |
|
|
|
9.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
29,787 |
|
|
|
30,375 |
|
|
|
(588 |
) |
|
|
(1.9 |
)% |
Commissions |
|
|
60,604 |
|
|
|
52,650 |
|
|
|
7,954 |
|
|
|
15.1 |
% |
Cost of revenue |
|
|
44,740 |
|
|
|
44,696 |
|
|
|
44 |
|
|
|
0.1 |
% |
General and administrative |
|
|
28,562 |
|
|
|
25,945 |
|
|
|
2,617 |
|
|
|
10.1 |
% |
Depreciation |
|
|
4,046 |
|
|
|
3,660 |
|
|
|
386 |
|
|
|
10.6 |
% |
Amortization |
|
|
4,162 |
|
|
|
4,092 |
|
|
|
70 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
171,901 |
|
|
|
161,418 |
|
|
|
10,483 |
|
|
|
6.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
10,524 |
|
|
$ |
5,928 |
|
|
$ |
4,596 |
|
|
|
77.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase in revenue is primarily the result of growth in revenue from existing
clients, the increase in the ratio of revenue from direct marketing arrangements to revenue from
indirect subscribers and increased revenue from our direct to consumer business. The growth in
revenue from existing clients is primarily from new and ongoing subscribers converting to higher
priced product offerings. The percentage of revenue from direct marketing arrangements, in which we
recognize the gross amount billed to the subscriber, has increased to 88.7% for the six months
ended June 30, 2010 from 87.1% in the six months ended
June 30, 2009.
Total subscriber additions for the six months ended June 30, 2010 were 1.2 million compared to
1.6 million in the six months ended June 30, 2009.
The table below shows the percentage of subscribers generated from direct marketing
arrangements:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Percentage of subscribers from direct marketing arrangements to total subscribers |
|
|
60.8 |
% |
|
|
58.7 |
% |
Percentage of new subscribers acquired from direct marketing arrangements to total
new subscribers acquired |
|
|
64.5 |
% |
|
|
71.3 |
% |
Percentage of revenue from direct marketing arrangements to total subscription revenue |
|
|
88.7 |
% |
|
|
87.1 |
% |
Marketing Expenses. Marketing expense decreased 1.9% to $29.8 million for the six months ended
June 30, 2010 from $30.4 million for the six months ended June 30, 2009. The decrease in marketing
is primarily a result of a decrease in marketing expenses for our direct subscription business with
existing clients and our direct to consumer business. Amortization of deferred subscription
solicitation costs related to marketing for the six months ended June 30, 2010 and 2009 were $23.7
million and $23.9 million, respectively. Marketing costs expensed as incurred for the six months
ended June 30, 2010 and 2009 were $6.1 million and $6.4 million, respectively.
As a percentage of revenue, marketing expenses decreased to 16.3% for the six months ended
June 30, 2010 from 18.2% for the six months ended June 30, 2009.
Commissions Expenses. Commission expenses increased 15.1% to $60.6 million for the six months
ended June 30, 2010 from $52.7 million for the six months ended June 30, 2009. The increase is
related to an increase in sales and subscribers from our direct marketing arrangements with
existing clients, as well as an increase in the effective commission rate.
As a percentage of revenue, commission expenses increased to 33.2% for the six months ended
June 30, 2010 from 31.5% for the six months ended June 30, 2009, primarily due to the increased
proportion of revenue from direct marketing arrangements with ongoing clients.
Cost of Revenue. Cost of revenue increased 0.1% and was $44.7 million for the six months ended
June 30, 2010 and June 30, 2009, respectively.
As a percentage of revenue, cost of revenue decreased slightly to 24.5% for the six months
ended June 30, 2010 compared to 26.7% for the six months ended June 30, 2009, as a result of an
increase in the ratio of revenue from direct marketing arrangements.
General and Administrative Expenses. General and administrative expenses increased 10.1% to
$28.6 million for the six months ended June 30, 2010 from $25.9 million for the six months ended
June 30, 2009. The increase in general and administrative expenses is primarily related to
increased payroll costs and professional fees.
41
Total share-based compensation expense in our consolidated statements of operations for
the six months ended June 30, 2010 and 2009 was $2.8 million and $2.0 million, respectively.
As a percentage of revenue, general and administrative expenses increased to 15.7% for the six
months ended June 30, 2010 from 15.5% for the six months ended June 30, 2009.
Depreciation. Depreciation expense increased by $386 thousand for the six months ended June
30, 2010 compared to the six months ended June 30, 2009 due to an increase in assets placed into
service in the six months ended June 30, 2010.
As a percentage of revenue, depreciation expenses was 2.2% for the six months ended June 30,
2010 and 2009, respectively.
Amortization. Amortization increased for the six months ended June 30, 2010 compared to the
six months ended June 30, 2009.
As a percentage of revenue, amortization expenses decreased to 2.3% for the six months ended
June 30, 2010 from 2.4% for the six months ended June 30, 2009.
Background Screening Segment
Our Background Screening segment, consisted of the personnel and vendor background screening
services provided by SI. On July 19, 2010 we and SIH, entered into a membership interest purchase
agreement with Sterling Infosystems, Inc. (Sterling), pursuant to which SIH sold, and Sterling
acquired, 100% of the membership interests of SI for an aggregate purchase price of $15.0 million
in cash plus adjustments for working capital and other items. SIH is not an operating subsidiary
and our background screening services ceased upon the sale of SI.
OVERVIEW
In our Background Screening segment we had income from operations in the six months ended June
30, 2010 as compared to a loss from operations in the six months ended June 30, 2009. This is
primarily due to goodwill impairments in the six months ended June 30, 2009, increased revenue in
all operations and reductions in general and administrative costs from our cost reduction
initiatives. Volume of background screens has increased 57.6% in the six months ended June 30,
2010 from the six months ended June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
11,846 |
|
|
$ |
8,945 |
|
|
$ |
2,901 |
|
|
|
32.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
6,640 |
|
|
|
6,151 |
|
|
|
489 |
|
|
|
8.0 |
% |
General and administrative |
|
|
4,543 |
|
|
|
6,054 |
|
|
|
(1,511 |
) |
|
|
(25.0 |
)% |
Impairment |
|
|
|
|
|
|
6,163 |
|
|
|
(6,163 |
) |
|
|
(100.0 |
)% |
Depreciation |
|
|
415 |
|
|
|
435 |
|
|
|
(20 |
) |
|
|
(4.6 |
)% |
Amortization |
|
|
|
|
|
|
243 |
|
|
|
(243 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
11,598 |
|
|
|
19,046 |
|
|
|
(7,448 |
) |
|
|
39.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
248 |
|
|
$ |
(10,101 |
) |
|
$ |
10,349 |
|
|
|
102,5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue increased 32.4% to $11.8 million for the six months ended June 30, 2010 from
$8.9 million for the six months ended June 30, 2009. The increase in revenue is primarily
attributable to increases in volume within all operations, which increased domestic revenue by $1.9
million and UK revenue of $817 thousand.
Cost of Revenue. Cost of revenue increased 8.0% to $6.6 million for the six months ended
June 30, 2010 from $6.2 million for the six months ended June 30, 2009. The increase is due to
increased database and other data fees, due to increases in volume, of $749 thousand and increased
domestic labor costs of $305 thousand. The increases were partially offset by labor reductions in
the UK of $526 thousand.
As a percentage of revenue, cost of revenue was 56.1% for the six months ended June 30, 2010
compared to 68.8% for the six months ended June 30, 2009.
General and Administrative Expenses. General and administrative expenses decreased 25.0% to
$4.5 million for the six months
42
ended June 30, 2010 from $6.1 million for the six months ended June 30, 2009. The decrease in general and administrative expenses is primarily attributable
to cost reduction initiatives of $786 thousand and reductions in payroll costs of $700 thousand.
As a percentage of revenue, general and administrative expenses decreased to 38.4% for the
year ended June 30, 2010 from 67.7% for the year ended June 30, 2009.
Impairment. Due to the deterioration in the general economic environment and the decline in
our market capitalization at June 30, 2009, we concluded a triggering event had occurred indicating
potential impairment in the Background Screening reporting unit as of June 30, 2009. For the three
months ended June 30, 2009, we recorded an impairment charge of $5.9 million in our Background
Screening reporting unit. In addition, during the three months ended March 31, 2009, we finalized
the second step of our goodwill impairment test, in which the first step was performed during the
year ended December 31, 2008. Based on the finalization of this second step, we recorded an
additional impairment charge of $214 thousand in our Background Screening reporting unit in the
three months ended March 31, 2009.
We reviewed all impairment indicators with regards to goodwill and we concluded that for the
six months ended June 30, 2010, there were no adverse changes in these indicators which would cause a need for
an interim goodwill impairment analysis. Therefore, we were not required to perform a goodwill
analysis during the second quarter of 2010.
Online Brand Protection Segment
Our loss from operations in our Online Brand Protection segment decreased for the six months
ended June 30, 2010 as compared to the six months year ended June 30, 2009 primarily due to
reductions in general and administrative costs associated with our ongoing litigation and
regulatory compliance issues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
959 |
|
|
$ |
1,120 |
|
|
$ |
(161 |
) |
|
|
(14.4 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
305 |
|
|
|
440 |
|
|
|
(135 |
) |
|
|
(30.7 |
)% |
General and administrative |
|
|
1,033 |
|
|
|
2,350 |
|
|
|
(1,317 |
) |
|
|
(56.0 |
)% |
Depreciation |
|
|
10 |
|
|
|
4 |
|
|
|
6 |
|
|
|
150.0 |
% |
Amortization |
|
|
14 |
|
|
|
34 |
|
|
|
(20 |
) |
|
|
(58.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,362 |
|
|
|
2,828 |
|
|
|
(1,466 |
) |
|
|
51.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(403 |
) |
|
$ |
(1,708 |
) |
|
$ |
1,305 |
|
|
|
76.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue decreased $161 thousand for the six months ended June 30, 2010 compared to
the six months ended June 30, 2009. This decrease is primarily due to the general economic
slowdown, which negatively impacted sales in the six months ended June 30, 2010.
Cost of Revenue. Cost of revenue decreased by $135 thousand for the six months ended June 30,
2010 compared to the six months ended June 30, 2009, primarily due to reductions in direct labor
costs.
As a percentage of revenue, cost of revenue was 31.8% for the six months ended June 30, 2010
compared to 39.3% for the six months ended June 30, 2009.
General and Administrative Expenses. General and administrative expenses primarily decreased
due to a reduction in legal fees in our ongoing litigation and regulatory compliance issues.
As a percentage of revenue, general and administrative expenses decreased to 107.7% for the
six months ended June 30, 2010 from 209.8% for the six months ended June 30, 2009.
Bail Bonds Industry Solutions Segment
Our loss from operations in our Bail Bonds Industry Solutions Segment decreased for the six
months ended June 30, 2010 as compared to the six months ended June 30, 2009. The decrease in loss
from operations is primarily driven by decreased amortization
43
expense. The general economic slowdown has impacted revenue growth, along with slower growth
for this early stage business in a new market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
231 |
|
|
$ |
175 |
|
|
$ |
56 |
|
|
|
32.0 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
35 |
|
|
|
97 |
|
|
|
(62 |
) |
|
|
(63.9 |
)% |
General and administrative |
|
|
967 |
|
|
|
881 |
|
|
|
86 |
|
|
|
9.8 |
% |
Depreciation |
|
|
|
|
|
|
13 |
|
|
|
(13 |
) |
|
|
(100.0 |
)% |
Amortization |
|
|
|
|
|
|
213 |
|
|
|
(213 |
) |
|
|
(100.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,002 |
|
|
|
1,204 |
|
|
|
(202 |
) |
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(771 |
) |
|
$ |
(1,029 |
) |
|
$ |
258 |
|
|
|
25.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue increased $56 thousand for the six months ended June 30, 2010 as compared to
the six months ended June 30, 2009.
Cost of Revenue. Cost of revenue decreased from the six months ended June 30, 2010 to the six
months ended June 30, 2009.
As a percentage of revenue, cost of revenue was 15.2% for the six months ended June 30, 2010
compared to 55.4% for the six months ended June 30, 2009.
General and Administrative Expenses. The general and administrative expenses increased $86
thousand for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.
As a percentage of revenue, general and administrative expenses decreased to 418.6% for the
six months ended June 30, 2010 from 503.4% for the six months ended June 30, 2009.
Amortization. Amortization decreased for the six months ended June 30, 2010 compared to the
six months ended June 30, 2009. This was due to impairment of amortizable intangible assets in
late 2009.
As a percentage of revenue, amortization expenses decreased 100.0% for the six months ended
June 30, 2010 from the six months ended June 30, 2009.
Interest Income
Interest income decreased to $6 thousand for the three months ended June 30, 2010 from $98
thousand for the three months ended June 30, 2009. Interest income decreased 92.3% to $11 thousand
for the six months ended June 30, 2010 from $142 thousand for the six months ended June 20, 2009.
This is primarily attributable to the decrease in the interest rates earned on short-term
investments.
Interest Expense
Interest expense increased to $560 thousand for the three months ended June 30, 2010 from $288
thousand for the three months ended June 30, 2009. Interest expense increased to $1.2 million for
the six months ended June 30, 2010 from $437 thousand for the six months ended June 30, 2009. The
increase in interest expense for both the three and six months ended June 30, 2010 is primarily
attributable to the increase in uncertain tax positions of $3.2 million, on which interest expense
is recorded.
In 2008, we entered into an interest rate swap to effectively fix our variable rate term loan
and a portion of the revolving credit facility under our Credit Agreement.
Other (Expense) Income
Other expense decreased to $23 thousand for the three months ended June 30, 2010 from income
of $919 thousand for the three months ended June 30, 2009. Other expense decreased to $472 thousand
for the six months ended June 30, 2010 from income of $473 thousand for the six months ended June
30, 2009. This is primarily attributable to the increase in the foreign currency transaction loss
resulting from exchange rate fluctuations over the current period.
44
Income Taxes
Our consolidated effective tax rate for the three months ended June 30, 2010 and 2009 was
40.4% and (3.7%), respectively. Our consolidated effective tax rate for the six months ended June
30, 2010 and 2009 was 48.3% and (12.8%), respectively The change is primarily due to the
utilization of domestic operating losses incurred in the Background Screening segment due to the
acquisition of the remaining non-controlling interest in this segment in the year ended December
31, 2009. As of June 30, 2010, we continued to have a valuation allowance against the foreign
deferred tax assets of the Background Screening segment.
In addition, our liability increased by approximately $3.2 million primarily related to an
uncertain tax position in a foreign jurisdiction in the six months ended June 30, 2010. This
liability is recorded in other long-term liabilities in our condensed consolidated balance sheet.
We record income tax penalties related to uncertain tax positions as part of our income tax expense
in our condensed consolidated financial statements. We record interest expense related to uncertain
tax positions as part of interest expense in our condensed consolidated financial statements. In
the three months ended June 30, 2010, we recorded interest of $24 thousand primarily due to the
uncertain tax position in a foreign jurisdiction. In the six months ended June 30, 2010, we
recorded penalties of $219 thousand and interest of $210 thousand primarily due to the uncertain
tax position in a foreign jurisdiction The penalties and interest, net of federal benefit,
increased the effective tax rate in the three and six months ended June 30, 2010.
Liquidity and Capital Resources
Cash and cash equivalents were $29.0 million as of June 30, 2010 compared to $12.4 million as
of December 31, 2009. We believe our cash and cash equivalents are highly liquid investments and
may include short-term U.S. Treasury securities with original maturity dates of less than or equal
to 90 days.
As of June 30, 2010 and December 31, 2009 we held short term U.S. treasury securities with a
maturity date greater than 90 days of approximately $5.0 million, which are classified as
short-term investments in our condensed consolidated financial statements.
Our accounts receivable balance as of June 30, 2010 was $24.7 million, including approximately
$3.3 million related to our Background Screening segment, compared to $25.1 million, including
approximately $1.8 million related to our Background Screening segment, as of December 31, 2009.
Our accounts receivable balance consists of credit card transactions that have been approved but
not yet deposited into our account, several large balances with some of the top financial
institutions and accounts receivable associated with background screening clients. The likelihood
of non-payment has historically been remote with respect to subscriber based clients, however, we
do provide for an allowance for doubtful accounts with respect to background screening clients and
corporate brand protection clients. Given the events in the financial markets, we are continuing to
monitor our allowance for doubtful accounts with respect to our financial institution obligors. In
addition, we provide for a refund allowance, which is included in liabilities in our condensed
consolidated balance sheet, against transactions that may be refunded in subsequent months. This
allowance is based on historical results.
Our sources of capital include, but are not limited to, cash and cash equivalents, cash from
continuing operations, amounts available under the credit agreement and other external sources of
funds. Our short-term and long-term liquidity depends primarily upon our level of net income,
working capital management and bank borrowings. We had a working capital surplus of $38.5 million
as of June 30, 2010 compared to $25.0 million as of December 31, 2009. We believe that available
short-term and long-term capital resources are sufficient to fund capital expenditures, working
capital requirements, scheduled debt payments, interest and tax obligations for the next twelve
months. We expect to utilize our cash provided by operations to fund our ongoing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
Difference |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cash flows provided by operating activities |
|
$ |
26,262 |
|
|
$ |
11,149 |
|
|
$ |
15,113 |
|
Cash flows used in investing activities |
|
|
(4,251 |
) |
|
|
(3,532 |
) |
|
|
(719 |
) |
Cash flows used in financing activities |
|
|
(5,440 |
) |
|
|
(4,574 |
) |
|
|
(866 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3 |
) |
|
|
151 |
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
16,568 |
|
|
|
3,194 |
|
|
|
13,374 |
|
Cash and cash equivalents, beginning of year |
|
|
12,394 |
|
|
|
10,762 |
|
|
|
1,632 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
28,962 |
|
|
$ |
13,956 |
|
|
$ |
15,006 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operations was $26.3 million for the six months ended June 30, 2010
compared to $11.1 million for the six months ended June 30, 2009. The $15.2 million increase in
cash flows provided by operations was primarily the result of an increase
45
in earnings, a decrease in cash paid for subscriber marketing and prepaid commissions and a
decrease in other assets due to payment on a trade receivable partially offset by an increase in
accounts receivable. In the six months ended June 30, 2010, net cash used in operations for
deferred subscription solicitation costs was $26.0 million as compared to $36.7 million in the six
months ended June 30, 2009. Our agreements are short-term in nature and are not a continuing
contract because either party may generally terminate the agreements without cause at any time,
without penalty. Due to the short-term nature of these agreements, our clients could, at any time,
re-negotiate (and at times have renegotiated) any of the key terms, including price, marketing and
commission arrangements. Our operating results will continue to be impacted by the non-cash
amortization of prepaid commissions, as well as the amortization of the deferred subscription
solicitation costs. If we consent to the specific requests and choose to incur the costs, we may
need to raise additional funds in the future in order to operate and expand our business. There can
be no assurances that we will be successful in raising additional funds on favorable terms, or at
all, which could materially adversely affect our business, strategy and financial condition,
including losses of or changes in the relationships with one or more of our clients.
Cash flows used in investing activities was $4.3 million for the six months ended June 30,
2010 compared to $3.5 million during the six months ended June 30, 2009. The increase in cash flows
used in investing activities for the six months ended June 30, 2010 was primarily attributable to
the additional long-term investment in White Sky, Inc.
Cash flows used in financing activities was $5.4 million compared to $4.6 million for the six
months ended June 30, 2010 and 2009, respectively. Cash flows used in financing activities for the
six months ended June 30, 2010 was primarily attributable to a cash distribution on vesting of
restricted stock units of $970 thousand.
On July 3, 2006, we entered into a $40 million credit agreement with Bank of America, N.A.
(Credit Agreement). The Credit Agreement consists of a revolving credit facility in the amount of
$25 million and a term loan facility in the amount of $15 million with interest at 1.00-1.75% over
LIBOR. On January 31, 2008, we amended our credit agreement in order to increase the term loan
facility to $28 million. In July 2009, we entered into a third amendment to the Credit Agreement.
The amendment related to the termination and ongoing operations of Screening International,
including the formation of a new domestic subsidiary that will not join in the Credit Agreement as
a co-borrower, and to clarify other matters related to the termination and the ongoing operations
of Screening International. On March 11, 2010, we entered into a fourth amendment to the Credit
Agreement. The amendment increased our interest rate by one percent at each pricing level such that
the interest rate now ranges from 2.00% to 2.75% over LIBOR. In addition, the amendment increased
our ability to invest additional funds into Screening International, as well as require a portion
of the proceeds from any disposition of that entity to be paid to Bank of America, N.A. As of June
30, 2010, the outstanding interest rate was 1.4% and principal balance under the Credit Agreement
was $34.1 million.
The Credit Agreement contains certain customary covenants, including among other things
covenants that limit or restrict the incurrence of liens; the making of investments, including at
SIH and subsidiaries; the incurrence of certain indebtedness; mergers, dissolutions, liquidation,
or consolidations; acquisitions (other than certain permitted acquisitions); sales of substantially
all of our or any co-borrowers assets; the declaration of certain dividends or distributions;
transactions with affiliates (other than co-borrowers under the Credit Agreement) other than on
fair and reasonable terms; and the creation or acquisition of any direct or indirect subsidiary by
us that is not a domestic subsidiary unless such subsidiary becomes a guarantor. We are also
required to maintain compliance with certain financial covenants which include our consolidated
leverage ratios, consolidated fixed charge coverage ratios as well as customary covenants,
representations and warranties, funding conditions and events of default. We are currently in
compliance with all such covenants.
In 2008, we entered into certain interest rate swap transactions that convert our
variable-rate debt to fixed-rate debt. Our interest rate swaps are related to variable interest
rate risk exposure associated with our long-term debt and are intended to manage this risk. The
counterparty to our derivative agreements is a major financial institution for which we continually
monitor its position and credit ratings. We do not anticipate nonperformance by this financial
institution.
The interest rate swaps on our outstanding term loan amount and a portion of our outstanding
revolving line of credit have notional amounts of $12.3 million and $10.0 million, respectively.
The swaps modify our interest rate exposure by effectively converting the variable rate on our term
loan (0.4% at June 30, 2010) to a fixed rate of 3.2% per annum through December 2011 and on our
revolving line of credit (0.4% at June 30, 2010) to a fixed rate of 3.4% per annum through December
2011.
The notional amount of the term loan interest rate swap amortizes on a monthly basis through
December 2011 and the notional amount on the revolving line of credit amortized to $10.0 million in
2009. Both swaps terminate in December 2011. We use the monthly LIBOR interest rate and have the
intent and ability to continue to use this rate on our hedged borrowings. Accordingly, we do not
recognize any ineffectiveness on the swaps. For the six months ended June 30, 2010, there was no
material ineffective portion of
the hedge and therefore, no impact to the condensed consolidated statement of operations.
46
On August 12, 2010, we announced that our Board of Directors had increased the authorized amount under our
existing share repurchase program to a total of $30.0 million of our common shares. This represents
an increase of approximately $10.0 million from the approximately $20.5 million remaining
in the program. Repurchase under the program may be made in open market or privately negotiated transactions
or otherwise, from time to time, depending on market conditions. We
did not repurchase any common stock in the six months ended
June 30, 2010 or 2009, respectively.
On July 19, 2010 we and SIH, entered into a membership interest purchase agreement with
Sterling Infosystems, Inc. (Sterling), pursuant to which SIH sold, and Sterling acquired, 100% of
the membership interests of SI for an aggregate purchase price of $15.0 million in cash plus
adjustments for working capital and other items. SIH is not an operating subsidiary and our
background screening services ceased upon the sale of SI. The sale is subject to customary
representations, warranties, indemnifications, escrow and a further post-closing working capital
adjustment. As a result of the proceeds received from the sale of SI, we prepaid the remaining
balance and accrued interest on the term loan under our Credit Agreement of approximately $11.2
million. The outstanding balance of the revolving credit facility under the Credit Agreement is
$23.0 million.
On August 12, 2010, we announced a cash dividend of $.15 per share on our common stock, payable on September 10, 2010 to
stockholders of record as of August 31, 2010.
Contractual Obligations
We entered into an agreement with a provider of identity theft products under which we are
required to pay non-refundable minimum payments totaling $1.5 million during the year ended
December 31, 2010, in exchange for exclusivity.
During the six months ended June 30, 2010, we entered into additional capital lease agreements
for approximately $170 thousand. Additionally, in the six months ended June 30, 2010, we financed
certain software development costs. These costs did not meet the criteria for capitalization.
Amounts owed under this arrangement as of June 30, 2010 are $212 thousand and $258 thousand and are
included in accrued expenses and other current liabilities and other long-term liabilities,
respectively, in our condensed consolidated financial statements.
On July 1, 2010, we entered into additional capital lease agreements for fixed assets of
approximately $3.6 million. The minimum fixed commitments related to this capital lease agreement
are $400 thousand, $801 thousand, $801 thousand, $801 thousand, $801 thousand, and $400 thousand
for the years ended December 31, 2010, 2011, 2012, 2013, 2014 and 2015, respectively.
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Item 4. |
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Controls and Procedures |
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design
and operation of its disclosure controls and procedures (as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this
report. Our officers have concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934 is accumulated and communicated to our management, including our
chief executive officer and principal financial officer, to allow timely decisions regarding
required disclosure. Our disclosure controls and procedures are designed, and are effective, to
give reasonable assurance that the information required to be disclosed by us in reports that we
file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in our internal control over financial reporting during the three
months ended June 30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
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31.1*
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Certification of Michael R. Stanfield, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2*
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Certification of Madalyn C. Behneman, Principal Financial Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1*
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Certification of Michael R. Stanfield, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
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32.2*
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Certification of Madalyn C. Behneman, Principal Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
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.
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INTERSECTIONS INC.
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By: |
/s/ Madalyn C. Behneman
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Madalyn C. Behneman |
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Date: August 12, 2010 |
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Principal Financial Officer |
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