UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__X__ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 2006
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
------------------------ -------------------
(State of Incorporation) (IRS Employer
Identification No.)
20 Glover Avenue
Norwalk, Connecticut 06850
---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(203) 324-7635
---------------------------------
(Registrant's telephone number,
including area code)
680 Washington Boulevard, Stamford, Connecticut 06901
-----------------------------------------------------
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 9,827,000 shares of Common
Stock, $0.01 par value as of April 28, 2006.
VERTRUE INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2006
and June 30, 2005 1
Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2006 and 2005 2
Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2006 and 2005 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Forward Looking Statements 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 32
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, June 30,
2006 2005
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 54,704 $ 64,356
Restricted cash 3,506 3,411
Short-term investments 32,727 16,223
Accounts receivable 16,034 12,559
Prepaid membership materials 3,362 2,557
Prepaid expenses and other current assets 15,445 8,695
Deferred marketing costs 30,314 39,226
---------- ----------
Total current assets 156,092 147,027
Fixed assets, net 41,353 39,062
Goodwill 212,670 201,499
Intangible assets, net 39,952 46,476
Other assets 15,848 13,098
---------- ----------
Total assets $ 465,915 $ 447,162
========== ==========
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term obligations $ 749 $ 686
Accounts payable 41,049 42,077
Accrued liabilities 86,960 82,157
Deferred revenues 95,702 108,117
Deferred income taxes 9,750 9,780
---------- ----------
Total current liabilities 234,210 242,817
Deferred income taxes 9,509 9,702
Other long-term liabilities 8,053 5,257
Long-term debt 237,939 237,814
---------- ----------
Total liabilities 489,711 495,590
---------- ----------
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; 20,112 shares issued (19,703 shares at
June 30, 2005) 201 197
Capital in excess of par value 183,958 169,463
Retained earnings 56,126 35,680
Accumulated other comprehensive income (loss) 202 (148)
Treasury stock, 10,295 shares at cost (10,020 shares at
June 30, 2005) (264,283) (253,620)
---------- ----------
Total shareholders' deficit (23,796) (48,428)
---------- ----------
Total liabilities and shareholders' deficit $ 465,915 $ 447,162
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
1
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three months ended Nine months ended
March 31, March 31,
---------------------- ----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Revenues $ 163,841 $ 148,995 $ 481,499 $ 421,097
Expenses:
Marketing 81,626 75,968 231,795 213,189
Operating 38,038 31,107 108,379 81,269
General and administrative 31,337 27,914 89,318 78,821
Amortization of intangibles 1,878 2,467 6,511 5,764
---------- ---------- ---------- ----------
Operating income 10,962 11,539 45,496 42,054
Interest expense, net (4,140) (4,993) (12,984) (14,247)
Other income (expense), net 13 13 (148) 306
---------- ---------- ---------- ----------
Income before income taxes 6,835 6,559 32,364 28,113
Provision for income taxes 2,694 2,206 11,918 10,281
---------- ---------- ---------- ----------
Net income $ 4,141 $ 4,353 $ 20,446 $ 17,832
========== ========== ========== ==========
Earnings per share:
Basic $ 0.43 $ 0.44 $ 2.11 $ 1.77
========== ========== ========== ==========
Diluted $ 0.38 $ 0.40 $ 1.78 $ 1.55
========== ========== ========== ==========
Weighted average common shares
used in earnings per share
calculations:
Basic 9,728 9,915 9,713 10,072
========== ========== ========== ==========
Diluted 12,848 13,005 12,820 13,014
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended
March 31,
----------------------
2006 2005
---------- ----------
Operating activities
Net income $ 20,446 $ 17,832
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in deferred revenues (12,641) (24,309)
Change in deferred marketing costs 9,008 10,830
Depreciation and amortization 19,781 16,879
Stock-based compensation 3,362 -
Deferred income taxes (206) 3,516
Excess tax benefit from stock-based compensation (1,457) 1,545
Other (639) 174
Change in assets and liabilities:
Restricted cash (95) (155)
Accounts receivable (3,475) (2,894)
Prepaid membership materials (805) 256
Prepaid expenses (1,397) (1,424)
Other assets (8,904) (1,158)
Accounts payable (798) 1,457
Accrued and other liabilities 15,383 2,007
---------- ----------
Net cash provided by operating activities 37,563 24,556
---------- ----------
Investing activities
Acquisition of fixed assets (14,862) (7,407)
Purchases of short-term investments (121,875) (397,462)
Sales of short-term investments 106,383 491,548
Acquisitions of businesses, net of cash acquired (14,942) (65,687)
---------- ----------
Net cash (used in) provided by investing activities (45,296) 20,992
---------- ----------
Financing activities
Net proceeds from issuance of stock 7,400 9,795
Excess tax benefit from stock-based compensation 1,457 -
Treasury stock purchases (10,663) (33,817)
Debt issuance costs (125) (803)
Payments of long-term obligations (519) (373)
---------- ----------
Net cash used in financing activities (2,450) (25,198)
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents 531 212
---------- ----------
Net (decrease) increase in cash and cash equivalents (9,652) 20,562
Cash and cash equivalents at beginning of year 64,356 47,166
---------- ----------
Cash and cash equivalents at end of period $ 54,704 $ 67,728
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Vertrue Incorporated ("Vertrue" or the "Company") is a leading internet
marketing services company. The Company gives consumers access to services that
offer substantial discounts and convenience for important decisions in their
everyday lives. The Company's services span healthcare, personal property,
security/insurance, discounts and personals and are all offered online through
an array of marketing channels. Vertrue is a premier marketing partner to
corporate clients and its services enable partners to enhance market presence,
strengthen customer affinity and generate additional value.
NOTE 2 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information 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. Such statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
statement have been included. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires management of
the Company to make estimates, judgments and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. Operating results for the three and nine
months ended March 31, 2006 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 2006. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2005.
The Company acquired Bargain Network, Inc. ("Bargain") on November 30, 2004 and
My Choice Medical Holdings, 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 have been
included in the Marketing Services segment and the results of MCM have been
included in the Management Services segment.
NOTE 3 - STOCK-BASED COMPENSATION
The Company adopted Financial Accounting Standards Board Statement ("SFAS") No.
123(R), "Share-Based Payment" ("SFAS 123R") on July 1, 2005. SFAS 123R
established the accounting for share-based compensation and requires companies
to measure and recognize compensation expense for all share-based payments at
fair value. Accordingly, share-based compensation cost is measured at grant date
based on the fair value of the award and is recognized as expense over the
requisite service period. The Company adopted the modified prospective
application method as permitted by SFAS 123R.
4
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prior to the adoption of SFAS 123R, the Company accounted for its share-based
employee compensation plans under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and the related interpretations. If compensation cost for 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," ("SFAS 123"), the Company's pro forma net income and earnings per
share would have been as follows for the three and nine months ended March 31,
2005 (in thousands, except per share data):
Three months ended Nine months ended
March 31, 2005 March 31, 2005
------------------ -----------------
Net income reported $ 4,353 $ 17,832
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 (1) 986 2,926
------------------ -----------------
Pro forma net income $ 3,367 $ 14,906
================== =================
Earnings per share:
As reported
Basic $ 0.44 $ 1.77
Diluted $ 0.40 $ 1.55
Pro forma
Basic $ 0.34 $ 1.48
Diluted $ 0.32 $ 1.31
(1) Compensation expense was reduced for forfeitures as they occurred.
The Company evaluated its valuation method and assumptions in connection with
SFAS 123R. The Company determined that the use of the Black-Scholes
option-pricing model was appropriate and is consistent with the Company's pro
forma disclosures under the fair value recognition provisions of SFAS 123. The
Company believes it has used appropriate assumptions in accordance with SFAS
123R to estimate the fair value of its stock options and its employee stock
purchase plan during the three and nine months ended March 31, 2006. The
following weighted average assumptions were used to estimate the fair value of
options granted:
Three months ended Nine months ended
March 31, March 31,
------------------ -----------------
Black-Scholes Option Valuation Assumptions 2006 2005 2006 2005
------------------------------------------ -------- -------- -------- --------
Dividend yield 0.0% 0.0% 0.0% 0.0%
Expected volatility (1) 57% 61% 64% 66%
Risk free interest rate (2) 4.6% 3.7% 3.9% 3.7%
Expected lives (in years) (3) 5.0 5.0 5.6 5.0
(1) Estimated based on the historical volatility of the Company's stock.
(2) Based on the U.S. Treasury yield curve in effect at the time of grant with
a term consistent with the expected life of the options granted.
(3) Estimated based on historical exercise experience and expected future
results of similar grants.
The weighted average fair values of options granted during the three and nine
months ended March 31, 2006 estimated on the grant date using the Black-Scholes
option-pricing model with the assumptions listed above were $22.94 and $21.23,
respectively. The weighted average fair values of options granted during the
three and nine months ended March 31, 2005 estimated on the grant date using the
Black-Scholes option-pricing model with the assumptions listed above were $22.07
and $18.24, respectively.
For the three and nine months ended March 31, 2006, the Company recognized
$1,112,000 ($674,000 net of tax, or $0.05 per diluted share) and $3,362,000
($2,125,000 net of tax, or $0.17 per diluted share), respectively, in general
and administrative expenses related to stock option compensation. As of March
31, 2006, unrecognized stock compensation expense related to unvested options
was $8,379,000, which is expected to be recognized over a weighted average
period of 2.6 years.
5
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The total intrinsic value of options exercised during the three and nine months
ended March 31, 2006 was $7,045,000 and $9,164,000, respectively, and $5,864,000
and $10,411,000 during the three and nine months ended March 31, 2005,
respectively. The total cash received as a result of employee stock option
exercises for the three and nine months ended March 31, 2006 was $4,671,000 and
$7,400,000, respectively, and $3,558,000 and $9,795,000 during the three and
nine months ended March 31, 2005, respectively. The tax benefits realized in
connection with these exercises were $897,000 and $1,457,000 during the three
and nine months ended March 31, 2006, respectively, and $606,000 and $1,545,000
during the three and nine months ended March 31, 2005, respectively.
As of March 31, 2006, 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 options to acquire
5,524,000 shares of Common 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.
In addition, the 2005 Equity Incentive Plan has 1,000,000 shares authorized,
reserved and available for issuance. Awards granted may be in the form of stock
options, restricted stock, restricted stock units, stock appreciation rights,
performance stock and performance stock units. As of March 31, 2006, no awards
have been made under this plan. The Board of Directors has the authority to
determine the form, terms and conditions of awards at the time of grant,
including vesting, exercisability, payment, and the effect, if any, that a
participant's termination of service will have on an award.
As of March 31, 2006, 4,074,000 shares of common stock were reserved for
issuance under these stock incentive plans, of which 1,477,000 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):
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding at July 1, 2005 2,872 $ 22.16
Granted 235 38.43
Exercised (404) 18.00
Forfeited or expired (106) 32.60
--------
Outstanding at March 31, 2006 2,597 23.85
========
6
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the Company's stock options outstanding and
exercisable as of March 31, 2006 (shares in thousands):
Options Outstanding Options Exercisable
---------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Aggregate Average Aggregate
Contractual Exercise Intrinsic Exercise Intrinsic
Exercise Price Shares Term (Yrs) Price ($) Value ($) Shares Price ($) Value ($)
----------------- ------ ---------- --------- --------- ------ --------- ----------
$7.98 - $13.05 441 6.03 12.42 12,952 314 12.16 9,307
$13.05 - $19.375 376 3.85 16.43 9,554 342 16.40 8,674
$19.375 - $25.563 557 5.68 20.69 11,765 496 20.66 10,488
$25.563 - $29.875 852 4.86 29.47 10,502 699 29.43 8,638
$29.875 - $43.00 371 9.07 36.87 1,838 23 33.12 203
------ --------- ------ ----------
2,597 5.69 23.85 46,611 1,874 21.89 37,310
====== ========= ====== ==========
The weighted average remaining contractual term of stock options exercisable as
of March 31, 2006 was 4.73 years. Of the options outstanding, the Company
expects 2,525,000 options to vest. Options expected to vest have a weighted
average exercise price of $23.57, a weighted average remaining contractual term
of 5.5 years and an intrinsic value of $46,042,000.
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying value and accumulated amortization of goodwill and other
intangibles are as follows (in thousands):
March 31, 2006 June 30, 2005
------------------------ ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ------------
Amortizable intangible assets:
Membership and client relationships $ 40,215 $ 20,419 $ 40,215 $ 15,184
Trade names 21,859 2,751 21,859 1,662
Other 1,505 1,424 1,518 1,237
---------- ------------ ---------- ------------
Total amortizable intangible assets $ 63,579 $ 24,594 $ 63,592 $ 18,083
========== ============ ========== ============
Amortizable intangible assets, net $ 38,985 $ 45,509
========== ==========
Indefinite-lived intangible assets:
Goodwill $ 212,670 $ 201,499
Intangible asset related to minimum pension liability $ 967 $ 967
Changes in the carrying amount of goodwill by segment during the nine months
ended were as follows (in thousands):
March 31, 2006
----------------------------------------
Marketing Management
Services Personals Services Total
--------- --------- --------- ----------
Balance at beginning of period $ 95,917 $ 82,215 $ 23,367 $ 201,499
Purchase adjustments and other 515 (189) 10,845 11,171
--------- --------- --------- ----------
Balance at end of period $ 96,432 $ 82,026 $ 34,212 $ 212,670
========= ========= ========= ==========
As required by SFAS 142, goodwill was tested for impairment during the quarters
ended September 30, 2005 and 2004 using a July 1 measurement date. 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 definite 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.
7
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 for cash flow hedges 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 expenses and other
current assets. As of March 31, 2006 and June 30, 2005, the fair value of these
instruments was $243,000 (asset) and $559,000 (asset), respectively. Derivative
gains recognized in earnings were recorded in operating expenses and general and
administrative expenses and amounted to $265,000 and $678,000 for the three and
nine months ended March 31, 2006, respectively, and $416,000 and $1,027,000 for
the three and nine months ended March 31, 2005, respectively. All forecasted
transactions currently being hedged are expected to occur over the remaining
fiscal year.
NOTE 6 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities reported in the accompanying unaudited condensed
consolidated balance sheets as of March 31, 2006 and June 30, 2005 include an
allowance for membership cancellations of $9,308,000 and $11,232,000,
respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
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 term.
The Company has an amended and restated senior secured credit facility dated as
of March 17, 2006, which allows borrowings of up to $50,000,000. Borrowings
under this senior secured credit facility accrue interest at the Eurodollar rate
plus an applicable margin or the Prime rate plus an applicable margin. There
were no borrowings outstanding under this senior secured credit facility as of
March 31, 2006. This credit facility matures on March 31, 2009.
Contingent payments related to the acquisition of MCM of up to $56,000,000 may
be paid if certain performance targets, including increasing levels of revenues
and earnings, are achieved during the three calendar years ending December 31,
2007. As of March 31, 2006, the Company has recorded $10,726,000 in accrued
liabilities related to contingent payments paid during the fourth quarter of
fiscal 2006.
As of March 31, 2006, the Company had outstanding purchase obligations of
$11,846,000 primarily related to marketing agreements and contracts for the
Company's software, equipment and other services. In addition, as of March 31,
2006, the Company had commitments of $57,365,000 related to existing operating
leases.
During the quarter ended March 31, 2006, the Company recovered certain expenses
related to litigation settled during the current period. As a result, the
Company recognized a benefit of $1,585,000 and $967,000 in general and
administrative expenses during the three and nine months ended March 31, 2006,
respectively.
Legal proceedings
Except as set forth below, 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. The Company or its subsidiaries are
involved in other lawsuits and claims generally incidental to their respective
businesses including, but not limited to, various suits, including previously
disclosed suits, brought by individual consumers seeking monetary and/or
injunctive relief relating to the marketing of the Company's services. In
addition, from time to time in the regular course of its business, the Company
or a subsidiary may receive inquiries from various federal and/or state
regulatory authorities.
On October 17, 2005, the U.S. Supreme Court declined to review the Connecticut
Supreme Court's May 10, 2005 decision to uphold an arbitration panel's award of
$5,458,000 in punitive damages and costs to MedValUSA Health Programs, Inc.
Accordingly, the full amount of the award was paid in the quarter ending
December 31, 2005. The Company recorded a one-time $5,458,000 charge in the
quarter ended June 30, 2005 related to this award.
8
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAX EXPENSE
Income tax expense as a percent of pre-tax income was 39.4% and 36.8% for the
three and nine months ended March 31, 2006, respectively, and 33.6% and 36.6%
for the three and nine months ended March 31, 2005, respectively. The effective
tax rate was higher than the U.S. statutory rate for the three and nine months
ended March 31, 2006 primarily due to state taxes and other non-deductible items
offset by the favorable impact of foreign operations. The effective tax rate was
higher than the U.S. statutory rate for the nine months ended March 31, 2005
primarily due to state taxes and other non-deductible items offset by the
favorable impact of foreign operations.
The Company has open tax years in the U.S., Canada and other jurisdictions. The
Company is currently under examination by the Internal Revenue Service for the
fiscal year ended June 30, 2004. The audit is in the intermediate stages. No
assessments have been issued.
In addition, there are certain tax years that are not currently under
examination by the applicable tax authorities but may be subject to examination
in the future. The results of audits are inherently uncertain. The Company
periodically evaluates the adequacy of its related tax reserves, taking into
account its open tax return positions and tax law changes. The Company believes
that its tax reserves are appropriate. However, the final determination of tax
audits could impact the Company's assessment of tax requirements.
NOTE 9 - EARNINGS PER SHARE
Basic and diluted earnings per share amounts are determined in accordance with
the provisions of SFAS 128. The following table reconciles the numerators and
denominators used in the computations of basic and diluted earnings per share
(in thousands, except per share data):
Three months ended Nine months ended
March 31, March 31,
------------------- -------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Numerator:
Income available to common shareholders used in basic earnings per share $ 4,141 $ 4,353 $ 20,446 $ 17,832
Add back interest expense on convertible securities, net of tax 750 821 2,346 2,355
--------- --------- --------- ---------
Income available to common shareholders after assumed conversion
of dilutive securities $ 4,891 $ 5,174 $ 22,792 $ 20,187
========= ========= ========= =========
Denominator:
Weighted average number of common shares outstanding - basic 9,728 9,915 9,713 10,072
Effect of dilutive securities:
Convertible securities 2,230 2,230 2,230 2,230
Stock options 890 860 877 712
--------- --------- --------- ---------
Weighted average number of common shares outstanding - diluted 12,848 13,005 12,820 13,014
========= ========= ========= =========
Basic earnings per share $ 0.43 $ 0.44 $ 2.11 $ 1.77
========= ========= ========= =========
Diluted earnings per share $ 0.38 $ 0.40 $ 1.78 $ 1.55
========= ========= ========= =========
The diluted earnings per common share calculations exclude the effect of
potentially dilutive shares when their effect is antidilutive. Excluded from the
diluted share calculation above for the three and nine months ended March 31,
2006 are incremental weighted average stock options of approximately 342,000 and
377,000, respectively, and 25,000 and 54,000, respectively, for the three and
nine months ended March 31, 2005.
9
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three months ended Nine months ended
March 31, March 31,
----------------- -------------------
2006 2005 2006 2005
-------- -------- --------- ---------
Net income $ 4,141 $ 4,353 $ 20,446 $ 17,832
Unrealized (loss) gain on derivative assets (250) (680) (136) 523
Foreign currency translation gain (loss) 75 (16) 486 77
-------- -------- --------- ---------
Comprehensive income $ 3,966 $ 3,657 $ 20,796 $ 18,432
======== ======== ========= =========
NOTE 11 - 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 capital and other
resources. The Company has three reportable business segments: Marketing
Services, Personals and Management Services. 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. During the quarter ended December 31, 2005, the
Management Services business segment became reportable due to the increase in
its assets and all prior periods have been restated to reflect this change. The
Management Services business segment provides management services to healthcare
professionals throughout the United States. The Corporate business unit includes
unallocated general corporate expenses.
Management evaluates the operating results of each reportable business segment
based on revenue and Adjusted EBITDA. The following is a summary of revenues,
Adjusted EBITDA, capital expenditures, depreciation and amortization and assets
by business segment (in thousands):
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Revenues
Marketing Services $ 132,453 $ 123,949 $ 398,780 $ 359,941
Personals 18,384 17,998 55,617 54,244
Management Services 13,049 7,144 27,287 7,144
Intersegment (45) (96) (185) (232)
---------- ---------- ---------- ----------
Total $ 163,841 $ 148,995 $ 481,499 $ 421,097
========== ========== ========== ==========
Adjusted EBITDA (1)
Marketing Services $ 19,545 $ 16,555 $ 69,450 $ 52,746
Personals 3,721 882 7,643 4,418
Management Services 2,950 2,057 3,933 2,057
Corporate (7,777) (4,712) (20,233) (15,022)
---------- ---------- ---------- ----------
Total $ 18,439 $ 14,782 $ 60,793 $ 44,199
========== ========== ========== ==========
Capital Expenditures (2)
Marketing Services $ 8,033 $ 2,583 $ 14,013 $ 6,531
Personals 247 469 729 860
Management Services 64 16 120 16
---------- ---------- ---------- ----------
Total $ 8,344 $ 3,068 $ 14,862 $ 7,407
========== ========== ========== ==========
10
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31, Nine months ended March 31,
---------------------------- ---------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Depreciation and
Amortization
Marketing Services $ 2,929 $ 3,191 $ 9,277 $ 7,880
Personals 2,860 2,345 7,611 7,041
Management Services 409 399 1,214 399
Corporate 272 103 828 304
---------- ---------- ---------- ----------
Total $ 6,470 $ 6,038 $ 18,930 $ 15,624
========== ========== ========== ==========
March 31, June 30,
2006 2005
---------- ----------
Assets
Marketing Services $ 238,120 $ 245,635
Personals 128,884 132,992
Management Services 55,641 41,053
Corporate (3) 43,270 27,482
---------- ----------
Total $ 465,915 $ 447,162
========== ==========
(1) Defined as net income excluding 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
business unit. However, the associated depreciation expense has been
allocated for purposes of evaluating performance.
(3) Includes 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):
Three months ended March 31, 2006
------------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
---------- ---------- ---------- ---------- ---------
Income before income taxes $ 6,835
Interest and other expense, net (1) 4,127
---------
Operating income (expense) $ 16,461 $ 821 $ 1,729 $ (8,049) $ 10,962
Depreciation and amortization 2,929 2,860 409 272 6,470
Change in deferred revenues (2,882) 40 812 - (2,030)
Change in deferred marketing costs 3,037 - - - 3,037
---------- ---------- ---------- ---------- ---------
Adjusted EBITDA $ 19,545 $ 3,721 $ 2,950 $ (7,777) $ 18,439
========== ========== ========== ========== =========
Three months ended March 31, 2005
------------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
---------- ---------- ---------- ---------- ---------
Income before income taxes $ 6,559
Interest and other expense, net (1) 4,980
---------
Operating income (expense) $ 17,546 $ (1,458) $ 266 $ (4,815) $ 11,539
Depreciation and amortization 3,191 2,345 399 103 6,038
Change in deferred revenues (6,327) (5) 1,392 - (4,940)
Change in deferred marketing costs 2,145 - - - 2,145
---------- ---------- ---------- ---------- ---------
Adjusted EBITDA $ 16,555 $ 882 $ 2,057 $ (4,712) $ 14,782
========== ========== ========== ========== =========
11
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended March 31, 2006
-------------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
---------- ---------- ---------- ---------- ---------
Income before income taxes $ 32,364
Interest and other expense, net (1) 13,132
---------
Operating income (expense) $ 64,231 $ 77 $ 2,249 $ (21,061) $ 45,496
Depreciation and amortization 9,277 7,611 1,214 828 18,930
Change in deferred revenues (13,066) (45) 470 - (12,641)
Change in deferred marketing costs 9,008 - - - 9,008
---------- ---------- ---------- ---------- ---------
Adjusted EBITDA $ 69,450 $ 7,643 $ 3,933 $ (20,233) $ 60,793
========== ========== ========== ========== =========
Nine months ended March 31, 2005
-------------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
---------- ---------- ---------- ---------- ---------
Income before income taxes $ 28,113
Interest and other expense, net (1) 13,941
---------
Operating income (expense) $ 59,856 $ (2,742) $ 266 $ (15,326) $ 42,054
Depreciation and amortization 7,880 7,041 399 304 15,624
Change in deferred revenues (25,820) 119 1,392 - (24,309)
Change in deferred marketing costs 10,830 - - - 10,830
---------- ---------- ---------- ---------- ---------
Adjusted EBITDA $ 52,746 $ 4,418 $ 2,057 $ (15,022) $ 44,199
========== ========== ========== ========== =========
(1) Management does not allocate interest and other expense, net to the individual segments.
NOTE 12 - 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 March 31, 2006 and June 30, 2005 and the
related statements of operations for the three and nine months ended March 31,
2006 and 2005 and the cash flows for the nine months ended March 31, 2006 and
2005. 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.
Subsequent event
The Company entered into a First Supplemental Indenture dated as of April 28,
2006 that made substantially all of the Company's subsidiaries guarantors of the
Company's payments under the Senior Notes. Since this occurred after March 31,
2006, the subsidiaries that became guarantors as a result of the First
Supplemental Indenture are presented as nonguarantor subsidiaries in the
following financial information. They will be presented as guarantor
subsidiaries beginning in the quarter ending June 30, 2006 and all prior periods
will be restated to conform to this presentation.
12
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, 2006
------------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ------------
Assets
Current assets $ 92,390 $ 75,774 $ 32,483 $ (44,555) $ 156,092
Fixed assets, net 23,053 10,508 7,792 - 41,353
Goodwill - 117,560 95,110 - 212,670
Intangible assets, net 989 27,293 11,670 - 39,952
Other assets 10,443 313 5,092 - 15,848
Investment in subsidiaries 300,238 - - (300,238) -
---------- ------------ ------------ ------------ ------------
Total assets $ 427,113 $ 231,448 $ 152,147 $ (344,793) $ 465,915
========== ============ ============ ============ ============
Liabilities and Shareholders' (Deficit) Equity
Current liabilities $ 204,775 $ 45,918 $ 28,072 $ (44,555) $ 234,210
Deferred income taxes 1,629 7,510 370 - 9,509
Other long-term liabilities 6,566 - 1,487 - 8,053
Long-term debt 237,939 - - - 237,939
---------- ------------ ------------ ------------ ------------
Total liabilities 450,909 53,428 29,929 (44,555) 489,711
---------- ------------ ------------ ------------ ------------
Shareholders' (deficit) equity:
Preferred stock - - - - -
Common stock 201 6 3 (9) 201
Capital in excess of par value 183,958 165,285 113,431 (278,716) 183,958
Accumulated earnings (deficit) 56,126 12,564 8,686 (21,250) 56,126
Accumulated other comprehensive income (loss) 202 165 98 (263) 202
Treasury stock (264,283) - - - (264,283)
---------- ------------ ------------ ------------ ------------
Total shareholders' (deficit) equity (23,796) 178,020 122,218 (300,238) (23,796)
---------- ------------ ------------ ------------ ------------
Total liabilities and shareholders' (deficit) equity $ 427,113 $ 231,448 $ 152,147 $ (344,793) $ 465,915
========== ============ ============ ============ ============
13
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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) income (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
========== ============ ============ ============ ============
14
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three months ended March 31, 2006
----------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Revenues $ 96,123 $ 39,305 $ 34,509 $ (6,096) $ 163,841
Expenses:
Marketing 56,496 18,037 13,118 (6,025) 81,626
Operating 16,658 8,375 13,076 (71) 38,038
General and administrative 20,320 6,402 4,615 - 31,337
Amortization of intangibles 9 1,491 378 - 1,878
--------- ------------ ------------ ------------ ------------
Operating income 2,640 5,000 3,322 - 10,962
Equity in income of subsidiaries 5,152 - - (5,152) -
Interest (expense) income, net (4,614) 201 273 - (4,140)
Other (expense) income, net (21) 92 (58) - 13
--------- ------------ ------------ ------------ ------------
Income before income taxes 3,157 5,293 3,537 (5,152) 6,835
Provision for income taxes (984) 2,145 1,533 - 2,694
--------- ------------ ------------ ------------ ------------
Net income $ 4,141 $ 3,148 $ 2,004 $ (5,152) $ 4,141
========= ============ ============ ============ ============
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three months ended March 31, 2005
----------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Revenues $ 91,512 $ 37,016 $ 26,286 $ (5,819) $ 148,995
Expenses:
Marketing 52,273 17,435 11,380 (5,120) 75,968
Operating 15,563 7,476 8,767 (699) 31,107
General and administrative 15,186 8,571 4,157 - 27,914
Amortization of intangibles 76 1,522 869 - 2,467
--------- ------------ ------------ ------------ ------------
Operating income 8,414 2,012 1,113 - 11,539
Equity in income of subsidiaries 2,065 - - (2,065) -
Interest (expense) income, net (5,031) 22 16 - (4,993)
Other (expense) income, net 42 (14) (15) - 13
--------- ------------ ------------ ------------ ------------
Income before income taxes 5,490 2,020 1,114 (2,065) 6,559
Provision for income taxes 1,137 560 509 - 2,206
--------- ------------ ------------ ------------ ------------
Net income $ 4,353 $ 1,460 $ 605 $ (2,065) $ 4,353
========= ============ ============ ============ ============
15
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Nine months ended March 31, 2006
-----------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ------------
Revenues $ 289,896 $ 118,479 $ 88,934 $ (15,810) $ 481,499
Expenses:
Marketing 160,277 52,872 33,749 (15,103) 231,795
Operating 50,713 26,090 32,283 (707) 108,379
General and administrative 54,603 21,427 13,288 - 89,318
Amortization of intangibles 94 4,494 1,923 - 6,511
---------- ------------ ------------ ------------ ------------
Operating income 24,209 13,596 7,691 - 45,496
Equity in income of subsidiaries 13,699 - - (13,699) -
Interest (expense) income, net (14,120) 500 636 - (12,984)
Other income (expense), net (8) (143) 3 - (148)
---------- ------------ ------------ ------------ ------------
Income before income taxes 23,780 13,953 8,330 (13,699) 32,364
Provision for income taxes 3,334 5,273 3,311 - 11,918
---------- ------------ ------------ ------------ ------------
Net income $ 20,446 $ 8,680 $ 5,019 $ (13,699) $ 20,446
========== ============ ============ ============ ============
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Nine months ended March 31, 2005
-----------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ------------
Revenues $ 280,148 $ 106,838 $ 41,632 $ (7,521) $ 421,097
Expenses:
Marketing 152,145 50,839 15,832 (5,627) 213,189
Operating 46,311 21,956 14,896 (1,894) 81,269
General and administrative 46,364 25,340 7,117 - 78,821
Amortization of intangibles 152 4,593 1,019 - 5,764
---------- ------------ ------------ ------------ ------------
Operating income 35,176 4,110 2,768 - 42,054
Equity in income of subsidiaries 4,652 - - (4,652) -
Interest (expense) income, net (14,380) 113 20 - (14,247)
Other (expense) income, net (56) 341 21 - 306
---------- ------------ ------------ ------------ ------------
Income before income taxes 25,392 4,564 2,809 (4,652) 28,113
Provision for income taxes 7,560 1,402 1,319 - 10,281
---------- ------------ ------------ ------------ ------------
Net income $ 17,832 $ 3,162 $ 1,490 $ (4,652) $ 17,832
========== ============ ============ ============ ============
16
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended March 31, 2006
-----------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $ 58,302 $ (6,162) $ (878) $ (13,699) $ 37,563
Investing activities
Acquisition of fixed assets (10,196) (1,438) (3,228) - (14,862)
Purchases of short-term investments (121,875) - - - (121,875)
Sales of short-term investments 105,764 619 - - 106,383
Acquisitions of businesses, net of cash acquired (14,717) (224) (1) - (14,942)
Investment in subsidiaries (13,699) - - 13,699 -
--------- ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (54,723) (1,043) (3,229) 13,699 (45,296)
--------- ------------ ------------ ------------ ------------
Financing activities
Net proceeds from issuance of stock 7,400 - - - 7,400
Excess tax benefit from stock-based compensation 1,457 - - - 1,457
Treasury stock purchases (10,663) - - - (10,663)
Debt issuance costs (125) - - - (125)
Payments of long-term obligations (293) - (226) - (519)
--------- ------------ ------------ ------------ ------------
Net cash used in financing activities (2,224) - (226) - (2,450)
--------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents - 217 314 - 531
--------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,355 (6,988) (4,019) - (9,652)
Cash and cash equivalents at beginning of year 24,366 29,821 10,169 - 64,356
--------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 25,721 $ 22,833 $ 6,150 $ - $ 54,704
========= ============ ============ ============ ============
17
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended March 31, 2005
-----------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $ 112,759 $ (89,116) $ 5,565 $ (4,652) $ 24,556
Investing activities
Acquisition of fixed assets (5,043) (1,208) (1,156) - (7,407)
Purchases of short-term investments (397,218) (244) - - (397,462)
Sales of short-term investments 490,735 813 - - 491,548
Acquisitions of businesses, net of cash acquired (160,994) 93,937 1,370 - (65,687)
Investment in subsidiaries (4,652) - - 4,652 -
---------- ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (77,172) 93,298 214 4,652 20,992
---------- ------------ ------------ ------------ ------------
Financing activities
Net proceeds from issuance of stock 9,795 - - - 9,795
Treasury stock purchases (33,817) - - - (33,817)
Debt issuance costs (803) - - - (803)
Payments of long-term obligations (242) (14) (117) - (373)
---------- ------------ ------------ ------------ ------------
Net cash used in financing activities (25,067) (14) (117) - (25,198)
---------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents - (272) 484 - 212
---------- ------------ ------------ ------------ ------------
Net increase in cash and cash equivalents 10,520 3,896 6,146 - 20,562
Cash and cash equivalents at beginning of year 18,251 26,657 2,258 - 47,166
---------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 28,771 $ 30,553 $ 8,404 $ - $ 67,728
========== ============ ============ ============ ============
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("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.
18
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the year ended June
30, 2005, which describes, among other things, the Company's basic business
model and critical accounting policies.
The Company has three reportable business segments: Marketing Services,
Personals and Management Services. During the quarter ended December 31, 2005,
the Management Services business segment became reportable due to the increase
in its assets. The Management Services business segment provides management
services to healthcare professionals throughout the United States. For
additional information about these reportable business segments, see Note 11 to
the condensed consolidated financial statements in this Quarterly Report on Form
10-Q.
The results of My Choice Medical Holdings, Inc. ("MCM") and Bargain Network,
Inc. ("Bargain") (collectively the "Acquired Companies") have been included in
the consolidated results since their acquisitions on January 1, 2005 and
November 30, 2004, respectively.
Adjusted EBITDA and EBITDA are used by the Company's management to evaluate the
performance of its business. A discussion of Adjusted EBITDA can be found in
"Liquidity and Capital Resources" in this Quarterly Report on Form 10-Q. A
description and reconciliation of net income to EBITDA and Adjusted EBITDA are
disclosed in "Reconciliation of Non-GAAP Measures" in this Quarterly Report on
Form 10-Q.
Three months ended Increase/ Nine months ended Increase/
March 31, (Decrease) March 31, (Decrease)
------------------- ------------ ------------------- ------------
(Dollars in millions) 2006 2005 '06 vs.'05 2006 2005 '06 vs.'05
-------- -------- ------------ -------- -------- ------------
Revenues $ 163.8 $ 149.0 10% $ 481.5 $ 421.1 14%
Marketing expenses 81.6 76.0 7% 231.8 213.2 9%
Operating expenses 38.0 31.1 22% 108.4 81.3 33%
General and administrative expenses 31.3 27.9 12% 89.3 78.8 13%
Amortization of intangibles 1.9 2.5 (24)% 6.5 5.8 12%
-------- -------- ------------ -------- -------- ------------
Operating income 11.0 11.5 (4)% 45.5 42.0 8%
Interest expense, net (4.2) (4.9) (14)% (13.0) (14.2) (8)%
Other (expense) income, net - - 0% (0.2) 0.3 (167)%
-------- -------- ------------ -------- -------- ------------
Income before income taxes 6.8 6.6 3% 32.3 28.1 15%
Provision for income taxes 2.7 2.2 23% 11.9 10.3 16%
Net income $ 4.1 $ 4.4 (7)% $ 20.4 $ 17.8 15%
======== ======== ============ ======== ======== ============
EBITDA $ 17.4 $ 17.6 (1)% $ 64.4 $ 57.7 12%
======== ======== ============ ======== ======== ============
19
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth revenue by payment plan and by segment (in
millions):
Three months ended Increase/ Nine months ended Increase/
March 31, (Decrease) March 31, (Decrease)
------------------ ------------ ------------------- ------------
Revenues 2006 2005 '06 vs.'05 2006 2005 '06 vs.'05
-------- -------- ------------ -------- -------- ------------
Monthly payment plans $ 89.0 $ 67.4 32% $ 258.7 $ 172.9 50%
Annual payment plans:
Initial year 7.6 11.7 (35)% 25.5 45.7 (44)%
Renewal year 26.8 36.8 (27)% 87.6 118.7 (26)%
Other 9.1 8.1 12% 27.0 22.7 19%
-------- -------- ------------ -------- -------- ------------
Total Marketing Services 132.5 124.0 7% 398.8 360.0 11%
Personals 18.3 17.9 2% 55.4 54.0 3%
Management Services 13.0 7.1 83% 27.3 7.1 285%
-------- -------- ------------ -------- -------- ------------
Total $ 163.8 $ 149.0 10% $ 481.5 $ 421.1 14%
======== ======== ============ ======== ======== ============
For the Three Months Ended March 31, 2006 and 2005
Revenues increased $14.8 million, or 10%, in 2006 primarily due to growth in the
Marketing Services Segment and the Management Services Segment, as discussed
below. Net active retail members and customers increased 3% to 6.5 million at
March 31, 2006 from 6.3 million at March 31, 2005.
Marketing Services revenues increased $8.5 million, or 7%, in the 2006 fiscal
third quarter due to a 32% increase in revenues from members enrolled in monthly
payment plans partially offset by a 29% decrease in revenue from members
enrolled in annual payment plans. The increase in revenues from monthly payment
plans was due to a 23% increase in average monthly members billed and a 6%
increase in the monthly member price point. Revenues from members enrolled in
annual payment plans continue to decrease for both initial year members and
renewal members due to the continued shift to enrolling new members in monthly
payment programs as well as the attrition of the annual renewal base.
Personals revenues increased $0.4 million, or 2%, in the 2006 fiscal third
quarter primarily due to the incremental revenue generated from Lavalife's
growing mobile service. Management Services revenues increased $5.9 million, or
83%, in the 2006 fiscal third quarter primarily due to an increase in the number
of transactions managed and the mix of transactions performed.
Marketing expenses increased $5.6 million, or 7%, in the 2006 fiscal third
quarter and as a percent of revenues, were 50% this year versus 51% last year.
Operating expenses increased $6.9 million, or 22%, in the 2006 fiscal third
quarter and as a percent of revenues, were 23% this year versus 21% last year.
The Acquired Companies have a higher proportion of their cost structure included
as operating expenses offset by a lower proportion included as marketing
expenses. On a combined basis Marketing and Operating expenses increased 12% in
the 2006 fiscal third quarter and as a percent of revenues were 73% this year
versus 72% last year. The 12% increase was primarily due to the inclusion of the
costs incurred by the Acquired Companies. The overall increase as a percent of
revenue is due to the increased cost of servicing the higher member and customer
base. Marketing expenses as a percentage of revenues, excluding the impact of
the Acquired Companies, would have been 54% this year versus 53% last year
despite a decrease in marketing cost before deferral as a percent of revenue
before deferral, excluding the impact of the Acquired Companies.
General and administrative expenses increased $3.4 million, or 12%, in the 2006
fiscal third quarter and included a $1.1 million charge related to the adoption
of Financial Accounting Standards Board Statement No. 123(R), "Share-Based
Payment" ("SFAS 123R") offset by a one time $1.6 million benefit realized on the
recovery of certain expenses related to litigation settled during the current
quarter. The remaining increase in general and administrative expenses was due
to increased employee related and occupancy related expenses.
Amortization of intangible assets decreased $0.6 million, or 24%, in the 2006
fiscal third quarter due to certain intangibles reaching the end of their
estimated useful lives.
20
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating income decreased $0.5 million, or 4%, in the 2006 fiscal third quarter
and as a percent of revenues, was 7% this year and 8% last year. The decrease in
operating income is primarily due to the increase in operating and marketing
expenses as a percent of revenue discussed above.
Interest expense, net decreased $0.7 million, or 14%, in the 2006 fiscal third
quarter and included $3.6 million of interest expense related to the 9.25%
Senior Notes and $1.2 million of interest expense related to the 5.5%
Convertible Notes. Interest expense, net decreased due to increased interest
income earned on increased short-term investment balances and rates of return.
The provision for income taxes increased $0.5 million, or 23%, in the 2006
fiscal third quarter and was based on an effective tax rate of 39.4% this year
versus 33.6% last year. For the nine months ended March 31, 2006, the effective
tax rate was 36.8% versus 36.6% for the nine months ended March 31, 2005.
EBITDA decreased 1% to $17.4 million in the 2006 fiscal third quarter from $17.6
million in the 2005 fiscal third quarter and as a percent of revenues, EBITDA
was 11% this year versus 12% last year due to the decrease in operating income
discussed above. Marketing Services EBITDA decreased 6% to $19.4 million in the
2006 fiscal third quarter from $20.7 million in the 2005 fiscal third quarter
due to an increase in employee related expenses. Personals EBITDA increased 311%
to $3.7 million in the 2006 fiscal third quarter from $0.9 million in the 2005
fiscal third quarter due in part to the one time $1.6 million benefit realized
on the recovery of certain expenses related to litigation settled during the
current quarter. The remaining increase is due to more efficient marketing and
cost containment measures. Management Services EBITDA increased 200% to $2.1
million in the 2006 fiscal third quarter from $0.7 million in the 2005 fiscal
third quarter due to the increase in the volume and mix of the transactions
managed. Corporate EBITDA decreased 66% to $(7.8) million in the 2006 fiscal
third quarter from $(4.7) million in the 2005 fiscal third quarter due to the
adoption of SFAS 123R and an increase in employee related and occupancy related
expenses.
For the Nine Months Ended March 31, 2006 and 2005
Revenues increased $60.4 million, or 14%, in the nine months ended March 31,
2006 primarily due to the inclusion of revenues from the Acquired Companies.
Excluding revenues from the Acquired Companies, revenues would have increased 6%
due to an increase in Marketing Services' revenues, as discussed below. Net
active retail members and customers increased 3% to 6.5 million at March 31,
2006 from 6.3 million at March 31, 2005.
Marketing Services revenues increased $38.8 million, or 11%, in the nine months
ended March 31, 2006. Excluding revenues from Bargain, total marketing services
revenues would have increased 7%. Revenues from members enrolled in monthly
payment plans increased 50% and were partially offset by a 31% decrease in
revenues from members enrolled in annual payment plans. The increase in revenues
from monthly payment plans was due to a 33% increase in the average monthly
members billed and an 11% increase in the monthly weighted average member price
point. Revenues from members enrolled in annual payment plans continue to
decrease for both initial year members and renewal members due to the continued
shift to enrolling new members in monthly payment programs as well as the
attrition of the annual renewal base.
Personals revenues increased $1.4 million, or 3%, in the nine months ended March
31, 2006 primarily due to the incremental revenue generated from Lavalife's
growing mobile service. Management Services revenues increased $20.2 million, or
285%, primarily due to inclusion of revenues from MCM for the full nine month
period ended March 31, 2006.
Marketing expenses increased $18.6 million, or 9%, in the nine months ended
March 31, 2006 and as a percent of revenues, were 48% this year versus 51% last
year. The increase in marketing expenses was due to the inclusion of costs
incurred by the Acquired Companies as well as an increase in online marketing
efforts which resulted in increased revenues, as discussed above. The decrease
in marketing expenses as a percent of revenues was primarily due to increased
price points and synergies realized from our Acquired Companies.
Operating expenses increased $27.1 million, or 33%, in the nine months ended
March 31, 2006 and as a percent of revenues, were 23% this year versus 19% last
year. Approximately half of the increase in both the level of operating expenses
and the operating expense ratio was due to the inclusion of expenses incurred by
the Acquired Companies with the remaining increase due to increased costs of
servicing the higher member and customer base.
21
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General and administrative expenses increased $10.5 million, or 13%, in the nine
months ended March 31, 2006 and included a $3.4 million charge related to the
adoption of SFAS 123R partially offset by the one-time $1.0 million benefit
realized on the recovery of certain expenses related to litigation settled
during the current quarter. Excluding the impact of these two items from both
periods, general and administrative expenses would have increased $8.7 million
and as a percent of revenues, would have been 18% this year versus 19% in the
prior year. Approximately half of the increase in general and administrative
expenses was due to the inclusion of expenses incurred by the Acquired
Companies. The remaining increase was due to increased employee related expenses
and occupancy related expenses. General and administrative expenses decreased as
a percent of revenue due to leveraging expenses with the increased revenue.
Amortization of intangible assets increased $0.7 million, or 12%, in the nine
months ended March 31, 2006 due to amortization expense related to the Acquired
Companies.
Operating income increased $3.5 million, or 8%, in the nine months ended March
31, 2006. Excluding the expenses associated with the adoption of SFAS 123R and
the one-time benefit realized related to the settlement of litigation from 2006
and the expenses associated with that same litigation in the nine months ended
March 2005, operating income would have increased 12% to $47.9 million from
$42.6 million due to the 14% increase in revenue.
Interest expense, net decreased $1.2 million, or 8%, to $13.0 million, in the
nine months ended March 31, 2006 and included $10.7 million interest expense
related to the 9.25% Senior Notes and $3.7 million of interest expense related
to the 5.5% Convertible Notes. Interest expense, net decreased due to an
increase in interest income earned on increased short-term investment balances
and rates of return.
The provision for income taxes increased $1.6 million, or 16%, in the nine
months ended March 31, 2006 and was based on an effective tax rate of 36.8% this
year versus 36.6% last year.
EBITDA increased 12% to $64.4 million in the nine months ended March 31, 2006
from $57.7 million in the nine months ended March 31, 2005. Excluding the
expenses associated with the adoption of SFAS 123R and the one-time benefit
realized related to the settlement of litigation from 2006 and the expenses
associated with that same litigation in the nine months ended March 2005 EBITDA,
would have increased 15% to $66.8 million from $58.3 million due to the 14%
increase in revenue generated. Marketing Services EBITDA increased 9% to $73.5
million in the nine months ended March 31, 2006 from $67.7 million in the nine
months ended March 31, 2005 due to increased price points and synergies realized
from our Acquired Companies. Personals EBITDA increased 79% to $7.7 million in
the nine months ended March 31, 2006 from $4.3 million in the nine months ended
March 31, 2005. Approximately half of the increase was related to the benefit
realized in 2006 and the related expenses recognized in 2005 in connection with
the litigation settled in the March 2006 quarter. The remaining increase was due
to Lavalife's growing mobile service business and cost containment efforts.
Management Services EBITDA increased to $3.4 million in the nine months ended
March 31, 2006 from $0.7 million in the nine months ended March 31, 2005.
Corporate EBITDA decreased to $(20.2) million in the nine months ended March 31,
2006 from $(15.0) million in the nine months ended March 31, 2005 primarily due
to the adoption of SFAS 123R and increased employee related and occupancy
related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided by operating activities is an important measure used to
understand the Company's liquidity. Net cash provided by operating activities
increased to $37.6 million in the nine months ended March 31, 2006 from $24.6
million in the nine months ended March 31, 2005. The $13.0 million increase in
operating cash flow was primarily due to a $16.6 million increase in Adjusted
EBITDA offset by a $3.0 million decrease in operating cash flow due to the
change in the classification of excess tax benefit from stock-based compensation
from operating activities to financing activities, as required by SFAS 123R. The
increase in Adjusted EBITDA is discussed in more detail below. Management
believes it is useful to analyze the components of net cash provided by
operating activities as follows: Revenue before deferral, marketing costs before
deferral, Adjusted EBITDA and changes in assets and liabilities. For definitions
and reconciliations of revenue before deferral, marketing costs before deferral
and Adjusted EBITDA, refer to the discussion in "Reconciliation of Non-GAAP
Measures" in this Quarterly Report on Form 10-Q.
22
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below summarizes the components of revenues before deferral (in
millions):
Nine months ended Increase/
March 31, (Decrease)
---------------------------- --------------
Revenues before deferral 2006 2005 '06 vs. '05
------------- -------------- --------------
Monthly payment plans $ 262.8 $ 177.4 48%
Annual payment plans:
Initial year 22.9 31.0 (26)%
Renewal year 73.2 103.2 (29)%
Other 26.8 22.6 19%
------------- ------------- --------------
Total Marketing Services 385.7 334.2 15%
Personals 55.4 54.1 2%
Management Services 27.8 8.5 227%
Total $ 468.9 $ 396.8 18%
------------- ------------- --------------
Revenues before deferral increased 18% to $468.9 million in the nine months
ended March 31, 2006 and excluding revenues before deferral from the Acquired
Companies, revenue before deferral would have increased 10% in 2006. Revenues
before deferral from monthly payment plans increased 48% due to a 33% increase
in the average monthly members billed to 2.1 million in the nine months ended
March 31, 2006 and an 11% increase in the monthly weighted average program price
point which increased to $13.67 for the nine months ended March 31, 2006. The
average monthly members billed increased due to the increase in the mix of new
members enrolled in monthly payment plan programs, which was 89% during the nine
months ended March 31, 2006 and 83% during the nine months ended March 31, 2005.
Revenues before deferral from annual payment plans declined due to the continued
shift to enrolling new members in monthly payment programs as well as the
attrition of the annual renewal base. The new annual weighted average program
price points were $107 and $104 for the nine months ended March 31, 2006 and
2005, respectively. Personals revenues before deferral increased 2% from the
prior year due to increased revenues before deferral generated from Lavalife's
growing mobile services. Management Services revenues before deferral represent
the revenues from MCM which was acquired on January 1, 2005.
Marketing costs before deferral were $222.8 million and $202.4 million for the
nine months ended March 31, 2006 and 2005, respectively. As a percent of revenue
before deferral, marketing costs before deferral were 48% and 51% in the fiscal
2006 and 2005 year to date periods, respectively. The improved ratio is due to
increased price points, more efficient marketing spending and better retention
in certain sectors of our business. Marketing costs before deferral increased
10% in the nine months ended March 31, 2006 primarily due to the inclusion of
marketing costs before deferral from the Acquired Companies. The effect of the
increase in marketing margin before deferral in the fiscal 2006 year to date
period contributed to a $16.6 million increase in Adjusted EBITDA to $60.8
million for the nine months ended March 31, 2006 from $44.2 million for the nine
months ended March 31, 2005. The table below presents Adjusted EBITDA by segment
(in millions).
Nine months ended Increase/
March 31, Decrease
---------------------------- --------------
Adjusted EBITDA 2006 2005 '06 vs. '05
------------- ------------- --------------
Marketing Services $ 69.4 $ 52.7 32%
Personals 7.7 4.4 75%
Management Services 3.9 2.1 86%
Corporate (20.2) (15.0) (35)%
------------- ------------- --------------
Total $ 60.8 $ 44.2 38%
============= ============= ==============
Changes in assets and liabilities used $0.1 million of cash in the nine months
ended March 31, 2006 compared to $1.9 million in the nine months ended March 31,
2005. The use of cash in fiscal 2006 primarily related to the timing of trade
and tax payments during the period and the $5.5 million arbitration award
payment made during the December 2005 quarter.
Capital expenditures increased to $14.9 million in 2006 from $7.5 million in
2005 due to the costs associated with the relocation of the Company's corporate
headquarters. As a result, free cash flow, defined as operating cash flow less
capital expenditures, was $22.7 million for the nine months ended March 31, 2006
compared to $17.1 million for the prior year period.
23
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash (used in) provided by investing activities was $(45.3) million and
$21.0 million in the nine months ended March 31, 2006 and 2005, respectively.
Net cash used in investing activities in the nine months ended March 31, 2006
primarily reflected $15.5 million net purchases of short-term investments and
$14.9 million used in connection with the Company's recent acquisitions. Net
cash provided by investing activities in the nine months ended March 31, 2005
primarily reflected $94.1 million of net proceeds from sales of short-term
investments and $(65.7) million invested in acquiring businesses.
Net cash used in financing activities was $2.5 million in the nine months ended
March 31, 2006 and $25.2 million in the nine months ended March 31, 2005. Net
cash used in financing activities in 2006 principally reflected the use of $10.7
million to repurchase the Company's stock, which was partially offset by $7.4
million of proceeds from the exercise of stock options and $1.5 million of
excess tax benefit from stock-based compensation. Net cash used in financing
activities in 2005 principally reflected the use of $33.8 million to repurchase
the Company's stock, which was partially offset by proceeds from the exercise of
stock options of $9.8 million.
Credit Facility
The Company has an amended and restated senior secured credit facility dated as
of March 17, 2006, which allows borrowings of up to $50.0 million. Borrowings
under this senior secured credit facility accrue interest at the Eurodollar rate
plus an applicable margin or the Prime rate plus an applicable margin. As of
March 31, 2006, the base interest rate for borrowings under this credit facility
was 8.00%. There were no borrowings outstanding under this credit facility as of
March 31, 2006. The senior secured credit facility has certain financial
covenants, including a maximum debt coverage ratio, potential restrictions on
borrowings and potential restrictions on additional stock repurchases. As of
March 31, 2006, the Company was in compliance with all such debt covenants. The
senior secured credit facility matures on March 31, 2009.
Stock Repurchase Program
The Company purchased 275,500 shares of its common stock for $10.7 million at an
average price of $38.70 per share during 2006 compared to 972,000 shares for
$33.8 million at an average price of $34.43 per share in 2005. The Company
utilized cash from operations, stock issuances and the issuance of the
Convertible Notes and Senior Notes to repurchase shares in fiscal 2006 and 2005.
As of March 31, 2006, the Company had 550,000 shares available for repurchase
under its stock repurchase program.
Other
As of March 31, 2006, the Company had cash, cash equivalents and short-term
investments of $90.9 million in addition to its senior secured credit facility.
The Company believes that existing cash and short-term investment balances and
funds available under its senior secured credit facility together with cash
generated from operations will be sufficient to meet its funding requirements
for the foreseeable future.
The Company expects to incur capital expenditures of $17.5 million in fiscal
2006. In addition, contingent payments related to the acquisition of MCM of up
to $56.0 million may be paid if certain performance targets, including
increasing levels of revenues and earnings, are achieved during the three
calendar years ending December 31, 2007. During the quarter ended June 30, 2006,
the Company paid $10.7 million related to these contingent payments. The Company
intends to utilize cash on hand, short-term investments and cash generated from
operations to fulfill payment obligations during 2006.
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 the 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 future 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.
24
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues before deferral are calculated as follows (in millions):
Nine months ended
March 31,
-----------------
2006 2005
-------- --------
Revenues $ 481.5 $ 421.1
Change in deferred revenues (12.6) (24.3)
-------- --------
Revenues before deferral $ 468.9 $ 396.8
======== ========
Marketing costs before deferral are calculated as follows (in millions):
Nine months ended
March 31,
-----------------
2006 2005
-------- --------
Marketing expenses $ 231.8 $ 213.2
Change in deferred marketing costs (9.0) (10.8)
-------- --------
Marketing costs before deferral $ 222.8 $ 202.4
======== ========
EBITDA is calculated as net income excluding interest and other expense, taxes,
depreciation and amortization. Adjusted EBITDA is calculated as EBITDA before
the deferral of revenues and the deferral of marketing costs.
EBITDA and Adjusted EBITDA are used by the Company's management to evaluate the
overall performance of its business and to measure that performance compared
with internal budgets. Additionally, Adjusted EBITDA is the primary measure used
by management to allocate capital and other resources to its operating segments
and assess the operating performance of those segments (See Note 11 to the
condensed consolidated financial statements in this Quarterly Report on Form
10-Q). Adjusted EBITDA is also one of the measures used to determine
compensation under the Company's management incentive plans.
Adjusted EBITDA is useful to management and investors because it provides
insight into the current period cash operating results. Adjusted EBITDA is
reconciled to net cash provided by operating activities because the Company
believes that it is the most directly comparable GAAP liquidity measure.
Adjusted EBITDA is also used by the Company's management as the primary
performance measure of the business both on an overall company basis as well as
for its operating segments. Adjusted EBITDA is reconciled to net income because
the Company believes it is the most directly comparable GAAP performance
measure.
EBITDA is useful to management and investors because it eliminates the effects
of interest and other expense, income taxes, non-cash depreciation of tangible
assets and non-cash amortization of intangible assets and is calculated using
revenues and marketing expenses. EBITDA is reconciled to net income because the
Company believes that it is the most directly comparable GAAP measure.
The usefulness of Adjusted EBITDA and EBITDA is limited as compared to net cash
provided by operating activities or net income in that Adjusted EBITDA and
EBITDA do not reflect the periodic amortization of certain capitalized tangible
and intangible assets used in generating revenues in the Company's businesses,
they do not reflect net income earned for GAAP reporting purposes and they
exclude the effects of interest and taxes.
Adjusted EBITDA and EBITDA should not be considered a substitute for or superior
to, operating income, net income, net cash from operating activities or other
measures of financial performance and liquidity determined in accordance with
generally accepted accounting principles.
25
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table reconciles net cash provided by operating activities to
Adjusted EBITDA (in millions):
Nine months ended
March 31,
-----------------
2006 2005
------- --------
Net cash provided by operating activities $ 37.6 $ 24.6
Changes in assets and liabilities (use of cash) 0.1 1.9
Interest and other expense, net (to be paid in cash) 12.3 12.7
Taxes 13.6 5.2
Stock compensation expense (3.4) -
Other 0.6 (0.2)
------- --------
Adjusted EBITDA $ 60.8 $ 44.2
======= ========
The following tables reconcile net income to EBITDA and Adjusted EBITDA (in
millions):
Three months ended March 31, 2006
-----------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
----------- --------- ---------- ---------- -------
Net income $ 4.1
Interest and other expense, net (1) 4.2
Provision for income taxes (1) 2.7
-------
Operating income (expense) $ 16.5 $ 0.8 $ 1.7 $ (8.0) $ 11.0
Depreciation and amortization 2.9 2.9 0.4 0.2 6.4
----------- --------- ---------- ---------- -------
EBITDA $ 19.4 $ 3.7 $ 2.1 $ (7.8) $ 17.4
=========== ========= ========== ========== =======
Three months ended March 31, 2005
-----------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
----------- --------- ---------- ---------- -------
Net income $ 4.4
Interest and other expense, net (1) 4.9
Provision for income taxes (1) 2.2
-------
Operating income (expense) $ 17.5 $ (1.5) $ 0.3 $ (4.8) $ 11.5
Depreciation and amortization 3.2 2.4 0.4 0.1 6.1
----------- --------- ---------- ---------- -------
EBITDA $ 20.7 $ 0.9 $ 0.7 $ (4.7) $ 17.6
=========== ========= ========== ========== =======
Nine months ended March 31, 2006
-----------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
----------- --------- ---------- ---------- -------
Net income $ 20.4
Interest and other expense, net (1) 13.2
Provision for income taxes (1) 11.9
-------
Operating income (expense) $ 64.3 $ 0.1 $ 2.2 $ (21.1) $ 45.5
Depreciation and amortization 9.2 7.6 1.2 0.9 18.9
----------- --------- ---------- ---------- -------
EBITDA 73.5 7.7 3.4 (20.2) 64.4
Change in deferred revenues (13.1) - 0.5 - (12.6)
Change in deferred marketing 9.0 - - - 9.0
----------- --------- ---------- ---------- -------
Adjusted EBITDA $ 69.4 $ 7.7 $ 3.9 $ (20.2) $ 60.8
=========== ========= ========== ========== =======
26
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended March 31, 2005
-----------------------------------------------------
Marketing Management
Services Personals Services Corporate Total
----------- --------- ---------- ---------- -------
Net income $ 17.8
Interest and other expense, net (1) 13.9
Provision for income taxes (1) 10.3
-------
Operating income (expense) $ 59.8 $ (2.7) $ 0.2 $ (15.3) $ 42.0
Depreciation and amortization 7.9 7.0 0.5 0.3 15.7
----------- --------- ---------- ---------- -------
EBITDA 67.7 4.3 0.7 (15.0) 57.7
Change in deferred revenues (25.8) 0.1 1.4 - (24.3)
Change in deferred marketing 10.8 - - - 10.8
----------- --------- ---------- ---------- -------
Adjusted EBITDA $ 52.7 $ 4.4 $ 2.1 $ (15.0) $ 44.2
=========== ========= ========== ========== =======
1) Management does not allocate interest and other expense, net nor does it
allocate provision for income taxes to the individual segments.
Free cash flow represents net cash provided by operating activities less capital
expenditures. Free cash flow is important because it represents the cash that is
available to a company to pursue opportunities that enhance shareholder value,
such as make acquisitions, reduce debt and develop new products. The following
table reconciles operating cash flow to free cash flow (in millions):
Nine months ended
March 31,
-----------------
2006 2005
------- -------
Net cash provided by operating activities $ 37.6 $ 24.6
Capital expenditures (14.9) (7.5)
------- -------
Free cash flow $ 22.7 $ 17.1
======= =======
COMMITMENTS
The Company is not aware of any factors that are reasonably likely to adversely
affect liquidity trends, other than the risk factors presented in the Forward
Looking Statements in this Quarterly Report on Form 10-Q. The Company does not
have off-balance sheet arrangements, non-exchange traded contracts or material
related party transactions.
Future minimum payments of contractual obligations as of March 31, 2006 are as
follows (in millions):
Payments Due by Period
----------------------------------------------------
Less than After 5
Total 1 year 1 - 3 years 3 - 5 years years
-------- --------- ----------- ------------ --------
Operating leases $ 57.4 $ 9.1 $ 17.3 $ 13.9 $ 17.1
Capital leases 1.5 0.8 0.7 - -
Long-term debt 240.0 - - 90.0 150.0
Purchase obligations 11.8 10.5 1.3 - -
Other (1) 158.3 29.8 37.7 38.1 52.7
-------- --------- ----------- ------------ --------
Total payments due $ 469.0 $ 50.2 $ 57.0 $ 142.0 $ 219.8
======== ========= =========== ============ ========
(1) Includes interest payments on long-term debt, pension obligations, line of
credit termination fee and expected contingent payments related to the MCM
acquisition.
27
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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 within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, are intended to qualify for the safe harbor provisions from
liability provided by the Private Securities Litigation Reform Act of 1995.
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 the Company's ability to obtain new financing or re-finance existing
debt;
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 Quarterly Report on Form 10-Q 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
Quarterly Report on Form 10-Q. Except as otherwise required by federal
securities law, the Company has no obligation and does not intend to publicly
update or revise any forward looking statements to reflect subsequent events or
circumstances.
28
VERTRUE INCORPORATED
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Interest Rate
The Company has an amended and restated senior secured credit facility which
allows borrowings of up to $50.0 million. Borrowings under this senior secured
credit facility accrue interest at the Eurodollar rate plus an applicable margin
or the Prime rate plus an applicable margin. There were no borrowings
outstanding under this credit facility as of March 31, 2006. As of March 31,
2006, the effective interest rate for borrowings under this credit facility was
8.00%. Management believes that an increase in the Eurodollar rate or the Prime
rate would not be material to the Company's financial position or its results of
operations. This credit facility matures on March 31, 2009.
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 March 31, 2006, the carrying value of the
Convertible Notes and the Senior Notes was $90.0 million and $147.9 million,
respectively, and the fair value of the notes was $105.3 million and $156.0
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 Convertible Notes is converted into equity.
Foreign Currency
The Company conducts business in certain foreign markets, primarily 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, which are based in the United States, 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 certain 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 all fluctuations in currency
exchange rates on its results of operations, cash flows 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 4. 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 and
timely in its 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.
29
Changes in internal control over financial reporting
During the third quarter of 2006, 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.
30
VERTRUE INCORPORATED
PART II. OTHER INFORMATION
Item 1. Legal proceedings
-----------------
Except as set forth below, 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. The Company or its subsidiaries are
involved in other lawsuits and claims generally incidental to their respective
businesses including, but not limited to, various suits, including previously
disclosed suits, brought by individual consumers seeking monetary and/or
injunctive relief relating to the marketing of the Company's services. In
addition, from time to time in the regular course of its business, the Company
or a subsidiary may receive inquiries from various federal and/or state
regulatory authorities.
On October 17, 2005, the U.S. Supreme Court declined to review the Connecticut
Supreme Court's May 10, 2005 decision to uphold an arbitration panel's award of
$5.5 million in punitive damages and costs to MedValUSA Health Programs, Inc.
Accordingly, the full amount of the award was paid in the quarter ending
December 31, 2005. The Company recorded a one-time $5.5 million charge in the
quarter ended June 30, 2005 related to this award. For additional information
about the MedValUSA Health Programs, Inc. arbitration, refer to Item 3 - "Legal
Proceedings" in the Company's Annual Report on Form 10-K for the year ended June
30, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
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
------ --------- ----------- ---------------- ----------------
January 1, 2006 to January 31, 2006 11,600 $ 35.38 11,600 648,830
February 1, 2006 to February 28, 2006 58,500 42.69 58,500 590,330
March 1, 2006 to March 31, 2006 40,600 43.36 40,600 549,730
--------- ----------- ----------------
Total 110,700 42.17 110,700 549,730
========= ================
(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.
Item 5. Other Information
-----------------
(a) The Company entered into a Second Amended and Restated Credit Agreement
dated March 17, 2006 with the Lenders and LaSalle Bank National
Association, as Agent. The senior secured credit facility allows borrowings
of up to $50.0 million for working capital and general corporate purposes.
Borrowings under the senior secured credit facility accrue interest at the
Eurodollar rate plus an applicable margin or the Prime rate plus an
applicable margin. The senior secured credit facility matures on March 31,
2009.
Item 6. Exhibits
--------
10.1 Second Amended and Restated Credit Agreement dated March 17, 2006 among the
Registrant, the Lenders Parties Hereto, and LaSalle Bank National
Association, as Agent
31.1 Rule 13a-14(a) CEO Certification.
31.2 Rule 13a-14(a) CFO Certification.
32.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
31
VERTRUE INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VERTRUE INCORPORATED
(Registrant)
Date: May 10, 2006 By: /s/ Gary A. Johnson
-------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
Date: May 10, 2006 By: /s/ James B. Duffy
-------------------
James B. Duffy, Executive Vice President and
Chief Financial Officer (Principal Financial
and Accounting Officer)
32