UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

 

 

Commission file number: 005-50580

 

INTERSECTIONS INC.

(Exact name of registrant as specified in the charter)

 

 

(703) 488-6100
(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  Yes o     No þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

As of June 30, 2009, the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $36 million based on the last sales price quoted on The NASDAQ Global Market.

 

As of February 26, 2010, the registrant had 18,681,039 shares of common stock, $0.01 par value per share, issued and 17,614,623 shares outstanding, with 1,066,416 shares of treasury stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from Registrant’s definitive proxy statement to be filed within 120 days of December 31, 2009, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2010 annual meeting of stockholders to be held on May 19, 2010.

 

 

INTERSECTIONS INC.

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Annual Report on Form 10-K are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to the safe harbor provisions of this legislation. We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements.

 

These forward looking statements reflect current views about our plan, strategies and prospects, which are based upon the information currently available and on current assumptions. Even though we believe our expectations regarding future events are based on reasonable assumptions, forward-looking statements are not guarantees of future performance. Important factors could cause actual results to differ materially from our expectations contained in our forward-looking statements. These factors include, but are not limited to

 

 

There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss under the caption “Risk Factors.” You should read these factors and other cautionary statements as being applicable to all related forward-looking statements wherever they appear. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We have no intention and undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. See “Item 1A, Risk Factors” for further discussion.

 

 

 

We are a leading provider of branded and fully customized identity management solutions. By integrating our technology solutions with our comprehensive services, we safeguard more than eight million customers, who are primarily received through marketing partnerships and consumer direct marketing of our Identity Guard^® brand. We also provide consumer-oriented insurance and membership products through marketing partnerships with the major mortgage services in the United States as well as other financial institutions through our subsidiary, Intersections Insurance Services, Inc. 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. We offer a portfolio of services which 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. 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 and inbound telemarketing.

 

Additionally, through our subsidiary, Screening International Holdings, LLC (“SIH” or “Screening International”), we provide pre-employment background screening services domestically and internationally. SIH has offices in Virginia and the UK. SIH’s 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.

 

Through our wholly owned subsidiary, Net Enforcers, Inc., we provide corporate identity theft protection services, including online brand monitoring, online auction monitoring, intellectual property monitoring and other services.

 

Through our wholly owned subsidiary, Captira Analytical, LLC, we provide software and automated service solutions for the bail bonds industry, including office automation tools, accounting, reporting and underwriting decisioning tools.

 

We have four 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, services from our relationship with a third party that administers referrals for identity theft to major banking institutions and breach response services, membership product offerings and other subscription based services such as life and accidental death insurance. Our Background Screening segment includes the personnel and vendor background screening services provided by Screening International. Our Online Brand Protection segment includes corporate brand protection provided by Net Enforcers. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond industry provided by Captira Analytical.

 

We were incorporated in Delaware in 1999. Through our predecessor companies, we have been offering consumer protection services since 1996. Intersections Insurance Services, through its predecessor companies, has been offering consumer products and services since 1982. Our principal executive offices are located at 3901 Stonecroft Boulevard, Chantilly, Virginia 20151 and our telephone number is (703) 488-6100. Our web site address is www.intersections.com. We make available on this web site under “Investors and Media”, free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, Forms 3, 4 and 5 filed by our directors and executive officers and various other SEC filings, including amendments to these reports, as soon as reasonably practicable after we electronically file or furnish such reports to the SEC.

 

We also make, available on our web site, our Corporate Governance Guidelines and Principles, Code of Business Conduct and Ethics, and Statement of Policy with Respect to Related Person Transactions, and the

charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. This information is also available by written request to Investor Relations at our executive office address listed above. The information on our web site, or on the site of our third-party service provider, is not incorporated by reference into this report. Our web site address is included here only as an inactive technical reference.

 

Consumer Products and Services

 

Our Services and Subscribers

 

We offer consumers their credit reports, and daily, monthly and quarterly monitoring of their credit files, at one or all three of the major credit reporting agencies: Equifax, Experian and TransUnion. We also offer reports and monitoring services based on additional information sources, including public records and new financial and non-financial account applications, along with services that help subscribers detect unauthorized use of their account information. In addition, we offer credit scores and credit score analysis tools, credit education, identity theft recovery services, identity theft cost reimbursement, and software and other technology tools to protect against identity theft, such as mobile data storage, anti-virus and anti-key logging software. Our products and services also include consumer discounts on healthcare, home, and auto related expenses, access to professional financial and legal information, and life, accidental death and disability insurance, provided through our subsidiary, Intersections Insurance Services. In 2008, we made a minority investment in White Sky, Inc. (formerly known as Guard ID Systems, Inc.), a maker of online privacy protection software, in conjunction with entering into an agreement which permits us to distribute that software as part of our consumer products and services.

 

Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit account. 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.

 

A substantial number of our subscribers cancel their subscriptions each year. Because there is an investment cost to acquire a new subscriber and produce initial fulfillment materials, subscribers typically must be retained for a number of months in order to cover these costs. Not all subscribers are retained for a sufficient period of time to achieve positive cash flow returns on these investment costs.

 

As part of our agreement with the Identity Theft Assistance Corporation (“ITAC”), we also offer victim assistance services 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 appears on their credit reports, 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 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. Under a license agreement with ITAC, we also offer certain of our identity theft protection products and services to consumer customers of ITAC members and other entities. We receive a combination of service fees and commissions in connection with those services.

 

Our Marketing

 

Our products and services are marketed to customers of our clients, and often are branded and tailored to meet our clients’ specifications. Our clients principally are 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. In 2009, we continued to invest in marketing with existing and new clients.

 

In 2009, we expanded our efforts to market our consumer products and services directly to consumers. We conduct our consumer direct marketing primarily through the Internet, television, radio and other mass media. We also may market through other channels, including direct mail, outbound telemarketing, inbound telemarketing and email. In 2009, we substantially increased our marketing investment in our direct to consumer business. We are continuing to invest in our direct to consumer business in 2010.

 

ITAC is primarily responsible for relations with ITAC member financial institutions in connection with the ITAC victim assistance service provided through the ITAC victim assistance center. We primarily employ an internal sales force to market our breach response services. Our breach response services are marketed both on a proactive basis to clients who have not yet experienced a breach, and on a reactive basis to clients already experiencing a loss of personal confidential information. We are primarily responsible for marketing of our consumer services to the consumer customers of ITAC members and others under our license agreement with ITAC.

 

Our Clients

 

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:

 

 

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 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.

 

Revenue from subscribers obtained through our largest clients in 2008 and 2009, as a percentage of our total revenue, was: Bank of America (including MBNA, which was acquired by Bank of America in 2006) — 48% and 58%; Citibank — 8% and 10%; Capital One (directly, and, for subscribers acquired prior to January 1, 2005, through our relationship with Equifax) — 7% and 5%.

 

Our ITAC clients are all financial institutions who have chosen to become members of ITAC. Our breach response clients are generally financial services clients, health care providers, educational institutions, retailers and other corporations.

 

Operations

 

Our operations platform for our consumer products and services, which consists principally of customer service, fulfillment, information processing and technology, is designed to serve the needs of both our clients and our subscribers. Our services are tailored to meet our clients’ requirements for branding and presentation, service levels, accuracy and security. We believe our operations offer a significant competitive advantage for us in our ability to produce high quality services in both online and offline environments while delivering high levels of both customer and client service and data security.

 

Our ITAC and breach response operations consist of a blend of internally developed, externally licensed and outsourced technology and operations components. The ITAC case management system provides a means of documenting case information for identity theft victims and electronically sharing the case file with impacted ITAC member institutions. Our breach response operations leverage the operations and technology of our Consumer Products and Services segment.

 

Customer Service

 

We have designed our customer service for our consumer products and services to achieve customer satisfaction by responding quickly to subscriber requests with value-added responses and solutions. In addition, we work to gain customer satisfaction through our policy of selective recruiting, hiring, training, retaining and management of customer service representatives who are focused exclusively on identity theft protection and credit management services. We also effectively manage numerous providers of outsourced call center and other services in order to achieve client and customer satisfaction. Prior to working with subscribers, service representatives are required to complete a training program that focuses on the fundamentals of the credit industry, regulation, credit reporting and our products and services. This classroom training is then followed by a closely monitored on-the-job training program with assigned mentors and call simulations. Service representatives then continue to be monitored and receive feedback based on the standards of our quality assurance program. In addition to call quality, we are bound by client-driven metrics specified by our client agreements.

 

We maintain in-house customer care centers in Chantilly, Virginia, Arlington Heights, Illinois, and Rio Rancho, New Mexico. Additionally, we utilize the services of outsourced vendors with capacity for additional customer service representatives trained to handle billing inquiries, subscription questions and account retention.

 

Information Processing

 

Our in-house information processing capabilities for our consumer products and services are designed to provide prompt, high quality, secure and cost-effective delivery of subscribers’ personal data. Proprietary software creates consumer friendly presentation, tracks delivery at the page level and stores the consolidated credit data for member servicing. For the purpose of ensuring accuracy and security of subscribers’ personal data, credit reports are electronically inspected upon receipt and again before final delivery. Operational auditing of fulfillment events is also conducted regularly. We have fulfillment centers in Chantilly, Virginia, Manassas, Virginia, and Arlington Heights, Illinois. We believe that these centers provide additional capacity to handle projected growth, provide contingency backup and efficiently respond to volume spikes.

We also make our services available to most subscribers via the Internet. Upon enrollment, each subscriber is provided a personal identification number that enables immediate activation and access. We deliver these services through client-branded web sites and our own branded web sites.

 

We have recently invested in significant changes to our e-commerce platform in order to enhance both our product enrollment and servicing capabilities. We expect to make continued investments in our e-commerce platform in 2010.

 

Information Technology

 

We continue to make significant investments in technology to enable continued growth in our subscriber base. This also allows us to provide flexible solutions for our subscribers and clients with a secure and reliable platform. Our customer resource management platform, which is the basis for our service delivery, integrates certain industry and application specific software. Since inception, we have contracted a portion of our credit data processing to Digital Matrix Systems, Inc. A portion of our web development is contracted to nVault, Inc.

 

We employ a range of information technology solutions, physical controls, procedures and processes to safeguard the security of data, and regularly evaluate those solutions against the latest available technology and security literature. We use respected third parties to review and test our security, we continue to be audited by our clients, and we have obtained an Enterprise Security Certification awarded by Cybertrust, which is now part of Verizon Business. In addition, we have obtained Visa PCI Service Provider Level I as tested by ControlCase.

 

We have undertaken several projects for the purpose of ensuring that the infrastructure expands with client and subscriber needs. We have a dedicated disaster recovery computing capability in Rio Rancho, New Mexico for the back office operations, a primary online data center in the Virginia area and a secondary hosted data center in Canada. Our back office and online environments are designed with high volume processing in mind and are constructed to optimize performance, reliability, and scalability.

 

Data and Analytics Providers

 

Under our agreements with Equifax, Experian and TransUnion, we purchase data for use in providing our services to consumers. The Experian and TransUnion contracts may be terminated by them on 30 days and 60 days notice, respectively. Our agreement with Equifax expires in November 2010. Each of these credit reporting agencies is a competitor of ours in providing credit information directly to consumers.

 

We have entered into contracts with several additional providers of data and analytics for use in our identity theft and fraud protection services, including new data sources, advanced tools and analytical capabilities, more timely notification of activities and more useable content. In certain contractual arrangements, we pay non-refundable license fees in exchange for the limited exclusive rights to use the data. We expect these third party data and analytics sources to be of increasing significance to our business in the future to the extent we are successful in marketing our new services. Our other consumer products and services are delivered by third party providers, including insurance companies, discount service providers and software distributors.

 

Our ITAC and breach response services utilize our contracts with the three major domestic credit reporting agencies as well as additional data providers to deliver our services.

 

Competition

 

The markets for our Consumer Products and Services segment are highly competitive. A number of divisions or subsidiaries of large, well-capitalized firms with strong brand names operate in the industry. We compete with these firms to provide our services to our clients’ customers and our direct subscribers. We compete for these clients on the basis of product features, technological capabilities, reputation in the market, ability to offer client-branded solutions, flexible service configurations, high quality standards and price.

 

We believe that our principal competitors for our Consumer Products and Services segment include: Equifax; Experian and its subsidiary, Consumerinfo.com; TransUnion and its subsidiary, Truelink; First Advantage, through its affiliate CREDCO; Affinion; and Vertrue. A number of additional competitors in providing identity theft

protection services to consumers, including LifeLock and TrustedID, have entered the market, and more may enter the market. We believe that these competitors primarily market their services directly to the consumer through the Web, except for Affinion, CREDCO and Equifax, which we believe primarily market offline and compete with us for financial institution clients. We believe that certain of our competitors, including Equifax, Experian and TransUnion, are and will continue to make efforts to compete with us in marketing offline and providing branded solutions for financial institution clients.

 

Our ITAC services operate a unique victim assistance service that is integrated via the case management system with the fraud departments at ITAC member institutions. ITAC is the only identity theft victim assistance service that offers this unique capability. More broadly, our ITAC and breach response services compete with similar offerings from Experian, Equifax, Trans Union, Affinion and other competitors.

 

Background Screening

 

Our Services

 

Through our subsidiary, SIH, we provide 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. 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 provided both by SIH and by our clients into reports that assist 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 Marketing

 

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 the complexity of the services offered, the cost of performing these services and competitive factors. On a contractual basis, Control Risks Group, our former business partner, provides marketing assistance and services, and licenses certain trademarks to SIH under which our services are branded in certain geographic areas. The license agreement for the trade name terminates in December 2010 and the marketing agreement terminates in May 2011.

 

Our Clients

 

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 United States and the United Kingdom. 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 have several clients that contribute greater than 10% of this segment’s revenue. The loss of one of these clients could have a material adverse impact on this segment’s financial results. Revenue through our largest client in 2008 and 2009 was 24% and 18%, respectively, of the segment’s revenue. None of these clients constitutes 10% or more of our consolidated revenue.

 

Operations

 

Our operations platforms for the background screening segment, which consist of both operational staff and information technology, are designed to meet the unique service specifications of our clients while providing common client needs such as access to information gateways and enforcement of data security standards. Our background screening services have primary operations centers in Winchester, Virginia, and London, UK, and indirectly through an outsourced processing center in Kuala Lumpur, Malaysia. We continue to invest in our

technology and operating platforms in order to offer high quality, low cost and flexible services to our clients. Our existing and planned future operating centers involve a mix of company owned and outsourced locations.

 

Information Technology

 

For our background screening services, we manage in-house information technology platforms in both Winchester, VA and London, UK. In addition, in certain cases, we leverage external technology platforms operated by subcontractors who conduct all or part of certain background screening services on our behalf. We are investing in software systems and infrastructure that further expand both our capabilities to meet global client demands. We are scaling our infrastructure as well, including increases in network capacity linking our offices to support our business growth. We employ a range of information technology solutions, physical controls, procedures and processes to safeguard the security of data, and regularly evaluate those solutions against the latest available technology and security literature.

 

Data and Analytics Providers

 

Our background screening services rely on multiple sources of data globally. Those data sources include commercial providers of public record data, credit reporting agencies, state and local government agencies, and data collectors in various locations. We use subcontractors to collect certain data that is not generally available in an automated format. Our data provider agreements are generally non-exclusive and may be cancelled by either party within time periods as short as thirty days. Certain providers of data for our background screening services may also be competitors of ours in providing background screening services to corporate clients. We continually evaluate our data provider relationships based upon a combination of cost, quality and coverage attributes and may make changes in our portfolio of data providers from time to time.

 

Competition

 

Our Background Screening segment operates in a variety of highly competitive local and global markets with differing characteristics. In the US, the employment background screening market is well established but remains highly fragmented and competitive. We believe that our competitors include national employment background screening providers such as First Advantage Corporation, ChoicePoint, Acxiom, and Altergrity, regional and local background screening providers, and smaller, independent private investigative firms. Outside the US, the screening market is less developed but growing rapidly. In these global markets, we believe that our services compete with a smaller universe of companies that have committed to developing an international delivery capability, as well as smaller local background screening providers and private investigative firms.

 

Online Brand Protection

 

Our Services

 

Through our subsidiary, Net Enforcers, we provide online brand protection services including online channel monitoring, auction monitoring, forum, blog and newsgroup monitoring and other services. Net Enforcers’ services include the use of technology and operations staff to search the Internet for instances of our clients’ brands and/or specific products, categorize each instance as potentially threatening to our clients based upon client provided criteria, and report our findings back to our clients. Net Enforcers also offers additional value added services to assist our clients to take actions to remediate perceived threats detected online. Net Enforcers’ services are typically priced as monthly subscriptions for a defined set of monitoring services, as well as per transaction charges for value added communications services. Prices for our services vary based upon the specific configuration of services purchased by each client and range from several hundred dollars per month to tens of thousands of dollars per month.

 

Our Marketing

 

Net Enforcers primarily uses an internal sales forces to market its services to corporate brand owners or law firms working on behalf of corporate brand owners. Clients purchase services from Net Enforcers based upon the need to monitor Internet activity associated with their brand and products, our positive reputation in the

marketplace, our combination of technology and operational solutions to Internet monitoring challenges, and the cost, quality and scope of our service offerings.

 

Our Clients

 

Net Enforcers’ clients are typically corporate brand owners or law firms working on behalf of corporate brand owners. Generally, client contracts have terms of one year with automatic annual renewals. We have one client that contributes greater than 10% of this segment’s revenue. The loss of this client could have a material adverse impact on this segment’s financial results. Revenue from this client in 2008 and 2009 was approximately 12% and 23% of the segment’s revenue, respectively. This client does not constitute 10% or more of our consolidated revenue.

 

Operations, Information Technology & Customer Service

 

Net Enforcers has developed its operational and technology platforms through years of experience detecting and taking action to remediate online brand abuse. Net Enforcers uses proprietary technology and processes to detect, classify, report and facilitate client action with respect to online corporate brand misuse. Net Enforcers employs a team of technology professionals responsible for developing, enhancing, maintaining and operating our proprietary technology systems. Our systems are generally hosted in two professional third-party co-location hosting facilities in Phoenix, AZ and Ashburn, VA. Net Enforcer’s operations staff are primarily responsible for client service activities, manual search and classification activities and other manual operations related to our services. Net Enforcers primary offices are in Gainesville, FL and Winchester, VA.

 

Data and Analysis Providers

 

Net Enforcers primarily utilizes publicly available information in its service offerings.

 

Competition

 

Net Enforcers has a number of competitors that offer brand protection services similar in whole or part to Net Enforcers own offerings. These competitors include Mark Monitor, Cyveillance, Channel Velocity, Name Protect and Op Sec. In addition, Net Enforcers, at times, competes for business against both internal and external legal counsel for corporate brand owners.

 

Bail Bonds Industry Solutions

 

Our Services

 

Through our subsidiary, Captira Analytical, we provide automated service solutions for the bail bonds industry. These services include accounting, reporting, and decision making tools which allow bail bondsmen, general agents and sureties to run their offices more efficiently, to exercise greater operational and financial control over their businesses, and to make better underwriting decisions. We believe Captira Analytical’s services are the only fully integrated suite of bail bonds management applications of comparable scope available in the marketplace today. Captira Analytical’s services are sold to retail bail bondsman on a “per seat” license basis plus additional one-time or recurring charges for various optional services. Captira Analytical has also developed a suite of services for bail bonds insurance companies, general agents and sureties which are also sold on either a transactional or recurring revenue basis. As Captira Analytical’s business model is relatively new, pricing and service configurations are subject to change at any time.

 

Our Marketing

 

Captira Analytical primarily markets its services through an internal sales force both directly to bail bondsmen and indirectly via bail bonds industry intermediaries such as trade associations, general agents, sureties and insurance companies. Captira Analytical has secured exclusive endorsements from the largest trade association in the bail bonds industry as well as several large general agents and sureties. Captira Analytical is actively working with these industry intermediaries to roll out their services to affiliated retail bail bondsmen.

Our Clients

 

Captira Analytical’s clients are bail bonds industry participants including insurance companies, sureties, general agents and retail bail bondsmen. Captira Analytical is at an early stage in its commercial operations and its operating results do not significantly impact consolidated financial results.

 

Operations, Information Technology & Customer Service

 

Captira Analytical has custom developed its technology and operational processes based upon an in depth understanding of the operational activities of the bail bonds industry. Captira Analytical’s primary offices are located in Albany, NY. Captira Analytical has additional sales and customer support personnel located throughout the country. Captira Analytical outsources hosting and management of its operational technology platforms to a domestic third party data center provider. Services are generally delivered to clients on a remote basis over the internet via secure connections. On site support is sometimes provided to clients, particularly during initial data migration and account setup. Captira Analytical continues to invest in its operational and technology platforms to improve functionality, scalability and the security of its offerings.

 

Among the functionality offered by Captira Analytical to its customers is the ability to retrieve reports for use in evaluating bail bonds applications. To provide these reports, Captira Analytical utilizes a combination of publicly available information and commercial providers of public record data, credit reporting agencies, state and local government agencies, and data collectors in various locations.

 

Data and Analysis Providers

 

Captira Analytical utilizes a combination of publicly available information and commercial providers of public record data, credit reporting agencies, state and local government agencies, and data collectors in various locations.

 

Competition

 

We believe that Captira Analytical is the only provider of an integrated suite of bail bonds industry office automation and decisioning tools of comparable scope. Captira Analytical competes in part with providers of a limited suite of bail bonds industry tools such as Creative Software Solutions, Bailbooks and others.

 

Government Regulation

 

Our business is subject to a variety of laws and regulations, some of which are summarized below. Should we fail to comply with these laws or regulations, we could be subject to a variety of criminal and civil enforcement actions, lawsuits and sanctions, any of which could have a material adverse effect on our company. Changes in these laws or regulations, or new laws or regulations, could affect our business.

 

Credit Reporting Laws

 

Our services involve the use of consumer credit reports governed by the federal Fair Credit Reporting Act and similar state laws governing the use of consumer credit information. The Fair Credit Reporting Act establishes a set of requirements that “consumer reporting agencies” must follow in conducting their business. A “consumer reporting agency” generally means any person who for monetary fees regularly engages in assembling consumer credit information for the purpose of furnishing consumer reports to third parties. Each of the major credit reporting agencies is a “consumer reporting agency” under the Fair Credit Reporting Act. Except for our Background Screening segment, and certain of our bail bonds industry services in our Other Services segment, we are not a “consumer reporting agency” within the meaning of the Fair Credit Reporting Act. Certain provisions of the Fair Credit Reporting Act, however, apply to users of consumer reports and others, such as ourselves. In addition, we are required by our contracts with Equifax, Experian and TransUnion, to comply with certain requirements of the Fair Credit Reporting Act. Some states have adopted laws and regulations governing the use of consumer credit information. Many of those laws are similar in effect to the Fair Credit Reporting Act, although some state laws have different provisions.

The Fair Credit Reporting Act provides consumers the ability to receive one free consumer credit report per year from each major consumer credit reporting agency, and requires each major consumer credit reporting agency to provide the consumer a credit score along with his or her credit report for a reasonable fee as determined by the Federal Trade Commission. Laws in several states, including Colorado, Georgia, Illinois, Maine, Maryland, Massachusetts, New Jersey and Vermont, require consumer reporting agencies to provide each consumer one credit report per year (or two credit reports, in the case of Georgia) upon request without charge. The Fair Credit Reporting Act and state laws give consumers other rights with respect to the protection of their credit files at the credit reporting agencies. For example, the Fair Credit Reporting Act gives consumers the right to place “fraud alerts” at the credit reporting agencies, and the laws in approximately 40 states give consumers the right to place “freezes” to block access to their credit files. We are not required to comply with these requirements because we are not a consumer reporting agency. These laws do apply to the three major credit reporting agencies from which we purchase data for our services. The rights of consumers to obtain free annual credit reports credit scores from consumer reporting agencies, and place fraud alerts and credit freezes directly with them, could cause consumers to perceive that the value of our services is reduced or replaced by those benefits, which could have a material adverse effect on our business.

 

The major credit reporting agencies that are obligated to provide free credit reports are required to maintain a centralized source through which consumers may request their free credit reports. The Federal Trade Commission has promulgated rules which allow the credit reporting agencies to advertise their paid products on the centralized source. The Federal Trade Commission’s rules restrict the manner of such advertising, and also prohibit the credit reporting agencies from using, for marketing purposes, the consumer information gathered through the centralized source. Nevertheless, advertising by the credit reporting agencies through the centralized source may compete with the marketing of our services.

 

Privacy

 

Generally, the Gramm-Leach-Bliley Act governs information about consumers received or obtained by “financial institutions.” The Gramm-Leach-Bliley Act, together with implementing regulations adopted by the Federal Trade Commission and other federal agencies, require, among other things, that financial institutions issue privacy policies to consumer customers and comply with various restrictions on use and disclosure of “nonpublic personal information.” The Gramm-Leach-Bliley Act and implementing regulations also restrict the use, disclosure and safeguarding of nonpublic personal information by non-financial institutions that receive such information from financial institutions. Some of our business, including use of nonpublic personal information we receive in connection with our services, is subject to the Gramm-Leach-Bliley Act and implementing regulations.

 

In addition, some states have or may adopt laws applicable to the privacy of consumer information and data security for such information, including laws that require notification of consumers in the event of unauthorized access to private information. Numerous states have adopted and may continue to adopt laws concerning the protection and usage of personal information, such as Social Security numbers, that may negatively impact our business and operations primarily by imposing usage limitations. Various states, as well as the federal government, may adopt such laws and other laws and regulations that may impede or increase the costs of the use of private consumer information in our business. Such restrictions also could impede the ability of third party data and analytics providers to provide us data for use in our new consumer services.

 

Marketing Laws and Regulations

 

We market our consumer products and services 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. These channels are subject to both federal and state laws and regulations. Federal and state laws and regulations may limit our ability to market to new subscribers or offer additional services to existing subscribers.

 

Telemarketing of our services is subject to federal and state telemarketing regulation. Federal statutes and regulations adopted by the Federal Trade Commission and Federal Communications Commission impose various restrictions on the conduct of telemarketing. The Federal Trade Commission also has enacted the national Do Not

Call Registry, which enables consumers to elect to prohibit telemarketers from calling them. We may not be able to reach potential subscribers because they are placed on the national Do Not Call Registry. Many states have adopted, and others are considering adopting, statutes or regulations that specifically affect telemarketing activities. Although we do not control the telemarketing firms that we engage to market our programs, in some cases we are responsible for compliance with these federal and state laws and regulations. In addition, the Federal Trade Commission and virtually all state attorneys general have authority to prevent marketing activities that constitute unfair or deceptive acts or practices.

 

Federal laws govern email communications. Some of these laws may affect our use of email to market to or communicate with subscribers or potential subscribers.

 

On February 23, 2010, the Federal Trade Commission released its final rule regarding free credit report offers. The rule imposes various disclosure requirements on any offer that includes a free credit report in the manner described by the rule. The rule is effective as of April 1, 2010, except for certain requirements for television and radio advertising, which become effective on September 1, 2010. These requirements may negatively impact certain of our advertising or marketing for our services, or the advertising or marketing of our services by our clients.

 

Insurance Laws

 

Some of the services provided by Intersections Insurance Services include insurance components governed by insurance laws. Insurance generally is regulated by each of the fifty states of the United States and the District of Columbia. Some insurance laws require licensing, and impose other extensive restrictions. The applicability of some insurance laws to various services and activities may vary by state, and may be uncertain within a state, which may result in unanticipated costs or restrictions on our business.

 

Canadian Laws

 

Various Canadian federal and provincial laws govern our consumer products and services in Canada, including provincial credit reporting laws similar in scope to the Fair Credit Reporting Act in the United States and privacy laws. Many of these laws vary by province within Canada.

 

Laws and Regulations Particularly Affecting Our Background Screening, Online Brand Protection, and Bail Bonds Industry Solutions Segments

 

Our background screening and bail bonds industry services depend on information about individuals from private and public sources. In the United States, these services are governed by the federal Fair Credit Reporting Act, various state consumer reporting laws, the federal Drivers’ Privacy Protection Act, and other federal and state laws. Our background screening services also are subject to the European Data Privacy Directive, and other privacy laws in Europe and other countries where we obtain data or provide background screening reports. We or our clients also must comply with laws that govern the data that may be used in making employment decisions. As we expand our background screening services around the world, we will be required to analyze and comply with a variety of laws in other countries and jurisdictions, which may significantly increase the costs of our business and may result in unanticipated restrictions on our planned activities.

 

Net Enforcers’ services depend in part on federal and state laws governing intellectual property ownership and enforcement, and may be governed by laws on the rights of third parties to conduct investigations and act on behalf of intellectual property owners. The types of services Net Enforcers may offer also may be limited by federal or state antitrust or other competition or trade regulation laws. Net Enforcers’ services also depend in part on the private rules adopted by internet auction and portal sites in order to comply with the safe harbor requirements of intellectual property laws and other legal requirements. Changes in these laws or rules or how they are interpreted or implemented may adversely affect the ability of Net Enforcers to provide its services or result in expenses related to legal or regulatory enforcement.

Intellectual Property

 

We consider certain of our processes, systems, methodologies, databases, tangible and intangible materials and software and trademarks to be proprietary. We rely on a combination of trade secret, patent, copyright, trademark and other laws, license agreements and non-disclosure, non-competition and other contractual provisions and technical measures to protect our proprietary and intellectual property rights. Various tools available for use on our website utilize software under license from several third parties. We do not believe that these software licenses are material to our business, and believe that they may be replaced on similar terms with software licensed from other third parties or developed by us or on our behalf, including by vendors currently under contract with us. When we market our services in client-branded programs, we rely on licenses from our clients to use their trademarks.

 

Financial Information About Segments and Geographic Areas

 

See Note 25 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for financial information about our segments and geographic areas.

 

Employees

 

As of December 31, 2009, we had approximately 968 employees. Our future performance depends significantly on the continued service of our key personnel. None of our employees are covered by collective bargaining arrangements. We believe our employee relations are good.

 

 

We believe the following risk factors, as well as the other information contained in this Annual Report on Form 10-K, are material to an understanding of our company. Any of the following risks as well as other risks and uncertainties discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our stock to decline. Additional risks and uncertainties that we are unaware of, or that are currently deemed immaterial, also may become important factors that affect us.

 

Risks Related to our Business

 

Weakness in the U.S. economy may negatively impact our consumer base and financial institution clients.

 

Our Consumer Products and Services and Background Screening businesses are dependent on favorable economic conditions. The recent weakness in the U.S. economy has negatively impacted our consumer base and financial institution clients. Our Background Screening business is substantially dependent on companies hiring new employees. During times of downsizing or flat growth in head count, there is reduced demand for our services.

 

Consumers.  Our primary subscriber base consists of individual consumers. The existing weakness in the U.S. economy has resulted in substantial reductions in consumer spending. As a result, we have seen a reduction in consumers subscribing to our services. If the current economic downturn continues or worsens, our current and potential subscribers may be unable or unwilling to subscribe for our services or there may be an increased incidence of their inability to pay their bills. In addition, there has been a slight increase in credit card declines and delinquencies as card holders’ balances continue to increase.

 

Financial Institutions.  Our financial institution clients might reduce or eliminate marketing programs that would cause a material adverse impact on our ability to obtain new subscribers and to expand our service offerings to existing subscribers. Over the past year, certain of our financial institutional clients have requested that we bear more of the new subscriber marketing costs and prepay commissions. This has resulted in our using an increased portion of our cash flow generated from operations to fund our business. We anticipate this trend will continue, which may require us to raise additional funds in the future to operate and expand our business. There can be no assurance 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.

We depend upon clients in the charge and credit card and mortgage industries. Services marketed through our charge and credit card issuer clients account for a substantial percentage of our revenue. We also have relied on mortgage issuers and other mortgage companies to market our products. Therefore, a significant downturn, such as the recession that had occurred during the past year or more, could harm our business. The reduction or elimination of marketing programs within our charge and credit card issuer or mortgage company clients could materially adversely affect our ability to acquire new subscribers and to expand the range of services offered to current subscribers. In addition, increases in credit card declines or credit card account or mortgage cancellations could result in the increased cancellation of our services that depend on those credit card accounts or mortgages as payment vehicles. These cancellations, and the accompanying loss of revenue, could have a materially adverse impact on our business.

 

Disruptions in the world markets adversely affecting financial institutions could adversely affect our business.

 

We are substantially dependent on revenues from subscribers obtained from our largest financial institution clients, including Bank of America and Citibank. As the result of recent unprecedented turmoil in the global markets, there has been substantial disruption to several major financial institutions. Due to this substantial deterioration, including increasing consolidation and concentration of our business in fewer material clients, there will be fewer opportunities to obtain new client relationships and increasing competition to maintain existing client relationships. In addition, if an existing client is acquired or files for bankruptcy, there are no assurances that we will be able to maintain the client relationship following the acquisition or bankruptcy. Any of these events could materially decrease our revenue, negatively impact our financial condition and harm our growth prospects.

 

We must replace the subscribers we lose in the ordinary course of business and, if we fail to do so, our revenue and subscriber base will decline.

 

A substantial number of subscribers to our consumer products and services cancel their subscriptions each year. Cancellations may occur due to numerous factors, including:

 

 

The number of cancellations to our consumer products and services within the first 90 days as a percentage of new subscribers was 25.2% in 2007, 25.4% in 2008 and 30.6% in 2009. The increase in cancellations in 2009 was driven by sales mix and sales from a partner, who is not a financial institution, which had higher than expected rate of disputed billing transactions. In the three months ended December 31, 2009 we ceased sales with that partner. We analyze subscriber cancellations during the first 90 days because we believe this time period affords the subscriber the opportunity to evaluate the service. The number of cancellations after the first 90 days, as a percentage of the number of subscribers at the beginning of the year plus the net of new subscribers and cancellations within the first 90 days, was 31.6% in 2007, 43.3% in 2008 and 37.2% in 2009. The larger percentage in 2008 is primarily due to a loss of approximately 800 thousand subscribers from our wholesale relationship with Discover in 2008.

 

If we fail to replace subscribers to our consumer products and services we lose in the ordinary course of business, our revenue may decline, causing a material adverse impact on the results of our operations. There can be no assurance that we can successfully replace the large number of subscribers that cancel each year.

We historically have depended upon a few clients to derive a significant portion of our revenue.

 

Revenue from subscribers obtained through our largest clients — Bank of America (including MBNA, which was acquired by Bank of America in 2006), Citibank, Discover, and Capital One (directly, and, for subscribers acquired prior to January 1, 2005, through our relationship with Equifax) — as a percentage of our total revenue was 71.5% in 2008 and 75.7% in 2009. The loss of any of our key clients could have a material adverse effect on our results of operations. For example, in February, 2008, our client Discover terminated its indirect agreement with us, effective September 1, 2008. Upon termination of that agreement, we ceased providing services to Discover customers governed by that agreement. In 2008, Discover customers governed by that agreement accounted for approximately 8%, of our revenue.

 

If one or more of our agreements with clients were to be terminated or expire, or one or more of our clients were to reduce or change (or threaten to reduce or change) the marketing of our services, we would lose access to prospective subscribers and could lose sources of revenue and profit.

 

Many of our key client relationships are governed by agreements that may be terminated without cause by our clients upon notice of as few as 60 days without penalty. Under many of these agreements, our clients may cease, reduce or change their marketing of our services in their discretion, which might cause us to lose access to prospective subscribers and significantly reduce our revenue and operating profit. In addition, certain of our largest clients have used the short term nature of our agreements as a means to re-negotiate lower prices with us over the last few months, which has materially impacted our gross margin and operating profit. We cannot assure you that this will not continue in the future.

 

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 indefinite, under the economic arrangements 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 after time periods ranging from immediately after termination of the contract to three years after termination. As discussed above, this occurred when Discover terminated its indirect agreement with us effective September 1, 2008. In addition, upon termination or expiration of a client contract, we may enter into a transition agreement with the client that modifies the original terms of the agreement.

 

We are substantially dependent upon our consumer products and services for a significant portion of our revenue, and market demand for these services could decrease.

 

Approximately 90% of our revenue in 2008 and 94% of our revenue in 2009 was derived from our consumer products and services, with the balance coming from our background screening and other services. We expect to remain dependent on revenue from our consumer products and services for the foreseeable future. Any significant downturn in the demand for these services would materially decrease our revenue.

 

If we lose our ability to purchase data from any of the three major credit reporting agencies, each of which is a competitor of ours, demand for our services could decrease.

 

We rely on the three major credit reporting agencies, Equifax, Experian and TransUnion, to provide us with essential data for our consumer identity theft protection and credit management services. Our agreement with Equifax expires in November 2010. Our agreements with Experian and TransUnion may be terminated by them on 30 days and 60 days notice, respectively. Each of the three major credit reporting agencies owns its consumer credit data and is a competitor of ours in providing credit information directly to consumers, and may decide that it is in their competitive interests to stop supplying data to us. Any interruption, deterioration or termination of our relationship with one or more of the three credit reporting agencies would be disruptive to our business and could cause us to lose subscribers.

Our consumer products and services depend on data and technology from third party suppliers, and any failure of that data or those technologies or their suppliers could harm our products and services and our business.

 

In addition to the three major credit reporting agencies, we include other data and technology from third party suppliers in our consumer products and services, including public records data, identity theft risk assessments and alerts, anti-virus, anti-key logging and other computer software, mobile data storage technology, and an online privacy protection device. Any defect or failure in this data or technology, or failure of a third party data or technology supplier, could require us to remove the affected data or technology from our products and services, cause us to lose customers or clients, or expose us to liability claims by customers or clients arising out of the failure.

 

A failure of any of the insurance companies that underwrite the insurance products or related benefits provided as part of our consumer products and services, or refusal by those insurance companies to provide the expected insurance, could harm our business.

 

Certain of our consumer products and services include or depend on insurance products, or are dependent on group insurance policies under which the customers for our products and services are the insureds. The current and expected economic climate may cause financial instability among one or more of those insurance companies. Any failure of any of those insurance companies, or refusal by them to provide the expected insurance, could require us to remove the affected insurance from our products and services, cause us to lose customers or clients, or expose us to liability claims by our customers or clients.

 

We may incur substantial marketing expenses as we enter new businesses, develop new products or increase our direct marketing arrangements, which could cause our operating income to decline on a quarterly basis and our stock price to drop.

 

We are committing significant resources to our strategic effort to market our services to the broader direct-to-consumer marketplace. In addition, as we increase our direct marketing arrangements with new or existing clients, we bear most of the new subscriber marketing costs and pay our client a commission for revenue derived from subscribers. This generally results in higher marketing costs and negative cash flow over the first several months after a program is launched. As a result, our marketing expenses for 2008 and 2009 were significantly higher than for 2007, and we anticipate that our spending will continue in 2010. This could cause our stock price to decline. In addition, we cannot assure you that our investment in the direct-to-consumer business or other new businesses or products or any increase in direct marketing arrangements will be successful in increasing our subscribers or generating future revenue or profits on our projected timeframes or at all, which could have a material adverse effect on our results of operations and financial condition.

 

If we experience system failures or interruptions in our telecommunications or information technology infrastructure, our revenue could decrease and our reputation could be harmed.

 

Our operations depend upon our ability to protect our telecommunications and information technology systems against damage or system interruptions from natural disasters, technical failures and other events beyond our control. We receive credit data electronically, and this delivery method is susceptible to damage, delay or inaccuracy. A significant portion of our business involves telephonic customer service as well as mailings, both of which depend upon the data generated from our computer systems. Unanticipated problems with our telecommunications and information technology systems may result in a significant system outage or data loss, which could interrupt our operations. Our infrastructure may also be vulnerable to computer viruses, hackers or other disruptions entering our systems from the credit reporting agencies, our clients and subscribers or other authorized or unauthorized sources.

 

We and our clients outsource telemarketing to third parties who may take actions that lead to negative publicity and consumer dissatisfaction.

 

We and our clients solicit some of our subscribers through outbound telemarketing that we outsource to third-party contractors. In outbound telemarketing, the third-party contractors make the initial contact with potential

subscribers. We attempt to control the level and quality of the services provided by these third parties through a combination of contractual provisions, monitoring, on-site visits and records audits. In arrangements where we bear the marketing cost, which represented 73% of new subscribers acquired in 2009, approximately 48% of new subscribers were obtained through outbound telemarketing by outsourced vendors. In arrangements where the clients bear the marketing cost, which represented 27% of new subscribers acquired in 2009, approximately 3% of new subscribers were obtained through outbound telemarketing by outsourced vendors. Any quality problems could result in negative publicity and customer dissatisfaction, which could cause us to lose clients and subscribers and decrease our revenue.

 

We may lose subscribers and customers and significant revenue if our existing products and services become obsolete, or if we fail to introduce new products and services with broad appeal or fail to do so in a timely or cost-effective manner.

 

Our growth depends upon developing and successfully introducing new products and services that generate client and consumer interest, including new data sources, advanced tools and analytical capabilities, more timely notification of activities and more useable content. We have made or may make significant investments in these new products and services, including development costs and prepayment of royalties and fees to third party providers. Although we have a limited history of developing and introducing products and services outside the areas of identity theft protection and consumer credit management, we are currently developing or introducing new products and services in the area of small business credit information and fraud detection. If we fail to develop, introduce or expand successfully our products and services, our business and prospects will be materially adversely affected.

 

We may lose subscribers and significant revenue if our subscribers cease to maintain the accounts through which they are billed for our products and services, or our clients change their billing or credit practices or policies.

 

Most of our subscribers are billed for our products and services through accounts with our clients, such as mortgage and credit card accounts. Market factors such as a high degree of mortgage refinancing may result in cancellation of those accounts, which will result in a loss of subscribers. Client decisions, such as changes in their credit card billing practices or policies, may result in our inability to bill for our products and services, which also may result in a loss of subscribers. These subscriber losses may have a material adverse impact on our revenue.

 

We may not be able to develop and maintain relationships with third party providers, and failures by those third parties could harm our business and prospects.

 

Our consumer products and services are substantially dependent on third party data, analytics and technology providers, as well as third party call center and customer service providers. Our failure to develop and maintain these third party relationships could harm our ability to provide those services. Our other consumer products and services are substantially dependent on third party providers, including insurance companies and software distributors. Our other services are dependent on other third party providers, including third party data sources, technology providers and outsourced service centers. Failure of any of the third party providers on which we depend to perform under our agreements with them, or to provide effective and competent services, could cause us to have liability to others or otherwise harm our business and prospects.

 

Our senior secured credit agreement provides our lenders with a first-priority lien against substantially all of our assets and contains financial covenants and other restrictions on our actions, and it could therefore limit our operational flexibility or otherwise adversely affect our financial condition.

 

We may fail to comply with the covenants in our credit agreement as a result of, among other things, changes in our results of operations or general economic changes. These covenants may restrict our ability to engage in transactions that would otherwise be in our best interests. Failure to comply with any of the covenants under our credit agreement could result in a default under the facility, which could cause the lenders to accelerate the timing of payments and exercise their lien on substantially all of our assets, which would have a material adverse effect on our business, operations, financial condition and liquidity. In addition, because our credit agreement bears interest at

variable interest rates, increases in interest rates would increase our cost of borrowing, resulting in a decline in our net income and cash flow, which could cause the price of our common stock to decline.

 

We may be unable to meet our future capital requirements to grow our business, which could adversely impact our financial condition and growth strategy.

 

We may need to raise additional funds in the future in order to operate and expand our business. There can be no assurance that additional funds will be available on terms favorable to us, or at all. Our inability to obtain additional financing could have a material adverse effect on our financial condition.

 

We depend on key members of our management and marketing personnel.

 

If one or more of these individuals, particularly our chairman and chief executive officer, were unable or unwilling to continue in their present positions, our business could be materially adversely affected. In addition, we do not maintain key person life insurance on our senior management. We also believe that our future success will depend, in part, on our ability to attract, retain and motivate skilled managerial, marketing and other personnel.

 

If we determine in the future that we are required to establish reserves or we incur liabilities for any litigation that has been or may be brought against us, our results of operations, cash flow and financial condition could be materially and adversely affected.

 

We have not established reserves for any of the legal proceedings in which we are currently involved and we are unable to estimate at this time the amount of charges, if any, that may be required to provide reserves for these matters in the future. We may determine in the future that a reserve or a charge for all or a portion of any of our legal proceedings is required, including charges related to legal fees. In addition, we may be required to record an additional charge if we incur liabilities in excess of reserves that we have previously recorded. Such charges, particularly in the event we may be found liable in a large class-action lawsuit, could be significant and could materially and adversely affect our results of operations, cash flow and financial condition and result in a significant reduction in the value of our shares of common stock.

 

We may not be able to consummate acquisitions or investments that are accretive or which improve our financial condition.

 

A component of our strategy going forward includes selectively acquiring assets or complementary businesses or making strategic investments in order to increase cash flow and earnings and/or diversify or expand our product offerings. This depends upon a number of factors, including our ability to identify acceptable acquisition or investment candidates, consummate transactions on favorable terms, successfully integrate acquired assets and obtain financing to support our growth and expansion, and many other factors beyond our control. We may encounter delays or other problems or incur substantial expenses in connection with seeking acquisitions that could negatively impact our operating results.

 

In connection with any acquisitions or investments, we could issue stock that would dilute our stockholders, incur substantial debt, assume known, contingent and unknown liabilities and/or reduce our cash reserves. For example, as part of the formation of Screening International, we agreed to cooperate with Control Risks Group to meet any future financing needs of Screening International, including agreeing to guarantee third party loans and making additional capital contributions on a pro rata basis, if necessary. Acquisitions may also require material infrequent charges and could result in adverse tax consequences, impairment of goodwill, substantial depreciation and amortization, increased interest expense, deferred compensation charges, and the amortization of amounts related to deferred compensation and identifiable purchased intangible assets, any of which could negatively impact our results of operations in one or more future periods.

 

We may not realize planned benefits of our acquisitions or investments.

 

In connection with our acquisitions, we may experience unforeseen operating difficulties as we integrate the acquired assets and businesses into our existing operations. These difficulties may require significant management

attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Any acquisition or investments by us involves risks, including:

 

 

We may not realize planned benefits of our membership agreement or other customer portfolio acquisitions.

 

We may acquire membership agreements or other customer portfolios from our clients or others. Although we receive certain representations, warranties and covenants from the seller of the membership agreements customer portfolio, we have no guarantee that attrition of customers will not exceed expected levels for reasons that do not require the seller to indemnify us. If attrition exceeds our expectations, the revenue expected from these portfolios or membership agreements otherwise is less than we expected, or our costs of servicing these customers are higher than we expected, we may lose some or all of the investment we made in acquiring the portfolio or membership agreements.. For example, in 2009 we accelerated the amortization of an acquired customer portfolio asset based on the unexpected increase in the rate of attrition of the subscriber base.

 

Screening International is subject to additional risks due to its international scope.

 

We have limited experience in conducting and managing a business internationally. Further, our ability to sell products and services internationally is reliant upon certain key relationships of Control Risks Group, under our continued marketing agreement with Control Risks Group, which may negatively impact us if Control Risks Group were no longer to assist us in marketing. We are also subject to currency risk relating to the overseas sales of the company. We cannot assure you that we will be successful in overcoming these risks, and if we fail to do so, these risks could have a negative effect on our business, financial condition and results of operations, and cause our stock price to decline.

 

In addition, our background screening business is and will be subject to a wide range of extensive local and international laws and regulations, which may materially increase our costs, impair our ability to provide our services, or expose us to legal claims or liability. Our background screening business depends on information about individuals from private and public sources. In the United States, these services are governed by the federal Fair Credit Reporting Act, various state consumer reporting laws, the federal Drivers’ Privacy Protection Act, and other federal and state laws. Our background screening business also is subject to the European Data Privacy Directive, and other privacy laws within the European Economic Area and other countries where Screening International obtains data or provides background screening reports. We or our clients also must comply with laws that govern the data that may be used in making employment decisions. As our background screening business expands around the world, we will be required to analyze and comply with a variety of laws in other countries and jurisdictions, which may significantly increase the costs of our business and may result in unanticipated restrictions on our planned activities that may have a material impact on our ability to carry on or expand our business as planned. In addition, any determination that we have violated any of these laws may result in liability for fines, damages, or other penalties, including the loss of the ability to carry on business, which may have a material adverse impact on our business.

Fluctuations of foreign currency values may adversely affect our reported revenue, results of operations and financial condition

 

We transact business in other parts of the world, where subsidiaries of Screening International are located. We also provide our consumer products and services to consumers in Canada. The fluctuations of these foreign currencies relative to the U.S. Dollar may adversely affect our reported revenue, results of operations and financial condition, and there can be no guarantee that our strategies to reduce these risks will be successful.

 

We recognized substantial impairment charges in 2008 and 2009 and may continue to incur future impairments of goodwill and other assets, both tangible and intangible, in the future.

 

We have acquired certain portions of our business and certain assets through acquisitions. Further, as part of our long-term business strategy, we may continue to pursue acquisitions of other companies or assets. In connection with prior acquisitions, we have accounted for the portion of the purchase price paid in excess of the book value of the assets acquired as goodwill or intangible assets, and we may be required to account for similar premiums paid on future acquisitions in the same manner.

 

Under the applicable accounting rules, goodwill is not amortized and is carried on our books at its original value, subject to periodic review and evaluation for impairment, whereas intangible assets are amortized over the life of the asset. Changes in the business itself, the economic environment (including business valuation levels and trends), or the legislative or regulatory environment may trigger a periodic review and evaluation of our goodwill and intangible assets for potential impairment. These changes may adversely affect either the fair value of the business or the fair value of our individual reporting units and we may be required to take an impairment charge to the extent that the carrying values of our goodwill or intangible assets exceeds the fair value of the business in the reporting unit with goodwill and intangible assets. Also, if we sell a business for less than the book value of the assets sold, plus any goodwill or intangible assets attributable to that business, we will be required to take an impairment charge on all or part of the goodwill and intangible assets attributable to that business.

 

Following revisions to our long-term financial outlook for our reporting units, which we conducted as part of our annual strategic planning cycles, and the deterioration in the price of our common stock and the resulting market capitalization, we determined that our goodwill was impaired, resulting in a non-cash impairment charge for our Background Screening, Online Brand Protection and Bail Bonds Industry Solutions reporting units of $13.7 million, $11.2 million and $1.4 million, respectively, which was recorded in the statements of operations for the year ended December 31, 2008. We also determined that there was an impairment of our long-lived assets in our Online Brand Protection segment and recorded a non-cash impairment charge of $2.6 million for the year ended December 31, 2008.

 

Due to the continuing economic downturn, which negatively impacted the long-term financial outlook for the Background Screening segment, we determined that our goodwill was impaired resulting in a non-cash impairment charge of $6.2 million, which was recorded in the statement of operations for the year ended December 31, 2009. See Notes 2 and 11 to the consolidated financial statements. We also determined that there was an impairment of our long-lived assets in our Background Screening, Online Brand Protection, and Bail Bonds Industry segments and recorded a non-cash impairment charge of $1.1 million for the year ended December 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 remaining goodwill in connection with a future goodwill impairment test.

 

In addition, a contract with a third party data provider for which we make minimum monthly payments for the usage of data and certain exclusivity rights was tested for impairment under applicable accounting rules. As a result, in the fourth quarter of 2008, we recognized a non-cash impairment charge of approximately $15.8 million related to the unamortized prepayments. There can be no assurances that we will not recognize additional impairment charges relating to similar arrangements in the future. See details of the arrangement in Notes 2 and 12 to the consolidated financial statements.

Our stock price fluctuates and may continue to fluctuate significantly over a short period of time.

 

In the past, our stock price has declined in response to period-to-period fluctuations in our revenue, expenses and operating results. In certain periods where our historical operating results have been below the expectations of analysts and investors, the price of our common stock has decreased significantly following earnings announcements. In addition, our stock price may continue to fluctuate significantly in the future as a result of a number of factors, many of which are beyond our control, including:

 

 

Insiders have substantial control over us and could delay or prevent a change in corporate control, which may harm the market price of our common stock.

 

Loeb Holding Corp., which is controlled by one of our directors, owns approximately 40% of our outstanding common stock. In addition, our executive officers and other directors own shares of our outstanding common stock. These stockholders may have interests that conflict with the other public stockholders. If these stockholders act together, they could have the ability to significantly influence or control the management and affairs of our company and potentially determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any sale of the company. Accordingly, this concentration of ownership may harm the market price of our common stock by delaying, discouraging or preventing a change in control transaction.

Risks Related to our Industry

 

Our failure to protect private data could damage our reputation and cause us to expend capital and resources to protect against future security breaches or other unauthorized access.

 

We collect, distribute and protect sensitive private data in delivering our services. We are subject to the risk that unauthorized users might access that data or human error might cause the wrongful dissemination of that data. If we experience a security breach or other unauthorized access to information, the integrity of our services may be affected. We continue to incur significant costs to protect against security breaches or other mishaps and to minimize problems if a data breach was to occur. Moreover, any public perception that we mishandle private information could adversely affect our ability to attract and retain clients and subscribers and could subject us to legal claims and liability. In addition, unauthorized third parties might alter information in our databases, which would adversely affect both our ability to market our services and the credibility of our information.

 

We are subject to government regulation and increasing public scrutiny, which could impede our ability to market and provide our services and have a material adverse effect on our business.

 

Our business and activities, or the information we use in our business and activities, are subject to regulation by foreign, federal, state and local authorities, including the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and similar foreign laws. In addition, certain of the services provided by Intersections Insurance Services include insurance components governed by insurance laws. Insurance generally is regulated by each of the fifty states of the United States and the District of Columbia. Some insurance laws require licensing, and impose other extensive restrictions. The applicability of some insurance laws to various services and activities may vary by state and may be uncertain within a state, which may result in conflicting rules and or unanticipated costs or restrictions on our business. In addition, as we expand our background screening business to other parts of the world, we will become subject to the laws and regulations of those countries, certain of which may conflict with the laws and regulations of other countries where we operate.

 

Net Enforcers’ services depend, in part, on federal and state laws governing intellectual property ownership and enforcement, and may be governed by laws on the rights of third parties to conduct investigations and act on behalf of intellectual property owners. The types of services Net Enforcers may offer also may be limited by federal or state antitrust or other competition or trade regulation laws. Net Enforcers’ services also depend in part on the private rules adopted by internet auction and portal sites in order to comply with the safe harbor requirements of intellectual property laws and other legal requirements.

 

We incur significant costs to operate our business and monitor our compliance with these laws, regulations and rules. Any changes to the existing applicable laws, regulations or rules, or any determination that other laws, regulations or rules are applicable to us, could increase our costs or impede our ability to provide our services to our customers, which might have a material adverse effect on our business and results of operations. In addition, any of these laws, regulations or rules are subject to revision, and we cannot predict the impact of such changes on our business. Further, any determination that we have violated any of these laws, regulations or rules may result in liability for fines, damages, or other penalties, including suspension or loss of required licenses, which may have a material adverse impact on our business.

 

Marketing laws and regulations may materially limit our or our clients’ ability to offer our products and services to consumers.

 

We market our consumer products and services 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. These channels are subject to both federal and state laws and regulations. Federal and state laws and regulations may limit our ability to market to new subscribers or offer additional services to existing subscribers, which may have a material impact on our ability to sell our services. For example, on February 23, 2010, the Federal Trade Commission released its final rule regarding free credit report offers. The rule imposes various disclosure requirements on any offer that includes a free credit report in the manner described by the rule. The rule is effective as of April 1, 2010, except for certain requirements for television and radio advertising, which

become effective on September 1, 2010. These requirements may negatively impact certain of our advertising or marketing for our services, or the advertising or marketing of our services by our clients.

 

Laws requiring the free issuance of credit reports by credit reporting agencies, and other services that must be provided by credit reporting agencies under the law, could impede our ability to obtain new subscribers or maintain existing subscribers and could have a material adverse effect on our revenue.

 

The Fair Credit Reporting Act provides consumers the ability to receive one free consumer credit report per year from each major consumer credit reporting agency, and requires each major consumer credit reporting agency to provide the consumer a credit score along with his or her credit report for a reasonable fee as determined by the Federal Trade Commission. Laws in several states, including Colorado, Georgia, Illinois, Maine, Maryland, Massachusetts, New Jersey and Vermont, require consumer reporting agencies to provide each consumer one credit report per year (or two credit reports, in the case of Georgia) upon request without charge. We are not required to comply with these requirements because we are not a consumer reporting agency in connection with our consumer products and services. These laws do apply to the three major credit reporting agencies from which we purchase data for our services. In addition, the Fair Credit Reporting Act and state laws give consumers other rights with respect to the protection of their credit files at the credit reporting agencies. For example, the Fair Credit Reporting Act gives consumers the right to place “fraud alerts” at the credit reporting agencies, and the laws in approximately 40 states give consumers the right to place “freezes” to block access to their credit files. The rights of consumers to obtain free annual credit reports credit scores from consumer reporting agencies, and place fraud alerts and credit freezes directly with them, could cause consumers to perceive that the value of our services is reduced or replaced by those benefits, which could have a material adverse effect on our business.

 

We are subject to legal claims, including consumer class action litigation and government agency enforcement, that could require us to pay damages and/or change our business practices.

 

Because we operate in a highly regulated industry and must comply with various foreign, federal, state and local laws, we may be subject to claims and legal proceedings in the ordinary course of our businesses and our clients’ businesses. These legal actions might include lawsuits styled as class actions and alleging violations of various federal and state consumer and privacy protection laws. We cannot predict the outcome of any other future actions or proceedings, and the cost of defending these claims might be material. If we are found liable in any actions or proceedings, we might have to pay substantial damages and change the way we conduct our business, any of which might have a material adverse effect on our profitability and business prospects. For example, 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. On February 16, 2010, a putative class action complaint was filed against Intersections, Inc., Bank of America Corporation, and FIA Card Services, N.A., in the U.S. District Court for the Northern District of California. The complaint alleges various claims based on the provision of identity protection services to the named plaintiff. Although we do not believe these claims have merit, these or similar claims may result in significant defense costs, and if we were found to have liability these claims could have a material adverse effect on our business.

 

Competition could reduce our market share or decrease our revenue.

 

We operate in highly competitive businesses. Our competitors may provide products and services comparable or superior to those provided by us, or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, increase their emphasis on products and services similar to ours, enter the markets in which we operate or introduce competing products and services. Any of these factors could reduce our market share or decrease our revenue. Many of our competitors have greater financial and other resources than we do.

Several of our competitors offer products and services that are similar to, or that directly compete with, our products and services. Competition for new subscribers for our consumer products and services is also intense. Even after developing a client relationship, we compete within the client organization with other consumer products and services for appropriately targeted customers because client organizations typically have only limited capacity to market third-party products and services like ours. We also compete directly with the credit reporting agencies that control the credit file data that we use to provide our services. Although we believe that the major credit reporting agencies generally do not provide client branded services that meet our clients’ specifications and needs, we have no assurance they will not do so in the future. In addition, our background screening business competes with a variety of companies that might provide a broader range of screening services and have a more established track record and brand name than we do.

 

 

None.

 

 

The following is a summary of our material leased facilities:

 

 

 

 

We also own a 2,670 square foot facility located in Arlington Heights, Illinois, which is used by our Consumer Products and Services segment for office space, an inbound call center and fulfillment center.

 

We believe that our facilities will support our future business requirements or that we will be able to lease additional space, if needed, on reasonable terms. Certain properties are utilized by all of our segments and in such cases the property is reported in the segment with highest usage.

 

 

On May 27, 2009, we filed a complaint in the U.S. District Court for the Eastern District of Virginia against Joseph C. Loomis and Jenni M. Loomis in connection with our stock purchase agreement to purchase all of Net Enforcers, Inc.’s (NEI) stock in November 2007 (the “Virginia Litigation”). We alleged, among other things, that Mr. Loomis committed securities fraud, breached the stock purchase agreement, and breached his fiduciary duties to the company. The complaint also seeks a declaration that NEI is not in breach of its employment agreement with Mr. Loomis and that, following NEI’s termination of Mr. Loomis for cause, NEI’s 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 asserted counterclaims for an unspecified amount not less than $10,350,000, alleging that NEI breached the employment agreement by terminating him without cause and breached the stock purchase agreement by preventing him from running NEI in such a way as to earn certain earn-out amounts. On January 14, 2010, we settled all claims with Mr. Loomis

and his sister, co-defendant Jenni Loomis. On January 26, 2010, prior to final documentation of the settlement and transfer of the funds to Intersections, Mr. Loomis filed for bankruptcy in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court’). The Virginia litigation thus was automatically stayed as related to Mr. Loomis. In furtherance of our efforts to enforce the settlement agreement, we obtained a stay of the case as related to Jenni Loomis as well. Further, on February 18, 2010, we filed a motion in the Bankruptcy Court to modify the stay as to Mr. Loomis so that we may seek a declaration from the U.S. District Court for the Eastern District of Virginia that the settlement is enforceable. A decision on that motion is anticipated within the next thirty to sixty days.

 

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 plaintiff’s claims, and the motions are pending. We believe we have meritorious and complete defenses to the plaintiff’s claims. We believe, however, that it is too early in the litigation to form an opinion as to the likelihood of success in defeating the claims.

 

On February 16, 2010, a putative class action complaint was filed against Intersections, Inc., Bank of America Corporation, and FIA Card Services, N.A., in the U.S. District Court for the Northern District of California. The complaint alleges various claims based on the provision of identity protection services to the named plaintiff. We believe we have meritorious and complete defenses to the plaintiff’s claims but believe that it is too early in the litigation to form an opinion as to the likelihood of success in defeating the claims.

 

 

None

 

Executive Officers of the Registrant

 

Our executive officers are as follows:

 

 

Michael R. Stanfield co-founded CreditComm, the predecessor to Intersections, in May 1996 and has been Chairman, Chief Executive Officer and a Director since that time. Mr. Stanfield joined Loeb Partners Corporation, an affiliate of Loeb Holding Corporation, in November 1993 and served as a Managing Director at the time of his resignation in August 1999. Mr. Stanfield has been involved in management information services and direct marketing through investments and management since 1982, and has served as a director of CCC Information Services Inc. and BWIA West Indies Airways. Prior to beginning his operational career, Mr. Stanfield was an investment banker with Loeb, Rhoades & Co. and Wertheim & Co. He holds a B.B.A. in Business Administration from Emory University and an M.B.A. from Columbia University.

 

Neal B. Dittersdorf served as our Senior Vice President and General Counsel from February 2003 until June 2004, when he was appointed Chief Legal Officer. From January 2002 to January 2003, Mr. Dittersdorf was of counsel at the law firm of Venable, Baetjer, Howard & Civiletti LLP. He holds a B.A. from Brandeis University and a J.D. from the New York University School of Law.

John G. Scanlon, who joined Intersections in November 2006, was promoted to Executive Vice President in January 2007 and, in December 2007, was appointed Chief Operating Officer, Business Services. Mr. Scanlon joined Intersections from National Auto Inspections, LLC where he was President and Chief Operating Officer for this venture capital backed startup company. Mr. Scanlon previously served as a senior executive at Capital One Financial Corporation from 2000 to 2006 where he held general management responsibility for the company’s direct banking business and previously led a large portion of the Information Technology organization. Mr. Scanlon holds a B.S. in Business Administration from Georgetown University, and a Masters of Management degree from the J.L. Kellogg Graduate School of Management at Northwestern University.

 

Steven A. Schwartz was named Executive Vice President, Endorsed Credit and Security Sales in October 2006, after serving as Senior Vice President of the Client Services division since joining Intersections in July 2003. In December 2007, he was appointed Executive Vice President, Consumer Services. From April 2001 to April 2003, Mr. Schwartz served as Senior Vice President at The Motley Fool. Mr. Schwartz holds a B.S. from Syracuse University and an M.B.A. from Rutgers University.

 

Christopher W. Shenefelt was named Executive Vice President, Operations, in December 2007, after serving as Senior Vice President, Operations from November 2003. Prior to joining Intersections, Mr. Shenefelt held executive and technical management positions at AES, Winstar Communications and SAIC. Mr. Shenefelt holds a B.S.E.E from Michigan Technological University, an M.S.E.E. from the University of Central Florida and an M.B.A. from George Washington University.

 

George (Chip) K. Tsantes was hired as Intersections’ Chief Technology Officer in January of 2005. Prior to joining Intersections, Mr. Tsantes was a Partner in Accenture’s Capital Markets Group, part of the global firm’s Financial Services practice and a member of its FSI Technology leadership. He was an employee or Partner with Accenture from August 1986 to January 2005. He holds a B.A from Virginia Wesleyan College and an M.B.A. from Old Dominion University.

 

Madalyn C. Behneman served as our Vice President of Finance and Accounting from June 2005 until February 2006, when she was appointed Senior Vice President and Principal Financial Officer. Prior to joining Intersections, Ms. Behneman was employed by NII Holdings, Inc. as the Director of External Financial Reporting from June 2004 until June 2005. Ms. Behneman previously held various finance and accounting positions at other companies, including Director of Financial Reporting, with MCI, Inc. from April 1989 until June 2004. Ms. Behneman was employed on the audit staff of Ernst & Young and is a CPA. She earned her Bachelor of Science degree in Accounting from Virginia Tech.

 

 

The Company’s common stock trades on The NASDAQ Global Market under the symbol “INTX.” As of February 26, 2010, the common stock was held by approximately 43 stockholders of record and an estimated 1,451 additional stockholders whose shares were held for them in street name or nominee accounts. Set forth below are the high and low closing sale prices per share of our common stock as reported on the NASDAQ Composite Tape.

 

 

 

We have never paid or declared any cash dividends on our common stock and have no plans to do so in the foreseeable future. We are prohibited from paying dividends under our credit agreement. We currently intend to retain future earnings, if any, to finance the growth and development of our business. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements and such other factors as our board of directors may, in its discretion, consider relevant.

 

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 shares during the three months or year ended December 31, 2009.

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

This section presents our historical financial data. The selected consolidated financial data is qualified by reference to and should be read carefully in conjunction with the consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The selected consolidated financial data in this section is not intended to replace the consolidated financial statements.

 

 

 

 

 

 

The following discussion and analysis of our financial condition and results of operations should be read together with “Selected Consolidated Financial Data,” and our financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, based on current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Risk Factors”, “Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.

 

Overview

 

We have four reportable segments: Consumer Products and Services, Background Screening, Online Brand Protection and Bail Bonds Industry Solutions. In the year ended December 31, 2009, we changed our segment reporting by realigning a portion of the business activities previously included in the Other segment into the Consumer Products and Services segment. The change in business segments was determined based on how our senior management operated, analyzed and evaluated our operations beginning in the three months ended December 31, 2009. Additionally, Net Enforcers and Captira Analytical’s business activities previously included in the Other segment met the quantitative thresholds for separate reporting as of December 31, 2009. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. This segment consists of identity theft management tools, services from our relationship with a third party that administers referrals for identity theft to major banking institutions and breach response services, membership product offerings and other subscription based services such as life and accidental death insurance. Our Background Screening segment includes the personnel and vendor background screening services provided by Screening International. Our Online Brand Protection segment includes corporate brand protection provided by Net Enforcers. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond industry provided by Captira Analytical.

Consumer Products and Services

 

We offer consumers a variety of consumer protection services and other consumer products and services primarily on a subscription basis. Our services help consumers protect themselves against identity theft or fraud and understand and monitor their credit profiles and other personal information. Through our subsidiary, Intersections Insurance Services, we offer a portfolio of services to include consumer discounts on healthcare, home, and auto related expenses, access to professional financial and legal information, and life, accidental death and disability insurance products. Our consumer services are offered through relationships with clients, including many of the largest financial institutions in the United States and Canada, and clients in other industries.

 

Our products and services are marketed to customers of our clients, and often are branded and tailored to meet our clients’ specifications. Our clients are principally credit card, direct deposit or mortgage issuing financial institutions, including many of the largest financial institutions in the United States and Canada. With certain of our financial institution clients, we have broadened our marketing efforts to access demand deposit accounts. Our financial institution clients currently account for the majority of our existing subscriber base. We also are continuing to augment our client base through relationships with insurance companies, mortgage companies, brokerage companies, associations, travel companies, retail companies, web and technology companies and other service providers with significant market presence and brand loyalty.

 

With our clients, our services are marketed to potential subscribers through a variety of marketing channels, including direct mail, outbound telemarketing, inbound telemarketing, inbound customer service and account activation calls, email, mass media and the Internet. Our marketing arrangements with our clients sometimes call for us to fund and manage marketing activity. The mix between our company-funded and client-funded marketing programs varies from year to year based upon our and our clients’ strategies. We anticipate this trend of our company-funded marketing programs continuing into 2010, 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.

 

In 2009, we continued to expand 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 and email. We expect to continue our investment in marketing in 2010 in our direct to consumer business.

 

Our client arrangements are distinguished from one another by the allocation between us and the client of the economic risk and reward of the marketing campaigns. The general characteristics of each arrangement are described below, although the arrangements with particular clients may contain unique characteristics:

 

 

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 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.

 

During the year ended December 31, 2008, we acquired membership agreements from Citibank, which is recorded as a customer related intangible asset in the accompanying consolidated financial statements, for $31.1 million. The acquisition increased our revenue and amortization expense over the useful life of the asset. In the year ended December 31, 2009, we reviewed our estimates related to this intangible asset under U.S. GAAP and, based on the analysis, reduced the useful life of the asset from ten to seven years. Due to us experiencing greater than estimated attrition of our subscriber base, we also accelerated the amortization of the asset.

 

As shown in the following table, the number of subscribers from our direct and shared marketing arrangements have increased over the past three fiscal years:

 

 

Through our increased direct marketing efforts over the last few years, subscribers in our Consumer Products and Services segment from direct marketing arrangements increased from 37.2% in 2007 to 55.3% in 2008 and to 61.0% in 2009.

 

The number of cancellations within the first 90 days as a percentage of new subscribers was 25.2% in 2007, 25.4% in 2008 and 30.6% in 2009. The number of cancellations within the first 90 days of subscription, as a percentage of new subscribers was higher during the year ended December 31, 2009 compared to the same period last year. The increase in cancellations in 2009 was driven by sales mix and sales from a partner, who is not a financial institution, which had higher than expected rate of disputed billing transactions. In the three months ended December 31, 2009 we ceased sales with that partner. We analyze subscriber cancellations during the first 90 days because we believe this time period affords the subscriber the opportunity to evaluate the service. The number of cancellations after the first 90 days, which are measured as a percentage of the number of subscribers at the beginning of the year plus new subscribers during the year less cancellations within the first 90 days, was 31.6% in 2007, 43.3% in 2008 and 37.2% in 2009. The total number of cancellations during the year as a percentage of the beginning of the year subscribers plus new subscriber additions, was 39.7% in 2007, 49.6% in 2008, and 44.7% in 2009. The higher percentages in 2008 are primarily due a loss of approximately 800 thousand subscribers from the termination of the wholesale relationship with Discover in 2008. Conversely, our retention rates, calculated by taking subscribers at the end of the year divided by subscribers at the beginning of the year plus additions for the year, was 60.3% in 2007, 50.4% in 2008 and 55.3% in 2009. The retention rate decreased in 2008 primarily from the termination of the wholesale relationship with Discover.

Revenue from subscribers obtained through our largest clients for the years ended December 31, 2007, 2008 and 2009 as a percentage of total revenue, and the principal contract arrangements with those clients, were as follows:

 

Percentage of Revenue for the
Years Ended December 31,

 

 

We have a master services agreement with Equifax, which terminates in November 2010, under which we provide various services to Equifax in Canada. Even if the master agreement is not terminated, however, either party may terminate the receipt of particular services from the other party on 60 days’ prior notice. With the exception of services to Capital One customers acquired prior to January 1, 2005, and services related to Equifax products in Canada, we are not providing any services under that agreement. Prior to January 1, 2005, we provided our identity theft protection and credit management services under the master agreement with Equifax to customers of Capital One Bank, or Capital One, which marketed those services to consumers under an agreement between Capital One and Equifax. On September 1, 2004, we entered into a marketing and services agreement with Capital One under which, effective January 1, 2005, our services are marketed by Capital One to its customers. The services marketed to Capital One customers under this agreement are substantially all of the services previously marketed through the master agreement between us and Equifax, in addition to other services. Through our agreement with Equifax, however, we continue to provide our services to the customers of Capital One who enrolled for the services prior to January 1, 2005.

 

On February 29, 2008, we received written notice from our client Discover that, effective September 1, 2008, it was terminating the Agreement for Services Administration between us and Discover dated March 11, 2002, as amended (the “Services Agreement”), including the Omnibus Amendment dated December 22, 2005 (the “Omnibus Amendment”). On the same date, we filed a complaint for declaratory judgment in the Circuit Court for Fairfax County, Virginia. The complaint sought a declaration that, if Discover used, for its own purposes, credit report authorizations given by customers to Intersections or Discover, it would be in breach of the Services Agreement and Omnibus Amendment to the Services Agreement. In the complaint, Intersections alleged that reliance on the credit report authorizations by Discover or its new provider would be a breach of the Services Agreement and Omnibus Amendment thereto, and thus sought a declaratory judgment to prevent Discover from committing a breach of the parties’ contract. A bench trial was held in the matter on February 10 and 11, 2009, and on or about May 5, 2009, the Court entered an order providing that the credit report authorizations may be used exclusively by Intersections. On June 5, 2009, Discover notified the Court that it was appealing the Court’s decision to the Supreme Court of Virginia. On August 3, 2009, Discover notified the Court that it was withdrawing their notice of appeal, thereby ending the case and giving full force and effect to the Court’s order entered May 5, 2009.

 

We regularly re-negotiate and adjust the products, retail pricing, pricing of our contracts, and marketing opportunities with our top five revenue producing clients. We expect some of these changes to affect the sales volumes, sales mix and profitability of our client marketing programs. In 2010, we expect sales volumes to decrease, in part, due to these adjustments and also due to current economic conditions.

 

Background Screening

 

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 CRG’s 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 21, on July 1,

2009, we and CRG agreed to terminate the existing ownership agreement, we acquired CRG’s ownership interest in Screening International, LLC, and we formed SIH, our wholly owned subsidiary, which became the sole owner of SI.

 

Through our 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 provided by both Screening International and by our clients into reports that assist 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 have several clients that contribute greater than 10% of this segment’s revenue. The loss of one of these clients could have a material adverse impact on this segment’s financial results. Revenue through our largest client in 2008 and 2009 was 24% and 18% of the segment’s revenue. None of these clients constitutes 10% or more of our consolidated revenue.

 

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. Control Risks Group, our former business partner, provides marketing assistance and services, and licenses certain trademarks to Screening International under which our services are branded in certain geographic areas. The license agreement for the trade name terminates in December 2010 and the marketing agreement terminates in May 2011.

 

Online Brand Protection

 

Through our subsidiary, Net Enforcers, we provide online brand protection services including online channel monitoring, auction monitoring, forum, blog and newsgroup monitoring and other services. Net Enforcers’ services include the use of technology and operations staff to search the Internet for instances of our clients’ brands and/or specific products, categorize each instance as potentially threatening to our clients based upon client provided criteria, and report our findings back to our clients. Net Enforcers also offers additional value added services to assist our clients to take actions to remediate perceived threats detected online. Net Enforcers’ services are typically priced as monthly subscriptions for a defined set of monitoring services, as well as per transaction charges for value added communications services. Prices for our services vary based upon the specific configuration of services purchased by each client and range from several hundred dollars per month to tens of thousands of dollars per month.

 

Bail Bonds Industry Solutions

 

Through our subsidiary, Captira Analytical, we provide automated service solutions for the bail bonds industry. These services include accounting, reporting, and decision making tools which allow bail bondsmen, general agents and sureties to run their offices more efficiently, to exercise greater operational and financial control over their businesses, and to make better underwriting decisions. We believe Captira Analytical’s services are the only fully integrated suite of bail bonds management applications of comparable scope available in the marketplace today. Captira Analytical’s services are sold to retail bail bondsman on a “per seat” license basis plus additional one-time or recurring charges for various optional services. Captira Analytical has also developed a suite of services for bail bonds insurance companies, general agents and sureties which are also sold on either a transactional or

recurring revenue basis. As Captira Analytical’s business model is relatively new, pricing and service configurations are subject to change at any time.

 

Critical Accounting Policies

 

In preparing our consolidated financial statements, we make estimates and assumptions that can have a significant impact on our consolidated financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our consolidated results of operations. For further information on our critical and other accounting policies, see Note 2 to our consolidated financial statements.

 

Goodwill, Identifiable Intangibles and Other Long Lived Assets

 

We record, as goodwill, the excess of the purchase price over the fair value of the identifiable net assets acquired in purchase transactions. We review our goodwill for impairment annually and follow the two step process. We test goodwill annually as of October 31, or more frequently if indicators of impairment exist. Goodwill has been assigned to our reporting units for purposes of impairment testing. As of December 31, 2009, goodwill of $43.2 million and $3.7 million resides in our Consumer Products and Services and Background Screening reporting units, respectively. There is no goodwill in our other reporting units in 2009.

 

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 consolidated financial statements.

 

The goodwill impairment test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using the best information available, using a combined income (discounted cash flow) valuation model and market based approach. The market approach measures the value of an entity through an analysis of recent sales or offerings of comparable companies. The income approach measures the value of the reporting units by the present values of its economic benefits. These benefits can include revenue and cost savings. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for use of funds, trends within the industry, and risks associated with particular investments of similar type and quality as of the valuation date.

 

The estimated fair value of our reporting units is dependent on several significant assumptions, including our earnings projections, and cost of capital (discount rate). The projections use management’s 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 management’s judgment in applying each to the analysis of the recoverability of goodwill.

 

We estimate fair value giving consideration to both the income and market approaches. Consideration is given to the line of business and operating performance of the entities being valued relative to those of actual transactions, potentially subject to corresponding economic, environmental, and political factors considered to be reasonable investment alternatives.

 

If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying value of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The

second step of the goodwill impairment test compares the implied fair value of the reporting unit’s 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 unit’s goodwill exceeds the implied fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.

 

As previously stated, we test our goodwill annually as of October 31; however, due to the deterioration in the general economic environment and the 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 the first step of our goodwill impairment analysis performed as of June 30, 2009, that goodwill in the Background Screening reporting unit was impaired.

 

As of June 30, 2009 the value under the income approach was 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. Examples that were considered in our Background Screening reporting unit 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% as of June 30, 2009 from 12.0% in our 2008 annual evaluation. This slight increase from 2008 represents a slight decrease 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 reporting unit was 17.0% for the June 30, 2009 analysis. The discount rate for this reporting unit was higher because there is inherent risk or volatility in the expected cash flows of this reporting unit. This volatility is due to the reduced rate of growth in a less stable start-up market and a weakened economic environment, coupled with the historical net losses within the 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, for the six months ended June 30, 2009 was 3.0%. This was based on management’s 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 unit’s 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 approaches 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 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 reporting unit, 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).

 

The second step of the impairment test requires us to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting unit’s 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.

 

We then performed our required annual impairment test as of October 31, 2009. We utilized the June 30, 2009 values determined under the income and market based approaches for our annual impairment test as there were no significant changes in our business or circumstances or events that have changed since that prior valuation. Again at October 31, 2009, the comparison of the values calculated using an equally weighted average between the income and market based approaches 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 October 31, 2009, the implied fair value of the Consumer Products and Services reporting unit exceeded the carrying value by approximately 40.5%. The carrying value of our Other reporting units exceeded its implied fair value by 76.9%; however, there is no remaining goodwill allocated to these reporting units. The implied fair value of our Background Screening reporting unit exceeded its carrying value by approximately 32.7%. Therefore, at October 31, 2009, the estimated fair value of our Consumer Product and Services and Background Screening reporting units exceeded their carrying values. Therefore, goodwill in the reporting units was not impaired and the second step of the impairment test was not necessary.

 

During the year ended December 31, 2008, we recorded impairment of $13.7 million in our Background Screening reporting unit and an impairment of $11.2 and $1.4 million in our Online Brand Protection and Bail Bonds Industry Solutions reporting units, respectively. We performed the second step of the impairment analysis during the three months ended March 31, 2009. Based on the finalization of this second step, we recorded an additional impairment charge of $214 thousand in our Background Screening reporting unit in the three months ended March 31, 2009.

 

We will continue to monitor our market capitalization, along with other operational performance measures and general economic conditions. A downward trend in one or more of these factors could cause us to reduce the estimated fair value of our reporting units and recognize a corresponding impairment of our goodwill in connection with a future goodwill impairment test.

 

Our Consumer Products and Services reporting unit has $43.2 million of remaining goodwill as of December 31, 2009. Our Background Screening reporting unit has $3.7 million of goodwill remaining as of December 31, 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 intangibles, are amortized on a straight-line basis over their estimated useful lives, which are generally three to ten years. Customer related intangible assets are amortized on either a straight-line or accelerated basis, dependent upon the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up.

 

During the year ended December 31, 2009, we reviewed our estimates regarding a customer related intangible asset. Based upon the pattern of use of the underlying the asset, we accelerated the amortization of that asset and reduced the estimated useful life from ten to seven years. This acceleration resulted in an additional $1.2 million of amortization expense in the year ended December 31, 2009. In addition, during the year ended December 31, 2009, we record an impairment of $947 thousand for intangible assets at our Background Screening, Online Brand Protection and Bail Bonds Industry Solutions segments and $147 thousand for long-lived assets at our Bail Bonds Industry Solutions segment. During the year ended December 31, 2008, we record an impairment of $2.6 million for intangible assets at our Online Brand Protection segment.

 

Revenue Recognition

 

We recognize revenue on 1) identity theft, credit management and background services, 2) accidental death insurance and other membership products and 3) other monthly subscription products.

 

Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees are generally billed directly to the subscriber’s 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 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 seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from large financial institutions are collected within 30 days with no significant write-offs, and d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year. We 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. We also generate revenue through a collaborative arrangement which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.

 

Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscription with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized

based on a pro rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our actual experience.

 

We also provide services for which certain financial institution clients are the primary obligors directly to their customers. Revenue from these arrangements is recognized when earned, which is at the time we provide the service, generally on a monthly basis.

 

We generally record revenue on a gross basis in the amount that we bill the subscriber when our arrangements with financial institution clients provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the risk of physical loss of inventory and credit risk for the amount billed to the subscriber. We generally record revenue in the amount that we bill our financial institution clients, and not the amount billed to their customers, when our financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

 

Accidental Death Insurance and other Membership Products

 

We recognize revenue from our services when: a) persuasive evidence of arrangement exists as we maintain paper and electronic confirmations with individual purchases, b) delivery has occurred at the completion of a product trial period, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized when earned. Marketing of our insurance products generally involves a trial period during which time the product is made available at no cost to the customer. No revenues are recognized until applicable trial periods are completed.

 

For insurance products, we record revenue on a net basis as we perform as an agent or broker for the insurance products without assuming the risks of ownership of the insurance products. For membership products, we generally record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.

 

We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of December 31, 2008 and 2009, totaled $1.6 million and $1.5 million, respectively, and are included in accrued expenses and other current liabilities in our consolidated balance sheet.

 

Other Monthly Subscription Products

 

We generate revenue from other types of subscription based products provided from our Online Brand Protection and Bail Bonds Industry Solutions segments. We recognize revenue from online brand protection and brand monitoring services, offered by Net Enforcers, on a monthly basis from providing management service solutions, offered by Captira Analytical, on a monthly subscription basis.

 

Deferred Subscription Solicitation and Advertising

 

Our deferred subscription solicitation costs consist of subscription acquisition costs, including telemarketing, web-based marketing expenses and direct mail such as printing and postage. We expense advertising costs the first time advertising takes place, except for direct-response marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response marketing costs, which are 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

 

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 from our client. If annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a full refund of the previously paid commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions with full commission refund provisions are deferred until the earlier of expiration of the refund privileges or cancellation. Once the refund privileges have expired, the commission costs are recognized ratably in the same pattern that the related revenue is recognized. Commissions that relate to annual subscriptions with pro-rata refund provisions are deferred and charged to operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt of the refunded commission from our client, we record a reduction to the deferred commission.

 

We have prepaid commission agreements with some of our clients. Under these agreements, we pay a commission on new subscribers in lieu of or a reduction in future 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 consolidated balance sheet. The long-term portion of the prepaid commissions are shown in other assets in our consolidated balance sheet. Amortization is included in commission expense in our consolidated statements of operations.

 

Total deferred subscription solicitation costs included in the accompanying consolidated balance sheet as of December 31, 2009 and December 31, 2008 was $41.6 million and $36.4 million, respectively. The long-term portion of the deferred subscription solicitation costs are reported in other assets in our consolidated balance sheet and include $7.4 million for both the years ended December 31, 2009 and 2008. Included in the current portion of the deferred subscription solicitation costs is the current portion of prepaid commissions which were $11.5 million and $8.2 million as of December 31, 2009 and 2008, respectively. Amortization of deferred subscription solicitation and commission costs, which are included in either marketing or commissions expense in our consolidated statements of operations, for the years ended December 31, 2007, 2008 and 2009 were $35.0 million, $54.2 million and $66.5 million, respectively. Marketing costs, which are included in marketing expenses in our consolidated statements of operations, as they did not meet the criteria for deferral in accordance with U.S. GAAP, for the years ended December 31, 2007, 2008 and 2009 were $2.5 million, $5.5 million and $16.4 million, respectively.

 

Share Based Compensation

 

We currently have three equity incentive plans, the 1999 and 2004 Stock Option Plans and the 2006 Stock Incentive Plan which provide us with the opportunity to compensate selected employees with stock options, restricted stock and restricted stock units. A stock option entitles the recipient to purchase shares of common stock from us at the specified exercise price. Restricted stock and restricted stock units (“RSUs”) entitle the recipient to obtain stock or stock units, $.01 par value, which vest over a set period of time. RSUs are granted at no cost to the employee and employees do not need to pay an exercise price to obtain the underlying common stock. All grants or awards made under the Plans are governed by written agreements between us and the participants.

 

On January 1, 2006, we adopted the provisions of stock option related guidance. We elected to use the modified-prospective method of implementation. Under this transition method, share-based compensation expense for the year ended December 31, 2006 included compensation expense for all share-based awards granted

subsequent to December 31, 2005 based on the grant-date fair value and compensation expense for all share-based awards granted prior to but unvested as of December 31, 2006 based on the grant-date fair value.

 

In November 2005, we elected to adopt the alternative transition method for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to determine the beginning balance of the additional paid-in capital (APIC) pool related to the tax effects of stock-based compensation, and to determine the subsequent impact on the APIC pool and the statement of cash flow of the tax effects of stock-based awards that were fully vested and outstanding upon the adoption of stock option related guidance on January 1, 2006.

 

We use the Black-Scholes option-pricing model to value all options and the straight-line method to amortize this fair value as compensation cost over the requisite service period. The fair value of each option granted has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

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 years ended December 31, 2007, 2008 and 2009 was 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. We will continue to review our estimate in the future.

 

Risk-free Interest Rate.  The yield on actively traded non-inflation indexed U.S. Treasury notes was used to extrapolate an average risk-free interest rate based on the expected term of the underlying grants.

 

Expected Term.  The expected term of options granted during the years ended December 31, 2007, 2008 and 2009 was determined under the simplified calculation ((vesting term + original contractual term)/2). For the majority of grants valued during these years ended, the options had graded vesting over 4 years (equal vesting of options annually) and the contractual term was 10 years.

 

In addition, we estimate forfeitures based on historical option and restricted stock unit activity on a grant by grant basis. We may make changes to that estimate throughout the vesting period based on actual activity.

 

Income Taxes

 

We account for income taxes under the 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.

 

Net loss for the years ended December 31, 2009 and 2008 included an income tax expense of $315 thousand and an income tax benefit of $2.9 million, respectively. The income tax expense includes a non-cash increase of the valuation allowance on federal, state and foreign deferred tax assets generated in the current year of $1.2 million. The income tax benefit includes a non-cash increase of the valuation allowance on cumulative federal, state and foreign deferred tax assets of approximately $672 thousand, $116 thousand and $1.4 million, respectively. These deferred tax assets are primarily related to federal, state and foreign net operating loss carryforwards that we believe cannot be utilized in the foreseeable future. U.S. GAAP requires a company to evaluate its deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable.

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 provided 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 that upon the conclusion of our tax examination, the respective tax positions were settled and we recognized various uncertain tax benefits as discrete events, which had an impact on our consolidated financial statements as of December 31, 2009. Refer to Note 15 for further discussion of income taxes and the related impact.

 

Foreign Currency Translation

 

We translate the assets and liabilities of our foreign subsidiary at the exchange rates in effect at the end of the period and the results of operations at the average rate throughout the period. The translation adjustments are recorded directly as a separate component of shareholders equity, while transaction gains and losses are included in net income.

 

Our financial results for the year ended December 31, 2009 includes a net impact of $1.7 million related to foreign currency transaction gain. Our financial results for the year ended December 31, 2008 includes a net impact of $1.8 million related to foreign currency transaction losses. For the year ended December 31, 2007, our financial results include $1.1 million related to a foreign currency transaction gain.

 

Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, which states that the FASB Accounting Standards Codification (“ASC”) will become the source of authoritative accounting principles generally accepted in the United States of America recognized by the FASB to be applied by nongovernmental entities. The Codification changes the way accounting standards are organized from a standards-based model (with thousands of individual standards) to a topically based model (with roughly 90 topics). The 90 topics are organized by ASC number and are updated with an Accounting Standards Update (“ASU”). The ASU will replace accounting changes that historically were issued as FASB Statements, FASB Interpretations, FASB Staff Positions, or other types of FASB standards. The FASB considers the ASU an update to the Codification but not as authoritative in its own right. The Codification serves as the single source of nongovernmental authoritative U.S. GAAP for interim and annual periods ending after September 15, 2009. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. It is effective for interim and annual periods ending after September 15, 2009. We adopted the provisions effective September 30, 2009 and the adoption did not have any effect on our consolidated financial statements. Accordingly, all accounting references included in this report are provided in accordance with the Codification.

 

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 entity’s 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 adopted the provisions of this update as of December 31, 2009 and there was no material impact to our consolidated financial statements.

In January 2010, an update was made to “Equity”, This update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. Those distributions should be accounted for and included in EPS calculations. This update is effective for interim and annual periods ending on or after December 15, 2009. We adopted the provisions of this update as of December 31, 2009 and there was no material impact to our consolidated financial statements.

 

In January 2010, an update was made to “Consolidation”, This update clarifies the scope of the decrease in ownership provisions in “Consolidation” and related guidance. The update clarifies that if a decrease in ownership occurs in a subsidiary that is not a business or nonprofit activity, an entity first needs to consider whether the substance of the transaction causing the decrease in ownership is addressed in other U.S. GAAP. If no other guidance exists, an entity should apply the guidance in “Consolidation”. The amendments in this update also expand the disclosures about the deconsolidation of a subsidiary or de-recognition of a group of assets within the scope of “Consolidation”. This update is effective for interim and annual periods ending on or after December 15, 2009. We adopted the provisions of this update as of December 31, 2009 and there was no material impact to our 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 VIE’s 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 company’s 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 of this update as of January 1, 2010 and do not expect a material impact to our 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 vendor’s 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 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 non-software components that function together to deliver the tangible product’s 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 consolidated financial statements

 

In January 2010, an update was made to “Fair Value Measurements and Disclosures”. This update requires new disclosures of transfers in and out of Levels 1 and 2 and of activity in Level 3 fair value measurements. The update also clarifies the existing disclosures for levels of disaggregation and about inputs and valuation techniques.

This update is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We will adopt the provisions of this update and do not expect a material impact to our consolidated financial statements.

 

Trends Related to the Current Economic Environment

 

The weakened economy has had several notable effects on our businesses in 2009, which will persist in 2010. First, new card issuances at our financial institution clients slowed, which translated into a reduction in subscriber additions in our Consumer Products and Services segment. This condition will carry over to 2010. Second, charge or credit card delinquencies and card cancellations increased for certain of our services. This trend may continue in 2010. Third, some of our financial institution clients presented us opportunities to fund partner additional subscriber solicitation costs. We anticipate continuing to make meaningful investments in subscriber solicitations in 2010, which may require additional cash, which may not be available to us. Fourth, we anticipate the consolidation of some major financial institutions and turbulence within the financial services market to continue, which may impact Intersections. Fifth, for Net Enforcers the economic climate made business more difficult to acquire and maintain, as clients went out of business, failed to renew contracts and/or delayed new contracts for “non-essential” services. We anticipate a similar environment in 2010. Substantially reduced hiring and lower employment turnover resulted in reduced screening volumes and revenue at Screening International.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain items on our consolidated statements of operations as a percentage of revenue:

 

 

We have four reportable segments. In 2009, we changed our segment reporting by realigning a portion of our Other segment into the Consumer Products and Services segment. The change in business segments was determined based on how our senior management operated, analyzed and evaluated our operations beginning in the three months ended December 31, 2009. Additionally, Net Enforcers and Captira Analytical’s business activities previously included in the Other segment met the quantitative thresholds for separate reporting as of December 31,

2009. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. This segment consists of identity theft management tools, services from our relationship with a third party that administers referrals for identity theft to major banking institutions and breach response services, membership product offerings and other subscription based services such as life and accidental death insurance. Our Background Screening segment includes the personnel and vendor background screening services provided by Screening International. Our Online Brand Protection segment includes corporate brand protection provided by Net Enforcers. Our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond industry provided by Captira Analytical.

 

We have recasted the results of our business segment data for the years ended December 31, 2007 and 2008 into the new operating segments for comparability with current presentation.

 

Years Ended December 31, 2008 and 2009 (in thousands):

 

The consolidated results of operations are as follows:

 

Consumer Products and Services Segment

 

OVERVIEW

 

Our income from operations for our Consumer Products and Services segment decreased in the year ended December 31, 2009 as compared to the year ended December 31, 2008. This is primarily due to increased marketing and commissions expenses as a result of our continued investment in our direct to consumer business and prepaid commission arrangements with some of our clients. This was partially offset by the growth in revenue from existing clients. Our subscription revenue (see Other Data) increased to $341.8 million from $328.3 million in the comparable period. We expect both new sales and subscriber attrition to remain relatively consistent in 2010.

 

 

Revenue.  The increase in revenue is primarily the result of growth in revenue from existing clients, the increase in the ratio of revenue from direct marketing arrangements to revenue from indirect subscribers and increased revenue from our direct to consumer business. This is partially offset by the loss of approximately 800 thousand subscribers from our wholesale relationship with Discover in 2008. The percentage of revenue from direct marketing arrangements, in which we recognize the gross amount billed to the subscriber, has increased to 87.6% for the year ended December 31, 2009 from 78.9% in the year ended December 31, 2008.

 

The table below shows the percentage of subscribers generated from direct marketing arrangements:

 

 

Marketing Expenses.  Marketing expenses consist of subscriber acquisition costs, including radio, television, telemarketing, web-based marketing and direct mail expenses such as printing and postage. Marketing expense increased 24.5% to $65.3 million for the year ended December 31, 2009 from $52.4 million for the year ended December 31, 2008. The increase in marketing is primarily a result of our continued investment in our direct to consumer business. Amortization of deferred subscription solicitation costs related to marketing of our products for the years ended December 31, 2009 and 2008 were $48.8 million and $46.9 million, respectively. Marketing costs expensed as incurred for the years ended December 31, 2009 and 2008 were $16.4 million and $5.5 million, respectively, as a result of our increased investment in broadcast media relating to our direct to consumer products. We expect to continue to invest in our direct to consumer business in 2010.

As a percentage of revenue, marketing expenses increased to 19.0% for the year ended December 31, 2009 from 15.8% for the year ended December 31, 2008.

 

Commissions Expenses.  Commissions expenses consist of commissions paid to clients. Commission expenses increased 28.3% to $110.3 million for the year ended December 31, 2009 from $86.0 million for the year ended December 31, 2008. The increase 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 expense increased to 32.1% for year ended December 31, 2009 from 26.0% for year ended December 31, 2008, primarily due to the increased portion of revenue from direct marketing arrangements with ongoing clients. We expect commissions expenses, as a percentage of revenue, to continue to increase as we continue to increase 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. Cost of revenue decreased 6.8% to $90.0 million for the year ended December 31, 2009 from $96.6 million for the year ended December 31, 2008. The decrease in cost of revenue is primarily the result of lower fulfillment and customer service costs for both the new member and ongoing subscriber base of $4.7 million, and lower data costs required to support new and ongoing customers due to less subscriber additions of $1.5 million.

 

As a percentage of revenue, cost of revenue decreased to 26.2% for the year ended December 31, 2009 compared to 29.2% for the year ended December 31, 2008, as the result of an increase in the ratio of revenue from direct marketing arrangements.

 

General and Administrative Expenses.  General and administrative expenses consist of personnel and facilities expenses associated with our executive, sales, marketing, information technology, finance, program and account management functions. General and administrative expenses increased 8.3% to $52.8 million for the year ended December 31, 2009 from $48.8 million for the year ended December 31, 2008. The increase in general and administrative expenses is primarily related to increased payroll costs, professional fees, as well as costs associated with moving our headquarters to a new location.

 

Total share based compensation expense for the years ended December 31, 2009 and 2008 was $4.6 million and $4.1 million, respectively.

 

As a percentage of revenue, general and administrative expenses increased to 15.4% for the year ended December 31, 2009 from 14.8% for the year ended December 31, 2008.

 

Goodwill, intangible and long-lived asset impairment charge.  In the year ended December 31, 2008, we recognized a non-cash impairment charge of approximately $15.8 million related to the write-off of unamortized prepayments in connection with a data usage contract. There was no related write-off in 2009. See Notes 2 and 11 to our consolidated financial statements.

 

As a percentage of revenue, goodwill, intangible and long-lived asset impairment charges was 4.8% for the year ended December 31, 2008. There were no impairment charges recognized in the year ended December 31, 2009.

 

Depreciation.  Depreciation expenses consist primarily of depreciation expenses related to our fixed assets and capitalized software. Depreciation expense decreased for the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease is the result of the timing of assets placed into service during the year ended December 31, 2009.

 

As a percentage of revenue, depreciation expenses decreased to 2.1% for the year ended December 31, 2009 from 2.5% for the year ended December 31, 2008.

Amortization.  Amortization expenses consist primarily of the amortization of our intangible assets. The decrease in amortization expense is due to a reduction in amortization of customer related intangible assets, which are amortized on an accelerated basis, from the comparable period.

 

In the year ended December 31, 2009, we reviewed our estimates regarding a customer related intangible asset, and based upon the analysis, we reduced the estimated useful life from ten to seven years. We also accelerated the amortization of the asset based on the increased rate of attrition of the subscriber base. This acceleration resulted in an additional $1.2 million of amortization expense in the year ended December 31, 2009.

 

As a percentage of revenue, amortization expenses decreased to 2.5% for the year ended December 31, 2009 from 2.8% for the year ended December 31, 2008.

 

Background Screening Segment

 

OVERVIEW

 

Our loss from operations in our Background Screening segment decreased in the year ended December 31, 2009 as compared to the year ended December 31, 2008. We incurred a $6.3 million non-cash goodwill and long-lived asset impairment charge in the year ended December 31, 2009 compared to $13.7 million in the year ended December 31, 2008. The general economic slowdown has reduced overall hirings by our clients both in the US and the UK and, accordingly, the demand for our services. For example, the domestic unemployment rate, per the U.S. Bureau of Labor, has increased from 7.4% as of December 31, 2008 to 10.0% as of December 31, 2009. Our decreased revenue is due to reduced volume in our domestic operations, which negatively impacted our revenue. Our volume decreased 14.0% in the year ended December 31, 2009 from the prior period in our domestic operations. In the UK, our volume in the year ended December 31, 2009 decreased 52.4% than in the comparable period. We are continuing efforts to make reductions in our costs to offset the declining revenue.

 

 

Revenue.  Revenue decreased 33.7% to $18.5 million for the year ended December 31, 2009 from $27.8 million for the year ended December 31, 2008. The revenue decrease is primarily attributable to a reduction in domestic revenue of $3.0 million and UK revenue of $6.4 million. The reduction in revenue is mainly due to a decrease in volume. The general economic slowdown has reduced overall hiring by our clients and, accordingly, the demand for our services. Therefore, our revenue is growing at a slower rate than we anticipated at the start of the year. This is particularly true in the UK where a significant portion of our clients are in the financial services industry.

 

Cost of Revenue.  Cost of revenue consists of the costs to fulfill background screens and is composed of direct labor costs, consultant costs, database fees and access fees. Cost of revenue decreased 29.8% to $11.7 million for the year ended December 31, 2009 from $16.6 million for the year ended December 31, 2008. Cost of revenue decreased due to reductions in database and fulfillment costs of $2.5 million and a reduction of $437 thousand in domestic labor costs primarily due to decreases in volume. Volume has also decreased in the UK and labor costs have been reduced by $2.0 million as a result of ongoing cost management and productivity initiatives.

As a percentage of revenue, cost of revenue was 63.3% for the year ended December 31, 2009 compared to 59.8% for the year ended December 31, 2008.

 

General and Administrative Expenses.  General and administrative expenses consist of personnel and facilities expenses associated with our sales, marketing, information technology, finance, and account management functions. General and administrative expenses decreased to $10.8 million for the year ended December 31, 2009 from $14.7 million for the year ended December 31, 2008. The decrease in general and administrative expenses is primarily attributable to reductions in payroll costs of $2.2 million, and other general and administrative expenses of $1.4 million from cost reduction initiatives.

 

As a percentage of revenue, general and administrative expenses increased to 58.6% for the year ended December 31, 2009 from 52.6% for the year ended December 31, 2008.

 

Goodwill, intangible and long-lived asset impairment charge.  Goodwill, intangible and long-lived asset impairment charges consists of impairments recognized for goodwill, intangible and other long-lived assets. In the year ended December 31, 2009, we recognized a non-cash impairment of goodwill of approximately $6.2 million and an impairment of a customer related intangible asset of $147 thousand. In the year ended December 31, 2008, we recognized a non-cash impairment of approximately $13.7 million related to goodwill. See Notes 2 and 11 to our consolidated financial statements.

 

Online Brand Protection Segment

 

Our loss from operations in our Online Brand Protection segment decreased in the year ended December 31, 2009 as compared to the year ended December 31, 2008 primarily due to a non-cash goodwill and intangible asset impairment charge recognized in 2008 of $13.8 million. The general economic slowdown has negatively impacted revenue, along with slower growth for this early stage business in a new market.

 

 

Revenue.  Revenue decreased $529 thousand in 2009 compared to 2008. This decrease is primarily due to the general economic slowdown, which negatively impacted sales in 2009.

 

Cost of Revenue.  Cost of revenue consists of the costs of operating our customer service and information processing centers, data costs and billing costs for subscribers. Cost of revenue decreased primarily due to the decrease in our sales.

 

As a percentage of revenue, cost of revenue was 41.0% for the year ended December 31, 2009 compared to 34.4% for the year ended December 31, 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 functions. General and administrative expenses primarily increased due to additional legal fees from ongoing litigation and regulatory compliance issues.

 

As a percentage of revenue, general and administrative expenses increased to 319.7% for the year ended December 31, 2009 from 81.4% for the year ended December 31, 2008.

 

Goodwill, intangible and long-lived asset impairment charge.  Goodwill, intangible and long-lived asset impairment charges consists of impairments recognized for goodwill, intangible and other long-lived assets. In the year ended December 31, 2009, we recognized a non-cash impairment charge on our intangible assets of $125 thousand. In the year ended December 31, 2008, we recognized a non-cash impairment charge of $13.8 million related to goodwill and intangible assets. See Notes 2 and 11 to our consolidated financial statements.

 

Amortization.  Amortization costs consist primarily of the amortization of our intangible assets. The decrease of $568 thousand is primarily attributable to a reduction in amortizable assets in 2009.

 

As a percentage of revenue, amortization expenses decreased to 3.2% for the year ended December 31, 2009 from 23.9% for the year ended December 31, 2008.

 

Bail Bonds Industry Solutions Segment

 

Our loss from operations in our Bail Bonds Industry Solutions Segment decreased in the year ended December 31, 2009 as compared to the year ended December 31, 2008 primarily due to a non-cash goodwill impairment charge in 2008 of $1.4 million. The general economic slowdown has negatively impacted revenue, along with slower growth for this early stage business in a new market.

 

 

Revenue.  Revenue increased $213 thousand in 2009 compared to 2008 as a result of new customer acquisitions.

 

Cost of Revenue.  Cost of revenue consists of monitoring and credit bureau expenses.

 

As a percentage of revenue, cost of revenue was 55.2% for the year ended December 31, 2009 compared to 162.5% for the year ended December 31, 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 functions.

 

Our general and administrative expenses decreased $421 thousand in 2009 compared to 2008 as a result of our cost reduction efforts.

As a percentage of revenue, general and administrative expenses decreased to 511.7% for the year ended December 31, 2009 from 1,682.2% for the year ended December 31, 2008.

 

Goodwill, intangible and long-lived asset impairment charge.  Goodwill, intangible and long-lived asset impairment charges consists of impairments recognized for goodwill, intangible and other long-lived assets. In the year ended December 31, 2009, we recognized a non-cash impairment charge on our intangible and long-lived assets of $824 thousand. In the year ended December 31, 2008, we recognized a non-cash impairment charge of $1.4 million related to goodwill for December 31, 2008. See Notes 2 and 11 to our consolidated financial statements.

 

Interest Income

 

Interest income decreased 40.4% to $151 thousand for the year ended December 31, 2009 from $254 thousand for the year ended December 31, 2008. This is primarily attributable to the decrease in the interest rate earned on cash balances and short-term investments.

 

Interest Expense

 

Interest expense decreased 48.4% to $1.4 million for the year ended December 31, 2009 from $2.6 million for the year ended December 31, 2008. This is primarily attributable to the reduction of interest recorded on uncertain tax positions in which the statute of limitations expired in the year ended December 31, 2009.

 

In February 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 $1.8 million in the year ended December 31, 2009 from an expense of $1.7 million in the year ended December 31, 2008. The income in the year ended December 31, 2009 is primarily attributable to increases in foreign currency transaction gains, which resulted from exchange rate fluctuations over the year.

 

Income Taxes

 

Our consolidated effective tax rate for the year ended December 31, 2009 was (3.0%) as compared to 10.4% in the year ended December 31, 2008. Net loss for the year ended December 31, 2009 included an income tax expense of approximately $315 thousand. The income tax expense includes an expense for the impairment of goodwill without tax basis, which effectively increases our effective tax rate. It also includes a non-cash increase of the valuation allowance on federal, state and foreign deferred tax assets generated in the current year of approximately $1.2 million. This non-cash valuation allowance increases the effective tax rate for the year ended December 31, 2009. These deferred tax assets are related to federal, state and foreign net operating loss carry forwards that we believe cannot be utilized in the foreseeable future. U.S. GAAP requires us to evaluate our deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years, in conjunction with a current year loss, is significant negative evidence in considering whether deferred tax assets are realizable.

Years Ended December 31, 2007 and 2008 (in thousands):

 

The consolidated results of operations are as follows: