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 September 30, 2009
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
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54-1956515 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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3901 Stonecroft Boulevard, Chantilly, Virginia
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20151 |
(Address of principal executive office)
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(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):
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in 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 November 2, 2009 there were 18,661,719 shares of common stock, $0.01 par value, issued
and 17,595,303 shares outstanding, with 1,066,416 shares of treasury stock.
Form 10-Q
September 30, 2009
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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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
|
Revenue |
|
$ |
92,927 |
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|
$ |
93,415 |
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|
$ |
270,513 |
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$ |
273,521 |
|
Operating expenses: |
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|
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Marketing |
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15,492 |
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12,776 |
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45,868 |
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38,573 |
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Commissions |
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28,232 |
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|
22,319 |
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80,882 |
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61,680 |
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Cost of revenue |
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25,408 |
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30,439 |
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76,792 |
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88,719 |
|
General and administrative |
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17,594 |
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17,712 |
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52,824 |
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51,031 |
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Impairment |
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6,163 |
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Depreciation |
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1,949 |
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2,438 |
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6,061 |
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7,107 |
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Amortization |
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1,891 |
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2,739 |
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6,473 |
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|
8,132 |
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Total operating expenses |
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90,566 |
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|
88,423 |
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|
275,063 |
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|
255,242 |
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Income (loss) from operations |
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2,361 |
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|
4,992 |
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(4,550 |
) |
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18,279 |
|
Interest income |
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6 |
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|
46 |
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|
148 |
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|
218 |
|
Interest expense |
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|
(472 |
) |
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|
(537 |
) |
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|
(909 |
) |
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(1,722 |
) |
Other income (expense), net |
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3 |
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|
(442 |
) |
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476 |
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|
(543 |
) |
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Income (loss) before income taxes and noncontrolling interest |
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1,898 |
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4,059 |
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(4,835 |
) |
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16,232 |
|
Income tax expense |
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|
(1,549 |
) |
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|
(1,736 |
) |
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|
(2,412 |
) |
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(6,715 |
) |
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Net income (loss) |
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349 |
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2,323 |
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(7,247 |
) |
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9,517 |
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Net loss attributable to noncontrolling interest |
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374 |
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4,380 |
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|
971 |
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Net income (loss) attributable to Intersections Inc. |
|
$ |
349 |
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|
$ |
2,697 |
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|
$ |
(2,867 |
) |
|
$ |
10,488 |
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Net income (loss) per share basic |
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$ |
0.02 |
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$ |
0.16 |
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$ |
(0.16 |
) |
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$ |
0.61 |
|
Net income (loss) per share diluted |
|
$ |
0.02 |
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$ |
0.15 |
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$ |
(0.16 |
) |
|
$ |
0.60 |
|
Weighted average common shares outstanding basic |
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17,534 |
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17,296 |
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17,470 |
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17,244 |
|
Weighted average common shares outstanding diluted |
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17,851 |
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17,707 |
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17,470 |
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17,586 |
|
See Notes to Condensed Consolidated Financial Statements
3
INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
12,033 |
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$ |
10,762 |
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Short-term investments |
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4,990 |
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4,955 |
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Accounts receivable, net of allowance for doubtful accounts $238 (2009) and $235 (2008) |
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26,985 |
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29,391 |
|
Prepaid expenses and other current assets |
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5,883 |
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|
5,697 |
|
Income tax receivable |
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2,292 |
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|
7,416 |
|
Deferred subscription solicitation costs |
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34,064 |
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28,951 |
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Total current assets |
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86,247 |
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|
87,172 |
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PROPERTY AND EQUIPMENT, net |
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18,240 |
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16,942 |
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LONG-TERM INVESTMENT |
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|
3,327 |
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|
3,327 |
|
GOODWILL |
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46,939 |
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|
53,102 |
|
INTANGIBLE ASSETS, net |
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|
25,557 |
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32,030 |
|
OTHER ASSETS |
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|
12,127 |
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|
9,056 |
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|
TOTAL ASSETS |
|
$ |
192,437 |
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$ |
201,629 |
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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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$ |
7,004 |
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$ |
7,014 |
|
Note payable to Control Risks Group Ltd. |
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|
900 |
|
Capital leases, current portion |
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|
951 |
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|
637 |
|
Accounts payable |
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5,994 |
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|
9,802 |
|
Accrued expenses and other current liabilities |
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19,122 |
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15,843 |
|
Accrued payroll and employee benefits |
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3,085 |
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|
4,998 |
|
Commissions payable |
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1,786 |
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|
2,401 |
|
Deferred revenue |
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5,038 |
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|
4,381 |
|
Deferred tax liability, net, current portion |
|
|
9,565 |
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|
7,535 |
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|
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Total current liabilities |
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52,545 |
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|
53,511 |
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LONG-TERM DEBT |
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33,111 |
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37,583 |
|
OBLIGATIONS UNDER CAPITAL LEASE, less current portion |
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1,377 |
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|
786 |
|
OTHER LONG-TERM LIABILITIES |
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|
3,342 |
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|
4,686 |
|
DEFERRED TAX LIABILITY, net, less current portion |
|
|
3,385 |
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|
|
2,611 |
|
|
|
|
|
|
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|
TOTAL LIABILITIES |
|
|
93,760 |
|
|
|
99,177 |
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|
COMMITMENTS AND CONTINGENCIES (see note 10 and 12) |
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STOCKHOLDERS EQUITY: |
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Common stock at $.01 par value; shares authorized, 50,000; shares issued, 18,662
(2009) and 18,383 (2008); shares outstanding, 17,595 (2009) and 17,317 (2008) |
|
|
187 |
|
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|
184 |
|
Additional paid-in capital |
|
|
103,709 |
|
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|
103,544 |
|
Treasury stock, 1,067 shares at cost in 2009 and 2008 |
|
|
(9,516 |
) |
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|
(9,516 |
) |
Retained earnings |
|
|
5,513 |
|
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|
8,380 |
|
Accumulated other comprehensive (loss) income: |
|
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|
Cash flow hedge |
|
|
(969 |
) |
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|
(1,263 |
) |
Other |
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|
(247 |
) |
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|
110 |
|
|
|
|
|
|
|
|
Total Intersections Inc. stockholders equity |
|
|
98,677 |
|
|
|
101,439 |
|
Noncontrolling interest |
|
|
|
|
|
|
1,013 |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
|
98,677 |
|
|
|
102,452 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
192,437 |
|
|
$ |
201,629 |
|
|
|
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|
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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, 2008 and the Nine Months Ended September 30, 2009
(in thousands)
(unaudited)
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Accumulated |
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Total |
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Common |
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Additional |
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Treasury |
|
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Other |
|
|
Intersections Inc. |
|
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Total |
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|
Stock |
|
|
Paid-in |
|
|
Stock |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
Noncontrolling |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Shares |
|
|
Income (Loss) |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
BALANCE,
DECEMBER 31, 2007 |
|
|
18,172 |
|
|
$ |
182 |
|
|
$ |
99,706 |
|
|
|
1,067 |
|
|
$ |
(9,516 |
) |
|
$ |
24,357 |
|
|
$ |
119 |
|
|
$ |
114,848 |
|
|
$ |
10,024 |
|
|
$ |
124,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock upon exercise
of stock options
and vesting of
restricted stock
units |
|
|
211 |
|
|
|
2 |
|
|
|
(343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(341 |
) |
|
|
|
|
|
|
(341 |
) |
Share based
compensation |
|
|
|
|
|
|
|
|
|
|
4,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,069 |
|
|
|
|
|
|
|
4,069 |
|
Tax benefit of
stock options
exercised |
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
|
|
|
|
112 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,977 |
) |
|
|
|
|
|
|
(15,977 |
) |
|
|
(9,004 |
) |
|
|
(24,981 |
) |
Foreign currency
translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(16 |
) |
Cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,263 |
) |
|
|
(1,263 |
) |
|
|
|
|
|
|
(1,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,409 |
) |
|
|
(9,011 |
) |
|
|
(22,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER
31, 2008 |
|
|
18,383 |
|
|
$ |
184 |
|
|
$ |
103,544 |
|
|
|
1,067 |
|
|
$ |
(9,516 |
) |
|
$ |
8,380 |
|
|
$ |
(1,153 |
) |
|
$ |
101,439 |
|
|
$ |
1,013 |
|
|
$ |
102,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock upon exercise
of stock options
and vesting of
restricted stock
units |
|
|
279 |
|
|
|
3 |
|
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363 |
) |
|
|
|
|
|
|
(363 |
) |
Share based
compensation |
|
|
|
|
|
|
|
|
|
|
3,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,151 |
|
|
|
|
|
|
|
3,151 |
|
Tax benefit of
stock options
exercised |
|
|
|
|
|
|
|
|
|
|
(87 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87 |
) |
|
|
|
|
|
|
(87 |
) |
Release of
uncertain tax
benefits |
|
|
|
|
|
|
|
|
|
|
526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526 |
|
|
|
|
|
|
|
526 |
|
Purchase of
noncontrolling
interest |
|
|
|
|
|
|
|
|
|
|
(3,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
(3,259 |
) |
|
|
3,658 |
|
|
|
399 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,867 |
) |
|
|
|
|
|
|
(2,867 |
) |
|
|
(4,380 |
) |
|
|
(7,247 |
) |
Foreign currency
translation
adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(157 |
) |
|
|
(157 |
) |
|
|
(291 |
) |
|
|
(448 |
) |
Cash flow hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294 |
|
|
|
294 |
|
|
|
|
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,762 |
) |
|
|
(1,013 |
) |
|
|
(3,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, SEPTEMBER
30, 2009 |
|
|
18,662 |
|
|
$ |
187 |
|
|
$ |
103,709 |
|
|
|
1,067 |
|
|
$ |
(9,516 |
) |
|
$ |
5,513 |
|
|
$ |
(1,216 |
) |
|
$ |
98,677 |
|
|
$ |
|
|
|
$ |
98,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements.
5
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Net (loss) income |
|
$ |
(7,247 |
) |
|
$ |
9,517 |
|
Adjustments to reconcile net (loss) income to cash flows provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
6,061 |
|
|
|
7,067 |
|
Amortization |
|
|
6,473 |
|
|
|
8,132 |
|
Amortization of gain from sale leaseback |
|
|
|
|
|
|
(29 |
) |
Amortization of debt issuance cost |
|
|
65 |
|
|
|
76 |
|
Loss on disposal of fixed assets |
|
|
64 |
|
|
|
|
|
Provision for doubtful accounts |
|
|
47 |
|
|
|
145 |
|
Share based compensation |
|
|
3,151 |
|
|
|
3,251 |
|
Amortization of deferred subscription solicitation costs |
|
|
49,477 |
|
|
|
38,624 |
|
Goodwill impairment charges |
|
|
6,163 |
|
|
|
|
|
Foreign currency transaction (gains) losses, net |
|
|
(616 |
) |
|
|
293 |
|
Changes in assets and liabilities, net of businesses acquired: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
2,418 |
|
|
|
(557 |
) |
Prepaid expenses and other current assets |
|
|
(129 |
) |
|
|
609 |
|
Income tax receivable |
|
|
5,123 |
|
|
|
2,880 |
|
Deferred subscription solicitation costs |
|
|
(53,885 |
) |
|
|
(46,059 |
) |
Other assets |
|
|
(3,773 |
) |
|
|
(1,479 |
) |
Accounts payable |
|
|
(3,732 |
) |
|
|
(2,104 |
) |
Accrued expenses and other current liabilities |
|
|
3,636 |
|
|
|
4,095 |
|
Accrued payroll and employee benefits |
|
|
(1,931 |
) |
|
|
179 |
|
Commissions payable |
|
|
(615 |
) |
|
|
(1,584 |
) |
Deferred revenue |
|
|
657 |
|
|
|
2,028 |
|
Deferred income tax, net |
|
|
2,805 |
|
|
|
(202 |
) |
Other long-term liabilities |
|
|
(651 |
) |
|
|
334 |
|
|
|
|
|
|
|
|
Cash flows provided by operating activities |
|
|
13,561 |
|
|
|
25,216 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
|
|
(5,868 |
) |
|
|
(5,400 |
) |
Purchase of short-term investments |
|
|
|
|
|
|
(4,955 |
) |
Purchase of long-term investment |
|
|
|
|
|
|
(3,327 |
) |
Proceeds from sale of property and equipment |
|
|
26 |
|
|
|
|
|
Cash paid in the acquisition of Net Enforcers, Inc. |
|
|
|
|
|
|
(867 |
) |
Cash paid in the acquisition of intangible membership agreements |
|
|
|
|
|
|
(30,176 |
) |
|
|
|
|
|
|
|
Cash flows used in investing activities |
|
|
(5,842 |
) |
|
|
(44,725 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Repayments under credit agreement |
|
|
(5,260 |
) |
|
|
(14,955 |
) |
Capital lease payments |
|
|
(559 |
) |
|
|
(846 |
) |
Borrowings under credit agreement |
|
|
|
|
|
|
32,611 |
|
Debt issuance costs |
|
|
|
|
|
|
(132 |
) |
Cash proceeds from stock options exercised |
|
|
2 |
|
|
|
175 |
|
Tax benefit of stock options exercised |
|
|
(87 |
) |
|
|
|
|
Withholding tax payment on vesting of restricted stock units |
|
|
(362 |
) |
|
|
(517 |
) |
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities |
|
|
(6,266 |
) |
|
|
16,336 |
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH |
|
|
(182 |
) |
|
|
(263 |
) |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
1,271 |
|
|
|
(3,436 |
) |
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
10,762 |
|
|
|
19,780 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
12,033 |
|
|
$ |
16,344 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,183 |
|
|
$ |
1,348 |
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
596 |
|
|
$ |
3,802 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Equipment obtained under capital lease |
|
$ |
1,577 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Equipment additions accrued but not paid |
|
$ |
315 |
|
|
$ |
353 |
|
|
|
|
|
|
|
|
Purchase of
noncontrolling interest with issuance of note |
|
$ |
778 |
|
|
$ |
|
|
Forgiveness
of note, including accrued interest, in connection with purchase of
noncontrolling interest |
|
$ |
1,034 |
|
|
$ |
|
|
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 including 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.
In addition, we also offer our services directly to consumers. 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 mass media.
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 17, Transfers
from Noncontrolling Interest, 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.
SIH has offices in Virginia and the UK. SIHs clients include leading United States, UK and
global companies in such areas as manufacturing, staffing and recruiting agencies, financial
services, retail and transportation. SIH provides a variety of risk management tools for the
purpose of personnel and vendor background screening, including criminal background checks, driving
records, employment verification and reference checks, drug testing and credit history checks.
We have three reportable segments. Our Consumer Products and Services segment includes our
consumer protection and other consumer products and services. This segment consists of identity
theft management tools, membership product offerings and other subscription based services such as
life and accidental death insurance. Our Background Screening segment includes the personnel and
vendor background screening services provided by SIH. Our Other segment includes services from our
relationship with a third party that administers referrals for identity theft to major banking
institutions and breach response services. This segment also includes the software management
solutions for the bail bond industry provided by Captira Analytical, LLC (Captira) and corporate
brand protection provided by Net Enforcers, Inc. (Net Enforcers).
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. 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 in accordance with U.S. GAAP and, accordingly, should be read
in conjunction with our audited consolidated financial statements and accompanying notes for the
year ended December 31, 2008, 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. We have three reporting units: Consumer Products and Services,
Background Screening and Other, which is consistent with our operating segments. As of September
30, 2009, goodwill of $43.2 million and $3.7 million resides 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, which 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 equal consideration to the
income and market approach. 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.
8
As a result of the deterioration in the general economic environment and decline in our market
capitalization indicating potential impairment in our Background Screening reporting unit, we
concluded a triggering event had occurred at June 30, 2009. 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. We did not have any triggering events in the three months
ended September 30, 2009 and, therefore, did not perform an analysis of our goodwill. 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 of approximately five years. The
assumptions for our discounted future cash flows begin with our historical operating performance.
Additionally, we considered the impact that known economic, industry and market trends will have on
our future forecasts, as well as the impact that we expect from planned business initiatives
including new products, client service and retention standards. Examples of known economic and
market trends that were considered in our Consumer Products and Services reporting unit include the
impact a weakened economy has had on our products associated with consumer credit card
originations, which negatively impact subscriber growth, subscriber attrition, and mortgage
billings for our products through June 30, 2009. Examples that were considered in our Background
Screening and Other reporting units include the impact the higher unemployment rate has had on our
application volumes, as well as reduced business spending.
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. For the step one impairment
test as of June 30, 2009, the discount rates used to develop the estimated fair value of the
reporting units ranged from 15.0% to 30.0%. The discount rate for our Consumer Products and
Services reporting unit increased to 15.0% from 12.0% for the three months ended June 30, 2009
compared to our annual goodwill impairment evaluation at October 31, 2008. This slight increase
represents some anticipated degradation in the core business due to the challenging economic
environment and its impact on our financial institution clients. The discount rate for our
Background Screening and Other reporting units were 17.0% and 30.0%, respectively. The discount
rates for these reporting units are higher because there is inherent risk or volatility in the
expected cash flows of these reporting units. This volatility is due to the reduced rate of growth
in both a less stable start-up market and a weakened economic environment, coupled with the
historical net losses within each reporting unit. The long-term growth rate we used to determine
the terminal value of each reporting unit for the year ended December 31, 2008 and for the six
months ended June 30, 2009 was 3.0%. This was based on managements assessment of the minimum
expected terminal growth rate of each reporting unit, as well as broader economic considerations
such as GDP, inflation and the maturity of the markets we serve.
In our market based approach, a valuation multiple was selected based on a financial
benchmarking analysis that compared the reporting units operating result with the comparable
companies information. In addition to these financial considerations, qualitative factors such as
business descriptions, business diversity, the size and operating performance, and overall risk
among the benchmark companies were considered in the ultimate selection of the multiple. We used
both an Earnings Before Interest Depreciation and Amortization (EBITDA) multiple and revenue
multiple to estimate the fair value using a market approach. At June 30, 2009, the Consumer
Products and Services reporting unit EBITDA and revenue multiples were 3.8 and 0.4, respectively.
The Background Screening and Other reporting units revenue multiples were 0.2 and 1.0,
respectively.
However, the comparison of the values calculated using an equally weighted average between 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. Based on the analysis as of June 30, 2009, the implied
fair value of the Consumer Products and Services reporting unit exceeded the carrying value by
approximately 67.6%. The carrying value of our Other reporting unit exceeded its implied fair
value by 44.3%; however, there is no remaining goodwill allocated to this reporting unit as of June
30, 2009. The carrying value of our Background Screening reporting unit exceeded its implied fair
value by approximately 21.7% based on this analysis as of at June 30, 2009, which resulted in an
impairment of goodwill in our Background Screening reporting unit.
In the reporting units where the carrying value exceeded the fair value which had allocable
goodwill, we included certain key assumptions in our discounted cash flows. For the Background
Screening segment, we included assumptions for revenue and the impact the recessionary economy is
having on worldwide hiring. Our revenue growth rates in later years are consistent with our
historical operations for a mature business in a stronger economy. As our operating margin has
stabilized in this business, we expect it to grow in proportion to the revenue. In addition, we
made several key assumptions regarding the long-term growth rate and discount rates in calculating
an implied fair value (see above for discussion).
9
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 unit 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 September 30, 2009. Our Background Screening reporting unit has $3.7 million of goodwill
remaining as of September 30, 2009. A continued increase in the domestic and international
unemployment rate will have an inverse effect on revenue and cash flow attributable to our
Background Screening reporting unit as volume for new hire background screens will be reduced. 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, 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 nine months ended September 30, 2009, we did not record an impairment for
long-lived assets.
Revenue Recognition
We recognize revenue on 1) identity theft, credit management and background 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, Credit Management and Background Services
We recognize revenue from our services in accordance with U.S. GAAP. Revenue is recognized
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
10
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 generate revenue from one-time credit reports and
background screenings which are recognized when the report is provided to the customer
electronically, which is generally at the time of completion.
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.
The amount of revenue recorded by us is also determined in accordance with U.S. GAAP, which
addresses whether a company should report revenue based on the gross amount billed to a customer or
the net amount retained by us (amount billed less commissions or fees paid). 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 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 in accordance with U.S. GAAP. Revenue is recognized
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.
The amount of revenue recorded by us is determined in accordance with U.S. GAAP. For insurance
products, we generally 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 September 30, 2009 and December 31, 2008
totaled $1.9 million and $1.6 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 Other
segment. We recognize revenue on services provided from identity theft referrals from major banking
institutions and breach response services on a monthly or annual subscription basis. We also
recognize revenue from providing management service solutions, offered by Captira, on a monthly
subscription basis, and online brand protection and brand monitoring, offered by Net Enforcers, on
a monthly basis.
11
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 accounted for in accordance with U.S. GAAP. 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.
We amortize deferred subscription solicitation costs on a cost pool basis over the period
during which the future benefits are expected to be received, but no more than 12 months.
Commission Costs
In accordance with U.S. GAAP, 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 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
prepaid expenses and other current assets 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.
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.
12
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.
U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax benefits. We
determined, in accordance with the guidance, that upon conclusion of our Internal Revenue Service
examination, the respective tax positions were settled and we recognized various uncertain tax
benefits as discrete events, which had an impact on our condensed consolidated financial statements
as of September 30, 2009. In addition to the amount of tax resulting from applying the estimated
effective tax rate to pretax loss, we included certain items treated as discrete events to arrive
at an estimated overall tax amount for the nine months ended September 30, 2009. See Note 14,
Income Taxes.
Net Income (Loss) Per Common Share
Basic and diluted income (loss) per share are 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 months ended
September 30, 2009, options to purchase 4.3 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 nine months ended September 30, 2009, options to
purchase 5.6 million shares of common stock, respectively, have been excluded from the computation
of diluted income per share because they do not have a dilutive effect due to our loss from
continuing operations. For the three and nine months ended September 30, 2008, options to purchase
4.3 million shares of common stock have been excluded from the computation of diluted income per
share as their effect would be anti-dilutive. These shares could dilute earnings per share in the
future.
A reconciliation of basic income per common share to diluted income per common share is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except |
|
|
(In thousands, except |
|
|
|
per share data) |
|
|
per share data) |
|
Net income (loss) available to common
shareholders basic and diluted |
|
$ |
349 |
|
|
$ |
2,697 |
|
|
$ |
(2,867 |
) |
|
$ |
10,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
17,534 |
|
|
|
17,296 |
|
|
|
17,470 |
|
|
|
17,244 |
|
Dilutive effect of common stock equivalents |
|
|
317 |
|
|
|
411 |
|
|
|
|
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
17,851 |
|
|
|
17,707 |
|
|
|
17,470 |
|
|
|
17,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
$ |
(0.16 |
) |
|
$ |
0.61 |
|
Diluted |
|
$ |
0.02 |
|
|
$ |
0.15 |
|
|
$ |
(0.16 |
) |
|
$ |
0.60 |
|
Subsequent Events
Management has evaluated subsequent events after the balance sheet date through November 9,
2009, which is the date our condensed consolidated financial statements were issued.
13
3. Accounting Standards Updates
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB
Accounting Standards Codification (Codification) established the Codification as the source of
authoritative U.S. GAAP, recognized by the FASB to be applied by nongovernmental entities. The FASB
will no longer issue new standards in the form of statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not
consider Accounting Standards Updates as authoritative in their own right; these updated will serve
only to update the Codification, provide background information about the guidance, and provide
bases for conclusions on the change(s) in the Codification. The Codification is effective for
interim and annual periods ending after September 15, 2009. We have updated our disclosures and
condensed consolidated financial statements to reflect the new Codification.
In August 2009, an update was made to Fair Value Measurement and Disclosures Measuring
Liabilities at Fair Value, to provide clarification that, in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting entity is required to
measure fair value using the techniques stated in the update. The update also clarifies fair value
calculation for a liability when a restriction exists that prevents the transfer of the liability.
The update further clarifies that use of quoted market price for an identical liability or the
quoted market price for the identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This
update is effective for the first reporting period, including interim periods, beginning after
issuance. We have adopted the provisions of this update as of September 30, 2009 and there is no
material impact on our condensed consolidated financial statements.
Accounting Standards Updates Not Yet Effective
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 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 will adopt the provisions this
update as of January 1, 2010 and do not anticipate a material impact to our condensed consolidated
financial statements.
In September 2009, an update was made to Fair Value Measurement and Disclosures
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),
which permits entities to measure the fair value of an investment that is within the scope of the
amendments in this update on the basis of net asset value per share of the investment (or its
equivalent) if the net asset value of the investment (or its equivalent) is calculated in a manner
consistent with the measurement principles of Financial Services Investment Companies as of
the reporting entitys measurement date, including measurement of all or substantially all of the
underlying investments of the investee in accordance with Fair Value Measurements and Disclosures
guidance. This update also requires disclosure by major category of investment about the attributes
of investments within the scope of the update. This update is effective for interim and annual
periods ending after December 15, 2009. We will adopt the provisions of this update as of January
1, 2010 and do not anticipate a material impact to our condensed consolidated financial statements.
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 are currently in the process of evaluating the impact on 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
14
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 are currently in the process of evaluating the impact on our condensed
consolidated financial statements.
4. Fair Value Measurement
Our cash and any investment instruments are classified within Level 1 or Level 2 of the fair
value hierarchy because 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, if any, 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 September 30, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using: |
|
|
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
|
September 30, |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury bills |
|
$ |
4,990 |
|
|
$ |
4,990 |
|
|
$ |
|
|
|
$ |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts |
|
$ |
969 |
|
|
$ |
|
|
|
$ |
969 |
|
|
$ |
|
|
The fair value of our instruments measured on a non-recurring basis at September 30, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
|
|
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
Total |
|
|
September 30, |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Gains |
|
|
2009 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
(Losses) |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable |
|
$ |
778 |
|
|
$ |
|
|
|
$ |
778 |
|
|
$ |
|
|
|
$ |
|
|
In the three months ended September 30, 2009, SI incurred a liability to CRG as part of the
acquisition of the noncontrolling interest. The terms of the note payable to CRG include a
non-interest bearing note of $1.4 million, payable in three equal annual installments of $467
thousand beginning June 30, 2012. Fair value was estimated using a discounted cash flow analysis,
based on the current estimated incremental borrowing rate of SI, in accordance with U.S. GAAP. The
incremental borrowing rate was estimated based on analysis of similar types of borrowing
arrangements by comparable companies.
5. Deferred Subscription Solicitation and Commission Costs
Deferred subscription solicitation costs included in the accompanying condensed consolidated
balance sheet as of September 30, 2009 and December 31, 2008, were $40.8 million and $36.4 million,
which includes $6.7 million and $7.4 million reported in other assets, respectively. The short-term
portion of prepaid commissions is approximately $9.6 million and $8.2 million as of September 30,
2009 and December 31, 2008, respectively, and is included in deferred subscription solicitation
costs in our condensed consolidated balance sheet. Amortization of deferred subscription
solicitation and commission costs, which are included in either
15
marketing or commissions expense in our condensed consolidated statement of operations, for
the three months ended September 30, 2009 and 2008 were $16.9 million and $13.2 million,
respectively. Amortization of deferred subscription solicitation and commission costs for the nine
months ended September 30, 2009 and 2008 were $49.5 million and $38.6 million, respectively.
Subscription solicitation costs expensed as incurred related to marketing costs, which are included
in marketing expenses in our condensed consolidated statement of operations, as they did not meet
the criteria for deferral in accordance with U.S. GAAP, for the three months ended September 30,
2009 and 2008 were $3.0 million and $1.1 million, respectively. Subscription solicitation costs
expensed as incurred related to marketing for the nine months ended September 30, 2009 and 2008
were $9.5 million and $3.5 million, respectively.
6. Goodwill and Intangible Assets
Due to the deterioration in the general economic environment and decline in our market
capitalization, we concluded a triggering event had occurred at June 30, 2009 indicating potential
impairment in our Background Screening reporting unit. We did not have any triggering events in the
three months ended September 30, 2009 and therefore, did not perform an analysis of our goodwill.
Changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Total |
|
Goodwill |
|
$ |
43,235 |
|
|
$ |
23,583 |
|
|
$ |
12,632 |
|
|
$ |
79,450 |
|
Accumulated impairment losses |
|
|
|
|
|
|
(13,716 |
) |
|
|
(12,632 |
) |
|
|
(26,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009 |
|
|
43,235 |
|
|
|
9,867 |
|
|
|
|
|
|
|
53,102 |
|
Impairment |
|
|
|
|
|
|
(6,163 |
) |
|
|
|
|
|
|
(6,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009 |
|
$ |
43,235 |
|
|
$ |
3,704 |
|
|
$ |
|
|
|
$ |
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 in our June 30, 2009 analysis. 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 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.
Intangibles consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer related |
|
$ |
40,857 |
|
|
$ |
(16,997 |
) |
|
$ |
23,860 |
|
Marketing related |
|
|
3,553 |
|
|
|
(2,975 |
) |
|
|
578 |
|
Technology related |
|
|
2,796 |
|
|
|
(1,677 |
) |
|
|
1,119 |
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
$ |
47,206 |
|
|
$ |
(21,649 |
) |
|
$ |
25,557 |
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer related |
|
$ |
40,857 |
|
|
$ |
(11,575 |
) |
|
$ |
29,282 |
|
Marketing related |
|
|
3,553 |
|
|
|
(2,392 |
) |
|
|
1,161 |
|
Technology related |
|
|
2,796 |
|
|
|
(1,209 |
) |
|
|
1,587 |
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
$ |
47,206 |
|
|
$ |
(15,176 |
) |
|
$ |
32,030 |
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2008, we recorded an impairment of $2.6 million 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 nine months ended September 30, 2009, we incurred aggregate amortization expense of
$1.9 million and $6.5 million, respectively, which was included in amortization expense in our
condensed consolidated statement of operations. For the three and nine months ended September 30,
2008, we incurred aggregate amortization expense of $2.7 million and $8.1 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 three months ending December 31, 2009 |
|
$ |
1,772 |
|
For the years ending December 31: |
|
|
|
|
2010 |
|
|
5,947 |
|
2011 |
|
|
4,493 |
|
2012 |
|
|
3,307 |
|
2013 |
|
|
2,748 |
|
Thereafter |
|
|
7,290 |
|
|
|
|
|
|
|
$ |
25,557 |
|
|
|
|
|
7. Other Assets
The components of our other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Prepaid royalty payments |
|
$ |
75 |
|
|
$ |
75 |
|
Prepaid contracts |
|
|
1,572 |
|
|
|
70 |
|
Escrow receivable |
|
|
501 |
|
|
|
501 |
|
Prepaid commissions |
|
|
6,707 |
|
|
|
7,412 |
|
Other |
|
|
3,272 |
|
|
|
998 |
|
|
|
|
|
|
|
|
|
|
$ |
12,127 |
|
|
$ |
9,056 |
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2009, the increase in other assets is primarily
related to a trade receivable from an ongoing marketing partner.
8. Accrued Expenses and Other Current Liabilities
The components of our accrued expenses and other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Accrued marketing |
|
$ |
4,091 |
|
|
$ |
2,908 |
|
Accrued cost of sales, including credit bureau costs |
|
|
5,232 |
|
|
|
5,195 |
|
Accrued general and administrative expense and professional fees |
|
|
5,742 |
|
|
|
5,121 |
|
Insurance premiums |
|
|
1,924 |
|
|
|
1,610 |
|
Other |
|
|
2,133 |
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
$ |
19,122 |
|
|
$ |
15,843 |
|
|
|
|
|
|
|
|
17
9. Accrued Payroll and Employee Benefits
The components of our accrued payroll and employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Accrued payroll |
|
$ |
1,163 |
|
|
$ |
3,466 |
|
Accrued benefits |
|
|
1,920 |
|
|
|
1,508 |
|
Other |
|
|
2 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
$ |
3,085 |
|
|
$ |
4,998 |
|
|
|
|
|
|
|
|
10. Commitments and Contingencies
Leases
We have entered into long-term operating lease agreements for office space and capital leases
for certain equipment. The minimum fixed commitments related to all noncancellable leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Operating |
|
|
Capital |
|
|
|
Leases |
|
|
Leases |
|
|
|
(In thousands) |
|
For the remaining three months ending December 31, |
|
|
|
|
|
|
|
|
2009 |
|
$ |
374 |
|
|
$ |
244 |
|
For the years ending December 31: |
|
|
|
|
|
|
|
|
2010 |
|
|
1,838 |
|
|
|
1,062 |
|
2011 |
|
|
1,902 |
|
|
|
882 |
|
2012 |
|
|
1,940 |
|
|
|
444 |
|
2013 |
|
|
2,380 |
|
|
|
|
|
2014 |
|
|
2,001 |
|
|
|
|
|
Thereafter |
|
|
10,033 |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
20,468 |
|
|
|
2,632 |
|
|
|
|
|
|
|
|
|
Less: amount representing interest |
|
|
|
|
|
|
(304 |
) |
|
|
|
|
|
|
|
|
Present value of minimum lease payments |
|
|
|
|
|
|
2,328 |
|
Less: current obligation |
|
|
|
|
|
|
(951 |
) |
|
|
|
|
|
|
|
|
Long term obligations under capital lease |
|
|
|
|
|
$ |
1,377 |
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2009 we entered into additional capital
lease agreements for approximately $488 thousand and $1.6 million, respectively.
In the nine months ended September 30, 2009, 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 September 30, 2009 are $173 thousand and $330 thousand and are included in
accrued expenses and other current liabilities and other long-term liabilities, respectively, on
our condensed consolidated financial statements. The minimum fixed commitments related to this
arrangement are as follows (in thousands):
|
|
|
|
|
For the remaining three months ending December 31, |
|
|
|
|
2009 |
|
$ |
26 |
|
For the years ending December 31: |
|
|
|
|
2010 |
|
|
178 |
|
2011 |
|
|
193 |
|
2012 |
|
|
106 |
|
|
|
|
|
Long term obligations under arrangements |
|
$ |
503 |
|
|
|
|
|
18
Rental expenses included in general and administrative expenses were $375 thousand and
$1.6 million for the three and nine months ended September 30, 2009, respectively. For the three
and nine months ended September 30, 2008 rental expenses included in general and administrative
expenses were $772 thousand and $2.1 million, respectively.
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. We have 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 our claims was denied in its entirety. Mr. Loomis also
has 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. We
believe we have meritorious and complete defenses to the counterclaims and intend to defend them
vigorously. We believe, however, that it is too early in the litigation to form an opinion as to
the likelihood of success on the merits of the counterclaims. Discovery in the case is ongoing.
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.
11. Other Long-Term Liabilities
The components of our other long-term liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Deferred rent |
|
$ |
712 |
|
|
$ |
106 |
|
Uncertain tax positions, interest and
penalties not recognized |
|
|
741 |
|
|
|
3,267 |
|
Interest rate swaps |
|
|
969 |
|
|
|
1,263 |
|
Accrued general and administrative expenses |
|
|
330 |
|
|
|
|
|
Other |
|
|
590 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
$ |
3,342 |
|
|
$ |
4,686 |
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009, our uncertain tax liability, interest and
penalties decreased by approximately $2.5 million, of which $323 thousand impacted the consolidated
effective tax rate. See Note 14, Income Taxes.
12. Debt and Other Financing
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Term loan |
|
$ |
16,333 |
|
|
$ |
21,583 |
|
Revolving line of credit |
|
|
23,000 |
|
|
|
23,000 |
|
Demand note payable to CRG |
|
|
|
|
|
|
900 |
|
Note payable to CRG: In 2009, a $1.4 million face amount, non-interest bearing,
due in three annual payments of $467
thousand beginning June 30, 2012 (less
unamortized discount of $622 thousand
which is based on an imputed interest rate
of 16%) |
|
|
778 |
|
|
|
|
|
Other |
|
|
4 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
40,115 |
|
|
|
45,497 |
|
Less current portion |
|
|
(7,004 |
) |
|
|
(7,914 |
) |
|
|
|
|
|
|
|
Total long term debt |
|
$ |
33,111 |
|
|
$ |
37,583 |
|
|
|
|
|
|
|
|
19
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 loan is payable in monthly installments of $583 thousand, plus interest. Substantially
all our assets and a pledge 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, which will
provide services to our Background Screening and Other segments, and which joined in the Credit
Agreement as a co-borrower. In 2008, we borrowed $16.6 million under the term loan facility to
acquire membership agreements from Citibank. As of September 30, 2009, the outstanding interest
rate was 1.3% and principal balance under the Credit Agreement was $39.3 million. Other notes
outstanding of $4 thousand were due in the remaining months of 2009.
The Credit Agreement contains certain customary covenants, including among other things
covenants that limit or restrict the incurrence of liens; the making of investments; 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 13, Derivative Financial Instruments, we entered into interest
rate swap transactions on our term loan that converts our variable-rate debt to fixed-rate debt.
As further described in Note 17, Transfers from Noncontrolling Interest, 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, June 30, 2013 and June 30, 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 year ended September 30, 2009
$30 thousand of interest was accrued on the note.
Aggregate maturities during the subsequent years are as follows (in thousands):
|
|
|
|
|
For the twelve month period ending September 30, |
|
2010 |
|
$ |
7,004 |
|
2011 |
|
|
7,000 |
|
2012 |
|
|
25,799 |
|
2013 |
|
|
467 |
|
2014 |
|
|
467 |
|
|
|
|
|
Total |
|
$ |
40,737 |
|
|
|
|
|
13. Derivative Financial Instruments
Risk Management Strategy
20
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 September 30, 2009, the interest
rate swaps on our outstanding term loan amount and a portion of our outstanding revolving line of
credit have notional amounts of $17.5 million and $10.0 million, respectively. The swaps modify our
interest rate exposure by effectively converting the variable rate on our term loan (1.3% at
September 30, 2009) to a fixed rate of 3.2% per annum through December 2011 and on our revolving
line of credit (1.3% at September 30, 2009) 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 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 as allowed under U.S. GAAP. For
the nine months ended September 30, 2009 and 2008, there was no material ineffective portion of the
hedge and therefore, no impact to the 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 September 30, 2009 and December 31, 2008 our interest rate contracts had a fair value of
$969 thousand and $1.3 million, 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 |
|
|
|
Amount of Gain or (Loss) |
|
|
Reclassified from |
|
|
Income (Ineffective |
|
Derivative in SFAS |
|
Recognized in OCI on |
|
|
Accumulated OCI into |
|
|
Portion and Amount |
|
No. 133 Cash Flow |
|
Derivative (Effective |
|
|
Income (Effective |
|
|
Excluded from |
|
Hedge Relationships Three Months Ended |
|
Portion) |
|
|
Portion) |
|
|
Effectiveness Testing) |
|
September 30, |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
In thousands of dollars |
|
Interest rate contracts |
|
$ |
(10 |
) |
|
$ |
(25 |
) |
|
$ |
(215 |
) |
|
$ |
(84 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(10 |
) |
|
$ |
(25 |
) |
|
$ |
(215) |
(1) |
|
$ |
(84) |
(1) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassified from |
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) |
|
|
Accumulated OCI into |
|
|
|
Amount of Gain or (Loss) |
|
|
Reclassified from |
|
|
Income (Ineffective |
|
Derivative in SFAS |
|
Recognized in OCI on |
|
|
Accumulated OCI into |
|
|
Portion and Amount |
|
No. 133 Cash Flow |
|
Derivative (Effective |
|
|
Income (Effective |
|
|
Excluded from |
|
Hedge Relationships Nine Months Ended |
|
Portion) |
|
|
Portion) |
|
|
Effectiveness Testing) |
|
September 30, |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
In thousands of dollars |
|
Interest rate contracts |
|
$ |
294 |
|
|
$ |
768 |
|
|
$ |
(677 |
) |
|
$ |
(154 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
294 |
|
|
$ |
768 |
|
|
$ |
(677) |
(1) |
|
$ |
(154) |
(1) |
|
$ |
|
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 the condensed consolidated
statement of operations. |
21
14. Income Taxes
Our consolidated effective tax rate for the three months ended September 30, 2009 and 2008 was
81.6% and 42.8%, respectively. Our consolidated effective tax rate for the nine months ended
September 30, 2009 and 2008 was (49.9%) and 41.4%, respectively. The change in the consolidated
effective tax rate for 2009 is primarily due to the inability to utilize the losses generated in
the domestic operations of our Background Screening segment for the first six months of 2009 and in
the UK operations of this segment for the nine months ended September 30, 2009. These losses are
not expected to result in a future tax benefit. Also, we have unfavorable permanent adjustments to
taxable loss for non-deductible goodwill impairments and a one-time benefit for the reversal of
previously accrued taxes of $323 thousand. For the nine months ended September 30, 2009, our
uncertain tax liability decreased by approximately $2.5 million, of which $323 thousand impacted
the consolidated effective tax rate. The remaining decrease was related to the timing of certain
accruals and has no impact to the consolidated effective tax rate.
15. 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
nine months ended September 30, 2009 and 2008.
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 September 30, 2009,
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. As of September 30, 2009, we have 361 thousand shares remaining
to issue and options to purchase 2.4 million 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 September 30, 2009, we have 2.1 million shares remaining to issue
and options to purchase 2.4 million shares 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 three and four years of continuous
service.
In May 2009, we completed an offer to eligible
employees under our Stock Incentive Plans to exchange certain stock options previously granted with
exercise prices below the value of our stock as of March 2009 for a lesser number of replacement options with a
lower exercise price. Exchange ratios varied based on the
exercise price and remaining term of the tendered option, as well as the fair market value of our
common stock used for purposes of the valuation. The new stock options issued pursuant to the
exchange vest over a four-year period with no credit for past vesting and have a ten-year
contractual term. The exchange of stock options was treated as a modification in accordance with
SFAS No. 123R; and the incremental stock-based compensation expense of approximately $1.2 million
will be recognized straight line over the four-year vesting period. The remaining unrecognized
compensation expense of the original grant will be amortized over the four-year vesting period of
the new options
22
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.
We account for share-based compensation under the provisions of U.S. GAAP. 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.
Total share-based compensation expense included in general and administrative expenses in the
accompanying condensed consolidated statements of operations was $1.1 million for both the three
months ended September 30, 2009 and 2008. Total share-based compensation expense included in
general and administrative expenses on our consolidated statements of operations was $3.2 million
for both the nine months ended September 30, 2009 and 2008.
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:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
55.4 |
% |
|
|
37.7 |
% |
Risk free interest rate |
|
|
2.0 |
% |
|
|
3.1 |
% |
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 nor do we expect to issue dividends in the
future. As such, the dividend yield used in our valuations for the three months and the nine months
ended September 30, 2009 and 2008 were zero.
Expected Volatility. The expected volatility of the options granted was estimated based upon
the average volatility of comparable public companies, as well as our historical share price
volatility.
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 nine months ended September 30,
2009 and 2008 was determined under the simplified calculation provided in U.S. GAAP ((vesting term
+ original contractual term)/2). For the majority of grants valued during the nine months ended
September 30, 2009 and 2008, the options had graded vesting over 3 and 4 years (equal vesting of
options annually) and the contractual term was 10 years.
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 September 30, 2009 and 2008 was $536 thousand and $562 thousand, respectively.
Total share based compensation expense recognized for stock options was $1.6 million for both the
nine months ended September 30, 2009 and 2008.
23
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, 2008 |
|
|
4,597,106 |
|
|
$ |
11.41 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,332,522 |
|
|
|
3.85 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(115,816 |
) |
|
|
.45 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(3,007,760 |
) |
|
|
12.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
3,806,052 |
|
|
$ |
6.49 |
|
|
$ |
4,483 |
|
|
|
7.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2009 |
|
|
1,238,191 |
|
|
$ |
11.01 |
|
|
$ |
|
|
|
|
4.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no grants in the three months ended September 30, 2009. The weighted average grant
date fair value of options granted based on the Black-Scholes method, during the three months ended
September 30, 2008 was $3.87, respectively. The weighted average grant date fair value of options
granted, based on the Black-Scholes method, during the nine months ended September 30, 2009 and
2008 was $1.76 and $3.56, respectively.
For options exercised, intrinsic value is calculated as the difference between the market
price on the date of exercise and the exercise price. The total intrinsic value of options
exercised during the three and nine months ended September 30, 2009 was $873 thousand. The total
intrinsic value of options exercised during the three and nine months ended September 30, 2008 was
$240 thousand and $487 thousand, respectively.
As of September 30, 2009, there was $6.9 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 3.4 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 September 30, 2009 and 2008 was $577 thousand and $562 thousand, respectively.
Total share based compensation recognized for restricted stock units was $1.6 million for both the
nine months ended September 30, 2009 and 2008.
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, 2008 |
|
|
513,884 |
|
|
$ |
9.33 |
|
|
|
|
|
Granted |
|
|
1,288,941 |
|
|
|
4.18 |
|
|
|
|
|
Canceled |
|
|
(78,346 |
) |
|
|
9.41 |
|
|
|
|
|
Vested |
|
|
(162,371 |
) |
|
|
9.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
1,562,108 |
|
|
$ |
4.32 |
|
|
|
3.26 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009, there was $6.2 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 3.1 years.
16. Related Party Transactions
We have a minority investment in White Sky, Inc. (White Sky) (formerly Guard ID) and a
commercial agreement to incorporate and market their product into our fraud and identity theft
protection product offerings. For the three and nine months ended September 30, 2009, there was
$588 thousand and $1.2 million, respectively, included in cost of revenue in our condensed
consolidated statement of operations related to royalties for exclusivity and product costs. As of
September 30, 2009, we held $166 thousand of inventory related to White Sky, which is recorded in
prepaid and other current assets in our condensed consolidated balance sheet.
17. Transfers from Noncontrolling Interest
24
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. In addition, we contributed to SIH, which in turn,
contributed to the capital of SI, certain indebtedness and payables owed to us by SI and its
subsidiaries.
The following table summarizes our net (loss) income attributable to Intersections Inc., and
transfers from the noncontrolling interest for the nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Intersections Inc. |
|
$ |
(2,867 |
) |
|
$ |
10,488 |
|
Decrease in Intersections paid-in capital for
purchase of 45 common units of Screening
International, LLC |
|
|
(3,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net transfers from noncontrolling interest |
|
|
(3,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to Intersections
Inc. and transfers from noncontrolling interest |
|
$ |
(5,926 |
) |
|
$ |
10,488 |
|
|
|
|
|
|
|
|
In accordance with U.S. GAAP, 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. 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
18. Segment and Geographic Information
We have three reportable segments. Our Consumer Products and Services segment includes our
consumer protection and other consumer products and services. This consists of identity theft
management tools, membership product offerings and other subscription based services such as life
and accidental death insurance. Our Background Screening segment includes the personnel and vendor
background screening services provided by SI. Our Other segment includes the services for our
relationship with a third party that administers referrals for identity theft to major banking
institutions and breach response services. This segment also includes the software management
solutions for the bail bond industry provided by Captira and corporate brand protection provided by
Net Enforcers.
The following table sets forth segment information for the three and nine months ended
September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
Products |
|
Background |
|
|
|
|
|
|
and Services |
|
Screening |
|
Other |
|
Consolidated |
|
|
(in thousands) |
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
87,191 |
|
|
$ |
4,603 |
|
|
$ |
1,133 |
|
|
$ |
92,927 |
|
Goodwill impairment charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,736 |
|
|
|
196 |
|
|
|
17 |
|
|
|
1,949 |
|
Amortization |
|
|
1,671 |
|
|
|
96 |
|
|
|
124 |
|
|
|
1,891 |
|
Income (loss) before income taxes and minority interest |
|
$ |
5,106 |
|
|
$ |
(844 |
) |
|
$ |
(2,364 |
) |
|
$ |
1,898 |
|
Three Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
83,788 |
|
|
$ |
7,814 |
|
|
$ |
1,813 |
|
|
$ |
93,415 |
|
Depreciation |
|
|
2,190 |
|
|
|
241 |
|
|
|
7 |
|
|
|
2,438 |
|
Amortization |
|
|
2,363 |
|
|
|
126 |
|
|
|
250 |
|
|
|
2,739 |
|
Income (loss) before income taxes and minority interest |
|
$ |
6,149 |
|
|
$ |
(1,367 |
) |
|
$ |
(723 |
) |
|
$ |
4,059 |
|
Nine Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
Products |
|
Background |
|
|
|
|
|
|
and Services |
|
Screening |
|
Other |
|
Consolidated |
|
|
(in thousands) |
Revenue |
|
$ |
252,803 |
|
|
$ |
13,548 |
|
|
$ |
4,162 |
|
|
$ |
270,513 |
|
Goodwill impairment charges |
|
|
|
|
|
|
6,163 |
|
|
|
|
|
|
|
6,163 |
|
Depreciation |
|
|
5,396 |
|
|
|
631 |
|
|
|
34 |
|
|
|
6,061 |
|
Amortization |
|
|
5,762 |
|
|
|
339 |
|
|
|
372 |
|
|
|
6,473 |
|
Income (loss) before income taxes and minority interest |
|
$ |
9,994 |
|
|
$ |
(10,320 |
) |
|
$ |
(4,509 |
) |
|
$ |
(4,835 |
) |
Nine Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
245,793 |
|
|
$ |
22,570 |
|
|
$ |
5,158 |
|
|
$ |
273,521 |
|
Depreciation |
|
|
6,375 |
|
|
|
724 |
|
|
|
8 |
|
|
|
7,107 |
|
Amortization |
|
|
6,940 |
|
|
|
379 |
|
|
|
813 |
|
|
|
8,132 |
|
Income (loss) before income taxes and minority interest |
|
$ |
21,355 |
|
|
$ |
(3,358 |
) |
|
$ |
(1,765 |
) |
|
$ |
16,232 |
|
As of September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
15,774 |
|
|
$ |
2,258 |
|
|
$ |
208 |
|
|
$ |
18,240 |
|
Identifiable assets |
|
$ |
162,341 |
|
|
$ |
9,826 |
|
|
$ |
20,270 |
|
|
$ |
192,437 |
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
14,862 |
|
|
$ |
2,004 |
|
|
$ |
76 |
|
|
$ |
16,942 |
|
Identifiable assets |
|
$ |
214,173 |
|
|
$ |
(4,451 |
) |
|
$ |
(8,093 |
) |
|
$ |
201,629 |
|
Information concerning the revenues and total assets of principal geographic areas is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
United Kingdom |
|
Other |
|
Consolidated |
|
|
(in thousands) |
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2009
|
|
$ |
91,972 |
|
|
$ |
870 |
|
|
$ |
85 |
|
|
$ |
92,927 |
|
For the three months ended September 30, 2008
|
|
|
89,823 |
|
|
|
3,549 |
|
|
|
43 |
|
|
|
93,415 |
|
For the nine months ended September 30, 2009
|
|
|
267,423 |
|
|
|
2,894 |
|
|
|
196 |
|
|
|
270,513 |
|
For the nine months ended September 30, 2008
|
|
|
264,501 |
|
|
|
8,932 |
|
|
|
88 |
|
|
|
273,521 |
|
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
$ |
189,973 |
|
|
$ |
2,385 |
|
|
$ |
79 |
|
|
$ |
192,437 |
|
As of December 31, 2008
|
|
|
200,717 |
|
|
|
1,947 |
|
|
|
(1,035 |
) |
|
|
201,629 |
|
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, 2008 filed on March 16, 2009, 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 ongoing significant 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 three reportable segments. Our Consumer Products and Services segment includes our
consumer protection and other consumer products and services. This consists of identity theft
management tools, membership product offerings and other
26
subscription based services such as life and accidental death insurance. Our Background
Screening segment includes the personnel and vendor background screening services provided by SI.
Our Other segment includes the services for our relationship with a third party that administers
referrals for identity theft to major banking institutions and breach response services. This
segment also includes the software management solutions for the bail bond industry provided by
Captira and corporate brand protection provided by Net Enforcers.
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. We also offer our services directly to consumers.
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. We anticipate this trend of our company-funded marketing programs
continuing in the remaining months of 2009, particularly as our financial institution clients
continue to request that we bear more of the new subscriber marketing costs as well as prepay
commissions to them on new subscribers. We expect this trend to continue for the foreseeable future
until the financial markets and the general economy start to recover.
We expanded our efforts to market our consumer products and services directly to consumers. 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, email and mass media. We expect to continue our own investment in marketing in the
remaining months of 2009 with existing and new clients and expand 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:
|
|
|
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
|
27
|
|
|
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 |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Subscribers at beginning of period |
|
|
4,467 |
|
|
|
5,657 |
|
|
|
4,730 |
|
|
|
5,259 |
|
New subscribers indirect |
|
|
171 |
|
|
|
366 |
|
|
|
622 |
|
|
|
1,551 |
|
New subscribers direct (1) |
|
|
582 |
|
|
|
659 |
|
|
|
1,703 |
|
|
|
1,774 |
|
Cancelled subscribers within first 90 days of subscription |
|
|
(240 |
) |
|
|
(269 |
) |
|
|
(700 |
) |
|
|
(844 |
) |
Cancelled subscribers after first 90 days of subscription |
|
|
(581 |
) |
|
|
(1,482 |
) |
|
|
(1,956 |
) |
|
|
(2,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscribers at end of period |
|
|
4,399 |
|
|
|
4,931 |
|
|
|
4,399 |
|
|
|
4,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
92,927 |
|
|
$ |
93,415 |
|
|
$ |
270,513 |
|
|
$ |
273,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from transactional sales |
|
|
(5,574 |
) |
|
|
(9,094 |
) |
|
|
(16,979 |
) |
|
|
(26,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from lost/stolen credit card registry |
|
|
(12 |
) |
|
|
(9 |
) |
|
|
(38 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue |
|
$ |
87,341 |
|
|
$ |
84,312 |
|
|
$ |
253,496 |
|
|
$ |
247,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
$ |
43,724 |
|
|
$ |
35,095 |
|
|
$ |
126,750 |
|
|
$ |
100,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions paid on transactional sales |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions paid on lost/stolen credit card registry |
|
|
(41 |
) |
|
|
(15 |
) |
|
|
(83 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions associated with subscription revenue |
|
$ |
43,682 |
|
|
$ |
35,079 |
|
|
$ |
126,664 |
|
|
$ |
100,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We classify subscribers from shared marketing arrangements with direct marketing
arrangements. |
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
28
Through our wholly-owned subsidiary, SIH, we provide 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 integrate 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 are generally sold to corporate clients under contractual arrangements with
individual per unit prices for specific service specifications. Due to substantial difference in
both service specifications and associated data acquisition costs, prices for our background
screening services vary significantly among clients and geographies.
Our clients include leading US, UK and global companies in such areas as manufacturing,
staffing and recruiting agencies, financial services, retail and transportation. Our clients are
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 have other clients in various
countries, and expect the number of these clients to increase as we develop our global background
screening business. Because we currently service the majority of our clients through our operations
in the US and the UK, we consider those two locations to be the sources of our business for
purposes of allocating revenue on a geographic basis.
We generally market our background screening services to businesses through an internal sales
force. Our services are offered to businesses on a local or global basis. Prices for our services
vary based upon complexity of the services offered, the cost of performing these services and
competitive factors. Our former joint venture partner, Control Risks Group, Ltd (Control Risks
Group), will continue to promote our products under a global
marketing agreement through May 2011 and license certain
trademarks under which our services are branded in certain geographic
areas until December 2010.
Other
Our Other segment includes our wholly-owned subsidiary Captira Analytical, LLC (Captira),
which provides software and 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 Captiras
services are the only fully integrated suite of bail bonds management applications of comparable
scope available in the marketplace today. Captiras services are sold to retail bail bondsman on a
per seat license basis plus additional one-time or transaction related charges for various
optional services. As Captiras business model is relatively new, pricing and service
configurations are subject to change at any time.
Through our wholly-owned subsidiary, Net Enforcers, Inc (Net Enforcers), we provide
corporate identity theft protection services, including online brand monitoring, online auction
monitoring and enforcement, intellectual property monitoring, price monitoring and other services.
Net Enforcers services are typically priced as monthly subscriptions for a defined set of
monitoring and analysis services, as well as per transaction charges for communications related
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 thousands of dollars per month.
We also offer victim assistance services as part of our agreement with the Identity Theft
Assistance Corporation (ITAC) to help victims of identity theft that are referred to ITAC by
their financial institutions. We assist these customers in identifying instances of identity theft
that appear on their credit report, notifying the affected institutions, and sharing the data with
law enforcement. These victim assistance services are provided free to the customers and we are
paid fees by the ITAC Members for the services we provide to their customers. In addition, we offer
data security breach response services to organizations responding to compromises of sensitive
personal information. We help these clients notify the affected individuals and we provide the
affected individuals with identity theft recovery and credit monitoring services offered by our
clients at no charge to the affected individuals. We are paid fees by the clients for the services
we provide their customers.
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
29
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 additional information,
see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, 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 31st, or more
frequently if indicators of impairment exist. Goodwill has been assigned to our reporting units for
purposes of impairment testing. We have three reporting units: Consumer Products and Services,
Background Screening and Other, which is consistent with our operating segments. As of September
30, 2009, goodwill of $43.2 million and $3.7 million resides 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, which 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 equal consideration to
the income and market approach. 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.
Due to the deterioration in the general economic environment and decline in our market
capitalization, we concluded a triggering event had occurred at June 30, 2009 indicating potential
impairment in our Background Screening reporting unit. We determined, in
30
the first step of our goodwill impairment analysis performed as of June 30, 2009, that
goodwill in the Background Screening reporting unit was impaired. We did not have any triggering
events in the three months ended September 30, 2009 and, therefore, did not perform an analysis of
our goodwill. 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 of
approximately five years. The assumptions for our discounted future cash flows begin with our
historical operating performance. Additionally, we considered the impact that known economic,
industry and market trends will have on our future forecasts, as well as the impact that we expect
from planned business initiatives including new products, client service and retention standards.
Examples of known economic and market trends that were considered in our Consumer Products and
Services reporting unit include the impact a weakened economy has had on our consumer credit card
originations, which negatively impact subscriber growth, subscriber attrition, mortgage billings
for our products through June 30, 2009. Examples that were considered in our Background Screening
and Other reporting units include the impact the higher unemployment rate has had on our
application volumes, as well as reduced business spending.
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. For the step one impairment
test as of June 30, 2009, the discount rates used to develop the estimated fair value of the
reporting units ranged from 15.0% to 30.0%. The discount rate for our Consumer Products and
Services reporting unit increased to 15.0% from 12.0% for the three months ended June 30, 2009
compared to our annual goodwill impairment evaluation at October 31, 2008. This slight increase
represents some anticipated degradation in the core business due to the challenging economic
environment and its impact on our financial institution clients. The discount rate for our
Background Screening and Other reporting units were 17.0% and 30.0%, respectively. The discount
rates for these reporting units are higher because there is inherent risk or volatility in the
expected cash flows of these reporting units. This volatility is due to the reduced rate of growth
in a less stable start-up market and the reduced rate of growth in a weakened economic environment,
coupled with the historical net losses within each reporting unit. The long-term growth rate we
used to determine the terminal value of each reporting unit for the year ended December 31, 2008
and for the six months ended June 30, 2009 was 3.0%. This was based on managements assessment of
the minimum expected terminal growth rate of each reporting unit, as well as broader economic
considerations such as GDP, inflation and the maturity of the markets we serve.
In our market based approach, a valuation multiple was selected based on a financial
benchmarking analysis that compared the reporting units operating result with the comparable
companies information. In addition to these financial considerations, qualitative factors such as
business descriptions, business diversity, the size and operating performance, and overall risk
among the benchmark companies were considered in the ultimate selection of the multiple. We used
both an Earnings Before Interest Depreciation and Amortization (EBITDA) multiple and revenue
multiple to estimate the fair value using a market approach. At June 30, 2009, the Consumer
Products and Services reporting unit EBITDA and revenue multiples were 3.8 and 0.4, respectively.
The Background Screening and Other reporting units revenue multiples were 0.2 and 1.0,
respectively.
However, the comparison of the values calculated using an equally weighted average between 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. Based on the analysis as of June 30, 2009, the implied
fair value of the Consumer Products and Services reporting unit exceeded the carrying value by
approximately 67.6%. The carrying value of our Other reporting unit exceeded its implied fair
value by 44.3%, however, there is no remaining goodwill allocated to this reporting unit as of June
30, 2009. The carrying value of our Background Screening reporting unit exceeded its implied fair
value by approximately 21.7% based on this analysis as of at June 30, 2009, which resulted in an
impairment of goodwill in our Background Screening reporting unit.
In the reporting units where the carrying value exceeded the fair value and had allocable
goodwill, we included certain key assumptions in our discounted cash flows. For the Background
Screening segment, we included assumptions for revenue and the impact the recessionary economy is
having on worldwide hiring. Our revenue growth rates in later years are consistent with our
historical operations for a mature business in a stronger economy. As our operating margin has
stabilized in this business, we expect it to grow in proportion to the revenue. In addition, we
made several key assumptions regarding the long-term growth rate and discount rates in calculating
an implied fair value (see above for discussion).
31
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 unit 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 September 30, 2009. Our Background Screening reporting unit has $3.7 million of goodwill
remaining as of September 30, 2009. A continued increase in the domestic and international
unemployment rate will have an inverse effect on revenue and cash flow attributable to our
Background Screening reporting unit as volume for new hire background screens will be reduced. 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, 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 nine months ended September 30, 2009, we did not record an impairment for
long-lived assets.
Revenue Recognition
We recognize revenue on 1) identity theft, credit management and background 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, Credit Management and Background Services
We recognize revenue from our services in accordance with U.S. GAAP. Revenue is recognized
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
32
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 generate revenue from one-time credit reports and
background screenings which are recognized when the report is provided to the customer
electronically, which is generally at the time of completion.
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.
The amount of revenue recorded by us is also determined in accordance with U.S. GAAP, which
addresses whether a company should report revenue based on the gross amount billed to a customer or
the net amount retained by us (amount billed less commissions or fees paid). 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 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 in accordance with U.S. GAAP. Revenue is recognized
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.
The amount of revenue recorded by us is determined in accordance with U.S. GAAP. For insurance
products, we generally 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 September 30, 2009 and December 31, 2008
totaled $1.9 million and $1.6 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 Other
segment. We recognize revenue on services provided from identity theft referrals from major banking
institutions and breach response services on a monthly or annual subscription basis. We also
recognize revenue from providing management service solutions, offered by Captira, on a monthly
subscription basis, and online brand protection and brand monitoring, offered by Net Enforcers, on
a monthly basis.
33
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 accounted for in accordance with U.S. GAAP. 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.
We amortize deferred subscription solicitation costs on a cost pool basis over the period
during which the future benefits are expected to be received, but no more than 12 months.
Commission Costs
In accordance with U.S. GAAP, 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 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
prepaid expenses and other current assets 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.
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.
34
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.
U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized tax benefits. We
determined, in accordance with the guidance, that upon conclusion of our Internal Revenue Service
examination, the respective tax positions were settled and we recognized various uncertain tax
benefits as discrete events, which had an impact on our condensed consolidated financial statements
as of September 30, 2009. In addition to the amount of tax resulting from applying the estimated
effective tax rate to pretax loss, we included certain items treated as discrete events to arrive
at an estimated overall tax amount for the three months ended September 30, 2009. See Note 14,
Income Taxes.
Net Income (Loss) Per Common Share
Basic and diluted income (loss) per share are 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 and warrants.
For the three months ended
September 30, 2009, options to purchase 4.3 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 nine months ended September 30, 2009, options to
purchase 5.6 million shares of common stock, respectively, have been excluded from the computation
of diluted income per share because they do not have a dilutive effect due to our loss from
continuing operations. For the three and nine months ended September 30, 2008, options to purchase
4.3 million shares of common stock have been excluded from the computation of diluted income per
share as their effect would be anti-dilutive. These shares could dilute earnings per share in the
future.
A reconciliation of basic income per common share to diluted income per common share is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except |
|
|
(In thousands, except |
|
|
|
per share data) |
|
|
per share data) |
|
Net income (loss) available to common shareholders
basic and diluted |
|
$ |
349 |
|
|
$ |
2,697 |
|
|
$ |
(2,867 |
) |
|
$ |
10,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
17,534 |
|
|
|
17,296 |
|
|
|
17,470 |
|
|
|
17,244 |
|
Dilutive effect of common stock equivalents |
|
|
317 |
|
|
|
411 |
|
|
|
|
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
17,851 |
|
|
|
17,707 |
|
|
|
17,470 |
|
|
|
17,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
$ |
(0.16 |
) |
|
$ |
0.61 |
|
Diluted |
|
$ |
0.02 |
|
|
$ |
0.15 |
|
|
$ |
(0.16 |
) |
|
$ |
0.60 |
|
Subsequent Events
Management has evaluated subsequent events after the balance sheet date through November 9,
2009, which is the date our condensed consolidated financial statements were issued.
Accounting Standards Updates
35
In June 2009, the Financial Accounting Standards Board (FASB) issued, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB
Accounting Standards Codification (Codification) established the Codification as the source of
authoritative U.S. GAAP, recognized by the FASB to be applied by nongovernmental entities. The FASB
will no longer issue new standards in the form of statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts; instead, it will issue Accounting Standards Updates. The FASB will not
consider Accounting Standards Updates as authoritative in their own right; these updated will serve
only to update the Codification, provide background information about the guidance, and provide
bases for conclusions on the change(s) in the Codification. The Codification is effective for
interim and annual periods ending after September 15, 2009. We have updated our disclosures and
condensed consolidated financial statements to reflect the new Codification.
In August 2009, an update was made to Fair Value Measurement and Disclosures Measuring
Liabilities at Fair Value, to provide clarification that, in circumstances in which a quoted price
in an active market for the identical liability is not available, a reporting entity is required to
measure fair value using the techniques stated in the update. The update also clarifies fair value
calculation for a liability when a restriction exists that prevents the transfer of the liability.
The update further clarifies that use of quoted market price for an identical liability or the
quoted market price for the identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This
update is effective for the first reporting period, including interim periods, beginning after
issuance. We have adopted the provisions of this update as of September 30, 2009 and there is no
material impact on our condensed consolidated financial statements.
Accounting Standards Updates Not Yet Effective
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 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 will adopt the provisions this
update as of January 1, 2010 and do not anticipate a material impact to our condensed consolidated
financial statements.In September 2009, an update was made to Fair Value Measurement and
Disclosures Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent), which permits entities to measure the fair value of an investment that is within the
scope of the amendments in this update on the basis of net asset value per share of the investment
(or its equivalent) if the net asset value of the investment (or its equivalent) is calculated in a
manner consistent with the measurement principles of Financial Services Investment Companies
as of the reporting entitys measurement date, including measurement of all or substantially all of
the underlying investments of the investee in accordance with Fair Value Measurements and
Disclosures guidance. This update also requires disclosure by major category of investment about
the attributes of investments within the scope of the update. This update is effective for interim
and annual periods ending after December 15, 2009. We will adopt the provisions of this update as
of January 1, 2010 and do not anticipate a material impact to our condensed consolidated financial
statements.
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 are currently in the process of evaluating the impact on 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
36
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 are currently in the process of evaluating the impact on our condensed
consolidated financial statements.
Trends Related to the Current Economic Environment
We anticipate the recessionary economy to continue to have the following three principal
effects on our business: We expect new card issuances at our financial institution clients to
continue at a lower rate than we experienced prior to the economic downturn, which in turn translates into a softening of revenue for our Consumer
Products and Services segment. Our relationships with some financial institution clients may
continue to trend toward more direct marketing arrangements as they look more for outside sources
to fund partner programs and invest in marketing, which can present both opportunities and
challenges to us. This may require additional cash, which may not be available to us. The
consolidation of the major financial institutions and turbulence with the financial services market
could also have an impact. The global slowdown in hiring will continue to reduce the volume of
purchases of background screening reports, which will continue to reduce revenue in our Background
Screening segment. Reductions in external spending by financial institutions and corporations may
reduce case volumes and increase cancellation rates in our Other segment.
Results of Operations
We operate in three primary business segments: Consumer Products and Services, Background
Screening, and Other. In 2008, we changed our segment reporting by realigning a portion of the
Consumer Products and Services segment into the Other segment. The Other segment now contains
breach response and identify theft referral services previously accounted for in the Consumer
Products and Services segment. The change in business segments was determined based on how our
senior management analyzed, evaluated, and operated our global operations beginning in the three
months ended June 30, 2008.
Our Consumer Products and Services segment includes our consumer protection and other consumer
products and services. It includes identity theft management tools, membership product offerings
and other subscription based services such as life and accidental death insurance. Our Background
Screening segment includes the personnel and vendor background screening services provided by SIH.
Our Other segment includes breach response and identity theft referral services. This segment also
includes the software management solutions for the bail bond industry provided by Captira and
corporate brand protection provided by Net Enforcers.
We have developed methodologies to fully allocate indirect costs associated with these
revenues to the Other segment. These costs include expenses associated with fulfillment, credit
bureau costs, indirect selling and general and administrative expenses. The allocation
methodologies are based on historical cost percentages of these services from our continuing
operations.
As a result, we have modified the way we manage our business to utilize operating income
(loss) information to evaluate the performance of our business segments and to allocate resources
to them.
Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008 (in thousands):
The consolidated results of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Consolidated |
|
Three Months Ended September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
87,191 |
|
|
$ |
4,603 |
|
|
$ |
1,133 |
|
|
$ |
92,927 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
15,492 |
|
|
|
|
|
|
|
|
|
|
|
15,492 |
|
Commissions |
|
|
28,172 |
|
|
|
|
|
|
|
60 |
|
|
|
28,232 |
|
Cost of revenue |
|
|
22,149 |
|
|
|
2,726 |
|
|
|
533 |
|
|
|
25,408 |
|
General and administrative |
|
|
12,657 |
|
|
|
2,174 |
|
|
|
2,763 |
|
|
|
17,594 |
|
Impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,736 |
|
|
|
196 |
|
|
|
17 |
|
|
|
1,949 |
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Consolidated |
|
Amortization |
|
|
1,671 |
|
|
|
96 |
|
|
|
124 |
|
|
|
1,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
81,877 |
|
|
|
5,192 |
|
|
|
3,497 |
|
|
|
90,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
5,314 |
|
|
$ |
(589 |
) |
|
$ |
(2,364 |
) |
|
$ |
2,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
83,788 |
|
|
$ |
7,814 |
|
|
$ |
1,813 |
|
|
$ |
93,415 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
12,776 |
|
|
|
|
|
|
|
|
|
|
|
12,776 |
|
Commissions |
|
|
22,199 |
|
|
|
|
|
|
|
120 |
|
|
|
22,319 |
|
Cost of revenue |
|
|
25,048 |
|
|
|
4,600 |
|
|
|
791 |
|
|
|
30,439 |
|
General and administrative |
|
|
12,444 |
|
|
|
3,898 |
|
|
|
1,370 |
|
|
|
17,712 |
|
Depreciation |
|
|
2,190 |
|
|
|
241 |
|
|
|
7 |
|
|
|
2,438 |
|
Amortization |
|
|
2,363 |
|
|
|
126 |
|
|
|
250 |
|
|
|
2,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
77,020 |
|
|
|
8,865 |
|
|
|
2,538 |
|
|
|
88,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
6,768 |
|
|
$ |
(1,051 |
) |
|
$ |
(725 |
) |
|
$ |
4,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products and Services Segment
Our Consumer Products and Services segment includes our consumer protection and other consumer
products and services. It includes identity theft management tools, membership product offerings
and other subscription based services such as life and accidental death insurance.
OVERVIEW
Our income from operations for our Consumer Products and Services segment decreased in the
three months ended September 30, 2009 as compared to the three months ended September 30, 2008.
This was primarily from increased marketing and commission expenses primarily as a result of our
continued investment in our direct to consumer business and prepaid commission arrangements. This
was partially offset by increased revenue from direct marketing arrangements, which increased 8.3%
to 88.1% as of September 30, 2009. This includes our 2008 acquisition of Citibanks membership
agreements, which we recognize as a direct marketing arrangement. Our subscription revenue (see
Other Data on page 28) increased to $87.1 million from $84.3 million in the comparable period. We
expect both new sales and subscriber attrition to remain relatively consistent in the remaining
months of 2009 until the economy begins to recover.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
87,191 |
|
|
$ |
83,788 |
|
|
$ |
3,403 |
|
|
|
4.1 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
15,492 |
|
|
|
12,776 |
|
|
|
2,716 |
|
|
|
21.3 |
% |
Commissions |
|
|
28,172 |
|
|
|
22,199 |
|
|
|
5,973 |
|
|
|
27.0 |
% |
Cost of revenue |
|
|
22,149 |
|
|
|
25,048 |
|
|
|
(2,899 |
) |
|
|
(11.6 |
)% |
General and administrative |
|
|
12,657 |
|
|
|
12,444 |
|
|
|
213 |
|
|
|
1.7 |
% |
Depreciation |
|
|
1,736 |
|
|
|
2,190 |
|
|
|
(454 |
) |
|
|
(20.7 |
)% |
Amortization |
|
|
1,671 |
|
|
|
2,363 |
|
|
|
(692 |
) |
|
|
(29.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
81,877 |
|
|
|
77,020 |
|
|
|
4,857 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
5,314 |
|
|
$ |
6,768 |
|
|
$ |
(1,454 |
) |
|
|
(21.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. Revenue increased in the three months ended September 30, 2009 compared to the three
months ended September 30, 2008 primarily from growth in revenue from existing client relations and
an increase in the ratio of revenue from direct marketing arrangements to revenue from
indirect marketing arrangements and increased revenue from products and services marketed directly to consumers,
partially offset by the loss of subscribers from our wholesale relationship with Discover. Revenue
from direct marketing arrangements, in which we recognize the gross amount billed to the customer,
has increased to 87.9% for the three months ended September 30, 2009 from 79.8% in the three months
ended September 30, 2008.
Total subscriber additions for the three months ended September 30, 2009 were 753 thousand
compared to 1.0 million in the three months ended September 30, 2008.
The table below shows the percentage of subscribers generated from direct marketing
arrangements:
38
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Percentage of subscribers from direct marketing arrangements to total subscribers |
|
|
60.6 |
% |
|
|
52.5 |
% |
Percentage of new subscribers acquired from direct marketing arrangements to total
new subscribers acquired |
|
|
77.3 |
% |
|
|
64.3 |
% |
Percentage of revenue from direct marketing arrangements to total subscription revenue |
|
|
87.9 |
% |
|
|
79.8 |
% |
Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including
telemarketing, web-based marketing and direct mail expenses such as printing and postage. The
increase in marketing is primarily a result of our continued investment in our Consumer Direct
business. Amortization of deferred subscription solicitation costs related to marketing for the
three months ended September 30, 2009 and 2008 were $12.5 million and $11.7 million, respectively.
Subscription solicitation costs related to marketing costs expensed as incurred for the three
months ended September 30, 2009 and 2008 were $3.0 million and $1.1 million, respectively, as a
result of our increased investment in broadcast media relating to our
direct to consumer products. We expect this trend to continue at an
increased level.
As a percentage of revenue, marketing expenses increased to 17.8% for the three months ended
September 30, 2009 from 15.2% for the three months ended September 30, 2008.
Commissions Expenses. Commission expenses consist of commissions paid to our clients. The
increase is related to an increase in sales and subscribers from our direct marketing arrangements
as well as commissions recognized under our prepaid commission arrangements.
As a percentage of revenue, commission expenses increased to 32.3% for the three months ended
September 30, 2009 from 26.5% for the three months ended September 30, 2008 primarily due to the
increased proportion of revenue from direct marketing arrangements with ongoing clients. We expect
commission expenses, as a percentage of revenue, to continue to increase as we continue to grow our
direct marketing arrangements.
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. The decrease in cost of revenue was attributed mainly to a $2.0 million
reduction in fulfillment volumes and a $844 thousand decrease in data costs due to less subscriber
additions.
As a percentage of revenue, cost of revenue was 25.4% for the three months ended September 30,
2009 compared to 29.9% for the three months ended September 30, 2008.
General and Administrative Expenses. General and administrative expenses consist of personnel,
supplies, professional fees and facilities expenses associated with our executive, sales,
marketing, information technology, finance, and program and account management functions. The
increase in general and administrative expenses is primarily related to expenses related to moving
our operations to a new facility.
As a percentage of revenue, general and administrative expenses decreased to 14.5% for the
three months ended September 30, 2009 from 14.9% for the three months ended September 30, 2008.
Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our
fixed assets and capitalized software. Depreciation expense decreased for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008. The decrease is due to a
reduction in depreciable assets placed into service.
As a percentage of revenue, depreciation expenses decreased to 2.0% for the three months ended
September 30, 2009 from 2.6% for the three months ended September 30, 2008.
Amortization. Amortization expenses consist primarily of the amortization of our intangible
assets. The decrease is due to a reduction in amortization of customer related intangibles, which
are amortized on an accelerated basis.
As a percentage of revenue, amortization expenses decreased to 1.9% for the three months ended
September 30, 2009 from 2.8% for the three months ended September 30, 2008.
39
Background Screening Segment
Our Background Screening segment consists of the personnel and vendor background screening
services provided by SI.
OVERVIEW
Our loss from operations for our Background Screening segment decreased in the three months
ended September 30, 2009 as compared to the three months ended September 30, 2008. The general
economic slowdown has reduced overall hirings by our clients both in the US and UK and,
accordingly, the demand for our services. For example, the domestic unemployment rate, per the U.S.
Bureau of Labor, has increased since September 30, 2008 (6.2%) to 9.8% as of September 30, 2009 and
is expected to continue to increase in 2010. Our decreased revenue is due to reduced volume in our
domestic operations, which negatively impacted our revenue. Our volume decreased 18.2% in the
three months ended September 30, 2009 from the prior period in our domestic operations. In the
UK, our volume in the three months ended September 30, 2009 also decreased 72.2% from the
comparable period. We are attempting to make reductions in our costs to offset the declining
revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
4,603 |
|
|
$ |
7,814 |
|
|
$ |
(3,211 |
) |
|
|
(41.1 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
2,726 |
|
|
|
4,600 |
|
|
|
(1,874 |
) |
|
|
(40.1 |
)% |
General and administrative |
|
|
2,174 |
|
|
|
3,898 |
|
|
|
(1,724 |
) |
|
|
(44.2 |
)% |
Depreciation |
|
|
196 |
|
|
|
241 |
|
|
|
(45 |
) |
|
|
(18.7 |
)% |
Amortization |
|
|
96 |
|
|
|
126 |
|
|
|
(30 |
) |
|
|
(23.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
5,192 |
|
|
|
8,865 |
|
|
|
(3,673 |
) |
|
|
(41.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(589 |
) |
|
$ |
(1,051 |
) |
|
$ |
462 |
|
|
|
44.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The decrease is primarily attributable to a reduction in revenue from our UK
operations of $2.7 million and a reduction in domestic revenue of $542 thousand. The reduction in
revenue is primarily due to a decrease in volume for our background screening services. The
economic recession has reduced overall hiring by our clients and, accordingly, the demand for our
services. We anticipate this trend to continue for the remaining months of 2009, and possibly
beyond, until the economy starts to recover.
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. The decrease in
cost of revenue is due to a reduction of $715 thousand in database fees and fulfillment costs and
reductions of $122 thousand in domestic labor costs primarily due to reductions in volume. Volume
has decreased in the UK as well as labor costs of $1.0 million as a result of ongoing cost
management and productivity initiatives.
As a percentage of revenue, cost of revenue was 59.2% for the three months ended September 30,
2009 compared to 58.9% for the three months ended September 30, 2008.
General and Administrative Expenses. General and administrative expenses consist of personnel,
professional services and facilities expenses associated with our sales, marketing, information
technology, finance, human resources and account management functions. The decrease in general and
administrative expenses is primarily attributable to reductions in payroll costs of $966 thousand
and other general and administrative expenses of $758 thousand from cost reduction initiatives.
As a percentage of revenue, general and administrative expenses decreased to 47.2% for the
three months ended September 30, 2009 from 49.9% for the three months ended September 30, 2008.
Other Segment
Our Other segment includes the services for our relationship with a third party that
administers referrals for identity theft to major banking institutions and breach response
services. This segment also includes the software management solutions for the bail bond industry
provided by Captira and corporate brand protection provided by Net Enforcers.
OVERVIEW
40
Our loss from operations for our Other segment increased in the three months ended September
30, 2009 as compared to the three months ended September 30, 2008. The general economic slowdown
has negatively impacted these businesses and its revenue, along with slower growth for these early
stage businesses in a new market. In addition, there are increased professional fees at Net
Enforcers from ongoing litigation and regulatory compliance issues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
1,133 |
|
|
$ |
1,813 |
|
|
$ |
(680 |
) |
|
|
(37.5 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
60 |
|
|
|
120 |
|
|
|
(60 |
) |
|
|
(50.0 |
)% |
Cost of revenue |
|
|
533 |
|
|
|
791 |
|
|
|
(258 |
) |
|
|
(32.6 |
)% |
General and administrative |
|
|
2,763 |
|
|
|
1,370 |
|
|
|
1,393 |
|
|
|
101.7 |
% |
Depreciation |
|
|
17 |
|
|
|
7 |
|
|
|
10 |
|
|
|
142.8 |
% |
Amortization |
|
|
124 |
|
|
|
250 |
|
|
|
(126 |
) |
|
|
(50.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,497 |
|
|
|
2,538 |
|
|
|
959 |
|
|
|
37.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations |
|
$ |
(2,364 |
) |
|
$ |
(725 |
) |
|
|
(1,639 |
) |
|
|
(226.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The decrease in revenue is primarily attributable to a decrease in sales and
subscribers from our referral and breach business, along with a decrease in our corporate brand
protection business. Our referrals from banking institutions have decreased, which has a
corresponding decrease to our revenue. The general economic slowdown has negatively impacted sales
at Net Enforcers. We anticipate this trend continuing for the remaining months of 2009 and possibly
beyond. We are attempting to make reductions in our costs to offset the declining revenue in this
segment.
Commissions Expense. Commissions expenses consist of commissions paid to our clients. The
decrease in commissions is related to the decrease in sales and subscribers from our referral and
breach business.
As a percentage of revenue, commission expense was 5.3% for the three months ended September
30, 2009 and 6.6% for the three months ended September 30, 2008.
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 primarily decreased due to a decrease in sales from our
referral and breach entity, along with a decrease of volume in our corporate brand protection
business.
As a percentage of revenue, cost of revenue was 47.0% for the three months ended September 30,
2009 and 43.6% for the three months ended September 30, 2008.
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 management functions. The increase is primarily due to additional
legal fees at Net Enforcers from ongoing litigation and regulatory compliance issues.
As a percentage of revenue, general and administrative expenses increased to 243.8% for the
three months ended September 30, 2009 from 75.5% for the three months ended September 30, 2008.
Amortization. Amortization expenses consist primarily of the amortization of our intangible
assets. The decrease is due to a reduction in the depreciable carrying value from intangible asset
impairments recorded in the year ended December 31, 2008.
As a percentage of revenue, amortization expenses decreased to 10.9% for the three months
ended September 30, 2009 from 13.8% for the three months ended September 30, 2008.
Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008 (in thousands):
The consolidated results of operations are as follows:
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Consolidated |
|
Nine Months Ended September 30,
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
252,803 |
|
|
$ |
13,548 |
|
|
$ |
4,162 |
|
|
$ |
270,513 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
45,868 |
|
|
|
|
|
|
|
|
|
|
|
45,868 |
|
Commissions |
|
|
80,604 |
|
|
|
|
|
|
|
278 |
|
|
|
80,882 |
|
Cost of revenue |
|
|
66,151 |
|
|
|
8,877 |
|
|
|
1,764 |
|
|
|
76,792 |
|
General and administrative |
|
|
38,373 |
|
|
|
8,229 |
|
|
|
6,222 |
|
|
|
52,824 |
|
Impairment |
|
|
|
|
|
|
6,163 |
|
|
|
|
|
|
|
6,163 |
|
Depreciation |
|
|
5,396 |
|
|
|
631 |
|
|
|
34 |
|
|
|
6,061 |
|
Amortization |
|
|
5,762 |
|
|
|
339 |
|
|
|
372 |
|
|
|
6,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
242,154 |
|
|
|
24,239 |
|
|
|
8,670 |
|
|
|
275,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
10,649 |
|
|
$ |
(10,691 |
) |
|
$ |
(4,508 |
) |
|
$ |
(4,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
245,793 |
|
|
$ |
22,570 |
|
|
$ |
5,158 |
|
|
$ |
273,521 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
38,573 |
|
|
|
|
|
|
|
|
|
|
|
38,573 |
|
Commissions |
|
|
61,320 |
|
|
|
|
|
|
|
360 |
|
|
|
61,680 |
|
Cost of revenue |
|
|
73,769 |
|
|
|
12,814 |
|
|
|
2,136 |
|
|
|
88,719 |
|
General and administrative |
|
|
35,759 |
|
|
|
11,663 |
|
|
|
3,609 |
|
|
|
51,031 |
|
Depreciation |
|
|
6,375 |
|
|
|
724 |
|
|
|
8 |
|
|
|
7,107 |
|
Amortization |
|
|
6,940 |
|
|
|
379 |
|
|
|
813 |
|
|
|
8,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
222,736 |
|
|
|
25,580 |
|
|
|
6,926 |
|
|
|
255,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
23,057 |
|
|
$ |
(3,010 |
) |
|
$ |
(1,768 |
) |
|
$ |
18,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products and Services Segment
OVERVIEW
Our income from operations for our Consumer Products and Services segment decreased in the
nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. This
is primarily due to increased marketing and commissions expenses primarily as a result of our
continued investment in our Consumer Direct business and prepaid commission arrangements This was
partially offset by an increase in revenue from direct marketing arrangements, which increased
10.9% to 87.4% as of September 30, 2009, partially offset by the loss of our wholesale relationship
with Discover. Our subscription revenue (see Other Data on page 28) increased to $253.2 million
from $247.0 million in the comparable period. We expect both new sales and subscriber attrition
to remain relatively consistent in the remaining months of 2009 until the economy begins to
recover.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
252,803 |
|
|
$ |
245,793 |
|
|
$ |
7,010 |
|
|
|
2.9 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
45,868 |
|
|
|
38,573 |
|
|
|
7,295 |
|
|
|
19.0 |
% |
Commissions |
|
|
80,604 |
|
|
|
61,320 |
|
|
|
19,284 |
|
|
|
31.4 |
% |
Cost of revenue |
|
|
66,151 |
|
|
|
73,769 |
|
|
|
(7,618 |
) |
|
|
(10.3 |
)% |
General and administrative |
|
|
38,373 |
|
|
|
35,759 |
|
|
|
2,614 |
|
|
|
7.3 |
% |
Depreciation |
|
|
5,396 |
|
|
|
6,375 |
|
|
|
(979 |
) |
|
|
(15.4 |
)% |
Amortization |
|
|
5,762 |
|
|
|
6,940 |
|
|
|
(1,178 |
) |
|
|
(17.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
242,154 |
|
|
|
222,736 |
|
|
|
19,418 |
|
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
$ |
10,649 |
|
|
$ |
23,057 |
|
|
$ |
(12,408 |
) |
|
|
(53.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase is primarily the result of growth in revenue from existing clients, the
increase in the ratio of revenue from direct consumer marketing arrangements to revenue from
indirect customers and increased revenue from products and services marketed directly to consumers.
This was partially offset by the loss of subscribers from our wholesale relationship with Discover.
Revenue from direct marketing arrangements, in which we recognize the gross amount billed to the
customer, has increased to 87.4% for the nine months ended September 30, 2009 from 76.5% in the
nine months ended September 30, 2008.
42
Total subscriber additions for the nine months ended September 30, 2009 were 2.3 million
compared to 3.3 million in the nine months ended September 30, 2008.
The table below shows the percentage of subscribers generated from direct marketing
arrangements:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2009 |
|
2008 |
Percentage of subscribers from direct marketing arrangements to total subscribers |
|
|
60.6 |
% |
|
|
52.5 |
% |
Percentage of new subscribers acquired from direct marketing arrangements to total
new subscribers acquired |
|
|
73.2 |
% |
|
|
53.4 |
% |
Percentage of revenue from direct marketing arrangements to total subscription revenue |
|
|
87.4 |
% |
|
|
76.5 |
% |
Marketing Expenses. The increases in marketing is primarily a result of our continued
investment in our Consumer Direct business. Amortization of deferred subscription solicitation
costs related to marketing for the nine months ended September 30, 2009 and 2008 were $36.4 and
$35.1 million, respectively. Subscription solicitation costs related to marketing costs expensed as
incurred for the nine months ended September 30, 2009 and 2008 were $9.5 million and $3.5 million,
respectively, as a result of our increased investment in broadcast
media relating to our direct to consumer products. We expect this trend to
continue at an increased level.
As a percentage of revenue, marketing expenses increased to 18.1% for the nine months ended
September 30, 2009 from 15.7% for the nine months ended September 30, 2008.
Commission Expenses. The increase in commissions is related to an increase in sales and
subscribers from our direct subscription business and in commissions recognized under our prepaid
commission arrangements.
As a percentage of revenue, commission expenses increased to 31.9% for the nine months ended
September 30, 2009 from 24.9% for the nine months ended September 30, 2008 primarily due to the
increased proportion of revenue from direct marketing arrangements with ongoing clients. We expect
commissions expense, as a percentage of revenue, to continue to increase as we continue to increase
our direct marketing arrangements.
Cost of Revenue. The decrease in cost of revenue was attributed mainly to $4.7 million in
decreased fulfillment costs due to a reduction in initial fulfillment costs for ongoing subscribers
and a $4.0 million reduction in data costs required to support new and ongoing customers due to
less subscriber additions.
As a percentage of revenue, cost of revenue was 26.2% for the nine months ended September 30,
2009 compared to 30.0% for the nine months ended September 30, 2008.
General and Administrative Expenses. The increase in general and administrative expenses is
primarily related to increased payroll costs, professional fees, as well as costs associated with
moving our operations to a new facility.
As a percentage of revenue, general and administrative expenses increased to 15.2% for the
nine months ended September 30, 2009 from 14.5% for the nine months ended September 30, 2008.
Depreciation. Depreciation expense decreased for the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008. The decrease is a reduction in depreciable
assets placed into service.
As a percentage of revenue, depreciation expenses decreased to 2.1% for the nine months ended
September 2009 from 2.6% for the nine months ended September 30, 2008.
Amortization. Amortization expense decreased for the nine months ended September 30, 2009
compared to the nine months ended September 30, 2008. The decrease is due to a reduction in
amortization of customer related intangibles, which are amortized on an accelerated basis.
As a percentage of revenue, amortization expenses decreased to 2.3% for the nine months ended
September 30, 2009 from 2.8% for the nine months ended September 30, 2008.
43
Background Screening Segment
OVERVIEW
Our loss from operations for our Background Screening segment decreased in the nine months
ended September 30, 2009 as compared to the nine months ended September 30, 2008. The general
economic slowdown has reduced overall hirings by our clients both in the US and UK and,
accordingly, the demand for our services. For example, the domestic unemployment rate, per the U.S.
Bureau of Labor, has increased since September 30, 2008 (6.2%) to 9.8% as of September 30, 2009 and
is expected to continue to increase in 2010. Our decreased revenue is due to reduced volume in our
domestic operations, which negatively impacted our revenue. Our volume decreased 25.4% in the nine
months ended September 30, 2009 from the prior period in our domestic operations. In the UK, our
volume in the nine months ended September 30, 2009 also decreased 57.9% than in the comparable
period. We are attempting to make reductions in our costs to offset the declining revenue. Also,
we incurred a $6.2 million non-cash goodwill impairment charge in the nine months ended September
30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
13,548 |
|
|
$ |
22,570 |
|
|
$ |
(9,022 |
) |
|
|
(40.0 |
%) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
8,877 |
|
|
|
12,814 |
|
|
|
(3,937 |
) |
|
|
(30.1 |
%) |
General and administrative |
|
|
8,229 |
|
|
|
11,663 |
|
|
|
(3,434 |
) |
|
|
(29.4 |
%) |
Impairment |
|
|
6,163 |
|
|
|
|
|
|
|
6,163 |
|
|
|
100.0 |
% |
Depreciation |
|
|
631 |
|
|
|
724 |
|
|
|
(93 |
) |
|
|
(12.8 |
%) |
Amortization |
|
|
339 |
|
|
|
379 |
|
|
|
(40 |
) |
|
|
(10.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
24,239 |
|
|
|
25,580 |
|
|
|
(1,341 |
) |
|
|
(5.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(10,691 |
) |
|
$ |
(3,010 |
) |
|
$ |
(7,681 |
) |
|
|
(255.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The decrease is primarily attributable to a reduction in UK revenue of $6.1 million
and domestic revenue of $3.0 million. The reduction in revenue is primarily due to a decrease in
volume of our background screening services, as the economic recession has reduced overall hiring
by our clients and, accordingly, the demand for our services. We anticipate that this trend will
continue for the remaining months of 2009 and possibly beyond until the economy starts to recover.
Cost of Revenue. The decrease in cost of revenue is due to reductions in database fees and
fulfillment costs of $2.4 million and domestic labor costs of $1.6 million primarily due to
reductions in volume. Volume has decreased in the UK as well as labor costs in the UK operations of
$1.3 million as a result of ongoing cost management and productivity initiatives.
As a percentage of revenue, cost of revenue was 65.5% for the nine months ended September 30,
2009 compared to 56.8% for the nine months ended September 30, 2008.
General and Administrative Expenses. The decrease in general and administrative expenses is
primarily attributable to reductions in other general and administrative expense expenses of $1.9
million, payroll costs of $1.5 million and advertising expenses of $276 thousand, partially offset
by a one-time severance expense of $250 thousand paid in 2008.
As a percentage of revenue, general and administrative expenses increased to 60.7% for the
nine months ended September 30, 2009 from 51.7% for the nine months ended September 30, 2008.
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 our Background Screening reporting unit as of June 30, 2009. We considered
current and expected future market conditions and 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.
44
Other Segment
OVERVIEW
Our loss from operations for our Other segment increased in the nine months ended September
30, 2009 as compared to the nine months ended September 30, 2008. The general economic slowdown
has negatively impacted these businesses and its revenue, along with slower growth for these early
stage businesses in a new market. In addition, there are increased professional fees at Net
Enforcers from ongoing litigation and regulatory compliance issues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
4,162 |
|
|
$ |
5,158 |
|
|
$ |
(996 |
) |
|
|
(19.3 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
|
278 |
|
|
|
360 |
|
|
|
(82 |
) |
|
|
(22.8 |
)% |
Cost of revenue |
|
|
1,764 |
|
|
|
2,136 |
|
|
|
(372 |
) |
|
|
(17.4 |
)% |
General and administrative |
|
|
6,222 |
|
|
|
3,609 |
|
|
|
2,613 |
|
|
|
72.4 |
% |
Depreciation |
|
|
34 |
|
|
|
8 |
|
|
|
26 |
|
|
|
325.0 |
% |
Amortization |
|
|
372 |
|
|
|
813 |
|
|
|
(441 |
) |
|
|
(54.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,670 |
|
|
|
6,926 |
|
|
|
1,744 |
|
|
|
25.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
$ |
(4,508 |
) |
|
$ |
(1,768 |
) |
|
$ |
(2,740 |
) |
|
|
(155.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The decrease is primarily attributable to a decrease in sales and subscribers from
our referral and breach business, along with a decrease in our corporate brand protection business.
Our referrals from banking institutions have decreased, which has a corresponding decrease to
revenue. The general economic slowdown has negatively impacted sales at Net Enforcers. We
anticipate this trend continuing for the remaining quarter of 2009, and possibly beyond. We are
attempting to make reductions in our costs to offset the declining revenue in this segment.
Commissions Expense. The decrease in commissions is related to a decrease in sales and
subscribers from our referral and breach business.
As a percentage of revenue, commission expense was 6.7% for the nine months ended September
30, 2009 and 7.0% for the nine months ended September 30, 2008.
Cost of Revenue. The decrease is due to a decrease in sales from our referral and breach
entity.
As a percentage of revenue, cost of revenue was 42.4% for the nine months ended September 30,
2009 compared to 41.4% for the nine months ended September 30, 2008.
General and Administrative Expenses. The increase is primarily due to additional legal fees
due to ongoing litigation and regulatory compliance issues.
As a percentage of revenue, general and administrative expenses increased to 149.5% for the
nine months ended September 30, 2009 from 70.0% for the nine months ended September 30, 2008.
Amortization. The decrease is due to a reduction in the depreciable carrying value from
intangible asset impairments recorded in the year ended December 31, 2008.
As a percentage of revenue, amortization expenses decreased to 8.9% for the nine months ended
September 30, 2009 compared to 15.8% for the nine months ended September 30, 2008.
Interest Income
Interest income decreased 87.0% to $6 thousand for the three months ended September 30, 2009
from $46 thousand for the three months ended September 30, 2008. Interest income decreased 32.1% to
$148 thousand for the nine months ended September 30, 2009
45
from $218 thousand for the nine months ended September 20, 2008. The decrease was primarily
attributable to the decrease in interest income earned on cash balances due to lower overnight
investment rates.
Interest Expense
Interest expense decreased 12.1% to $472 thousand for the three months ended September 30,
2009 from $537 thousand for the three months ended September 30, 2008. Interest expense decreased
47.2% to $909 thousand for the nine months ended September 30, 2009 from $1.7 million for the nine
months ended September 30, 2008. The reduction in interest expense is primarily due to the interest
calculated on an uncertain tax position in 2008 which was effectively settled in the nine months
ended September 30, 2009.
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 Income (Expense)
Other income increased to $3 thousand for the three months ended September 30, 2009 from an
expense of $442 thousand for the three months ended September 30, 2008. Other income increased to
$476 thousand for the nine months ended September 30, 2009 from an expense of $543 thousand for the
nine months ended September 30, 2008. This is primarily attributable to the increase in the foreign
currency transaction gain resulting from exchange rate fluctuations over the current period.
Income Taxes
Our consolidated effective tax rate for the three months ended September 30, 2009 and 2008 was
81.6% and 42.8%, respectively. Our consolidated effective tax rate for the nine months ended
September 30, 2009 and 2008 was (49.9%) and 41.4%, respectively. The change in the consolidated
effective tax rate for 2009 is primarily due to the inability to utilize the losses generated in
the domestic operations of our Background Screening segment for the first six months of 2009 and in
the UK operations of this segment for the nine months ended September 30, 2009. These losses are
not expected to result in a future tax benefit. Also, we have unfavorable permanent adjustments to
taxable loss for non-deductable goodwill impairments and a one-time benefit for the reversal of
previously accrued taxes of $323thousand. For the nine months ended September 30, 2009, our
uncertain tax liability decreased by approximately $2.5 million, of which $323 thousand impacted
the consolidated effective tax rate. The remaining decrease was related to the timing of certain
accruals and has no impact to the consolidated effective tax rate.
Liquidity and Capital Resources
Cash and cash equivalents were $12.0 million as of September 30, 2009 compared to $10.8
million as of December 31, 2008. 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.
During the nine months ended September 30, 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 Background Screening and Other segments operate at a cash flow deficit, and we anticipate
this cash flow deficit to continue for the remaining months of 2009 and thereafter for the
Background Screening segment until the economy and unemployment rate begins to recover, as well as
for the Other segment. We have made and continue to attempt to make cost reductions, such as
decreases to headcount and consolidation of operations, at these segments to offset their declining
volume and revenue.
During the nine months ended September 30, 2009, we funded the operations within our
Background Screening and Other segments using cash flow generated by the operations of our Consumer
Products and Services segment. However, we are currently prohibited under our credit agreement
with Bank of America from making investments in our Background Screening segment in excess of $5.0
million, and as of November 1, 2009, we have invested approximately $4.9 million in this segment.
Accordingly, we will not be able to continue to fund the Background Screening operations from cash
flow generated by our other businesses unless we obtain the consent of Bank of America. We are
attempting to continue to reduce costs in this business, as well as seeking alternative sources of
financing, modifying the credit agreement and considering operational and business alternatives for
our Background Screening segment; however, we cannot assure you that we will be successful in these
alternatives. If we are not successful, we may not be able to continue to fund the operations of the Backgrounds Screening segment, which may result in
changes in the operations that have a material adverse effect on the business. Our accounts
receivable balance as of September 30, 2009 was $26.8 million, including approximately $2.0 million
related to our Background Screening segment, compared to $29.4 million, including approximately
$2.3 million related to our Background Screening segment, as of December 31, 2008.
46
Our accounts
receivable balance consists primarily 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 on 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 $32.6 million
as of September 30, 2009 compared to $33.7 million as of December 31, 2008. We believe that
available short-term and long-term capital resources are sufficient to fund capital expenditures,
working capital requirements, scheduled debt payments and interest and tax obligations for the next
twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
Difference |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cash flows provided by operating activities |
|
$ |
13,561 |
|
|
$ |
25,216 |
|
|
$ |
(11,655 |
) |
Cash flows used in investing activities |
|
|
(5,842 |
) |
|
|
(44,725 |
) |
|
|
38,883 |
|
Cash flows (used in) provided by financing activities |
|
|
(6,266 |
) |
|
|
16,336 |
|
|
|
(22,602 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(182 |
) |
|
|
(263 |
) |
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents |
|
|
1,271 |
|
|
|
(3,436 |
) |
|
|
4,707 |
|
Cash and cash equivalents, beginning of year |
|
|
10,762 |
|
|
|
19,780 |
|
|
|
(9,018 |
) |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
12,033 |
|
|
$ |
16,344 |
|
|
$ |
(4,311 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operations was $13.6 million for the nine months ended September 30,
2009 compared to $25.2 million for the nine months ended September 30, 2008. The $11.7 million
decrease in cash flows provided by operations was primarily the result of a decrease in earnings
and an increase in subscription solicitation costs partially offset by a decrease in accounts
receivable. Over the past year, as certain of our financial institution clients have requested that
we bear more of the new subscriber marketing costs as well as prepay commissions to them on new
subscribers, we have used an increased portion of our cash flow generated from operations to
finance our business. In the nine months ended September 30, 2009, net cash used in operations for
deferred subscription solicitation costs was $53.9 million. We anticipate this trend to continue
with our financial institutions clients in the remaining months of 2009. For the remaining three
months of the year ended December 31, 2009 and for the year ended December 31, 2010, we expect our
future cash flows may be impacted by prepaying these commissions. We also expect that our future
cash flows could be impacted by our agreements to pay more of the new subscriber marketing costs.
These 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 these 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 $5.8 million for the nine months ended September
30, 2009 compared to $44.7 million during the nine months ended September 30, 2008. Cash flows used
in investing activities for the nine months ended September 30, 2009 was primarily attributable to
the purchase of property and equipment. Cash used in investing activities for the nine months ended
September 30, 2008 was primarily attributable to the purchase of the Citibank membership agreements
in January 2008.
47
Cash flows used in financing activities was $6.3 million compared to cash flows provided by
financing activities of $16.3 million for the nine months ended September 30, 2009 and 2008,
respectively. Cash flows used in financing activities for the nine months ended September 30, 2009
was primarily attributable to long term debt repayments of $5.3 million. Cash flows provided by
financing activities for the nine months ended September 30, 2008 was primarily attributable to
debt proceeds which were principally used to purchase the Citibank membership agreements, partially
offset by the repayment of our revolving line of credit.
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. As of September 30, 2009, the outstanding interest rate was 1.3% and
principal balance under the Credit Agreement was $39.3 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 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 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 $17.5 million and $10.0 million, respectively.
The swaps modify our interest rate exposure by effectively converting the variable rate on our term
loan (1.3% at September 30, 2009) to a fixed rate of 3.2% per annum through December 2011 and on
our revolving line of credit (1.3% at September 30, 2009) 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
the nine months ended September 30, 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 as allowed under U.S.
GAAP. For the nine months ended September 30, 2009, there was no material ineffective portion of
the hedge and therefore, no impact to the condensed consolidated statement of operations.
On April 25, 2005, we announced that our Board of Directors had 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 has no expiration date but may be suspended or discontinued at any time.
We did not repurchase any common stock in the nine months ended September 30, 2009.
Contractual Obligations
During the three and nine months ended September 30, 2009 we entered into additional capital
lease agreements for approximately $488 thousand and $1.6 million, respectively. Additionally, in
the nine months ended September 30, 2009, 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 September 30, 2009 are $173 thousand and $330 thousand and are included in
accrued expenses and other current liabilities and other long-term liabilities, respectively, on
our condensed consolidated financial statements.
48
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate
We had cash and cash equivalents totaling $12.0 million and $10.8 million at September 30,
2009 and December 31, 2008, respectively. We believe our cash and cash equivalents are highly
liquid investments that may consist primarily of short-term U.S. Treasury securities with original
maturity dates of less than or equal to three months. We do not enter into investments for trading
or speculative purposes. Due to the short term nature of these investments, we believe that we do
not have any material exposure to changes in the fair value of our investment portfolio as a result
of changes in interest rates. Declines in interest rates, however, will reduce future investment
income. Market risks related to our operations result primarily from changes in interest rates. Our
interest rate exposure is related to long-term debt obligations. A significant portion of our
interest expense is based upon changes in the benchmark interest rate (LIBOR). We have entered into
a series of interest rate swaps to mitigate the variable-rate risk on our long-term debt
obligations. As of September 30, 2009 the fixed rate is 3.4% and 3.2% on notional amounts of $10.0
million and $17.5 million, respectively.
Foreign Currency
We have a foreign majority-owned subsidiary, Screening International, and therefore, are
subject to foreign currency exposure. Screening Internationals wholly-owned subsidiary, Control
Risks Screening Limited, is located in the UK, conducts international business and prepares
financial statements per UK statutory requirements in British pounds. Control Risks Screenings
financial statements are translated to US dollar for US GAAP reporting. As a result, our financial
results are affected by fluctuations in this foreign currency exchange rate. During the nine months
ended September 30, 2009, the U.S. dollar has generally been weaker relative to the British pound.
This has a positive impact on our results of operations as British pounds are translating into a
greater amount of U.S. dollars. During 2008, the U.S. dollar was generally stronger relative to the
British pound. This adversely impacted our results of operations as British pounds were translating
into less U.S. dollars. The impact of the transaction gains and losses from the UK statutory
records on the statement of operations was a gain of $437 thousand for the nine months ended
September 30, 2009. We do not believe that the volatile impact of exchange risk from recent prior
periods is indicative of the future, however, there can be no assurances that this volatility will
not continue.
We have international sales in Canada and, therefore, are subject to foreign currency rate
exposure. We collect fees from subscriptions in Canadian currency and pay a portion of the related
expenses in Canadian currency, which mitigates our exposure to currency exchange rate risk. As a
result, our financial results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions.
We do not maintain any derivative instruments to mitigate the exposure to foreign currency
risk; however, this does not preclude our adoption of specific hedging strategies in the future. We
will assess the need to utilize financial instruments to hedge currency exposures on an ongoing
basis. The foreign exchange transaction gains and losses are included in our results of operations,
and were not material for all periods presented.
Fair Value
We do not have material exposure to market risk with respect to investments. We do not use
derivative financial instruments for speculative or trading purposes; however, this does not
preclude our adoption of specific hedging strategies in the future.
Item 4. 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 Exchange Act) 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
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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 September 30, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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. We have 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 our claims was denied in its entirety. Mr. Loomis also
has 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. We
believe we have meritorious and complete defenses to the counterclaims and intend to defend them
vigorously. We believe, however, that it is too early in the litigation to form an opinion as to
the likelihood of success on the merits of the counterclaims. Discovery in the case is ongoing.
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.
Item 1A. Risk Factors
A detailed discussion of risk factors is provided in Item 1A, Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2008. Other than the additional or modified
risk factors described below, no material changes in risk factors occurred during the third quarter
of 2009. Additional risks and uncertainties that we are unaware of, or that are currently deemed
immaterial, also may become important factors that affect us.
As a result of the termination of our Screening International ownership agreement and Screening
International becoming our wholly-owned subsidiary, through our ownership of Screening
International Holdings, we will now be responsible for all of the losses and liabilities, as well
as capital requirements, of Screening International. Screening Internationals revenue continues to
decline primarily because the general economic slowdown has reduced overall hiring by its clients
and, accordingly, the demand for its services. We anticipate this trend will continue for the
remaining months of 2009 and possibly beyond until the economy starts to recover. This declining
revenue at Screening International Holdings may negatively impact our overall results of operations
and could have a material adverse effect on our business and stock price.
Our Background Screening and Other segments operate at a cash flow deficit, and we anticipate
this cash flow deficit to continue for the remaining months of 2009 and thereafter for the
Background Screening segment until the economy and unemployment rate begins to recover, as well as
for the Other segment. We have made and continue to attempt to make cost reductions, such as
decreases to headcount and consolidation of operations, at these segments to offset their declining
volume and revenue.
During the nine months ended September 30, 2009, we funded the operations within our
Background Screening and Other segments using cash flow generated by the operations of our Consumer
Products and Services segment. However, we are currently prohibited under our credit agreement
with Bank of America from making investments in our Background Screening segment in excess of $5.0
million, and as of November 1, 2009, we have invested approximately $4.9 million in this segment.
Accordingly, we will not be able to continue to fund the Background Screening operations from cash
flow generated by our other businesses unless we obtain the consent of Bank of America. We are
attempting to continue to reduce costs in this business, as well as seeking alternative sources of
financing, modifying the credit agreement and considering operational and business alternatives for
our Background Screening segment; however, we cannot assure you that we will be successful in these
alternatives. If we are not successful, we may not be able to continue to fund the operations of the Backgrounds Screening segment, which may result in
changes in the operations that have a material adverse effect on the business. Our accounts
receivable balance as of September 30, 2009 was $26.8 million, including approximately $2.0 million
related to our Background Screening segment, compared to $29.4 million, including approximately
$2.3 million related to our Background Screening segment, as of December 31, 2008.
Item 6. Exhibits
10.1 |
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Amendment No. 3 dated as of July 1, 2009 to Credit Agreement dated
as of July 3, 2006 by and among Registrant, certain Subsidiaries
thereof, Bank of America, N.A. and L/C Issuer (Incorporated by
reference to Exhibit 10.1, filed with the Form 8-K dated July 1,
2009) |
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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* |
|
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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Principal Financial Officer |
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Date: November 9, 2009
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