UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K/A

(Amendment No. 1)

 

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

or

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 005-50580

 

 

INTERSECTIONS INC.

(Exact name of registrant as specified in the charter)

 

Delaware		54-1956515
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
3901 Stonecroft Boulevard,		20151
Chantilly, Virginia		(Zip Code)
(Address of principal executiveoffice)

(703) 488-6100

(Registrant’s telephone number including area code)

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

 

Title of Each Class		Name of Exchange on Which Registered
Common Stock, $.01 par value		The NASDAQ Global Market

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

None.

 

 

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

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  ¨    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (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 Rule 12b-2 of the Act).    Yes  ¨    No  þ

As of June 30, 2010, the aggregate market value of the common stock held by nonaffiliates of the registrant was approximately $46 million based on the last sales price quoted on The NASDAQ Global Market.

As of February 28, 2011, the registrant had 19,093,845 shares of common stock, $0.01 par value per share, issued and 17,927,429 shares outstanding, with 1,116,416 shares of treasury stock.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated herein by reference from Registrant’s definitive proxy statement to be filed within 120 days of December 31, 2010, pursuant to Regulation 14A under the Securities Exchange Act of 1934, for its 2011 annual meeting of stockholders to be held on May 18, 2011.

 

 

 

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Explanatory Note:

Intersections Inc. (the “Company”) is filing this Amendment No. 1 (this “Amendment”) to its Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2011 (the “Original Report”) to amend and restate in its entirety Item 8 of Part II to include a properly signed report by the Company’s independent registered public accounting firm pursuant to Rule 2-02(a) of Regulation S-X.

No other changes have been made to the Original Report, or to the financial statements or the Company’s financial results for the year ended December 31, 2010. This Amendment speaks as of the original filing date of the Original Report, does not reflect facts or events that may have occurred subsequent to the filing date of the Original Report, and does not modify or update in any way any other disclosures made in the Original Report, or subsequent to any periods for which disclosure was otherwise provided in the Original Report. Accordingly, this Amendment on Form 10-K/A should be read in conjunction with our filings with the SEC subsequent to the filing date of the Original Report, including any amendments thereto.

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Part III

 

Item 8.

Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE INTERSECTIONS INC.

 

Report of Independent Registered Public Accounting Firm			F-1
Consolidated Financial Statements of Intersections Inc.:
Consolidated Balance Sheets			F-2
Consolidated Statements of Operations			F-3
Consolidated Statements of Changes in Stockholders’ Equity			F-4
Consolidated Statements of Cash Flows			F-5
Notes to Consolidated Financial Statements			F-6
Schedule II — Valuation and Qualifying Accounts			F-40

 

3

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Intersections Inc.

Chantilly, Virginia

We have audited the accompanying consolidated balance sheets of Intersections Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index to the Financial Statements. We also have audited the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intersections Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ DELOITTE & TOUCHE LLP

McLean, Virginia

March 16, 2011

 

F-1

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INTERSECTIONS INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2009 and 2010

(In thousands, except par value)

 

		December 31,
		2009				2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	12,394			$	14,453
Short-term investments			4,995				4,994
Accounts receivable, net of allowance for doubtful accounts of $374 (2009) and $41 (2010)			25,111				19,195
Prepaid expenses and other current assets			5,182				7,010
Income tax receivable			2,460				—
Deferred subscription solicitation costs			34,256				24,756
Total current assets			84,398				70,408
PROPERTY AND EQUIPMENT, net			17,802				21,569
DEFERRED TAX ASSET, net			3,700				2,298
LONG-TERM INVESTMENT			3,327				4,327
GOODWILL			46,939				43,235
INTANGIBLE ASSETS, net			21,613				14,897
OTHER ASSETS			14,392				5,893
TOTAL ASSETS		$	192,171			$	162,627
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	7,000			$	—
Capital leases, current portion			1,028				1,645
Accounts payable			9,168				5,097
Accrued expenses and other current liabilities			17,255				14,718
Accrued payroll and employee benefits			2,782				2,342
Commissions payable			2,044				787
Income tax payable			—				1,782
Deferred revenue			5,202				4,856
Deferred tax liability, net, current portion			14,879				8,662
Total current liabilities			59,358				39,889
LONG-TERM DEBT			31,393				—
OBLIGATIONS UNDER CAPITAL LEASES, less current portion			1,681				3,399
OTHER LONG-TERM LIABILITIES			3,332				2,783
TOTAL LIABILITIES			95,764				46,071
COMMITMENTS AND CONTINGENCIES (see notes 16 and 18)
STOCKHOLDERS’ EQUITY:
Common stock at $0.01 par value, shares authorized 50,000; shares issued 18,662 (2009) and 18,912 (2010); shares outstanding 17,595 (2009) and 17,795 (2010)			187				189
Additional paid-in capital			104,810				109,250
Treasury stock, shares at cost; 1,067 (2009) and 1,117 (2010)			(9,516	)			(9,948	)
Retained earnings			2,027				17,060
Accumulated other comprehensive (loss) income:
Cash flow hedge			(856	)			—
Other			(245	)			5
TOTAL STOCKHOLDERS’ EQUITY			96,407				116,556
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	192,171			$	162,627

See Notes to Consolidated Financial Statements.

 

F-2

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INTERSECTIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2008, 2009 and 2010

 

		2008				2009				2010
		(In thousands, except per share amounts)
REVENUE		$	333,764			$	346,170			$	364,136
OPERATING EXPENSES:
Marketing			52,439				65,267				53,333
Commissions			86,008				110,348				117,588
Cost of revenue			97,694				91,080				88,879
General and administrative			53,145				61,416				63,170
Goodwill, intangible and long-lived asset impairment charges			30,987				949				—
Depreciation			8,426				7,436				8,119
Amortization			10,284				9,078				6,716
Total operating expenses			338,983				345,574				337,805
(LOSS) INCOME FROM OPERATIONS			(5,219	)			596				26,331
Interest income			253				149				48
Interest expense			(2,544	)			(1,252	)			(1,723	)
Other (expense) income, net			(698	)			1,362				(442	)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES			(8,208	)			855				24,214
INCOME TAX BENEFIT (EXPENSE )			2,755				(168	)			(9,338	)
(LOSS) INCOME FROM CONTINUING OPERATIONS			(5,453	)			687				14,876
Loss from discontinued operations, net of tax			(19,528	)			(11,420	)			(379	)
Gain on disposal of discontinued operations			—				—				5,868
Net loss attributable to noncontrolling interest in discontinued operations			9,004				4,380				—
(LOSS) INCOME FROM DISCONTINUED OPERATIONS			(10,524	)			(7,040	)			5,489
NET (LOSS) INCOME ATTRIBUTABLE TO INTERSECTIONS INC		$	(15,977	)		$	(6,353	)		$	20,365
Basic (loss) earnings per share:
(Loss) income from continuing operations		$	(0.32	)		$	0.04			$	0.84
(Loss) income from discontinued operations			(0.61	)			(0.40	)			0.31
Basic (loss) earnings per share		$	(0.93	)		$	(0.36	)		$	1.15
Diluted (loss) earnings per share:
(Loss) income from continuing operations		$	(0.32	)		$	0.04			$	0.81
(Loss) income from discontinued operations			(0.61	)			(0.40	)			0.30
Diluted (loss) earnings per share		$	(0.93	)		$	(0.36	)		$	1.11
Cash dividends paid per common share		$	—			$	—			$	0.30
Weighted average shares outstanding:
Basic			17,264				17,503				17,709
Diluted			17,264				17,583				18,412

See Notes to Consolidated Financial Statements.

 

F-3

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INTERSECTIONS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2008, 2009 and 2010

 

		Common Stock								Additional				Treasury Stock								Retained Earnings				Accumulated Other				Total Intersections Inc.				Noncontrolling Interest				Total
		Shares				Amount				Paid-in Capital				Shares				Income (Loss)								Comprehensive Income (Loss)				Stockholders’ Equity								Stockholders’ Equity
		(In thousands)
BALANCE, DECEMBER 31, 2007			18,172			$	182			$	99,706				1,067			$	(9,516	)		$	24,357			$	119			$	114,848			$	10,024			$	124,872
Issuance of common stock upon exercise of stock options and vesting of restricted stock units			211				2				(343	)			—				—				—				—				(341	)			—				(341	)
Share based compensation			—				—				4,069				—				—				—				—				4,069				—				4,069
Tax benefit of stock options exercised			—				—				112				—				—				—				—				112				—				112
Net loss			—				—				—				—				—				(15,977	)			—				(15,977	)			(9,004	)			(24,981	)
Foreign currency translation adjustments			—				—				—				—				—				—				(9	)			(9	)			(7	)			(16	)
Cash flow hedge			—				—				—				—				—				—				(1,263	)			(1,263	)			—				(1,263	)
Comprehensive Loss			—				—				—				—				—				—				—				(13,409	)			(9,011	)			(22,420	)
BALANCE, DECEMBER 31, 2008			18,383			$	184			$	103,544				1,067			$	(9,516	)		$	8,380			$	(1,153	)		$	101,439			$	1,013			$	102,452
Issuance of common stock upon exercise of stock options and vesting of restricted stock units			279				3				(670	)			—				—				—				—				(667	)			—				(667	)
Share based compensation			—				—				4,556				—				—				—				—				4,556				—				4,556
Tax deficiency of stock options exercised and vesting of restricted stock units			—				—				(87	)			—				—				—				—				(87	)			—				(87	)
Release of uncertain tax benefits			—				—				526				—				—				—				—				526				—				526
Purchase of noncontrolling interest			—				—				(3,059	)			—				—				—				(200	)			(3,259	)			3,658				399
Net loss			—				—				—				—				—				(6,353	)			—				(6,353	)			(4,380	)			(10,733	)
Foreign currency translation adjustments			—				—				—				—				—				—				(155	)			(155	)			(291	)			(446	)
Cash flow hedge			—				—				—				—				—				—				407				407				—				407
Comprehensive Loss			—				—				—				—				—				—				—				(5,032	)			(1,013	)			(6,045	)
BALANCE, DECEMBER 31, 2009			18,662			$	187			$	104,810				1,067			$	(9,516	)		$	2,027			$	(1,101	)		$	96,407			$	—			$	96,407
Issuance of common stock upon exercise of stock options and vesting of restricted stock units			250				2				(976	)			—				—				—				—				(974	)			—				(974	)
Share based compensation			—				—				5,808				—				—				—				—				5,808				—				5,808
Tax deficiency of stock options exercised and vesting of restricted stock units			—				—				(380	)			—				—				—				—				(380	)			—				(380	)
Other			—				—				(12	)			—				—				—				—				(12	)			—				(12	)
Cash dividends paid on common shares			—				—				—				—				—				(5,332	)			—				(5,332	)			—				(5,332	)
Purchase of treasury stock			—				—				—				50				(432	)			—				—				(432	)			—				(432	)
Net income			—				—				—				—				—				20,365				—				20,365				—				20,365
Foreign currency translation adjustments			—				—				—				—				—				—				250				250				—				250
Cash flow hedge			—				—				—				—				—				—				856				856				—				856
Comprehensive Income			—				—				—				—				—				—				—				20,149				—				20,149
BALANCE, DECEMBER 31, 2010			18,912			$	189			$	109,250				1,117			$	(9,948	)		$	17,060			$	5			$	116,556			$	—			$	116,556

See Notes to Consolidated Financial Statements.

 

F-4

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INTERSECTIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2008, 2009 and 2010

 

		2008				2009				2010
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(24,981	)		$	(10,733	)		$	20,365
Adjustments to reconcile net (loss) income to cash flows provided by operating activities:
Depreciation			9,411				8,292				8,546
Amortization			10,789				9,470				6,716
Amortization of gain from sale leaseback			(39	)			—				—
Loss on disposal of fixed assets			—				64				—
Amortization of debt issuance cost			101				83				104
Gain on disposal of discontinued operations			—				—				(5,868	)
Derivative loss reclassified to earnings			—				—				565
Provision for doubtful accounts			213				139				(210	)
Accretion of interest on note payable			—				—				73
Share based compensation			4,069				4,556				5,677
Amortization of deferred subscription solicitation costs			54,201				66,466				61,824
Foreign currency transaction losses (gain), net			800				(1,862	)			307
Goodwill, intangible and long-lived asset impairment charges			44,702				7,259				—
Changes in assets and liabilities, net of businesses acquired:
Accounts receivable			(4,440	)			4,212				2,869
Prepaid expenses and other current assets			350				572				(538	)
Income tax, net			(2,974	)			4,869				4,242
Deferred subscription solicitation costs			(67,073	)			(71,722	)			(48,991	)
Other assets			(2,296	)			(4,138	)			4,897
Tax benefit upon vesting of restricted stock units and option exercises			(112	)			87				(198	)
Accounts payable			(782	)			(548	)			(2,887	)
Accrued expenses and other current liabilities			743				2,037				(2,340	)
Accrued payroll and employee benefits			147				(2,236	)			180
Commissions payable			(12	)			(357	)			(1,257	)
Deferred revenue			1,502				821				(342	)
Deferred income tax, net			(4,959	)			1,032				(5,570	)
Other long-term liabilities			1,401				(1,004	)			121
Cash flows provided by operating activities			20,761				17,359				48,285
CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:
Acquisition of property and equipment			(7,437	)			(7,020	)			(10,616	)
(Purchase) sale of short-term investments			(4,955	)			28				—
Purchase of long-term investment			(3,327	)			—				(1,000	)
Proceeds from the sale of discontinued operations			—				—				12,640
Cash paid in the acquisition of Net Enforcers, Inc., net of cash received			(411	)			—				—
Cash paid in the acquisition of intangible membership agreements			(31,050	)			—				—
Cash flows (used in) provided by investing activities			(47,180	)			(6,992	)			1,024
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Borrowings under Credit Agreement			35,611				—				—
Debt issuance costs			(133	)			—				—
Repayments under Credit Agreement			(16,708	)			(7,011	)			(37,583	)
Repayment of note payable to Control Risks Group, Ltd.			—				—				(1,400	)
Capital lease payments			(1,077	)			(786	)			(1,264	)
Cash dividends paid on common shares			—				—				(5,332	)
Cash paid to terminate interest rate swaps			—				—				(477	)
Cash distribution on vesting of restricted stock units			—				—				(970	)
Cash proceeds from stock options exercised			176				3				371
Tax benefit upon vesting of restricted stock units and option exercises			112				(87	)			198
Withholding tax payment on vesting of restricted stock units and option exercises			(517	)			(670	)			(375	)
Purchase of treasury stock			—				—				(432	)
Cash flows provided by (used in) financing activities			17,464				(8,551	)			(47,264	)
EFFECT OF EXCHANGE RATE ON CASH			(63	)			(184	)			14
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(9,018	)			1,632				2059
CASH AND CASH EQUIVALENTS — Beginning of period			19,780				10,762				12,394
CASH AND CASH EQUIVALENTS — End of period		$	10,762			$	12,394			$	14,453
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest		$	2,019			$	1,515			$	1,675
Cash paid for taxes		$	4,520			$	610			$	11,596
NONCASH FINANCING AND INVESTING ACTIVITIES:
Equipment obtained under capital lease		$	621			$	2,185			$	3,599
Equipment additions accrued but not paid		$	384			$	592			$	644
Forgiveness of note, including accrued interest, in connection with the purchase of noncontrolling interest		$	—			$	1,166			$	—
Purchase of noncontrolling interest with issuance of note		$	—			$	778			$	—

See notes to consolidated financial statements.

 

F-5

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2008, 2009 and 2010

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 22, 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 year ended December 31, 2010. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. This segment consists of identity theft management tools, services from our relationship with a third party that administers referrals for identity theft to major banking institutions and breach response services, membership product offerings and other subscription based services such as life and accidental death insurance. Our Online Brand Protection segment includes corporate brand protection provided by Net Enforcers, Inc. (“Net Enforcers”) and our Bail Bonds Industry Solutions segment includes the software management solutions for the bail bond industry provided by Captira Analytical, LLC (“Captira Analytical”). In addition, until the sale of SI on July 19, 2010, 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 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 periods in our consolidated statements of operations. We have not recasted our consolidated balance sheet or statements of cash flows for the sale of SI. See Note 22 for further 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.

During the three months ended September 30, 2010, we recorded a cumulative out-of-period adjustment to revenue. The adjustment had the effect of reducing the revenue by $1.3 million and net income by $796 thousand in the three and nine months ended September 30, 2010. Based upon an evaluation of all relevant quantitative and qualitative factors, and after considering the applicable provisions within U.S. GAAP, we do not believe this correcting entry is material to our results of operations for any period.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

Cash and Cash Equivalents

We consider all highly liquid investments, including those with an original maturity of 90 days or less, to be cash equivalents. Cash and cash equivalents consist primarily of interest-bearing accounts and short-term U.S. treasury securities with original maturities less than or equal to 90 days. Interest income on these short-term investments is recognized when earned.

Investments

Our short-term investments consist of short-term U.S. Treasury securities with original maturities greater than 90 days but not greater than one year. These investments are categorized as held to maturity and are carried at amortized cost as we have both the intent and the ability to hold these investments until they mature. Discounts are accreted into earnings over the life of the investment. Interest income is recognized when earned. There are no restrictions on the withdrawal of these investments.

We evaluate impairment of investments in accordance with U.S. GAAP. We consider both triggering events and tangible evidence that investments are recoverable within a reasonable period of time, as well as our intent and ability to hold investments that may have become temporarily or otherwise impaired. There has been no impairment to investments as of December 31, 2010.

Foreign Currency Translation

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

Property and Equipment

Property and equipment, including property and equipment under finance leases, are recorded at cost and are depreciated on a straight-line basis over the following estimated useful lives:

 

		Life
		(In years)
Machinery and equipment		3-5
Software		3-5
Furniture and fixtures		5
Leasehold improvements		Shorter of lease term or useful life
Building		30

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

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reporting units for purposes of impairment testing. As of December 31, 2010, 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 on our consolidated financial statements.

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

The estimated fair value of our reporting units is dependent on several significant assumptions, including our earnings projections, and cost of capital (discount rate). The projections use management’s best estimates of economic and market conditions over the projected period including business plans, growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. There are inherent uncertainties related to these factors and management’s judgment in applying each to the analysis of the recoverability of goodwill.

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

If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying value of the reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with its goodwill carrying value to measure the amount of impairment charge, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of that reporting unit was the purchase price paid. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment charge is recognized in an amount equal to that excess.

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

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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.

Derivative Financial Instruments

We account for all derivative instruments on the balance sheet at fair value, and follow accounting guidance for hedging instruments, which depend on the nature of the hedge relationship. All financial instrument positions are intended to be used to reduce risk by hedging an underlying economic exposure. During the year ended December 31, 2008, we entered into certain interest rate swap transactions that converted our variable-rate debt to fixed-rate debt. Our interest rate swaps were related to variable interest rate risk exposure associated with our long-term debt and were intended to manage this risk. During the year ended December 31, 2010, we prepaid the remaining principal balance on the term loan and revolving credit facility under our Credit Agreement and terminated the related interest rate swaps. We do not have any derivative instruments at December 31, 2010. The effective portion of the change in fair value of interest rate swaps designated as cash flow hedges are recorded in the shareholders’ equity section in the accompanying consolidated balance sheet. The ineffective portion of the interest rate swaps is recorded in other expense in the accompanying consolidated statements of operations.

Fair Value Measurements

We account for certain assets and liabilities at fair value in accordance with U.S. GAAP. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are as follows:

Level 1 — Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 — Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

We account for derivative instruments and short-term U.S. treasury securities using recurring fair value measures. Our goodwill and intangible assets are subject to non-recurring fair value measures.

For financial instruments such as cash and cash equivalents, short-term government debt instruments, trade accounts receivables, notes payable, leases payable, accounts payable and short-term and long-term debt, we consider the recorded value of the financial instruments to approximate the fair value based on the liquidity of these financial instruments.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Revenue Recognition

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

Our products and services are offered to consumers principally on a monthly subscription basis. Subscription fees are generally billed directly to the subscriber’s credit card, mortgage bill or demand deposit accounts. The prices to subscribers of various configurations of our products and services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues are recognized until applicable trial periods are completed.

Identity Theft and Credit Management Services

We recognize revenue from our services when: a) persuasive evidence of arrangement exists as we maintain signed contracts with all of our large financial institution customers and paper and electronic confirmations with individual purchases, b) delivery has occurred once the product is transmitted over the internet, c) the seller’s price to the buyer is fixed as sales are generally based on contract or list prices and payments from large financial institutions are collected within 30 days with no significant write-offs, and d) collectability is reasonably assured as individual customers pay by credit card which has limited our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year. We also generate revenue through a collaborative arrangement which involves joint marketing and servicing activities. We recognize our share of revenues and expenses from this arrangement.

Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service. Annual subscriptions include subscribers with full refund provisions at any time during the subscription period and pro-rata refund provisions. Revenue related to annual subscription with full refund provisions is recognized on the expiration of these refund provisions. Revenue related to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue earned. An allowance for discretionary subscription refunds is established based on our actual experience.

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

We 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 and electronic confirmations with individual purchases, b) delivery has occurred at the completion of a product trial period, c) the seller’s price to the buyer is fixed as the price of the product is agreed to by the customer as a condition of the sales transaction which established the sales arrangement, and d) collectability is reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments of our customers or through checking account debits to our customers’ accounts. Revenues from insurance contracts are recognized

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 record revenue on a gross basis as we serve as the primary obligor in the transactions, have latitude in establishing price and bear credit risk for the amount billed to the subscriber.

We participate in agency relationships with insurance carriers that underwrite insurance products offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance carriers are excluded from our revenues and operating expenses. Insurance premiums collected but not remitted to insurance carriers as of December 31, 2009 and 2010, totaled $1.5 million and $1.2 million, respectively, and are included in accrued expenses and other current liabilities in our consolidated balance sheet.

Other Monthly Subscription Products

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

Deferred Subscription Solicitation and Advertising

Our deferred subscription solicitation costs consist of subscription acquisition costs, including telemarketing, web-based marketing expenses and direct mail such as printing and postage. We expense advertising costs the first time advertising takes place, except for direct-response marketing costs. Telemarketing, web-based marketing and direct mail expenses are direct response marketing costs, which are 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 from our client. If annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a full refund of the previously paid commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal to the unused portion of the subscription, for those annual subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions with full commission refund provisions are deferred until the earlier of expiration of the refund privileges or cancellation. Once the refund privileges have expired, the commission costs are recognized ratably in the same pattern that the related revenue is recognized. Commissions that relate to annual subscriptions

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 future commission payments. We amortize these prepaid commissions, on an accelerated basis, over a period of time not to exceed three years, which is the average expected life of customers. The short-term portion of the prepaid commissions is shown in deferred subscription solicitation costs in our consolidated balance sheet. The long-term portion of the prepaid commissions is shown in other assets in our consolidated balance sheet. Amortization is included in commission expense in our consolidated statements of operations.

Software Development Costs

We develop software for our internal use and capitalize these software development costs incurred during the application development stage in accordance with U.S. GAAP. Costs incurred prior to and after the application development stage are charged to expense. When the software is ready for its intended use, capitalization ceases and such costs are amortized on a straight-line basis over the estimated life, which is generally three to five years.

We regularly review our capitalized software projects for impairment. We had no impairments in the years ended December 31, 2008, 2009 or 2010.

Income Taxes

We account for income taxes under the provisions of U.S. GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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.

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

We believe that our tax positions comply with applicable tax law. As a matter of course, we may be audited by various taxing authorities and these audits may result in proposed assessments where the ultimate resolution may result in us owing additional taxes. U.S. GAAP addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.

U.S. GAAP provides guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. We determined that upon the conclusion of our tax examination, the respective tax positions were settled and we recognized various uncertain tax benefits as discrete events, which had an impact on our consolidated financial statements for the years ended December 31, 2009 and 2010.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Share-Based Compensation

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

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:

 

		2008				2009				2010
Expected dividend yield			0	%			0	%			.05	%
Expected volatility			38	%			55.4	%			67.9	%
Weighted average risk free interest rate			3.06	%			2.00	%			2.75	%
Weighted average expected life of options			6.2 years				6.2 years				6.2 years

Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as an input. As further described in Note 21, 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 one grant, of five thousand options, subsequent to September 10, 2010 and we applied a dividend yield. For future grants, we will apply a dividend yield based on our history and expectation of dividend payouts.

Expected Volatility. The expected volatility of the options granted was estimated based upon our historical share price volatility as well as the average volatility of comparable public companies. We will continue to review our estimate in the future.

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

Expected Term. The expected term of options granted during the years ended December 31, 2008, 2009 and 2010 was determined under the simplified calculation ((vesting term + original contractual term)/2). For the majority of grants valued during these years ended, the options had graded vesting over 4 years (equal vesting of options annually) and the contractual term was 10 years.

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

Treasury Stock

We account for treasury stock under the cost method and include treasury stock as a component of stockholder’s equity. We did not repurchase shares of common stock in the years ended December 31, 2008 or 2009. In the year ended December 31, 2010, we repurchased 50 thousand shares of our common stock. See Note 21 for further information.

Segment Reporting

We have three reportable operating segments with continuing operations through the period ended December 31, 2010. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. This segment consists of identity theft management tools, services from our

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 and 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, we had a fourth reportable segment, our Background Screening segment, which included the personnel and vendor background screening services provided by SI.

3. Accounting Standards Updates

Accounting Standards Updates Recently Adopted

In June 2009, an update was made to “Consolidation — Consolidation of Variable Interest Entities”, to replace the calculation for determining which entities, if any, have a controlling financial interest in a variable interest entity (“VIE”) from a quantitative risk based calculation, to a qualitative approach that focuses on identifying which entities have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. The update requires an ongoing assessment as to whether an entity is the primary beneficiary of a VIE, modifies the presentation of consolidated VIE assets and liabilities, and requires additional disclosures about a company’s involvement in VIEs. This update was effective for annual periods beginning after November 15, 2009, for interim periods within the first annual reporting period and for interim and annual periods thereafter. Earlier application was prohibited. We have adopted the provisions of this update as of January 1, 2010 and there was no material impact to our consolidated financial statements.

In February 2010, an update was made to “Subsequent Events”. This update removes the requirement for a public filer to disclose a date in both issued and revised financial statements. This update is effective upon issuance of the final update, except for the use of the issued date for conduit debt obligators. That amendment is effective for interim or annual periods ending after June 15, 2010. We have adopted the provisions of this update as of March 31, 2010 and there was no material impact to our consolidated financial statements.

In March 2010, an update was made to “Derivatives and Hedging”. This update provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception. This update is effective for each reporting entity at the beginning of the first fiscal quarter beginning after June 15, 2010. We have adopted the provisions of this update as of June 30, 2010 and there was no material impact to our consolidated financial statements.

Accounting Standards Updates Not Yet Effective

In October 2009, an update was made to “Software — Certain Revenue Arrangements That Include Software Elements”. This update changes the accounting model for revenue arrangements that include both tangible products and software elements. This update removed tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality from the scope of the software revenue guidance in “Software-Revenue Recognition”. This update also provides guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software, how to allocate arrangement consideration when an arrangement includes deliverables both included and excluded from the scope of software revenue guidance and provides additional disclosure requirements. This update is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We will adopt the provisions of this update and do not anticipate a material impact to our consolidated financial statements.

In January 2010, an update was made to “Fair Value Measurements and Disclosures”. This update requires new disclosures of transfers in and out of Levels 1 and 2 and of activity in Level 3 fair value measurements. The

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 a portion of the provisions of this update as of January 1, 2010 and have included the additional disclosure requirements. We will adopt the remaining portion of the provisions of this update and do not anticipate a material impact to our 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 entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would classify such an award as a liability if it otherwise qualifies as equity. This update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. We will adopt the provisions of this update and do not anticipate a material impact to our 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. Earlier adoption is not permitted. We will adopt the provisions of this update and do not anticipate a material impact to our 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 under Topic 805 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 will adopt the provisions of this update and do not anticipate a material impact to our consolidated financial statements.

4. Net Income (Loss) Per Common Share

Basic and diluted income (loss) per share is determined in accordance with the applicable provisions of U.S. GAAP. Basic income (loss) per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted income (loss) per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method or the if-converted method, includes the potential exercise of stock options under our share-based employee compensation plans and our restricted stock units.

For the years ended December 31, 2008, 2009 and 2010, options to purchase 5.3 million, 5.6 million and 2.3 million shares of common stock, respectively, have been excluded from the computation of diluted income per share as their effect would be anti-dilutive. These shares could dilute earnings per share in the future.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A reconciliation of basic income (loss) per common share to diluted income (loss) per common share is as follows (in thousands, except per share data):

 

		2008				2009				2010
(Loss) income from continuing operations		$	(5,453	)		$	687			$	14,876
(Loss) income from discontinued operations			(10,524	)			(7,040	)			5,489
Net (loss) income available to common shareholders — basic and diluted		$	(15,977	)		$	(6,353	)		$	20,365
Weighted average common shares outstanding — basic			17,264				17,503				17,709
Dilutive effect of common stock equivalents			—				80				703
Weighted average common shares outstanding — diluted			17,264				17,583				18,412
Basic (loss) earnings per common share:
(Loss) income from continuing operations		$	(0.32	)		$	0.04			$	0.84
(Loss) income from discontinued operations		$	(0.61	)		$	(0.40	)		$	0.31
Basic (loss) earnings per common share		$	(0.93	)		$	(0.36	)		$	1.15
Diluted (loss) earnings per common share:
(Loss) income from continuing operations		$	(0.32	)		$	0.04			$	0.81
(Loss) income from discontinued operations		$	(0.61	)		$	(0.40	)		$	0.30
Diluted (loss) earnings per common share		$	(0.93	)		$	(0.36	)		$	1.11

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.

The fair value of our instruments measured on a recurring basis at December 31, 2010 is as follows (in thousands):

 

		Fair Value Measurements at Reporting Date using:
		December 31, 2010				Quoted Prices in  Active Markets for Identical  Assets (Level 1)				Significant other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
US Treasury bills		$	4,994			$	4,994			$	—			$	—

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The fair value of our instruments measured on a recurring basis at December 31, 2009 is as follows (in thousands):

 

		Fair Value Measurements at Reporting Date using:
		December 31, 2009				Quoted Prices in  Active Markets for Identical  Assets (Level 1)				Significant other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets:
US Treasury bills		$	4,995			$	4,995			$	—			$	—
Liabilities:
Interest rate swap contracts			856				—				856				—

The carrying amounts of 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 year ended December 31, 2009 or 2010, respectively.

6. Prepaid Expenses and Other Current Assets

The components of our prepaid expenses and other current assets are as follows:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Prepaid services		$	2,774			$	2,882
Escrow receivable			—				1,750
Prepaid contracts			440				927
Other			1,968				1,451
		$	5,182			$	7,010

As part of the sale agreement for SI, we recorded an escrow receivable of $1.8 million. See Note 22 for further information.

As of December 31, 2009, $652 thousand of prepaid expenses and other current assets related to SI, which was sold on July 19, 2010.

7. Deferred Subscription Solicitation Costs

Total deferred subscription solicitation costs included in the accompanying consolidated balance sheet as of December 31, 2010 and December 31, 2009 was $28.8 million and $41.6 million, respectively. The long-term portion of the deferred subscription solicitation costs are reported in other assets in our consolidated balance sheet and include $4.0 million and $7.4 million for the years ended December 31, 2010 and 2009, respectively. The current portion of the prepaid commissions are included in the deferred subscription solicitation costs, which were $8.5 million and $11.5 million as of December 31, 2010 and 2009, respectively. Amortization of deferred subscription solicitation and commission costs, which are included in either marketing or commissions expense in our consolidated statements of operations, for the years ended December 31, 2008, 2009 and 2010 were $54.2 million, $66.5 million and $61.8 million, respectively. Marketing costs, which are included in marketing expenses in our consolidated statements of operations, as they did not meet the criteria for deferral for the years ended December 31, 2008, 2009 and 2010 were $5.5 million, $16.4 million and $9.8 million, respectively.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

8. Property and Equipment

Property and equipment consist of the following as of:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Machinery and equipment		$	22,505			$	21,484
Software			33,336				32,971
Software development-in-progress			3,368				6,162
Furniture and fixtures			1,689				1,652
Leasehold improvements			3,069				3,451
Building			725				725
Land			25				25
			64,717				66,470
Less: accumulated depreciation			(46,915	)			(44,901	)
Property and equipment — net		$	17,802			$	21,569

Based on the analysis described in Note 10, we recognized an impairment charge on our long-lived assets in the year ended December 31, 2009 of $149 thousand in our Bail Bonds Industry Solutions segment. As of December 31, 2009, $2.2 million of net property and equipment related to SI, which was sold on July 19, 2010. The sale of SI reduced our accumulated depreciation balances by $3.1 million.

Depreciation of fixed assets and software for the years ended December 31, 2008, 2009 and 2010 were $8.4 million, $7.4 million and $8.1 million, respectively. During the year ended December 31, 2010, we had retirements that impacted our property and equipment and accumulated depreciation balances by $7.0 million.

Leased property held under capital leases and included in property and equipment consists of the following as of:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Leased property consisting of machinery and equipment		$	3,213			$	3,429
Leased property consisting of software			2,846				3,015
Leased property			6,059				6,444
Less: accumulated depreciation			(3,201	)			(1,165	)
Leased property, net		$	2,858			$	5,279

During the year ended December 31, 2010, we entered into additional capital leases for fixed assets of $3.6 million, which was partially offset by $2.4 million of leased equipment that was converted to property and equipment, which impacted the leased property and accumulated depreciation balances.

9. Long-Term Investments

Our long-term investment consists of an investment in equity shares of a privately held company. During the year ended December 31, 2010, we paid $1.0 million in cash for an additional preferred stock investment in White Sky, Inc (“White Sky”), a privately held company in California. In accordance with our initial investment in the year ended December 31, 2008, we received stock purchase warrants to purchase 1.4 million shares of White Sky’s preferred stock at $1.05 per share. The warrants are contingently exercisable at two vesting periods subject to White Sky meeting certain revenue thresholds. The first and second vesting period occurred at December 31, 2009

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

and December 31, 2010 and we did not meet the threshold; therefore, we did not vest in any warrants. According to the warrant agreement, the unvested warrants as of December 31, 2010 expired. White Sky provides smart card-based software solutions to safeguard consumers against identity theft and online crime when they bank, shop and invest online. We own less than 20% of the outstanding voting stock of White Sky. The investment is accounted for at cost on the consolidated balance sheet. As of December 31, 2010, no indicators of impairment were identified.

In addition to the investment, we amended a commercial agreement with White Sky in the year ended December 31, 2010 to receive exclusivity on the sale of its ID Vault products. The amended strategic commercial agreement allows us to include these products and services as part of our comprehensive identity theft protection services to consumers. The amendment also modified our future royalty payments to White Sky in exchange for certain exclusivity on the sale of its ID Vault products.

10. Goodwill and Intangibles

Changes in the carrying amount of goodwill are as follows (in thousands):

 

		December 31, 2009
		Gross Carrying Amount				Accumulated Impairment Losses				Net Carrying Amount at January 1, 2009				Impairment				Adjustments				Net Carrying Amount at December 31, 2009
Consumer Products and Services		$	43,235			$	—			$	43,235			$	—			$	—			$	43,235
Background Screening			23,583				(13,716	)			9,867				(6,163	)			—				3,704
Online Brand Protection			11,242				(11,242	)			—				—				—				—
Bail Bonds Industry Solutions			1,390				(1,390	)			—				—				—				—
Total goodwill		$	79,450			$	(26,348	)		$	53,102			$	(6,163	)		$	—			$	46,939
		December 31, 2010
		Gross Carrying Amount				Accumulated Impairment Losses				Net Carrying Amount at January 1, 2010				Impairment				Discontinued Operations (See Note 22)				Net Carrying Amount at December 31, 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

We performed our required annual impairment test as of October 31, 2010. We estimated fair value using a weighted average between the income and market based approaches. The implied fair value of the reporting units, at October 31, 2010, was in excess of the carrying value. Therefore, goodwill in the reporting unit was not impaired and the second step of the impairment test was not necessary. As further described in Note 22, in the three months ended September 30, 2010, we reduced goodwill by $3.7 million due to the sale of SI.

In the prior year, due to the deterioration in the general economic environment and decline in our market capitalization, we concluded a triggering event had occurred at June 30, 2009 indicating potential impairment in our Background Screening reporting unit, which was included in the sale of Screening International in July 2010. We

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

determined, in the first step of our goodwill impairment analysis performed as of June 30, 2009, that goodwill in the Background Screening reporting unit was impaired.

As of June 30, 2009, the value under the income approach was developed by discounting the projected future cash flows to present value. The reporting units discounted cash flows require significant management judgment with respect to revenue, earnings, capital expenditures and the selection and use of an appropriate discount rate. The discounted cash flows are based on our annual business plan or other forecasted results of approximately five years. The assumptions for our discounted future cash flows begin with our historical operating performance. Additionally, we considered the impact that known economic, industry and market trends will have on our future forecasts, as well as the impact that we expect from planned business initiatives including new products, client service and retention standards.

In our market based approach, a valuation multiple was selected based on a financial benchmarking analysis that compared the reporting unit’s operating result with the comparable companies’ information. In addition to these financial considerations, qualitative factors such as business descriptions, business diversity, the size and operating performance, and overall risk among the benchmark companies were considered in the ultimate selection of the multiple.

However, the comparison of the values calculated using an equally weighted average between the income and market based approaches to our market capitalization resulted in a value significantly in excess of our market capitalization. We therefore proportionally allocated the market capitalization, including a reasonable control premium, to the reporting units to determine the implied fair value of the reporting units. Based on the analysis as of June 30, 2009, the implied fair value of the Consumer Products and Services reporting unit exceeded the carrying value by approximately 67.6%. The carrying value of our Other reporting unit exceeded its implied fair value by 44.3%; however, there is no remaining goodwill allocated to this reporting unit as of June 30, 2009. The carrying value of our Background Screening reporting unit exceeded its implied fair value by approximately 21.7% based on this analysis as of June 30, 2009, which resulted in an impairment of goodwill in our Background Screening reporting unit.

The second step of the impairment test requires us to allocate the fair value of the reporting unit derived in the first step to the fair value of the reporting unit’s net assets. Goodwill was written down to its implied fair value for our Background Screening reporting unit. For the three months ended June 30, 2009, we recorded an impairment charge of $5.9 million in our Background Screening reporting unit, which is included in our loss from discontinued operations, net of tax, in our consolidated statements of operations.

We then performed our required annual impairment test as of October 31, 2009. We utilized the June 30, 2009 values determined under the income and market based approaches for our annual impairment test as there were no significant changes in our business or circumstances or events that have changed since that prior valuation. Based on the analysis as of October 31, 2009, the implied fair value of the Consumer Products and Services reporting unit exceeded the carrying value. Therefore, goodwill in the reporting units was not impaired and the second step of the impairment test was not necessary as of October 31, 2009.

In addition, during the three months ended March 31, 2009, we finalized the second step of our goodwill impairment test, in which the first step was performed during the year ended December 31, 2008, and we recorded an additional impairment charge of $214 thousand in our Background Screening reporting unit, which is included in our loss from discontinued operations, net of tax, in our consolidated statements of operations.

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

 

F-20

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We may not be able to take sufficient cost containment actions to maintain our current operating margins in the future. In addition, due to the concentration of our significant clients in the financial industry, any significant impact to a contract held by a major client may have an effect on future revenue which could lead to additional impairment charges.

Our intangible assets consisted of the following (in thousands):

 

		December 31, 2009
		Gross Carrying Amount				Accumulated Amortization				Impairment				Net Carrying Amount
Amortizable intangible assets:
Customer related		$	40,857			$	(19,766	)		$	(147	)		$	20,944
Marketing related			3,553				(3,048	)			(287	)			218
Technology related			2,796				(1,832	)			(513	)			451
Total amortizable intangible assets		$	47,206			$	(24,646	)		$	(947	)		$	21,613
		December 31, 2010
		Gross Carrying Amount				Accumulated Amortization				Impairment				Net Carrying 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

As further described in Note 22, due to the sale of SI, in the three months ended September 30, 2010, we reduced both the gross carrying amount and accumulated amortization on our amortizable intangible assets by $2.4 million. The intangible assets held by SI were fully amortized.

During the year ended December 31, 2010, there were no adverse changes in our long-lived assets, which would cause a need for an impairment analysis. During the year ended December 31, 2009, we reviewed our estimates regarding a customer related intangible asset. Based upon the pattern of use of the underlying the asset, we accelerated the amortization of that asset and reduced the estimated useful life from ten to seven years. This acceleration resulted in an additional $1.2 million of amortization expense in the year ended December 31, 2009. In addition, during the year ended December 31, 2009, we recorded an impairment of $947 thousand for intangible assets, of which $800 thousand is included in income from continuing operations and $147 thousand is included in loss from discontinued operations on our consolidated statements of operations. See Note 8 for information on impairment charge related to property and equipment of $149 thousand, which, when combined with the $800 thousand is $949 thousand. This amount is shown as total impairment charges in continuing operations on our consolidated statements of operations.

Intangible assets are generally amortized over a period of three to ten years. For the years ended December 31, 2008, 2009 and 2010 we had an aggregate amortization expense from continuing operations of $10.3 million, $9.1 million and $6.7, respectively, which were included in amortization expense on our consolidated statements of

 

F-21

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

operations. We estimate that we will have the following amortization expense for the future periods indicated below (in thousands):

 

For the years ending December 31,
2011		$	3,828
2012			3,542
2013			3,483
2014			3,437
2015			607
Thereafter			—
		$	14,897

11. Other Assets

The components of our other assets are as follows:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Prepaid royalty payments		$	75			$	75
Prepaid contracts			1,341				92
Prepaid commissions			7,362				4,029
Other			5,614				1,697
		$	14,392			$	5,893

The decrease in other assets is primarily related to receipt of a receivable from an ongoing joint marketing arrangement and a decrease in prepaid commissions.

In addition, $59 thousand of other assets as of December 31, 2009 related to SI, which was sold on July 19, 2010.

12. Accrued Expenses and Other Current Liabilities

The components of our accrued expenses and other liabilities are as follows:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Accrued marketing		$	3,614			$	2,637
Accrued cost of sales, including credit bureau costs			5,764				6,239
Accrued general and administrative expense and professional fees			4,191				3,269
Insurance premiums			1,473				1,190
Other			2,213				1,383
		$	17,255			$	14,718

As of December 31, 2009, $366 thousand of accrued expenses and other current liabilities related to SI, which was sold on July 19, 2010.

 

F-22

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

13. Accrued Payroll and Employee Benefits

The components of our accrued payroll and employee benefits are as follows:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Accrued payroll		$	415			$	233
Accrued benefits			2,364				1,918
Other			3				191
		$	2,782			$	2,342

As of December 31, 2009, $358 thousand of accrued payroll and employee benefits related to SI, which was sold on July 19, 2010.

14. Income Taxes

The components of income tax benefit (expense) from continuing operations for the three years ended December 31, 2008, 2009 and 2010 are as follows:

 

		2008				2009				2010
		(In thousands)
Current:
Federal		$	(556	)		$	(463	)		$	(12,729	)
State			(109	)			(63	)			(2,177	)
Total current income tax expense			(665	)			(526	)			(14,906	)
Deferred:
Federal			2,865				359				5,011
State			555				(1	)			557
Total deferred income tax (expense) benefit			3,420				358				5,568
Total income tax (expense) benefit		$	2,755			$	(168	)		$	(9,338	)

Deferred tax assets and liabilities as of December 31, 2009 and 2010, consist of the following:

 

		2009				2010
		(In thousands)
Deferred tax assets:
Reserves and accrued expenses		$	3,479			$	4,530
Intangible assets			3,085				3,165
NOL and capital loss carryforwards			4,012				4,878
Total deferred tax assets			10,576				12,573
Deferred tax liabilities:
Prepaid expenses			(15,732	)			(11,170	)
Property, plant, and equipment			(2,231	)			(3,162	)
Total deferred tax liabilities			(17,963	)			(14,332	)
Valuation allowances			(3,798	)			(4,605	)
Net deferred tax liability		$	(11,185	)		$	(6,364	)

 

F-23

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We have state net operating loss carryforwards of $516 thousand, which will begin to expire in 2012. We also have a capital loss carryforward generated from the sale of SI of $4.4 million, which will expire in 2015. Realization of deferred tax assets related to net operating losses is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. We have established a valuation allowance against deferred tax assets, primarily the capital loss carryforward and $244 thousand of our state net operating loss carryforwards, that we believe cannot be utilized in the foreseeable future. Although realization is not assured, management believes it is more likely than not that the remaining net deferred tax assets will be realized.

The reconciliation of income tax from continuing operations from the statutory rate is as follows (in thousands):

 

		December 31,
		2008				2009				2010
Tax benefit (expense) at statutory rate		$	2,700			$	(474	)		$	(8,475	)
State income (benefit) tax, net of federal benefit			539				164				(641	)
Nondeductible executive compensation			(46	)			(94	)			(218	)
Valuation allowances			—				(9	)			(194	)
Change in uncertain tax positions			—				272				72
Other			(438	)			(27	)			118
Net tax benefit (expense)		$	2,755			$	(168	)		$	(9,338	)

Our consolidated effective tax rate from continuing operations for the year ended December 31, 2010 was 38.6% as compared to 19.6% in the year ended December 31, 2009. The increase in the effective tax rate is primarily due to the ratio of reduced income from continuing operations in 2009 along with the reduction in uncertain tax positions and decreases in the overall state tax rates, which decreased the effective tax rate in the year ended December 31, 2009. The reduction of these items, along with the ratio of a significant increase in income from continuing operations before tax, increased the effective tax rate and resulted in a more normalized rate in 2010.

The following table summarizes the activity related to our unrecognized tax benefits for the years ended December 31, 2008, 2009 and 2010 (in thousands):

 

		December 31,
		2008				2009				2010
Unrecognized tax benefit -January 1		$	813			$	2,160			$	225
Gross increases, tax positions in current period			48				38				—
Gross increases, tax positions in prior period			1,299				—				—
Gross decreases, tax positions in prior period			—				(1,214	)			—
Decreases related to settlements with taxing authorities			—				—				(44	)
Lapse of the statute of limitations			—				(759	)			—
Unrecognized tax benefit -December 31		$	2,160			$	225			$	181

The balance of the unrecognized tax benefits as of December 31, 2010, if recognized, would not have a significant impact on our annual effective rate.

During the year ended December 31, 2010 we increased, and subsequently, reduced our gross unrecognized tax benefits by $4.2 million primarily related to an uncertain tax position in a foreign jurisdiction. Upon further analysis, it was determined that this item did not meet the recognition requirement for providing a tax reserve.

We have elected to include income tax penalties related to uncertain tax positions as part of our income tax expense in the consolidated financial statements. The accrual for estimated penalties is included as a component of

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

other long-term liabilities in our consolidated balance sheet. We did not accrue penalties in the years ended December 31, 2008 or 2010. In the year ended December 31, 2009, we decreased penalties by a net amount of $45 thousand as a result of our gross decreases to our unrecognized tax benefit.

We have elected to include interest expense related to uncertain tax positions as part of interest expense in the consolidated financial statements. The accrued interest is included as a component of other long-term liabilities in our consolidated balance sheet. In the years ended December 31, 2008, 2009 and 2010, we have interest expense of $391 thousand, $10 thousand and $10 thousand, respectively. In the year ended December 31, 2009 and 2010, we decreased interest expense $532 thousand and $7 thousand, respectively as a result of our gross decreases to our unrecognized tax benefit.

The company is subject to taxation in the U.S. and various state jurisdictions. As of December 31, 2010, we were subject to examination in the U.S. federal tax jurisdiction for the 2008-2009 tax years and various state jurisdictions for the 1999-2009 tax years. We are under audit for a state income tax return for the year ended December 31, 2007.

In the year ended December 31, 2011, we do not expect our unrecognized tax benefits to change by a material amount.

15. Related Party Transactions

Digital Matrix Systems, Inc. — The chief executive officer and president of Digital Matrix Systems, Inc. (“DMS”) serves as a board member of the Company.

In November 2001, we entered into a contract with DMS that provides for services that assist us in monitoring credit on a daily and quarterly basis for $20 thousand per month. In December 2004, we entered into a contract with DMS that provides for certain on-line credit analysis services. In January 2007, we amended those agreements into a single Software Services Schedule. In connection with these agreements, we paid monthly installments totaling $875 thousand, $864 thousand and $870 thousand for the years ended December 31, 2008, 2009 and 2010, respectively. These amounts are included within cost of revenue and general and administrative expense in the accompanying consolidated statements of operations.

On January 2, 2008, we entered into a professional services agreement with DMS under which DMS provides additional development and consulting services pursuant to work orders that are agreed upon by the parties from time to time. The initial term of the agreement is two years, with successive automatic renewal terms of two years, but is terminable without cause by either party upon 90 days notice to the other party. As of December 31, 2009 and 2010, we owed $142 thousand and $140 thousand to DMS, respectively.

RCS International, Inc. 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 Canadian fulfillment operations. For the year ended December 31, 2008, 2009 and 2010, we paid $2.0 million, $1.5 million and $1.7 million, respectively. As of December 31, 2009, there were no amounts owed to RCS. As of December 31, 2010, we owed $102 thousand.

Lazard Freres & Co, LLC. A managing director of Lazard Freres & Co (“Lazard”) serves as a board member of the Company. On May 30, 2007, we retained Lazard to act as investment banker to the Company in connection with possible strategic alternatives. For the year ended December 31, 2008, we paid $50 thousand to Lazard for these services. For the year ended December 31, 2009, we did not remit any payments to Lazard. For the year ended December 31, 2010, we paid $300 thousand to Lazard. As of December 31, 2009 and 2010, there were no amounts due to Lazard.

White Sky, Inc. We have a minority investment in White Sky, Inc. (“White Sky”) and a commercial agreement to incorporate and market their service into our fraud and identity theft protection product offerings. For the years ended December 31, 2008, 2009 and 2010, under the commercial agreement we paid $117 thousand

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

$1.8 million and $1.5 million to White Sky, respectively. During the year ended December 31, 2010, we paid $1.0 million in cash for an additional preferred stock investment in White Sky. See Note 9 for further information. As of December 31, 2009 and 2010, there were no amounts due to or from White Sky. As of December 31, 2009, we held $167 thousand of inventory related to White Sky, which is recorded in prepaid and other current assets in our consolidated balance sheet. As of December 31, 2010, we did not hold any inventory related to White Sky.

Albertine Enterprises Inc. The chairman and CEO of Albertine Enterprises Inc. (“Albertine Enterprises”) serves as our board member. In the year ended December 31, 2010, we entered into a contract with Albertine Enterprises to provide lobbying and consulting services. For the year ended December 30, 2010, we paid $68 thousand to Albertine Enterprises for these services. As of December 31, 2010, we owed $6 thousand to Albertine Enterprises.

16. Debt and Other Financing

 

		December 31, 2009				December 31, 2010
		(In thousands)
Term loan		$	14,583			$	—
Revolving credit facility			23,000				—
Demand note payable to CRG			—				—
Note payable to CRG: In 2009, a $1.4 million face amount, non-interest bearing, due in three annual payments of $467 thousand beginning June 30, 2012 (less unamortized discount of $590 thousand which is based on an imputed interest rate of 16)%			810				—
Other			—				—
			38,393				—
Less current portion			(7,000	)			—
Total long term debt		$	31,393			$	—

On July 3, 2006 we negotiated bank financing in the amount of $40 million (the “Credit Agreement”). Under terms of the Credit Agreement, we were granted a $25 million revolving credit facility and a term loan of $15 million with interest at 1.00-1.75 percent over LIBOR. On January 31, 2008, we amended the Credit Agreement in order to increase the term loan facility to $28 million. The amended term loan was payable in monthly installments of $583 thousand, plus interest. Substantially all our assets and a pledge by us of stock and membership interests we hold in certain subsidiaries are pledged as collateral to these loans. In addition, pursuant to the amendment, our subsidiaries Captira and Net Enforcers were added as co-borrowers under the Credit Agreement. The amendment provides that the maturity date for the revolving credit facility and the term loan facility under the Credit Agreement will be December 31, 2011. In July 2009, we entered into a third amendment to the Credit Agreement related to the termination and ongoing operations of SI as a co-borrower, and to clarify other matters related to the termination of our joint ownership agreement with CRG and the ongoing operations of SIH. We also formed Intersections Business Services, LLC, to provide services to our Background Screening, Online Brand Protection and Bail Bonds Industry Solutions segments, and which joined in the Credit Agreement as a co-borrower. On March 11, 2010, we entered into a fourth amendment to the Credit Agreement. The amendment increased our interest rate by one percent at each pricing level such that the interest rate now ranges from 2.00% to 2.75% over LIBOR. In addition, the amendment increased our ability to invest additional funds into Screening International, as well as required a portion of the proceeds from any disposition of that entity to be paid to Bank of America, N.A. On July 30, 2010, following the sale of Screening International on July 19, 2010, we prepaid the remaining principal balance of $11.1 million on our term loan, which included the required amount as well as additional amounts. On August 18, 2010 we paid $2.0 million of principal on our revolving credit facility. Additionally, on December 22, 2010 we prepaid the remaining principal balance of $21.0 million on our revolving credit facility.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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; and the creation or acquisition of any direct or indirect subsidiary of ours that is not a domestic subsidiary unless such subsidiary becomes a guarantor. We are also required to maintain compliance with certain financial covenants which includes our consolidated leverage ratios, consolidated fixed charge coverage ratios as well as customary covenants, representations and warranties, funding conditions and events of default. We are currently in compliance with all such covenants.

As further described in Note 17, we entered into interest rate swap transactions on our term loan and revolving credit facility that converts our variable-rate debt to fixed-rate debt. Due to the prepayment of the remaining principal balance on our term loan and revolving credit facility, we no longer met the criteria for hedge accounting and, therefore, discontinued our cash flow hedges and reclassified our interest rate swaps to non-designated derivatives. In December 2010, we paid $477 thousand to our counterparty to terminate the interest rate swaps.

As further described in Note 20 on July 1, 2009, we and CRG agreed to terminate our existing ownership agreement in SI and we acquired CRG’s 45% ownership interest in SI, resulting in SI becoming our wholly-owned subsidiary. As part of the termination, a $900 thousand demand loan between SI and CRG was forgiven and a non-interest bearing $1.4 million note was issued by SIH to CRG. The note matured in five years and required equal annual payments by SIH of $467 thousand due on June 30, 2012, 2013 and 2014. The note was recorded at fair value, which was $748 thousand, as of July 1, 2009. Interest was accrued monthly using a 16% imputed interest rate in accordance with U.S. GAAP. As further described in Note 22, on July 19, 2010 as a result of the sale of SI, the note payable to CRG was paid, resulting in a loss on debt extinguishment of $517 thousand, which is included in the gain on disposal of discontinued operations in our consolidated statements of operations.

17. Derivative Financial Instruments

Risk Management Strategy

We maintained an interest rate risk management strategy that incorporated the use of derivative instruments to minimize the economic effect of interest rate changes. In 2008, we entered into certain interest rate swap transactions that converted our variable-rate long-term debt to fixed-rate debt. Our interest rate swaps were related to variable interest rate risk exposure associated with our long-term debt and were intended to manage this risk. The swaps modified our interest rate exposure by effectively converting the variable rate on our term loan to a fixed rate of 3.2% per annum through December 2011 and on our revolving line of credit to a fixed rate of 3.4% per annum through December 2011. The notional amount of the term loan interest rate swap amortized on a monthly basis through December 2011 and the notional amount of the line of credit interest rate swap amortized from $15.0 million to $10.0 million through March 31, 2009 and terminates in December 2011. For the year ended December 31, 2008 and 2009, there was no material ineffective portion of the hedge and therefore, no impact to the consolidated statements of operations. As further described in Note 16, in the year ended December 31, 2010 we prepaid the remaining principal balance on the term loan and revolving credit facility under our Credit Agreement and therefore, we no longer met the criteria for hedge accounting. We discontinued our cash flow hedges and reclassified our interest rate swaps to non-designated derivatives. For the year ended December 31, 2010, we reclassified $565 thousand from accumulated other comprehensive loss into earnings to record the ineffective portion of the hedge. In the year ended December 2010, we also terminated our interest rate swaps with payments totaling $477 thousand.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Summary of Derivative Financial Statement Impact

As of December 31, 2009, our interest rate contracts had a fair value of $856 thousand, which was included in other long-term liabilities in our consolidated balance sheet. As of December 31, 2010, we terminated our interest rate contracts in conjunction with the prepayment of debt. The following table summarizes the impact of derivative instruments in our consolidated statements of operations.

The Effect of Derivative Instruments on the Statements of Operations

 

																		Amount of (Loss)
																		Gain Reclassified from
										Amount of (Loss)								Accumulated OCI into
		Amount of Gain or (Loss)								Reclassified from								Income (Ineffective
		Recognized in OCI								Accumulated OCI								Portion and Amount
		on Derivative								into Income								Excluded from
Cash Flow Hedge Relationships		(Effective Portion)								(Effective Portion)								Effectiveness Testing)
Year Ended December 31,		2010				2009				2010				2009				2010				2009
		In thousands of dollars
Interest rate contracts		$	291			$	407			$	(541	)		$	(888	)		$	(565	)		$	—
Total		$	291			$	407			$	(541	)(1)		$	(888	)(1)		$	(565	)		$	—

 

(1)	Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into income for the effective portion of the cash flow hedge is recorded in interest expense in our consolidated statement of operations.

As further described in Note 16, in the three months ended September 30, 2010 we prepaid the remaining principal balance on the term loan under our Credit Agreement. Therefore, we no longer met the criteria for hedge accounting and we discontinued our cash flow hedge and reclassified our interest rate swap on the term loan to a non designated derivative. This resulted in the recognition of a loss of $265 thousand, which was reclassified from accumulated other comprehensive loss into earnings during the three months ended September 30, 2010. We retained this interest rate swap to economically hedge our interest rate risk on the non-hedged portion of the revolving line of credit. We continued to fair value the non-hedged swap through our consolidated statements of operations.

Subsequently, in the three months ended December 31, 2010 we prepaid the remaining principal balance on the revolving credit facility under our Credit Agreement and paid $477 thousand to terminate the related interest rate swaps. We, therefore, no longer met the criteria for hedge accounting and we discontinued our cash flow hedge and reclassified the effective portion of our interest rate swap on the revolving credit facility. This resulted in the recognition of a loss of $300 thousand, which was reclassified from accumulated other comprehensive loss into earnings during the three months ended December 31, 2010.

The effect on the consolidated statements of operations of derivative instruments not designated as hedges is summarized as follows (in thousands):

 

				(Losses) Gains for the Years Ended
Derivatives not Designated as Hedging Instruments		Line Item in Statements of Operations		December 31, 2008				December 31, 2009				December 31, 2010
Interest rate contracts		Other (expense) income, net		$	—			$	—			$	(477	)
Total				$	—			$	—			$	(477	)

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

18. Commitments and Contingencies

Leases

We have entered into long-term operating lease agreements for office space and capital leases for certain fixed assets. The minimum fixed commitments related to all noncancellable leases are as follows:

 

Years Ending December 31,		Operating Leases				Capital Leases
		(In thousands)
2011		$	1,646			$	1,903
2012			2,037				1,500
2013			2,499				867
2014			2,120				785
2015			2,161				548
Thereafter			7,951				—
Total minimum lease payments		$	18,414				5,603
Less: amount representing interest							(559	)
Present value of minimum lease payments							5,044
Less: current obligation							(1,645	)
Long term obligations under capital lease						$	3,399

In the year ended December 31, 2009, we entered into additional capital lease agreements for approximately $2.2 million. In the year ended December 31, 2010 we entered into additional capital lease agreements for approximately $3.6 million for fixed assets. We recorded the lease liability at the fair market value of the underlying assets on our consolidated balance sheet.

In the year ended December 31, 2009 and 2010, we financed certain software development costs. These costs did not meet the criteria for capitalization under U.S. GAAP. Amounts owed under this arrangement as of December 31, 2010 are $221 thousand and $144 thousand, respectively, and are included in accrued expenses and other current liabilities and other long-term liabilities, respectively, in our consolidated financial statements. The minimum fixed commitments related to this arrangement are as follows:

 

For the years ended December 31 (in thousands):
2011		$	221
2012			136
2013			8
Obligations under arrangement		$	365

Rental expenses included in general and administrative expenses were $1.8 million, $2.3 million and $2.7 million for the years ended December 31, 2008, 2009 and 2010, respectively. The increase in rental expenses in the year ended December 31, 2010 compared to the year ended December 31, 2009 is due to the increase in rent as a result of our relocation to a new building facility in the third quarter of 2009 and an additional operating lease associated with opening a new customer care center in the third quarter of 2010.

As of December 31, 2008, 2009, and 2010, the rental expenses included in loss from discontinued operations in our consolidated statements of operations were $1.1 million, $978 thousand and $404 thousand, respectively. These amounts related to SI, which was sold on July 19, 2010.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 NEI’s termination of Mr. Loomis for cause, NEI’s obligations pursuant to the agreement were terminated. In addition to a judgment rescinding the stock purchase agreement and return of the entire purchase price we had paid, we are seeking unspecified compensatory, consequential and punitive damages, among other relief. On July 2, 2009, Mr. Loomis filed a motion to dismiss certain of our claims. On July 24, 2009, Mr. Loomis’ motion to dismiss our claims was denied in its entirety. Mr. Loomis also asserted counterclaims for an unspecified amount not less than $10,350,000, alleging that NEI breached the employment agreement by terminating him without cause and breached the stock purchase agreement by preventing him from running NEI in such a way as to earn certain earn-out amounts. On January 14, 2010, we settled all claims with Mr. Loomis and his sister, co-defendant Jenni Loomis. On January 26, 2010, prior to final documentation of the settlement and transfer of the funds, Mr. Loomis filed for bankruptcy in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”). The Virginia litigation thus was automatically stayed as related to Mr. Loomis. In furtherance of our efforts to enforce the settlement agreement, we obtained a stay of the case as related to Jenni Loomis as well. On April 22, 2010, the Bankruptcy Court granted our motion to modify the stay so that we may seek a declaration from the U.S. District Court for the Eastern District of Virginia that the settlement is enforceable. 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 has scheduled a trial to commence on May 2, 2011.

On September 11, 2009, a putative class action complaint was filed against Intersections, Inc., Intersections Insurance Services Inc., Loeb Holding Corp., Bank of America of America, NA, Banc of America Insurance Services, Inc., American International Group, Inc., National Union Fire Insurance Company of Pittsburgh, PA, and Global Contact Services, LLC, in the U.S. District Court for the Southern District of Texas. The complaint alleges various claims based on telemarketing of an accidental death and disability program. On February 22, 2011, the U.S. District Court dismissed all of the plaintiff’s claims against us and the other defendants. The plaintiff has filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit.

On February 16, 2010, a putative class action complaint was filed against Intersections, Inc., Bank of America Corporation, and FIA Card Services, N.A., in the U.S. District Court for the Northern District of California. The complaint alleges various claims based on the provision of identity protection services to the named plaintiff. We believe we have meritorious and complete defenses to the plaintiff’s claims but believe that it is too early in the litigation to form an opinion as to the likelihood of success in defeating the claims. Defendants filed answers to the complaint on May 24, 2010. Discovery is ongoing.

Other

We have entered into various software licenses, marketing and operational commitments for several years totaling $33.6 million as of December 31, 2010. In January, 2011, we entered into a new contract with a credit reporting agency, in which we will make non-refundable minimum payments totaling $21.5 million in the year ending December 31, 2011. Also, we terminated an arrangement with a service provider, under which we receive data and other information for use in our fraud protection services. We are obligated to pay non-refundable payments totaling $6.0 million in the year ending December 31, 2011 in exchange for a defined subscriber count of data usage and limited exclusivity rights.

 

F-30

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

19. Other Long-Term Liabilities

The components of our other long-term liabilities are as follows:

 

		December 31, 2009				December 31, 2010
		(In thousands)
Deferred rent		$	1,129			$	2,415
Uncertain tax positions, interest and penalties not recognized			224				224
Interest rate swaps			856				—
Accrued general and administrative expenses			352				144
Other			771				—
		$	3,332			$	2,783

The increase in deferred rent is primarily due to our operating lease that was effective July 2009 in connection with our headquarters relocation. As of December 31, 2010, we terminated our interest rate swaps in conjunction with the prepayment of debt. See Note 17 for further discussion of the interest rate swaps and the related impact.

As of December 31, 2009, $21 thousand of other long-term liabilities related to SI, which was sold on July 19, 2010.

20. Transfers from Noncontrolling Interest

On July 1, 2009, we and CRG terminated our May 15, 2006 ownership agreement pursuant to which we established and operated SI. In connection with the termination, we formed SIH, which purchased from CRG (a) all of CRG’s equity in SI and (b) all of SI’s indebtedness (with an aggregate principal amount and accrued interest of $1.0 million) and certain payables (with a value of $125 thousand (based on current currency conversion rates)) to CRG. SIH paid the purchase price for this equity and indebtedness by delivery of a promissory note in favor of CRG with a principal amount of $1.4 million, accruing no interest and maturing in five years, with equal principal repayments due on June 30, 2012, 2013 and 2014.

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. In connection with the sale, we remitted $1.4 million in full payment of a note payable entered into between SIH and CRG in 2009. As a result, a loss on debt extinguishment of $517 thousand is included in the gain on disposal of discontinued operations in our consolidated statements of operations.

The following table summarizes our net (loss) income attributable to Intersections Inc., and transfers from the noncontrolling interest for the years ended December 31:

 

		2008				2009				2010
Net (loss) income attributable to Intersections		$	(15,977	)		$	(6,353	)		$	20,365
Decrease in Intersections paid-in capital for purchase of 45 common units of SI			—				(3,059	)			—
Change from net (loss) income attributable to Intersections and transfers from noncontrolling interest		$	(15,977	)		$	(9,412	)		$	20,365

In accordance with U.S. GAAP, changes in a parent’s ownership interest in which the parent retains its controlling financial interest in its subsidiary are accounted for as an equity transaction. The carrying amount of the noncontrolling interest was adjusted to reflect the change in our ownership interest in SIH. The difference between

 

F-31

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

the fair value of the consideration received or paid and the amount by which the noncontrolling interest were adjusted were recognized in our stockholders’ equity. As a result of the transaction, we reclassified the noncontrolling interest to stockholders’ equity in our consolidated financial statements.

21. Stockholders’ Equity

Outstanding Securities

Our authorized capital stock consists of 50 million shares of common stock, par value $.01 per share, and 5 million shares of preferred stock, par value $.01 per share. As of December 31, 2009 and 2010, there were approximately 18.7 and 18.9 million shares of our common stock outstanding and no shares of preferred stock outstanding. The board of directors has the authority to issue up to 5 million shares of preferred stock and to fix the price, rights, preferences, privileges, and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. We do not have any outstanding warrants to purchase common shares. Holders of common stock are entitled to one vote per share in the election of directors and on all other matters on which stockholders are entitled or permitted to vote. Holders of common stock are not entitled to cumulative voting rights. Therefore, holders of a majority of the shares voting for the election of directors can elect all the directors. Holders of common stock are entitled to dividends in amounts and at times as may be declared by the Board of Directors out of funds legally available. Upon liquidation or dissolution, holders of common stock are entitled to share ratably in all net assets available for distribution to stockholders after payment of any liquidation preferences to holders of preferred stock. Holders of common stock have no redemption, conversion or preemptive rights.

Share Repurchase

On April 25, 2005, we announced that our Board of Directors had authorized a share repurchase program under which we can repurchase up to $20 million of our outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. On August 12, 2010, we announced that our Board of Directors had increased the authorized amount under our existing share repurchase program to a total of $30 million of our common shares. The repurchases may be made on the open market, in block trades, through privately negotiated transactions or otherwise, and the program may be suspended or discontinued at any time. We did not repurchase shares during the years ended December 31, 2008 or 2009. In the year ended December 31, 2010, we repurchased 50 thousand common shares at $8.62 a share. The aggregate cost of common stock repurchased, including commissions, was $432 thousand, leaving an authorized amount for repurchase of $20.1 million.

Dividends

On August 12, 2010, we announced a cash dividend of $.15 per share on our common stock, payable on September 10, 2010 to stockholders of record as of August 31, 2010. On November 15, 2010, we announced a cash dividend of $.15 per share on our common stock, payable on December 10, 2010 to stockholders of record as of November 30, 2010. These dividends resulted in cash payments of $5.3 million in the year ended December 31, 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 December 31, 2010, there were 319 thousand shares outstanding. Individual awards under the 1999 Plan took the form of incentive stock options and nonqualified stock options.

On March 12, 2004 and May 5, 2004, the Board of Directors and stockholders, respectively, approved the 2004 Stock Option Plan (the “2004 Plan”) to be effective immediately prior to the consummation of the initial public

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

offering. The 2004 Plan provides for the authorization to issue 2.8 million shares of common stock. As of December 31, 2010, we have 375 thousand shares remaining to issue and options to purchase 2.3 million shares outstanding. Individual awards under the 2004 Plan may take the form of incentive stock options and nonqualified stock options. Option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant; those option awards generally vest over three and four years of continuous service and have ten year contractual terms.

On March 8, 2006 and May 24, 2006, the Board of Directors and stockholders, respectively, approved the 2006 Stock Incentive Plan (the “2006 Plan”). The number of shares of common stock that may be issued under the 2006 Plan may not exceed 5.1 million shares pursuant to an amendment to the plan approved by the Board of Directors and then by stockholders on May 20, 2009. As of December 31, 2010, we have 982 thousand shares or restricted stock units remaining to issue and options to purchase 3.1 million shares and restricted stock units outstanding. Individual awards under the 2006 Plan may take the form of incentive stock options, nonqualified stock options, restricted stock awards and/or restricted stock units. These awards generally vest over four years of continuous service.

In May 2009, we completed an offer to eligible employees under our Stock Incentive Plans to exchange certain stock options previously granted with exercise prices below the value of our stock as of March 2009 for a lesser number of replacement options with a lower exercise price. Exchange ratios varied based on the exercise price and remaining term of the tendered option, as well as the fair market value of our common stock used for purposes of the valuation. The new stock options issued pursuant to the exchange vest over a four-year period with no credit for past vesting and have a ten-year contractual term. The exchange of stock options was treated as a modification in accordance with U.S. GAAP; and the incremental stock-based compensation expense of approximately $1.2 million will be recognized straight line over the four-year vesting period. The remaining unrecognized compensation expense of the original grant will be amortized over the four-year vesting period of the new options.

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 stock based compensation expense recognized for stock options, which was included in general and administrative expense in our consolidated statements of operations, for the years ended December 31, 2008, 2009 and 2010 was $1.9 million, $2.1 million and $2.5 million, respectively. Total share-based compensation expense recognized for stock options included in gain on disposal of discontinued operations in our consolidated statement of operations, for the year ended December 31, 2010 was $53 thousand.

 

F-33

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the Company’s stock option activity:

 

		2008								2009								2010								Aggregate Intrinsic Value				Weighted Average Remaining Contractual Term
		Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price				Number of Shares				Weighted Average Exercise Price
																										(In thousands)				(In years)
Outstanding, beginning of year			3,839,274			$	12.22				4,597,106			$	11.41				3,806,052			$	6.49
Granted			1,130,492				8.42				2,332,522				3.85				724,335				4.36
Canceled			(306,300	)			11.19				(3,007,760	)			12.32				(635,179	)			8.45
Exercised			(66,360	)			10.04				(115,816	)			0.45				(100,151	)			5.21
Outstanding, end of year			4,597,106			$	11.41				3,806,052			$	6.49				3,795,057			$	5.79			$	19,373				7.31
Exercisable at end of the year			2,970,940			$	12.93				1,241,941			$	11.00				1,388,008			$	8.67			$	4,138				5.25

The weighted average grant date fair value of options granted, based on the Black Scholes method, during the years December 31, 2008, 2009 and 2010 was $3.56, $1.76 and $2.80, 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 years ended December 31, 2008, 2009 and 2010 was $490 thousand, $873 thousand and $671 thousand, respectively.

As of December 31, 2010, there was $5.6 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 2.4 years.

The following table summarizes information about employee stock options outstanding at December 31, 2010:

 

		Options Outstanding												Options Exercisable
Exercise Price		Shares				Weighted  Average Remaining Contractual Term				Weighted Average  Exercise Price				Shares				Weighted Average Exercise Price
						(In years)
$0 — $5.00			2,171,698				8.60			$	3.48				342,064			$	3.12
$5.01 — $10.00			1,149,262				6.25				6.80				573,097				7.62
$10.01 — $15.00			348,750				4.16				12.89				347,500				12.89
$15.01 — $20.00			125,347				3.50				16.87				125,347				16.87
Greater than $20.00			—				0.00				0.00				—				0.00
			3,795,057				7.31			$	5.79				1,388,008			$	8.67

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Restricted Stock Units

The following table summarizes our restricted stock unit activity:

 

		2008								2009								2010
		Number of RSUs				Weighted Average Grant Date Fair Value				Number of RSUs				Weighted Average Grant Date Fair Value				Number of RSUs				Weighted Average Grant Date Fair Value
Outstanding, beginning of year			568,512			$	9.70				513,884			$	9.33				1,562,108			$	4.32
Granted			155,000				8.39				1,288,941				4.18				1,015,205				4.34
Canceled			(64,722	)			6.52				(78,346	)			9.41				(260,567	)			4.52
Vested			(144,906	)			9.61				(162,371	)			9.41				(372,938	)			5.79
Outstanding, end of year			513,884			$	9.33				1,562,108			$	4.32				1,943,808			$	4.62

The weighted average contractual life for restricted stock units for the years ended December 31, 2008, 2009 and 2010 was 1.9 years, 3.0 years and 2.6 years, respectively.

Total stock based compensation recognized for restricted stock units in our consolidated statements of operations for the years ended December 31, 2008, 2009 and 2010 was $2.2 million and $2.4 million and $3.2 million, respectively. Total share-based compensation expense recognized for restricted stock units included in gain on disposal of discontinued operations in our consolidated statement of operations, for the year ended September 30, 2010 was $78 thousand.

In the year ended December 31, 2010, there were two restricted stock unit grants, at the vesting date, that were paid in cash rather that stock to recipients at the election of the Company. Total cash paid was $970 thousand, which did not exceed the fair value on the settlement date.

As of December 31, 2010, there was $6.2 million of total unrecognized compensation cost related to unvested restricted stock units compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 2.3 years.

22. 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 of approximately $610 thousand. 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. We recognized a gain of $5.9 million on the sale of our subsidiary in the year ended December 31, 2010.

Our Background Screening segment reflected the results of operations for SI. We evaluated the segment disposal for classification as a discontinued operation under U.S. GAAP. SI qualified as a discontinued operation as we did not have significant continuing involvement in the business and its operations and cash flows were eliminated from our ongoing operations.

In connection with the sale, we remitted $1.4 million in full payment of a note payable entered into between SIH and CRG in 2009. As a result, a loss on debt extinguishment of $517 thousand is included in the gain on disposal of discontinued operations in our consolidated statements of operations.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the operating results of the discontinued operations included in the consolidated statement of operations (in thousands):

 

		Years Ended December 31,
		2008				2009				2010
Revenue		$	27,843			$	18,462			$	12,907
Loss before income taxes from discontinued operations		$	(19,685	)		$	(11,273	)		$	(158	)
Income tax benefit (expense)			157				(147	)			(221	)
Loss from discontinued operations			(19,528	)			(11,420	)			(379	)
Gain on disposal from discontinued operations			—				—				5,868
Net loss attributable to noncontrolling interest in discontinued operations			9,004				4,380				—
(Loss) income from discontinued operations		$	(10,524	)		$	(7,040	)		$	5,489

We did not record an income tax benefit on the tax loss on disposal in the year ended December 31, 2010, as the income tax benefit was not deemed to be realizable within the foreseeable future under U.S. GAAP.

The following table summarizes the carrying values of the major assets and liabilities of discontinued operations as finally reported on the closing date of July 19, 2010 and as of December 31, 2009 (in thousands):

 

		As of July 19, 2010				As of December 31, 2009
Accounts receivable		$	3,307			$	1,809
Prepaid expenses and other current assets			448				652
Property and equipment, net			2,016				2,212
Goodwill			3,704				3,704
Accounts payable		$	1,014			$	1,113
Accrued expenses and other current liabilities			640				366
Accrued payroll and employee benefits			615				358
Other			10				46

23. Employee Benefit Plan

In February 1998, we adopted a 401(k) profit-sharing plan (the “401(k) Plan”) that covered substantially all full-time employees. Employees are eligible to participate upon completion of one month of service and may contribute up to 25% of their annual compensation, not to exceed the maximum contribution provided by statutory limitations. In 2008, the 401(k) Plan provided for matching $0.50 per dollar on the first 6% of the employee’s contribution. Eligible employees vested in employer contributions 20% per year and were fully vested in five years. Expenses under the 401(k) Plan for the years ended December 31, 2008, 2009 and 2010 were $560 thousand, $0, and $0, respectively.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

24. Major Clients

As discussed in Notes 1 and 2, we market credit monitoring services to consumers through our relationships with our financial institution clients. Revenue from subscribers obtained through our largest financial institution clients, as a percentage of total revenue, is as follows:

 

		2008				2009				2010
Citibank			8	%			10	%			10	%
Capital One			7	%			5	%			5	%
Bank of America (includes MBNA)			48	%			58	%			56	%

We believe that, once a subscriber is obtained through our arrangements with our financial institution clients, the decision to continue the service is made by the subscriber; however, a decision to limit our access to its customers or the termination of an agreement by one of the financial institution clients could have an adverse effect on our financial condition and results of operations. Accounts receivable related to these customers totaled $12.6 million and $13.1 million at December 31, 2009 and 2010, respectively.

25. Segment and Geographic Information

We have three reportable operating segments within continuing operations. In 2009, we changed our segment reporting by realigning a portion of our Other segment into the Consumer Products and Services segment. The change in business segments was determined based on how our senior management operated, analyzed and evaluated our operations beginning in the three months ended December 31, 2009. Additionally, Net Enforcers and Captira Analytical’s business activities previously included in the Other segment met the quantitative thresholds for separate reporting as of December 31, 2009. Our Consumer Products and Services segment includes our consumer protection and other consumer products and services. This segment consists of identity theft management tools, services from our relationship with a third party that administers referrals for identity theft to major banking institutions and breach response services, membership product offerings and other subscription based services such as life and accidental death insurance. Our 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.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We recasted the results of our business segment data for the years ended December 31, 2008 and 2009 into the new operating segments for comparability with current presentation. The following table sets forth segment information for the years ended December 31, 2008, 2009 and 2010.

 

		Consumer Products and Services				Online  Brand Protection				Bail Bonds Industry Solutions				Consolidated
		(In thousands)
Year Ended December 31, 2008
Revenue		$	330,973			$	2,662			$	129			$	333,764
Depreciation			8,411				6				9				8,426
Amortization			9,221				637				426				10,284
Income (loss) from continuing operations before income taxes			10,753				(14,886	)			(4,075	)			(8,208	)
Year Ended December 31, 2009
Revenue		$	343,695			$	2,133			$	342			$	346,170
Depreciation			7,380				12				44				7,436
Amortization			8,583				69				426				9,078
Income (loss) from continuing operations before income taxes			9,513				(5,769	)			(2,889	)			855
Year Ended December 31, 2010
Revenue		$	361,570			$	2,033			$	533			$	364,136
Depreciation			8,085				20				14				8,119
Amortization			6,690				26				—				6,716
Income (loss) from continuing operations before income taxes			26,607				(835	)			(1,558	)			24,214

 

		Consumer Products and Services				Background Screening				Online  Brand Protection				Bail Bonds Industry Solutions				Consolidated
As of December 31, 2009
Property, plant and equipment, net		$	15,553			$	2,212			$	37			$	—			$	17,802
Total assets		$	165,995			$	14,016			$	9,210			$	2,950			$	192,171

 

		Consumer Products and Services				Online  Brand Protection				Bail Bonds Industry Solutions				Consolidated
As of December 31, 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.

 

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INTERSECTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

26. Quarterly Financial Data (Unaudited)

 

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
		(In thousands)
Year ended December 31, 2008:
Revenue		$	79,073			$	86,277			$	85,600			$	82,814
Income (loss) from operations			7,042				8,203				6,042				(26,506	)
Income (loss) from continuing operations before income taxes			6,567				7,597				5,426				(27,798	)
Net income		$	3,439			$	4,352			$	2,697			$	(26,465	)
Year ended December 31, 2009:
Revenue		$	82,834			$	85,807			$	88,324			$	89,205
Income (loss) from operations			1,907				1,284				2,950				(5,545	)
Income (loss) from continuing operations before income taxes			1,528				1,216				2,742				(4,631	)
Net income (loss)		$	(558	)		$	(2,658	)		$	349			$	(3,486	)
Year ended December 31, 2010:
Revenue		$	91,489			$	92,125			$	89,326			$	91,196
Income from operations			708				8,641				7,782				9,200
Income from continuing operations before income taxes			86				8,092				7,036				9,000
Net income (loss)		$	(1,068	)		$	5,176			$	10,304			$	5,953

27. Subsequent Events

On February 7, 2011, we announced a cash dividend of $.15 per share on our common stock, payable on March 10, 2011 to stockholders of record as of February 28, 2011.

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.

 

F-39

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

 

Description		Balance at Beginning  of Period				Additions Charged to Costs and Expenses				Deductions from Allowance(1)				Balance at End of Period
						(In thousands)
Year Ended December 31, 2010
Allowance for doubtful accounts(2)		$	375			$	58			$	391			$	42
Year Ended December 31, 2009
Allowance for doubtful accounts		$	235			$	483			$	343			$	375
Year Ended December 31, 2008
Allowance for doubtful accounts		$	37			$	239			$	41			$	235

 

(1)	The year ended December 31, 2010 includes a reduction of $75 thousand related to the sale of SI on July 19, 2010.

 

(2)	The deductions from allowance includes $127 thousand related to write-offs.

 

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Part IV

 

Item 15.

Exhibits and Financial Statement Schedules

(a) 1. and 2. Financial Statements and Financial Statement Schedules

The response to this portion of Item 15 is included in Item 8 of this report.

3. Exhibits

 

Exhibit Number		Description
23.1		Consent of Deloitte & Touche LLP
31.1		Certification of Michael R. Stanfield, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of John 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 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.

 

F-41

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment to Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 18, 2011