e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
INTERSECTIONS INC.
(Exact name of registrant as specified in the charter)
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DELAWARE
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54-1956515 |
(State or other jurisdiction of incorporation or
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(I.R.S. Employer |
organization)
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Identification Number) |
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14901 Bogle Drive, Chantilly, Virginia
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20151 |
(Address of principal executive office)
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(Zip Code) |
(703) 488-6100
(Registrants telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act (Check one):
Large
accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the last practicable date:
As of November 1, 2007, there were 18,149,515 shares of common stock, $0.01 par value, issued and
17,133,093 shares outstanding, with 1,016,422 shares of treasury stock.
Form 10-Q
September 30, 2007
Table of Contents
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Page |
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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3 |
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Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006
(unaudited) |
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3 |
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Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited) |
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4 |
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited) |
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5 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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6 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. Quantitative and Qualitative Disclosure About Market Risk |
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33 |
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Item 4. Controls and Procedures |
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34 |
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PART II. OTHER INFORMATION |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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34 |
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Item 6. Exhibits |
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34 |
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2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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Revenue |
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$ |
71,403 |
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$ |
55,261 |
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$ |
194,708 |
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$ |
146,318 |
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Operating expenses: |
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Marketing |
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9,390 |
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6,473 |
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25,325 |
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18,454 |
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Commissions |
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13,992 |
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7,389 |
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35,830 |
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18,007 |
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Cost of revenue |
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27,074 |
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19,967 |
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75,070 |
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54,217 |
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General and administrative |
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14,968 |
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13,815 |
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44,268 |
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34,560 |
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Depreciation and amortization |
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3,132 |
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2,895 |
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9,005 |
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7,298 |
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Total operating expenses |
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68,556 |
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50,539 |
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189,498 |
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132,536 |
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Income from operations |
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2,847 |
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4,722 |
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5,210 |
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13,782 |
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Interest income |
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171 |
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248 |
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667 |
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1,384 |
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Interest expense |
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(304 |
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(355 |
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(968 |
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(519 |
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Other (expense) income, net |
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(18 |
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3 |
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(23 |
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324 |
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Income before income taxes and minority interest |
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2,696 |
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4,618 |
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4,886 |
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14,971 |
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Income tax expense |
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(1,269 |
) |
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(1,850 |
) |
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(2,196 |
) |
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(5,936 |
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Income before minority interest |
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1,427 |
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2,768 |
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2,690 |
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9,035 |
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Minority interest in net loss (income) of Screening International, LLC |
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297 |
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(132 |
) |
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853 |
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(238 |
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Net income |
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$ |
1,724 |
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$ |
2,636 |
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$ |
3,543 |
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$ |
8,797 |
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Net income per share basic |
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$ |
0.10 |
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$ |
0.16 |
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$ |
0.21 |
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$ |
0.53 |
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Net income per share diluted |
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$ |
0.10 |
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$ |
0.15 |
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$ |
0.20 |
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$ |
0.50 |
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Weighted average common shares outstanding basic |
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17,156 |
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16,788 |
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17,086 |
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16,746 |
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Weighted average common shares outstanding diluted |
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17,560 |
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17,855 |
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17,492 |
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17,542 |
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See Notes to Condensed Consolidated Financial Statements
3
INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
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September 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
13,533 |
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$ |
15,580 |
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Short-term investments |
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10,453 |
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Accounts receivable, net of allowance for doubtful accounts $58 (2007) and $38 (2006) |
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26,874 |
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22,369 |
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Prepaid expenses and other current assets |
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6,688 |
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5,241 |
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Income tax receivable |
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818 |
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2,113 |
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Note receivable |
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750 |
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Deferred subscription solicitation costs |
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21,782 |
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11,786 |
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Total current assets |
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69,695 |
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68,292 |
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PROPERTY AND EQUIPMENTnet |
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19,735 |
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21,699 |
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GOODWILL |
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67,961 |
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66,663 |
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INTANGIBLE ASSETSnet |
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11,755 |
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12,388 |
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OTHER ASSETS |
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17,011 |
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10,425 |
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TOTAL ASSETS |
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$ |
186,157 |
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$ |
179,467 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Note payablecurrent portion |
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$ |
3,345 |
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$ |
3,333 |
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Note payableControl Risks Group Ltd. |
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450 |
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Capital leasescurrent portion |
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1,104 |
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1,176 |
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Accounts payable |
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8,342 |
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5,193 |
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Accrued expenses and other current liabilities |
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18,433 |
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15,690 |
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Accrued payroll and employee benefits |
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4,600 |
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7,073 |
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Commissions payable |
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2,066 |
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1,194 |
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Deferred revenue |
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2,745 |
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5,292 |
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Deferred tax liability current portion |
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2,385 |
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2,483 |
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Total current liabilities |
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43,470 |
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41,434 |
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NOTE PAYABLE less current portion |
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9,183 |
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11,667 |
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OBLIGATIONS UNDER CAPITAL LEASESless current portion |
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814 |
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1,637 |
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OTHER LONG-TERM LIABILITIES |
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2,836 |
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551 |
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DEFERRED TAX LIABILITY less current portion |
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8,127 |
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8,152 |
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TOTAL LIABILITIES |
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$ |
64,430 |
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$ |
63,441 |
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MINORITY INTEREST |
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10,642 |
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11,450 |
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STOCKHOLDERS EQUITY: |
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Common stock at $.01 par value; shares authorized, 50,000; shares issued, 18,150
shares (2007) and 17,836 shares (2006); shares outstanding, 17,133 (2007) and 16,871
(2006) |
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181 |
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178 |
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Additional paid-in capital |
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98,796 |
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95,462 |
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Treasury stock, 1,016 shares at cost |
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(9,071 |
) |
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(8,600 |
) |
Retained earnings |
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21,035 |
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17,447 |
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Accumulated other comprehensive income |
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144 |
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89 |
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Total stockholders equity |
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111,085 |
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104,576 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
186,157 |
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$ |
179,467 |
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See Notes to Condensed Consolidated Financial Statements
4
INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months Ended |
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September 30, |
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
3,543 |
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$ |
8,797 |
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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9,092 |
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7,370 |
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Amortization of gain from sale leaseback |
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(72 |
) |
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(72 |
) |
Loss on disposal of fixed assets |
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60 |
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54 |
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Amortization of debt issuance costs |
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57 |
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16 |
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Deferred tax |
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(26 |
) |
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2,275 |
|
Provision for doubtful accounts |
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19 |
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|
104 |
|
Stock based compensation |
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2,026 |
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|
919 |
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Amortization of deferred subscription solicitation costs |
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24,125 |
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15,458 |
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Minority interest |
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(853 |
) |
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|
238 |
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Foreign currency transaction losses, net |
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29 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(4,523 |
) |
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(4,836 |
) |
Prepaid expenses and other current assets |
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(1,505 |
) |
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|
(608 |
) |
Income tax receivable |
|
|
1,296 |
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Deferred subscription solicitation costs |
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(34,122 |
) |
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(14,141 |
) |
Other assets |
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(6,585 |
) |
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(3,570 |
) |
Accounts payable |
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|
2,605 |
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|
(1,910 |
) |
Accrued expenses and other current liabilities |
|
|
2,228 |
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|
3,882 |
|
Accrued payroll and employee benefits |
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(2,473 |
) |
|
|
1,162 |
|
Commissions payable |
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|
872 |
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(1,091 |
) |
Current tax payable |
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(168 |
) |
Deferred revenue |
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(2,546 |
) |
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|
3,245 |
|
Other long-term liabilities |
|
|
2,273 |
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|
462 |
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Net cash (used in) provided by operating activities |
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(4,480 |
) |
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|
17,586 |
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES: |
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Sale of short term investments |
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|
10,453 |
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|
27,673 |
|
Cash paid in the acquisition of Intersections Insurance Services Inc. |
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(5 |
) |
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|
(50,609 |
) |
Cash received in the acquisition of Screening International, LLC |
|
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|
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|
|
1,710 |
|
Cash paid in the acquisition of Hide N Seek, LLC |
|
|
(936 |
) |
|
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|
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Acquisition of property and equipment |
|
|
(4,325 |
) |
|
|
(6,113 |
) |
|
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|
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Net cash provided by (used in) investing activities |
|
|
5,187 |
|
|
|
(27,339 |
) |
|
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES: |
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|
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Cash proceeds from stock options exercised |
|
|
940 |
|
|
|
220 |
|
Tax benefit of stock options exercised |
|
|
372 |
|
|
|
|
|
Proceeds from debt issuance |
|
|
450 |
|
|
|
15,000 |
|
Debt issuance costs |
|
|
|
|
|
|
(243 |
) |
Repurchase of treasury stock |
|
|
(471 |
) |
|
|
|
|
Repayments on note payable |
|
|
(2,546 |
) |
|
|
|
|
Note receivable |
|
|
(750 |
) |
|
|
|
|
Capital lease payments |
|
|
(820 |
) |
|
|
(1,062 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(2,825 |
) |
|
|
13,915 |
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE ON CASH |
|
|
71 |
|
|
|
33 |
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
(2,047 |
) |
|
|
4,195 |
|
CASH AND CASH EQUIVALENTSBeginning of period |
|
|
15,580 |
|
|
|
17,555 |
|
|
|
|
|
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|
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CASH AND CASH EQUIVALENTSEnd of period |
|
$ |
13,533 |
|
|
$ |
21,750 |
|
|
|
|
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|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
853 |
|
|
$ |
203 |
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
1,575 |
|
|
$ |
3,892 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Equipment accrued but not paid |
|
$ |
531 |
|
|
$ |
448 |
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
5
INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business
We offer consumers a variety of consumer protection services and other consumer products and
services primarily on a subscription basis. Our services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information. Through our acquisition of Intersections Insurance Services Inc. (IISI), formerly
known as Chartered Marketing Services, Inc., in July of 2006, we expanded our portfolio of services
to include consumer discounts on healthcare, home and auto related expenses, access to professional
financial and legal information, and life, accidental death and disability insurance products. Our
consumer services are offered through relationships with clients, including many of the largest
financial institutions in the United States and Canada, and clients in other industries. In
addition, we also offer our services directly to consumers.
Through our majority owned subsidiary Screening International, LLC (SI), we provide personnel and
vendor background screening services to businesses worldwide. SI was formed in May 2006, with
Control Risks Group, Ltd., (CRG), a company based in the UK. SI has offices in Winchester,
Virginia, London, in the UK, and Singapore. SIs clients include leading United States, UK and global
companies in such areas as manufacturing, healthcare, telecommunications and financial services. SI
provides a variety of risk management tools for the purpose of personnel and vendor background
screening, including criminal background checks, driving records, employment verification and
reference checks, drug testing and credit history checks.
We have three reportable segments. Our Consumer Products and Services segment includes our consumer
protection and other consumer products and services. This segment also includes the data security
breach services we provide to assist organizations in responding to compromises of sensitive
personal information. We help these clients notify the affected individuals, and we provide the
affected individuals with identity theft recovery and credit monitoring services offered by our
clients at no charge to the affected individual. Our Background Screening segment includes the
personnel and vendor background screening services provided by SI. Our Other segment includes the
newly acquired Captira Analytical, LLC (Captira), which provides software and automated service
solutions for the bail bonds industry.
We acquired American Background Services, Inc. (ABI), in November 2004. In May 2006, we created
SI with CRG by combining ABI with CRGs background screening division. We own 55% of SI, and have
the right to designate a majority of the five-member board of directors. CRG owns 45% of SI. We and
CRG have agreed to cooperate to meet any future financing needs of SI, including guaranteeing third
party loans and making additional capital contributions on a pro rata basis, if necessary, subject
to certain capital call and minority protection provisions.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared by us in accordance
with accounting principles generally accepted in the United States of America. Our financial
results include ABI for the period January 1, 2006 through May 30, 2006, and SI, which combined ABI
with CRGs background screening business, for the period May 31, 2006 through September 30, 2007.
We own 55% of SI. Our financial results also include IISI, which we acquired on July 3, 2006, and
Captira, of which we acquired from Hide NSeek on August 7, 2007. In the opinion of management, all adjustments
consisting of only normal recurring adjustments necessary for a fair presentation of the financial
position of the Company, the results of its operations and cash flows have been made. All
significant intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America 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.
6
Cash and Cash Equivalents
We consider all highly liquid investments, including those with an original maturity of three
months or less, to be cash equivalents. Cash and cash equivalents consist primarily of
interest-bearing accounts.
Short-Term Investments
Our investments consist of short-term U.S. Treasury securities with original maturities greater
than 90 days but no greater than nine months. These investments are categorized as held to maturity
and are carried at amortized cost because 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.
Foreign Currency Translation
We account for foreign currency translation and transaction gains and losses in accordance with
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. We
translate the asset and liabilities of our foreign subsidiary at the exchange rates in effect at
the end of the period and the results of operations at the average rate throughout the period. The
translation adjustments are recorded directly as a separate component of shareholders equity, while
transaction gains and losses are included in net income.
Accounts Receivable
Accounts receivable represents trade receivables as well as in-process credit card billings. We
provide an allowance for doubtful accounts on trade receivables based upon factors related to
historical trends, a specific review of outstanding invoices and other information. We also record
a provision for estimated sales refunds and allowances related to sales in the same period that the
related revenues are recorded. These estimates are based on historical refunds and other known
factors.
Goodwill and Other Intangibles
We record as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. The determination of fair value of the identifiable net assets acquired was determined based upon a third party valuation and evaluation of other information.
SFAS No. 142, Goodwill and Other
Intangible Assets, prescribes a two-step process for impairment testing of goodwill and intangibles with indefinite lives, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. We elected to perform our annual analysis during the fourth quarter of each fiscal year as of October 31 and no indicators of impairment have been identified.
Intangible assets subject to amortization include trademarks, customer marketing and technology related asses. Such intangible assets are amortized on a straight-line or accelerated basis over their estimated useful lives, which are generally three to ten years.
Beginning in the nine months ended September 30, 2007, we modified our amortization method for customer related intangible assets prospectively in accordance with SFAS No. 154,
Accounting Changes and Error Corrections.
The goodwill and intangibles balances as of September 30, 2007 pertain to the acquisitions of American Background on November 12, 2004, Screening International on May 31, 2006, Chartered Marketing Services on July 3, 2006 and Captira on August 7, 2007.
Revenue Recognition
We recognize revenue on 1) identity theft, credit management and background services and 2)
accidental death insurance and other membership products.
Our products and services are offered to consumers primarily on a monthly subscription basis.
Subscription fees are generally billed directly to the subscribers credit card, mortgage bill or
demand deposit accounts. The prices to subscribers of various configurations of our products and
services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become
familiar with our services, we sometimes offer free trial or guaranteed refund periods. No revenues
are recognized until applicable trial periods are completed.
Identity Theft, Credit Management and Background Services
We recognize revenue from our services in accordance with Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements as amended by SAB No. 104, Revenue Recognition.
Consistent with the requirements of SAB No.s 101 and 104, revenue is recognized when: a)
persuasive evidence of arrangement exists as we maintain signed contracts with all of our large
financial institution customers and paper and electronic confirmations with individual purchases,
b) delivery has occurred once the product is transmitted over the internet, c) the sellers price
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)
collectibility is reasonably assured as individual customers pay by credit card which has limited
our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the
subscription fee is earned. For subscriptions with refund provisions whereby only the prorated
subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are
recorded when billed and amortized as subscription fee revenue on a straight-line basis over the
subscription period, generally one year. We generate revenue from one-time credit reports and
background screenings which are recognized when the report is provided to the customer
electronically, which is generally at the time of completion.
Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the
service. Annual subscriptions include subscribers with full refund provisions at any time during
the subscription period and pro-rata refund provisions. Revenue related to annual subscription with
full refund provisions is recognized on the expiration of these refund provisions. Revenue related
to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue
earned. An allowance for discretionary subscription refunds is established based on our actual
cancellation experience.
7
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. In addition, we generate revenue
from the sale of one-time credit reports and background screens, which is generally at the time of
completion.
The amount of revenue recorded by us is determined in accordance with Financial Accounting
Standards Boards (FASB) Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, which addresses whether a company should report revenue based on
the gross amount billed to a customer or the net amount retained by us (amount billed less
commissions or fees paid). We generally record revenue on a gross basis in the amount that we bill
the subscriber when our arrangements with financial institution clients provide for us to serve as
the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We generally
record revenue in the amount that we bill our financial institution clients, and not the amount
billed to their customers, when our financial institution client is the primary obligor,
establishes price to the customer and bears the credit risk.
Accidental Death Insurance and other Membership Products
We recognize revenue from our services in accordance with SAB No. 101, as amended by SAB No. 104.
Consistent with the requirements of SAB No.s 101 and 104 revenue is recognized when: a) persuasive
evidence of arrangement exists as we maintain paper and electronic confirmations with individual
purchases, b) delivery has occurred at the completion of a product trial period, c) the sellers
price to the buyer is fixed as the price of the product is agreed to by the customer as a condition
of the sales transaction which established the sales arrangement, and d) collectibility is
reasonably assured as evidenced by our collection of revenue through the monthly mortgage payments
of our customers or through checking account debits to our customers accounts. Revenues from
insurance contracts are recognized when earned. Marketing of our insurance products generally
involves a trial period during which time the product is made available at no cost to the customer.
No revenues are recognized until applicable trial periods are completed.
The amount of revenue recorded by us is determined in accordance with FASBs EITF 99-19, which
addresses whether a company should report revenue based on the gross amount billed to a customer or
the net amount retained by us (amount billed less commissions or fees paid). For insurance products
we generally record revenue on a net basis as we perform as an agent or broker for the insurance
products without assuming the risks of ownership of the insurance products. For membership
products, we generally record revenue on a gross basis as we serve as the primary obligor in the
transactions, have latitude in establishing price and bear credit risk for the amount billed to the
subscriber.
We participate in agency relationships with insurance carriers that underwrite insurance products
offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance
carriers are excluded from our revenues and operating expenses. Insurance premiums collected but
not remitted to insurance carriers as of September 30, 2007 and December 31, 2006 totaled $2.1
million and $1.8 million, respectively, and is included in
accrued expenses and other current liabilities in our consolidated financial statements.
Deferred Subscription Solicitation and Commission Costs
Deferred subscription solicitation and commission costs include direct-response marketing costs and
deferred commissions.
We expense advertising costs as incurred except for direct-response marketing costs.
Direct-response marketing costs include telemarketing, web-based marketing and direct mail costs
related directly to subscription solicitation. In accordance with American Institute of Certified
Public Accountants Statement of Position (SOP) 93-7, Reporting on Advertising Costs,
direct-response advertising costs are deferred and charged to operations on a cost pool basis as
the corresponding revenues from subscription fees are recognized, but not for more than one year.
The recoverability of the amounts capitalized as deferred subscription solicitation and commission
costs are evaluated at each balance sheet date, in accordance with SOP 93-7, 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. Probable remaining future benefit is estimated
based upon historical customer patterns, and represents net revenues less costs to earn those
revenues.
Deferred subscription solicitation costs included in the accompanying balance sheet as of September
30, 2007 and December 31, 2006, were $21.8 million and $11.8 million, respectively. Amortization of
deferred subscription solicitation and commission costs, which are included in either marketing or
commissions expense in our consolidated statement of operations, for the three month periods ended
September 30, 2007 and 2006 was $9.4 million and $5.0 million, respectively. Amortization of
deferred subscription solicitation and commission costs for the nine month periods ended September
30, 2007 and 2006 were $24.1 million and $15.5 million, respectively. Subscription solicitation
costs expensed as incurred related to marketing costs, which are included in marketing expenses in
our consolidated statement of operations, as they did not meet the criteria for deferral in
accordance with SOP 93-7, for
the three months ended September 30, 2007 and 2006 were $215 thousand and $1.4 million,
respectively. Subscription solicitation costs expensed as incurred related to marketing costs in
the nine months ended September 30, 2007 and 2006 were $1.9 million and $4.8 million, respectively.
8
In accordance with SAB No. 101, as amended by SAB No. 104, commissions that relate to annual
subscriptions with full refund provisions and monthly subscriptions are expensed when incurred,
unless we are entitled to a refund of the commissions. If annual subscriptions are cancelled prior
to their initial terms, we are generally entitled to a full refund of the previously paid
commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal
to the unused portion of the subscription, for those annual subscriptions with a pro-rata refund
provision. Commissions that relate to annual subscriptions with full commission refund provisions
are deferred until the earlier of expiration of the refund privileges or cancellation. Once the
refund privileges have expired, the commission costs are recognized ratably in the same pattern
that the related revenue is recognized. Commissions that relate to annual subscriptions with
pro-rata refund provisions are deferred and charged to operations as the corresponding revenue is
recognized. If a subscription is cancelled, upon receipt of the refunded commission from our
client, we record a reduction to the deferred commission.
We have prepaid commission agreements with some of our clients. Under these agreements, we pay a
commission on new subscribers in lieu of ongoing commission payments. We amortize these prepaid
commissions over a period of time not to exceed three years. The prepaid commissions are shown in
prepaid expenses and other current assets on our consolidated balance sheet. Amortization is
included in commissions expense on our consolidated statement of operations.
Software Development Costs
We develop software for internal use and capitalize software development costs incurred during the
application development stage in accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, and EITF 00-2, Accounting for Web Site Development
Cost. 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 useful life, which is generally three to five years.
In accordance with SOP 98-1, the Company regularly reviews its capitalized software projects for impairment in accordance with
the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. We did not have any impairments
in the three or nine months ended September 30, 2007.
Stock-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, which vest
over a set period of time. RSUs are granted at no cost to the employee. Employees do not need to
pay an exercise price to obtain the underlying common stock. All grants or awards made under the
Plans are governed by written agreements between us and the participants.
On January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment. The Company uses the Black-Scholes option-pricing model to value all options and the
straight-line method to amortize this fair value as compensation cost over the requisite service
period. Total share-based compensation expense included in general and administrative expenses on
our consolidated statements of operations for the three months ended September 30, 2007 and 2006
was $737 thousand and $654 thousand, respectively. Total share-based compensation expense included
in general and administrative expenses on our consolidated statements of operations for the nine
months ended September 30, 2007 and 2006 was $2.0 million and $919 thousand, respectively.
The following weighted-average assumptions were used for option grants during the nine months ended
September 30, 2007 and 2006:
Expected Dividend Yield. The Black-Scholes valuation model requires an expected dividend yield as
an input. We have not issued dividends in the past nor do we expect to issue dividends in the
future. As such, the dividend yield used in our valuations for the nine months ended September 30,
2007 and 2006 was zero.
Expected Volatility. The expected volatility of the options granted was estimated based upon the
average volatility of comparable public companies, as described in the SAB No. 107, Share-Based
Payment. Due to the fact that we have only been a public company for approximately three years, we
believe that there is not a substantive share price history to calculate accurate volatility and
have elected to use the average volatility of companies similar to us in size or industry. At the
point when we have enough public history, we will reconsider the utilization of our own stock price
volatility.
Risk-free Interest Rate. The yield on actively traded non-inflation indexed U.S. Treasury notes was
used to extrapolate an average risk-free interest rate based on the expected term of the underlying
grants.
9
Expected Term. The expected term of options granted during the nine months ended September 30, 2007
and 2006 was determined under the simplified calculation provided in SAB No. 107 ((vesting term +
original contractual term)/2). For the majority of grants valued during the nine months ended
September 30, 2007 and 2006, the options had graded vesting over 4 years (25% of the options in
each grant vest annually) with a contractual term of 10 years.
The fair value of each option granted has been estimated as of the date of grant using the
Black-Scholes option pricing model with the following assumptions:
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|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
September 30, 2007 |
|
September 30, 2006 |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
38 |
% |
|
|
44 |
% |
Risk free interest rate |
|
|
4.46 |
% |
|
|
4.80 5.12 |
% |
Expected life of options |
|
6.25 years |
|
5.75 6.25 years |
Income Taxes
We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes,
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. Deferred tax assets are reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not (a likelihood of more than 50%)
that some portion or all of the deferred tax assets will not be realized.
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. On January 1, 2007, we adopted FASB
Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109, Accounting for Income Taxes, as further amended by FIN No. 48-1, Definition of
Settlement in FASB Interpretation No. 48. This interpretation addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN No. 48, 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. Upon adoption of FIN No. 48, and as further described in Note 9, we adjusted retained
earnings by $45 thousand.
Net Income Per Common Share
Basic and diluted income per share are determined in accordance with the provisions of SFAS No.
128, Earnings Per Share. Basic income per common share is computed using the weighted average
number of shares of common stock outstanding for the period. Diluted income 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 convertible debt, preferred stock, options and warrants.
For the three and nine months ended September 30, 2007, options to purchase 3.0 million shares of
common stock have been excluded from the computation of diluted earnings per share as their effect
would not be dilutive. These shares could dilute earnings per share in the future. For the three
and nine months ended September 30, 2006, options to purchase 3.1 million shares of common stock
have been excluded from the computation of diluted earnings per share as their effect would not be
dilutive.
10
A reconciliation of basic income per common share to diluted income per common share is as follows:
|
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|
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands, except per |
|
|
(in thousands, except per |
|
|
|
share data) |
|
|
share data) |
|
Net income available to common shareholders basic and diluted |
|
$ |
1,724 |
|
|
$ |
2,636 |
|
|
$ |
3,543 |
|
|
$ |
8,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingbasic |
|
|
17,156 |
|
|
|
16,788 |
|
|
|
17,086 |
|
|
|
16,746 |
|
Dilutive effect of common stock equivalents |
|
|
404 |
|
|
|
1,067 |
|
|
|
406 |
|
|
|
796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstandingdiluted |
|
|
17,560 |
|
|
|
17,855 |
|
|
|
17,492 |
|
|
|
17,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.10 |
|
|
$ |
0.16 |
|
|
$ |
0.21 |
|
|
$ |
0.53 |
|
Diluted |
|
$ |
0.10 |
|
|
$ |
0.15 |
|
|
$ |
0.20 |
|
|
$ |
0.50 |
|
Segment Reporting
We have adopted SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information,
which defines how operating segments are determined and requires disclosures about products,
services, major customers and geographic areas. We have three reportable segments. Our Consumer
Products and Services segment includes our consumer protection and other consumer products and
services provided by Intersections and Intersections Insurance Services. Our Background Screening
segment includes the personnel and vendor background screening services provided by SI. Our Other
segment includes software solutions for the bail bonds industry provided by Captira.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use in pricing the
asset or liability. The provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are in the process of
evaluating the impact, if any, that SFAS No.157 will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115. SFAS No. 159 permits an
entity, at specified election dates, to choose to measure certain financial instruments and other
items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently, without having to apply complex hedge accounting provisions. SFAS No. 159 is effective
for accounting periods beginning after November 15, 2007. We are in the process of evaluating the impact, if any, that SFAS No. 159 will have on our consolidated financial statements.
In June 2007, EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities, was issued and is effective for fiscal years
beginning January 1, 2008. EITF 07-3 requires that non-refundable advance payments for future
research and development activities should be deferred and capitalized. We are in the process of
evaluating the impact, if any, that EITF 07-3 will have on our consolidated financial statements.
11
Reclassifications
Certain financial statement items from prior periods have been reclassified for consistency with
our current presentation.
3. Business Acquisitions
Captira Analytical
On August 7, 2007, our wholly owned subsidiary, Captira Analytical LLC, acquired substantially all
of the assets of Hide N Seek, LLC (Seller), an Idaho limited liability company, for $3.1
million, which included approximately $105 thousand in acquisition costs. Additional consideration
up to approximately $2.5 million in cash is due if the Company achieves certain cash flow
milestones in the future.
The purchase price consists of the following:
|
|
|
|
|
Cash paid |
|
$ |
833 |
|
Assumption of operating liabilities |
|
|
637 |
|
Forgiveness of loans and accrued interest from Intersections |
|
|
1,567 |
|
Transaction costs |
|
|
105 |
|
|
|
|
|
|
|
$ |
3,142 |
|
|
|
|
|
This
transaction was accounted for as a business combination in accordance with the provisions of SFAS No. 141, Business Combinations.
The estimated determination of the purchase price allocation was based on the fair values of the
acquired assets and liabilities assumed including acquired intangible assets. The estimated
determination was made by management through various means, including obtaining a third party
valuation of identifiable intangible assets acquired and an evaluation of the fair value of other
assets and liabilities acquired.
The following table summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
$ |
13 |
|
Property, plant and equipment |
|
|
|
|
|
|
282 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Marketing related for trade name (estimated useful life of 4 years) |
|
$ |
407 |
|
|
|
|
|
Existing developed technology assets (estimated useful life of 4 years) |
|
|
1,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
|
1,704 |
|
Goodwill |
|
|
|
|
|
|
1,143 |
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
|
|
|
$ |
3,142 |
|
|
|
|
|
|
|
|
|
The $1.1 million of goodwill was assigned to the Other segment. The total amount is expected to be
deductible for income tax purposes. Captira will provide software and automated service solutions
for the bail bonds industry, including office automation, bond inventory and client tracking, and
public records and reports for the purpose of evaluating bond applications.
The pro forma impact of Captira or Hide NSeek on the Companys historical operating results is not material.
Intersections Insurance Services
On July 3, 2006, we acquired all of the outstanding shares of IISI, formerly Chartered Marketing
Services, Inc., for $54.3 million in cash, which included $364 thousand in acquisition costs. $15
million of the purchase price was financed through borrowings on a new term loan with the balance
financed through cash on hand and short term investments. Of the total cash consideration,
approximately $5.5 million was distributed to an escrow account to be used for indemnification
claims as set forth in the escrow agreement. In the nine months ended September 30, 2007, we filed
a claim notice for $4.2 million related to various federal and state tax matters pursuant to the
escrow agreement. All funds remaining in the account after resolution of any claims will be
distributed to the former IISI shareholders in accordance with the acquisition agreement on
September 16, 2008. In order to fund the purchase of IISI, we sold $27.8 million of short-term
investments. There was no gain or loss recognized on the sale of these investments. The results of
IISIs operations have been included in the consolidated financial statements since the date of
acquisition. IISI is a marketer of various insurance products and services. As a result of the
acquisition, we have diversified our client and product portfolios. In addition, IISI provides us
access to new market segments, particularly with large mortgage servicers.
The final determination of the purchase price allocation was based on the fair values of the
acquired assets and liabilities assumed including acquired intangible assets. The determination was
made by management through various means, including obtaining a third party valuation of
identifiable intangible assets acquired and an evaluation of the fair value of other assets and
liabilities acquired.
12
The following table summarizes the final fair values of the assets acquired and liabilities assumed
at the date of acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
$ |
11,047 |
|
Property, plant and equipment |
|
|
|
|
|
|
1,368 |
|
Other assets |
|
|
|
|
|
|
135 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Registered trademarks (estimated useful life of 3 years) |
|
$ |
1,886 |
|
|
|
|
|
Existing subscriber base and client relationships (estimated useful life of 10 years) |
|
|
7,641 |
|
|
|
|
|
Carrier and network provider agreements (estimated useful life of 5 years) |
|
|
731 |
|
|
|
|
|
Existing developed technology assets (estimated useful life of 5 years) |
|
|
1,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
|
11,757 |
|
Goodwill |
|
|
|
|
|
|
43,235 |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
67,542 |
|
Deferred tax and current liabilities |
|
|
|
|
|
|
(8,073 |
) |
Deferred tax and long term liabilities |
|
|
|
|
|
|
(5,192 |
) |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
(13,265 |
) |
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
|
|
|
$ |
54,277 |
|
|
|
|
|
|
|
|
|
The $43.2 million of goodwill was assigned to the Consumer Products and Services segment. Of that
total amount, approximately $27.1 million is expected to be deductible for income tax purposes.
In connection with the IISI acquisition, we commenced integration activities which have resulted in
involuntary terminations. The liability for involuntary termination benefits covers approximately
15 employees, primarily in general and administrative functions. In 2006, we recorded $2.6 million
of severance and severance-related costs in the above allocation of the cost of the acquisition in
accordance with EITF No. 95-3, Recognition of Liabilities in Connection with a Purchase Business
Combination. We expect to pay the severance and severance-related costs of $1.8 million during 2007
and the remaining balance of $234 thousand during 2008.
The following table summarizes the obligations recognized in connection with the IISI acquisition
and the activity to date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Beginning |
|
|
|
|
|
|
Increases |
|
|
Ending |
|
|
|
Balance |
|
|
Payments |
|
|
(Decreases) |
|
|
Balance |
|
Severance costs and contract termination costs |
|
$ |
2,016 |
|
|
$ |
(1,679 |
) |
|
$ |
248 |
|
|
$ |
585 |
|
At January 1, 2007, we recorded a liability of $1.8 million, related to state income tax matters,
net of federal benefit, relating to the acquisition of IISI, offset by an escrow receivable of $1.8
million. The escrow receivable and liability were recorded as a long-term asset and other long-term
liability, respectively, in the accompanying consolidated balance sheet. The amount includes the
estimated state tax, penalties and cumulative interest related to this matter. Total interest
expense on the liability for the three and months ended September 30, 2007 was $33 thousand and $80
thousand, increasing the total liability and escrow receivable balance to approximately $1.9
million.
The following table summarizes unaudited pro forma financial information assuming the IISI
acquisition had occurred on January 1, 2006. This unaudited pro forma financial information does
not necessarily represent what would have occurred if the transaction had taken place on the dates
presented and should not be taken as representative of our future consolidated results of
operations or financial position:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, 2006 |
|
September 30, 2006 |
|
|
(In thousands, except share data) |
|
|
(Unaudited) |
|
(Unaudited) |
Revenue |
|
$ |
55,261 |
|
|
$ |
167,664 |
|
Net Income |
|
$ |
2,636 |
|
|
$ |
8,997 |
|
Basic earning per share |
|
$ |
0.16 |
|
|
$ |
0.54 |
|
Diluted earnings per share |
|
$ |
0.15 |
|
|
$ |
0.51 |
|
13
Screening International, LLC
As described in Note 1, we created SI for the purpose of combining our wholly-owned subsidiary ABI
and CRGs U.K. background screening business, Control Risks Screening Limited (CRS). SI provides
global pre-employment background screening services. As a result of the transaction, we have
expanded our background screening business worldwide.
We initially contributed all of the outstanding shares of our wholly-owned subsidiary, ABI, to SI,
in exchange for a 55% ownership interest in SI. The background screening operations and assets of
CRG were transferred to its wholly-owned subsidiary, CRS, and at closing CRG, initially contributed
all of the outstanding shares of CRS to SI, in exchange for a 45% ownership interest. In addition,
we and CRG have agreed to cooperate to meet any future financing needs of SI, including seeking
third party financing, guaranteeing third party loans and making additional capital contributions
on a pro rata basis, if necessary, subject to certain capital call and minority protection
provisions.
In the three months ended September 30, 2007 we and CRG loaned SI a total of $1.6 million as part
of its ownership commitment. The note is an on demand loan, with interest at 8% per annum.
The final determination of the purchase price allocation was based on the fair values of the
acquired assets and liabilities assumed including acquired intangible assets. The determination was
made by management through various means, including obtaining a third party valuation of
identifiable intangible assets acquired and an evaluation of the fair value of other assets and
liabilities acquired. The purchase price of the acquisition was $11.8 million, which included $529
thousand in acquisition costs.
The final allocation of purchase price, including acquisition costs is as follows (in thousands):
|
|
|
|
|
Current assets |
|
$ |
4,126 |
|
Property and equipment |
|
|
378 |
|
Goodwill |
|
|
6,842 |
|
Intangible assets |
|
|
663 |
|
Deferred tax liability |
|
|
(199 |
) |
|
|
|
|
Total consideration |
|
$ |
11,810 |
|
|
|
|
|
In accordance with SFAS No. 141, we recorded goodwill in the amount of $6.8 million for the excess
of the purchase price, including estimated acquisition costs, over the net assets acquired.
Intangible assets were recorded at a value of $302 thousand for customer related intangible assets
and $361 thousand for marketing related intangible assets. Customer intangible assets will be
amortized over a period of seven years and marketing intangible assets will be amortized over a
period of ten years.
The $6.8 million of goodwill was assigned to the Background Screening segment. The goodwill is not
deductible for tax purposes.
4. Deferred Subscription Solicitation and Commission Costs
Deferred subscription solicitation costs included in the accompanying balance sheet as of September
30, 2007 and December 31, 2006, were $21.8 million and $11.8 million, respectively. Amortization of
deferred subscription solicitation and commission costs, which are included in either marketing or
commissions expenses on our consolidated statement of operations, for the three months ended
September 30, 2007 and 2006 was $9.4 million and $5.0 million, respectively. Amortization of
deferred subscription solicitation and commission costs for the nine months ended September 30,
2007 and 2006 was $24.1 million and $15.5 million, respectively. Subscription solicitation costs
expensed as incurred related to marketing costs as they did not meet the criteria for deferral in
accordance with SOP 93-7, which are included in marketing expenses on our consolidated statement of
operations, for the three months ended September 30, 2007 and 2006 were $215 thousand and $1.4
million, respectively. Subscription solicitation costs expensed as incurred related to marketing
for the nine months ended September 30, 2007 and 2006 were $1.9 million and $4.8 million,
respectively.
14
5. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2007, by
reportable segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Total |
|
Balance, December 31, 2006 |
|
$ |
43,080 |
|
|
$ |
23,583 |
|
|
$ |
|
|
|
$ |
66,663 |
|
Acquired during the year |
|
|
|
|
|
|
|
|
|
|
1,143 |
|
|
|
1,143 |
|
Adjustments |
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 |
|
$ |
43,235 |
|
|
$ |
23,583 |
|
|
$ |
1,143 |
|
|
$ |
67,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill was increased by $155 thousand, net of tax, in the nine months ended September 30, 2007
due to additional severance expense for integration activities related to the IISI acquisition.
Intangibles consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related |
|
$ |
9,652 |
|
|
$ |
(2,503 |
) |
|
$ |
7,149 |
|
|
$ |
9,652 |
|
|
$ |
(1,133 |
) |
|
$ |
8,519 |
|
Marketing related |
|
|
3,385 |
|
|
|
(1,146 |
) |
|
|
2,239 |
|
|
|
2,978 |
|
|
|
(458 |
) |
|
|
2,520 |
|
Technology related |
|
|
2,796 |
|
|
|
(429 |
) |
|
|
2,367 |
|
|
|
1,499 |
|
|
|
(150 |
) |
|
|
1,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets |
|
$ |
15,833 |
|
|
$ |
(4,078 |
) |
|
$ |
11,755 |
|
|
$ |
14,129 |
|
|
$ |
(1,741 |
) |
|
$ |
12,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets are amortized over a period of three to ten years. For the three and nine months
ended September 30, 2007, we had an aggregate amortization expense of $913 thousand and $2.3
million, respectively, which was included in depreciation and amortization expense on the
consolidated statements of operations. For the three and nine months ended September 30, 2006, we
had an aggregate amortization expense of $696 thousand and $878 thousand, respectively. We estimate
that we will have the following amortization expense for the future periods indicated below (in
thousands).
|
|
|
|
|
For the remaining three months ending December 31, 2007 |
|
$ |
946 |
|
For the years ending December 31, |
|
|
|
|
2008 |
|
|
3,284 |
|
2009 |
|
|
2,506 |
|
2010 |
|
|
1,661 |
|
2011 |
|
|
1,156 |
|
2012 |
|
|
606 |
|
Thereafter |
|
|
1,596 |
|
|
|
|
|
|
|
$ |
11,755 |
|
|
|
|
|
6. Other Assets.
The components of our other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
(In thousands) |
|
Prepaid royalty payments |
|
$ |
11,913 |
|
|
$ |
9,705 |
|
Prepaid contracts |
|
|
764 |
|
|
|
512 |
|
Escrow
receivable |
|
|
1,931 |
|
|
|
|
|
Other |
|
|
2,403 |
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
$ |
17,011 |
|
|
$ |
10,425 |
|
|
|
|
|
|
|
|
In February and March 2005, respectively, we entered into agreements with two providers under which
we receive data and other information for use in the new consumer services that we introduced in
the first quarter of 2006. Under these arrangements, we pay non-refundable royalties based on usage of the data or
analytics, and make certain minimum royalty payments in exchange for defined limited exclusivity
rights. Prepaid royalties
will be applied against future royalties incurred and the minimum royalty payments.
15
7. Accrued Expenses and Other Current Liabilities.
The components of our accrued expenses and other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31, 2006 |
|
|
|
(In thousands) |
|
Accrued marketing |
|
$ |
2,936 |
|
|
$ |
1,008 |
|
Accrued cost of sales, including credit bureau costs |
|
|
6,989 |
|
|
|
6,192 |
|
Accrued general and administrative expense and professional fees |
|
|
3,812 |
|
|
|
3,348 |
|
Transition costs |
|
|
585 |
|
|
|
2,016 |
|
Insurance premiums |
|
|
2,078 |
|
|
|
1,830 |
|
Other |
|
|
2,033 |
|
|
|
1,296 |
|
|
|
|
|
|
|
|
|
|
$ |
18,433 |
|
|
$ |
15,690 |
|
|
|
|
|
|
|
|
8. Accrued Payroll and Employee Benefits.
The components of our accrued payroll and employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
December 31,2006 |
|
|
|
(In thousands) |
|
Accrued payroll |
|
$ |
3,215 |
|
|
$ |
4,724 |
|
Accrued
severance |
|
|
|
|
|
|
1,142 |
|
Accrued benefits |
|
|
1,338 |
|
|
|
1,173 |
|
Other |
|
|
47 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
$ |
4,600 |
|
|
$ |
7,073 |
|
|
|
|
|
|
|
|
9. Income Taxes
In June 2006, the FASB issued FIN No 48, Accounting for Uncertainty in Income Taxes, which
clarifies the accounting for uncertainty in income taxes recognized in a companys financial
statements in accordance with SFAS No. 109, Accounting for Income Taxes. The interpretation
prescribes a recognition threshold and measurement attribute criteria for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The
interpretation also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
In connection with our adoption of FIN No. 48, as further amended by FIN No. 48-1, Definition of
Settlement in FASB Interpretation No. 48, as of January 1, 2007, we recorded a net increase to
retained earnings of $45 thousand. The increase to retained earnings includes the effect of
previously unrecognized tax benefits related to research and development tax credits. As of
September 30, 2007, we had total unrecognized tax benefits of $719 thousand related to various
federal and state tax matters. If recognized, an income tax benefit of $268 thousand would be
recorded as a component of income taxes and reduce the effective tax rate.
As of September 30, 2007, we were subject to examination in the U.S. federal tax jurisdiction for
the 2000-2006 tax years and in various state jurisdictions for the 1999-2006 tax years.
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 as
of adoption of $45 thousand is included as a component of other long-term liabilities. No
additional penalties were accrued in the three or nine months ended September 30, 2007.
We have
elected to include interest expense related to uncertain tax
positions as part of interest expense in the consolidated financial
statements. The accrual for estimated interest expense is included as
a component of other long-term liabilities.
During the three and nine months ended September 30, 2007, there were no changes in our uncertain
tax positions. We do not expect that the amounts of unrecognized tax benefits will change
significantly within the next 12 months.
Our effective tax rate for the three months ended September 30, 2007 and September 30, 2006 was
47.1% and 40.1%, respectively. Our effective tax rate for the nine months ended September 30, 2007,
and 2006 was 44.9% and 39.7%, respectively. The increase is primarily a result of losses outside of
the United States, which are subject to tax at rates different than the statutory income tax rate.
10. Leases
In October 2005, we entered into an Equipment Lease Agreement with a financial institution. The
facility can be drawn upon for the purchase of qualifying assets. The term and interest rate for
this facility were set at the time we drew upon this facility. In December 2005, we drew down $1.2
million based on assets purchased during 2005 with a term of three years and an interest rate of
5.86%. Accordingly, we recorded the lease liability at the fair market value of the underlying
assets, which was $1.0 million, resulting in the
recognition of a deferred gain which will be amortized in proportion to the amortization of the
leased assets. As of September 30, 2007, the balance of the lease liability and deferred gain was
$462 thousand and $62 thousand, respectively.
16
11. Notes Payable
On July 3, 2006 we negotiated bank financing in the amount of $40 million. Under terms of the
financing agreements, we were granted a $25 million line of credit and a term loan of $15 million
with interest. The term loan is payable in monthly installments of $278 thousand, plus interest.
Substantially all our assets are pledged as collateral to these loans. As of September 30, 2007,
the outstanding interest rate was 6.67% and principal balance under the credit agreement was $12.5
million.
In addition, SI has an outstanding demand loan of $450 thousand with CRG at an average rate of
8.0%. Other notes outstanding of $28 thousand will be due in 2009.
Aggregate maturities during the subsequent years are as follows (in thousands):
|
|
|
|
|
For the remainder of 2007 |
|
$ |
837 |
|
As of December 31, |
|
|
|
|
2008 |
|
|
3,345 |
|
2009 |
|
|
3,346 |
|
2010 |
|
|
3,333 |
|
2011 |
|
|
1,667 |
|
|
|
|
|
|
|
|
12,528 |
|
Demand loan |
|
|
450 |
|
|
|
|
|
|
|
$ |
12,978 |
|
|
|
|
|
The credit agreement contains certain customary covenants, including among other things covenants
that limit or restrict the incurrence of liens; the making of investments; the incurrence of
certain indebtedness; mergers, dissolutions, liquidation, or consolidations; acquisitions (other
than certain permitted acquisitions); sales of substantially all of our or any co-borrowers
assets; the declaration of certain dividends or distributions; transactions with affiliates (other
than co-borrowers under the credit agreement) other than on fair and reasonable terms; and the
creation or acquisition of any direct or indirect subsidiary of the company that is not a domestic
subsidiary unless such subsidiary becomes a guarantor. We are also required to maintain compliance
with certain financial covenants which include our tangible net worth, 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.
12. Stock Based Compensation
On August 24, 1999, the Board of Directors and stockholders approved the 1999 Stock Option Plan
(the 1999 Plan). The number of shares of common stock that may be issued under the 1999 Plan may
not exceed 4,162,004 shares pursuant to an amendment to the plan executed in November 2001. As of
September 30, 2007, we have 1,490,500 shares remaining to issue. We do not intend to issue further
options under the 1999 Plan. Individual awards under the 1999 Plan may take 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) which became effective immediately prior to the
consummation of the initial public offering. The 2004 Plan provides for the authorization to issue
2,775,000 shares of common stock. As of September 30, 2007, we have 598,504 shares remaining to
issue. 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 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 2006 Plan provides for the authorization to
issue 2,500,000 shares of common stock. As of September 30, 2007, we have 1,777,000 shares
remaining to issue. 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. To
date, only restricted stock units have been granted under the 2006 Plan. These awards generally
vest over three and four years of continuous service.
The compensation committee administers the Plans, selects the individuals who will receive awards
and establishes the terms and conditions of those awards. Shares of common stock subject to awards
that have expired, terminated, or been canceled or forfeited are available for issuance or use in
connection with future awards.
17
The 1999 Plan will remain in effect until August 24, 2009, the 2004 Plan will remain in effect
until May 5, 2014 and the 2006 Plan will remain in effect until May 24, 2016, unless terminated by
the Board of Directors.
Stock Options
The following table summarizes the Companys stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Value |
|
|
|
Shares |
|
|
Price |
|
|
Life |
|
|
(In thousands) |
|
Outstanding at December 31, 2006 |
|
|
3,944,566 |
|
|
$ |
13.10 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
623,000 |
|
|
|
9.90 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(659,141 |
) |
|
|
17.03 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(226,229 |
) |
|
|
5.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
3,682,196 |
|
|
$ |
12.30 |
|
|
|
5.68 |
|
|
$ |
4,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2007 |
|
|
2,867,110 |
|
|
$ |
12.93 |
|
|
|
4.34 |
|
|
$ |
3,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the nine months ended
September 30, 2007 and 2006 was $6.39 and $5.51, 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 nine months ended September 30, 2007 and 2006 was $963 thousand and $998 thousand,
respectively.
Total stock based compensation recognized for stock options, which was included in general and
administrative expense on our consolidated statement of operations, for the three months ended
September 30, 2007 and 2006 was $256 thousand and $81 thousand, respectively. Total stock based
compensation recognized for stock options for the nine months ended September 30, 2007 and 2006 was
$658 thousand and $116 thousand, respectively.
As of September 30, 2007, there was $3.1 million of total unrecognized compensation cost related to
nonvested stock option arrangements granted under the Plans. That cost is expected to be recognized
over a weighted-average period of 3.2 years.
Restricted Stock Units
The following table summarizes our restricted stock unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Remaining |
|
|
Fair |
|
|
|
Number of |
|
|
Contractual |
|
|
Value |
|
|
|
RSUs |
|
|
Life |
|
|
(In thousands) |
|
Outstanding at December 31, 2006 |
|
|
459,000 |
|
|
|
2.2 |
|
|
$ |
4,333 |
|
Granted |
|
|
336,000 |
|
|
|
3.4 |
|
|
|
3,326 |
|
Canceled |
|
|
(34,228 |
) |
|
|
|
|
|
|
(323 |
) |
Vested |
|
|
(93,760 |
) |
|
|
|
|
|
|
(884 |
) |
Forfeited |
|
|
(77,000 |
) |
|
|
|
|
|
|
(726 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
590,012 |
|
|
|
2.6 |
|
|
$ |
5,726 |
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 there was $4.3 million of total unrecognized compensation cost related to
unvested restricted stock units granted under the Plans. That cost is
expected to be recognized over a weighted-average period of 2.6 years.
Total stock based compensation recognized for restricted stock units, which was included in general
and administrative expense on our consolidated statement of operations, for the three months ended
September 30, 2007 and 2006 was $481 thousand and $573, respectively. Total stock based
compensation recognized for restricted stock units for the nine months ended September 30, 2007 and
2006 was $1.4 million and $803 thousand, respectively.
18
13. Segment Reporting
We operate in three primary business segments: Consumer Products and Services, Background
Screening, and Other. These segments are organized based on the differences in the products and
services. Products and services provided by the Consumer Products and Services segment include
daily, monthly or quarterly monitoring of subscribers credit files at one or all three major
credit reporting agencies (Equifax, Experian and TransUnion), credit reports from one or all three
major credit reporting agencies, credit score analysis tools, credit education, an identity theft
recovery unit, security breach services, identity theft cost coverage and, through IISI, consumer
discounts on healthcare, home and auto related expenses, access to professional and legal
information, and life, accidental death and disability insurance products.
The Background Screening segment includes products and services related to pre-employment
background screening, including criminal background checks, driving records, employment
verification and reference checks, drug testing and credit history checks.
The Other segment consists of newly acquired Captira, which provides software and automated service
solutions for the bail bonds industry. The operating impact of the Other segment is not material.
The following table sets forth segment information for the three and nine months ended September
30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products |
|
Background |
|
|
|
|
|
|
and Services |
|
Screening |
|
Other |
|
Consolidated |
|
|
(In thousands) |
Three Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
63,678 |
|
|
$ |
7,714 |
|
|
$ |
11 |
|
|
$ |
71,403 |
|
Depreciation and amortization |
|
|
2,696 |
|
|
|
356 |
|
|
|
80 |
|
|
|
3,132 |
|
Income (loss) before income taxes |
|
$ |
4,278 |
|
|
$ |
(1,185 |
) |
|
$ |
(397 |
) |
|
$ |
2,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
47,758 |
|
|
$ |
7,503 |
|
|
|
|
|
|
$ |
55,261 |
|
Depreciation and amortization |
|
|
2,600 |
|
|
|
295 |
|
|
|
|
|
|
|
2,895 |
|
Income before income taxes |
|
$ |
3,945 |
|
|
$ |
673 |
|
|
|
|
|
|
$ |
4,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
172,506 |
|
|
$ |
22,191 |
|
|
$ |
11 |
|
|
$ |
194,708 |
|
Depreciation and amortization |
|
|
7,902 |
|
|
|
1,023 |
|
|
|
80 |
|
|
|
9,005 |
|
Income (loss) before income taxes |
|
$ |
8,418 |
|
|
$ |
(3,135 |
) |
|
$ |
(397 |
) |
|
$ |
4,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
129,038 |
|
|
$ |
17,280 |
|
|
|
|
|
|
$ |
146,318 |
|
Depreciation and amortization |
|
|
6,628 |
|
|
|
670 |
|
|
|
|
|
|
|
7,298 |
|
Income before income taxes |
|
$ |
13,215 |
|
|
$ |
1,756 |
|
|
|
|
|
|
$ |
14,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
17,136 |
|
|
$ |
2,326 |
|
|
$ |
273 |
|
|
$ |
19,735 |
|
Identifiable assets |
|
$ |
172,680 |
|
|
$ |
13,381 |
|
|
$ |
96 |
|
|
$ |
186,157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
19,697 |
|
|
$ |
2,002 |
|
|
|
|
|
|
$ |
21,699 |
|
Identifiable assets |
|
$ |
144,170 |
|
|
$ |
35,297 |
|
|
|
|
|
|
$ |
179,467 |
|
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We have three reportable segments. Our Consumer Products and Services segment includes our consumer
protection and other consumer products and services. Our Background Screening segment includes the
personnel and vendor background screening services provided by Screening International. Our Other
segment includes software solutions for the bail bonds industry provided by Captira Analytical,
LLC.
Consumer Products and Services
We offer consumers a variety of consumer protection services and other consumer products and
services primarily on a subscription basis. Our services help consumers protect themselves against
identity theft or fraud and understand and monitor their credit profiles and other personal
information. Through our acquisition of Intersections Insurance Services, formerly known as
Chartered Marketing Services, Inc., in July of 2006, we expanded our portfolio of services to
include consumer discounts on healthcare, home, and auto related expenses, access to professional
financial and legal information, and life, accidental death and disability insurance products. Our
consumer services are offered through relationships with clients, including many of the largest
financial institutions in the United States and Canada, and clients in other industries. We also
offer our services directly to consumers.
Our products and services are marketed to customers of our clients, and often are branded and
tailored to meet our clients specifications. Our clients are principally credit card or mortgage
issuing financial institutions, including many of the largest financial institutions in the United
States and Canada. With certain of our financial institution clients, we have broadened our
marketing efforts to access demand deposit accounts and selling at the point of personal contact in
branches. Our financial institution clients currently account for the majority of our existing
subscriber base. We also are continuing to augment our client base through relationships with
insurance companies, mortgage companies, brokerage companies, associations, travel companies,
retail companies, web and technology companies and other service providers with significant market
presence and brand loyalty.
We also offer data security breach services to organizations responding to compromises of sensitive
personal information. We help these clients notify the affected individuals and we provide the
affected individuals with identity theft recovery and credit monitoring services offered by our
clients at no charge to the affected individuals.
With our clients, our services are marketed to potential subscribers through a variety of marketing
channels, including direct mail, outbound telemarketing, inbound telemarketing, inbound customer
service and account activation calls, email, mass media and the internet. Our marketing
arrangements with our clients sometimes call for us to fund and manage marketing activity. The mix
between our company-funded and client-funded marketing programs varies from year to year based upon
our and our clients strategies. We have substantially increased our own investment in marketing
with one or more clients over the past nine months and anticipate this continuing over the next 12
months.
Our client arrangements are distinguished from one another by the allocation between us and the
client of the economic risk and reward of the marketing campaigns. The general characteristics of
each arrangement are described below, although the arrangements with particular clients may contain
unique characteristics:
|
|
|
Direct marketing arrangements: Under direct marketing arrangements, we bear most of the
new subscriber marketing costs and pay our client a commission for revenue derived from
subscribers. These arrangements generally result in negative cash flow over the first
several months after a program is launched due to the upfront nature of the marketing
investments. In some arrangements we pay the client a service fee for access to the clients
customers or billing of the subscribers by the client. |
|
|
|
|
Indirect marketing arrangements: Under indirect marketing arrangements, our client bears
the marketing expense and pays us a service fee or percentage of the revenue. Because the
subscriber acquisition cost is borne by our client under these arrangements, our revenue per
subscriber is typically lower than that under direct marketing arrangements. Indirect
marketing arrangements generally provide positive cash flow earlier than direct arrangements
and the ability to obtain subscribers and utilize marketing channels that the clients
otherwise may not make available. |
|
|
|
|
Shared marketing arrangements: Under shared marketing arrangements, marketing expenses
are shared by us and the client in various proportions, and we may pay a commission to or
receive a service fee from the client. Revenue generally is split in proportion to the
investment made by our client and us. |
20
The classification of a client relationship as direct, indirect or shared is based on whether we or
the client pay the marketing expenses. Our accounting policies for revenue recognition, however,
are not based on the classification of a client arrangement as direct, indirect
or shared. We look to the specific client arrangement to determine the appropriate revenue
recognition policy, as discussed in detail in Note 2 to our consolidated financial statements.
Our typical contracts for direct marketing arrangements, and some indirect and shared marketing
arrangements, provide that after termination of the contract we may continue to provide our
services to existing subscribers, for periods ranging from two years to no specific termination
period, under the economic arrangements that existed at the time of termination. Under certain of
our agreements, however, including most indirect marketing arrangements and some shared marketing
arrangements, the clients may require us to cease providing services under existing subscriptions.
Clients under some contracts may also require us to cease providing services to their customers
under existing subscriptions if the contract is terminated for material breach by us. We look to
the specific client arrangement to determine the appropriate revenue recognition policy.
In 2006 we began expanding our efforts to market our consumer products and services directly to
consumers. We conduct our consumer direct marketing primarily through the internet. We also may
market through other channels, including direct mail, outbound telemarketing, inbound
telemarketing, email and mass media. We are in the process of making a significant investment in
marketing direct to consumers in 2007.
The following table details other selected subscriber and financial data.
Other Data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Subscribers at beginning of period |
|
|
4,850 |
|
|
|
3,744 |
|
|
|
4,626 |
|
|
|
3,660 |
|
New subscribers indirect |
|
|
578 |
|
|
|
707 |
|
|
|
1,659 |
|
|
|
1,875 |
|
New subscribers direct (1) |
|
|
472 |
|
|
|
503 |
|
|
|
1,331 |
|
|
|
892 |
|
Cancelled subscribers within first 90 days of subscription |
|
|
(258 |
) |
|
|
(226 |
) |
|
|
(768 |
) |
|
|
(683 |
) |
Cancelled subscribers after first 90 days of subscription |
|
|
(691 |
) |
|
|
(400 |
) |
|
|
(1,897 |
) |
|
|
(1,416 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscribers at end of period |
|
|
4,951 |
|
|
|
4,328 |
|
|
|
4,951 |
|
|
|
4,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
71,403 |
|
|
$ |
55,261 |
|
|
$ |
194,708 |
|
|
$ |
146,318 |
|
Revenue from transactional sales |
|
|
(8,673 |
) |
|
|
(9,600 |
) |
|
|
(27,229 |
) |
|
|
(22,379 |
) |
Revenue from lost/stolen credit card registry |
|
|
(7 |
) |
|
|
(20 |
) |
|
|
(37 |
) |
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription revenue |
|
$ |
62,723 |
|
|
$ |
45,641 |
|
|
$ |
167,442 |
|
|
$ |
123,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
$ |
23,382 |
|
|
$ |
13,862 |
|
|
$ |
61,155 |
|
|
$ |
36,461 |
|
Commissions paid on transactional sales |
|
|
(2 |
) |
|
|
(6 |
) |
|
|
(11 |
) |
|
|
(25 |
) |
Commissions paid on lost/stolen credit card registry |
|
|
(10 |
) |
|
|
(9 |
) |
|
|
(25 |
) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions associated with subscription revenue |
|
$ |
23,370 |
|
|
$ |
13,847 |
|
|
$ |
61,119 |
|
|
$ |
36,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We classify subscribers from shared marketing arrangements with direct marketing
arrangements. |
Background Screening
Through our majority owned subsidiary Screening International, LLC, we provide personnel and vendor
background screening services to businesses worldwide. Screening International was formed in May
2006, by combining our subsidiary American Background Services, Inc., with the background screening
division of Control Risks Group, Ltd., a company based in the UK.
Other
Our Other segment includes the newly acquired Captira Analytical, LLC (Captira), which provides
software and automated service solutions for the bail bonds industry, including office automation,
bond inventory and client tracking, and public records and reports for the purpose of evaluating
bond applications. On August 7, 2007, our wholly owned subsidiary, Captira Analytical LLC,
acquired substantially all of the assets of Hide N Seek, LLC (Seller), an Idaho limited
liability company, for $3.1 million, which included approximately $105 thousand in acquisition
costs. Additional consideration up to approximately $2.5 million in cash is due if the Company
achieves certain cash flow milestones in the future.
The
pro forma impact of Captira or Hide NSeek on the Companys historical operating results is not material.
21
Critical Accounting Policies
In preparing our consolidated financial statements, we make estimates and assumptions that can have
a significant impact on our financial position and results of operations. The application of our
critical accounting policies requires an evaluation of a number of complex criteria and significant
accounting judgments by us. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain estimates. Actual
results may differ significantly from these estimates under different assumptions, judgments or
conditions. We have identified the following policies as critical to our business operations and
the understanding of our results of operations. For additional information, see Note 2 to our
consolidated financial statements.
Revenue Recognition
We recognize revenue on 1) identity theft, credit management and background services and 2)
accidental death insurance and other membership products.
Our products and services are offered to consumers primarily on a monthly subscription basis.
Subscription fees are generally billed directly to the subscribers credit card, mortgage bill or
demand deposit accounts. The prices to subscribers of various configurations of our products and
services range generally from $4.99 to $25.00 per month. As a means of allowing customers to become
familiar with our services, we sometimes offer free trial or guaranteed refund periods.
Identity Theft, Credit Management and Background Services
We recognize revenue from our services in accordance with Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements as amended by SAB No. 104, Revenue Recognition.
Consistent with the requirements of SAB No.s 101 and 104, revenue is recognized when: a)
persuasive evidence of arrangement exists as we maintain signed contracts with all of our large
financial institution customers and paper and electronic confirmations with individual purchases,
b) delivery has occurred once the product is transmitted over the internet, c) the sellers price
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)
collectibility is reasonably assured as individual customers pay by credit card which has limited
our risk of non-collection. Revenue for monthly subscriptions is recognized in the month the
subscription fee is earned. For subscriptions with refund provisions whereby only the prorated
subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are
recorded when billed and amortized as subscription fee revenue on a straight-line basis over the
subscription period, generally one year. We generate revenue from one-time credit reports and
background screenings which are recognized when the report is provided to the customer
electronically, which is generally at the time of completion.
Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the
service. Annual subscriptions include subscribers with full refund provisions at any time during
the subscription period and pro-rata refund provisions. Revenue related to annual subscription with
full refund provisions is recognized on the expiration of these refund provisions. Revenue related
to annual subscribers with pro-rata provisions is recognized based on a pro rata share of revenue
earned. An allowance for discretionary subscription refunds is established based on our actual
cancellation 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. In addition, we generate revenue
from the sale of one-time credit reports and background screens, which is generally at the time of
completion.
The amount of revenue recorded by us is determined in accordance with Financial Accounting
Standards Boards (FASB) Emerging Issues Task Force (EITF) 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent, which addresses whether a company should report revenue based on
the gross amount billed to a customer or the net amount retained by us (amount billed less
commissions or fees paid). We generally record revenue on a gross basis in the amount that we bill
the subscriber when our arrangements with financial institution clients provide for us to serve as
the primary obligor in the transaction, we have latitude in establishing price and we bear the credit risk for the amount billed to the subscriber. We generally
record revenue in the amount that we bill our financial institution clients, and not the amount
billed to their customers, when our financial institution client is the primary obligor,
establishes price to the customer and bears the credit risk.
22
Accidental Death Insurance and other Membership Products
We recognize revenue from our services in accordance with SAB No. 101, as amended by SAB No. 104.
Consistent with the requirements of SAB No.s 101 and 104, revenue is recognized when: a)
persuasive evidence of arrangement exists as we maintain
paper and electronic confirmations with individual purchases, b) delivery has occurred at the
completion of a product trial period, c) the sellers price to the buyer is fixed as the price of
the product is agreed to by the customer as a condition of the sales transaction which established
the sales arrangement, and d) collectibility is reasonably assured as evidenced by our collection
of revenue through the monthly mortgage payments of our customers or through checking account
debits to our customers accounts. Revenues from insurance contracts are recognized when earned.
Marketing of our insurance products generally involves a trial period during which time the product
is made available at no cost to the customer. No revenues are recognized until applicable trial
periods are completed.
The amount of revenue recorded by us is determined in accordance with FASBs EITF 99-19, which
addresses whether a company should report revenue based on the gross amount billed to a customer or
the net amount retained by us (amount billed less commissions or fees paid). For insurance products
we generally record revenue on a net basis as we perform as an agent or broker for the insurance
products without assuming the risks of ownership of the insurance products. For membership
products, we generally record revenue on a gross basis as we serve as the primary obligor in the
transactions, have latitude in establishing price and bear credit risk for the amount billed to the
subscriber.
We participate in agency relationships with insurance carriers that underwrite insurance products
offered by us. Accordingly, insurance premiums collected from customers and remitted to insurance
carriers are excluded from our revenues and operating expenses. Insurance premiums collected but
not remitted to insurance carriers as of September 30, 2007 and December 31, 2006 totaled $2.1
million and $1.8 million, respectively, and is included in accrued expenses and other current liabilities in our consolidated financial statements.
Deferred Subscription Solicitation and Commission Costs
Deferred subscription solicitation and commission costs include direct-response marketing costs and
deferred commissions.
Our deferred subscription solicitation costs consist of subscription acquisition costs, including
telemarketing, web-based marketing expenses and direct mail such as printing and postage.
Telemarketing, web-based marketing and direct mail expenses are direct response advertising costs,
which are accounted for in accordance with American Institute of Certified Public Accountants
Statement of Position (SOP) 93-7, Reporting on Advertising Costs. The recoverability of amounts
capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date,
in accordance with SOP 93-7, by comparing the carrying amounts of such assets on a cost pool basis
to the probable remaining future benefit expected to result directly from such advertising costs.
Probable remaining future benefit is estimated based upon historical subscriber patterns, and
represents net revenues less costs to earn those revenues. In estimating probable future benefit
(on a per subscriber basis) we deduct our contractual cost to service that subscriber from the
known sales price. We then apply the future benefit (on a per subscriber basis) to the number of
subscribers expected to be retained in the future to arrive at the total probable future benefit.
In estimating the number of subscribers we will retain (i.e., factoring in expected cancellations),
we utilize historical subscriber patterns maintained by us that show attrition rates by client,
product and marketing channel. The total probable future benefit is then compared to the costs of a
given marketing campaign (i.e., cost pools), and if the probable future benefit exceeds the cost
pool, the amount is considered to be recoverable. If direct response advertising costs were to
exceed the estimated probable remaining future benefit, an adjustment would be made to the deferred
subscription costs to the extent of any shortfall.
We amortize deferred subscription solicitation costs on a cost pool basis over the period during
which the future benefits are expected to be received, but no more than 12 months.
In accordance with SAB No. 101, as amended by SAB No. 104, commissions that relate to annual
subscriptions with full refund provisions and monthly subscriptions are expensed in the month
incurred, unless we are entitled to a refund of the commissions. If annual subscriptions are
cancelled prior to their initial terms, we are generally entitled to a full refund of the
previously paid commission for those annual subscriptions with a full refund provision and a
pro-rata refund, equal to the unused portion of their subscription, for those annual subscriptions
with a pro-rata refund provision. Commissions that relate to annual subscriptions with full
commission refund provisions are deferred until the earlier of expiration of the refund privileges
or cancellation. Once the refund privileges have expired, the commission costs are recognized
ratably in the same pattern that the related revenue is recognized. Commissions that relate to
annual subscriptions with pro-rata refund provisions are deferred and charged to operations as the
corresponding revenue is recognized. If a subscription is cancelled, upon receipt of the refunded
commission from our client, we record a reduction to the deferred commission.
We have prepaid commission agreements with some of our clients. Under these agreements, we pay a
commission on new subscribers in lieu of ongoing commission payments. We amortize these prepaid
commissions over a period of time not to exceed three years. The prepaid commissions are shown in
prepaid expenses and other current assets on our consolidated balance sheet. Amortization is
included in commissions expense on our consolidated statement of operations.
23
Software Development Costs
We develop software for internal use and capitalize software development costs incurred during the
application development stage in accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, and EITF 00-2, Accounting for Web Site Development
Cost. 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 useful life, which is generally three to five years.
In accordance with SOP 98-1, the Company regularly reviews its capitalized software projects for
impairment in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. We did not have any impairments in the three or nine months ended
September 30, 2007.
Goodwill and Other Intangible Assets
We record as goodwill the excess of purchase price over the fair value of the identifiable net
assets acquired. The determination of fair value of the identifiable net assets acquired was
determined based upon a third party valuation and evaluation of other information.
SFAS No. 142, Goodwill and Other Intangible Assets, prescribes a two-step process for impairment
testing of goodwill and intangibles with indefinite lives, which is performed annually, as well as
when an event triggering impairment may have occurred. The first step tests for impairment, while
the second step, if necessary, measures the impairment. We elected to perform our annual analysis
during the fourth quarter of each fiscal year as of October 31 and no indicators of impairment have
been identified.
Intangible assets subject to amortization include trademarks, customer, marketing and technology
related asses. Such intangible assets, excluding customer related, are amortized on a straight-line
basis over their estimated useful lives, which are generally three to ten years. Beginning in the
nine months ended September 30, 2007 we modified our amortization method for customer related
intangible assets prospectively in accordance with SFAS No. 154, Accounting Changes and Error
Corrections. Customer related intangible assets are amortized on either a straight-line or
accelerated basis, dependant upon the underlying.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement
should be determined based on the assumptions that market participants would use in pricing the
asset or liability. The provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. We are in the process of
evaluating the impact, if any, that SFAS No.157 will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115. SFAS No. 159 permits an
entity, at specified election dates, to choose to measure certain financial instruments and other
items at fair value. The objective of SFAS No. 159 is to provide entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently, without having to apply complex hedge accounting provisions. SFAS No. 159 is effective
for accounting periods beginning after November 15, 2007. We are in the process of evaluating the impact, if any, that SFAS No. 159 will have on our consolidated financial statements.
In June 2007, EITF 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities, was issued and is effective for the fiscal
years beginning January 1, 2008. EITF 07-3 requires that non-refundable advance payments for
future research and development activities should be deferred and capitalized. We are in the
process of evaluating the impact, if any, that EITF 07-3 will have on our consolidated financial
statements.
24
Results of Operations
We have three reportable segments. Our Consumer Products and Services segment includes our
consumer protection and other consumer products and services. Our Background Screening segment
includes the personnel and vendor background screening services provided by Screening
International. Our Other segment includes software solutions for the bail bonds industry provided
by Captira Analytical, LLC.
Three Months Ended September 30, 2007 vs. Three Months Ended September 30, 2006 (in thousands):
The consolidated results of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Consolidated |
|
Three Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
63,678 |
|
|
$ |
7,714 |
|
|
$ |
11 |
|
|
$ |
71,403 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
9,390 |
|
|
|
|
|
|
|
|
|
|
|
9,390 |
|
Commissions |
|
|
13,992 |
|
|
|
|
|
|
|
|
|
|
|
13,992 |
|
Cost of revenue |
|
|
22,366 |
|
|
|
4,662 |
|
|
|
46 |
|
|
|
27,074 |
|
General and administrative |
|
|
10,804 |
|
|
|
3,882 |
|
|
|
282 |
|
|
|
14,968 |
|
Depreciation and amortization |
|
|
2,696 |
|
|
|
356 |
|
|
|
80 |
|
|
|
3,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
59,248 |
|
|
|
8,900 |
|
|
|
408 |
|
|
|
68,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
4,430 |
|
|
$ |
(1,186 |
) |
|
$ |
(397 |
) |
|
$ |
2,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
47,758 |
|
|
$ |
7,503 |
|
|
$ |
|
|
|
$ |
55,261 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
6,473 |
|
|
|
|
|
|
|
|
|
|
|
6,473 |
|
Commissions |
|
|
7,389 |
|
|
|
|
|
|
|
|
|
|
|
7,389 |
|
Cost of revenue |
|
|
15,940 |
|
|
|
4,027 |
|
|
|
|
|
|
|
19,967 |
|
General and administrative |
|
|
11,299 |
|
|
|
2,516 |
|
|
|
|
|
|
|
13,815 |
|
Depreciation and amortization |
|
|
2,600 |
|
|
|
295 |
|
|
|
|
|
|
|
2,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
43,701 |
|
|
|
6,838 |
|
|
|
|
|
|
|
50,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
4,057 |
|
|
$ |
665 |
|
|
$ |
|
|
|
$ |
4,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Products and Services Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
63,678 |
|
|
$ |
47,758 |
|
|
$ |
15,920 |
|
|
|
33.3 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
9,390 |
|
|
|
6,473 |
|
|
|
2,917 |
|
|
|
45.1 |
% |
Commissions |
|
|
13,992 |
|
|
|
7,389 |
|
|
|
6,603 |
|
|
|
89.4 |
% |
Cost of revenue |
|
|
22,366 |
|
|
|
15,940 |
|
|
|
6,426 |
|
|
|
40.3 |
% |
General and administrative |
|
|
10,804 |
|
|
|
11,299 |
|
|
|
(495 |
) |
|
|
(4.4 |
)% |
Depreciation and amortization |
|
|
2,696 |
|
|
|
2,600 |
|
|
|
96 |
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
59,248 |
|
|
|
43,701 |
|
|
|
15,547 |
|
|
|
35.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
4,430 |
|
|
$ |
4,057 |
|
|
$ |
373 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase in Consumer Products and Services is primarily the result of an increase in
our subscriber base to 5.0 million subscribers for the three months ended September 30, 2007 from
4.3 million for the three months ended September 30, 2006, an increase of 14.4%. The growth in our
subscriber base has been accomplished primarily through direct marketing efforts with a new client
arrangement in 2007 and additional subscribers through continued indirect marketing efforts.
Revenue from direct marketing arrangements, in which we recognize the gross amount billed to the
customer, has increased 10.5% to 70.2% for the three months ended September 30, 2007 from 59.7% in
the three months ended September 30, 2006.
25
The table below shows the percentage of subscribers generated from indirect marketing arrangements.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Percentage of subscribers from indirect marketing arrangements to total subscribers |
|
|
63.1 |
% |
|
|
69.1 |
% |
Percentage of new subscribers acquired from indirect marketing arrangements to total
new subscribers acquired |
|
|
55.1 |
% |
|
|
58.4 |
% |
Percentage of revenue from indirect marketing arrangements to total subscription revenue |
|
|
29.8 |
% |
|
|
40.3 |
% |
Marketing Expenses. Marketing expenses consist of subscriber acquisition costs, including
telemarketing, web-based marketing and direct mail expenses such as
printing and postage. The
increase in marketing is primarily a result of an increased investment in marketing for direct marketing agreements. Amortization of deferred
subscription solicitation costs related to marketing for the three months ended September 30, 2007
and 2006 were $9.2 million and $5.1 million, respectively. Subscription solicitation costs related
to marketing costs expensed as incurred for the three months ended September 30, 2007 and 2006 were
$215 thousand and $1.4 million, respectively.
As a percentage of revenue, marketing expenses increased to 14.7% for the three months ended
September 30, 2007 from 13.6% for the three months ended September 30, 2006 primarily as the result
of an increased investment in marketing for direct marketing
arrangements.
Commission Expenses. Commission expenses consist of commissions paid to clients. The increase is
related to revenue and subscribers from our direct subscription business and a new client
arrangement in 2007.
As a percentage of revenue, commission expenses increased to 22.0% for three months ended September
30, 2007 from 15.5% for three months ended September 30, 2006 primarily due to increased proportion
of revenue from direct marketing arrangements.
Cost of Revenue. Cost of revenue consists of the costs of operating our customer service and
information processing centers, data costs and billing costs
for subscribers and one-time transactional sales. The increase in Consumer Products and Services is
primarily the
result of $6.6 million in increased data costs, higher cost of revenue for initial fulfillment
and customer service costs for new subscribers, which are incurred prior to the commencement of
related revenue due to the trial periods, as well as a 14.4% growth
in our customer base.
As a percentage of revenue, cost of revenue was 35.1% for the three months ended September 30, 2007
compared to 33.4% for the three months ended September 30, 2006.
General and Administrative Expenses. General and administrative expenses consist of personnel and
facilities expenses associated with our executive, sales, marketing, information technology,
finance, and program and account management functions. The decrease in Consumer Products and
Services costs includes a $902 thousand decrease in consulting and professional fees, partially offset by increased
payroll expenses.
Total
share based compensation expense for the three months ended September
30, 2007 and 2006 was $737 thousand and $654 thousand, respectively.
As a percentage of revenue, general and administrative expenses decreased to 17.0% for the three
months ended September 30, 2007 from 23.7% for the three months ended September 30, 2006.
Depreciation and Amortization. Depreciation and amortization expenses consist primarily of
depreciation expenses related to our fixed assets and capitalized software, and the amortization of
our intangible assets. This increase is primarily attributable to the increase in intangible assets
as the result of the modification to the amortization method for customer related intangibles in
2007.
As a percentage of revenue, depreciation and amortization expenses decreased to 4.2% for the three
months ended September 30, 2007 from 5.4% for the three months ended September 30, 2006.
Operating
Income. Operating income in the three months ended
September 30, 2007 for the Consumer Products and Services segment was $4.4 million. This compares with $4.0 million in the three months ended September 30, 2006. Operating income in the three months ended September 30, 2007 includes a net impact of $1.1 million in settlement payments from ongoing partner relationships in the normal course of business. Included in this amount is approximately a $1.5 million settlement with an ongoing marketing partner. The $1.5 million settlement related to prior periods and was calculated utilizing additional information received from the marketing partner in the three months ended September 30, 2007.
26
Background Screening Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
7,714 |
|
|
$ |
7,503 |
|
|
$ |
211 |
|
|
|
2.8 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
4,662 |
|
|
|
4,027 |
|
|
|
635 |
|
|
|
15.8 |
% |
General and administrative |
|
|
3,882 |
|
|
|
2,516 |
|
|
|
1,366 |
|
|
|
54.3 |
% |
Depreciation and amortization |
|
|
356 |
|
|
|
295 |
|
|
|
61 |
|
|
|
20.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
8,900 |
|
|
|
6,838 |
|
|
|
2,062 |
|
|
|
30.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
$ |
(1,186 |
) |
|
$ |
665 |
|
|
$ |
(1,851 |
) |
|
|
(278.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase is attributable to increased revenue in the UK operations of $249 thousand.
Cost of Revenue. Cost of revenue consists of the costs to fulfill background screens and is
composed of direct labor costs, consultant costs, database fees and access fees. This increase is
primarily the result of increased labor costs in the UK.
As a percentage of revenue, cost of revenue was 60.4% for the three months ended September 30, 2007
compared to 53.7% for the three months ended September 30, 2006.
General and Administrative Expenses. General and administrative expenses consist of personnel and
facilities expenses associated with our sales, marketing, information technology, finance, and
account management functions. The increase in Background Screening is primarily a result of
continued investment in both the domestic, UK and Singapore operations.
As a percentage of revenue, general and administrative expenses increased to 50.3% for the three
months ended September 30, 2007 from 33.5% for the three months ended June 30, 2006.
Depreciation and Amortization. Depreciation and amortization expenses consist primarily of
depreciation expenses related to our fixed assets and capitalized software, and the amortization of
our intangible assets.
As a percentage of revenue, depreciation and amortization expenses increased to 4.6% for the three
months ended September 30, 2007 from 3.9% for the three months ended September 30, 2006.
Other Segment
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
Revenue |
|
$ |
11 |
|
|
$ |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
46 |
|
|
|
|
|
General and administrative |
|
|
282 |
|
|
|
|
|
Depreciation and amortization |
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(397 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
On August 7, 2007, our wholly owned subsidiary, Captira Analytical LLC, acquired substantially all
of the assets of Hide N Seek, LLC (Seller), an Idaho limited liability company, for $3.1
million, which included approximately $105 thousand in acquisition costs. The purchase price
consists of approximately $833 thousand in cash and the right to earn an additional amount of
approximately $2.5 million in cash if the company achieves certain cash flow milestones in the
future. In addition, Captira agreed to assume approximately $637 thousand in operating liabilities
of the Seller and we agreed to cancel and forgive $1.5 million in loans from Intersections to the
Seller and $67 thousand of accrued interest.
27
Captira is an early stage business and costs represent implementation efforts for this business.
Income Taxes
Our consolidated effective tax rate for the three months ended
September 30, 2007 was 47.1% as compared to 40.1% for the three months ended September 30, 2006. The increase is primarily a result of losses outside of the United States, which are subject to tax at rates different than the statutory income tax rate.
Nine Months Ended September 30, 2007 vs. Nine Months Ended September 30, 2006 (in thousands):
The consolidated results of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
Background |
|
|
|
|
|
|
|
|
|
and Services |
|
|
Screening |
|
|
Other |
|
|
Consolidated |
|
Nine Months Ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
172,506 |
|
|
$ |
22,191 |
|
|
$ |
11 |
|
|
$ |
194,708 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
25,325 |
|
|
|
|
|
|
|
|
|
|
|
25,325 |
|
Commissions |
|
|
35,830 |
|
|
|
|
|
|
|
|
|
|
|
35,830 |
|
Cost of revenue |
|
|
61,755 |
|
|
|
13,269 |
|
|
|
46 |
|
|
|
75,070 |
|
General and administrative |
|
|
32,966 |
|
|
|
11,020 |
|
|
|
282 |
|
|
|
44,268 |
|
Depreciation and amortization |
|
|
7,902 |
|
|
|
1,023 |
|
|
|
80 |
|
|
|
9,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
163,778 |
|
|
|
25,312 |
|
|
|
408 |
|
|
|
189,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
8,728 |
|
|
$ |
(3,121 |
) |
|
$ |
(397 |
) |
|
$ |
5,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
129,038 |
|
|
$ |
17,280 |
|
|
$ |
|
|
|
$ |
146,318 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
18,454 |
|
|
|
|
|
|
|
|
|
|
|
18,454 |
|
Commissions |
|
|
18,007 |
|
|
|
|
|
|
|
|
|
|
|
18,007 |
|
Cost of revenue |
|
|
45,383 |
|
|
|
8,834 |
|
|
|
|
|
|
|
54,217 |
|
General and administrative |
|
|
28,543 |
|
|
|
6,017 |
|
|
|
|
|
|
|
34,560 |
|
Depreciation and amortization |
|
|
6,628 |
|
|
|
670 |
|
|
|
|
|
|
|
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
117,015 |
|
|
|
15,521 |
|
|
|
|
|
|
|
132,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
12,023 |
|
|
$ |
1,759 |
|
|
$ |
|
|
|
$ |
13,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Consumer Products and Services Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
172,506 |
|
|
$ |
129,038 |
|
|
$ |
43,468 |
|
|
|
33.7 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing |
|
|
25,325 |
|
|
|
18,454 |
|
|
|
6,871 |
|
|
|
37.2 |
% |
Commissions |
|
|
35,829 |
|
|
|
18,007 |
|
|
|
17,822 |
|
|
|
99.0 |
% |
Cost of revenue |
|
|
61,755 |
|
|
|
45,383 |
|
|
|
16,372 |
|
|
|
36.1 |
% |
General and administrative |
|
|
32,966 |
|
|
|
28,543 |
|
|
|
4,423 |
|
|
|
15.5 |
% |
Depreciation and amortization |
|
|
7,902 |
|
|
|
6,628 |
|
|
|
1,274 |
|
|
|
19.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
163,777 |
|
|
|
117,015 |
|
|
|
46,762 |
|
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
8,729 |
|
|
$ |
12,023 |
|
|
$ |
(3,294 |
) |
|
|
(27.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase in Consumer Products and Services is primarily the result of an increase in
our subscriber base to 5.0 million subscribers for the nine months ended September 30, 2007 from
4.3 million for the nine months ended September 30, 2006, an increase of 14.4%. The growth in our
subscriber base has been accomplished primarily from additional insurance and other consumer
products and services as a result of the acquisition of Intersections Insurance Services and
through continued direct marketing efforts with new and existing clients. Revenue from direct
marketing arrangements, in which we recognize the gross amount billed to the customer, has
increased 8.0% to 67.0% in the nine months ended September 30, 2007 as compared to 59.0% for the
nine months ended September 30, 2006. This increase was partially offset by a decline in revenue as
a result of the loss of American Express as a client in May of 2006.
In addition, during the fourth quarter of 2006, we experienced a significant increase in the rate
of credit card declines at one of our clients due to changes to the manner in which the client
administers third-party products. This increase in decline rates occurred simultaneously with a
system conversion implemented at the client, and was originally believed to be the result of
conversion errors. As a result, we continued providing service to these customers throughout the
fourth quarter of 2006 and into the beginning of 2007, while working with the client to investigate
and address the causes of the increased decline rates. In the nine months ended September 30, 2007,
we successfully collected approximately $490 thousand in revenue by re-billing the impacted
customers. We also canceled service to approximately 250 thousand subscribers from this client.
The table below shows the percentage of subscribers generated from indirect marketing arrangements.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, |
|
|
2007 |
|
2006 |
Percentage of subscribers from indirect marketing arrangements to total subscribers |
|
|
63.1 |
% |
|
|
69.1 |
% |
Percentage of new subscribers acquired from indirect marketing arrangements to total
new subscribers acquired |
|
|
55.5 |
% |
|
|
67.8 |
% |
Percentage of revenue from indirect marketing arrangements to total subscription revenue |
|
|
33.0 |
% |
|
|
41.0 |
% |
Marketing
Expenses. The increase is primarily a result of marketing costs related to additional
insurance and membership costs as the result of the acquisition of Intersections Insurance
Services and increased marketing investment related to a new client
arrangement in 2007. Amortization of deferred subscription solicitation costs related to marketing
for the nine months ended September 30, 2007 and 2006 were $23.4 million and $13.7 million,
respectively. Subscription solicitation costs related to marketing costs expensed as incurred for
the nine months ended September 30, 2007 and 2006 were $1.9 million and $4.8 million, respectively.
As a percentage of revenue, marketing expenses increased to 14.7% for the nine months ended
September 30, 2007 from 14.3% for the nine months ended September 30, 2006 primarily as the result
of an increase in direct response marketing.
Commission Expenses. The increase is related to additional insurance and membership costs related
to the acquisition of Intersections Insurance Services and an increase in revenue and subscribers
from our direct subscription business, and a new client arrangement in 2007.
29
As a percentage of revenue, commission expenses increased to 20.8% for nine months ended September
30, 2007 from 14.0% for nine months ended September 30, 2006 primarily due to increased proportion
of revenue from direct marketing arrangements.
Cost of Revenue. The increase in Consumer Products and Services is primarily the result of $2.9 million related to the insurance and membership costs related to the acquisition of
Intersections Insurance Services, an increase in data costs, higher
cost of revenue for initial fulfillment and customer service costs
for new subscribes, which are included prior to the commencement of
related revenue due to trial periods, as well as a 14.4% increase in
our customer base.
As a percentage of revenue, cost of revenue was 35.8% for the nine months ended September 30, 2007
compared to 35.2% for the nine months ended September 30, 2006.
General and Administrative Expenses. The increase in Consumer Products and Services costs includes
$2.3 million related to the additional insurance and membership costs related to the acquisition of
Intersections Insurance Services, additional payroll expenses of $2.0 million, partially offset by
a reduction in consulting and professional fees.
Total
share based compensation expense for the nine months ended September
30, 2007 and 2006 was $2.0 million and $919 thousand, respectively.
As a percentage of revenue, general and administrative expenses decreased to 19.1% for the nine
months ended September 30, 2007 from 22.1% for the nine months ended September 30, 2006.
Depreciation
and Amortization. The increase is primarily due a $1.4 million
increase in amortization due to the acquisition of Intersections
Insurance Services; partially offset by a reduction in
depreciation.
As a percentage of revenue, depreciation and amortization expenses decreased to 4.6% for the nine
months ended September 30, 2007 from 5.1% for the nine months ended September 30, 2006.
Operating Income. Operating income in the nine months ended September 30, 2007 for the Consumer Products and Services segment was $8.7 million. This compares with $12.0 million in the nine months ended September 30, 2006. Operating income in the nine months ended September 30,
2007 includes a net impact of $1.1 million in settlement payments from ongoing partner relationships in the normal course of business. Included in this amount is approximately a $1.5 million settlement with an ongoing marketing partner. The $1.5 million settlement related to prior periods and was calculated utilizing additional information received from the marketing partner in the three months ended September 30, 2007.
Background Screening Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
Difference |
|
|
% |
|
Revenue |
|
$ |
22,191 |
|
|
$ |
17,280 |
|
|
$ |
4,911 |
|
|
|
28.4 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
13,269 |
|
|
|
8,834 |
|
|
|
4,435 |
|
|
|
50.2 |
% |
General and administrative |
|
|
11,020 |
|
|
|
6,017 |
|
|
|
5,003 |
|
|
|
83.1 |
% |
Depreciation and amortization |
|
|
1,024 |
|
|
|
670 |
|
|
|
354 |
|
|
|
52.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
25,313 |
|
|
|
15,521 |
|
|
|
9,792 |
|
|
|
63.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
$ |
(3,122 |
) |
|
$ |
1,759 |
|
|
$ |
(4,881 |
) |
|
|
(277.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The increase in Background Screening is primarily a result of the addition of our
operations in the UK in June 2006 as a result of the formation of Screening International by
combining our subsidiary American Background Information Services, Inc., with the acquisition of
the background screening division of Control Risks Group, and an increase in our domestic
background screening volume.
Cost of Revenue. The increase in Background Screening is primarily a result of the acquisition of
the UK operations in June 2006 of $4.3 million, an increase in our domestic background screening
volumes and continued investment in the overseas operations.
As a percentage of revenue, cost of revenue was 59.8% for the nine months ended September 30, 2007
compared to 51.1% for the nine months ended September 30, 2006.
General and Administrative Expenses. The increase in Background Screening is primarily a result of
the addition of the UK operations in June 2006 of $2.5 million, an increase in our domestic
background screening volume and continued investment in the overseas operations..
30
As a percentage of revenue, general and administrative expenses increased to 49.7% for the nine
months ended September 30, 2007 from 34.8% for the nine months ended September 30, 2006.
Depreciation and Amortization. This increase is primarily as a result of the addition of the UK
operations in June 2006 and continued investment in the overseas operations.
Amortization expense increased $64 thousand from $315 thousand for the nine months ended September
30, 2006 to $379 thousand for the nine months ended September 30, 2007. This increase is primarily
attributable to the increase in intangible assets as the result of the addition of the UK
operations in June 2006.
As a percentage of revenue, depreciation and amortization expenses was 4.6% for the nine months
ended September 30, 2007 and and 3.9% for the nine months ended September 30, 2006.
Other Segment
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
Revenue |
|
$ |
11 |
|
|
$ |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
46 |
|
|
|
|
|
General and administrative |
|
|
282 |
|
|
|
|
|
Depreciation and amortization |
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(397 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
As
previously discussed, we acquired Captira, from Hide NSeek LLC, for $3.1 million. Captira is
an early stage business and costs represent implementation efforts for this business.
Income Taxes
Our consolidated effective tax rate for the nine months ended September 30, 2007 was 44.9% as compared to 39.7% for the nine months ended September 30, 2006. The increase is primarily a result of losses outside of the United States, which are subject to tax at rates different than the statutory income tax rate.
Liquidity and Capital Resources
Cash and cash equivalents were $13.5 million as of September 30, 2007 compared to $15.6 million as
of December 31, 2006. Cash includes $1.5 million held within our 55% owned subsidiary SI, and is
not directly accessible to us. Our cash also includes $2.1 million related to premiums as of
September 30, 2007 and $1.8 million as of December 31, 2006 that we have collected on behalf of insurance carriers and which will be
remitted based on criteria set forth in the individual contracts. Our cash and cash equivalents are
highly liquid investments and consist primarily of short-term U.S. Treasury securities with
original maturity dates of less than 90 days. During the nine months ended September 30, 2007, we
sold $10.5 million of short-term investments primarily to fund business operations, which include
an increased investment in marketing.
Accounts receivable balance as of September 30, 2007 was $26.9 million, including approximately
$4.7 million related to our Background Screening segment, compared to $22.4 million, including
approximately $3.5 million related to our Background Screening segment, as of December 31, 2006.
Our accounts receivable balance consists of credit card transactions that have been approved but
not yet deposited into our account, several large balances with some of the top financial
institutions and accounts receivable associated with background screening clients. The likelihood
of non-payment has historically been remote with respect to clients billed under indirect marketing
arrangements, however, we do provide for an allowance for doubtful accounts with respect to
background screening clients and for a refund allowance, which is included in liabilities on our
consolidated balance sheet, against transactions that may be refunded in subsequent months. This
allowance is based on historical results.
31
Our liquidity is impacted by our ability to generate cash from operations and working capital
management. We had a working capital surplus of $26.2 million as of September 30, 2007 compared to
$26.9 million as of December 31, 2006.
Net cash
used in operations was $4.5 million for the nine months ended September 30, 2007 compared
to net cash provided by operations of $17.6 million for the nine months ended September 30, 2006.
The $22.1 million decrease in net cash provided by operations was primarily the result of increased marketing
expenditures.
Net cash
provided by investing activities was $5.2 million for the nine months ended September 30,
2007 compared to net cash used of $27.3 million during the nine months ended September 30, 2006.
Cash provided in investing activities for the nine months ended September 30, 2007 was primarily attributable to $10.5 million provided in the sale of investments, partially offset by $936 thousand used in the acquisition of Captira.
Cash used in investing activities for the nine months ended September 30, 2006 was primarily attributable to $50.6 million used for the acquisition of Intersections Insurance Services in July 2006, partially offset by $27.7 million provided in the sale of investments for this acquisition.
Net cash
used in financing activities was $2.8 million compared to net
cash provided by financing activities
of $13.9 million for the nine months ended September 30, 2007 and 2006, respectively.
Cash used in financing activities for the nine months ended September
30, 2007 was primarily attributable to $2.5
million in notes payable repayments. In addition, SI has an outstanding demand loan of $450
thousand with CRG at an average rate of 8.0%.
Cash provided by financing activities for the nine months ended September 30, 2006 was primarily attributable to $15.0 million in proceeds from debt issuance for the Intersections Insurance Services acquisition, partially offset by $1.1 million in capital lease payments.
On July 3, 2006, we entered into a $40 million credit agreement with Bank of America, N.A. (Credit
Agreement). The Credit Agreement consists of a revolving credit facility in the amount of $25
million and a term loan facility in the amount of $15 million. Pursuant to the terms of the Credit
Agreement, we agreed that the proceeds of the term loan facility were to be used solely to pay a
portion of the purchase price of the acquisition by us of IISI and related costs and expenses of
such acquisition. We borrowed down the full $15 million term loan facility. The Credit Agreement
provides that the term loan and all loans under the revolving credit facility will generally bear
interest at a rate per annum equal to LIBOR plus an applicable rate per annum ranging from 1.000% to 1.750%. As of September 30, 2007, the outstanding interest
rate was 6.67% and principal balance under the Credit Agreement was $12.5 million.
The Credit Agreement contains certain customary covenants, including among other things covenants
that limit or restrict the incurrence of liens; the making of investments; the incurrence of
certain indebtedness; mergers, dissolutions, liquidation, or consolidations; acquisitions (other
than certain permitted acquisitions); sales of substantially all of our or any co-borrowers
assets; the declaration of certain dividends or distributions; transactions with affiliates (other
than co-borrowers under the credit agreement) other than on fair and reasonable terms; and the
creation or acquisition of any direct or indirect subsidiary by us that is not a domestic
subsidiary unless such subsidiary becomes a guarantor. We are also required to maintain compliance
with certain financial covenants which include our tangible net worth, 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.
Our short-term capital needs consist primarily of day-to-day operating expenses, capital
expenditures, anticipated acquisitions and contractual obligations with respect to facility leases,
capital equipment leases and software licenses. We expect cash flow generated by operations, and
existing cash balances, and existing equity lines of credit will provide sufficient resources to
meet our short-term obligations. Long-term capital requirements will consist of capital
expenditures required to sustain our growth and contractual obligations with respect to facility
leases, capital equipment leases, software licenses and service agreements. We anticipate that
continued cash generated from operations as well as existing cash balances will provide sufficient
resources to meet our long-term obligations.
On April 25, 2005, we announced that our Board of Directors had authorized a share repurchase
program under which we can repurchase up to $20 million of our outstanding shares of common stock
from time to time, depending on market conditions, share price and other factors. The repurchases
may be made on the open market, in block trades, through privately negotiated transactions or
otherwise, and the program has no expiration date but may be suspended or discontinued at any time.
For the three and nine months ended September 30, 2007, the aggregate cost of shares of common
stock repurchased, including commissions, was approximately $471 thousand, leaving an authorized
amount for repurchases of $11.0 million. For the three and nine months ended September 30, 2007,
we repurchased approximately 52 thousand shares of common stock under our repurchase program. The
average price per share, excluding commissions, was $9.09. See Item 2 of Part II of this filing
for further information on this repurchase program.
Contractual Obligations
32
Except as discussed below, there have been no material changes to our contractual obligations since
December 31, 2006, as previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006.
Our other arrangements include payments related to agreements to a service provider under which we
receive data and other information for use in our new fraud protection services. Under these
arrangements we pay royalties based on usage of the data or analytics, and make certain minimum
royalty payments in exchange for defined limited exclusivity rights. In the remaining months in
2007 we are obligated to pay an additional $1.5 million of minimum royalties. Any further minimum
royalty payments in excess of this amount will be paid by us at our sole discretion or are subject
to termination by us under certain contingent conditions.
Forward Looking Statements
Certain written and oral statements made by or on our behalf may constitute forward-looking
statements as defined under the Private Securities Litigation Reform Act of 1995. Words or phrases
such as should result, are expected to, we anticipate, we estimate, we project, or
similar expressions are intended to identify forward-looking statements. These statements are
subject to certain risks and uncertainties that could cause actual results to differ materially
from those expressed in any forward-looking statements. These risks and uncertainties include, but
are not limited to, those disclosed in our Annual Report on Form 10-K for the year ended December
31, 2006 filed on March 16, 2007, and the following important factors: demand for our services,
product development, maintaining acceptable margins, maintaining secure systems, ability to control
costs, the impact of federal, state and local regulatory requirements on our business, specifically
the consumer credit market, the impact of competition, ability to continue our long-term business
strategy including growth through acquisition, ability to attract and retain qualified personnel
and the uncertainty of economic conditions in general. Readers are cautioned not to place undue
reliance on forward-looking statements, since the statements speak only as of the date that they
are made, and we undertake no obligation to publicly update these statements based on events that
may occur after the date of this report.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate
We had cash and cash equivalents totaling $13.5 million and $15.6 million at September 30, 2007 and
December 31, 2006, respectively. Our cash and cash equivalents are highly liquid investments and
consist primarily of short term U.S. Treasury securities with original maturity dates of less than
90 days. We do not enter into investments for trading or speculative purposes. Due to the short
term nature of these investments, we believe that we do not have any material exposure to changes
in the fair value of our investment portfolio as a result of changes in interest rates. Declines in
interest rates, however, will reduce future investment income.
Market risks related to our operations result primarily from changes in interest rates. Our
interest rate exposure is related to long-term debt obligations. A significant portion of our
interest expense is based upon changes in the benchmark interest rate (LIBOR). Based upon our
outstanding long term debt subject to variable interest rates as of September 30, 2007 of $12.5
million, a 60 basis point movement in the LIBOR rate would result in a change in annual pretax
interest expense of approximately $76 thousand based on our current level of borrowing.
Foreign Currency
We have a foreign majority-owned subsidiary, Screening International, and therefore, are subject to
foreign currency exposure. Screening Internationals wholly-owned subsidiary, Control Risks
Screening Limited, is located in the UK, conducts international business and prepares financial
statements per UK statutory requirements in British pounds. Control Risks Screenings financial
statements are translated to US dollar for US GAAP reporting. As a result, our financial results
are affected by fluctuations in the foreign currency exchange rates. The impact of the transaction
gains and losses on the income statement was a loss of $29 thousand for the nine months ended
September 30, 2007. We have determined that the impact of the conversion has an insignificant
effect on our consolidated financial position, results of operations and cash flows and we believe
that a near term 10% appreciation or depreciation of the US dollar will continue to have an
insignificant effect on our consolidated financial position, results of operations and cash flows.
33
We have international sales in Canada and, therefore, are subject to foreign currency rate
exposure. We collect fees from subscriptions in Canadian currency and pay a portion of the related
expenses in Canadian currency, which mitigates our exposure to currency exchange rate risk. As a
result, our financial results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions. We have determined that the impact of the depreciation
of the U.S. dollar had an insignificant effect on our financial position, results of operations and
cash flows and we believe that a near term 10% appreciation or depreciation of the U.S. dollar will
continue to have an insignificant effect on our financial position, results of operations and cash
flows.
We have commenced startup operations in Singapore and therefore, are subject to foreign currency
rate exposure. Due to the limited nature of operations to date, we believe that we do not have any
material exposure to changes in the foreign currency.
We do not maintain any derivative instruments to mitigate the exposure to translation and
transaction risk; however, this does not preclude our adoption of specific hedging strategies in
the future. We will assess the need to utilize financial instruments to hedge currency exposures on
an ongoing basis. The foreign exchange transaction gains and losses are included in our results of
operations, and were not material for all periods presented.
Fair Value
We do not have material exposure to market risk with respect to investments, as our investments
consist primarily of short term U.S. Treasury securities. We do not use derivative financial
instruments for speculative or trading purposes; however, this does not preclude our adoption of
specific hedging strategies in the future.
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its management, including the
Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of the design
and operation of its disclosure controls and procedures (as such term is defined in Rule
13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Our officers
have concluded that our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934
is accumulated and communicated to our management, including our chief executive officer and
principal financial officer, to allow timely decisions regarding required disclosure. Our
disclosure controls and procedures are designed, and are effective, to give reasonable assurance
that the information required to be disclosed by us in reports that we file under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
There have been no changes in our internal control over financial reporting during the three months
ended September 30, 2007 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers
On April 25, 2005, we announced that our Board of Directors had authorized a share repurchase
program under which we can repurchase up to $20 million of our outstanding shares of common stock
from time to time, depending on market conditions, share price and other factors. The repurchases
may be made on the open market, in block trades, through privately negotiated transactions or
otherwise, and the program has no expiration date but may be suspended or discontinued at any time.
The following table contains information for shares repurchased during the three months ended
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Approximate Dollar Value |
|
|
|
|
|
|
|
|
|
|
|
Purchased as Part of |
|
|
of Shares that May Yet Be |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Publicly |
|
|
Purchased Under the |
|
Fiscal Period |
|
Shares Purchased |
|
|
per Share (1) |
|
|
Announced Plans Programs |
|
|
Plans or Programs |
|
August 1, 2007
through August 31,
2007 |
|
|
37,700 |
|
|
$ |
9.02 |
|
|
|
37,700 |
|
|
$ |
11,096,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2007
through September
30, 2007 |
|
|
13,900 |
|
|
$ |
9.32 |
|
|
|
13,900 |
|
|
$ |
10,966,683 |
|
|
|
|
|
TOTAL |
|
|
51,600 |
|
|
$ |
9.10 |
|
|
|
51,600 |
|
|
$ |
10,966,683 |
|
|
|
|
|
|
|
(1) |
|
Average price per share excludes commissions. |
34
For the three months ended September 30, 2007, the aggregate cost of shares of common stock
repurchased, including commissions, was approximately $471 thousand.
Item 6. Exhibits
|
|
|
2.1
|
|
Asset Purchase Agreement dated August 7, 2007 by and among
Intersections Inc., Captira Analytical, LLC, Hide N See, LLC and
certain of the members of Hide N Seek, LLC (Incorporated by
reference to Exhibit 2.1 filed with the Form 8-K on August 8, 2007. |
|
|
|
31.1*
|
|
Certification of Michael R. Stanfield, Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Madalyn C. Behneman, Principal 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 Madalyn C, Behneman, Principal Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. |
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
Date: November 8, 2007 |
|
|
|
|
|
|
|
|
INTERSECTIONS INC. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Madalyn C. Behneman
Madalyn C. Behneman
Principal Financial Officer
|
|
|
36