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EXCEL - IDEA: XBRL DOCUMENT - INTERSECTIONS INC | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - INTERSECTIONS INC | w82995exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - INTERSECTIONS INC | w82995exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - INTERSECTIONS INC | w82995exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - INTERSECTIONS INC | w82995exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
INTERSECTIONS INC.
(Exact name of registrant as specified in the charter)
DELAWARE (State or other jurisdiction of incorporation or organization) |
54-1956515 (I.R.S. Employer Identification Number) |
|
3901 Stonecroft Boulevard, Chantilly, Virginia (Address of principal executive office) |
20151 (Zip Code) |
(703) 488-6100
(Registrants telephone number including area code)
(Registrants telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the last practicable date:
As
of August 2, 2011
there were 19,839,253 shares of common stock, $0.01 par value, issued and
16,980,374 shares outstanding, with 2,858,879 shares of treasury stock.
Form 10-Q
June 30, 2011
Table of Contents
Table of Contents
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | 94,085 | $ | 92,126 | $ | 184,530 | $ | 183,615 | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
9,278 | 12,684 | 19,051 | 29,787 | ||||||||||||
Commissions |
27,468 | 29,809 | 55,243 | 60,604 | ||||||||||||
Cost of revenue |
27,829 | 21,910 | 53,237 | 45,080 | ||||||||||||
General and administrative |
17,287 | 15,244 | 33,824 | 30,562 | ||||||||||||
Depreciation |
2,167 | 1,960 | 4,090 | 4,056 | ||||||||||||
Amortization |
1,017 | 1,877 | 2,017 | 4,176 | ||||||||||||
Total operating expenses |
85,046 | 83,484 | 167,462 | 174,265 | ||||||||||||
Income from operations |
9,039 | 8,642 | 17,068 | 9,350 | ||||||||||||
Interest income |
| 6 | 6 | 10 | ||||||||||||
Interest expense |
(210 | ) | (526 | ) | (316 | ) | (1,131 | ) | ||||||||
Other income (expense), net |
174 | (30 | ) | 127 | (51 | ) | ||||||||||
Income from continuing operations before income taxes |
9,003 | 8,092 | 16,885 | 8,178 | ||||||||||||
Income tax expense |
(3,818 | ) | (3,286 | ) | (7,116 | ) | (3,629 | ) | ||||||||
Income from continuing operations |
5,185 | 4,806 | 9,769 | 4,549 | ||||||||||||
Income (loss) from discontinued operations, net of tax |
| 370 | | (441 | ) | |||||||||||
Income (loss) from discontinued operations |
| 370 | | (441 | ) | |||||||||||
Net income attributable to Intersections, Inc. |
$ | 5,185 | $ | 5,176 | $ | 9,769 | $ | 4,108 | ||||||||
Basic earnings per common share: |
||||||||||||||||
Income from continuing operations |
$ | 0.31 | $ | 0.27 | $ | 0.57 | $ | 0.26 | ||||||||
Income (loss) from discontinued operations |
| 0.02 | | (0.03 | ) | |||||||||||
Basic earnings per common share |
$ | 0.31 | $ | 0.29 | $ | 0.57 | $ | 0.23 | ||||||||
Diluted earnings per common share: |
||||||||||||||||
Income from continuing operations |
$ | 0.28 | $ | 0.27 | $ | 0.51 | $ | 0.25 | ||||||||
Income (loss) from discontinued operations |
| 0.02 | | (0.02 | ) | |||||||||||
Diluted earnings per common share |
$ | 0.28 | $ | 0.29 | $ | 0.51 | $ | 0.23 | ||||||||
Cash dividends paid per common share |
$ | 0.15 | $ | | $ | 0.30 | $ | | ||||||||
Weighted average shares outstanding: |
||||||||||||||||
Basic |
16,527 | 17,683 | 17,229 | 17,652 | ||||||||||||
Diluted |
18,657 | 18,128 | 19,041 | 18,004 |
See Notes to Condensed Consolidated Financial Statements
3
Table of Contents
INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 19,615 | $ | 14,453 | ||||
Short-term investments |
| 4,994 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $28 (2011) and $41 (2010) |
23,318 | 19,195 | ||||||
Prepaid expenses and other current assets |
7,784 | 7,010 | ||||||
Prepaid income tax |
3,695 | | ||||||
Deferred subscription solicitation costs |
21,855 | 24,756 | ||||||
Total current assets |
76,267 | 70,408 | ||||||
PROPERTY AND EQUIPMENT, net |
23,399 | 21,569 | ||||||
DEFERRED TAX ASSET, net |
630 | 2,298 | ||||||
LONG-TERM INVESTMENT |
4,327 | 4,327 | ||||||
GOODWILL |
43,235 | 43,235 | ||||||
INTANGIBLE ASSETS, net |
12,880 | 14,897 | ||||||
OTHER ASSETS |
5,214 | 5,893 | ||||||
TOTAL ASSETS |
$ | 165,952 | $ | 162,627 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 3,365 | $ | 5,097 | ||||
Accrued expenses and other current liabilities |
13,746 | 14,718 | ||||||
Accrued payroll and employee benefits |
2,305 | 2,342 | ||||||
Current portion of debt |
20,000 | | ||||||
Capital leases, current portion |
1,677 | 1,645 | ||||||
Commissions payable |
725 | 787 | ||||||
Income tax payable |
| 1,782 | ||||||
Deferred revenue |
4,561 | 4,856 | ||||||
Deferred tax liability, net, current portion |
8,662 | 8,662 | ||||||
Total current liabilities |
55,041 | 39,889 | ||||||
OBLIGATIONS UNDER CAPITAL LEASE, less current portion |
2,852 | 3,399 | ||||||
OTHER LONG-TERM LIABILITIES |
3,310 | 2,783 | ||||||
TOTAL LIABILITIES |
61,203 | 46,071 | ||||||
COMMITMENTS AND CONTINGENCIES (see notes 10 and 12) |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Common stock at $.01 par value, shares authorized 50,000; shares issued 19,540 (2011)
and 18,912 (2010); shares outstanding 16,681 (2011) and 17,795 (2010) |
195 | 189 | ||||||
Additional paid-in capital |
112,465 | 109,250 | ||||||
Treasury stock, shares at cost; 2,859 (2011) and 1,117 (2010) |
(29,551 | ) | (9,948 | ) | ||||
Retained earnings |
21,640 | 17,060 | ||||||
Accumulated other comprehensive income |
| 5 | ||||||
TOTAL STOCKHOLDERS EQUITY |
104,749 | 116,556 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 165,952 | $ | 162,627 | ||||
See Notes to Condensed Consolidated Financial Statements
4
Table of Contents
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Year Ended December 31, 2010 and the Six Months Ended June 30, 2011
(in thousands)
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Year Ended December 31, 2010 and the Six Months Ended June 30, 2011
(in thousands)
(unaudited)
Common | Additional | Treasury Stock | Other | Total | ||||||||||||||||||||||||||||
Stock | Paid-in | Retained | Comprehensive | Stockholders | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Earnings | Income (Loss) | Equity | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2009 |
18,662 | $ | 187 | $ | 104,810 | 1,067 | $ | (9,516 | ) | $ | 2,027 | $ | (1,101 | ) | $ | 96,407 | ||||||||||||||||
Issuance of common stock upon exercise
of stock options and vesting of
restricted stock units |
250 | 2 | (976 | ) | | | | | (974 | ) | ||||||||||||||||||||||
Share based compensation |
| | 5,808 | | | | | 5,808 | ||||||||||||||||||||||||
Tax deficiency of stock options
exercised and vesting of restricted
stock units |
| | (380 | ) | | | | | (380 | ) | ||||||||||||||||||||||
Other |
| | (12 | ) | | | | | (12 | ) | ||||||||||||||||||||||
Cash dividends paid on common shares |
| | | | | (5,332 | ) | | (5,332 | ) | ||||||||||||||||||||||
Purchase of treasury stock |
| | | 50 | (432 | ) | | | (432 | ) | ||||||||||||||||||||||
Net income |
| | | | | 20,365 | | 20,365 | ||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | | 250 | 250 | ||||||||||||||||||||||||
Cash flow hedge |
| | | | | | 856 | 856 | ||||||||||||||||||||||||
Comprehensive Income |
| | | | | | | 20,149 | ||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2010 |
18,912 | $ | 189 | $ | 109,250 | 1,117 | $ | (9,948 | ) | $ | 17,060 | $ | 5 | $ | 116,556 | |||||||||||||||||
Issuance of common stock upon exercise
of stock options and vesting of
restricted stock units |
628 | 6 | (2,460 | ) | | | | | (2,454 | ) | ||||||||||||||||||||||
Share based compensation |
| | 3,495 | | | | | 3,495 | ||||||||||||||||||||||||
Tax benefit of stock options exercised
and vesting of restricted stock units |
| | 2,180 | | | | | 2,180 | ||||||||||||||||||||||||
Cash dividends paid on common shares |
| | | | | (5,189 | ) | | (5,189 | ) | ||||||||||||||||||||||
Purchase of treasury stock |
| | | 1,742 | (19,603 | ) | | | (19,603 | ) | ||||||||||||||||||||||
Net income |
| | | | | 9,769 | | 9,769 | ||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | | (5 | ) | (5 | ) | ||||||||||||||||||||||
Comprehensive Loss |
| | | | | | | (11,807 | ) | |||||||||||||||||||||||
BALANCE, June 30, 2011 |
19,540 | $ | 195 | $ | 112,465 | 2,859 | $ | (29,551 | ) | $ | 21,640 | $ | | $ | 104,749 | |||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
Table of Contents
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 9,769 | $ | 4,108 | ||||
Adjustments to reconcile net income to cash flows provided by operating activities: |
||||||||
Depreciation |
4,090 | 4,472 | ||||||
Amortization |
2,017 | 4,176 | ||||||
Amortization of debt issuance cost |
| 34 | ||||||
Provision for doubtful accounts |
(13 | ) | (164 | ) | ||||
Share based compensation |
3,495 | 2,785 | ||||||
Amortization of deferred subscription solicitation costs |
24,443 | 31,996 | ||||||
Foreign currency transaction (gains) losses, net |
(46 | ) | 506 | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(4,323 | ) | 507 | |||||
Prepaid expenses and other current assets |
(774 | ) | (501 | ) | ||||
Income tax, net |
(5,477 | ) | 743 | |||||
Tax benefit upon vesting of restricted stock units and stock options exercised |
(2,180 | ) | (208 | ) | ||||
Deferred subscription solicitation costs |
(20,489 | ) | (26,027 | ) | ||||
Other assets |
(120 | ) | 5,203 | |||||
Accounts payable |
(1,537 | ) | (3,386 | ) | ||||
Accrued expenses and other current liabilities |
(1,100 | ) | 1,227 | |||||
Accrued payroll and employee benefits |
(37 | ) | 1,352 | |||||
Commissions payable |
(62 | ) | (1,104 | ) | ||||
Deferred revenue |
(296 | ) | (182 | ) | ||||
Deferred income tax, net |
3,848 | (2,773 | ) | |||||
Other long-term liabilities |
326 | 3,498 | ||||||
Cash flows provided by operating activities |
11,534 | 26,262 | ||||||
CASH FLOWS USED IN INVESTING ACTIVITIES: |
||||||||
Proceeds from sale of short-term investment |
4,994 | | ||||||
Purchase of additional interest in long-term investment |
| (1,000 | ) | |||||
Acquisition of property and equipment |
(6,188 | ) | (3,251 | ) | ||||
Proceeds from reimbursements for property and equipment |
720 | | ||||||
Cash flows used in investing activities |
(474 | ) | (4,251 | ) | ||||
CASH FLOWS USED IN FINANCING ACTIVITIES: |
||||||||
Repayments under Credit Agreement |
| (3,500 | ) | |||||
Borrowings under Credit Agreement |
20,000 | | ||||||
Cash dividends paid on common shares |
(5,189 | ) | | |||||
Cash distribution on vesting of restricted stock units |
| (970 | ) | |||||
Capital lease payments |
(832 | ) | (478 | ) | ||||
Purchase of treasury stock |
(19,603 | ) | | |||||
Tax benefit upon vesting of restricted stock units and stock options exercised |
2,180 | (208 | ) | |||||
Withholding tax payment on vesting of restricted stock units and stock options exercised |
(3,093 | ) | (284 | ) | ||||
Cash proceeds from stock options exercised |
639 | | ||||||
Cash flows used in financing activities |
(5,898 | ) | (5,440 | ) | ||||
EFFECT OF EXCHANGE RATE ON CASH |
| (3 | ) | |||||
INCREASE IN CASH AND CASH EQUIVALENTS |
5,162 | 16,568 | ||||||
CASH AND CASH EQUIVALENTS Beginning of period |
14,453 | 12,394 | ||||||
CASH AND CASH EQUIVALENTS End of period |
$ | 19,615 | $ | 28,962 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION, INCLUDING DISCONTINUED OPERATIONS: |
||||||||
Cash paid for interest |
$ | 259 | $ | 613 | ||||
Cash paid for taxes |
$ | 9,475 | $ | 3,183 | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: |
||||||||
Equipment obtained under capital lease |
$ | 318 | $ | 170 | ||||
Equipment additions accrued but not paid |
$ | 577 | $ | 488 | ||||
See Notes to Condensed Consolidated Financial Statements
6
Table of Contents
INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business
We offer consumers a variety of consumer protection services and other consumer products and
services primarily on a subscription basis. Our services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information. Through our subsidiary, Intersections Insurance Services, Inc. (IISI), we offer a
portfolio of services to include consumer discounts on healthcare, home and auto related expenses,
access to professional financial and legal information, and life, accidental death and disability
insurance products. Our consumer products and services are offered through relationships with
clients, including many of the largest financial institutions in the United States and Canada, and
clients in other industries.
In addition, we also offer our services directly to consumers. We conduct our consumer direct
marketing primarily through the Internet, television, radio and other mass media. We also may
market through other channels, including direct mail, outbound telemarketing, inbound telemarketing
and email.
Through a subsidiary, Screening International Holdings, LLC (SIH), we provided personnel and
vendor background screening services to businesses worldwide. As further described in Note 16, on
July 19, 2010, we and SIH entered into a membership interest purchase agreement with Sterling
Infosystems, Inc. (Sterling), pursuant to which SIH sold, and Sterling acquired, 100% of the
membership interests of Screening International, LLC (SI) for an aggregate purchase price of
$15.0 million in cash plus adjustments for working capital and other items. SIH is not an operating
subsidiary, and our background screening services ceased upon the sale of SI.
We have three reportable operating segments with continuing operations through the period
ended June 30, 2011. Our Consumer Products and Services segment includes our consumer protection
and other consumer products and services. This segment consists of identity theft management tools,
services from our relationship with a third party that administers referrals for identity theft to
major banking institutions and breach response services, membership product offerings and other
subscription based services such as life and accidental death insurance. Our Online Brand
Protection segment includes corporate brand protection provided by Net Enforcers, Inc. (Net
Enforcers) and our Bail Bonds Industry Solutions segment includes the software management
solutions for the bail bond industry provided by Captira Analytical, LLC (Captira Analytical). In
addition, until the sale of SI on July 19, 2010, we had a fourth reportable segment, our Background
Screening segment, which included the personnel and vendor background screening services provided
by SI.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared by
us in accordance with accounting principles generally accepted in the United States of America
(U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission. They
include the accounts of the company and our subsidiaries. The results of SI, a former subsidiary
which we sold on July 19, 2010, are presented as discontinued operations for all prior periods in
our condensed consolidated statements of operations. We have not recast our condensed consolidated
balance sheet or statements of cash flows for the sale of SI. See Note 16 for additional
information. Our decision to consolidate an entity is based on our direct and indirect majority
interest in the entity. All significant intercompany transactions have been eliminated. The
condensed consolidated results of operations for the interim periods are not necessarily indicative
of results for the full year.
These condensed consolidated financial statements do not include all the information or notes
necessary for a complete presentation and, accordingly, should be read in conjunction with our
audited consolidated financial statements and accompanying notes for the year ended December 31,
2010, as filed in our Annual Report on Form 10-K.
7
Table of Contents
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
We recognize revenue on 1) identity theft and credit management services, 2) accidental death
insurance and 3) other membership products.
Our products and services are offered to consumers primarily on a monthly subscription basis.
Subscription fees are generally billed directly to the subscribers credit card, mortgage bill or
demand deposit accounts. The prices to subscribers of various configurations of our products and
services generally range from $4.99 to $25.00 per month. As a means of allowing customers to become
familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues
are recognized until applicable trial periods are completed.
Identity Theft and Credit Management Services
We recognize revenue from our services when: a) persuasive evidence of arrangement exists as
we generally maintain signed contracts with all of our large financial institution customers and
paper or electronic confirmations with individual purchases, b) delivery has occurred, c) the
sellers price to the buyer is fixed as sales are generally based on contract or list prices and
payments from large financial institutions are collected within 30 to 45 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. 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
subscriptions 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. For subscriptions with refund provisions whereby only
the prorated subscription fee is refunded upon cancellation by the subscriber, deferred
subscription fees are recorded when billed and amortized as subscription fee revenue on a
straight-line basis over the subscription period, generally one year.
We also 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 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 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 or electronic confirmations with individual purchases, b) delivery has occurred
at the completion of a product trial period, c) the sellers price to the buyer is fixed as the
price of the product is agreed to by the customer as a condition of the sales transaction which
established the sales arrangement, and d) collectability is reasonably assured as evidenced by our
collection of revenue through the monthly mortgage payments of our customers or through checking
account debits to our customers accounts. Revenues from insurance contracts are recognized when
earned. Marketing of our insurance products generally involves a trial period during which time the
product is made available at no cost to the customer. No revenues are recognized until applicable
trial periods are completed.
8
Table of Contents
For insurance products, we record revenue on a net basis as we perform as an agent or broker
for the insurance products without assuming the risks of ownership of the insurance products. For
membership products, we generally record revenue on a gross basis as we serve as the primary
obligor in the transactions, have latitude in establishing price and bear credit risk for the
amount billed to the subscriber.
We participate in agency relationships with insurance carriers that underwrite insurance
products offered by us. Accordingly, insurance premiums collected from customers and remitted to
insurance carriers are excluded from our revenues and operating expenses. Insurance premiums
collected but not remitted to insurance carriers as of June 30, 2011 and December 31, 2010 were
$976 thousand and $1.2 million, respectively, and are included in accrued expenses and other
current liabilities in our condensed consolidated balance sheet.
Other Monthly Subscription Products
We generate revenue from other types of subscription based products and transactional sales
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 or transactional basis and from providing management service solutions, offered by Captira
Analytical, on a monthly subscription or transactional basis.
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, as of October 31, or more frequently if indicators of impairment exist, and follow the
two step process. Goodwill has been assigned to our reporting units for purposes of impairment
testing. As of June 30, 2011, goodwill of $43.2 million resides in our Consumer Products and
Services reporting unit and there is no goodwill remaining in our other reporting units.
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 in our
condensed consolidated financial statements.
The goodwill impairment test involves a two-step process. The first step is a comparison of
each reporting units fair value to its carrying value. We estimate fair value using the best
information available, using a combined income (discounted cash flow) valuation model and market
based approach. The market approach measures the value of an entity through an analysis of recent
sales or offerings of comparable companies. The income approach measures the value of the reporting
units by the present values of its economic benefits. These benefits can include revenue and cost
savings. Value indications are developed by discounting expected cash flows to their present value
at a rate of return that incorporates the risk-free rate for use of funds, trends within the
industry, and risks associated with particular investments of similar type and quality as of the
valuation date.
The estimated fair value of our reporting units is dependent on several significant
assumptions, including our earnings projections, and cost of capital (discount rate). The
projections use managements best estimates of economic and market conditions over the projected
period including business plans, growth rates in sales, costs, and estimates of future expected
changes in operating margins and cash expenditures. Other significant estimates and assumptions
include terminal value growth rates, future estimates of capital expenditures and changes in future
working capital requirements. There are inherent uncertainties related to these factors and
managements judgment in applying each to the analysis of the recoverability of goodwill.
We estimate fair value giving consideration to both the income and market approaches.
Consideration is given to the line of business and operating performance of the entities being
valued relative to those of actual transactions, potentially subject to corresponding economic,
environmental, and political factors considered to be reasonable investment alternatives.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the
reporting unit is not impaired and the second step of the impairment test is not necessary. If the
carrying value of the reporting unit exceeds its estimated fair value, then the
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second step of the goodwill impairment test must be performed. The second step of the goodwill
impairment test compares the implied fair value of the reporting units goodwill with its goodwill
carrying value to measure the amount of impairment charge, if any. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination. In other words, the estimated fair value of the reporting unit is allocated to all of
the assets and liabilities of that unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the fair value of that reporting
unit was the purchase price paid. If the carrying value of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment charge is recognized in an amount equal to
that excess.
We 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 may 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.
Deferred Subscription Solicitation and Advertising
Our deferred subscription solicitation costs consist of subscription acquisition costs,
including telemarketing, web-based marketing expenses and direct mail such as printing and postage.
We expense advertising costs the first time advertising takes place, except for direct-response
marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response
marketing costs, which are amortized on a cost pool basis over the period during which the future
benefits are expected to be received, but no more than 12 months. The recoverability of amounts
capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date by
comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future
benefit expected to result directly from such advertising costs. Probable remaining future benefit
is estimated based upon historical subscriber patterns, and represents net revenues less costs to
earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct
our contractual cost to service that subscriber from the known sales price. We then apply the
future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in
the future to arrive at the total probable future benefit. In estimating the number of subscribers
we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber
patterns maintained by us that show attrition rates by client, product and marketing channel. The
total probable future benefit is then compared to the costs of a given marketing campaign (i.e.,
cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to
be recoverable. If direct response advertising costs were to exceed the estimated probable
remaining future benefit, an adjustment would be made to the deferred subscription costs to the
extent of any shortfall.
Commission Costs
Commissions that relate to annual subscriptions with full refund provisions and monthly
subscriptions are expensed when incurred, unless we are entitled to a refund of the commissions. If
annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a
full refund of the previously paid commission for those annual subscriptions with a full refund
provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual
subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions
with full commission refund provisions are deferred until the earlier of expiration of the refund
privileges or cancellation. Once the refund privileges have expired, the commission costs are
recognized ratably in the same pattern that the related revenue is recognized. Commissions that
relate to annual subscriptions with pro-rata refund provisions are deferred and charged to
operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt
of the refunded commission from our client, we record a reduction to the deferred commission.
We have prepaid commission agreements with some of our clients. Under these agreements, we pay
a commission on new subscribers in lieu of or reduction in ongoing commission payments. We amortize
these prepaid commissions, on an accelerated basis,
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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 is shown in deferred subscription
solicitation costs in our condensed consolidated balance sheet. The long-term portion of the
prepaid commissions is shown in other assets in our condensed consolidated balance sheet.
Amortization is included in commission expense in our condensed consolidated statement of
operations.
Share Based Compensation
We use the Black-Scholes option-pricing model to value all options and the straight-line
method to amortize this fair value as compensation cost over the requisite service period. The fair
value of each option granted has been estimated as of the date of grant with the following
weighted-average assumptions:
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Expected dividend yield |
4.5 | % | 0 | % | ||||
Expected volatility |
73.8 | % | 67.8 | % | ||||
Risk-free interest rate |
2.5 | % | 2.8 | % | ||||
Expected life of options |
6.2 years | 6.2 years |
Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield
as an input. Prior to September 10, 2010 we had not issued dividends and, therefore, the dividend
yield used in grants prior to September 10, 2010 was zero. Subsequent to September 2010, we paid
quarterly cash dividends of $0.15 per share on our common stock. We had grants in the three and six
months ended June 30, 2011 and applied a dividend yield. For future grants, we will apply a
dividend yield based on our history and expectation of dividend payouts.
Expected Volatility. In 2010, we revised our estimation method for calculating expected
volatility. For the three and six months ended June 30, 2011, the expected volatility of options
granted was estimated based upon our historical share price volatility. For the three and six
months ended June 30, 2010, the expected volatility of options granted was estimated based upon our
historical share price volatility as well as the average volatility of comparable public companies.
We will continue to review our estimate in the future.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury
notes was used to extrapolate an average risk-free interest rate based on the expected term of the
underlying grants.
Expected Term. The expected term of options granted during the three and six months ended June
30, 2011 and 2010 was determined under the simplified calculation ((vesting term + original
contractual term)/2). For the majority of grants valued during the three and six months ended June
30, 2011 and 2010, the options had graded vesting over 4 years (equal vesting of options annually)
and the contractual term was 10 years. We will continue to review our estimate in the future.
In addition, we estimate forfeitures based on historical option and restricted stock unit
activity on a grant by grant basis. We may make changes to that estimate throughout the vesting
period based on actual activity.
Income Taxes
We account for income taxes under the applicable provisions of U.S. GAAP, which requires an
asset and liability approach to financial accounting and reporting for income taxes. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Valuation allowances are provided, if, based upon the weight of the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized.
Accounting for income taxes in interim periods provides that at the end of each interim period
we are required to make our best estimate of the consolidated effective tax rate expected to be
applicable for our full calendar year. The rate so determined shall be used in providing for income
taxes on a consolidated current year-to-date basis. Further, the rate is reviewed, if necessary, as
of the end of each successive interim period during the year to our best estimate of our annual
effective tax rate.
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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.
3. Accounting Standards Updates
Accounting Standards Updates Recently Adopted
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 have adopted the provisions of this update related to Level 3 fair
value measurements as of January 1, 2011 and have included the additional disclosure requirements
and there was no material impact to our condensed consolidated financial statements.
In April 2010, an update was made to Compensation Stock Compensation. This update
provides amendments to clarify that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the entitys equity
securities trades should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would classify such an award as a liability
if it otherwise qualifies as equity. This update is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted.
We have adopted the provisions of this update as of January 1, 2011 and there was no material
impact to our condensed consolidated financial statements.
In December 2010, an update was made to Intangibles Goodwill and Other. This update
modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating that an impairment may exist. The
amendments in this update are effective for fiscal years, and interim periods within those years,
beginning on or after December 15, 2010. We have adopted the provisions of this update as of
January 1, 2011 and there was no material impact to our condensed consolidated financial
statements.
In December 2010, an update was made to Business Combinations. The amendments in this update
specify that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments in this update also expand the supplemental pro forma
disclosures to include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments in this update are effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. Early adoption is permitted. We have
adopted the provisions of this update as of January 1, 2011 and there was no impact to our
condensed consolidated financial statements.
Accounting Standards Updates Not Yet Effective
In January 2011, an update was made to Receivables. The amendments in this update
temporarily delay the effective date of disclosures about troubled debt restructuring for public
entities. The effective date of the new disclosures about troubled debt restructuring for public
entities and the guidance for determining what constitutes a troubled debt restructurings for
public entities will be coordinated. Currently, that guidance is anticipated to be effective for
interim and annual periods ending after September 15, 2011. We will adopt the provisions of this
update as of September 30, 2011 and do not anticipate a material impact to our condensed
consolidated financial statements.
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In May 2011, an update was made to Fair Value Measurement. The amendments in this update
result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Some of
the amendments clarify the Boards intent about the application of existing fair value measurement
requirements. Other amendments change a particular principle or requirement for measuring fair
value or for disclosing information about fair value measurements. For public entities, the
amendments are effective during interim and annual periods beginning after December 15, 2011. Early
adoption by public entities is not permitted. We will adopt the provisions of this update and do
not anticipate a material impact to our condensed consolidated financial statements.
In June 2011, an update was made to Comprehensive Income. In this update an entity has the
options to present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. The entity is also required to present on the
face of the financial statements reclassification adjustments for items that are reclassified from
other comprehensive income to net income in the statement(s) where the components of net income and
the components of other comprehensive income are presented. The amendments in this update should
be applied retrospectively. For public entities, the amendments are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2011. Early adoption is permitted.
We will adopt the provisions of this update in fiscal year 2012 and do not anticipate a material
impact to our condensed consolidated financial statements.
4. Earnings Per Common Share
Basic and diluted earnings (loss) per common share is determined in accordance with the
applicable provisions of U.S. GAAP. Basic earnings (loss) per common share is computed using the
weighted average number of shares of common stock outstanding for the period. Diluted earnings
(loss) per common share is computed using the weighted average number of shares of common stock,
adjusted for the dilutive effect of potential common stock. Potential common stock, computed using
the treasury stock method or the if-converted method, includes the potential exercise of stock
options under our share-based employee compensation plans and our restricted stock units.
For the three and six months ended June 30, 2011, options to purchase 312 thousand and 632
thousand shares of common stock, respectively, have been excluded from the computation of diluted
earnings per common share as their effect would be anti-dilutive. For the three and six months
ended June 30, 2010, options to purchase 4.7 million shares of common stock have been excluded from
the computation of diluted earnings per share as their effect would be anti-dilutive. These shares
could dilute earnings per common share in the future.
A reconciliation of the components of basic and diluted earnings (loss) per share is as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In thousands, except | (In thousands, except | |||||||||||||||
per share data) | per share data) | |||||||||||||||
Income from continuing operations |
$ | 5,185 | $ | 4,806 | $ | 9,769 | $ | 4,549 | ||||||||
Income (loss) from discontinued operations |
| 370 | | (441 | ) | |||||||||||
Net income available to common shareholders basic and diluted |
$ | 5,185 | $ | 5,176 | $ | 9,769 | $ | 4,108 | ||||||||
Weighted average common shares outstanding basic |
16,527 | 17,683 | 17,229 | 17,652 | ||||||||||||
Dilutive effect of common stock equivalents |
2,130 | 445 | 1,812 | 352 | ||||||||||||
Weighted average common shares outstanding diluted |
18,657 | 18,128 | 19,041 | 18,004 | ||||||||||||
Basic earnings per common share: |
||||||||||||||||
Income from continuing operations |
$ | 0.31 | $ | 0.27 | $ | 0.57 | $ | 0.26 | ||||||||
Income (loss) from discontinued operations |
$ | | $ | 0.02 | $ | | $ | (0.03 | ) | |||||||
Basic earnings per common share |
$ | 0.31 | $ | 0.29 | $ | 0.57 | $ | 0.23 | ||||||||
Diluted earnings per common share: |
||||||||||||||||
Income from continuing operations |
$ | 0.28 | $ | 0.27 | $ | 0.51 | $ | 0.25 | ||||||||
Income (loss) from discontinued operations |
$ | | $ | 0.02 | $ | | $ | (0.02 | ) | |||||||
Diluted earnings per common share |
$ | 0.28 | $ | 0.29 | $ | 0.51 | $ | 0.23 | ||||||||
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5. Fair Value Measurement
Our cash and any investment instruments are classified within Level 1 or Level 2 of the fair
value hierarchy as they are valued using quoted market prices, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price transparency. The types of instruments
valued are based on quoted market prices in active markets and are primarily U.S. government and
agency securities and money market securities. Such instruments are generally classified within
Level 1 of the fair value hierarchy.
We did not hold instruments that are measured at fair value on a recurring basis as of June
30, 2011. The fair value of our instruments measured on a recurring basis at December 31, 2010 was
as follows (in thousands):
Fair Value Measurements at Reporting Date using: | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | other | Significant | ||||||||||||||
Identical Assets | Observable | Unobservable | ||||||||||||||
December 31, 2010 | (Level 1) | Inputs (Level 2) | Inputs (Level 3) | |||||||||||||
Assets: |
||||||||||||||||
US Treasury bills |
$ | 4,994 | $ | 4,994 | $ | | $ | |
For certain financial instruments, such as cash and cash equivalents, short-term government
debt instruments, trade accounts receivables, leases payable and trade accounts payable, we
consider the recorded value to approximate fair value based on the liquidity of these financial
instruments. We did not have any transfers in or out of Level 1 and Level 2 in the three or six
months ended June 30, 2011 or in the year ended December 31, 2010.
At June 30, 2011, we had a total of $20.0 million outstanding under our revolving credit
facility, which is a variable rate loan and therefore fair value approximates book value.
6. Deferred Subscription Solicitation and Commission Costs
Total deferred subscription solicitation costs included in the accompanying condensed
consolidated balance sheet as of June 30, 2011 and December 31, 2010 was $24.9 million and $28.8
million, respectively. The long-term portion of the deferred subscription solicitation costs are
reported in other assets in our condensed consolidated balance sheet and include $3.0 million and
$4.0 million as of June 30, 2011 and December 31, 2010, respectively. The current portion of the
prepaid commissions are included in the deferred subscription solicitation costs, which was $6.8
million and $8.5 million as of June 30, 2011 and December 31, 2010, respectively. Amortization of
deferred subscription solicitation and commission costs, which are included in either marketing or
commissions expense in our condensed consolidated statements of operations, for the three months
ended June 30, 2011 and 2010 were $11.8 million and $14.0 million, respectively. Amortization of
deferred subscription solicitation and commission costs for the six months ended June 30, 2011 and
2010 were $24.4 million and $32.0 million, respectively. Marketing costs, which are included in
marketing expenses in our condensed consolidated statements of operations, as they did not meet the
criteria for deferral, for the three months ended June 30, 2011 and 2010, were $1.0 million and
$1.3 million respectively. Marketing costs expensed as incurred related to marketing for the six
months ended June 30, 2011 and 2010 were $1.8 million and $6.1 million, respectively.
7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill are as follows (in thousands):
June 30, 2011 | ||||||||||||||||||||
Net Carrying | ||||||||||||||||||||
Gross | Accumulated | Net Carrying | Amount at | |||||||||||||||||
Carrying | Impairment | Amount at | June 30, | |||||||||||||||||
Amount | Losses | January 1, 2011 | Impairment | 2011 | ||||||||||||||||
Consumer Products and Services |
$ | 43,235 | $ | | $ | 43,235 | $ | | $ | 43,235 | ||||||||||
Online Brand Protection |
11,242 | (11,242 | ) | | | | ||||||||||||||
Bail Bonds Industry Solutions |
1,390 | (1,390 | ) | | | | ||||||||||||||
Total Goodwill |
$ | 55,867 | $ | (12,632 | ) | $ | 43,235 | $ | | $ | 43,235 | |||||||||
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December 31, 2010 | ||||||||||||||||||||||||
Net Carrying | ||||||||||||||||||||||||
Gross | Accumulated | Net Carrying | Discontinued | Amount at | ||||||||||||||||||||
Carrying | Impairment | Amount at | Operations | December 31, | ||||||||||||||||||||
Amount | Losses | January 1, 2010 | Impairment | (See Note 16) | 2010 | |||||||||||||||||||
Consumer Products and Services |
$ | 43,235 | $ | | $ | 43,235 | $ | | $ | | $ | 43,235 | ||||||||||||
Background Screening |
23,583 | (19,879 | ) | 3,704 | | (3,704 | ) | | ||||||||||||||||
Online Brand Protection |
11,242 | (11,242 | ) | | | | | |||||||||||||||||
Bail Bonds Industry Solutions |
1,390 | (1,390 | ) | | | | | |||||||||||||||||
Total Goodwill |
$ | 79,450 | $ | (32,511 | ) | $ | 46,939 | $ | | $ | (3,704 | ) | $ | 43,235 | ||||||||||
During the three and six months ended June 30, 2011, we did not identify any triggering events
related to our goodwill and therefore, were not required to test our goodwill for impairment. As
further described in Note 16, in the year ended December 31, 2010, we reduced goodwill by $3.7
million due to the sale of SI.
Our intangible assets consisted of the following (in thousands):
June 30, 2011 | ||||||||||||||||
Gross | Net | |||||||||||||||
Carrying | Accumulated | Carrying | ||||||||||||||
Amount | Amortization | Impairment | Amount | |||||||||||||
Amortizable intangible assets: |
||||||||||||||||
Customer related |
$ | 38,846 | $ | (25,966 | ) | $ | | $ | 12,880 | |||||||
Marketing related |
3,192 | (3,192 | ) | | | |||||||||||
Technology related |
2,796 | (2,796 | ) | | | |||||||||||
Total amortizable intangible assets |
$ | 44,834 | $ | (31,954 | ) | $ | | $ | 12,880 | |||||||
December 31, 2010 | ||||||||||||||||
Gross | Net | |||||||||||||||
Carrying | Accumulated | Carrying | ||||||||||||||
Amount | Amortization | Impairment | Amount | |||||||||||||
Amortizable intangible assets: |
||||||||||||||||
Customer related |
$ | 38,846 | $ | (24,172 | ) | $ | | $ | 14,674 | |||||||
Marketing related |
3,192 | (3,119 | ) | | 73 | |||||||||||
Technology related |
2,796 | (2,646 | ) | | 150 | |||||||||||
Total amortizable intangible assets |
$ | 44,834 | $ | (29,937 | ) | $ | | $ | 14,897 | |||||||
Intangible assets are amortized on a straight-line or accelerated basis over a period of three
to ten years. For the three months ended June 30, 2011 and 2010, we incurred aggregate amortization
expense of $1.0 million and $1.9 million, respectively, which was included in amortization expense
in the condensed consolidated statements of operations. For the six months ended June 30, 2011 and
2010, we incurred aggregate amortization expense of $2.0 million and $4.2 million, respectively,
which was included in amortization expense in the condensed consolidated statements of operations.
We estimate that we will have the following amortization expense for the future periods indicated
below (in thousands):
For the remaining six months ending December 31, 2011 |
$ | 1,811 | ||
For the years ending December 31: |
||||
2012 |
3,541 | |||
2013 |
3,483 | |||
2014 |
3,437 | |||
2015 |
427 | |||
Thereafter |
181 | |||
$ | 12,880 | |||
8. Other Assets
The components of our other assets are as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Prepaid royalty payments |
$ | 725 | $ | 75 | ||||
Prepaid contracts |
22 | 92 | ||||||
Prepaid commissions |
2,976 | 4,029 | ||||||
Other |
1,491 | 1,697 | ||||||
$ | 5,214 | $ | 5,893 | |||||
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9. Accrued Expenses and Other Current Liabilities
The components of our accrued expenses and other liabilities are as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Accrued marketing |
$ | 2,126 | $ | 2,637 | ||||
Accrued cost of sales, including credit bureau costs |
6,086 | 6,239 | ||||||
Accrued general and administrative expense and professional fees |
3,170 | 3,269 | ||||||
Insurance premiums |
976 | 1,190 | ||||||
Other |
1,388 | 1,383 | ||||||
$ | 13,746 | $ | 14,718 | |||||
10. Commitments and Contingencies
Leases
We have entered into long-term operating lease agreements for office space and capital leases
for fixed assets. The minimum fixed commitments related to all noncancellable leases are as
follows:
Operating | Capital | |||||||
Leases | Leases | |||||||
(In thousands) | ||||||||
For the remaining six months ending December 31, 2011 |
$ | 1,047 | $ | 967 | ||||
For the years ending December 31: |
||||||||
2012 |
2,385 | 1,575 | ||||||
2013 |
2,825 | 942 | ||||||
2014 |
2,455 | 859 | ||||||
2015 |
2,466 | 621 | ||||||
2016 |
2,403 | 28 | ||||||
Thereafter |
6,419 | | ||||||
Total minimum lease payments |
$ | 20,000 | 4,992 | |||||
Less: amount representing interest |
(463 | ) | ||||||
Present value of minimum lease payments |
4,529 | |||||||
Less: current obligation |
(1,677 | ) | ||||||
Long term obligations under capital lease |
$ | 2,852 | ||||||
During the six months ended June 30, 2011 we entered into additional capital lease agreements
for approximately $318 thousand. We recorded the lease liability at the fair market value of the
underlying assets in our condensed consolidated balance sheet.
We have financed certain software development costs. These costs did not meet the criteria for
capitalization under U.S. GAAP. Amounts owed under this arrangement as of June 30, 2011 are $256
thousand, of which $212 thousand is included in accrued expenses and other current liabilities and
$44 thousand is included in other long-term liabilities, respectively, in our condensed
consolidated financial statements. The minimum fixed commitments related to this arrangement are as
follows (in thousands):
For the remaining six months ending December 31, 2011 |
$ | 112 | ||
For the years ending December 31: |
||||
2012 |
136 | |||
2013 |
8 | |||
Obligations under arrangement |
$ | 256 | ||
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Rental expenses included in general and administrative expenses were $795 thousand and $1.5
million for the three and six months ended June 30, 2011, respectively. Rental expenses included in
general and administrative expenses were $671 thousand and $1.4 million for the three and six
months ended June 30, 2010, respectively. For the three and six months ended June 30, 2010, the
rental expenses included in loss from discontinued operations in our condensed consolidated
statements of operations was $185 thousand and $378 thousand, respectively. This amount is related
to SI, which was sold on July 19, 2010.
Legal Proceedings
On May 27, 2009, we filed a complaint in the U.S. District Court for the Eastern District of
Virginia against Joseph C. Loomis and Jenni M. Loomis in connection with our stock purchase
agreement to purchase all of Net Enforcers, Inc.s (NEI) stock in November 2007 (the Virginia
Litigation). We alleged, among other things, that Mr. Loomis committed securities fraud, breached
the stock purchase agreement, and breached his fiduciary duties to the company. The complaint also
seeks a declaration that NEI is not in breach of its employment agreement with Mr. Loomis and that,
following NEIs termination of Mr. Loomis for cause, NEIs obligations pursuant to the agreement
were terminated. In addition to a judgment rescinding the stock purchase agreement and return of
the entire purchase price we had paid, we are seeking unspecified compensatory, consequential and
punitive damages, among other relief. On July 2, 2009, Mr. Loomis filed a motion to dismiss certain
of our claims. On July 24, 2009, Mr. Loomis motion to dismiss our claims was denied in its
entirety. Mr. Loomis also asserted counterclaims for an unspecified amount not less than
$10,350,000, alleging that NEI breached the employment agreement by terminating him without cause
and breached the stock purchase agreement by preventing him from running NEI in such a way as to
earn certain earn-out amounts. On January 14, 2010, we settled all claims with Mr. Loomis and his
sister, co-defendant Jenni Loomis. On January 26, 2010, prior to final documentation of the
settlement and transfer of the funds, Mr. Loomis filed for bankruptcy in the United States
Bankruptcy Court for the District of Arizona (the Bankruptcy Court). The Virginia litigation thus
was automatically stayed as related to Mr. Loomis. In furtherance of our efforts to enforce the
settlement agreement, we obtained a stay of the case as related to Jenni Loomis as well. On April
22, 2010, the Bankruptcy Court granted our motion to modify the stay to permit us to seek a
declaration from the U.S. District Court for the Eastern District of Virginia that the settlement
is enforceable. We made a motion in the U.S. District Court to enforce the settlement agreement. On
November 3, 2010, the U.S. District Court denied our motion, and ordered the parties to report in
fourteen days on whether the automatic stay had been lifted by the Bankruptcy Court to allow the
U.S. District Court to proceed with trial. On January 26, 2011, the Bankruptcy Court lifted the
automatic stay, and the U.S. District Court for the Eastern District of Virginia scheduled a trial
to commence on May 2, 2011. Prior to the trial date, the parties, along with various related
non-parties, entered into a settlement agreement resolving all claims in this matter. Completion of
the settlement depends on satisfaction of certain conditions, including our acceptance of the
transfer to us by Mr. Loomis or certain related non-parties of certain real property and real
property interests. The settlement has been approved by the Bankruptcy Court, and the U.S. District
Court has stayed the trial pending completion of the settlement. We are conducting due diligence
regarding the real property and real property interests, and negotiating with the other parties to
resolve other conditions to closing. We do not know at this time whether all conditions to
completion of the settlement will be satisfied, or whether all issues will be resolved.
On September 11, 2009, a putative class action complaint was filed against Intersections,
Inc., Intersections Insurance Services Inc., Loeb Holding Corp., Bank of America, NA, Banc of
America Insurance Services, Inc., BA 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 22, 2011, the U.S.
District Court dismissed all of the plaintiffs claims against us and the other defendants. The
plaintiff has appealed the District Courts ruling to the U.S. Court of Appeals for the Fifth
Circuit. The parties have filed their briefs with the Court of Appeals and a decision is pending.
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. Defendants filed answers to the complaint on
May 24, 2010. On April 19, 2011, an amended complaint was filed. In the amended complaint, the
original named plaintiff was withdrawn from the case, and three new plaintiffs were added. On June
10, 2011, Intersections filed a motion to stay the litigation pursuant to arbitration agreements
with each of the Plaintiffs. Plaintiffs have opposed our motion. A hearing on the Motion will be
held on September 30, 2011, with a ruling to be issued sometime thereafter.
On July 19, 2011, a putative class action complaint was filed against Intersections Inc.,
Intersections Insurance Services Inc. and Bank of America Corporation in Los Angeles Superior Court
alleging various claims based on the sale of an accidental death and
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disability program. We currently are investigating the new claims. We believe that it is too
early to make a determination of the likelihood of success in defeating the claims.
Contractual Obligations
We entered into an agreement with White Sky to receive exclusivity on the sale of its ID Vault
products. We amended the agreement in the year ended December 31, 2010. The agreement allows us to
include these products and services as part of our comprehensive identity theft protection services
to consumers. Under the amended agreement, we are required to make royalty payments to White Sky in
exchange for certain exclusivity on the sale of its ID Vault products. In the three months ended
June 30, 2011, we further amended the agreement to make an advance payment of $1.3 million to
satisfy the remaining required royalties for the year ended December 31, 2012. We also may make
minimum payments in 2011 as a condition of maintaining exclusivity, and if we do not make those
payments the exclusivity will lapse. The short term portion of the payment is recorded in prepaid
expenses and other current assets and the long term portion of the payment is recorded in other
assets in our condensed consolidated balance sheet.
11. Other Long-Term Liabilities
The components of our other long-term liabilities are as follows:
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Deferred rent |
$ | 3,038 | $ | 2,415 | ||||
Uncertain tax positions, interest and penalties not recognized |
228 | 224 | ||||||
Accrued general and administrative expenses |
44 | 144 | ||||||
$ | 3,310 | $ | 2,783 | |||||
12. Debt and Other Financing
We have a Credit Agreement with Bank of America, N.A., which has a maturity date of December
31, 2011. Our Credit Agreement currently consists of a revolving credit facility in the amount of
$25.0 million and is secured by substantially all of our assets and a pledge by us of stock and
membership interests we hold in certain of our subsidiaries. Our subsidiaries are co-borrowers
under the Credit Agreement.
In July 2010, following the sale of Screening International, we prepaid the outstanding
principal balance of the term loan portion of the Credit Agreement, and the term loan may not be
re-drawn. We amended the Credit Agreement in the three months ended March 31, 2011, in connection
with the share repurchase (see Note 14) to provide for the consent of the lenders to the share
repurchase and to clarify covenant calculations. As part of this amendment, we agreed to maintain
available liquidity of at least $10.0 million at all times while the Credit Agreement is in effect.
As of June 30, 2011, the outstanding balance of the revolving credit facility was $20.0 million,
which is included as a current liability in our condensed consolidated balance sheet, and we have
approximately $19.6 million in cash and equivalents on hand in
addition to unused capacity under the Credit Agreement, which more than satisfies the minimum
available liquidity requirement.
The Credit Agreement contains certain customary covenants, including among other things
covenants that limit or restrict the incurrence of liens; the incurrence of certain indebtedness;
mergers, dissolutions, liquidation, or consolidations; acquisitions (other than certain permitted
acquisitions); sales of substantially all of our or any co-borrowers assets; the declaration of
certain dividends or distributions; transactions with affiliates (other than co-borrowers under the
Credit Agreement) other than on fair and reasonable terms; share repurchases; and the creation or
acquisition of any direct or indirect subsidiary of ours that is not a domestic subsidiary unless
such subsidiary becomes a guarantor. We are also required to maintain compliance with certain
financial covenants which includes our consolidated leverage ratios, consolidated fixed charge
coverage ratios, minimum available liquidity requirements as well as customary covenants,
representations and warranties, funding conditions and events of default. We are currently in
compliance with all such covenants.
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13. Income Taxes
Our consolidated effective tax rate from continuing operations for the three months ended June
30, 2011 and 2010 was 42.4% and
40.6%, respectively. Our consolidated effective tax rate from continuing operations for the six
months ended June 30, 2011 and 2010 was 42.1% and 44.4%, respectively. The change from the
comparable period is primarily due to increases in book expenses which are not deductible for
income tax purposes, partially offset by a reduction in a discrete item from an uncertain tax
position in a foreign jurisdiction.
In addition, the total liability for uncertain tax positions increased by approximately $65
thousand from December 31, 2010. The short-term portion of the liability is recorded in accrued
expenses and other current liabilities and the long-term portion is recorded in other long-term
liabilities in the condensed consolidated balance sheet. We record income tax penalties related to
uncertain tax positions as part of our income tax expense in our condensed consolidated financial
statements. We recorded no penalties in the three months ended June 30, 2011 and 2010. In the six
months ended June 30, 2011 and 2010, we recorded penalties of
$22 thousand and $219 thousand,
respectively.
We record interest expense related to uncertain tax positions as part of interest expense in
our condensed consolidated financial statements. In the three months ended June 30, 2011 and 2010,
we recorded interest of $2 thousand and $24 thousand, respectively. In the six months ended June
30, 2011 and 2010, we recorded interest of $11 thousand and $210 thousand, respectively.
14. Stockholders Equity
Share Repurchase
In April 2005, our Board of Directors authorized a share repurchase program under which we can
repurchase our outstanding shares of common stock from time to time, depending on market
conditions, share price and other factors.
During the three months ended June 30, 2011, we did not repurchase any common stock. During
the six months ended June 30, 2011 we repurchased approximately 1.7 million shares of common stock
at $11.25 per share resulting in an aggregate cost to us of $19.6 million. We did not repurchase
any common stock in the three and six months ended June 30, 2010. As of June 30, 2011,
we had $20.0 million remaining under our share repurchase
program, of which approximately $10.4 million is available for purchase as of June 30, 2011 under
the terms of our Credit Agreement. The repurchases may be made on the open market, in block trades,
through privately negotiated transactions or otherwise, and the program may be suspended or
discontinued at any time.
Dividends
The following summarizes our dividend activity for the six months ended June 30, 2011:
Cash Dividend | ||||||||||||
Announcement Date | Record Date | Payment Date | Amount (per share) | |||||||||
February 7, 2011 |
February 28, 2011 | March 10, 2011 | $ | 0.15 | ||||||||
April 21, 2011 |
May 31, 2011 | June 10, 2011 | $ | 0.15 |
We did not make any dividend payments in the three and six months ended June 30, 2010.
Share Based Compensation
On August 24, 1999, the Board of Directors and stockholders approved the 1999 Stock Option
Plan (the 1999 Plan). The active period for this plan expired on August 24, 2009. The number of
shares of common stock that have been issued under the 1999 Plan could not exceed 4.2 million
shares pursuant to an amendment to the plan executed in November 2001. As of June 30, 2011, options
to purchase 270 thousand shares were outstanding under the 1999 Plan. Individual awards under the
1999 Plan took the form of incentive stock options and nonqualified stock options.
On March 12, 2004 and May 5, 2004, the Board of Directors and stockholders, respectively,
approved the 2004 Stock Option Plan (the 2004 Plan) to be effective immediately prior to the
consummation of the initial public offering. The 2004 Plan provides for the authorization to issue
2.8 million shares of common stock, and options to purchase 231
thousand shares are remaining to be granted. As of
June 30, 2011, options to purchase 2.3 million
shares are outstanding under the 2004 Plan.
Individual awards under the 2004 Plan
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may take the form of incentive stock options and nonqualified stock options. Option awards are
granted with an exercise price equal to the market price of our stock at the date of grant; those
option awards generally vest over three and four years of continuous service and have ten year
contractual terms.
On March 8, 2006 and May 24, 2006, the Board of Directors and stockholders, respectively,
approved the 2006 Stock Incentive Plan (the 2006 Plan). The number of shares of common
stock that may be issued under the 2006 Plan may not exceed 7.1 million, pursuant to an
amendment approved by the Board of Directors and Stockholders in May 2011. As of June 30, 2011,
we have 2.0 million shares of common stock available for future grants of awards under the 2006
Plan, and awards for approximately 3.3 million shares outstanding. Individual awards under the
2006 Plan may take the form of incentive stock options, nonqualified stock options, restricted
stock awards and/or restricted stock units. These awards generally vest over four years of
continuous service.
The Compensation Committee administers the Plans, selects the individuals who will receive
awards and establishes the terms and conditions of those awards. Shares of common stock subject to
awards that have expired, terminated, or been canceled or forfeited are available for issuance or
use in connection with future awards.
The 1999 Plan active period expired on August 24, 2009, the 2004 Plan will remain in effect
until May 5, 2014, and the 2006 Plan will remain in effect until March 7, 2016, unless terminated
by the Board of Directors.
Stock Options
Total share-based compensation expense recognized for stock options in our condensed
consolidated statement of operations, for the three and six months ended June 30, 2011 was $620
thousand and $1.2 million, respectively. Total share-based compensation expense recognized for
stock options included in general and administrative expense in our condensed consolidated
statement of operations, for the three and six months ended June 30, 2010 was $590 thousand and
$1.2 million, respectively.
The following table summarizes our stock option activity:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | |||||||||||||||
Number of | Exercise | Aggregate | Contractual | |||||||||||||
Shares | Price | Intrinsic Value | Term | |||||||||||||
(In thousands) | (In years) | |||||||||||||||
Outstanding at December 31, 2010 |
3,795,057 | $ | 5.79 | |||||||||||||
Granted |
150,000 | 13.74 | ||||||||||||||
Canceled and Forfeited |
(136,509 | ) | 5.84 | |||||||||||||
Exercises |
(210,575 | ) | 5.29 | |||||||||||||
Outstanding at June 30, 2011 |
3,597,973 | $ | 6.15 | $ | 43,360 | 6.96 | ||||||||||
Exercisable at June 30, 2011 |
1,820,543 | $ | 7.40 | $ | 19,657 | 5.74 | ||||||||||
The weighted average grant date fair value of options granted, based on the Black-Scholes
method, during the three months ended June 30, 2011 was $7.28. There were no options granted during
the three months ended June 30, 2010. The weighted average grant date fair value of options
granted, based on the Black-Scholes method, during the six months ended June 30, 2011 and 2010 was
$6.53 and $2.75, respectively.
For options exercised, intrinsic value is calculated as the difference between the market
price on the date of exercise and the exercise price. The total intrinsic value of options
exercised during the three and six months ended June 30, 2011 was $3.0 million and $3.1 million,
respectively. There were no options exercised in the three and six months ended June 30, 2010.
As of June 30, 2011, there was $5.3 million of total unrecognized compensation cost related to
nonvested stock option arrangements granted under the Plans. That cost is expected to be recognized
over a weighted-average period of 2.0 years.
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Restricted Stock Units
Total share based compensation recognized for restricted stock units in our condensed
consolidated statement of operations, for the three and six months ended June 30, 2011 was $1.2
million and $2.3 million, respectively. Total share based compensation recognized for restricted
stock units included in general and administrative expense in our condensed consolidated statements
of operations for the three and six months ended June 30, 2010 was $775 thousand and $1.6 million,
respectively.
The following table summarizes our restricted stock unit activity:
Weighted-Average | ||||||||||||
Weighted-Average | Remaining | |||||||||||
Number of | Grant Date | Contractual | ||||||||||
RSUs | Fair Value | Life | ||||||||||
(In years) | ||||||||||||
Outstanding at December 31, 2010 |
1,943,808 | $ | 4.62 | |||||||||
Granted |
959,189 | 10.15 | ||||||||||
Canceled |
(207,427 | ) | 5.11 | |||||||||
Vested |
(421,792 | ) | 5.11 | |||||||||
Outstanding at June 30, 2011 |
2,273,778 | $ | 6.82 | 2.80 | ||||||||
As of June 30, 2011, there was $13.3 million of total unrecognized compensation cost related
to unvested restricted stock units compensation arrangements granted under the Plans. That cost is
expected to be recognized over a weighted-average period of 2.5 years.
15. Related Party Transactions
We have a minority investment in White Sky and a commercial agreement to incorporate and
market their product into our fraud and identity theft protection product offerings. For the three
and six months ended June 30, 2011, there was $650 thousand and $1.3 million, respectively,
recorded in cost of revenue in our condensed consolidated statement of operations related to
royalties for exclusivity and product costs. For the three and six months ended June 30, 2010,
there was $375 thousand and $926 thousand, respectively, recorded in cost of revenue in our
condensed consolidated statement of operations related to royalties for exclusivity and product
costs. In the three months ended June 30, 2011, we amended this agreement and made an advance
payment of $1.3 million to satisfy the remaining required royalties for the year ended December 31,
2012. The short term portion of the payment is recorded in prepaid expenses and other current
assets and the long term portion of the payment is recorded in other assets in our condensed
consolidated balance sheet.
The chief executive officer and president of Digital Matrix Systems, Inc. (DMS) serves as
our board member. We have entered into contracts with DMS that provide for services that assist us
in monitoring credit on a daily and quarterly basis, as well as certain on-line credit analysis
services. In connection with these agreements, we paid monthly installments totaling $216 thousand
and $432 thousand for the three and six months ended June 30, 2011 and 2010, respectively. These
amounts are recorded within cost of revenue and general and administrative expenses in the
condensed consolidated statement of operations. As of June 30, 2011 and 2010, we owed DMS $155
thousand and $72 thousand, respectively. These amounts are recorded in accounts payable in our
condensed consolidated balance sheet.
A family member of our executive vice president of operations is the president of RCS
International, Inc. (RCS). We have entered into a contract with RCS to assist us in our Canada
fulfillment operations. In connection with these agreements, we paid monthly installments totaling
$433 thousand and $816 thousand for the three and six months ended June 30, 2011 and 2010,
respectively. These amounts are recorded in cost of revenue in our condensed consolidated statement
of operations.
16. Discontinued Operations
On July 19, 2010, we and SIH entered into a membership interest purchase agreement with
Sterling, pursuant to which SIH sold, and Sterling acquired, 100% of the membership interests of SI
for an aggregate purchase price of $15.0 million in cash plus adjustments for working capital and
other items. SIH is not an operating subsidiary and our background screening services ceased upon
the sale of SI. The sale is subject to customary representations, warranties, indemnifications and
an escrow account of $1.8 million for a period of one year after the closing date to satisfy any
claims by Sterling under the Purchase Agreement. Please see
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Note 18 for additional information regarding the receipt of the escrow amount. We recognized a
gain of $5.9 million on the sale of our subsidiary in the year ended December 31, 2010.
The following table summarizes the operating results of the discontinued operations included
in our condensed consolidated statement of operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | | $ | 6,746 | $ | | $ | 11,846 | ||||||||
Income (loss) before income taxes from discontinued operations |
| 593 | | (239 | ) | |||||||||||
Income tax expense |
| (223 | ) | | (202 | ) | ||||||||||
Income (loss) from discontinued operations |
| 370 | | (441 | ) | |||||||||||
Gain on disposal from discontinued operations |
| | | | ||||||||||||
Net loss attributable to noncontrolling interest in
discontinued operations |
| | | | ||||||||||||
Income (loss) from discontinued operations |
$ | | $ | 370 | $ | | $ | (441 | ) | |||||||
17. Segment and Geographic Information
We have three reportable operating segments within continuing operations. Our Consumer
Products and Services segment includes our consumer protection and other consumer products and
services. This segment consists of identity theft management tools, services from our relationship
with a third party that administers referrals for identity theft to major banking institutions and
breach response services, membership product offerings and other subscription based services such
as life and accidental death insurance. Our Online Brand Protection segment includes corporate
brand protection provided by Net Enforcers. Our Bail Bonds Industry Solutions segment includes the
software management solutions for the bail bond industry provided by Captira Analytical. In
addition, until the sale of SI on July 19, 2010, our Background Screening segment included the
personnel and vendor background screening services provided by SI.
The following table sets forth segment information for the three and six months ended June 30,
2011 and 2010:
Consumer | Bail Bonds | |||||||||||||||
Products | Online Brand | Industry | ||||||||||||||
and Services | Protection | Solutions | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
Three Months Ended June 30, 2011 |
||||||||||||||||
Revenue |
$ | 93,302 | $ | 551 | $ | 232 | $ | 94,085 | ||||||||
Depreciation |
2,145 | 5 | 17 | 2,167 | ||||||||||||
Amortization |
1,010 | 7 | | 1,017 | ||||||||||||
Income (loss) from continuing operations before income taxes |
$ | 9,588 | $ | (260 | ) | $ | (325 | ) | $ | 9,003 | ||||||
Three Months Ended June 30, 2010 |
||||||||||||||||
Revenue |
$ | 91,507 | $ | 496 | $ | 123 | $ | 92,126 | ||||||||
Depreciation |
1,955 | 5 | | 1,960 | ||||||||||||
Amortization |
1,870 | 7 | | 1,877 | ||||||||||||
Income (loss) from continuing operations before income taxes |
$ | 8,561 | $ | (94 | ) | $ | (375 | ) | $ | 8,092 | ||||||
Six Months Ended June 30, 2011 |
||||||||||||||||
Revenue |
$ | 183,032 | $ | 1,093 | $ | 405 | $ | 184,530 | ||||||||
Depreciation |
4,052 | 10 | 28 | 4,090 | ||||||||||||
Amortization |
2,003 | 14 | | 2,017 | ||||||||||||
Income (loss) from continuing operations before income taxes |
$ | 18,228 | $ | (671 | ) | $ | (672 | ) | $ | 16,885 | ||||||
Six Months Ended June 30, 2010 |
||||||||||||||||
Revenue |
$ | 182,425 | $ | 959 | $ | 231 | $ | 183,615 | ||||||||
Depreciation |
4,046 | 10 | | 4,056 | ||||||||||||
Amortization |
4,162 | 14 | | 4,176 | ||||||||||||
Income (loss) from continuing operations before income taxes |
$ | 9,351 | $ | (402 | ) | $ | (771 | ) | $ | 8,178 |
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Consumer | Bail Bonds | |||||||||||||||
Products | Online Brand | Industry | ||||||||||||||
and Services | Protection | Solutions | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
As of June 30, 2011 |
||||||||||||||||
Property, plant and equipment, net |
$ | 23,169 | $ | 25 | $ | 205 | $ | 23,399 | ||||||||
Total assets |
$ | 161,896 | $ | 3,379 | $ | 677 | $ | 165,952 | ||||||||
Consumer | Bail Bonds | |||||||||||||||
Products | Online Brand | Industry | ||||||||||||||
and Services | Protection | Solutions | Consolidated | |||||||||||||
(in thousands) | ||||||||||||||||
As of December 30, 2010 |
||||||||||||||||
Property, plant and equipment, net |
$ | 21,424 | $ | 23 | $ | 122 | $ | 21,569 | ||||||||
Total assets |
$ | 148,884 | $ | 9,900 | $ | 3,843 | $ | 162,627 | ||||||||
The principal geographic area of our revenue and assets from continuing operations is the
United States.
18. Subsequent Events
On
July 19, 2011, we received the full escrow amount of approximately
$1.8 million in cash from Sterling as part of the Purchase Agreement
for the sale of 51.
On August 2, 2011, we announced a cash dividend of $0.20 per share on our common stock, payable
on September 9, 2011, to stockholders of record as of August 31, 2011.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements
Certain written and oral statements made by or on our behalf may constitute forward-looking
statements as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases
such as should result, are expected to, we anticipate, we estimate, we project, or
similar expressions are intended to identify forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to differ materially
from those expressed in any forward-looking statements. These risks and uncertainties include, but
are not limited to, those disclosed in our Annual Report on Form 10-K for the year ended December
31, 2010 filed on March 16, 2011, and our quarterly and current reports filed with the Securities
and Exchange Commission and the following important factors: demand for our services, general
economic conditions, including the effects of the recession in the U.S. and the worldwide economic
slowdown, recent disruptions to the credit and financial markets in the U.S. and worldwide,
economic conditions specific to our financial institutions clients, product development,
maintaining acceptable margins, maintaining secure systems, ability to control costs, the impact of
federal, state and local regulatory requirements on our business, specifically the consumer credit
market, the impact of competition, ability to continue our long-term business strategy including
the ability to attract and retain qualified personnel and the uncertainty of economic conditions in
general.
Readers are cautioned not to place undue reliance on forward-looking statements, since the
statements speak only as of the date that they are made, and we undertake no obligation to publicly
update these statements based on events that may occur after the date of this report.
Overview
We have three reportable segments with continuing operations: Consumer Products and Services,
Online Brand Protection and Bail Bonds Industry Solutions. Our Consumer Products and Services
segment includes our consumer protection and other consumer products and services. This segment
consists of identity theft management tools, services from our relationship with a third party that
administers referrals for identity theft to major banking institutions and breach response
services, membership product offerings and other subscription based services such as life and
accidental death insurance. Our Online Brand Protection segment includes corporate
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brand protection provided by Net Enforcers. Our Bail Bonds Industry Solutions segment includes
the software management solutions for the bail bond industry provided by Captira Analytical. In
addition, until the sale of Screening International on July 19, 2010, we had a fourth reportable
segment, our Background Screening segment, which included the personnel and vendor background
screening services provided by Screening International.
Consumer Products and Services
We offer consumers a variety of consumer protection services and other consumer products and
services primarily on a subscription basis. Our services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information. Through our subsidiary, Intersections Insurance Services, we offer a portfolio of
services to include consumer discounts on healthcare, home, and auto related expenses, access to
professional financial and legal information, and life, accidental death and disability insurance
products. Our consumer services are offered through relationships with clients, including many of
the largest financial institutions in the United States and Canada, and clients in other
industries. We also provide certain limited versions of our products and services to consumers who
are eligible for them as benefits of their accounts with our clients, as well as limited
administrative services in connection with customers who were transferred from a clients prior
service provider. We call the customers for whom we provide these limited versions of our products
and services, or these administrative services, non-subscriber customers.
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, internet service providers,
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 and non-subscriber
customers 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 continued 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 2011 in our direct to
consumer business.
Our client arrangements are distinguished from one another primarily by the allocation between
us and the client of the economic risk and reward of the marketing campaigns. The general
characteristics of each arrangement are described below, although the arrangements with particular
clients may contain unique characteristics:
| Direct marketing arrangements: Under direct marketing arrangements, we bear most of the new subscriber marketing costs and pay our client a commission for revenue derived from subscribers. These commissions could be payable upfront in a lump sum on a per subscriber basis for the subscribers enrollment, periodically over the life of a subscriber, or through a combination of both. These arrangements generally result in negative cash flow over the first several months after a program is launched due to the upfront nature of the marketing investments. In some arrangements, we pay the client a service fee for access to the clients customers or billing of the subscribers by the client, and we may reimburse the client for certain of its out-of-pocket marketing costs incurred in obtaining the subscriber. Even in a direct marketing arrangement, some marketing channels may entail limited or no marketing expenses. In these cases, we generally pay higher commissions to our clients compared to channels where we incur more substantial marketing expenses. | ||
| Indirect marketing arrangements: Under indirect marketing arrangements, our client bears the marketing expense and pays us a service fee or percentage of the revenue. Because the subscriber acquisition cost is borne by our client under these arrangements, our revenue per subscriber is typically lower than that under direct marketing arrangements. Indirect marketing |
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arrangements generally provide positive cash flow earlier than direct arrangements and the ability to obtain subscribers and utilize marketing channels that the clients otherwise may not make available. The majority of our non-subscriber customers are acquired under indirect marketing relationships that primarily generate little or no revenue per customer for us. |
| Shared marketing arrangements: Under shared marketing arrangements, marketing expenses are shared by us and the client in various proportions, and we may pay a commission to or receive a service fee from the client. Revenue generally is split relative to the investment made by our client and us. |
The classification of a client relationship as direct, indirect or shared is based on whether
we or the client pay the marketing expenses. Our accounting policies for revenue recognition,
however, are not based on the classification of a client arrangement as direct, indirect or shared.
We look to the specific client arrangement to determine the appropriate revenue recognition policy,
as discussed in detail in Note 2 to our condensed consolidated financial statements.
Our typical contracts for direct marketing arrangements, and some indirect and shared
marketing arrangements, provide that, after termination of the contract, we may continue to provide
our services to existing subscribers, for periods ranging from two years to no specific termination
period, under the economic arrangements that existed at the time of termination. Under certain of
our agreements, however, including most indirect marketing arrangements and some shared marketing
arrangements; the clients may require us to cease providing services under existing subscriptions.
Clients under some contracts may also require us to cease providing services to their customers
under existing subscriptions if the contract is terminated for material breach by us.
The following table details other selected subscriber and financial data.
Other Data (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Subscribers at beginning of period |
4,148 | 4,238 | 4,150 | 4,301 | ||||||||||||
Reclassed subscribers |
148 | | 148 | | ||||||||||||
New subscribers indirect |
588 | 191 | 820 | 420 | ||||||||||||
New subscribers direct (1) |
346 | 293 | 659 | 765 | ||||||||||||
Cancelled subscribers within first 90 days of subscription |
(150 | ) | (203 | ) | (327 | ) | (443 | ) | ||||||||
Cancelled subscribers after first 90 days of subscription |
(338 | ) | (412 | ) | (708 | ) | (936 | ) | ||||||||
Subscribers at end of period |
4,742 | 4,107 | 4,742 | 4,107 | ||||||||||||
Non-Subscriber Customers |
4,866 | 3,532 | 4,866 | 3,532 | ||||||||||||
Transactional and Other |
61 | 225 | 61 | 225 | ||||||||||||
Total Customers at end of period |
9,669 | 7,864 | 9,669 | 7,864 | ||||||||||||
Total revenue |
$ | 94,085 | $ | 92,126 | $ | 184,530 | $ | 183,615 | ||||||||
Other revenue |
(1,237 | ) | (1,199 | ) | (2,406 | ) | (2,044 | ) | ||||||||
Customer revenue |
$ | 92,848 | $ | 90,927 | $ | 182,124 | $ | 181,571 | ||||||||
Marketing and commissions |
$ | 36,746 | $ | 42,493 | $ | 74,294 | $ | 90,391 | ||||||||
Other commissions paid |
(9 | ) | (22 | ) | (32 | ) | (35 | ) | ||||||||
Marketing and commissions associated with customer revenue |
$ | 36,737 | $ | 42,471 | $ | 74,262 | $ | 90,356 | ||||||||
(1) | We classify subscribers from shared marketing arrangements with direct marketing arrangements. |
During the three months ended June 30, 2011, we refined the criteria we use to calculate and
report the Other Data depicted in the table above. The changes in our criteria include, but are
not limited to (1) adjustments to the definition of Subscribers, resulting in approximately 148
thousand customers being reclassified into our Subscriber count, (2) inclusion of a Non-Subscriber
Customers count, and (3) inclusion of a total Customers count which adds together Subscribers and
Non-Subscriber Customers.
Non-Subscriber Customers include consumers who receive or are eligible for certain limited
versions of our products and services as benefits of their accounts with our clients.
Non-Subscriber Customers also includes consumers for whom we provide limited administrative
services in connection with their transfer from a clients prior service provider. We generate an
immaterial
percentage of our revenue from Non-Subscriber Customers. We expect our Non-Subscriber Customer
counts to be more volatile from period to period than Subscriber counts. We expect a significant
decrease in Nonsubscriber Customer counts during the year ending
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December 31, 2011, due to the expected cancellation by one of our clients of customers
recently transferred from the clients prior service provider.
For the three months ended June 30, 2011, both Subscribers, and New Subscribers indirect,
include Subscribers that are new to us and originally initiated their enrollments when a client was
using a different service provider. As such, they may have different retention characteristics
than our typical new Subscriber.
Customer revenue, net of marketing and commissions associated with customer revenue, is a
non-GAAP financial measure that we believe is important to investors and one that we utilize in
managing our business as customer revenue normalizes the effect of changes in the mix of indirect
and direct marketing arrangements.
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 and hourly based fees for certain
project work. Prices for our services vary based upon the specific configuration of services
purchased by each client and range from several hundred dollars per month to tens of thousands of
dollars per month.
Bail Bonds Industry Solutions
Through our subsidiary, Captira Analytical, we provide automated service solutions for the
bail bonds industry. These services include accounting, reporting, and decision making tools which
allow bail bondsmen, general agents and sureties to run their offices more efficiently, to exercise
greater operational and financial control over their businesses, and to make better underwriting
decisions. We believe Captira Analyticals services are the only fully integrated suite of bail
bonds management applications of comparable scope available in the marketplace today. Captira
Analyticals services are sold to retail bail bondsmen on a per seat license basis plus
additional transactional 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.
Critical Accounting Policies
Management Estimates
In preparing our condensed consolidated financial statements, we make estimates and
assumptions that can have a significant impact on our financial position and results of operations.
The application of our critical accounting policies requires an evaluation of a number of complex
criteria and significant accounting judgments by us. In applying those policies, our management
uses its judgment to determine the appropriate assumptions to be used in the determination of
certain estimates. Actual results may differ significantly from these estimates under different
assumptions, judgments or conditions. We have identified the following policies as critical to our
business operations and the understanding of our results of operations. For further information on
our critical and other accounting policies, see Note 2 to our condensed consolidated financial
statements.
Revenue Recognition
We recognize revenue on 1) identity theft and credit management services, 2) accidental death
insurance and 3) other membership products.
Our products and services are offered to consumers primarily on a monthly subscription basis.
Subscription fees are generally billed directly to the subscribers credit card, mortgage bill or
demand deposit accounts. The prices to subscribers of various configurations of our products and
services generally range from $4.99 to $25.00 per month. As a means of allowing customers to
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become
familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues
are recognized until applicable trial periods are completed.
Identity Theft and Credit Management Services
We recognize revenue from our services when: a) persuasive evidence of arrangement exists as
we generally maintain signed contracts with all of our large financial institution customers and
paper or electronic confirmations with individual purchases, b) delivery has occurred, c) the
sellers price to the buyer is fixed as sales are generally based on contract or list prices and
payments from large financial institutions are collected within 30 to 45 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. 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
subscriptions 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. For subscriptions with refund provisions whereby only
the prorated subscription fee is refunded upon cancellation by the subscriber, deferred
subscription fees are recorded when billed and amortized as subscription fee revenue on a
straight-line basis over the subscription period, generally one year.
We also 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 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 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 or electronic confirmations with individual purchases, b) delivery has occurred
at the completion of a product trial period, c) the sellers price to the buyer is fixed as the
price of the product is agreed to by the customer as a condition of the sales transaction which
established the sales arrangement, and d) collectability is reasonably assured as evidenced by our
collection of revenue through the monthly mortgage payments of our customers or through checking
account debits to our customers accounts. Revenues from insurance contracts are recognized when
earned. Marketing of our insurance products generally involves a trial period during which time the
product is made available at no cost to the customer. No revenues are recognized until applicable
trial periods are completed.
For insurance products, we record revenue on a net basis as we perform as an agent or broker
for the insurance products without assuming the risks of ownership of the insurance products. For
membership products, we generally record revenue on a gross basis as we serve as the primary
obligor in the transactions, have latitude in establishing price and bear credit risk for the
amount billed to the subscriber.
We participate in agency relationships with insurance carriers that underwrite insurance
products offered by us. Accordingly, insurance premiums collected from customers and remitted to
insurance carriers are excluded from our revenues and operating expenses. Insurance premiums
collected but not remitted to insurance carriers as of June 30, 2011 and December 31, 2010 were
$976 thousand and $1.2 million, respectively, and are included in accrued expenses and other
current liabilities in our condensed consolidated balance sheet.
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Other Monthly Subscription Products
We generate revenue from other types of subscription based products and transactional sales
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 or transactional basis and from providing management service solutions, offered by Captira
Analytical, on a monthly subscription or transactional basis.
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, as of October 31, or more frequently if indicators of impairment exist, and follow the
two step process. Goodwill has been assigned to our reporting units for purposes of impairment
testing. As of June 30, 2011, goodwill of $43.2 million resides in our Consumer Products and
Services reporting unit and there is no goodwill remaining in our other reporting units.
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 in our
condensed consolidated financial statements.
The goodwill impairment test involves a two-step process. The first step is a comparison of
each reporting units fair value to its carrying value. We estimate fair value using the best
information available, using a combined income (discounted cash flow) valuation model and market
based approach. The market approach measures the value of an entity through an analysis of recent
sales or offerings of comparable companies. The income approach measures the value of the reporting
units by the present values of its economic benefits. These benefits can include revenue and cost
savings. Value indications are developed by discounting expected cash flows to their present value
at a rate of return that incorporates the risk-free rate for use of funds, trends within the
industry, and risks associated with particular investments of similar type and quality as of the
valuation date.
The estimated fair value of our reporting units is dependent on several significant
assumptions, including our earnings projections, and cost of capital (discount rate). The
projections use managements best estimates of economic and market conditions over the projected
period including business plans, growth rates in sales, costs, and estimates of future expected
changes in operating margins and cash expenditures. Other significant estimates and assumptions
include terminal value growth rates, future estimates of capital expenditures and changes in future
working capital requirements. There are inherent uncertainties related to these factors and
managements judgment in applying each to the analysis of the recoverability of goodwill.
We estimate fair value giving consideration to both the income and market approaches.
Consideration is
given to the line of business and operating performance of the entities being valued relative
to those of actual transactions, potentially subject to corresponding economic, environmental, and
political factors considered to be reasonable investment alternatives.
If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the
reporting unit is not impaired and the second step of the impairment test is not necessary. If the
carrying value of the reporting unit exceeds its estimated fair value, then the second step of the
goodwill impairment test must be performed. The second step of the goodwill impairment test
compares the implied fair value of the reporting units goodwill with its goodwill carrying value
to measure the amount of impairment charge, if any. The implied fair value of goodwill is
determined in the same manner as the amount of goodwill recognized in a business combination. In
other words, the estimated fair value of the reporting unit is allocated to all of the assets and
liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit
had been acquired in a business combination and the fair value of that reporting unit was the
purchase price paid. If the carrying value of the reporting units goodwill exceeds the implied
fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.
We 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
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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 may 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.
Deferred Subscription Solicitation and Advertising
Our deferred subscription solicitation costs consist of subscription acquisition costs,
including telemarketing, web-based marketing expenses and direct mail such as printing and postage.
We expense advertising costs the first time advertising takes place, except for direct-response
marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response
marketing costs, which are amortized on a cost pool basis over the period during which the future
benefits are expected to be received, but no more than 12 months. The recoverability of amounts
capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date by
comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future
benefit expected to result directly from such advertising costs. Probable remaining future benefit
is estimated based upon historical subscriber patterns, and represents net revenues less costs to
earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct
our contractual cost to service that subscriber from the known sales price. We then apply the
future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in
the future to arrive at the total probable future benefit. In estimating the number of subscribers
we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber
patterns maintained by us that show attrition rates by client, product and marketing channel. The
total probable future benefit is then compared to the costs of a given marketing campaign (i.e.,
cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to
be recoverable. If direct response advertising costs were to exceed the estimated probable
remaining future benefit, an adjustment would be made to the deferred subscription costs to the
extent of any shortfall.
Commission Costs
Commissions that relate to annual subscriptions with full refund provisions and monthly
subscriptions are expensed when incurred, unless we are entitled to a refund of the commissions. If
annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a
full refund of the previously paid commission for those annual subscriptions with a full refund
provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual
subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions
with full commission refund provisions are deferred until the earlier of expiration of the refund
privileges or cancellation. Once the refund privileges have expired, the commission costs are
recognized ratably in the same pattern that the related revenue is recognized. Commissions that
relate to annual subscriptions with pro-rata refund provisions are deferred and charged to
operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt
of the refunded commission from our client, we record a reduction to the deferred commission.
We have prepaid commission agreements with some of our clients. Under these agreements, we pay
a commission on new subscribers in lieu of or reduction in ongoing commission payments. We amortize
these prepaid commissions, on an accelerated basis, over a period of time not to exceed three
years, which is the average expected life of customers. The short-term portion of the prepaid
commissions is shown in deferred subscription solicitation costs in our condensed consolidated
balance sheet. The long-term portion of the prepaid commissions is shown in other assets in our
condensed consolidated balance sheet. Amortization is included in commission expense in our
condensed consolidated statement of operations.
Share Based Compensation
We use the Black-Scholes option-pricing model to value all options and the straight-line
method to amortize this fair value as compensation cost over the requisite service period. The fair
value of each option granted has been estimated as of the date of grant with the following
weighted-average assumptions:
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Expected dividend yield |
4.5 | % | 0 | % | ||||
Expected volatility |
73.8 | % | 67.8 | % | ||||
Risk-free interest rate |
2.5 | % | 2.8 | % | ||||
Expected life of options |
6.2 years | 6.2 years |
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Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield
as an input. Prior to September 10, 2010 we had not issued dividends and, therefore, the dividend
yield used in grants prior to September 10, 2010 was zero. Subsequent to September 2010, we paid
quarterly cash dividends of $0.15 per share on our common stock. We had grants in the three and six
months ended June 30, 2011 and applied a dividend yield. For future grants, we will apply a
dividend yield based on our history and expectation of dividend payouts.
Expected Volatility. In 2010, we revised our estimation method for calculating expected
volatility. For the three and six months ended June 30, 2011, the expected volatility of options
granted was estimated based upon our historical share price volatility. For the three and six
months ended June 30, 2010, the expected volatility of options granted was estimated based upon our
historical share price volatility as well as the average volatility of comparable public companies.
We will continue to review our estimate in the future.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury
notes was used to extrapolate an average risk-free interest rate based on the expected term of the
underlying grants.
Expected Term. The expected term of options granted during the three and six months ended June
30, 2011 and 2010 was determined under the simplified calculation ((vesting term + original
contractual term)/2). For the majority of grants valued during the three and six months ended June
30, 2011 and 2010, the options had graded vesting over 4 years (equal vesting of options annually)
and the contractual term was 10 years. We will continue to review our estimate in the future.
In addition, we estimate forfeitures based on historical option and restricted stock unit
activity on a grant by grant basis. We may make changes to that estimate throughout the vesting
period based on actual activity.
Income Taxes
We account for income taxes under the applicable provisions of U.S. GAAP, which requires an
asset and liability approach to financial accounting and reporting for income taxes. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Valuation allowances are provided, if, based upon the weight of the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized.
Accounting for income taxes in interim periods provides that at the end of each interim period
we are required to make our best estimate of the consolidated effective tax rate expected to be
applicable for our full calendar year. The rate so determined shall be used in providing for income
taxes on a consolidated current year-to-date basis. Further, the rate is reviewed, if necessary, as
of the end of each successive interim period during the year to our best estimate of our annual
effective tax rate.
We believe that our tax positions comply with applicable tax law. As a matter of course, we
may be audited by various taxing authorities and these audits may result in proposed assessments
where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. We may recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate
settlement.
Accounting Standards Updates
Accounting Standards Updates Recently Adopted
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
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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 have adopted the provisions of this update related to Level 3 fair
value measurements as of January 1, 2011 and have included the additional disclosure requirements
and there was no material impact to our condensed consolidated financial statements.
In April 2010, an update was made to Compensation Stock Compensation. This update
provides amendments to clarify that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the entitys equity
securities trades should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would classify such an award as a liability
if it otherwise qualifies as equity. This update is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted.
We have adopted the provisions of this update as of January 1, 2011 and there was no material
impact to our condensed consolidated financial statements.
In December 2010, an update was made to Intangibles Goodwill and Other. This update
modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those
reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it
is more likely than not that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity should consider whether there are any adverse
qualitative factors indicating that an impairment may exist. The amendments in this update are
effective for fiscal years, and interim periods within those years, beginning on or after December
15, 2010. We have adopted the provisions of this update as of January 1, 2011 and there was no
material impact to our condensed consolidated financial statements.
In December 2010, an update was made to Business Combinations. The amendments in this update
specify that if a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business combination(s) that
occurred during the current year had occurred as of the beginning of the comparable prior annual
reporting period only. The amendments in this update also expand the supplemental pro forma
disclosures to include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro forma
revenue and earnings. The amendments in this update are effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. Early adoption is permitted. We have
adopted the provisions of this update as of January 1, 2011 and there was no impact to our
condensed consolidated financial statements.
Accounting Standards Updates Not Yet Effective
In January 2011, an update was made to Receivables. The amendments in this update
temporarily delay the effective date of disclosures about troubled debt restructuring for public
entities. The effective date of the new disclosures about troubled debt restructuring for public
entities and the guidance for determining what constitutes a troubled debt restructurings for
public entities will be coordinated. Currently, that guidance is anticipated to be effective for
interim and annual periods ending after September 15, 2011. We will adopt the provisions of this
update as of September 30, 2011 and do not anticipate a material impact to our condensed
consolidated financial statements.
In May 2011, an update was made to Fair Value Measurement. The amendments in this update
result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Some of
the amendments clarify the Boards intent about the application of existing fair value measurement
requirements. Other amendments change a particular principle or requirement for measuring fair
value or for disclosing information about fair value measurements. For public entities, the
amendments are effective during interim and annual periods beginning after December 15, 2011. Early
adoption by public entities is not permitted. We will adopt the provisions of this update and do
not anticipate a material impact to our condensed consolidated financial statements.
In June 2011, an update was made to Comprehensive Income. In this update an entity has the
options to present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement of comprehensive
income or in two separate but consecutive statements. The entity is also required to present on the
face of the financial statements reclassification adjustments for items that are reclassified from
other comprehensive income to net income in the statement(s) where the components of net income and
the components of other comprehensive income are presented.
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The amendments in this update should
be applied retrospectively. For public entities, the amendments are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2011. Early adoption is permitted.
We will adopt the provisions of this update in fiscal year 2012 and do not anticipate a material
impact to our condensed consolidated financial statements.
Results of Continuing Operations
We have three reportable segments with continuing operations through the period ended June 30,
2011. In 2010, we changed our segment reporting by realigning a portion of our Other segment into
the Consumer Products and Services segment. Our Consumer Products and Services segment includes our
consumer protection and other consumer products and services. This segment consists of identity
theft
management tools, services from our relationship with a third party that administers referrals
for identity theft to major banking institutions and breach response services, membership product
offerings and other subscription based services such as life and accidental death insurance. Our
Online Brand Protection segment includes corporate brand protection provided by Net Enforcers. Our
Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond
industry provided by Captira Analytical.
Three Months Ended June 30, 2011 vs. Three Months Ended June 30, 2010 (in thousands):
The condensed consolidated results of continuing operations are as follows:
Consumer | ||||||||||||||||
Products | Bail Bonds | |||||||||||||||
and | Online Brand | Industry | ||||||||||||||
Services | Protection | Solutions | Consolidated | |||||||||||||
Three Months Ended June 30, 2011 |
||||||||||||||||
Revenue |
$ | 93,302 | $ | 551 | $ | 232 | $ | 94,085 | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
9,278 | | | 9,278 | ||||||||||||
Commissions |
27,468 | | | 27,468 | ||||||||||||
Cost of revenue |
27,659 | 155 | 15 | 27,829 | ||||||||||||
General and administrative |
16,118 | 644 | 525 | 17,287 | ||||||||||||
Depreciation |
2,145 | 5 | 17 | 2,167 | ||||||||||||
Amortization |
1,010 | 7 | | 1,017 | ||||||||||||
Total operating expenses |
83,678 | 811 | 557 | 85,046 | ||||||||||||
Income (loss) from continuing operations |
$ | 9,624 | $ | (260 | ) | $ | (325 | ) | $ | 9,039 | ||||||
Three Months Ended June 30, 2010 |
||||||||||||||||
Revenue |
$ | 91,507 | $ | 496 | $ | 123 | $ | 92,126 | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
12,684 | | | 12,684 | ||||||||||||
Commissions |
29,809 | | | 29,809 | ||||||||||||
Cost of revenue |
21,755 | 143 | 12 | 21,910 | ||||||||||||
General and administrative |
14,323 | 435 | 486 | 15,244 | ||||||||||||
Depreciation |
1,955 | 5 | | 1,960 | ||||||||||||
Amortization |
1,870 | 7 | | 1,877 | ||||||||||||
Total operating expenses |
82,396 | 590 | 498 | 83,484 | ||||||||||||
Income (loss) from continuing operations |
$ | 9,111 | $ | (94 | ) | $ | (375 | ) | $ | 8,642 | ||||||
Consumer Products and Services Segment
Our income from continuing operations in our Consumer Products and Services segment increased
in the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This
is primarily due to growth in subscribers from indirect marketing arrangements, as well as
decreased marketing expenses in our direct subscription business. This was partially offset by
increased cost of revenue due to an increase in the effective rates for data, increased data
fulfillment and service costs for new subscribers from a new client and an increase in the
effective rates for commissions. Our Customer revenue (see Other
Data) increased to $92.8 million
from $90.9 million in the comparable period.
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Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | Difference | % | |||||||||||||
Revenue |
$ | 93,302 | $ | 91,507 | $ | 1,795 | 2.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
9,278 | 12,684 | (3,406 | ) | (26.9 | )% | ||||||||||
Commissions |
27,468 | 29,809 | (2,341 | ) | (7.9 | )% | ||||||||||
Cost of revenue |
27,659 | 21,755 | 5,904 | 27.1 | % | |||||||||||
General and administrative |
16,118 | 14,323 | 1,795 | 12.5 | % | |||||||||||
Depreciation |
2,145 | 1,955 | 190 | 9.7 | % | |||||||||||
Amortization |
1,010 | 1,870 | (860 | ) | (46.0 | )% | ||||||||||
Total operating expenses |
83,678 | 82,396 | 1,282 | 1.6 | % | |||||||||||
Income from
continuing
operations |
$ | 9,624 | $ | 9,111 | $ | 513 | 5.6 | % | ||||||||
Revenue. The increase in revenue is primarily the result of new subscribers from indirect
marketing arrangements from a new client and from existing clients, and increased revenue from our
direct to consumer business. This was partially offset by a reduction in revenue from our
prepaid commission arrangements and from our direct marketing arrangements
due in part to changes in customer billing practices by certain of our financial
institution clients. We believe these changes are a result of the federal regulatory agencies that oversee these clients
and will continue to offset our revenue growth for the balance of 2011. The percentage of revenue from direct marketing arrangements, in
which we recognize the gross amount billed to the subscriber, has
decreased to 85.4% for the three
months ended June 30, 2011 from 88.8% in the three months ended June 30, 2010.
Total subscriber additions for the three months ended June 30, 2011 were 934 thousand compared
to 484 thousand in the three months ended June 30, 2010.
The table below shows the percentage of subscribers generated from direct marketing
arrangements:
Three Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Percentage of subscribers from direct marketing arrangements to total subscribers |
53.3 | % | 60.8 | % | ||||
Percentage of new subscribers acquired from direct marketing arrangements to total
new subscribers acquired |
37.0 | % | 60.5 | % | ||||
Percentage of revenue from direct marketing arrangements to total Customer revenue |
85.4 | % | 88.8 | % |
The percentage of new subscribers acquired from direct marketing arrangements to total new
subscribers was negatively influenced in the three months ended June 30, 2011 by the conversion of
a portfolio of subscribers from an indirect marketing arrangement. Therefore, the results of this
metric as of June 30, 2011 may not be indicative of future period performance.
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. The decrease in marketing expense is primarily a result of a decrease in marketing for our
direct subscription business with existing clients, partially offset by an increase in marketing
for our direct to consumer business from the comparable period. Amortization of deferred
subscription solicitation costs related to marketing for the three months ended June 30, 2011 and
2010 were $8.3 million and $11.4 million, respectively. Marketing costs expensed as incurred for
the three months ended June 30, 2011 and 2010 were $1.0 million and $1.3 million, respectively,
primarily related to broadcast media for our direct to consumer business, which do not meet the
criteria for capitalization.
As a percentage of revenue, marketing expenses decreased to 9.9% for the three months ended
June 30, 2011 from 13.9% for the three months ended June 30, 2010.
Commissions Expenses. Commission expenses consist of commissions paid to our clients. The
decrease in commission expense is related to a decrease in subscribers from our direct marketing
arrangements, which includes our prepaid commission arrangements. This was partially offset by an
increase in the effective rates for commissions.
As a percentage of revenue, commission expenses decreased to 29.4% for the three months ended
June 30, 2011 from 32.6% for the three months ended June 30, 2010.
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Table of Contents
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 transactional
sales. The increase in cost of revenue is primarily the result of an increase in the effective
rates for data and increased
data fulfillment and service costs for new subscribers from a new client. We expect increased
data rates to continue.
As a percentage of revenue, cost of revenue increased to 29.6% for the three months ended June
30, 2011 compared to 23.8% for the three months ended June 30, 2010, as a result of an increase in
data cost rates and fulfillment for indirect 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. The increase in general and administrative
expenses is primarily related to increased payroll and facilities expense associated with
additional office space obtained in 2011, partially offset by a decrease in professional fees.
Total share based compensation expense for the three months ended June 30, 2011 and 2010 was
$1.8 million and $1.4 million, respectively. In addition,
we incurred compensation expense of $341
thousand for payments to RSU holders equivalent to the dividends that would have been received on
these shares had they been fully vested.
As a percentage of revenue, general and administrative expenses increased to 17.3% for the
three months ended June 30, 2011 from 15.7% for the three months ended June 30, 2010.
Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our
fixed assets and capitalized software. Depreciation expense increased for the three months ended
June 30, 2011 compared to the three months ended June 30, 2010.
As a percentage of revenue, depreciation expenses increased to 2.3% for the three months ended
June 30, 2011 from 2.1% for the three months ended June 30, 2010. We expect depreciation expense
to increase as a percentage of revenue in 2011, and possibly thereafter, due to new assets placed
into service during the three months ended June 30, 2011.
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 our customer
related intangible assets, which are amortized on an accelerated basis, from the comparable period.
As a percentage of revenue, amortization expenses decreased to 1.1% for the three months ended
June 30, 2011 from 2.0% for the three months ended June 30, 2010.
Online Brand Protection Segment
Our loss from continuing operations in our Online Brand Protection segment increased for the
three months ended June 30, 2011 as compared to the three months ended June 30, 2010 primarily due
to increased in general and administrative costs associated with our ongoing litigation.
Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | Difference | % | |||||||||||||
Revenue |
$ | 551 | $ | 496 | $ | 55 | 11.1 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue |
155 | 143 | 12 | 8.4 | % | |||||||||||
General and administrative |
644 | 435 | 209 | 48.1 | % | |||||||||||
Depreciation |
5 | 5 | | 0.0 | % | |||||||||||
Amortization |
7 | 7 | | 0.0 | % | |||||||||||
Total operating expenses |
811 | 590 | 221 | 37.5 | % | |||||||||||
Loss from continuing
operations |
$ | (260 | ) | $ | (94 | ) | $ | (166 | ) | (176.6 | )% | |||||
Revenue. The increase in revenue is the result of revenue from new clients.
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Table of Contents
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
increased slightly for the three months ended June 30, 2011 compared to the three months ended June
30, 2010.
As a percentage of revenue, cost of revenue remained flat at 28.1% for the three months ended
June 30, 2011 compared to 28.8% for the three months ended June 30, 2010.
General and Administrative Expenses. General and administrative expenses consist of personnel
and facilities expenses associated with our sales, marketing, information technology, finance, and
program and account functions. The increase in general and administrative expenses is due to legal
fees associated with our ongoing litigation.
As a percentage of revenue, general and administrative expenses increased to 116.9% for the
three months ended June 30, 2011 from 87.7% for the three months ended June 30, 2010.
Bail Bonds Industry Solutions Segment
Our loss from continuing operations in our Bail Bonds Industry Solutions Segment decreased for
the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The
decrease in loss from operations is driven by growth in revenue partially offset by increased
operating expenses.
Three Months Ended June 30, | ||||||||||||||||
2011 | 2010 | Difference | % | |||||||||||||
Revenue |
$ | 232 | $ | 123 | $ | 109 | 88.6 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue |
15 | 12 | 3 | 25.0 | % | |||||||||||
General and administrative |
525 | 486 | 39 | 8.0 | % | |||||||||||
Depreciation |
17 | | 17 | 100.0 | % | |||||||||||
Total operating expenses |
557 | 498 | 59 | 11.9 | % | |||||||||||
Loss from continuing
operations |
$ | (325 | ) | $ | (375 | ) | $ | 50 | 13.3 | % | ||||||
Revenue. The increase in revenue is the result of revenue from new clients.
Cost of Revenue. Cost of revenue consists of monitoring and credit bureau expenses. Cost of
revenue remained flat for the three months ended June 30, 2011 as compared to the three months
ended June 30, 2010.
As a percentage of revenue, cost of revenue was 6.5% for the three months ended June 30, 2011
compared to 9.8% for the three months ended June 30, 2010.
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. The increase in general and administrative expenses is
primarily due to an increase in professional fees.
Depreciation. Depreciation expenses consist primarily of depreciation expenses related to our
fixed assets. The increase in depreciation expense is primarily due to an increase in assets placed
into service in the three months ended June 30, 2011.
As a percentage of revenue, depreciation expense increased to 7.3% for the three months ended
June 30, 2011 compared to 0.0% for the three months ended June 30, 2010.
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Table of Contents
Six Months Ended June 30, 2011 vs. Six Months Ended June 30, 2010 (in thousands):
The condensed consolidated results of continuing operations are as follows:
Consumer | ||||||||||||||||
Products | Bail Bonds | |||||||||||||||
and | Online Brand | Industry | ||||||||||||||
Services | Protection | Solutions | Consolidated | |||||||||||||
Six Months Ended June 30, 2011 |
||||||||||||||||
Revenue |
$ | 183,032 | $ | 1,093 | $ | 405 | $ | 184,530 | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
19,051 | | | 19,051 | ||||||||||||
Commissions |
55,243 | | | 55,243 | ||||||||||||
Cost of revenue |
52,909 | 299 | 29 | 53,237 | ||||||||||||
General and administrative |
31,363 | 1,441 | 1,020 | 33,824 | ||||||||||||
Depreciation |
4,052 | 10 | 28 | 4,090 | ||||||||||||
Amortization |
2,003 | 14 | | 2,017 | ||||||||||||
Total operating expenses |
164,621 | 1,764 | 1,077 | 167,462 | ||||||||||||
Income (loss) from continuing operations |
$ | 18,411 | $ | (671 | ) | $ | (672 | ) | $ | 17,068 | ||||||
Six Months Ended June 30, 2010 |
||||||||||||||||
Revenue |
$ | 182,425 | $ | 959 | $ | 231 | $ | 183,615 | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
29,787 | | | 29,787 | ||||||||||||
Commissions |
60,604 | | | 60,604 | ||||||||||||
Cost of revenue |
44,740 | 305 | 35 | 45,080 | ||||||||||||
General and administrative |
28,562 | 1,033 | 967 | 30,562 | ||||||||||||
Depreciation |
4,046 | 10 | | 4,056 | ||||||||||||
Amortization |
4,162 | 14 | | 4,176 | ||||||||||||
Total operating expenses |
171,901 | 1,362 | 1,002 | 174,265 | ||||||||||||
Income (loss) from continuing operations |
$ | 10,524 | $ | (403 | ) | $ | (771 | ) | $ | 9,350 | ||||||
Consumer Products and Services Segment
Our income from continuing operations in our Consumer Products and Services segment increased
in the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This is
primarily due to growth in subscribers from indirect marketing arrangements and growth in revenue
from existing clients, as well as decreased marketing expenses in our direct subscription business
and direct to consumer business and decreased commissions expenses. This was partially offset by
increased cost of revenue due to an increase in the effective rates for data, as well as
fulfillment and service costs for new subscribers. Our Customer revenue (see Other Data) increased
to $182.1 million from $181.6 million in the comparable period.
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | Difference | % | |||||||||||||
Revenue |
$ | 183,032 | $ | 182,425 | $ | 607 | 0.3 | % | ||||||||
Operating expenses: |
||||||||||||||||
Marketing |
19,051 | 29,787 | (10,736 | ) | (36.0 | )% | ||||||||||
Commissions |
55,243 | 60,604 | (5,361 | ) | (8.9 | )% | ||||||||||
Cost of revenue |
52,909 | 44,740 | 8,169 | 18.3 | % | |||||||||||
General and administrative |
31,363 | 28,562 | 2,801 | 9.8 | % | |||||||||||
Depreciation |
4,052 | 4,046 | 6 | 0.2 | % | |||||||||||
Amortization |
2,003 | 4,162 | (2,159 | ) | (51.9 | )% | ||||||||||
Total operating expenses |
164,621 | 171,901 | (7,280 | ) | (4.2 | )% | ||||||||||
Income from continuing
operations |
$ | 18,411 | $ | 10,524 | $ | 7,887 | 74.9 | % | ||||||||
Revenue. The increase in revenue is primarily the result of new subscriber growth from
indirect marketing arrangements from a new client, existing clients, and increased revenue from our
direct to consumer business. The growth in revenue from existing clients is primarily from new and
ongoing subscribers converting to higher priced product offerings. The percentage of revenue from
direct marketing arrangements, in which we recognize the gross amount billed to the subscriber, has
decreased to 87.3% for the six months ended June 30, 2011 from 87.7% in the six months ended June
30, 2010.
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Table of Contents
Total subscriber additions for the six months ended June 30, 2011 were 1.5 million compared to
1.2 million in the six months ended June 30, 2010.
The table below shows the percentage of subscribers generated from direct marketing
arrangements:
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Percentage of subscribers from direct marketing arrangements to total subscribers |
53.3 | % | 60.8 | % | ||||
Percentage of new subscribers acquired from direct marketing arrangements to total
new subscribers acquired |
44.6 | % | 64.5 | % | ||||
Percentage of revenue from direct marketing arrangements to total Customer revenue |
87.3 | % | 88.7 | % |
The percentage of new subscribers acquired from direct marketing arrangements to total new
subscribers was negatively influenced in the three months ended June 30, 2011 by the conversion of
a portfolio of subscribers from an indirect marketing arrangement. Therefore, the results of this
metric as of June 30, 2011 may not be indicative of future period performance.
Marketing Expenses. The decrease in marketing is primarily a result of a decrease in marketing
expenses for our direct subscription business with existing clients and a decrease in marketing for
our direct to consumer business. Amortization of deferred subscription solicitation costs related
to marketing for the six months ended June 30, 2011 and 2010 were $17.3 million and $23.7 million,
respectively. Marketing costs expensed as incurred for the six months ended June 30, 2011 and 2010
were $1.8 million and $6.1 million, respectively, primarily related to broadcast media for our
direct to consumer business, which do not meet the criteria for capitalization.
As a percentage of revenue, marketing expenses decreased to 10.4% for the six months ended
June 30, 2011 from 16.3% for the six months ended June 30, 2010.
Commissions Expenses. The decrease in commissions expense is related to a decrease in
subscribers from our direct marketing arrangements, which includes our prepaid commission
arrangements. This was partially offset by an increase in the effective rates for commissions.
As a percentage of revenue, commission expenses decreased to 30.2% for the six months ended
June 30, 2011 from 33.2% for the six months ended June 30, 2010.
Cost of Revenue. The increase in cost of revenue is primarily the result of an increase in the
effective rates for data and increased data fulfillment and service costs for new subscribers from
a new client. We expect increased data rates to continue.
As a percentage of revenue, cost of revenue increased to 28.9% for the six months ended June
30, 2011 compared to 24.5% for the six months ended June 30, 2010, as a result of an increase in
data cost rates.
General and Administrative Expenses. The increase in general and administrative expenses is
primarily related to increased payroll and facilities expense associated with additional office
space occupied in 2011, partially offset by a decrease in professional fees.
Total share-based compensation expense in our consolidated statements of operations for the
six months ended June 30, 2011 and 2010 was $3.5 million and $2.8 million, respectively. In
addition, we incurred compensation expense of $725 thousand for payments to RSU holders equivalent
to the dividends that would have been received on these shares had they been fully vested.
As a percentage of revenue, general and administrative expenses increased to 17.1% for the six
months ended June 30, 2011 from 15.7% for the six months ended June 30, 2010.
Depreciation. Depreciation expense remained flat for the six months ended June 30, 2011
compared to the six months ended June 30, 2010.
As a percentage of revenue, depreciation expense was 2.2% for the six months ended June 30,
2011 and 2010, respectively. We expect depreciation expense to increase as a percentage of revenue
in 2011, and possibly thereafter, due to new assets placed into service during the three months
ended June 30, 2011.
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Table of Contents
Amortization. The decrease in amortization expense is due to a reduction in amortization of
our customer related intangible assets, which are amortized on an accelerated basis, from the
comparable period.
As a percentage of revenue, amortization expenses decreased to 1.1% for the six months ended
June 30, 2011 from 2.3% for the six months ended June 30, 2010.
Online Brand Protection Segment
Our loss from continuing operations in our Online Brand Protection segment increased for the
six months ended June 30, 2011 as compared to the six months ended June 30, 2010 primarily due to
increased general and administrative costs associated with our ongoing litigation.
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | Difference | % | |||||||||||||
Revenue |
$ | 1,093 | $ | 959 | $ | 134 | 14.0 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue |
299 | 305 | (6 | ) | (2.0 | )% | ||||||||||
General and administrative |
1,441 | 1,033 | 408 | 39.5 | % | |||||||||||
Depreciation |
10 | 10 | | 0.0 | % | |||||||||||
Amortization |
14 | 14 | | 0.0 | % | |||||||||||
Total operating expenses |
1,764 | 1,362 | 402 | 29.5 | % | |||||||||||
Loss from continuing
operations |
$ | (671 | ) | $ | (403 | ) | $ | (268 | ) | (66.5 | )% | |||||
Revenue. The increase in revenue is the result of revenue from new clients.
Cost of Revenue. Cost of revenue decreased slightly for the six months ended June 30, 2011
compared to the six months ended June 30, 2010.
As a percentage of revenue, cost of revenue was 27.4% for the six months ended June 30, 2011
compared to 31.8% for the six months ended June 30, 2010.
General and Administrative Expenses. The increase in general and administrative expenses is
due to legal fees associated with our ongoing litigation.
As a percentage of revenue, general and administrative expenses was 131.8% for the six months
ended June 30, 2011 compared to 107.7% for the six months ended June 30, 2010.
Bail Bonds Industry Solutions Segment
Our loss from continuing operations in our Bail Bonds Industry Solutions Segment decreased for
the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The decrease
in loss from operations is primarily driven by growth in revenue partially offset by an increase in
operating expenses.
Six Months Ended June 30, | ||||||||||||||||
2011 | 2010 | Difference | % | |||||||||||||
Revenue |
$ | 405 | $ | 231 | $ | 174 | 75.3 | % | ||||||||
Operating expenses: |
||||||||||||||||
Cost of revenue |
29 | 35 | (6 | ) | (17.1 | )% | ||||||||||
General and administrative |
1,020 | 967 | 53 | 5.5 | % | |||||||||||
Depreciation |
28 | | 28 | 100.0 | % | |||||||||||
Total operating expenses |
1,077 | 1,002 | 75 | 7.5 | % | |||||||||||
Loss from continuing
operations |
$ | (672 | ) | $ | (771 | ) | $ | 99 | 12.8 | % | ||||||
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Table of Contents
Revenue. The increase in revenue is the result of revenue from new clients.
Cost of Revenue. Cost of revenue decreased slightly for the six months ended June 30, 2011 as
compared to the six months ended June 30, 2010.
As a percentage of revenue, cost of revenue was 7.2% for the six months ended June 30, 2011
compared to 15.2% for the six months ended June 30, 2010.
General and Administrative Expenses. The increase in general and administrative expenses was
primarily due to increased professional fees.
Depreciation. The increase in depreciation expense is primarily due to an increase in assets
placed into service in the six months ended June 30, 2011.
As a percentage of revenue, depreciation expense increased to 6.9% for the six months ended
June 30, 2011 compared to 0.0% for the six months ended June 30, 2010.
Interest Expense
Interest expense from continuing operations decreased to $210 thousand for the three months
ended June 30, 2011 from $526 thousand for the three months ended June 30, 2010. Interest expense
from continuing operations decreased to $316 thousand for the six months ended June 30, 2011 from
$1.1 million for the six months ended June 30, 2010. The decrease in interest expense for the three
and six months ended June 30, 2011 is primarily attributable to a decrease in interest expense on
our outstanding debt balance and reductions in our uncertain tax positions, on which interest
expense is recorded, in the comparable period.
Other Income (Expense)
Other income from continuing operations increased to $174 thousand for the three months ended
June 30, 2011 from expense of $30 thousand for the three months ended June 30, 2010. Other income
from continuing operations increased to $127 thousand for the six months ended June 30, 2011 from
expense of $51 thousand for the six months ended June 30, 2010. This is primarily attributable to
an increase in foreign currency translation gains resulting from exchange rate fluctuations over
the period.
Income Taxes
Our consolidated effective tax rate from continuing operations for the three months ended June
30, 2011 and 2010 was 42.4% and 40.6%, respectively. Our consolidated effective tax rate from
continuing operations for the six months ended June 30, 2011 and 2010 was 42.1% and 44.4%,
respectively. The change from the comparable period is primarily due to increases in book expenses
which are not deductible for income tax purposes, partially offset by a reduction in a discrete
item from an uncertain tax position in a foreign jurisdiction.
In addition, the total liability for uncertain tax positions increased by approximately $65
thousand from December 31, 2010. The short-term portion of the liability is recorded in accrued
expenses and other current liabilities and the long-term portion is recorded in other long-term
liabilities in the condensed consolidated balance sheet. We record income tax penalties related to
uncertain tax positions as part of our income tax expense in our condensed consolidated financial
statements. We recorded no penalties in the three months ended June 30, 2011 and 2010. In the six
months ended June 30, 2011 and 2010, we recorded penalties of $22 thousand and $219 thousand,
respectively.
We record interest expense related to uncertain tax positions as part of interest expense in
our condensed consolidated financial statements. In the three months ended June 30, 2011 and 2010,
we recorded interest of $2 thousand and $24 thousand, respectively. In the six months ended June
30, 2011 and 2010, we recorded interest of $11 thousand and $210 thousand, respectively.
39
Table of Contents
Results of Discontinued Operations
Our Background Screening segment consisted of the personnel and vendor background screening
services provided by Screening International. On July 19, 2010, we and Screening International
Holdings entered into a membership interest purchase agreement with Sterling Infosystems, Inc.,
pursuant to which Screening International Holdings sold, and Sterling Infosystems acquired, 100% of
the membership interests of Screening International for an aggregate purchase price of $15.0
million in cash plus adjustments for working capital and other items. Screening International
Holdings is not an operating subsidiary and our background screening services ceased upon the sale
of Screening International.
The following table summarizes the operating results of the discontinued operations included
in the condensed consolidated statement of operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue |
$ | | $ | 6,746 | $ | | $ | 11,846 | ||||||||
Income (loss) before income taxes from discontinued operations |
| 593 | | (239 | ) | |||||||||||
Income tax expense |
| (223 | ) | | (202 | ) | ||||||||||
Income (loss) from discontinued operations |
| 370 | | (441 | ) | |||||||||||
Gain on disposal from discontinued operations |
| | | | ||||||||||||
Net loss attributable to noncontrolling interest in
discontinued operations |
| | | | ||||||||||||
Income (loss) from discontinued operations |
$ | | $ | 370 | $ | | $ | (441 | ) | |||||||
Liquidity and Capital Resources
Cash Flow
Cash and cash equivalents were $19.6 million as of June 30, 2011 compared to $14.5 million as
of December 31, 2010. We believe our cash and cash equivalents are highly liquid investments and
may include short-term U.S. Treasury securities with original maturity dates of less than or equal
to 90 days.
As of December 31, 2010 we held short term U.S. treasury securities with a maturity date
greater than 90 days of approximately $5.0 million, which were classified as short-term investments
in our consolidated financial statements. We redeemed all of our U.S. treasury securities in the
three months ended March 31, 2011.
Our accounts receivable balance as of June 30, 2011 was $23.3 million compared to $19.2
million as of December 31, 2010. Our accounts receivable balance consists primarily of credit card
transactions that have been approved but not yet deposited into our account and several large
balances with some of our top financial institutions clients. The likelihood of non-payment has
historically been remote with respect to subscriber based clients billed, however, we do provide
for an allowance for doubtful accounts with respect to corporate brand protection clients. We are
continuing to monitor our allowance for doubtful accounts with respect to our financial institution
obligors. In addition, we provide for a refund allowance, which is included in liabilities in our
condensed consolidated balance sheet, against transactions that may be refunded in subsequent
months. This allowance is based on historical results.
Our sources of capital include, but are not limited to, cash and cash equivalents, cash from
continuing operations, amounts available under our Credit Agreement and other external sources of
funds. Our short-term and long-term liquidity depends primarily upon our level of net income,
working capital management and bank borrowings. We had a working capital surplus of $21.2 million
as of June 30, 2011 compared to $30.5 million as of December 31, 2010. We believe that available
short-term and long-term capital resources are sufficient to fund capital expenditures, working
capital requirements, scheduled debt payments and interest and tax obligations for the next twelve
months. We expect to utilize our cash provided by operations to fund our ongoing operations.
Six Months Ended June 30, | ||||||||||||
2011 | 2010 | Difference | ||||||||||
(In thousands) | ||||||||||||
Cash flows provided by operating activities |
$ | 11,534 | $ | 26,262 | $ | (14,728 | ) | |||||
Cash flows used in investing activities |
(474 | ) | (4,251 | ) | 3,777 | |||||||
Cash flows used in financing activities |
(5,898 | ) | (5,440 | ) | (458 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
| (3 | ) | 3 | ||||||||
Net increase in cash and cash equivalents |
5,162 | 16,568 | (11,406 | ) | ||||||||
Cash and cash equivalents, beginning of year |
14,453 | 12,394 | 2,059 | |||||||||
Cash and cash equivalents, end of year |
$ | 19,615 | $ | 28,962 | $ | (9,347 | ) | |||||
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The decrease in cash flows provided by operations was primarily the result of an increase in
accounts receivable, an increase in income tax payments and the advance payment of remaining
royalties due under a commercial agreement with a related party, partially offset by an increase in
earnings. In the six months ended June 30, 2011, cash flows used in operations for deferred
subscription solicitation costs was $20.5 million as compared to $26.0 million in the six months
ended June 30, 2010. If we consent to the specific requests from clients to incur higher
solicitation costs and choose to incur the costs, we may need to raise additional funds in the
future in order to operate and expand our business. There can be no assurances that we will be
successful in raising additional funds on favorable terms, or at all, which could materially
adversely affect our business, strategy and financial condition, including losses of or changes in
the relationships with one or more of our clients.
On July 19, 2011, we received the full escrow amount of approximately $1.8 million in cash
from Sterling Infosystems as part of the Purchase Agreement for the sale of Screening
International.
The decrease in cash flows used in investing activities for the six months ended June 30, 2011
was primarily attributable to cash proceeds received from the redemption of our short-term
investment and proceeds received from reimbursement of asset development costs, partially offset by
purchases of property and equipment.
The increase in cash flows used in financing activities for six months ended June 30, 2011 was
primarily due to cash dividends paid on common shares and increased withholding tax payments on
vesting of restricted stock and option exercises, partially offset by a reduction in long-term debt
repayments. We borrowed $20.0 million from our Credit Agreement to repurchase approximately 1.7
million common shares at an aggregate cost to us of $19.6 million during the three months ended
March 31, 2011.
The following summarizes our dividend activity for the six months ended June 30, 2011:
Cash Dividend | ||||||||||||
Announcement Date | Record Date | Payment Date | Amount (per share) | |||||||||
February 7, 2011 |
February 28, 2011 | March 10, 2011 | $ | 0.15 | ||||||||
April 21, 2011 |
May 31, 2011 | June 10, 2011 | $ | 0.15 |
On August 2, 2011, we announced a cash dividend of $0.20 per share on our common stock, payable
on September 9, 2011, to stockholders of record as of August 31, 2011.
Credit Facility and Borrowing Capacity
We have a Credit Agreement with Bank of America, N.A., which has a maturity date of December
31, 2011. Our Credit Agreement currently consists of a revolving credit facility in the amount of
$25.0 million, and is secured by substantially all of our assets and a pledge by us of stock and
membership interests it holds in certain of its subsidiaries. Our subsidiaries are co-borrowers
under the Credit Agreement.
In July 2010, following the sale of Screening International, we prepaid the outstanding
principal balance of the term loan portion of the Credit Agreement, and the term loan may not be
re-drawn. We amended the Credit Agreement in the three months ended March 31, 2011 in connection
with the share repurchase to provide for the consent of the lenders to the share repurchase and to
clarify covenant calculations. As part of this amendment, we agreed to maintain available liquidity
of at least $10.0 million at all times while the Credit Agreement is in effect. As of June 30,
2011, the outstanding balance of the revolving credit facility was $20.0 million, which is included
as a current liability in our condensed consolidated balance sheet, and we have approximately $19.6
million in cash and equivalents in our condensed consolidated balance sheet in addition to unused
capacity under the Credit Agreement, which more than satisfies the minimum available liquidity
requirement.
The Credit Agreement contains certain customary covenants, including among other things
covenants that limit or restrict the incurrence of liens; the incurrence of certain indebtedness;
mergers, dissolutions, liquidation, or consolidations; acquisitions (other than certain permitted
acquisitions); sales of substantially all of our or any co-borrowers assets; the declaration of
certain dividends or distributions; transactions with affiliates (other than co-borrowers under the
Credit Agreement) other than on fair and reasonable terms; share repurchases; and the creation or
acquisition of any direct or indirect subsidiary of ours that is not a domestic subsidiary
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unless such subsidiary becomes a guarantor. We are also required to maintain compliance with
certain financial covenants which includes our consolidated leverage ratios, consolidated fixed
charge coverage ratios, minimum available liquidity requirements as well as customary covenants,
representations and warranties, funding conditions and events of default. We are currently in
compliance with all such covenants.
We are currently in discussions with various lenders, including Bank of America, N.A., in
order to replace our existing credit facility with one or more new facilities prior to the maturity
date of our existing facility. Although we believe we can do so on terms at least as favorable as
the current facility; however, such terms will be subject to market conditions which may change
significantly.
Share Repurchase
In April 2005, our Board of Directors authorized a share repurchase program under which we can
repurchase our outstanding shares of common stock from time to time, depending on market
conditions, share price and other factors.
During the three months ended June 30, 2011, we did not repurchase any common stock. During
the six months ended June 30, 2011 we repurchased approximately 1.7 million shares of common stock
at $11.25 per share resulting in an aggregate cost to us of $19.6 million. We did not repurchase
any common stock in the three and six months ended June 30, 2010. As of June 30, 2011,
we had $20.0 million remaining under our share repurchase
program, of which approximately $10.4 million is available for purchase as of June 30, 2011 under
the terms of our Credit Agreement. The repurchases may be made on the open market, in block trades,
through privately negotiated transactions or otherwise, and the program may be suspended or
discontinued at any time.
Contractual Obligations
On January 19, 2011, we entered into a Broker Agreement for Consumer Disclosure Service with
Equifax Information Services LLC (Equifax), pursuant to which we will continue to purchase credit
information from Equifax for use in our products and services. The Broker Agreement is effective as
of January 1, 2011 and has a term of one year, subject to automatic renewals for two additional one
year terms unless either party decides not to renew or the agreement is terminated for cause.
On April 18, 2011, we entered into a first amendment of the second amended and restated
distribution agreement with White Sky, Inc. In the three months ended June 30, 2011, we amended the
agreement to make an advance payment of $1.3 million to satisfy the remaining required royalties
for the year ended December 31, 2012. We also may make minimum payments in 2011 as a condition of
maintaining exclusivity, and if we do not make those payments the exclusivity will lapse. The short
term portion of the payment is recorded in prepaid expenses and other current assets and the long
term portion of the payment is recorded in other assets in our condensed consolidated balance
sheet.
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Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and
operation of its disclosure controls and procedures (as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Our
officers have concluded that our disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports we file or submit under the Securities Exchange
Act of 1934 is accumulated and communicated to our management, including our chief executive
officer and principal financial officer, to allow timely decisions regarding required disclosure.
Our disclosure controls and procedures are designed, and are effective, to give reasonable
assurance that the information required to be disclosed by us in reports that we file under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in our internal control over financial reporting during the six
months ended June 30, 2011 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 27, 2009, we filed a complaint in the U.S. District Court for the Eastern District of
Virginia against Joseph C. Loomis and Jenni M. Loomis in connection with our stock purchase
agreement to purchase all of Net Enforcers, Inc.s (NEI) stock in November 2007 (the Virginia
Litigation). We alleged, among other things, that Mr. Loomis committed securities fraud, breached
the stock purchase agreement, and breached his fiduciary duties to the company. The complaint also
seeks a declaration that NEI is not in breach of its employment agreement with Mr. Loomis and that,
following NEIs termination of Mr. Loomis for cause, NEIs obligations pursuant to the agreement
were terminated. In addition to a judgment rescinding the stock purchase agreement and return of
the entire purchase price we had paid, we are seeking unspecified compensatory, consequential and
punitive damages, among other relief. On July 2, 2009, Mr. Loomis filed a motion to dismiss certain
of our claims. On July 24, 2009, Mr. Loomis motion to dismiss our claims was denied in its
entirety. Mr. Loomis also asserted counterclaims for an unspecified amount not less than
$10,350,000, alleging that NEI breached the employment agreement by terminating him without cause
and breached the stock purchase agreement by preventing him from running NEI in such a way as to
earn certain earn-out amounts. On January 14, 2010, we settled all claims with Mr. Loomis and his
sister, co-defendant Jenni Loomis. On January 26, 2010, prior to final documentation of the
settlement and transfer of the funds, Mr. Loomis filed for bankruptcy in the United States
Bankruptcy Court for the District of Arizona (the Bankruptcy Court). The Virginia litigation thus
was automatically stayed as related to Mr. Loomis. In furtherance of our efforts to enforce the
settlement agreement, we obtained a stay of the case as related to Jenni Loomis as well. On April
22, 2010, the Bankruptcy Court granted our motion to modify the stay to permit us to seek a
declaration from the U.S. District Court for the Eastern District of Virginia that the settlement
is enforceable. We made a motion in the U.S. District Court to enforce the settlement agreement. On
November 3, 2010, the U.S. District Court denied our motion, and ordered the parties to report in
fourteen days on whether the automatic stay had been lifted by the Bankruptcy Court to allow the
U.S. District Court to proceed with trial. On January 26, 2011, the Bankruptcy Court lifted the
automatic stay, and the U.S. District Court for the Eastern District of Virginia scheduled a trial
to commence on May 2, 2011. Prior to the trial date, the parties, along with various related
non-parties, entered into a settlement agreement resolving all claims in this matter. Completion of
the settlement depends on satisfaction of certain conditions, including our acceptance of the
transfer to us by Mr. Loomis or certain related non-parties of certain real property and real
property interests. The settlement has been approved by the Bankruptcy Court, and the U.S. District
Court has stayed the trial pending completion of the settlement. We are conducting due diligence
regarding the real property and real property interests, and negotiating with the other parties to
resolve other conditions to closing. We do not know at this time whether all conditions to
completion of the settlement will be satisfied, or whether all issues will be resolved.
On September 11, 2009, a putative class action complaint was filed against Intersections,
Inc., Intersections Insurance Services Inc., Loeb Holding Corp., Bank of America, NA, Banc of
America Insurance Services, Inc., BA 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 22, 2011, the U.S.
District Court dismissed all of the plaintiffs claims against us and the other defendants. The
plaintiff has appealed the District Courts ruling to the U.S. Court of Appeals for the Fifth
Circuit. The parties have filed their briefs with the Court of Appeals and a decision is pending.
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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. Defendants filed answers to the complaint on
May 24, 2010. On April 19, 2011, an amended complaint was filed. In the amended complaint, the
original named plaintiff was withdrawn from the case, and three new plaintiffs were added. On June
10, 2011, Intersections filed a motion to stay the litigation pursuant to arbitration agreements
with each of the Plaintiffs. Plaintiffs have opposed our motion. A hearing on the Motion will be
held on September 30, 2011, with a ruling to be issued sometime thereafter.
On July 19, 2011, a putative class action complaint was filed against Intersections Inc.,
Intersections Insurance Services Inc. and Bank of America Corporation in Los Angeles Superior Court
alleging various claims based on the sale of an accidental death and disability program. We
currently are investigating the new claims. We believe that it is too early to make a determination
of the likelihood of success in defeating the claims.
Item 6. Exhibits
31.1*
|
Certification of Michael R. Stanfield, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of John G. Scanlon, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of Michael R. Stanfield, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2*
|
Certification of John G. Scanlon, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
INTERSECTIONS INC. |
||||
Date: August 9, 2011 | By: | /s/ John G. Scanlon | ||
John G. Scanlon | ||||
Chief Financial Officer | ||||
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