UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
----- Act of 1934 for the fiscal year ended June 30, 2005
or
Transition report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934 for the transition period from
________ to ________.
Commission File No. 0-21527
VERTRUE INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 06-1276882
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(State of Incorporation) I.R.S. Employer
Identification No.)
680 Washington Boulevard
Stamford, Connecticut 06901
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(Address of principal executive offices) (Zip Code)
(203) 324-7635
--------------
(Registrant's telephone number,
including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.01
Par Value
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.
[ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ X ] Yes [ ] No
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [ X ] No
The aggregate market value of voting stock held by non-affiliates of the
registrant at December 31, 2004 was $217,443,000. This was computed by reference
to the closing price of the registrant's Common Stock at December 31, 2004. For
purposes of this calculation, all directors, executive officers and shareholders
reporting beneficial ownership of more than 10% of the registrant's Common Stock
are considered to be affiliates.
The number of shares of Common Stock outstanding as of August 12, 2005 was
9,742,347.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders of
Vertrue Incorporated are incorporated by reference in Parts II and III of this
report.
Index
Page
----
Part I Item 1. Business 1
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
Part II Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
Item 9A. Controls and Procedures 24
Item 9B. Other Information 25
Part III Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 25
Item 13. Certain Relationships and Related Transactions 25
Item 14. Principal Accountant Fees and Services 26
Part IV Item 15. Exhibits and Financial Statement Schedules 26
Signatures 27
Exhibit Listing 28
Part I
Item 1. Business
--------
OVERVIEW
Vertrue Incorporated ("Vertrue" or the "Company") is a leading consumer services
marketing company. The Company offers both subscription and transaction based
services focused on meeting consumer needs in large spending categories -
healthcare, personal property, discounts, security and insurance and personals.
The Company's service offerings provide consumers everyday savings,
event-oriented discounts, benefits that provide the consumer with peace of mind
and access to information and opportunities for self-enrichment.
Vertrue operates a group of businesses that have a diverse mix of product
offerings that reach consumers through direct marketing efforts. Vertrue markets
its services through inbound call marketing, internet marketing, television and
newspaper advertising, outbound telemarketing and direct mail. Over the last
three years, Vertrue has increased its use of the internet to market, deliver
and service its customers. During 2005, revenues before deferral generated
through internet marketing efforts were 29% of total revenues before deferral.
Looking ahead to 2006, Vertrue expects the internet channel to continue to grow.
The Company has two reportable business segments: Marketing Services, formerly
known as the Membership segment, and Personals. The Marketing Services business
segment provides discounted products and services to consumers on a subscription
basis. The Personals business segment provides both web-based and phone-based
personals services to its customers.
The Company was incorporated in 1989 in Delaware under the name Cardmember
Publishing Corporation. On October 17, 1996, the Company completed an initial
public offering of its stock and changed its name to MemberWorks Incorporated.
On October 13, 2004, the Company began doing business as Vertrue Incorporated
and on November 18, 2004, shareholders approved an amendment to the Company's
charter formally changing its name to Vertrue Incorporated. The name change was
intended to reflect the ever-broadening base of services that the Company offers
to its customers.
MARKETING SERVICES SEGMENT
The Marketing Services segment designs membership programs that provide
consumers everyday savings, event-oriented discounts, benefits that provide
consumers with peace of mind and access to information. The membership programs
provide substantial benefits to members, clients and vendors. Members benefit by
receiving an array of programs and services in the categories of healthcare,
personal property, discounts, security and insurance. Clients benefit from the
increased revenue stream that partnering with Vertrue generates or by
strengthening the loyalty of their customer base. Vendors benefit by obtaining
access to a large number of demographically attractive consumers with minimal
incremental marketing costs.
When consumers agree to enroll in a program, they generally receive a trial
membership. During this time, the member may use the program's services without
obligation, as outlined in the marketing solicitation. Membership materials,
which include a membership brochure and a membership card with a membership
identification number, are either mailed or emailed to the member during the
trial period. The brochure outlines in detail the benefits offered and contains
a toll-free number and a website address, which may be used to access membership
benefits and information. In the event that a member elects not to participate
in the membership program, he or she can call a toll-free number or log on to
the website during the trial period to cancel the service without incurring any
additional charges. Trial memberships are generally for a period ranging from 7
to 30 days and there are no conditions with respect to the ability of the
consumer to terminate a trial membership.
If the membership is not canceled during the trial period, the member is charged
the annual or monthly membership fee, depending upon the applicable payment plan
offered. Annual members who do not cancel their memberships after the initial
one year membership term receive a renewal notice in advance of each membership
year and are charged for the succeeding year's membership fee. During the course
of an initial annual membership term or renewal term, a member may cancel his or
her membership in the program generally for a pro rata refund of the membership
fee based on the remaining portion of the membership period at the time of the
cancellation. Monthly members are billed each month after the trial period ends
and continue to be billed each month until the member cancels. During 2005,
approximately 85% of the Marketing Services segments' new member enrollments
were in a monthly payment program. Membership fees vary depending upon the
particular services offered in the membership program. The Marketing Services
segment had approximately 5.7 million members as of June 30, 2005.
Membership service programs are also delivered through loyalty arrangements with
client partners. The Marketing Services segment works with its clients to
incorporate elements from one or more of the standard membership programs and
designs a custom program for the client. The client then either provides the
1
customized membership program to its customers as a value-added feature or
resells the customized membership program. In some cases, the client provides
loyalty memberships to its customers free of charge and pays the periodic
membership fee for each customer's membership. In other cases, the client
charges a reduced fee to its customer. Under these loyalty programs, the
Marketing Services segment does not pay for the marketing costs to solicit
memberships. Instead, the client offering the memberships is responsible for the
marketing.
Products. The Marketing Services segment partners with leading, brand name
merchants and service companies to offer members valuable packages of
members-only benefits. Programs are available in English, French and Spanish and
can be customized for specific clients, customer segments or consumer
communities. Membership programs are packaged around popular spending categories
and offer potential savings greater than the program fee. The membership
programs fall into the four consumer spending categories described below.
Healthcare
Health, wellness and self-improvement programs offer savings on nearly every
healthcare product and service, including prescription drugs, vitamins and
supplements, eye glasses and contact lenses, hearing aides, durable medical
equipment and select consumer products. These programs also offer discounts on
professional services, including medical, dental, vision, hearing, chiropractic,
alternative medicine, elder care, diet, exercise and other personal health
services. These programs offer real solutions for the uninsured and
underinsured.
Personal Property
Personal property programs offer consumers online access to listings of
discounted homes and autos. Members also have access to complementary services
such as a mortgage center, roadside assistance, lemon checker and extended
warranties.
Security and Insurance
Security and insurance programs offer discounts on products and services that
enhance the consumer's sense of security and well being. These programs provide
access to services that help manage privacy and protection, including identity
theft insurance, credit card registration and credit reporting, scoring and
monitoring. Insurance programs offer competitively priced insurance products,
including life, supplemental health, accidental death, short-term and long-term
disability, warranty and identity theft insurance coverage. Other program
benefits include 24-hour protection services, roadside assistance and financial,
tax and retirement consultation services.
Discounts
Discount programs offer exclusive access to members-only savings with leading
brand name merchants covering a wide range of consumer spending categories,
including travel, transportation, entertainment, dining, shopping, home
improvement and small business. Savings are available through discounted gift
cards, coupons, promotion codes and rebates.
The Company's loyalty programs provide clients with a wide range of benefits to
offer or market to their customers and include stand-alone benefits, reward
point accumulation and management, gift certificates, merchandise and travel
reward redemption. The Marketing Services segment's versatility in designing
loyalty strategies and providing turnkey execution is essential in supporting
and promoting the client's brand.
Vendors. The Marketing Services segment has established a large network of
vendor relationships that deliver the discounts and services in each of the
various membership programs. The Marketing Services segment evaluates and
engages only those vendors who can cost-effectively deliver high quality
products and services. Participating vendors generally benefit by obtaining
access to a large number of demographically attractive consumers with minimal
incremental marketing costs. Specifically, vendors gain access and marketing
exposure to the Marketing Services' membership base, and in almost all cases,
pursuant to contractual arrangements, provide members-only discounts on products
or services. The Marketing Services segment generally does not receive payments
from these vendors for rendering services to the members and, in certain cases,
it pays the vendors a fee based on the number of members in the membership
program or based on other agreed upon factors.
Contracts with vendors are generally for one year or more with subsequent
one-year renewal terms at Vertrue's option. In most cases, vendors may cancel
contracts only for cause and subject to notice provisions that provide the
Marketing Services segment time to locate a substitute vendor. Most vendor
contracts are non-exclusive and require vendors to maintain the confidentiality
of the contract terms.
2
Marketing and Distribution. The Marketing Services segment solicits members for
its programs using direct marketing methods, including inbound call marketing,
referred to as MemberLink, online marketing, newspaper and magazine advertising,
television advertising, direct mail and outbound telemarketing.
MemberLink inbound call marketing occurs when clients' inbound callers who meet
certain criteria are offered membership programs by the client's service
representative or by a Marketing Services membership service representative
through a call transfer. Vertrue pays the client either a royalty for initial
and renewal membership fees or a fee per marketing offer or per sale.
Online marketing is conducted through arrangements with internet service
providers, online retailers and online marketers. The marketing methods include
banner ads, pop-up boxes and search engine marketing. The Marketing Services
segment buys advertising or pays a royalty on membership fees generated or a fee
per impression or per sale. The Marketing Services segment also makes use of
affiliate marketing. New members sign up for membership programs by clicking
through to the Marketing Services segment's websites through links posted on
affiliate partner websites.
Clients. Membership programs are marketed, in many cases, through arrangements
with clients, which include banks and other financial institutions, e-commerce
companies, direct response television companies, catalog companies, retailers
and other organizations with large numbers of individual customers. These
companies have outsourced the implementation of membership programs to
providers, such as Vertrue, that are able to apply advanced database systems to
capture, process and store consumer and market information, use their experience
to provide effective membership programs and realize economies of scale. In
addition, businesses that outsource their membership programs demand that the
program provider have the expertise to continue to introduce innovative new
programs and have resources, such as extensive vendor networks and an
experienced management team, to launch membership programs quickly and
successfully. Clients receive royalty payments in exchange for providing new
members or access to potential members.
The Marketing Services segment's clients supply substantially all the
information for marketing efforts in accordance with strict consumer privacy
safeguards. As a result, the ability to market a new program to an existing
customer base or an existing program to a new customer base may depend on first
obtaining the client's approval.
Contracts with clients typically grant the Marketing Services segment the right
to indefinitely continue to provide membership services directly to the clients'
account holders even if the client terminates its contract. Many client
contracts may be terminated by the client upon 30 to 90 days notice without
cause and without penalty.
Membership programs sponsored by the Company's largest client, West Corporation,
accounted for 14% of total revenues for the year ended June 30, 2005. A loss of
this client could have a material effect on the Company's results of operations.
Member Service. Providing high quality service to members is an extremely
important factor in retaining members and strengthening the affinity of the
clients' customers. Currently membership call centers are located in Montreal,
Canada, Goleta, California, Houston, Texas, Omaha, Nebraska and Chicago,
Illinois, with a total of over 1,300 membership service representatives. All new
membership service representatives are required to attend on-the-job training.
Through its training programs, systems and software, the Marketing Services
segment seeks to provide members with friendly, rapid and effective answers to
members' questions. Members can access their benefits 24 hours a day via the
program's website or automated telephone response technology. The Marketing
Services segment also works closely with its clients' customer service personnel
to ensure that their representatives are knowledgeable in matters relating to
the membership programs.
Technology. The Marketing Services segment has invested substantially in new
technology, including data warehousing and mining capabilities, and various
Internet applications which work together to allow the Company to effectively
and efficiently market its services to members. New member information is
received from clients daily and from internet customers immediately. That
information is maintained on core infrastructure systems that drive information
constantly to the customer service platform ("CRM"), fulfillment, billing and
data warehousing systems. This allows for rapid fulfillment of member
information kits as well as other benefits. All membership information is
maintained on a state-of-the-art CRM system, which allows extremely responsive
targeted call center interactions. Vertrue receives confirmation of billing data
from merchant processors on a regular basis, permitting Vertrue to update the
status of each member, including member profile information.
In providing quality service to its members, the management information systems
interact with the Company's advanced call routing system in order to display
member profile information prior to answering the call, allowing membership
service representatives to have the best possible information prior to serving
those members. The telecommunications systems also monitor the performance
quality of the membership service representatives and other aspects of business
through sophisticated reporting capabilities.
3
In addition, the Marketing Services segment has increased its use of the data
warehousing capabilities to review, analyze and model the membership base to
optimize service and to market additional products most appropriate for each
member.
Competition. The Marketing Services segment believes that the principal
competitive factors in the membership services industry include the ability to
identify, develop and offer innovative programs, the quality and breadth of
programs offered, competitive prices and in-house marketing expertise.
Competitors offer programs which provide services similar to or compete directly
with those provided by the Marketing Services segment. Some of these competitors
have substantially larger customer bases and greater financial and other
resources. To date, the Marketing Services segment has effectively competed with
such competitors. However, there can be no assurance that competitors will not
increase their emphasis on programs similar to those offered by the Marketing
Services segment; provide programs comparable or superior to those provided by
the Marketing Services segment at lower membership prices; adapt more quickly to
evolving industry trends or changing market requirements; or that new
competitors will not enter the market or that other businesses will not
introduce competing programs. Such increased competition may result in price
reductions, reduced marketing margins or loss of market share, any of which
could materially adversely affect the segment's business, financial condition
and results of operations. Additionally, because contracts between clients and
program providers are often exclusive with respect to a particular service,
potential clients may be prohibited from contracting with the Marketing Services
segment to promote a program if the services are similar to or overlap the
services provided by an existing program of a competitor.
PERSONALS SEGMENT
The Personals segment consists of the Lavalife business. Lavalife offers
web-based and phone-based personals services to its customers. Lavalife's
open-minded approach to dating allows members to choose how they want to "click
with other singles" by offering different dating communities including dating,
relationships and intimate encounters. These services allow customers to
interact with each other from anywhere in real time by phone, email, text chat
or video. To acquire new users and retain existing customers, Lavalife relies on
its innovative products, marketing relationships with major media groups,
advertising campaigns in large markets, a widely recognized brand name and an
advanced technology infrastructure. These interactive services allow customers
who want to enhance their social lives to search for a date, meet new people and
communicate with other customers in a real time, "Anywhere," "Anytime" and
"Anyhow" environment.
Lavalife employs a transactional business model, in which customers buy
non-refundable credits up front and spend those credits only when they want to
interact with other customers. Lavalife's competitors generally employ a
subscription business model, in which customers pay a fixed periodic fee.
Lavalife believes a transactional model is more attractive to new customers, who
will join due to a lower initial cost and the ability to easily control their
spending. The customer determines when to use the credits to communicate with
other customers. Furthermore, once a customer has an account balance, the
customer has a strong financial incentive to return to use the remaining
credits. To further develop brand loyalty and to encourage return visits,
Lavalife continues to add features and functionality to its existing service
offerings and introduce new innovative interactive products. Lavalife continues
to employ new distribution channels, recently expanding the distribution of its
phone-product by marketing it through mobile carriers.
Lavalife utilizes an integrated network to support both its phone and web
operations. The Lavalife infrastructure for both the IVR and the web is built on
state of the art, industry standard, high capacity technology designed to
support the significant level of member interaction and a quality experience.
The technology supports such high demand features as live chat, voice messaging,
quick response searches for "who's online now" and instant messaging. The
network operations center, located in Toronto, Canada, allows the personals
business to scale both its web and phone operations, as well as support text
messaging operations, with full remote management capabilities for all services.
The personals business is very competitive and highly fragmented. Primary
competitors of the various brands that comprise personals include numerous
online and offline dating and matchmaking services (both free and paid), some of
which operate nationwide and some of which operate locally, and the personals
sections of newspapers and magazines. In addition to broad-based personals
services, there are numerous niche websites and offline personals services that
cater to specific demographic groups.
4
ACQUISITIONS
On January 1, 2005, the Company completed the acquisition of certain of the
assets of My Choice Medical Holdings, Inc. ("MCM"), a privately held advertising
and practice management company serving cosmetic surgeons throughout the United
States. The Company acquired certain of the assets of MCM in order to expand its
consumer offerings to include cosmetic surgery. The results of MCM have been
included in the Corporate and Other business unit.
On November 30, 2004, the Company completed the acquisition of certain of the
assets of Bargain Network, Inc. ("Bargain"), a privately held provider of
premier pricing services for homes and vehicles. The Company acquired certain of
the assets of Bargain in order to expand its direct to consumer marketing
presence and to expand its discounted consumer offerings to include personal
property. The results of Bargain have been included in the Marketing Services
segment.
GOVERNMENT REGULATION
The Company markets its products and services through various distribution
channels including internet, print, direct mail and telemarketing. These
channels are regulated at both the state and federal levels and the Company
believes that these marketing methods may increasingly be subject to such
regulation, particularly in the area of consumer privacy. Regulations may limit
the Company's ability to solicit new members or to offer one or more products or
services to existing members. The telemarketing industry has become subject to
an increasing amount of federal and state regulation. For example, the Federal
Telephone Consumer Protection Act of 1991 limits the hours during which
telemarketers may call consumers and prohibits the use of automated telephone
dialing equipment to call certain telephone numbers. Additionally, the Federal
Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and Federal
Trade Commission ("FTC") regulations, including the Telemarketing Sales Rule, as
amended, promulgated thereunder, prohibit deceptive, unfair or abusive practices
in telemarketing sales. Both the FTC and state attorneys general have authority
to prevent marketing activities deemed by them to be "unfair or deceptive acts
or practices." Further, some states have enacted laws and others are considering
enacting laws targeted directly at regulating telemarketing and/or internet
marketing practices, and there can be no assurance that any such laws, if
enacted, will not adversely affect or limit the Company's current or future
operations. Compliance with these regulations is generally the responsibility of
the Company, and the Company could be subject to a variety of enforcement and/or
private actions for any failure to comply with such regulations. The Company's
provision of products and services requires the Company to comply with certain
state regulations, changes in which could materially increase the Company's
operating costs associated with complying with such regulations. Noncompliance
with any rules and regulations enforced by a federal or state consumer
protection authority may subject the Company or its management to fines or
various forms of civil or criminal prosecution, any of which could have a
material adverse affect on the Company's business, financial condition and
results of operations. Also, the media often publicizes perceived noncompliance
with consumer protection regulations and violations of notions of fair dealing
with consumers that make the membership programs industry susceptible to
peremptory charges of regulatory noncompliance and unfair dealing by the media.
The Company currently maintains rigorous security and quality controls that are
intended to ensure that all of its marketing practices meet or exceed industry
standards and all applicable state and federal laws and regulations. The Company
only collects and maintains customer data that is necessary to administer its
business activities, such as a customer's name, address and encrypted billing
information and only public information is used for marketing and modeling
purposes, such as demographic, neighborhood and lifestyle data. The Company
neither resells any confidential consumer information that is obtained or
derived in its marketing efforts nor purchases consumer information from
financial or other institutions.
FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS
See Note 18 to the consolidated financial statements in Item 8 of this Annual
Report on Form 10-K for financial information about geographic areas.
EMPLOYEES
As of June 30, 2005, the Company employed 1,505 persons on a full-time basis and
776 on a part-time basis. The Company's employees are not represented by a labor
union. The Company believes its employee relations are good.
AVAILABLE INFORMATION
The Company's Internet address is http://www.vertrue.com. Information on the
Company's website is not a part of this Annual Report on Form 10-K.
The Company makes available, free of charge through its website, the Company's
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, Section 16 filings and all amendments to those reports as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission ("SEC"). You may read and
copy any document filed with the SEC on its website, http://www.sec.gov, or at
its public reference facility at 100 F Street, N.E., Washington, D.C. 20459.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference facility.
5
Item 2. Properties
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A summary of key information with respect to the Company's leased facilities is
as follows:
Location Square Footage Year Lease Expires
-------- -------------- ------------------
Omaha, NE 124,832 2009 through 2015
Toronto, Canada 73,929 2009
Goleta, CA 66,251 2006
Stamford, CT 63,559 2006
Montreal, Canada 48,193 2011
Houston, TX 41,591 2006
Chicago, IL 15,218 2010
Atlanta, GA 13,717 2005
Stroudsburg, PA 9,500 2008
The Stamford, Connecticut office serves as the Company's corporate headquarters
and also includes non-corporate offices for the Marketing Services segment. The
Toronto, Canada office serves as the operational office for the Personals
segment. All other locations serve as operational offices for the Marketing
Services segment. The Company believes that its properties are generally in good
condition, are well maintained and are suitable and adequate to carry on its
business. Vertrue recently signed a lease effective March 1, 2006 to relocate
its Stamford, CT offices to Norwalk, CT.
Item 3. Legal Proceedings
-----------------
In management's opinion, there are no significant legal proceedings to which the
Company or any of its subsidiaries is a party or to which any of their
properties is subject except as set forth below. The Company is involved in
other lawsuits and claims generally incidental to its business, including but
not limited to various suits, including previously disclosed suits, brought
against the Company by individual consumers seeking monetary and/or injunctive
relief relating to the marketing of the Company's programs. In addition, from
time to time in the regular course of its business the Company receives
inquiries from various federal and/or state regulatory authorities.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which sought unspecified monetary damages, alleged that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The Court certified a class of Michigan
residents. The Court approved the settlement agreement, which was signed by all
parties, at a Fairness/Approval hearing on November 22, 2004 and the Company was
not required to make any payment.
On January 24, 2003, the Company filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration, filed against
the Company by MedValUSA Health Programs, Inc. ("MedVal") in September 2000,
involved claims of breach of contract, breach of the duty of good faith and fair
dealing, and violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
Even though the arbitrators found that the Company was not liable to MedVal for
any compensatory damages, they awarded $5.5 million in punitive damages and
costs against the Company solely under CUTPA. The Company believes that this
arbitration award was unjustified and not based on any existing legal precedent.
Specifically, the Company challenged the award on a number of grounds, including
that it violated a well-defined public policy against excessive punitive damage
awards, raised constitutional issues and disregarded certain legal requirements
for a valid award under CUTPA. On June 22, 2003, the Superior Court denied the
Company's motion to vacate the award and on May 10, 2005, the Connecticut
Supreme Court denied the Company's appeal of that decision. As a result of the
Connecticut Supreme Court's decision, the Company recorded a one-time $5.5
million charge in the June 2005 quarter. The Company has requested the U.S.
Supreme Court to review the Connecticut Supreme Court's decision. However, there
can be no assurance that the Company will be successful in its efforts.
6
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
June 30, 2005.
Executive Officers of the Registrant
------------------------------------
The executive officers of the registrant of the Company and their respective
ages as of July 31, 2005 are as follows:
Name Age Position
---- --- --------
Gary A. Johnson 50 President and Chief Executive Officer, Director
Vincent DiBenedetto 48 Executive Vice President, Health and Insurance
Services
James B. Duffy 51 Executive Vice President and Chief Financial
Officer
GARY A. JOHNSON, a co-founder of the Company, has served as President, Chief
Executive Officer and a director since its inception.
VINCENT DIBENEDETTO joined the Company in October 2000 and currently serves as
Executive Vice President, Health and Insurance Services. Prior to joining the
Company, Mr. DiBenedetto was President of Discount Development Services, L.L.C.,
a subsidiary of the Company which was acquired in October 2000.
JAMES B. DUFFY has served as Executive Vice President and Chief Financial
Officer since he joined the Company in 1996.
7
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
-----------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
Market Information
The Company's Common Stock is listed on the NASDAQ National Market ("NASDAQ")
under the symbol VTRU. The following table sets forth the high and low closing
sale prices per share for the periods indicated as reported on the NASDAQ.
Fiscal Year Ended June 30, 2005: High Low
-------- --------
First Quarter $ 29.28 $ 24.42
Second Quarter 38.33 24.70
Third Quarter 40.89 35.34
Fourth Quarter 39.47 29.47
Fiscal Year Ended June 30, 2004: High Low
-------- --------
First Quarter $ 38.22 $ 19.75
Second Quarter 34.00 24.16
Third Quarter 36.77 26.96
Fourth Quarter 35.02 26.89
Holder and Dividend Information
As of August 12, 2005, there were 40,000,000 shares of the Company's Common
Stock authorized of which 9,742,347 shares were outstanding, held by
approximately 1,700 stockholders of record. The Company has not declared or paid
any cash dividends to date and anticipates that all of its earnings in the
foreseeable future will be retained for use in its business and to repurchase
its common stock under the stock repurchase program. The Company's future
dividend policy will depend on the Company's earnings, capital requirements,
financial condition, requirements of the financing agreements to which the
Company is a party and other factors considered relevant by the Board of
Directors.
Securities Authorized for Issuance under Equity Compensation Plans
Number of Number of securities
securities to be Weighted- remaining available for
issued upon average future issuance under
exercise of exercise price equity compensation
outstanding of outstanding plans (excluding
Plan category options options securities reflected in (a))
------------- ----------------- --------------- ---------------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 1,640,000 $ 25.51 443,000
Equity compensation plans not
approved by security holders (1) 1,232,000 17.70 163,000
----------------- --------------- ---------------------------
Total 2,872,000 $ 22.16 606,000
================= =============== ===========================
(1) These shares represent an increase in the share reserve during 2002 under
the 1996 Stock Option Plan. These options have an exercise price per share
equal to or greater than the fair market value at the grant date and
generally become exercisable over a four to five year period and expire at
the earlier of termination of employment or ten years from the grant date.
8
Purchases of Equity Securities by the Issuer
The following table summarizes the shares of the Company's equity securities
purchased by or on behalf of the Company:
Maximum
Total Number of Number of
Shares Shares that May
Total Purchased as Yet be
Number of Average Part of Publicly Purchased
Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs (1) or Programs
------ ----------- ------------ ------------------ -----------------
April 1, 2005 to April 30, 2005 42,000 $ 36.16 42,000 979,430
May 1, 2005 to May 31, 2005 90,500 36.60 90,500 888,930
June 1, 2005 to June 30, 2005 63,700 38.97 63,700 825,230
----------- ------------ ------------------ -----------------
Total 196,200 $ 37.28 196,200 825,230
=========== ============ ================== =================
(1) In October 2004, the Board of Directors authorized an additional 1,000,000
shares, no expiration date, to be purchased under the Company's stock
repurchase program originally authorized during fiscal 1997.
9
Item 6. Selected Financial Data
-----------------------
The selected consolidated operating and common stock data for each of the years
ended June 30, 2005 through 2001 and the selected consolidated financial
position data and liquidity as of June 30, 2005 through 2001 below are derived
from the Company's audited consolidated financial statements. All selected
financial information in this Item 6 is qualified by reference to and should be
read in conjunction with Item 8, "Financial Statements and Supplementary Data,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in this Annual Report on Form 10-K.
For the years ended June 30,
--------------------------------------------------
(In millions except per share data) 2005(1) 2004(2) 2003 2002 2001
--------------------------------------------------
Consolidated Operating Data:
Revenues $ 579.8 $ 488.7 $ 456.9 $ 427.6 $ 475.7
Operating income (loss) 57.1 52.9 22.3 11.9 (33.3)
Income (loss) before provision for income taxes 38.9 46.6 40.6 43.9 (26.8)
Provision for income taxes 13.4 18.6 16.2 - -
Income (loss) before cumulative effect of accounting
change 25.5 28.0 24.4 43.9 (26.8)
Net income (loss) 25.5 28.0 24.4 38.0 (52.5)
Common Stock Data:
Diluted earnings (loss) before cumulative effect of
accounting change per share $ 2.22 $ 2.29 $ 1.84 $ 2.95 $ (1.75)
Diluted earnings (loss) per share $ 2.22 $ 2.29 $ 1.84 $ 2.55 $ (3.44)
Diluted weighted average common shares outstanding 13.0 13.2 13.2 14.9 15.2
June 30,
--------------------------------------------------
2005 2004 2003 2002 2001
--------------------------------------------------
Consolidated Financial Position Data and Liquidity:
Cash and cash equivalents (3) $ 64.4 $ 47.2 $ 67.3 $ 45.5 $ 21.7
Short-term investments (3) 16.2 120.0 5.0 - -
Total assets 447.2 453.2 248.5 280.8 348.5
Long-term liabilities 252.8 246.9 8.3 3.6 3.1
Shareholders' (deficit) equity (48.4) (46.1) (20.3) (20.6) (26.0)
Cash flow provided by operating activities 32.3 47.9 48.5 17.0 12.0
(1) In 2005, the Company acquired certain of the net assets of Bargain Network,
Inc. and My Choice Medical Holdings, Inc.
(2) In 2004, the Company completed the acquisition of all of the net assets and
outstanding capital stock of Lavalife Inc.
(3) Reclassifications have been made to prior year amounts to conform to the
current year presentation including reclassifying $112.3 million and $5.0
million of auction rate securities from cash and cash equivalents to
short-term investments as of June 30, 2004 and 2003, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
OVERVIEW
The Company is a leading consumer services marketing company. The Company offers
both subscription and transaction based services focused on meeting consumer
needs in large spending categories - healthcare, personal property, discounts,
security and insurance and personals. The Company's service offerings provide
consumers everyday savings, event-oriented discounts, benefits that provide the
consumer with peace of mind and access to information and opportunities for
self-enrichment. The Company's loyalty programs provide clients with a wide
range of benefits to offer or market to their customers and include stand-alone
benefits, reward point accumulation and management, gift certificates,
merchandise and travel reward redemption.
10
The Company has two reportable business segments: Marketing Services, formerly
known as the Membership segment, and Personals. For additional financial
information about these reportable business segments, see Note 18 to the
consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
The Marketing Services segment offers consumers a variety of products and
services from selected vendors and service providers on an annual or monthly
subscription basis or a fee for service basis. Revenues are derived principally
from recurring fees which are billed to the member on either an annual or
monthly basis. In the case of annually billed membership fees, the Company
receives full payment at or near the beginning of the membership period, but
recognizes the revenues as the member's refund privilege expires. Membership
fees that are billed monthly are recognized when earned. Revenues derived from
one time fees are recognized when the service is performed.
The Personals segment employs a transactional business model in which users buy
non-refundable credits up front and spend those credits only when they want to
interact with other customers. Personals revenues are recognized when the
services are used.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies that are important to the
Company's financial condition and results of operations and involve subjective
or complex judgments on the part of management, often as a result of the need to
make estimates. The following areas require the use of judgments and estimates:
revenue recognition, deferred marketing costs, valuation of goodwill and other
intangible assets, estimation of remaining useful lives of intangible assets and
valuation of deferred tax assets. Estimates in each of these areas are based on
historical experience and various assumptions that management believes are
appropriate. Actual results may differ from these estimates. Management believes
the areas listed above represent the critical accounting policies of the Company
as contemplated by Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure about Critical Accounting Policies." For a summary of all
the Company's significant accounting policies, see Note 2 to the consolidated
financial statements in Item 8 of this Annual Report on Form 10-K.
Revenue recognition
Revenues are billed primarily through credit and debit cards and are recognized
when earned. Members may cancel their memberships at any time. Members enrolled
in an annual payment plan who cancel their memberships receive a pro rata refund
of the remaining unused portion of their membership fees. In accordance with
Staff Accounting Bulletin 104, "Revenue Recognition" ("SAB 104"), revenues, net
of estimated cancellations, are deferred and recognized as revenues when
membership refund privileges expire. Management establishes and regularly
updates the allowance for membership cancellations. In estimating the allowance
for membership cancellations, management analyzes historical cancellation
experience, current economic trends and changes in customer demand for the
Company's products and services. Actual membership refunds are charged against
the allowance for membership cancellations on a current basis. If actual
cancellations differ from the estimate, the results of operations would be
impacted. The Personals segment employs a transactional business model in which
users buy non-refundable credits up front and spend those credits only when they
want to interact with other customers. Personals revenues are recognized when
the services are used.
Marketing expenses
Marketing expenses are comprised of refundable royalty payments, non-refundable
royalty payments, advertising costs, telemarketing costs and direct mail costs.
Advertising costs and non-refundable royalty payments, which include fee per
offer, fee per sale and fee per impression marketing arrangements, are expensed
when incurred. Refundable royalty payments are charged to operations as the
associated revenues are recognized in accordance with SAB 104. Telemarketing
costs, including costs for third party vendors to solicit members for the
Company, and direct mail costs, including costs of printing and mailing direct
mail pieces, are deferred direct response advertising costs and are charged to
marketing expenses over the expected future benefit period in accordance with
American Institute of Certified Public Accountants Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7").
Deferred marketing costs to enroll a new member are less than the related
estimated total net revenues. However, if deferred marketing costs were to
exceed the related estimated total net revenues, management would adjust the
deferred marketing costs for that impairment.
Valuation of goodwill and other intangibles
The Company reviews the carrying value of its goodwill and other intangible
assets and assesses the estimated remaining useful lives of its intangible
assets in accordance with Financial Accounting Standards Board ("FASB")
Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
11
Management reviews goodwill and other intangible assets for impairment by
comparing their carrying values to their fair values at least annually or more
frequently if circumstances indicate possible impairment. When determining fair
value, management utilizes various assumptions, including projections of future
cash flows. A change in the underlying assumptions could cause fair value to be
less than carrying value and require the Company to record a corresponding
charge against operations. Management tested goodwill for impairment at July 1,
2004, 2003 and 2002 during the quarters ended September 30, 2004, 2003 and 2002,
respectively, and concluded that it was not impaired as of July 1, 2004, 2003 or
2002. Management also reassessed the estimated useful lives of its indefinite
lived intangible assets and determined that they were appropriate.
Income Taxes
The Company accounts for income taxes under the provisions of FASB Statement No.
109, "Accounting for Income Taxes." Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. Management assesses the realizability of deferred tax
assets considering various assumptions, including estimates of future taxable
income and ongoing tax strategies. A change in these underling assumptions could
impact the results of operations.
RESULTS OF OPERATIONS
Consolidated Overview
For the years ended June 30, Percent Increase/(Decrease)
------------------------------------ -----------------------------
(Dollars in millions) 2005 2004 2003 '05 vs. '04 '04 vs. '03
---------- ---------- ---------- ------------- -------------
Revenues $ 579.8 $ 488.7 $ 456.9 19% 7%
Marketing expenses 286.4 255.8 280.7 12% (9%)
Operating expenses 114.4 91.8 78.4 25% 17%
General and administrative expenses 108.2 85.8 74.1 26% 16%
Charge for arbitration award 5.5 - - NM NM
Amortization of intangibles 8.2 2.4 1.4 242% 71%
---------- ---------- ----------
Operating income 57.1 52.9 22.3 8% 137%
Settlement of investment related litigation - - 19.1 NM NM
Loss on sale of subsidiary - - (1.0) NM NM
Net loss on investment - - (0.2) NM NM
Interest (expense) income, net (18.8) (6.6) 0.6 (185%) (1,200%)
Other income (expense), net 0.6 0.3 (0.2) 100% 250%
---------- ---------- ----------
Income before income taxes 38.9 46.6 40.6 (17%) 15%
Provision for income taxes 13.4 18.6 16.2 (28%) 15%
---------- ---------- ----------
Net income $ 25.5 $ 28.0 $ 24.4 (9%) 15%
========== ========== ==========
NM = Not Meaningful
The Company operates in two reportable business segments: Marketing Services,
formerly known as the Membership segment, and Personals. The Marketing Services
reportable business segment provides discounted products and services to
consumers. The Personals reportable business segment provides both web-based and
phone-based personals services to its customers. The Corporate and Other
business unit includes the results of MCM as well as unallocated general
corporate expenses.
The results of MCM, Bargain and Lavalife (the "acquired companies") have been
included in the consolidated results since their acquisitions on January 1,
2005, November 30, 2004 and April 1, 2004, respectively.
Revenues
Revenues increased 19% in 2005 due to the inclusion of revenues from the
acquired companies. During 2005, Vertrue increased direct to consumer marketing
efforts in order to provide additional growth opportunities and a more diverse
business model. Vertrue decreased its level of marketing with certain client
partners in the outbound telemarketing channel. Vertrue's member and customer
base was 6.3 million at the end of 2005 versus 6.2 million at the end of 2004.
12
In 2004, revenues increased 7% primarily due to the effect of the acquisition of
Lavalife. Excluding the impact of the acquisition of Lavalife, revenues would
have increased 3% primarily due to an increase in the weighted average program
price point per member.
Marketing expenses
Marketing expenses increased 12% in 2005 primarily due to the inclusion of
marketing expenses incurred by the acquired companies. As a percentage of
revenues, marketing expenses were 49% in 2005 compared to 52% in 2004. Marketing
expenses decreased as a percentage of revenues primarily due to the decrease in
the level and mix of members enrolled through the higher cost outbound
telemarketing channel and the effect of the lower marketing expense ratios of
the acquired companies.
In 2004, marketing expenses decreased 9% and, as a percentage of revenues,
decreased to 52% from 61% in 2003. These decreases were primarily due to the
decrease in the level and mix of members enrolled through the higher cost
outbound telemarketing channel.
Operating expenses
Operating expenses increased 25% in 2005 and, as a percentage of revenues,
operating expenses increased to 20% in 2005 from 19% in 2004. These increases
were primarily due to the effect of the higher operating expense ratios of the
acquired companies.
In 2004, operating expenses increased 17% and, as a percentage of revenues, were
19% in 2004 compared to 17% in 2003. These increases were primarily due to
increased member service call center related costs incurred to improve the value
and quality of services offered to the membership base.
General and administrative expenses
General and administrative expenses increased 26% in 2005 and, as a percentage
of revenues, were 19% in 2005 compared to 18% in 2004. These increases were
primarily due to the impact of the acquired companies. General and
administrative expenses increased 16% in 2004 and, as a percentage of revenues,
were 18% in 2004 compared to 16% in 2003. These increases were primarily due to
increased employee related expenses and the impact of the acquisition of
Lavalife.
Charge for arbitration award
In 2005, the Company recorded a $5.5 million charge related to an arbitration
award against the Company. For additional information, see Item 3 "Legal
Proceedings" in this Annual Report on Form 10-K.
Amortization of intangibles
The increase in amortization of intangible assets during 2005 and 2004 was due
to the acquisitions that occurred during those years.
Operating income
Operating income increased 8% in 2005 due to the impact of the acquired
companies and the decrease in marketing expense ratios. As a percentage of
revenues, marketing expenses were 49% in 2005 compared to 52% in 2004. Marketing
expenses decreased as a percentage of revenues primarily due to the decrease in
the level and mix of members enrolled through the higher cost outbound
telemarketing channel and the effect of the lower marketing expense ratios of
the acquired companies. These increases were partially offset by the impact of
the $5.5 million charge for the arbitration award.
In 2004, operating income increased 137% primarily due to a decrease in
marketing expense as a percentage of revenues. As a percentage of revenues,
marketing expenses were 52% in 2004 compared to 61% in 2003 primarily due to the
decrease in the level and mix of members enrolled through the higher cost
outbound telemarketing channel.
Interest expense, net
Interest expense, net in 2005 included $14.3 million related to the 9.25% Senior
Notes and $5.0 million related to the 5.5% Convertible Notes. The increase in
interest expense, net in 2005 was due to a full year of interest expense related
to the 9.25% Senior Notes issued in April 2004 and the 5.5% Convertible Notes
issued in September 2003. In addition to the increase in interest expense,
interest income earned in 2005 decreased due to lower short-term investment
balances. The decrease in short-term investments was due to acquisitions of
businesses and purchases of treasury stock.
13
The increase in interest expense, net in 2004 was due to interest expense
related to the 5.5% Convertible Notes and the 9.25% Senior Notes. For additional
information on these debt issuances, refer to Item 7 "Management's Discussion
and Analysis of Financial Condition - Liquidity and Capital Resources" in this
Annual Report on Form 10-K.
Settlement of investment related litigation
In 2003, the Company, along with certain of the other former shareholders of
iPlace, Inc., settled their lawsuit against Homestore.com, Inc. The total
settlement amount in favor of the plaintiffs was $23.0 million of which the
Company received $19.1 million.
Loss on sale of subsidiary
In 2003, the Company settled with Homestore.com, Inc. all issues pending related
to amounts held in escrow in connection with the 2002 sale of the Company's
investment in iPlace, Inc. The Company recorded a net loss of $1.0 million
related to this settlement in 2003.
Net loss on investment
In 2003, the Company sold all of its Homestore.com, Inc. common stock and
recognized a loss of $0.2 million.
Provision for income taxes
In 2005, 2004 and 2003, the Company recorded provisions for income taxes of
$13.4 million, $18.6 million and $16.2 million, respectively, based on effective
tax rates of 34.4%, 40% and 40%, respectively. The effective tax rate in 2005
decreased from the prior year as a result of the full year impact of the
acquisition of Lavalife. The effective tax rate was higher than the U.S. federal
statutory rate in 2004 and 2003 due to state tax expense and other
non-deductible items. As of June 30, 2005 and 2004, the Company had accumulated
federal net operating loss carry forwards of $1.5 million and $6.5 million,
respectively.
EBITDA Measures
EBITDA and Adjusted EBITDA are used by the Company's management and its
investors to evaluate the performance of its business. A description and
reconciliation of EBITDA and Adjusted EBITDA are disclosed in Item 7
"Management's Discussion and Analysis of Financial Condition - Reconciliation of
Non-GAAP Measures" of this Annual Report on Form 10-K.
EBITDA increased 20% in 2005 to $78.7 million and, as a percentage of revenues,
EBITDA increased to 14% in 2005 from 13% in 2004. These increases were due to
the impact of the acquired companies and improved marketing margins. As a
percentage of revenues, marketing expenses decreased to 49% in 2005 from 52% in
2004 primarily due to the decrease in the level and mix of members enrolled
through the higher cost outbound telemarketing channel and the effect of the
lower marketing expense ratios of the acquired companies. These increases were
partially offset by the impact of the $5.5 million charge for the arbitration
award.
EBITDA increased 90% in 2004 to $65.4 million and, as a percentage of revenues,
EBITDA increased to 13% in 2004 from 8% in 2003. These increases were due to a
decrease in marketing expenses as a percentage of revenue from 61% in 2003 to
52% in 2004 primarily due to the decrease in the level and mix of members
enrolled through the higher cost outbound telemarketing channel.
Adjusted EBITDA decreased 2% in 2005 to $57.2 million and, as a percentage of
revenues before deferral, adjusted EBITDA decreased to 10% in 2005 from 13% in
2004. These decreases were due to the increase in the mix of revenue from
monthly payment plans and the impact of the $5.5 million charge for the
arbitration award partially offset by the impact of the acquired companies.
Adjusted EBITDA increased 25% in 2004 to $58.6 million and, as a percentage of
revenues before deferral, adjusted EBITDA increased to 13% in 2005 from 11% in
2004. Theses increases were due to an increase in revenues before deferral of 9%
while marketing costs before deferral remained flat. This improvement was
primarily due to the decrease in the level and mix of members enrolled through
the higher cost outbound telemarketing channel.
14
Summary of Results by Segment
For the years ended June 30, Percent Increase/(Decrease)
------------------------------------ -----------------------------
(Dollars in millions) 2005 2004 2003 '05 vs. '04 '04 vs. '03
---------- ---------- ---------- ------------- -------------
Revenues
Marketing Services $ 490.3 $ 471.0 $ 456.9 4% 3%
Personals 72.1 17.7 - 307% NM
Corporate and Other 17.4 - - NM NM
---------- ---------- ----------
Total $ 579.8 $ 488.7 $ 456.9 19% 7%
========== ========== ==========
Operating Income
Marketing Services $ 85.5 $ 76.6 $ 41.8 12% 83%
Personals (3.1) 0.3 - NM NM
Corporate and Other (25.3) (24.0) (19.5) 5% 23%
---------- ---------- ----------
Total $ 57.1 $ 52.9 $ 22.3 8% 137%
========== ========== ==========
EBITDA
Marketing Services $ 96.5 $ 86.7 $ 53.7 11% 61%
Personals 6.2 2.7 - 130% NM
Corporate and Other (24.0) (24.0) (19.3) 0% 24%
---------- ---------- ----------
Total $ 78.7 $ 65.4 $ 34.4 20% 90%
========== ========== ==========
Adjusted EBITDA
Marketing Services $ 74.0 $ 80.5 $ 66.1 (8%) 22%
Personals 6.3 2.1 - 200% NM
Corporate and Other (23.1) (24.0) (19.3) (4%) 24%
---------- ---------- ----------
Total $ 57.2 $ 58.6 $ 46.8 (2%) 25%
========== ========== ==========
NM = Not Meaningful
Marketing Services Segment
Revenues
Revenues increased 4% in 2005 and net active members increased 2% to 5.7 million
as of June 30, 2005 due to the inclusion of revenues and members from Bargain.
During 2005, the Marketing Services segment increased direct to consumer
marketing efforts in order to provide additional growth opportunities and a more
diverse business model. In addition, the Marketing Services segment decreased
its level of marketing with certain client partners in the outbound
telemarketing channel.
Revenues increased 3% in 2004 primarily due to an increase in the weighted
average program price point per member. Net active members decreased 11% in 2004
to 5.6 million primarily due to a decrease in marketing efforts in 2004.
Revenues in 2003 benefited from the completion of the migration of members that
participate in a full-money-back refund policy program to a pro rata refund
policy program.
15
The mix of new members enrolled in a monthly payment plan was approximately 85%,
62% and 27% in 2005, 2004 and 2003, respectively. Revenues from members enrolled
in different payment plans are summarized below (dollars in millions):
For the years ended June 30, Percent Increase/(Decrease)
------------------------------------ -----------------------------
2005 2004 2003 '05 vs. '04 '04 vs. '03
---------- ---------- ---------- ------------- -------------
Monthly payment plans $ 250.8 $ 160.6 $ 76.9 56% 109%
Annual payment plans:
Initial year 56.5 113.2 163.6 (50%) (31%)
Renewal year 152.6 170.1 189.8 (10%) (10%)
Other 30.4 27.1 26.6 12% 2%
---------- ---------- ----------
Total $ 490.3 $ 471.0 $ 456.9 4% 3%
========== ========== ==========
Operating income
Operating income increased 12% in 2005 primarily due to a 4% increase in
revenues while marketing expenses increased 1%. Marketing expenses were $251.1
million in 2005 versus $248.9 million in 2004 and, as a percentage of revenues,
marketing expenses were 51% in 2005 versus 53% in 2004. This decrease was
primarily due to the decrease in the level and mix of members enrolled through
the higher cost outbound telemarketing channel.
Operating income increased 83% in 2004 primarily due to a 3% increase in
revenues while marketing expenses decreased 11%. Marketing expenses were $248.9
million in 2004 versus $280.7 million in 2003 and, as a percentage of revenues,
marketing expenses were 53% in 2004 versus 61% in 2003. These decreases were
primarily due to the decrease in the level and mix of members enrolled through
the higher cost outbound telemarketing channel. The decrease in members enrolled
through the outbound telemarketing channel was not completely offset by an
increase in the level of members enrolled through the Company's more profitable
online and MemberLink channels. Operating income was reduced by an increase in
operating expenses. Operating expenses increased 12% in 2004 and, as a
percentage of revenues, were 19% in 2004 and 17% in 2003 primarily due to
increased member service call center related costs incurred to improve the value
and quality of services offered to the membership base.
EBITDA
EBITDA increased 11% in 2005 to $96.5 million and, as a percentage of revenues,
EBITDA increased to 20% in 2005 from 18% in 2004. These increases were primarily
due to a 4% increase in revenues while marketing expenses only increased 1%.
Marketing expenses were 51% in 2005 versus 53% in 2004. This decrease was
primarily due to the decrease in the level and mix of members enrolled through
the higher cost outbound telemarketing channel.
In 2004, EBITDA increased 61% to $86.7 million and, as a percentage of revenues,
EBITDA increased to 18% in 2004 from 12% in 2003. These increases were primarily
due to a decrease in marketing expenses of 11% combined with a 3% increase in
revenues offset by an increase in operating expenses. Marketing expenses as a
percentage of revenues were 53% in 2004 compared to 61% in 2003. This decrease
was primarily due to the decrease in the level and mix of members enrolled
through the higher cost outbound telemarketing channel. In 2004, EBITDA
increased 61% while operating income increased 83% due to a $1.8 million
decrease in depreciation expenses.
Adjusted EBITDA
Adjusted EBITDA decreased 8% in 2005 to $74.0 million and, as a percentage of
revenues before deferral, adjusted EBITDA was 16% in 2005 compared to 18% in
2004. These decreases were due to a 6% increase in marketing costs before
deferral while revenue before deferral increased only 3%. As a percentage of
revenue before deferral, marketing costs before deferral was 52% in 2005 and 51%
in 2004 due to the increase in the mix of revenue from monthly payment plans.
Adjusted EBITDA increased 22% in 2004 to $80.5 million and, as a percentage of
revenues before deferral, adjusted EBITDA was 18% in 2004 compared to 16% in
2003. These increases were primarily due to an increase in revenues before
deferral of 5% while marketing costs before deferral decreased 3%. The
improvement in the marketing margin was primarily due to the decrease in the
level and mix of members enrolled through the higher cost outbound telemarketing
channel.
16
Personals Segment
Revenues
Revenues were $72.1 million in 2005 and represent the revenues of Lavalife,
which was acquired by the Company on April 1, 2004. On a pro forma basis
assuming the acquisition of Lavalife occurred on July 1, 2003, revenues would
have remained flat from fiscal 2004. There were approximately 0.6 million active
customers as of June 30, 2005, which was also flat from June 30, 2004.
Operating income
The operating loss was $3.1 million in 2005 and included $5.2 million of
intangible amortization expense related to the acquisition. On a pro forma basis
assuming the acquisition of Lavalife occurred on July 1, 2003, operating income
would have been $0.7 million in 2004. The decrease from fiscal 2004 was
primarily due to increased employee related expenses.
EBITDA
EBITDA was $6.2 million in 2005 and, as a percentage of revenue was 9%. On a pro
forma basis assuming the acquisition of Lavalife occurred on July 1, 2003,
EBITDA would have been $9.9 million in 2004. The decrease from fiscal 2004 was
primarily due to increased employee related expenses.
Adjusted EBITDA
Adjusted EBITDA was $6.3 million in 2005 and, as a percentage of revenue was 9%.
On a pro forma basis assuming the acquisition of Lavalife occurred on July 1,
2003, adjusted EBITDA would have been $10.3 million in 2004. The decrease from
fiscal 2004 pro forma adjusted EBITDA was primarily due to increased employee
related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities is an important measure used to
understand the Company's liquidity. Management believes it is useful to analyze
the components of net cash provided by operating activities as follows: Revenues
before deferral, marketing costs before deferral, operating expenses, general
and administrative expenses, interest paid, current taxes payable and changes in
assets and liabilities. For definitions and reconciliations of revenues before
deferral and marketing costs before deferral see "Reconciliation of Non-GAAP
Measures" in Item 7 "Management's Discussion and Analysis of Financial Condition
- Liquidity and Capital Resources" in this Annual Report on Form 10-K.
Net cash provided by operating activities was $32.3 million, $47.9 million and
$48.5 million for the years ended June 30, 2005, 2004 and 2003, respectively.
The table below summarizes the components of revenues before deferral for the
years ended June 30 (in millions):
Revenues before deferral 2005 2004 2003
---------- ---------- ----------
Monthly payment plans $ 255.8 $ 166.3 $ 76.9
Annual payment plans:
Initial year 40.3 78.2 149.4
Renewal year 127.7 167.7 165.0
Personals 72.2 17.1 -
Other 48.9 27.1 26.6
---------- ---------- ----------
Total $ 544.9 $ 456.4 $ 417.9
========== ========== ==========
Revenues before deferral increased 19% to $544.9 million in 2005 and increased
9% to $456.5 million in 2004 primarily due to the inclusion of revenues before
deferral from the acquired companies. Excluding revenues before deferral from
the acquired companies, revenues before deferral would have decreased 1% in 2005
and increased 5% in 2004. The decrease in 2005 is primarily due to the effect of
an increase in the marketing of monthly payment programs. In 2005, 2004 and
2003, the mix of new members enrolled in a monthly payment plan program was
approximately 85%, 62% and 27% of total members enrolled, respectively. The
increase in revenues before deferral in 2004 was primarily due to an increase in
the weighted average program price point per member. Monthly weighted average
program price points per member were $12.61, $11.37 and $10.11 for 2005, 2004
and 2003, respectively. The new annual weighted average program price points per
member for 2005, 2004 and 2003 were $104, $107 and $104, respectively.
17
Marketing costs before deferral were $273.0 million, $230.3 million and $229.3
million in 2005, 2004 and 2003, respectively. As a percentage of revenue before
deferral, marketing costs before deferral were 50%, 50% and 55% in 2005, 2004
and 2003, respectively. Marketing costs before deferral increased 19% in 2005
primarily due to the inclusion of marketing costs of $52.2 million from the
acquired companies. Marketing margin before deferral was $271.9 million, $226.1
million and $188.6 million for 2005, 2004 and 2003, respectively.
The effect of the increase in marketing margin before deferral in 2005 on net
cash provided by operating activities was more than offset by increased general
and administrative and operating expenses primarily due to the operations of the
acquired companies and increased interest costs associated with the Convertible
Notes and Senior Notes. Interest paid on the Convertible Notes was $5.0 million
in 2005 compared to $2.5 million in 2004. Interest paid on the Senior Notes was
$13.9 million in 2005 while no payments were made in 2004. Taxes paid in 2005
and 2004 were $8.0 million and $5.6 million, respectively. The effect of the
increase in marketing margin before deferral in 2004 on net cash provided by
operating activities was partially offset by increased operating expenses,
general and administrative expenses and net interest expense. The net changes in
assets and liabilities excluding the impact of interest and taxes paid discussed
above were neutral for 2006.
Net cash provided by (used in) investing activities was $16.4 million in 2005,
($237.0) million in 2004 and $7.4 million in 2003. Net cash provided by
investing activities in 2005 reflected $104.6 million of net proceeds from sales
of short-term investments offset by $77.2 million of cash used in connection
with the Company's recent acquisitions. Net cash used in investing activities in
2004 reflected $114.9 million of cash used in connection with the acquisition of
Lavalife and $115.0 million of cash used in the net purchases of short-term
investments. Net cash provided by investing activities in 2003 reflected the
Company's $19.1 million settlement of a lawsuit against Homestore.com, Inc.
Capital expenditures were $11.0 million, $7.1 million and $5.5 million in 2005,
2004 and 2003, respectively.
Net cash (used in) provided by financing activities was ($31.7) million in 2005,
$168.8 million in 2004 and ($34.2) million in 2003. Net cash used in financing
activities in 2005 principally reflected the use of $41.1 million to repurchase
the Company's stock, which was partially offset by proceeds from the exercise of
stock options of $10.8 million. In 2004, net cash provided by financing
activities principally reflected the issuance of $229.8 million in debt, net of
issuance costs, proceeds from the exercise of employee stock options of $24.5
million and proceeds from the issuance of restricted stock of $9.1 million.
These sources of cash were partially offset by $94.2 million of cash used to
repurchase the Company's stock. In 2003, net cash used in financing activities
principally reflected repurchase of the Company's stock for $37.2 million
partially offset by proceeds from exercise of employee stock options of $4.1
million.
Debt Issuances
As of June 30, 2005, the Company had $240.0 million of debt outstanding. In
September 2003, the Company issued $90.0 million aggregate principal amount 5.5%
convertible senior subordinated notes ("Convertible Notes") due September 2010.
The Convertible Notes were registered in 2004. The Convertible Notes bear
interest at the rate of 5.5% per year, which is payable in cash semi-annually in
arrears on April 1 and October 1. Upon a change in control, holders of the
Convertible Notes may require the Company to repurchase all or part of the
Convertible Notes for cash.
In April 2004, the Company issued $150.0 million aggregate principal amount of
9.25% Senior Notes due 2014. The Senior Notes were registered in 2005. The
Senior Notes were sold at 98.418% of the principal amount which resulted in an
effective yield of 9.5%. Interest on the Senior Notes is payable in cash
semi-annually in arrears on April 1 and October 1. A portion of the proceeds
from the offering of the Senior Notes was used to repay amounts borrowed under
the senior secured credit facility to fund a portion of the Lavalife
acquisition. The Company intends to use the remaining proceeds for general
corporate purposes, including working capital, future acquisitions and
repurchases of the Company's common stock under the Company's stock buyback
program to the extent permitted under the indenture governing the Senior Notes
and the senior secured credit facility.
Credit Facility
The Company has a senior secured credit facility, which was amended and restated
on March 1, 2005 and matures on March 23, 2006, that allows borrowings of up to
$45.0 million. Borrowings under the senior secured credit facility accrue
interest at either the Eurodollar rate, or the higher of the Prime rate, or the
Federal Funds rate plus an applicable margin. As of June 30, 2005, availability
under the senior secured credit facility was reduced by an outstanding letter of
credit of $5.5 million and was $39.5 million. As of June 30, 2005, the effective
interest rate for borrowings under the senior secured credit facility was 6.25%.
The senior secured credit facility has certain financial covenants, including a
maximum debt coverage ratio, potential restrictions on additional borrowings and
potential restrictions on additional stock repurchases. As of June 30, 2005, the
Company was in compliance with all such debt covenants.
18
Stock Repurchase Program
The Company purchased 1.2 million shares of its common stock for $41.1 million
at an average price of $34.92 per share during 2005 compared to 3.0 million
shares for $94.2 million at an average price of $31.56 per share in 2004 and 2.0
million shares for $37.2 million at an average price of $18.67 per share in
2003. The Company utilized cash from operations, stock issuances and the
issuance of the Convertible Notes and Senior Notes to repurchase shares.
During 2005, the Company's Board of Directors authorized the repurchase of 1.0
million shares of its common stock under its ongoing stock repurchase program.
On November 8, 2004, the Board of Directors authorized a modified Dutch Auction
self-tender offer for up to 500,000 shares of its common stock. Under the terms
of the self-tender offer as approved by the Board of Directors and as set forth
in the Offer to Purchase filed as an exhibit to the Company's Schedule TO filed
on November 15, 2004, as amended, the Company's stockholders were given the
opportunity to tender part or all of their shares to the Company at a price of
not less than $33.50 per share and not more than $38.50 per share. The
self-tender offer closed on January 7, 2005 with a total of 605,000 shares
tendered by shareholders. The Company exercised its right, as set forth in the
Offer to Purchase, to purchase the additional 105,000 shares and repurchased a
total of 605,000 shares for $38.50 per share, paying a total of $23.3 million.
As of June 30, 2005, the Company had 0.8 million shares available for repurchase
under its stock repurchase program.
Acquisitions
In January 2005, the Company completed the acquisition of certain of the assets
of MCM, a privately held advertising and practice management company serving
cosmetic surgeons throughout the United States. The purchase price, excluding
fees and expenses, amounted to $33.0 million and was paid in cash on the closing
date. In addition, contingent payments of up to $56.0 million may be paid in the
next three years if certain performance targets, including increasing levels of
revenues and earnings, are achieved over the next three calendar years.
In November 2004, the Company completed the acquisition of certain of the assets
of Bargain, a privately held provider of premier pricing services for homes and
vehicles. The purchase price, which excludes fees and expenses and is subject to
certain purchase price adjustments, amounted to $39.1 million. The Company
expects to pay approximately $14.6 million of contingent payments in the
December 2005 quarter. No further contingent payments are required by the
purchase agreement. In addition, the Company assumed certain liabilities
amounting to $4.7 million.
In April 2004, the Company completed the acquisition of all of the net assets
and outstanding capital stock of Lavalife, a leading provider of web-based and
phone-based interactive personals services. The purchase price, excluding fees
and expenses, was Cdn$152.5 million, or $116.3 million. In connection with this
acquisition, the Company received $9.1 million related to the issuance of the
Company's restricted common stock to Lavalife's senior management.
Other
As of June 30, 2005, the Company had cash, cash equivalents and short-term
investments of $80.6 million in addition to its senior secured credit facility.
The Company believes that existing cash and short term investment balances
together with funds available under its senior secured credit facility will be
sufficient to meet its funding requirements for the foreseeable future.
The Company did not have any material commitments for capital expenditures as of
June 30, 2005. The Company expects to incur capital expenditures of $15.0
million in 2006. The Company intends to utilize cash on hand and cash generated
from operations to fulfill capital expenditure requirements during 2006.
19
RECONCILIATION OF NON-GAAP MEASURES
Management believes that revenues before deferral and marketing costs before
deferral are important measures of liquidity and are significant factors in
understanding the Company's operating cash flow trends. These non-GAAP measures
are used by management and the Company's investors to understand the liquidity
trends of the Company's marketing margins related to current period operations
which are reflected within the operating cash flow section of the cash flow
statement. GAAP revenues and marketing expenses are important measures used to
understand the marketing margins earned during the period in the income
statement. However, in order to understand the Company's operating cash flow, it
is important to understand the primary current period drivers of that cash flow.
Two of the primary indicators of operating liquidity for the period are revenues
before deferral and marketing costs before deferral. Revenues before deferral
are revenues before application of SAB 104 and represent the revenues billed
during the current reporting period less an allowance for membership
cancellations. That is, revenues before deferral for a reporting period include
membership fees received in the current reporting period that will be recorded
as GAAP revenues in future reporting periods and exclude membership fees
received in prior reporting periods that are recorded as GAAP revenues in the
current reporting period. Marketing costs before deferral are marketing costs
before the application of SAB 104 and SOP 93-7 and represent marketing costs
paid or accrued during the current reporting period. That is, marketing costs
before deferral for a reporting period include costs paid or accrued in the
current reporting period that will be recorded as GAAP marketing expenses in
future reporting periods and exclude marketing expenses paid or accrued in prior
reporting periods that are recorded as GAAP marketing expenses in the current
reporting period. Neither revenues before deferral nor marketing costs before
deferral exclude charges or liabilities that will require cash settlement.
Additionally, these measures are not a substitute for or superior to revenues
and marketing expenses determined in accordance with generally accepted
accounting principles. In light of the difference between revenues before
deferral, marketing costs before deferral and their most directly comparable
GAAP measures, the Company uses these measures solely as liquidity measures and
not as performance measures.
Revenues before deferral for the years ended June 30, 2005, 2004 and 2003 are
calculated as follows (in millions):
2005 2004 2003
---------- ---------- ----------
Revenues $ 579.8 $ 488.7 $ 456.9
Change in deferred revenues (34.9) (32.3) (39.0)
---------- ---------- ----------
Revenues before deferral $ 544.9 $ 456.4 $ 417.9
========== ========== ==========
Marketing costs before deferral for the years ended June 30, 2005, 2004 and 2003
are calculated as follows (in millions):
2005 2004 2003
---------- ---------- ----------
Marketing expenses $ 286.4 $ 255.8 $ 280.7
Change in deferred marketing costs (13.4) (25.5) (51.4)
---------- ---------- ----------
Marketing costs before deferral $ 273.0 $ 230.3 $ 229.3
========== ========== ==========
The Company's management and investors use EBITDA and adjusted EBITDA, among
other measures, to evaluate the year over year performance of its businesses, to
measure that performance compared with internal budgets and to determine
compensation under its management incentive plans.
EBITDA eliminates the effects of interest and other expense, income taxes,
noncash depreciation of tangible assets and noncash amortization of intangible
assets that were recognized in business combinations. A limitation of this
measure, however, is that it does not reflect the periodic cost of certain
capitalized tangible assets and intangible assets used in generating revenues in
the Company's businesses nor does it reflect the effect of interest and taxes.
The Company's management evaluates these costs through other financial measures.
Adjusted EBITDA is calculated using revenues before deferral and marketing costs
before deferral instead of GAAP revenues and GAAP marketing expenses. Adjusted
EBITDA is useful to management because it eliminates the amortization related to
the recognition of GAAP revenues and GAAP marketing expenses and therefore
includes only membership fees received in the current reporting period and
marketing costs paid or accrued in the current reporting period.
These non-GAAP measures should be considered in addition to, not as a substitute
for or superior to, operating income, net income, operating cash flows or other
measures of financial performance and liquidity determined in accordance with
generally accepted accounting principles.
20
The following tables reconcile EBITDA and adjusted EBITDA to net income for the
years ended June 30 (in millions):
For the year ended June 30, 2005
-----------------------------------------------------------------
Consolidated Marketing Corporate and
Total Services Personals Other
-------------- -------------- -------------- --------------
Net income $ 25.5
Interest and other expense, net (1) 18.2
Provision for income taxes (1) 13.4
--------------
Operating income (expense) $ 57.1 $ 85.5 $ (3.1) $ (25.3)
Depreciation and amortization 21.6 11.0 9.3 1.3
-------------- -------------- -------------- --------------
EBITDA 78.7 96.5 6.2 (24.0)
Change in deferred revenues (34.9) (35.9) 0.1 0.9
Change in deferred marketing costs 13.4 13.4 - -
-------------- -------------- -------------- --------------
Adjusted EBITDA $ 57.2 $ 74.0 $ 6.3 $ (23.1)
============== ============== ============== ==============
For the year ended June 30, 2004
-----------------------------------------------------------------
Consolidated Marketing Corporate and
Total Services Personals Other
-------------- -------------- -------------- --------------
Net income $ 28.0
Interest and other expense, net (1) 6.3
Provision for income taxes (1) 18.6
--------------
Operating income (expense) $ 52.9 $ 76.6 $ 0.3 $ (24.0)
Depreciation and amortization 12.5 10.1 2.4 -
-------------- -------------- -------------- --------------
EBITDA 65.4 86.7 2.7 (24.0)
Change in deferred revenues (32.3) (31.7) (0.6) -
Change in deferred marketing costs 25.5 25.5 - -
-------------- -------------- -------------- --------------
Adjusted EBITDA $ 58.6 $ 80.5 $ 2.1 $ (24.0)
============== ============== ============== ==============
For the year ended June 30, 2003
-----------------------------------------------------------------
Consolidated Marketing Corporate and
Total Services Personals Other
-------------- -------------- -------------- --------------
Net income $ 24.4
Interest and other expense, net (1) (18.3)
Provision for income taxes (1) 16.2
--------------
Operating income (expense) $ 22.3 $ 41.8 $ - $ (19.5)
Depreciation and amortization 12.1 11.9 - 0.2
-------------- -------------- -------------- --------------
EBITDA 34.4 53.7 - (19.3)
Change in deferred revenues (39.0) (39.0) - -
Change in deferred marketing costs 51.4 51.4 - -
-------------- -------------- -------------- --------------
Adjusted EBITDA $ 46.8 $ 66.1 $ - $ (19.3)
============== ============== ============== ==============
(1) Management does not allocate interest and other expense, net nor does it
allocate provision for income taxes to the individual segments.
21
COMMITMENTS
The Company is not aware of factors that are reasonably likely to adversely
affect liquidity trends, other than the risk factors presented in the Forward
Looking Statements in this Annual Report on Form 10-K. The Company does not have
off-balance sheet arrangements (other than those disclosed in the table below),
non-exchange traded contracts or material related party transactions.
Future minimum payments of contractual obligations as of June 30, 2005 are as
follows (in millions):
Payments Due by Period
--------------------------------------------------------------
Less than 1 - 3 3 - 5 After 5
Total 1 year years years years
---------- ---------- ---------- ---------- ----------
Operating leases $ 27.3 $ 8.7 $ 10.7 $ 6.9 $ 1.0
Capital leases 1.9 0.7 1.1 0.1 -
Long-term debt 240.0 - - - 240.0
Purchase obligations (1) 86.5 24.8 61.5 0.2 -
Pension obligation 4.6 - - 0.3 4.3
---------- ---------- ---------- ---------- ----------
Total payments due $ 360.3 $ 34.2 $ 73.3 $ 7.5 $ 245.3
========== ========== ========== ========== ==========
(1) Includes $70.6 million of contingent payments related to business
combinations.
The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and terms. The Company plans to relocate certain of its offices in 2006.
The new leases were signed during the first quarter of fiscal 2006 and
therefore, are not reflected in the table above. See Notes 7 and 8 to the
consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement No. 123 (Revised 2004), "Share-Based
Payment," ("SFAS 123R"). This statement is a revision of SFAS 123 and supersedes
APB 25. SFAS 123R will require the Company to measure all employee stock-based
compensation awards using a fair value method and record that expense in its
consolidated financial statements over the requisite service periods. Adoption
of SFAS 123R will also require additional accounting related to income tax
effects and additional disclosure regarding cash flow effects resulting from
share-based payment arrangements. SFAS 123R is effective beginning in the
Company's first quarter of fiscal 2006. Adoption of SFAS 123R will have a
material impact on the Company's consolidated financial position, results of
operations, cash flow presentation and related disclosures. The Company expects
additional expense related to the adoption of SFAS 123R of approximately $5.0
million in fiscal 2006.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections - A replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). This statement requires retrospective application to prior
periods' financial statements of changes in accounting principles unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. This statement applies to all voluntary changes in
accounting principles and changes required by an accounting pronouncement that
does not include specific transition provisions. SFAS 154 is effective beginning
in the Company's first quarter of fiscal 2007. The Company does not expect
adoption of SFAS 154 to have a material effect on its consolidated financial
position, results of operations or cash flows.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are
based on current expectations, estimates, forecasts and projections about the
industry in which the Company operates and management's beliefs and assumptions.
These forward-looking statements include statements that do not relate solely to
historical or current facts and can be identified by the use of words such as
"believe," "expect," "estimate," "project," "continue" or "anticipate." These
forward-looking statements are made pursuant to safe harbor provisions of the
Private Securities Litigation Reform Act of 1995.
22
Forward-looking statements are not guarantees of future performance and are
based on many assumptions and estimates that are inherently subject to
significant risks and uncertainties, many of which are beyond our control,
cannot be foreseen and reflect future business decisions that may change.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. Among the many
factors that could cause actual results to differ materially from the
forward-looking statements are:
o higher than expected membership cancellations or lower than expected
membership renewal rates;
o changes in the marketing techniques of credit card issuers;
o increases in the level of commission rates and other compensation
required by marketing partners to actively market with the Company;
o potential reserve requirements by business partners, such as the
Company's credit card processors;
o unanticipated termination of marketing agreements;
o the extent to which the Company can continue to successfully develop
and market new products and services and introduce them in a timely
manner;
o the Company's ability to integrate acquired businesses into the
Company's management and operations and operate successfully;
o unanticipated changes in or termination of the Company's ability to
process revenues through third parties, including credit card
processors and bank card associations;
o the Company's ability to develop and implement operational and
financial systems to manage growing operations;
o the Company's ability to recover from a complete or partial system
failure or impairment, other hardware or software related malfunctions
or programming errors;
o the degree to which the Company is leveraged;
o the Company's ability to obtain financing on acceptable terms to
finance the Company's growth strategy and to operate within the
limitations imposed by financing arrangements;
o further changes in the already competitive environment for the
Company's products or competitors' responses to the Company's
strategies;
o changes in the growth rate of the overall U.S. economy or the
international economy where the Company does business such that credit
availability, interest rates, consumer spending, related consumer
financing and related consumer debt are affected;
o additional government regulations and changes to existing government
regulations of the Company's industry;
o the Company's ability to compete with other companies that have
financial or other advantages;
o adverse movements of foreign exchange rates;
o the Company's ability to attract and retain active members and users;
o adverse results of litigation or regulatory matters; and
o new accounting pronouncements.
Many of these factors are beyond the Company's control and therefore its
business, financial condition, results of operations and cash flows may be
adversely affected by these factors.
The Company cautions that these factors are not exclusive. All forward looking
statements made in this Annual Report on Form 10-K are qualified by these
cautionary statements and readers are cautioned not to place undue reliance on
these forward looking statements, which speak only as of the date of this Annual
Report on Form 10-K. Except as required by law, the Company has no obligation
and does not intend to publicly update any forward looking statements, whether
as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Interest Rate
The Company has a senior secured credit facility, which was amended and restated
on March 1, 2005 and matures on March 23, 2006, that allows borrowings of up to
$45.0 million. Borrowings under this senior secured credit facility accrue
interest at either the Eurodollar rate or the higher of the Prime rate, or the
Federal Funds rate plus an applicable margin. There were no borrowings
outstanding under this senior secured credit facility as of June 30, 2005. As of
June 30, 2005, availability under the senior secured credit facility was reduced
by an outstanding letter of credit of $5.5 million and was $39.5 million. As of
June 30, 2005, the effective interest rate for borrowings under the senior
secured credit facility was 6.25%. Management believes that an increase in the
Eurodollar rate, the Prime rate or the Federal Funds rate would not be material
to the Company's financial position or its results of operations.
23
In addition, the Company has $90.0 million aggregate principal amount of 5.5%
Convertible Notes due 2010 and $150.0 million aggregate principal amount of
9.25% Senior Notes due 2014. The Convertible Notes and the Senior Notes pay
interest in cash semi-annually in arrears on April 1 and October 1. The fair
value of the fixed interest instruments is affected by changes in interest rates
and, with respect to the Convertible Notes, by changes in the Company's stock
price and volatility. The Company does not currently hedge interest rates with
respect to its outstanding debt. As of June 30, 2005, the carrying value of the
Convertible Notes and the Senior Notes was $90.0 million and $147.8 million,
respectively, and the fair value of the notes was $103.1 million and $151.5
million, respectively. Cash paid in connection with interest on the Convertible
Notes and the Senior Notes in each of the next five years is expected to be
$18.8 million assuming none of the notes is converted into equity.
Foreign Currency
The Company conducts business in certain foreign markets, primarily in Canada.
The Company's primary exposure to foreign currency risk relates to investments
in foreign subsidiaries that transact business in functional currencies other
than the U.S. dollar, primarily the Canadian dollar. The Company's recent
acquisitions have reduced the proportion of its operations exposed to
potentially volatile movements in currency exchange rates. The economic impact
of currency exchange rate movements on the Company is often linked to
variability in real growth, inflation, interest rates, governmental actions and
other factors. These changes, if material, could cause the Company to adjust its
financing and operating strategies. As currency exchange rates change,
translation of the income statements of the Company's international businesses
into U.S. dollars affects year-to-year comparisons of operating results.
The Company uses purchase option contracts and forward contracts to minimize its
exposure to changes in future cash flows caused by movements in foreign currency
exchange rates between the U.S. dollar and the Canadian dollar. However, there
can be no assurance that the Company's foreign currency hedging activities will
substantially offset the impact of fluctuations in currency exchange rates on
its results of operations and financial position. The Company does not use
derivatives for speculative purposes. Derivatives used to hedge forecasted
transactions and specific cash flows associated with Canadian dollar denominated
financial assets and liabilities that meet the criteria for hedge accounting are
designated as cash flow hedges. The effective portion of gains and losses is
deferred as a component of accumulated other comprehensive income and is
recognized in earnings in the same line item as the underlying hedged item at
the time the hedged item affects earnings.
Fair Value of Investments
The Company does not have material exposure to market risk with respect to
investments since the Company's investments are short-term in nature (original
maturities of less than one year).
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The Company's financial statements and related notes and report of independent
public registered accounting firm are included following Part IV beginning on
page F-1 and identified in the index in Item 15(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
-----------------------
Evaluation of disclosure controls and procedures.
The Chief Executive Officer and Chief Financial Officer evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934) as of the end of the period covered by this report and
have concluded that the Company's disclosure controls and procedures were
effective at the reasonable assurance level. The Company's disclosure controls
and procedures are designed to ensure that material information relating to the
Company and its consolidated subsidiaries that is required to be disclosed in
its reports under the Exchange Act is accumulated, communicated to the Chief
Executive Officer and Chief Financial Officer and disclosed appropriately in its
timely reports under the Exchange Act.
Because a cost-effective control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met, misstatements due to error or fraud
may occur and not be detected. In addition, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
24
Management's Report on Internal Control over Financial Reporting.
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f). Under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, management evaluated the
effectiveness of the Company's internal control over financial reporting as of
June 30, 2005.
On January 1, 2005 and November 30, 2004, respectively, the Company completed
the acquisitions of certain of the assets of MCM and Bargain. Management
excluded certain elements of the internal control over financial reporting of
MCM and Bargain from its assessment of internal control over financial reporting
as of June 30, 2005 because the assets were acquired in purchase business
combinations during 2005. Subsequent to the acquisitions, certain elements of
each of the MCM and Bargain internal control over financial reporting and
related processes were integrated into the Company's existing systems and
internal control over financial reporting. Those controls that were not
integrated have been excluded from management's assessments of the effectiveness
of internal control over financial reporting as of June 30, 2005. The excluded
elements of MCM and Bargain represent controls over accounts representing 3.8%
of the Company's consolidated assets and 6.6% of the Company's consolidated
revenues as of and for the year ended June 30, 2005.
Management used the criteria set forth in "Internal Control - Integrated
Framework" of the Committee of Sponsoring Organizations of the Treadway
Commission in making its assessment. Based on those criteria, management
concluded that the Company's internal control over financial reporting was
effective.
PricewaterhouseCoopers LLP, the independent registered public accounting firm
that audited the Company's financial statements included in Item 8 of this
Annual Report on Form 10-K, has also audited management's assessment of the
Company's internal control over financial reporting as of June 30, 2005 and the
effectiveness of the Company's internal control over financial reporting as of
June 30, 2005. Their report is included in Item 8.
Changes in internal control over financial reporting.
During the fourth quarter of 2005, there were no changes in the Company's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Item 9B. Other Information
-----------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information in the Company's Proxy Statement under the section titled
"Election of Directors" is incorporated herein by reference. Information
regarding the Executive Officers of the Company is furnished in Part I of this
Annual Report on Form 10-K under the heading "Executive Officers of the
Registrant."
Item 11. Executive Compensation
----------------------
The information in the Company's Proxy Statement under the section titled
"Executive Compensation" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information in the Company's Proxy Statement under the section titled
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information in the Company's Proxy Statement under the section titled
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
25
Item 14. Principal Accountant Fees and Services
--------------------------------------
The information in the Company's Proxy Statement under the section titled
"Ratification of Selection of Independent Auditors" is incorporated herein by
reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) Index to Financial Statements and Financial Statement Schedules Page
----
(1) Report of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm F-1
Consolidated Balance Sheets as of June 30, 2005 and 2004 F-3
Consolidated Statements of Operations for the years ended
June 30, 2005, 2004 and 2003 F-4
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended June 30, 2005, 2004 and 2003 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2005, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-7
(2) The following Financial Statement Schedule is included:
Schedule II - Valuation and Qualifying Accounts - Years ended
June 30, 2005, 2004 and 2003 F-30
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(3) Exhibits:
Exhibits filed as part of this Annual Report on Form 10-K are listed
in the Exhibit Index immediately following the signatures in this
Annual Report on Form 10-K.
26
VERTRUE INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VERTRUE INCORPORATED
--------------------
(Registrant)
By: /s/ GARY A. JOHNSON
---------------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
Date: September 13, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
By: /s/ Gary A. Johnson President, Chief Executive Officer September 13, 2005
----------------------------- Officer and Director
Gary A. Johnson
By: /s/ James B. Duffy Executive Vice President and Chief September 13, 2005
--------------------------- Financial Officer
James B. Duffy
By: /s/ Alec L. Ellison Director September 13, 2005
---------------------------
Alec L. Ellison
By: /s/ Joseph E. Heid Director September 13, 2005
---------------------------
Joseph E. Heid
By: /s/ Robert Kamerschen Director September 13, 2005
---------------------------
Robert Kamerschen
By: /s/ Michael T. McClorey Director September 13, 2005
---------------------------
Michael T. McClorey
By: /s/ Edward M. Stern Director September 13, 2005
---------------------------
Edward M. Stern
By: /s/ Marc S. Tesler Director September 13, 2005
---------------------------
Marc S. Tesler
27
Exhibits
--------
No. Description
--- -----------
*3.1 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.3 to the Company's Registration Statement on Form S-1,
Registration No. 333-10541, filed on September 6, 1996; Certificate of
Amendment of Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q,
File No. 000-21527, filed on February 9, 2005).
*3.2 Restated By-laws of the Registrant as amended (filed as Exhibit 3.3 to
the Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on August 21, 1996).
*4.1 Indenture dated as of September 30, 2003 between the Registrant and
Deutsche Bank Trust Company Americas, Trustee relating to the 5.5%
Convertible Senior Subordinated Notes due 2010 (filed as exhibit 4.1
to the Company's Quarterly report on Form 10-Q, File No. 000-21527,
filed on November 13, 2003).
*4.2 Registration Rights Agreement dated as of September 30, 2003 among the
Registrant and Lehman Brothers Inc. and CIBC World Markets Corp.
(filed as exhibit 4.2 to the Company's Quarterly report on Form 10-Q,
File No. 000-21527, filed on November 13, 2003).
*4.3 Indenture dated as of April 13, 2004 between the Registrant and each
of the Guarantors party thereto and LaSalle Bank National Association,
as Trustee relating to the 9.25% Senior Notes due 2014, including the
form of notes (filed as exhibit 4.1 to the Company's Registration
Statement on Form S-4, Registration No. 333-115500, filed on May 14,
2004).
*10.1^ Amended Employee Incentive Stock Option Plan of the Registrant
(filed as Exhibit 10.1 to the Company's Registration Statement on Form
S-1, Registration No. 333-10541, filed on September 6, 1996).
*10.2^ 1995 Non-Employee Directors' Stock Option Plan of the Registrant
(filed as Exhibit 10.3 to the Company's Registration Statement on Form
S-1, Registration No. 333-10541, filed on August 21, 1996).
*10.3^ 1996 Stock Option Plan of the Registrant (filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on September 27, 1996).
*10.4^ 1996 Employee Stock Purchase Plan of the Registrant (filed as
Exhibit 10.5 to the Company's Registration Statement on Form S-1,
Registration No. 333-10541, filed on September 27, 1996).
*10.5^ Amended and Restated 401(k) Profit Sharing Plan of the Registrant
dated July 1, 2000 (filed as Exhibit 10.6 to the Company's Annual
Report on Form 10-K, File No. 000-21527, filed on September 6, 2001).
*10.6 Amended and Restated Credit Agreement dated March 25, 2004, amended
March 1, 2005, among the Registrant, the Lenders Parties Hereto and
LaSalle Bank National Association (filed as exhibit 99.3 to the
Company's Current report on Form 8-K, File No. 000-21527, filed on
April 5, 2004).
*10.7 Master Transaction Agreement dated March 3, 2004 among the
Registrant, Lavalife Inc., Lavalife's Investors and Lavalife's Senior
Management (filed as exhibit 99.2 to the Company's Current report on
Form 8-K, File No. 000-21527, filed on April 5, 2004).
*10.8^ Long-term Incentive Plan of the Registrant (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q, File No. 000-21527, filed
on February 9, 2005).
*10.9 Lease Agreement between Stamford Towers Limited Partnership and the
Registrant dated January 15, 1996 (filed as Exhibit 10.22 to the
Company's Registration Statement on Form S-1, Registration No.
333-10541, filed on September 6, 1996).
*10.10 Arena Tower II Lease Agreement by and between Arena Tower II
Corporation and the Registrant dated February 12, 1996, as amended
(filed as Exhibit 10.24 to the Company's Registration Statement on
Form S-1, Registration No. 333-10541, filed on September 6, 1996).
*10.11 Lease Agreement between Stamford Towers Limited Partnership and the
Registrant dated May 20, 1997 (filed as Exhibit 10.23 to the Company's
Annual Report on Form 10-K, File No. 000-21527, filed on September 29,
1997).
*10.12 Second Amendment to Lease Agreement between Arena Tower II
Corporation and the Registrant dated January 24, 1997 (filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K, File No.
000-21527, filed on September 29, 1997).
28
*10.13 Third Amendment to Lease Agreement between Arena Tower II
Corporation and the Registrant dated July 23, 1997 (filed as Exhibit
10.25 to the Company's Annual Report on Form 10-K, File No. 000-21527,
filed on September 29, 1997).
*14.1 Code of Conduct of the Registrant (filed as Exhibit 14 to the
Company's Quarterly report on Form 10-Q, File No. 000-21527, filed on
May 14, 2004).
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Rule 13a-14(a)/15d-14(a) CEO Certification.
31.2 Rule 13a-14(a)/15d-14(a) CFO Certification.
32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.1 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
----------------------------------
* Previously filed and incorporated herein by reference.
^ Management contract or compensatory plan.
29
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Vertrue Incorporated:
We have completed an integrated audit of the Vertrue Incorporated 2005
consolidated financial statements and of its internal control over financial
reporting as of June 30, 2005 and audits of its 2004 and 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Vertrue Incorporated and its subsidiaries at June 30, 2005
and 2004, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2005 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
-----------------------------------------
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
June 30, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 30,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
F-1
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded certain elements of the internal control over
financial reporting of MCM and Bargain from its assessment of internal control
over financial reporting as of June 30, 2005 because they were acquired in
purchase business combinations during fiscal 2005. Subsequent to the
acquisitions, certain elements of each of the MCM and Bargain internal control
over financial reporting and related processes were integrated into the
Company's existing systems and internal control over financial reporting. Those
controls that were not integrated have been excluded from management's
assessment of the effectiveness of internal control over financial reporting as
of June 30, 2005. We have also excluded those elements of the internal control
over financial reporting of MCM and Bargain from our audit of internal control
over financial reporting. The excluded elements of MCM and Bargain represent
controls over accounts representing 3.8% of the consolidated assets and 6.6% of
the consolidated revenues as of and for the year ended June 30, 2005.
/s/ PricewaterhouseCoopers LLP
New York, New York
September 12, 2005
F-2
VERTRUE INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30,
-------------------
2005 2004
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 64,356 $ 47,166
Restricted cash 3,411 3,120
Short-term investments 16,223 119,980
Accounts receivable (net of allowance for doubtful accounts of
$63 and $235 at June 30, 2005 and 2004, respectfully 12,559 10,557
Prepaid membership materials 2,557 3,233
Prepaid expenses and other current assets 8,695 4,886
Deferred marketing costs 39,226 52,428
--------- ---------
Total current assets 147,027 241,370
Fixed assets, net 39,062 36,540
Goodwill 201,499 125,675
Intangible assets, net 46,476 38,872
Other assets 13,098 10,705
--------- ---------
Total assets $447,162 $453,162
========= =========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term obligations $ 686 $ 338
Accounts payable 42,077 35,185
Accrued liabilities 82,157 66,075
Deferred revenues 108,117 138,381
Deferred income taxes 9,780 12,323
--------- ---------
Total current liabilities 242,817 252,302
Deferred income taxes 9,702 4,354
Other long-term liabilities 5,257 4,930
Long-term debt 237,814 237,659
--------- ---------
Total liabilities 495,590 499,245
--------- ---------
Commitments and contingencies - -
Shareholders' deficit:
Preferred stock, $0.01 par value -- 1,000 shares authorized;
no shares issued - -
Common stock, $0.01 par value -- 40,000 shares authorized;
19,703 shares issued (19,089 shares at June 30, 2004) 197 191
Capital in excess of par value 169,463 156,457
Accumulated earnings 35,680 10,131
Accumulated other comprehensive loss (148) (373)
Treasury stock, 10,020 shares at cost (8,852 shares at June
30, 2004) (253,620) (212,489)
--------- ---------
Total shareholders' deficit (48,428) (46,083)
--------- ---------
Total liabilities and shareholders' deficit $447,162 $453,162
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
VERTRUE INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
For the years ended June 30,
-------------------------------------
2005 2004 2003
----------- ------------- -----------
Revenues $ 579,839 $ 488,739 $ 456,881
Expenses:
Marketing 286,437 255,818 280,673
Operating 114,418 91,832 78,444
General and administrative 108,231 85,826 74,085
Charge for arbitration award 5,458 - -
Amortization of intangibles 8,201 2,393 1,393
----------- ------------- -----------
Operating income 57,094 52,870 22,286
Settlement of investment related litigation - - 19,148
Loss on sale of subsidiary - - (959)
Net loss on investment - - (206)
Interest (expense) income, net (18,805) (6,621) 570
Other income (expense), net 652 349 (244)
----------- ------------- -----------
Income before income taxes 38,941 46,598 40,595
Provision for income taxes 13,392 18,638 16,239
----------- ------------- -----------
Net income $ 25,549 $ 27,960 $ 24,356
=========== ============= ===========
Earnings per share:
Basic $ 2.56 $ 2.60 $ 1.93
=========== ============= ===========
Diluted $ 2.22 $ 2.29 $ 1.84
=========== ============= ===========
Weighted average common shares used in earnings per
share calculations:
Basic 9,995 10,755 12,596
=========== ============= ===========
Diluted 12,973 13,208 13,233
=========== ============= ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-4
VERTRUE INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
Accumulated
Common Stock Capital in Accumulated Other
----------------- Excess of Earnings Comprehensive Treasury
Shares Amount Par Value (Deficit) (Loss) Gain Stock Total
------ ------ --------- --------- ----------- ----- -----
Balance - June 30, 2002 17,493 $ 175 $ 109,254 $ (42,185) $ (373) $(87,501) $(20,630)
Issuance of common stock 354 3 4,047 - - - 4,050
Tax benefit from employee stock options - - 9,100 - - - 9,100
Issuance of treasury stock to fund 401K Plan - - (21) - - 127 106
Expense associated with issuing stock options to a
non-employee - - 45 - - - 45
Acquisition of treasury stock - - - - - (37,214) (37,214)
Comprehensive income:
Net income - - - 24,356 - - 24,356
Currency translation adjustment - - - - (96) - (96)
----------
Total comprehensive income 24,260
--------------------------------------------------------------------------------
Balance - June 30, 2003 17,847 178 122,425 (17,829) (469) (124,588) (20,283)
Issuance of common stock 1,242 13 24,551 - - - 24,564
Issuance of restricted stock - - 2,774 - - 6,306 9,080
Tax benefit from employee stock options - - 6,520 - - - 6,520
Expense associated with issuing stock options to a
non-employee - - 187 - - - 187
Acquisition of treasury stock - - - - - (94,207) (94,207)
Comprehensive income:
Net income - - - 27,960 - - 27,960
Currency translation adjustment - - - - 105 - 105
Minimum pension liability adjustment (net of tax) - - - - (9) - (9)
----------
Total comprehensive income 28,056
--------------------------------------------------------------------------------
Balance - June 30, 2004 19,089 191 156,457 10,131 (373) (212,489) (46,083)
Issuance of common stock 614 6 10,786 - - - 10,792
Tax benefit from employee stock options - - 2,220 - - - 2,220
Acquisition of treasury stock - - - - - (41,131) (41,131)
Comprehensive income:
Net income - - - 25,549 - - 25,549
Currency translation adjustment - - - 79 - 79
Unrealized hedging gain - - - 239 - 239
Minimum pension liability adjustment (net of tax) - - - (93) - (93)
----------
Total comprehensive income 25,774
--------------------------------------------------------------------------------
Balance - June 30, 2005 19,703 $ 197 $ 169,463 $ 35,680 $ (148) $(253,620) $(48,428)
================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
VERTRUE INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended June 30,
-------------------------------
2005 2004 2003
---------- ---------- ---------
Operating activities
Net income $ 25,549 $ 27,960 $ 24,356
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in deferred revenues (34,911) (32,272) (39,003)
Change in deferred marketing costs 13,443 25,455 51,411
Depreciation and amortization 23,105 13,252 12,120
Deferred and other income taxes 453 10,254 14,182
Tax benefit from employee stock plans 2,220 6,520 942
Gain on settlement of investment related litigation - - (19,148)
Loss on sale of subsidiary - - 959
Net loss on investment - - 206
Other (423) 890 2,485
Change in assets and liabilities:
Restricted cash (291) (388) 2,951
Accounts receivable (1,789) (112) 758
Prepaid membership materials 676 (1,589) (135)
Prepaid expenses (2,114) 5,172 (3,246)
Other assets (2,584) (461) (1,331)
Accounts payable 8,758 (10,323) (255)
Accrued and other liabilities 219 3,590 1,281
---------- ---------- ---------
Net cash provided by operating activities 32,311 47,948 48,533
---------- ---------- ---------
Investing activities
Acquisition of fixed assets (11,006) (7,057) (5,463)
Settlement of investment related litigation - - 19,148
Purchases of short-term investments (402,630) (650,750) (5,000)
Sales of short-term investments 507,260 535,770 -
Acquisitions of businesses, net of cash acquired, and other
investing activities (77,237) (114,916) (1,250)
---------- ---------- ---------
Net cash provided by (used in) investing activities 16,387 (236,953) 7,435
---------- ---------- ---------
Financing activities
Net proceeds from issuance of stock 10,792 33,644 4,050
Treasury stock purchases (41,131) (94,207) (37,214)
(Debt issuance costs)/net proceeds from issuance of debt (844) 229,825 -
Payments of long-term obligations (549) (453) (1,051)
---------- ---------- ---------
Net cash (used in) provided by financing activities (31,732) 168,809 (34,215)
---------- ---------- ---------
Effect of exchange rate changes on cash and cash equivalents 224 102 5
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 17,190 (20,094) 21,758
Cash and cash equivalents at beginning of year 47,166 67,260 45,502
---------- ---------- ---------
Cash and cash equivalents at end of year $ 64,356 $ 47,166 $ 67,260
========== ========== =========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NOTE 1 - NATURE OF BUSINESS
Vertrue Incorporated ("Vertrue" or the "Company") is a leading consumer services
marketing company. The Company offers both subscription and transaction based
services focused on meeting consumer needs in large spending categories -
healthcare, personal property, discounts, security and insurance and personals.
The Company's service offerings provide consumers everyday savings,
event-oriented discounts, benefits that provide the consumer with peace of mind
and access to information and opportunities for self-enrichment.
The Company was incorporated in 1989 in Delaware under the name Cardmember
Publishing Corporation. On October 17, 1996, the Company completed an initial
public offering of its stock and changed its name to MemberWorks Incorporated.
On October 13, 2004, the Company began doing business as Vertrue Incorporated
and on November 18, 2004, shareholders approved an amendment to the Company's
charter formally changing its name to Vertrue Incorporated. The name change was
intended to reflect the ever-broadening base of services that the Company offers
to its customers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - consolidation
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include the accounts of the Company, its wholly owned subsidiaries and variable
interest entities required to be consolidated. All significant intercompany
accounts and transactions have been eliminated.
The Company acquired Lavalife Inc. ("Lavalife") on April 1, 2004, Bargain
Network, Inc. ("Bargain") on November 30, 2004 and My Choice Medical, Inc.
("MCM") on January 1, 2005. Therefore, their results of operations have been
included in the consolidated results of operations since their acquisition
dates. The results of Bargain, Lavalife and MCM have been included in the
Marketing Services, Personals and Corporate and Other segments, respectively.
Use of estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates. The most significant judgments and estimates include:
membership cancellation rates, deferred marketing costs, goodwill and other
intangible asset valuations, intangible assets' remaining useful lives and
deferred tax asset valuations.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation to reclassify auction rate securities from cash and cash
equivalents to short-term investments. Corresponding adjustments have been made
in the consolidated statements of cash flows for prior periods to reflect gross
purchases and sales of auction rate securities as investing activities rather
than as a component of cash and cash equivalents. The Company reclassified
$112,330,000 and $5,000,000 from cash and cash equivalents to short-term
investments at June 30, 2004 and 2003, respectively. These reclassifications do
not affect previously reported cash flows from operating or financing activities
in the consolidated statements of cash flows. For the years ended June 30, 2004
and 2003, net cash used in investing activities related to auction rate
securities was $107,330,000 and $5,000,000, respectively.
Foreign currency translation
Assets and liabilities of foreign subsidiaries, whose assets and liabilities are
denominated in their local currencies, are translated at the exchange rates in
effect as of the balance sheet dates. Equity accounts are translated at
historical exchange rates and revenues, expenses and cash flows are translated
at average exchange rates for the periods presented. Translation gains and
losses are included as a component of comprehensive income in the consolidated
statements of shareholders' deficit. Transaction gains and losses are included
in the consolidated statements of operations.
Fair value of financial instruments and concentration of credit risk
All current assets and liabilities are carried at cost, which approximates fair
value due to their short-term maturities. The recorded amounts of the Company's
long-term liabilities also approximate fair value except for differences with
respect to the Convertible Notes and the Senior Notes (see Note 7) which had
carrying values of $90,000,000 and $147,814,000, respectively, and fair values
of $103,050,000 and $151,500,000, respectively, as of June 30, 2005. The
Convertible Notes and the Senior Notes had carrying values of $90,000,000 and
$147,659,000, respectively, and fair values of $93,263,000 and $143,250,000,
respectively, as of June 30, 2004. The fair value information was based on
publicly available information. Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of accounts
receivable from credit card processors who facilitate payments from membership
and personals customers.
F-7
Fixed assets
Fixed assets, capitalized software costs and capital leases are carried at cost,
less accumulated depreciation and amortization. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets.
Useful lives are generally between 3 and 7 years for computer software and
equipment, the shorter of the estimated remaining useful life or the remaining
life of the lease, for leasehold improvements and 5 to 10 years for furniture
and fixtures. Maintenance and repair expenditures are charged to operations as
incurred.
Revenue recognition
Revenues are billed primarily through credit and debit cards. Revenues from
membership programs are recognized when earned. Members may cancel their
memberships at any time. Members enrolled in an annual payment plan who cancel
their memberships receive a pro rata refund of the remaining unused portion of
their membership fees. In accordance with Staff Accounting Bulletin 104,
"Revenue Recognition" ("SAB 104"), revenues, net of estimated cancellations, are
deferred and recognized as revenues when membership refund privileges expire.
Management establishes and regularly updates the allowance for membership
cancellations. In estimating the allowance for membership cancellations,
management analyzes historical cancellation experience, current economic trends
and changes in customer demand for the Company's products and services. Actual
membership refunds are charged against the allowance for membership
cancellations on a current basis. Accrued liabilities set forth in the
accompanying consolidated balance sheets as of June 30, 2005 and 2004 include an
allowance for membership cancellations of $11,232,000 and $14,156,000,
respectively.
Revenues generated by the Personals reportable business segment are recognized
when the services are used.
Membership programs sponsored by the Company's largest client accounted for 14%
of revenues in 2005. Membership programs sponsored by the Company's two largest
clients in each year accounted for 18% and 12% of revenues in 2004 and 21% and
16% of revenues in 2003, respectively.
Marketing expenses
The Company's marketing expenses are comprised of refundable royalty payments,
non-refundable royalty payments, advertising costs, telemarketing costs and
direct mail costs. Advertising costs and non-refundable royalty payments, which
include fee per offer, fee per sale and fee per impression marketing
arrangements, are expensed when incurred. Refundable royalty payments are
charged to operations as the associated revenues are recognized in accordance
with SAB 104. Telemarketing costs, including costs for third party vendors to
solicit members for the Company, and direct mail costs, including costs of
printing and mailing direct mail pieces, are deferred direct response
advertising costs and are charged to marketing expenses over the expected future
benefit period in accordance with American Institute of Certified Public
Accountants Statement of Position 93-7, "Reporting on Advertising Costs" ("SOP
93-7").
Deferred marketing costs to enroll a new member are less than the related
estimated total net revenues. However, if deferred marketing costs were to
exceed the related estimated total net revenues, management would adjust the
deferred marketing costs for that impairment.
Earnings per share
Basic and diluted earnings per share are determined in accordance with the
provisions of Financial Accounting Standards Board Statement ("SFAS") No. 128,
"Earnings Per Share" ("SFAS 128"). Basic earnings per share is computed using
the weighted average number of common shares outstanding during the reporting
period. Diluted earnings per share is computed using the weighted average number
of common shares outstanding and the dilutive effect of potentially outstanding
common shares determined using the treasury stock method.
Cash and cash equivalents
The Company considers highly liquid investment instruments with original
maturities of three months or less to be cash equivalents. The Company's cash
and cash equivalents are carried at cost, which approximates fair market value,
and primarily consist of money market funds.
Restricted cash
The Company excludes from cash and cash equivalents restricted cash that is held
in an escrow account for payment of commissions to a client.
F-8
Short-term investments
Short-term investments consist of commercial paper with original maturities of
more than 3 months but less than or equal to one year and auction rate
securities with interest rates that reset every 49 days or less but stated
contractual maturities greater than one year. As of June 30, 2005, these
investments are classified as available-for-sale and recorded at cost, which
approximates fair value due to their short-term reset dates. Historically, the
Company has been able to liquidate auction rate securities at any reset date to
provide funds for investing or financing activities or to invest in securities
that would generate higher yields.
Income taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Valuation of goodwill and other intangibles
The Company reviews the carrying value of its goodwill and other intangible
assets and assesses the estimated remaining useful lives of its intangible
assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Management reviews goodwill and other intangible assets for
impairment by comparing their carrying values to their fair values at least
annually or more frequently if circumstances indicate possible impairment. When
determining fair value, management utilizes various assumptions, including
projections of future cash flows. A change in the underlying assumptions could
cause fair value to be less than carrying value and require the Company to
record a corresponding charge against operations. Management tested goodwill for
impairment at July 1, 2004 and 2003 during the quarters ended September 30, 2004
and 2003, respectively, and concluded that it was not impaired as of July 1,
2004 or 2003. Management also reassessed the estimated useful lives of its
indefinite lived intangible assets and determined that they were appropriate.
Intangible assets principally include member and customer relationships and
trade names that arose in connection with business acquisitions. Acquired
intangibles, except member relationships, are recorded at cost and are amortized
on a straight-line basis over their estimated useful lives. The value of member
relationships is amortized using an accelerated method based on estimated future
cash flows. The weighted average amortization periods for membership and client
relationships, trade names, other amortizable intangible assets and total
amortizable intangible assets held at June 30, 2005 were 9 years, 15 years, 3
years and 11 years, respectively.
Impairment of long-lived assets
The Company accounts for impairment and disposition of long-lived assets in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company reviews its intangible and other long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying value may not be recoverable, as determined based on their
projected undiscounted future cash flows. If this review indicates that the
carrying value will not be recoverable, the carrying value is reduced to its
estimated fair value. As of June 30, 2005, no impairment had been indicated.
Treasury stock
Treasury stock is accounted for under the cost method.
Contingent Liabilities
In accordance with SFAS 5, "Accounting for Contingencies," and Financial
Accounting Standards Interpretation 14, "Reasonable Estimation of the Amount of
a Loss," the Company accrues for contingent liabilities when it is probable that
future costs will be incurred and those costs can be reasonably estimated and
measured.
F-9
Stock-based compensation
In accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), the Company applies the intrinsic value
method in accounting for employee stock options. Accordingly, the Company
generally does not recognize compensation expense with respect to stock-based
awards to employees. If compensation expense for all awards under the Company's
stock-based compensation plans had been determined based on the fair value
method (estimated using the Black-Scholes option-pricing model) at the grant
dates in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure," the Company's pro forma net income and earnings per
share would have been as follows (in thousands, except per share data):
For the years ended June 30,
2005 2004 2003
------------ -------------- ------------
Net income reported $ 25,549 $ 27,960 $ 24,356
Add: Stock-based employee compensation expense
under the intrinsic value method, net of related tax
effects - - -
Deduct: Stock-based employee compensation expense
under the fair value method, net of related tax
effects (4,013) (4,762) (6,055)
------------ -------------- ------------
Pro forma net income $ 21,536 $ 23,198 $ 18,301
============ ============== ============
Earnings per share:
As reported
Basic $ 2.56 $ 2.60 $ 1.93
Diluted $ 2.22 $ 2.29 $ 1.84
Pro forma
Basic $ 2.15 $ 2.16 $ 1.45
Diluted $ 1.89 $ 1.90 $ 1.38
Under the Company's stock option plans, the fair value of each option grant
calculated under the provisions of SFAS 123 was estimated on the grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for the years ended June 30:
2005 2004 2003
---- ---- ----
Dividend yield 0% 0% 0%
Expected volatility 64% 74% 69%
Risk free interest rate 3.7% 2.9% 3.5%
Expected lives 5 years 5 years 5 years
The weighted average fair value per share of options granted at market value was
$18.23, $14.98 and $7.95 for the years ended June 30, 2005, 2004 and 2003,
respectively. For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting periods
of four to five years and the estimated fair value of the Company's awards
issued under the Employee Stock Purchase Plan is recognized in the period the
stock is issued.
New accounting pronouncements
In December 2004, the FASB issued Statement No. 123 (Revised 2004), "Share-Based
Payment," ("SFAS 123R"). This statement is a revision of SFAS 123 and supersedes
APB 25. SFAS 123R will require the Company to measure all employee stock-based
compensation awards using a fair value method and record that expense in its
consolidated financial statements over the requisite service periods. Adoption
of SFAS 123R will also require additional accounting related to income tax
effects and additional disclosure regarding cash flow effects resulting from
share-based payment arrangements. SFAS 123R is effective beginning in the
Company's first quarter of fiscal 2006. Adoption of SFAS 123R will have a
material impact on the Company's consolidated financial position, results of
operations, cash flow presentation and related disclosures. The Company expects
additional expense related to the adoption of SFAS 123R of approximately
$5,000,000 in fiscal 2006.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections - A replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). This statement requires retrospective application to prior
periods' financial statements of changes in accounting principles unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. This statement applies to all voluntary changes in
accounting principles and changes required by an accounting pronouncement that
does not include specific transition provisions. SFAS 154 is effective beginning
in the Company's first quarter of fiscal 2007. The Company does not expect the
adoption of SFAS 154 to have a material effect on its consolidated financial
position, results of operations or cash flows.
F-10
NOTE 3 - FIXED ASSETS
June 30,
----------------------------
2005 2004
------------- -------------
Computer software and equipment $ 68,273 $ 62,501
Furniture and fixtures 8,269 8,246
Leasehold improvements 7,906 6,622
------------- -------------
84,448 77,369
Accumulated depreciation (45,386) (40,829)
------------- -------------
Fixed assets, net $ 39,062 $ 36,540
============= =============
Depreciation and amortization expense was $13,485,000, $10,189,000 and
$10,818,000 for the years ended June 30, 2005, 2004 and 2003, respectively.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying value and accumulated amortization of goodwill and other
intangibles were as follows (in thousands):
June 30, 2005 June 30, 2004
----------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ----------------
Amortizable intangible assets:
Membership and client relationships $ 40,215 $ 15,184 $ 27,999 $ 8,686
Trade names 21,859 1,662 18,543 310
Other 1,518 1,237 1,162 886
---------- ------------ ---------- ----------------
Total amortizable intangible assets $ 63,592 $ 18,083 $ 47,704 $ 9,882
---------- ------------ ---------- ----------------
Amortizable intangible assets, net $ 45,509 $ 37,822
========== ==========
Indefinite-lived intangible assets:
Goodwill $ 201,499 $ 125,675
Intangible asset related to minimum pension
liability $ 967 $ 1,050
Future intangible amortization expense for the next five years is
estimated to be as follows (in thousands):
Fiscal Year
2006 $ 8,483
2007 6,825
2008 4,743
2009 4,322
2010 3,191
Changes in the carrying amount of goodwill by segment were as
follows (in thousands):
2005 2004
---------------------------------------- ------------------------------
Marketing Corporate Marketing
Services Personals and Other Total Services Personals Total
---------- --------- --------- --------- ---------- --------- ---------
Balance at beginning of year $ 42,039 $ 83,636 $ - $125,675 $ 42,039 $ - $ 42,039
Acquisitions 53,664 - 23,367 77,031 - 83,636 83,636
Purchase adjustments and other 214 (1,421) - (1,207) - - -
---------- --------- --------- --------- ---------- --------- ---------
Balance at end of year $ 95,917 $ 82,215 $ 23,367 $201,499 $ 42,039 $ 83,636 $125,675
========== ========= ========= ========= ========== ========= =========
F-11
As part of the acquisitions of certain of the assets of MCM and Bargain in
fiscal 2005, the Company acquired intangible assets of $92,491,000. Of those
amounts, $12,220,000 was assigned to membership and client relationships and
$3,240,000 was assigned to trade names. These identified intangible assets are
subject to periodic amortization over the estimated useful lives ranging from 1
to 15 years. Goodwill of $77,031,000, which is not subject to amortization, also
arose in connection with these acquisitions.
As part of the purchase of Lavalife in fiscal 2004, the Company acquired
intangible assets of $115,632,000. Of that amount, $14,799,000 has been assigned
to membership and client relationships and $18,619,000 has been assigned to
trade name, both of which are subject to periodic amortization over the
estimated useful lives ranging from 3 to 15 years. Goodwill of $82,214,000,
which is not subject to amortization, also arose in connection with the
acquisition.
Goodwill was tested for impairment during the quarters ended September 30, 2004,
2003 and 2002 as required by SFAS 142. The Company concluded that none of its
goodwill was impaired. Fair value was estimated using discounted cash flow
methodologies. In addition, the Company reassessed the estimated useful lives of
its indefinite lived intangible assets and determined that the lives were
appropriate. The Company will continue to test the goodwill of each of its
reporting units annually or more frequently if impairment indicators exist.
NOTE 5 - FOREIGN CURRENCY INSTRUMENTS
The Company uses purchase option contracts and forward contracts to minimize its
exposure to changes in future cash flows caused by movements in foreign currency
exchange rates between the U.S. dollar and the Canadian dollar. Derivatives are
held only for the purpose of hedging such risks and are not used for speculative
purposes. Derivatives used to hedge forecasted cash flows associated with
Canadian dollar denominated forecasted transactions that meet the criteria for
hedge accounting are designated as cash flow hedges. The effective portion of
derivative gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized when the underlying hedged item is
recognized in earnings.
The fair value of these contracts is included in prepaid and other current
assets. As of June 30, 2005, the fair value of these instruments was $559,000
(asset). Derivative gains recognized in earnings were recorded in operating
expenses and general and administrative expenses and amounted to $1,382,000 for
2005. All forecast transactions currently being hedged are expected to occur
over the next year.
During 2004, the Company used purchase option contracts and forward contracts to
protect against the foreign currency exchange risk inherent in the purchase
price for its acquisition of Lavalife, which was denominated in Canadian dollars
(see Note 9). The risk of loss associated with purchase option contracts was
limited to premium amounts paid for them. The risk of loss associated with
forward contracts was equal to the exchange rate differential from the time the
contract was entered into until it was settled. These contracts expired on April
1, 2004 concurrently with the closing of the Lavalife acquisition. Derivative
gains recognized in earnings were recorded as a component of other income, net
and amounted to $353,000 in 2004. As of June 30, 2004, the Company did not hold
any foreign currency instruments.
NOTE 6 - RESTRUCTURING CHARGES
The restructuring reserve balance, which is recorded in accrued liabilities and
other long-term liabilities, was $1,499,000 and $1,644,000 as of June 30, 2005
and 2004, respectively. Cash payments related to lease obligations for the years
ended June 30, 2005 and 2004 were $145,000 and $66,000, respectively. Cash
payments related to workforce reductions for the years ended June 30, 2005 and
2004 were $0 and $91,000, respectively.
F-12
NOTE 7 - LONG-TERM LIABILITIES
Long-term liabilities were as follows at June 30, (in thousands):
2005 2004
-------------- --------------
Senior Notes $ 147,814 $ 147,659
Convertible Notes 90,000 90,000
Other long-term obligations 5,943 5,268
-------------- --------------
243,757 242,927
Less current maturities 686 338
-------------- --------------
Long-term liabilities $ 243,071 $ 242,589
============== ==============
In April 2004, the Company issued $150,000,000 aggregate principal amount of
unsecured 9.25% senior notes due 2014 ("Senior Notes"). The Senior Notes were
registered in 2005. These Senior Notes were sold at 98.418% of the principal
amount which resulted in an effective yield of 9.5%. Interest is payable in cash
semi-annually in arrears on April 1 and October 1. The first payment was made on
October 1, 2004. A portion of the proceeds from the offering of these Senior
Notes was used to repay amounts borrowed under the senior secured credit
facility to fund a portion of the Lavalife acquisition. At any time prior to
April 1, 2007, the Company may redeem up to 35% of the Senior Notes with net
cash proceeds of certain equity offerings, as long as at least 65% of the
aggregate principal amount of the Senior Notes issued remains outstanding after
the redemption. The Company may redeem all or part of the Senior Notes prior to
April 1, 2009 by paying a make-whole premium. At any time on or after April 1,
2009, the Company may redeem some or all of the Senior Notes at certain
redemption prices plus accrued and unpaid interest and liquidation damages, if
any, to the date of redemption. Debt issuance costs and debt discount associated
with this issuance of $5,889,000 were capitalized and are being amortized as
interest expense over the term of the Senior Notes using the effective interest
method.
In September 2003, the Company issued $90,000,000 aggregate principal amount of
5.5% convertible senior subordinated notes due 2010 ("Convertible Notes"). The
Convertible Notes were registered in 2004. The Convertible Notes bear interest
at the rate of 5.5% per year, which is payable in cash semi-annually in arrears
on April 1 and October 1. The first payment was made on April 1, 2004. Holders
of the Convertible Notes may convert their notes into shares of the Company's
common stock at any time prior to maturity at an initial conversion price of
approximately $40.37 per share, which is equivalent to an initial conversion
rate of approximately 24.7739 shares per $1,000 principal amount of the
Convertible Notes. There are no beneficial conversion features related to these
Convertible Notes. In accordance with Accounting Principles Board Opinion No.
14, "Accounting for Convertible Notes and Debt Issued with Stock Purchase
Warrants," these Convertible Notes have been classified as a liability. Debt
issuance costs associated with this issuance of $3,491,000 were capitalized and
are being amortized as interest expense over the term of the Convertible Notes
using the effective interest method.
Other long-term obligations are comprised of the long-term portion of the
restructuring reserve (see Note 6), minimum pension liability (see Note 15) and
lease incentives related to certain operating leases. The lease incentives are
amortized as a reduction to rent expense over the terms of the leases.
The Company has an amended and restated senior secured credit facility, which
was amended and restated on March 1, 2005 and matures on March 23, 2006, that
allows borrowings of up to $45,000,000. Borrowings under the senior secured
credit facility accrue interest at either the Eurodollar rate, or the higher of
the Prime rate, or the Federal Funds rate plus an applicable margin. As of June
30, 2005, the availability under the senior secured credit facility was reduced
by an outstanding letter of credit of $5,458,000 and was $39,542,000. There were
no borrowings outstanding under this bank credit facility as of June 30, 2005 or
2004. The senior secured credit facility has certain financial covenants,
including a maximum debt coverage ratio, potential restrictions on additional
borrowings and potential restrictions on additional stock repurchases. At June
30, 2005 and 2004, the Company was in compliance with all financial and
restrictive loan covenants. All of the Company's assets, including the stock of
its subsidiaries, are pledged as collateral for the senior secured credit
facility. Debt issuance costs associated with the amendment of this credit
facility were $56,000. Debt issuance costs associated with this amendment and
restatement of the senior secured credit facility were capitalized and are being
amortized over the term of the senior secured credit facility using the
effective interest method.
Interest (expense) income, net as shown in the statements of operations for the
years ended June 30, 2005, 2004 and 2003, includes interest expense of
$20,741,000, $7,715,000 and $238,000, respectively, and interest income of
$1,936,000, $1,094,000, and $808,000, respectively. Interest expense, net in
2005 and 2004 includes $1,373,000 and $742,000 amortization of debt issuance
costs, respectively, and $155,000 and $32,000 amortization of debt discount,
respectively.
F-13
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases similar in
nature and terms. Rent expense under operating leases was $8,643,000, $6,779,000
and $7,671,000 for the years ended June 30, 2005, 2004 and 2003, respectively.
The Company has certain capital leases for equipment. Lease amortization for the
years ended June 30, 2005, 2004 and 2003 was $536,000, $193,000 and $55,000,
respectively, and is included in depreciation and amortization expense. At June
30, 2005, the weighted average interest rate on the Company's capital leases was
8.0% with individual lease rates generally ranging from 5.5% to 19.0%.
Future minimum lease payments under operating and capital leases as of June 30,
2005 are as follows (in thousands):
Operating Capital
Fiscal Year Leases Leases
-------------- --------------
2006 $ 8,677 $ 803
2007 5,755 723
2008 4,975 427
2009 4,433 92
2010 2,499 -
Thereafter 1,009 -
-------------- --------------
Total minimum lease payments $ 27,348 2,045
==============
Less amount representing interest (209)
--------------
Present value of net minimum capital lease obligations 1,836
Less current portion (686)
--------------
Long-term capital lease obligations $ 1,150
==============
As of June 30, 2005, the Company had outstanding purchase obligations of
$86,544,000 which relate to marketing agreements and maintenance contracts on
the Company's software, equipment and other assets as well as $70,624,000 of
contingent payments related to the Bargain and MCM acquisitions.
Legal proceedings
In management's opinion, there are no significant legal proceedings to which the
Company or any of its subsidiaries is a party or to which any of their
properties is subject except as set forth below. The Company is involved in
other lawsuits and claims generally incidental to its business, including but
not limited to various suits, including previously disclosed suits, brought
against the Company by individual consumers seeking monetary and/or injunctive
relief relating to the marketing of the Company's programs. In addition, from
time to time in the regular course of its business the Company receives
inquiries from various federal and/or state regulatory authorities.
In March 2001, an action was instituted by plaintiff Teresa McClain against
Coverdell & Company ("Coverdell"), a wholly owned subsidiary of the Company,
Monumental Life Insurance Company and other defendants in the United States
District Court for the Eastern District of Michigan, Southern Division. The
suit, which sought unspecified monetary damages, alleged that Coverdell and the
other defendants violated the Michigan Consumer Protection Act and other
applicable Michigan laws in connection with the marketing of Monumental Life
Insurance Company insurance products. The Court certified a class of Michigan
residents. The Court approved the settlement agreement, which was signed by all
parties, at a Fairness/Approval hearing on November 22, 2004 and the Company was
not required to make any payment.
On January 24, 2003, the Company filed a motion with the Superior Court for the
Judicial District of Hartford, Connecticut to vacate and oppose the confirmation
of an arbitration award issued in December 2002. The arbitration, filed against
the Company by MedValUSA Health Programs, Inc. ("MedVal") in September 2000,
involved claims of breach of contract, breach of the duty of good faith and fair
dealing, and violation of the Connecticut Unfair Trade Practices Act ("CUTPA").
Even though the arbitrators found that the Company was not liable to MedVal for
any compensatory damages, they awarded $5,458,000 in punitive damages and costs
against the Company solely under CUTPA. The Company believes that this
arbitration award was unjustified and not based on any existing legal precedent.
Specifically, the Company challenged the award on a number of grounds, including
that it violated a well-defined public policy against excessive punitive damage
awards, raised constitutional issues and disregarded certain legal requirements
for a valid award under CUTPA. On June 22, 2003, the Superior Court denied the
Company's motion to vacate the award and on May 10, 2005, the Connecticut
Supreme Court denied the Company's appeal of that decision. As a result of the
Connecticut Supreme Court's decision, the Company recorded a one-time $5,458,000
charge in the June 2005 quarter. The Company has requested the U.S. Supreme
Court to review the Connecticut Supreme Court's decision. However, there can be
no assurance that the Company will be successful in its efforts.
F-14
NOTE 9 - BUSINESS COMBINATIONS
On January 1, 2005, the Company completed the acquisition of certain of the
assets of MCM, a privately held advertising and practice management company
serving cosmetic surgeons throughout the United States. The Company acquired
certain of the assets of MCM in order to expand its consumer offerings to
include cosmetic surgery. The purchase price, excluding fees and expenses,
amounted to $33,000,000 and was paid in cash on the closing date. In addition,
contingent payments of up to $56,000,000 may be paid in the next three years if
certain performance targets, including increasing levels of revenues and
earnings, are achieved over the next three calendar years. Any additional
payments under the contingency arrangement will be considered additional
purchase price and allocated to the net assets acquired. The Company identified
$12,060,000 of intangible assets other than goodwill, including membership and
client relationships and trade name, in conjunction with this acquisition. The
$23,367,000 of excess merger consideration over the net assets acquired was
allocated to goodwill, substantially all of which is deductible for tax
purposes.
On November 30, 2004, the Company completed the acquisition of certain of the
assets of Bargain, a privately held provider of premier pricing services for
homes and vehicles. The Company acquired certain of the assets of Bargain in
order to expand its direct to consumer marketing presence and to expand its
discounted consumer offerings to include personal property. The purchase price,
which excludes fees and expenses, was paid in cash and amounted to $39,118,000.
The Company expects to pay $14,624,000 of contingent payments in the December
2005 quarter. In addition, the Company assumed certain liabilities amounting to
$4,729,000. The Company identified $3,400,000 of intangible assets other than
goodwill, including membership and client relationships and trade name, in
conjunction with this acquisition. The $53,664,000 of excess merger
consideration over the net assets acquired was allocated to goodwill,
substantially all of which is deductible for tax purposes.
On April 1, 2004, the Company completed the acquisition of all of the net assets
and outstanding capital stock of Lavalife Inc., a leading provider of web-based
and phone-based interactive personals services. The Company acquired Lavalife in
order to broaden the scope of services offered to include personals services.
The acquisition of Lavalife benefited the Company by providing access to one of
the largest and fastest growing consumer categories on the internet while
expanding its target market. The purchase price, excluding fees and expenses,
was Cdn$152,500,000, or $116,300,000. In connection with this acquisition, the
Company received $9,080,000 related to the issuance of the Company's restricted
common stock to Lavalife's senior management. The acquisition was funded with
cash on hand and borrowings under the Company's $45,000,000 senior secured
credit facility. The Company identified $33,418,000 of intangible assets other
than goodwill. The $82,214,000 of unallocated excess merger consideration over
the net assets acquired was allocated to goodwill. The amount of tax deductible
goodwill was $77,436,000.
See Note 4 for detailed descriptions of the intangible assets and goodwill
identified in connection with these business combinations.
The fair values of the assets acquired and liabilities assumed at the
acquisition dates were as follows (in thousands):
MCM Bargain Lavalife
------------ ------------ ------------
Current assets $ 258 $ 2,163 $ 6,160
Fixed assets 600 4,428 14,730
Other assets - 871 -
Goodwill arising in the acquisition 23,367 53,664 82,214
Intangible assets 12,060 3,400 33,418
Current liabilities (3,060) (4,066) (19,990)
Other long-term obligations - (769) (2,498)
------------ ------------ ------------
Net assets acquired $ 33,225 $ 59,691 $ 114,034
============ ============ ============
F-15
Pro Forma Results
The following unaudited pro forma results of operations for the years ended June
30, 2004 and 2003 have been prepared assuming the Lavalife acquisition had
occurred on July 1, 2003 for the year ended June 30, 2004 and on July 1, 2002
for the year ended June 30, 2003. These pro forma results are not necessarily
indicative of the results of future operations or results that would have
occurred had the acquisition been consummated as of those dates (in thousands,
except per share data).
For the years ended June 30,
---------------------------------
2004 2003
-------------- --------------
Revenues $ 542,766 $ 527,736
Net income 28,979 25,879
Basic earnings per share $ 2.58 $ 1.98
Diluted earnings per share 2.28 1.89
The results of operations and balance sheets of Bargain and MCM for periods
prior to the acquisitions were not material to the Company and accordingly, pro
forma results of operations have not been presented.
NOTE 10 - SETTLEMENT OF INVESTMENT RELATED LITIGATION
During 2003, the Company, along with certain of the other former shareholders of
iPlace, Inc., settled their lawsuit against Homestore.com, Inc. The total
settlement amount in favor of the plaintiffs was $23,000,000 of which the
Company received $19,148,000.
NOTE 11 - INCOME TAXES
The provision for income taxes is as follows (in thousands):
For the years ended June 30,
---------------------------
2005 2004 2003
-------- -------- --------
Current
Federal $ 9,922 $ 7,219 $ 1,635
State 2,249 2,245 422
Foreign 802 1,028 -
-------- -------- --------
Total $12,973 $10,492 $ 2,057
======== ======== ========
Deferred
Federal $ 3,047 $ 8,673 $11,642
State (595) 140 2,540
Foreign (2,033) (667) -
-------- -------- --------
Total $ 419 $ 8,146 $14,182
======== ======== ========
The following is a reconciliation of the Company's effective tax rate to the
U.S. statutory rate:
For the years ended June 30,
--------------------------------
2005 2004 2003
---------- ---------- ----------
Statutory rate 35.0% 35.0% 35.0%
State and local 2.8% 3.3% 3.4%
Foreign (3.7%) (0.5%) 0.0%
Other 0.3% 2.2% 1.6%
---------- ---------- ----------
Effective rate 34.4% 40.0% 40.0%
========== ========== ==========
The foreign reconciling item includes the net U.S. tax benefit of the net losses
from foreign branch operations. The net U.S. tax benefit is primarily due to the
full year impact of the Lavalife acquisition.
F-16
Consolidated U.S. income before taxes was $43,458,000, $44,861,000 and
$37,236,000 in 2005, 2004 and 2003, respectively. The corresponding amounts for
non-U.S.-based operations were (loss) income of $(4,518,000), $1,737,000 and
$3,359,000, respectively.
Undistributed earnings of the Company's foreign subsidiaries amounted to
$500,000 at June 30, 2005. U.S. income taxes were not provided on certain
unremitted earnings from foreign subsidiaries since the Company intends to
permanently reinvest substantially all of such earnings outside the U.S.
However, if some portion of these earnings is remitted, the Company expects the
effect of any remittance after considering available tax credits and amounts
previously accrued not to be significant to the consolidated results of
operations. A calculation of the amount of unrecognized deferred U.S. income tax
liability is not practicable due to the complexities associated with the
calculation.
The following is a summary of the Company's deferred tax assets and liabilities
as of June 30 (in thousands):
2005 2004
---------- ----------
Deferred Tax Assets
Benefit of federal and state net operating loss carry
forwards $ 1,672 $ 3,093
Alternative minimum tax credits - 1,380
Allowance for membership cancellations 4,459 5,728
Charge for arbitration award 2,088 -
Other deferred tax assets 5,194 5,252
---------- ----------
Deferred tax assets 13,413 15,453
---------- ----------
Deferred Tax Liabilities
Deferred marketing costs (14,854) (20,503)
Deferred revenues (5,497) (1,468)
Goodwill and other intangibles (6,221) (6,721)
Depreciation (5,678) (3,438)
Other deferred tax liabilities (645) -
---------- ----------
Gross deferred tax liabilities (32,895) (32,130)
---------- ----------
Net deferred tax liability $ (19,482)$ (16,677)
========== ==========
As of June 30, 2005, the Company had federal net operating loss carry forwards
of $1,523,000 expiring June 30, 2024. The Company's ability to use these losses
to offset future taxable income would be subject to limitations under the
Internal Revenue Code if certain changes in the Company's ownership occur. The
Company also has state net operating loss carry forwards available to reduce
future state taxable income which expire beginning June 30, 2006 through June
30, 2011. In addition, the Company has foreign net operating losses of
$5,468,000 expiring beginning June 30, 2012 through June 30, 2013.
As of June 30, 2004, the Company had alternative minimum tax credits of
approximately $1,380,000. Credits of $664,000 and $716,000 were generated in the
years ended June 30, 2004 and 2003, respectively. These credits were carried
forward and fully utilized during the year ended June 30, 2005.
Tax benefits resulting from the exercise of nonqualified stock options and the
disqualifying dispositions of shares issued under the Company's stock-based
compensation plans reduced taxes payable by $2,220,000 and $6,520,000 in 2005
and 2004, respectively. Such benefits were credited to additional paid-in
capital.
F-17
NOTE 12 - EARNINGS PER SHARE
Basic and diluted earnings per share amounts are determined in accordance with
the provisions SFAS 128. The following table reconciles the numerators and
denominators in the computations of basic and diluted earnings per share (in
thousands, except per share data):
For the years ended June 30,
---------------------------------
2005 2004 2003
--------- --------- -------------
Numerator:
Income available to common shareholders used in basic earnings
per share $25,549 $ 27,960 $ 24,356
Add back interest expense on convertible securities, net of
tax 3,247 2,236 -
--------- --------- -------------
Income available to common shareholders after assumed
conversion of dilutive securities $28,796 $ 30,196 $ 24,356
========= ========= =============
Denominator:
Weighted average number of common shares outstanding - basic 9,995 10,755 12,596
Effect of dilutive securities:
Convertible securities 2,230 1,678 -
Stock options 748 775 637
--------- --------- -------------
Weighted average number of common shares outstanding - diluted 12,973 13,208 13,233
========= ========= =============
Basic earnings per share $ 2.56 $ 2.60 $ 1.93
========= ========= =============
Diluted earnings per share $ 2.22 $ 2.29 $ 1.84
========= ========= =============
The diluted earnings per common share calculation excludes the effect of
potentially dilutive shares when their effect is antidilutive. Excluded from the
diluted share calculation above for the years ended June 30, 2005, 2004 and 2003
are incremental weighted average stock options of approximately 67,000, 26,000
and 2,838,000, respectively.
NOTE 13 - SHAREHOLDERS' EQUITY
The Company has a stock repurchase program. During 2005 and 2004, the Board of
Directors authorized the Company to repurchase up to an aggregate additional
4,000,000 shares of the Company's Common Stock. As of June 30, 2005,
approximately 825,000 shares were authorized for repurchase under the stock
repurchase program. The Company repurchased 1,168,000 shares for $41,131,000, an
average price of $34.92 per share, in 2005, 2,985,000 shares for $94,207,000, an
average price of $31.56 per share, in 2004 and 1,993,000 shares for $37,214,000,
an average price of $18.67 per share, in 2003.
In fiscal 2005, the Board of Directors authorized a modified Dutch Auction
self-tender offer for up to 500,000 shares of its common stock. Under the terms
of the self-tender offer as approved by the Board of Directors, and as set forth
in the Offer to Purchase filed as an exhibit to the Company's Schedule TO filed
on November 15, 2004, as amended (the "Offer to Purchase"), the Company's
stockholders were given the opportunity to tender part or all of their shares to
the Company at a price of not less than $33.50 per share and not more than
$38.50 per share. The self-tender offer closed on January 7, 2005 with a total
of 605,000 shares tendered by shareholders. The Company exercised its right, as
set forth in the Offer to Purchase, to purchase the additional 105,000 shares
and repurchased a total of 605,000 shares for $38.50 per share, paying a total
of $23,293,000.
NOTE 14 - ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
June 30,
--------------------
2005 2004
--------- ----------
Unrealized hedging gain 239 -
Currency translation adjustment (285) (364)
Minimum pension liability adjustment, net
of tax (102) (9)
--------- ----------
Total (148) (373)
========= ==========
F-18
NOTE 15 - EMPLOYEE BENEFIT PLANS
The Company has a defined contribution 401(k) profit sharing plan. Employees may
contribute up to 20% of their compensation subject to certain limitations.
Effective July 1, 2000, the Company began making quarterly matching
contributions in Common Stock based on qualified employee contributions.
Treasury stock, calculated under the cost method, was used to match qualified
employee contributions. Effective January 1, 2003, the Company began making
matching contributions in cash. Matching contributions were $266,000, $168,000
and $153,000 for 2005, 2004 and 2003, respectively.
Effective January 1, 2004, the Company has an unfunded, nonqualified defined
benefit pension plan that benefits certain executives selected by the
Compensation Committee of the Board of Directors. This plan provides for fixed
annual payments for 10 years upon retirement after attaining the age of 55 and
10 years of service. Pension expense was $306,000 and $212,000 in 2005 and 2004,
respectively.
The Company used weighted-average discount rates of 5% and 6% in its 2005 and
2004 assumptions, respectively. The following tables present information about
this pension plan (in thousands):
June 30,
------------------------------
2005 2004
------------- --------------
Pension benefit obligation
Balance at beginning of year $ 1,276 $ -
Interest cost 77 35
Service cost 146 71
Prior service cost - 1,156
Actuarial loss 146 14
------------- --------------
Balance at end of year $ 1,645 $ 1,276
============= ==============
Funded status of the plan
Cumulative pension expense recognized $ 518 $ 212
Unrecognized net actuarial loss 160 14
Unrecognized prior service cost 967 1,050
------------- --------------
Excess of the benefit obligation over the value of plan assets $ 1,645 $ 1,276
============= ==============
Net recognized amounts as classified in the balance sheet
Intangible asset $ (967) $ (1,050)
Other long-term liabilities 1,645 1,276
Accumulated other comprehensive loss (160) (14)
------------- --------------
Cumulative pension expense recognized $ 518 $ 212
============= ==============
For the years ended June 30,
------------------------------
2005 2004
------------- --------------
Pension expense by component
Interest cost $ 77 $ 35
Service cost 146 71
Prior service cost 83 106
------------- --------------
Pension expense $ 306 $ 212
============= ==============
No benefits are expected to be paid by the plan during the next three years. The
Company expects to pay benefits of $60,000 and $225,000 in 2009 and 2010,
respectively, and $4,265,000 thereafter.
F-19
NOTE 16 - STOCK-BASED COMPENSATION
Stock Compensation Plans
As of June 30, 2005, the Company had the following stock-based compensation
plans which are described below.
Under the 1996 Stock Option Plan, the Board of Directors can determine the date
on which options vest and become exercisable as well as the term of the options
granted. The 1996 Stock Option Plan is authorized to grant 5,600,000 options to
acquire shares of Common Stock. Of these options, 2,000,000 must be granted
using treasury stock.
Under the 1995 Executive Officers' Stock Option Plan and the 1995 Non-Employee
Directors' Stock Option Plan the Board is authorized to grant 360,000 and
180,000 options, respectively, to acquire shares of Common Stock at a price per
share equal to or greater than fair market value at the grant date. Under the
Executive Officers' Stock Option Plan, the Board can determine the date on which
options vest and become exercisable.
Under the stock option plans described above, options generally become
exercisable over a four to five year period and expire at the earlier of
termination of employment or ten years from the grant date.
At June 30, 2005, 3,477,000 shares of common stock were reserved for issuance
under these stock option plans, of which 606,000 shares were available for
future grant.
Information with respect to options to purchase shares issued under the above
plans is as follows (shares in thousands):
2005 2004 2003
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of
year 3,305 $20.10 4,532 $19.88 4,341 $20.82
Granted at market value 366 32.35 240 24.92 850 13.42
Exercised (607) 17.49 (1,227) 19.78 (338) 11.30
Forfeited (192) 20.87 (240) 22.48 (321) 24.53
---------- ---------- ----------
Outstanding at end of year 2,872 22.16 3,305 20.10 4,532 19.88
========== ========== ==========
Options Outstanding
-------------------------------- Options Exercisable
Weighted ----------------------
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Outstanding Average
at Life Exercise at Exercise
6/30/05 (Years) Price 6/30/05 Price
---------- ---------- ---------- ---------- ----------
$4.00 to $13.99 608 6.01 $11.63 312 $10.55
$14.00 to $19.99 402 4.55 16.43 344 16.39
$20.00 to $26.99 706 6.36 20.71 442 20.81
$27.00 to $29.99 947 5.60 29.47 728 29.42
$30.00 to $40.99 209 9.36 35.71 18 33.24
---------- ----------
2,872 6.00 22.16 1,844 21.77
========== ==========
Options exercisable as of June 30, 2004 and 2003 were 1,835,000 and 2,305,000,
respectively.
Employee Stock Purchase Plan
During 1997, the Company adopted the 1996 Employee Stock Purchase Plan which
provides for the issuance of up to 360,000 shares of common stock. The plan
permits eligible employees to purchase Common Stock through payroll deductions,
which may not exceed 10% of an employee's compensation, at a price equal to 85%
of the closing price of the Common Stock on the day the purchase period
commences or terminates, whichever is lower. During 2005, 2004 and 2003, 11,000,
14,000 and 16,000 shares were purchased under the plan, respectively.
F-20
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information was (in thousands):
For the years ended June 30,
---------------------------------
2005 2004 2003
--------- --------- -------------
Cash paid for interest $ 18,754 $ 3,417 $ 241
Cash paid for income taxes 8,036 5,568 411
NOTE 18 - BUSINESS SEGMENTS
The operating business segments reported below are the reportable business
segments of the Company for which separate financial information is available
and for which operating results are evaluated regularly by executive management
in assessing performance and deciding how to allocate resources. The Company has
two reportable business segments: Marketing Services, formerly known as the
Membership segment, and Personals. The Marketing Services business segment
primarily provides discounted products and services to consumers. The Personals
business segment provides both web-based and phone-based personals services to
its customers. The Corporate and Other business unit includes the results of MCM
as well as unallocated general corporate expenses.
Management evaluates the operating results of each reportable business segment
based on revenue and adjusted EBITDA. In the past, each reportable segment was
evaluated based on operating income. Management decided to use adjusted EBITDA
as the measure of profitability beginning in fiscal 2005 in order to better
align the results of the acquired companies and to enhance the clarity of the
operating performance of the reportable business segments. The following is a
summary of revenues, adjusted EBITDA, capital expenditures, depreciation and
amortization and assets by business segment (in thousands):
For the years ended June 30,
-------------------------------------
Revenues 2005 2004 2003
----------- ----------- -----------
Marketing Services $ 490,289 $ 471,049 $ 456,881
Personals 72,336 17,690 -
Corporate and Other 17,513 - -
Intersegment (299) - -
----------- ----------- -----------
Total $ 579,839 $ 488,739 $ 456,881
=========== =========== ===========
Adjusted EBITDA (1)
Marketing Services $ 74,060 $ 80,434 $66,127
Personals 6,267 2,073 -
Corporate and Other (23,124) (23,947) (19,313)
----------- ----------- -----------
Total $ 57,203 $ 58,560 $ 46,814
=========== =========== ===========
Capital Expenditures (2)
Marketing Services $ 8,512 $ 6,486 $ 5,463
Personals 2,447 571 -
Corporate and Other 47 - -
----------- ----------- -----------
Total $ 11,006 $ 7,057 $ 5,463
=========== =========== ===========
Depreciation and Amortization
Marketing Services $ 10,978 $ 10,085 $ 11,921
Personals 9,323 2,327 -
Corporate and Other 2,804 840 199
----------- ----------- -----------
Total $ 23,105 $ 13,252 $ 12,120
=========== =========== ===========
F-21
June 30,
-----------------------
Assets 2005 2004
----------- -----------
Marketing Services $ 245,635 $ 178,723
Personals 132,992 136,874
Corporate and Other (3) 68,535 137,565
----------- -----------
Total $ 447,162 $ 453,162
=========== ===========
(1) Defined as net income plus interest and other expense, net, provision for
income taxes, depreciation and amortization and the changes in deferred
revenue and deferred marketing costs. See reconciliation below.
(2) Management does not allocate certain capital expenditures to the Corporate
and Other segment. However, the associated depreciation expense has been
allocated for purposes of evaluating performance.
(3) Includes assets of MCM and unallocated non-operating assets including
short-term investments, debt issuance costs and other.
The following tables reconcile Adjusted EBITDA to income before income taxes (in
thousands):
For the year ended June 30, 2005
--------------------------------------------------------
Consolidated Marketing Corporate
Total Services Personals and Other
----- -------- --------- ---------
Income before income taxes $ 38,941
Interest and other expense, net (1) 18,153
---------------
Operating income (expense) $ 57,094 $ 85,498 $ (3,129) $ (25,275)
Depreciation and amortization 21,577 10,978 9,323 1,276
Change in deferred revenues (34,911) (35,859) 73 875
Change in deferred marketing costs 13,443 13,443 - -
--------------- ------------ ------------ ------------
Adjusted EBITDA $ 57,203 $ 74,060 $ 6,267 $ (23,124)
=============== ============ ============ ============
For the year ended June 30, 2004
--------------------------------------------------------
Consolidated Marketing Corporate
Total Services Personals and Other
----- -------- --------- ---------
Income before income taxes $ 46,598
Interest and other expense, net (1) 6,272
---------------
Operating income (expense) $ 52,870 $ 76,576 $ 336 $ (24,042)
Depreciation and amortization 12,507 10,085 2,327 95
Change in deferred revenues (32,272) (31,682) (590) -
Change in deferred marketing costs 25,455 25,455 - -
--------------- ------------ ------------ ------------
Adjusted EBITDA $ 58,560 $ 80,434 $ 2,073 $ (23,947)
=============== ============ ============ ============
For the year ended June 30, 2003
--------------------------------------------------------
Consolidated Marketing Corporate
Total Services Personals and Other
----- -------- --------- ---------
Income before income taxes $ 40,595
Interest and other income, net (1) (18,309)
---------------
Operating income (expense) $ 22,286 $ 41,798 $ - $ (19,512)
Depreciation and amortization 12,120 11,921 - 199
Change in deferred revenues (39,003) (39,003) - -
Change in deferred marketing costs 51,411 51,411 - -
--------------- ------------ ------------ ------------
Adjusted EBITDA $ 46,814 $ 66,127 $ - $ (19,313)
=============== ============ ============ ============
(1) Management does not allocate interest and other expense, net to the
individual segments.
F-22
During 2005, the Company's assets and operations were primarily in the United
States and Canada. Geographic information is presented below (in thousands):
For the years ended June 30,
-------------------------------------
Revenues 2005 2004 2003
----------- ----------- -----------
United States $ 520,167 $ 460,606 $ 443,909
Canada 57,076 27,450 11,859
Other countries 2,596 683 1,113
----------- ----------- -----------
Total $ 579,839 $ 488,739 $ 456,881
=========== =========== ===========
June 30,
----------------------
Long-lived assets 2005 2004
----------- ----------
United States $ 35,188 $ 24,554
Canada 7,366 14,692
Other countries 2,434 344
----------- ----------
Total $ 44,988 $ 39,590
=========== ==========
NOTE 19 - QUARTERLY FINANCIAL DATA (unaudited)
(in thousands, except per share data)
For the year ended June 30, 2005
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $135,623 $136,479 $148,995 $158,742
Operating income 16,732 13,783 11,539 15,040
Net income 7,596 5,883 4,353 7,717
Basic earnings per share 0.75 0.58 0.44 0.79
Diluted earnings per share 0.65 0.51 0.40 0.67
For the year ended June 30, 2004
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenues $113,824 $123,164 $118,519 $133,232
Operating income 6,620 13,911 14,558 17,781
Net income 3,895 7,665 8,379 8,021
Basic earnings per share 0.33 0.71 0.81 0.78
Diluted earnings per share 0.30 0.60 0.68 0.66
NOTE 20 - GUARANTOR AND NONGUARANTOR FINANCIAL INFORMATION
In April 2004, the Company issued $150,000,000 aggregate principal amount of
9.25% Senior Notes due 2014. The Senior Notes are unsecured obligations and rank
pari passu in right of payment to all of the Company's existing and future
senior unsecured indebtedness and senior in right of payment to all of the
Company's existing and future subordinated indebtedness that expressly provides
for its subordination to the Senior Notes. The Senior Notes are fully and
unconditionally guaranteed by all of the Company's existing and future domestic
subsidiaries that guarantee the Company's Credit Facility (as defined in the
Indenture governing the Senior Notes) and certain of the Company's existing and
future foreign subsidiaries.
The following consolidating condensed financial information presents the
consolidating balance sheets as of June 30, 2005 and 2004, the related
statements of operations and cash flows for the years ended June 30, 2005, 2004
and 2003. The information includes the elimination entries necessary to
consolidate the Company ("Parent") with the guarantor and nonguarantor entities.
Investments in subsidiaries are accounted for by the Parent using the equity
method of accounting. The guarantor and nonguarantor subsidiaries are presented
on a combined basis. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
F-23
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2005
-----------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
------ ------------ ------------ ------------ -----
Assets
Current assets $ 80,036 $ 60,684 $ 23,509 $ (17,202) $ 147,027
Fixed assets, net 18,797 13,098 7,167 - 39,062
Goodwill - 117,749 83,750 - 201,499
Intangible assets, net 1,097 31,789 13,590 - 46,476
Other assets 10,991 64 2,043 - 13,098
Investment in subsidiaries 275,213 - - (275,213) -
--------- ----------- ------------ ----------- ------------
Total assets $386,134 $ 223,384 $ 130,059 $ (292,415) $ 447,162
========= =========== ============ =========== ============
Liabilities and Shareholders' (Deficit) Equity
Current liabilities $190,595 $ 46,890 $ 22,534 $ (17,202) $ 242,817
Deferred income taxes 2,588 7,265 (151) - 9,702
Other long-term liabilities 3,565 - 1,692 - 5,257
Long-term debt 237,814 - - - 237,814
--------- ----------- ------------ ----------- ------------
Total liabilities 434,562 54,155 24,075 (17,202) 495,590
--------- ----------- ------------ ----------- ------------
Shareholders' (deficit) equity:
Preferred stock - - - - -
Common stock 197 6 3 (9) 197
Capital in excess of par value 169,463 165,285 102,484 (267,769) 169,463
Accumulated earnings (deficit) 35,680 3,884 3,667 (7,551) 35,680
Accumulated other comprehensive loss (148) 54 (170) 116 (148)
Treasury stock (253,620) - - - (253,620)
--------- ----------- ------------ ----------- ------------
Total shareholders' (deficit) equity (48,428) 169,229 105,984 (275,213) (48,428)
--------- ----------- ------------ ----------- ------------
Total liabilities and shareholders' (deficit) equity $386,134 $ 223,384 $ 130,059 $(292,415) $ 447,162
========= =========== ============ =========== ============
F-24
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2004
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Assets
Current assets $194,227 $ 42,955 $ 10,760 $ (6,572) $ 241,370
Fixed assets, net 19,675 14,823 2,042 - 36,540
Goodwill - 118,956 6,719 - 125,675
Intangible assets, net 1,050 37,822 - - 38,872
Other assets 10,666 39 - - 10,705
Intercompany notes receivable 95,543 - - (95,543) -
Investment in subsidiaries 78,633 - - (78,633) -
--------- ------------ ------------ ------------ ------------
Total assets $399,794 $ 214,595 $ 19,521 $ (180,748) $ 453,162
========= ============ ============ ============ ============
Liabilities and Shareholders' (Deficit) Equity
Current liabilities $206,915 $ 40,549 $ 11,410 $ (6,572) $ 252,302
Deferred income taxes (2,402) 6,647 109 - 4,354
Other long-term liabilities 3,705 - 1,225 - 4,930
Intercompany notes payable - 95,543 - (95,543) -
Long-term debt 237,659 - - - 237,659
--------- ------------ ------------ ------------ ------------
Total liabilities 445,877 142,739 12,744 (102,115) 499,245
--------- ------------ ------------ ------------ ------------
Shareholders' (deficit) equity:
Preferred stock - - - - -
Common stock 191 6 3 (9) 191
Capital in excess of par value 156,457 71,744 9,564 (81,308) 156,457
Accumulated earnings (deficit) 10,131 (15) (2,305) 2,320 10,131
Accumulated other comprehensive loss (373) 121 (485) 364 (373)
Treasury stock (212,489) - - - (212,489)
--------- ------------ ------------ ------------ ------------
Total shareholders' (deficit) equity (46,083) 71,856 6,777 (78,633) (46,083)
--------- ------------ ------------ ------------ ------------
Total liabilities and shareholders' (deficit) equity $399,794 $ 214,595 $ 19,521 $ (180,748) $ 453,162
========= ============ ============ ============ ============
F-25
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the year ended June 30, 2005
-----------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Revenues $ 376,112 $ 145,007 $ 71,815 $ (13,095) $ 579,839
Expenses:
Marketing 202,429 68,233 26,208 (10,433) 286,437
Operating 62,911 29,579 24,590 (2,662) 114,418
General and administrative 62,839 33,997 11,395 - 108,231
Charge for arbitration award 5,458 - - - 5,458
Amortization of intangibles 228 6,103 1,870 - 8,201
--------- ----------- ------------ ----------- ------------
Operating income 42,247 7,095 7,752 - 57,094
Equity in income of subsidiaries 11,167 - - (11,167) -
Interest (expense) income, net (19,068) 199 64 - (18,805)
Other income (expense), net (55) 278 429 - 652
--------- ----------- ------------ ----------- ------------
Income before income taxes 34,291 7,572 8,245 (11,167) 38,941
Provision for income taxes 8,742 1,004 3,646 - 13,392
--------- ----------- ------------ ----------- ------------
Net income $ 25,549 $ 6,568 $ 4,599 $ (11,167) $ 25,549
========= =========== ============ =========== ============
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the year ended June 30, 2004
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Revenues $395,074 $ 75,985 $ 19,220 $ (1,540) $ 488,739
Expenses:
Marketing 213,884 36,969 4,965 - 255,818
Operating 69,222 16,358 7,792 (1,540) 91,832
General and administrative 65,640 16,346 3,840 - 85,826
Amortization of intangibles - 2,393 - - 2,393
--------- ------------ ------------ ------------ ------------
Operating income 46,328 3,919 2,623 - 52,870
Equity in income of subsidiaries 2,661 - - (2,661) -
Interest (expense) income, net (4,613) (2,113) 105 - (6,621)
Other income (expense), net 447 (77) (21) - 349
--------- ------------ ------------ ------------ ------------
Income before income taxes 44,823 1,729 2,707 (2,661) 46,598
Provision for income taxes 16,863 692 1,083 - 18,638
--------- ------------ ------------ ------------ ------------
Net income $ 27,960 $ 1,037 $ 1,624 $ (2,661) $ 27,960
========= ============ ============ ============ ============
F-26
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
For the year ended June 30, 2003
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Revenues $393,958 $ 50,787 $ 12,972 $ (836) $ 456,881
Expenses:
Marketing 253,389 23,198 4,086 - 280,673
Operating 64,539 11,639 3,102 (836) 78,444
General and administrative 60,553 10,381 3,151 - 74,085
Amortization of intangibles - 1,393 - - 1,393
--------- ------------ ------------ ------------ ------------
Operating income 15,477 4,176 2,633 - 22,286
Settlement of investment related litigation 19,148 - - - 19,148
Loss on sale of subsidiary (959) - - - (959)
Net loss on investment (206) - - - (206)
Equity in income of subsidiaries 4,600 - - (4,600) -
Interest income, net 421 126 23 - 570
Other expense income, net (953) (2) 711 - (244)
--------- ------------ ------------ ------------ ------------
Income before income taxes 37,528 4,300 3,367 (4,600) 40,595
Provision for income taxes 13,172 1,720 1,347 - 16,239
--------- ------------ ------------ ------------ ------------
Net income $ 24,356 $ 2,580 $ 2,020 $ (4,600) $ 24,356
========= ============ ============ ============ ============
F-27
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended June 30, 2005
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $124,196 $ (88,680) $ 7,962 $ (11,167) $ 32,311
Investing activities
Acquisition of fixed assets (6,418) (2,925) (1,663) - (11,006)
Purchases of short-term investments (402,970) 340 - - (402,630)
Sales of short-term investments 506,960 300 - - 507,260
Acquisitions of businesses, net of cash acquired,
and other investing activities (172,977) 94,375 1,365 - (77,237)
Other investments (11,167) - - 11,167 -
--------- ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (86,572) 92,090 (298) 11,167 16,387
--------- ------------ ------------ ------------ ------------
Financing activities
Net proceeds from issuance of stock 10,792 - - - 10,792
Treasury stock purchases (41,131) - - - (41,131)
Debt issuance costs (844) - - - (844)
Payments of long-term obligations (326) (13) (210) - (549)
--------- ------------ ------------ ------------ ------------
Net cash used in financing activities (31,509) (13) (210) - (31,732)
--------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents - (233) 457 - 224
--------- ------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 6,115 3,164 7,911 - 17,190
Cash and cash equivalents at beginning of year 18,251 26,657 2,258 - 47,166
--------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $ 24,366 $ 29,821 $ 10,169 $ - $ 64,356
========= ============ ============ ============ ============
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended June 30, 2004
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities $ (55,030) $ 104,436 $ 1,203 $ (2,661) $ 47,948
Investing activities
Acquisition of fixed assets (5,599) (883) (575) - (7,057)
Purchases of short-term investments (650,750) - - - (650,750)
Sales of short-term investments 535,770 - - - 535,770
Acquisitions of businesses, net of cash acquired,
and other investing activities - (114,916) - - (114,916)
Investment in subsidiaries (22,109) 19,448 - 2,661 -
--------- ----------- ----------- ----------- ------------
Net cash (used in) provided by investing activities (142,688) (96,351) (575) 2,661 (236,953)
--------- ----------- ----------- ----------- ------------
Financing activities
Net proceeds from issuance of stock 33,644 - - - 33,644
Treasury stock purchases (94,207) - - - (94,207)
Net proceeds from issuance of debt 229,825 - - - 229,825
Payments of long-term obligations (188) (265) - - (453)
--------- ----------- ----------- ----------- ------------
Net cash provided by (used in) financing activities 169,074 (265) - - 168,809
--------- ----------- ----------- ----------- ------------
Effect of exchange rate changes on cash and cash equivalents - 121 (19) - 102
--------- ----------- ----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents (28,644) 7,941 609 - (20,094)
Cash and cash equivalents at beginning of year 46,895 18,716 1,649 - 67,260
--------- ----------- ----------- ----------- ------------
Cash and cash equivalents at end of year $ 18,251 $ 26,657 $ 2,258 $ - $ 47,166
========= =========== =========== =========== ============
F-28
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended June 30, 2003
------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $42,216 $ 11,492 $ (575) $ (4,600) $ 48,533
Investing activities
Acquisition of fixed assets (4,931) (188) (344) - (5,463)
Settlement of investment related litigation 19,148 - - - 19,148
Purchases of short-term investments (5,000) - - - (5,000)
Acquisitions of businesses, net of cash acquired,
and other investing activities (4,600) - - 4,600 -
Other investments (1,250) - - - (1,250)
-------- ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 3,367 (188) (344) 4,600 7,435
-------- ------------ ------------ ------------ ------------
Financing activities
Net proceeds from issuance of stock 4,050 - - - 4,050
Treasury stock purchases (37,214) - - - (37,214)
Payments of long-term obligations - (1,051) - - (1,051)
-------- ------------ ------------ ------------ ------------
Net cash used in financing activities (33,164) (1,051) - - (34,215)
-------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents - - 5 - 5
-------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 12,419 10,253 (914) - 21,758
Cash and cash equivalents at beginning of year 34,476 8,463 2,563 - 45,502
-------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year $46,895 $ 18,716 $ 1,649 $ - $ 67,260
======== ============ ============ ============ ============
F-29
Vertrue Incorporated
Schedule II - Valuation and Qualifying Accounts
(in thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Accounts - Deductions - End
Description Period Expense Describe Describe of Period
----------- ------ ------- ---------- -------- ---------
For the year ended June 30, 2005
Allowance for membership cancellations $ 14,156 $ - $ 122,886 A $ 125,810 B $ 11,232
For the year ended June 30, 2004
Allowance for membership cancellations $ 20,934 $ - $ 183,086 A $ 189,864 B $ 14,156
For the year ended June 30, 2003
Allowance for membership cancellations $ 23,753 $ - $ 281,250 A $ 284,069 B $ 20,934
Valuation allowance for deferred tax
assets 6,581 - (6,581)C - -
(A) Charged to deferred revenues account. Includes $240,000 added in connection
with acquisitions in fiscal 2005.
(B) Charges for refunds upon membership cancellations.
(C) Decrease in the valuation allowance was due to current utilization of
deferred tax assets as well as management's belief that the Company will
more likely than not realize its deferred tax assets in the future.
F-30