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 December 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 or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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)
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: 9,697,000 shares of Common
Stock, $0.01 par value as of February 2, 2007.
VERTRUE INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2006
and June 30, 2006 1
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended December 31, 2006 and 2005 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 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 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits 30
Signatures 31
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VERTRUE INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
December 31, June 30,
2006 2006
--------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 57,969 $ 36,290
Restricted cash - 2,699
Short-term investments 2,006 31,798
Accounts and notes receivable, net 33,057 21,014
Prepaid expenses 6,105 9,053
Deferred marketing costs 25,293 26,463
Other current assets 7,801 4,706
--------------- --------------
Total current assets 132,231 132,023
Fixed assets, net 36,741 37,658
Goodwill 260,326 212,187
Intangible assets, net 34,898 37,798
Other long-term assets 30,521 23,362
--------------- --------------
Total assets $ 494,717 $ 443,028
=============== ==============
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of long-term obligations $ 742 $ 762
Accounts payable 37,513 42,281
Accrued liabilities 113,574 64,602
Deferred revenues 76,577 84,972
Deferred income taxes 12,268 11,687
--------------- --------------
Total current liabilities 240,674 204,304
Deferred income taxes 5,571 6,920
Long-term debt 238,075 237,984
Other long-term liabilities 9,472 9,989
--------------- --------------
Total liabilities 493,792 459,197
--------------- --------------
Commitments and contingencies (Note 6)
Shareholders' equity (deficit):
Preferred stock, $0.01 par value -- 1,000 shares authorized; no shares issued - -
Common stock, $0.01 par value -- 80,000 shares authorized;
20,269 shares issued (20,168 shares at June 30, 2006) 203 202
Capital in excess of par value 193,031 187,991
Retained earnings 83,753 68,382
Accumulated other comprehensive (loss) income (342) 214
Treasury stock, 10,584 shares at cost (10,518 shares at June 30, 2006) (275,720) (272,958)
--------------- --------------
Total shareholders' equity (deficit) 925 (16,169)
--------------- --------------
Total liabilities and shareholders' equity (deficit) $ 494,717 $ 443,028
=============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
VERTRUE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
Three months ended Six months ended
December 31, December 31,
------------------------ ---------------------------
2006 2005 2006 2005
----------- ----------- ------------ -------------
Revenues $ 178,559 $ 160,130 $ 355,905 $ 317,658
Expenses:
Marketing 85,938 76,270 173,321 150,169
Operating 40,618 35,258 82,828 70,341
General and administrative 31,916 29,527 63,678 57,981
Amortization of intangible assets 2,121 2,197 4,160 4,633
----------- ----------- ------------ -------------
Operating income 17,966 16,878 31,918 34,534
Interest income 1,432 699 2,928 1,334
Interest expense (5,127) (5,086) (10,241) (10,175)
Other income (expense), net 300 (120) 495 (164)
----------- ----------- ------------ -------------
Income before income taxes 14,571 12,371 25,100 25,529
Provision for income taxes 5,876 4,707 9,729 9,224
----------- ----------- ------------ -------------
Net income $ 8,695 $ 7,664 $ 15,371 $ 16,305
=========== =========== ============ =============
Earnings per share:
Basic $ 0.90 $ 0.79 $ 1.59 $ 1.68
=========== =========== ============ =============
Diluted $ 0.74 $ 0.66 $ 1.33 $ 1.40
=========== =========== ============ =============
Weighted average common shares used in earnings per share
calculations:
Basic 9,677 9,695 9,672 9,705
=========== =========== ============ =============
Diluted 12,694 12,776 12,706 12,802
=========== =========== ============ =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
VERTRUE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six months ended
December 31,
--------------------
2006 2005
--------- ---------
Operating activities
Net income $ 15,371 $ 16,305
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in deferred revenues (8,901) (10,611)
Change in deferred marketing costs 1,040 5,971
Depreciation and amortization 12,746 13,025
Stock-based compensation 2,378 2,250
Deferred and other income taxes (781) 1,521
Excess tax benefit from stock-based compensation (560) (560)
Other 396 (243)
Changes in assets and liabilities:
Restricted cash 2,699 (446)
Accounts and notes receivable (15,043) (6,319)
Prepaid expenses 3,238 (1,138)
Other assets (2,476) (942)
Accounts payable (4,768) (4,372)
Accrued and other liabilities 2,789 375
--------- ---------
Net cash provided by operating activities 8,128 14,816
--------- ---------
Investing activities
Acquisition of fixed assets (5,496) (6,518)
Purchases of short-term investments (11,016) (50,325)
Proceeds from maturities of short-term investments 40,724 49,830
Acquisitions of businesses, net of cash acquired, and other (9,766) (14,942)
--------- ---------
Net cash provided by (used in) investing activities 14,446 (21,955)
--------- ---------
Financing activities
Net proceeds from issuance of stock 2,103 2,729
Excess tax benefit from stock-based compensation 560 560
Treasury stock purchases (2,762) (5,995)
Debt issuance costs (63) -
Payments of long-term obligations (231) (392)
--------- ---------
Net cash used in financing activities (393) (3,098)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (502) 457
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,679 (9,780)
Cash and cash equivalents at beginning of period 36,290 64,356
--------- ---------
Cash and cash equivalents at end of period $ 57,969 $ 54,576
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS
Vertrue Incorporated is a premier internet marketing services company. We
operate a diverse group of marketing businesses that share a unified mission: to
provide every consumer with access to savings and services that improve their
daily lives. Our members and customers have access to direct-to-consumer savings
across our five vertical markets of healthcare, personal property,
security/insurance, discounts, and personals, which are all offered online
through a set of diverse marketing channels. Throughout this report, we refer to
Vertrue Incorporated and its subsidiaries as the "Company", "we", "us", or
"our".
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 ("GAAP") for interim financial information and include
the accounts of the Company, its wholly owned subsidiaries, and variable
interest entities as required by Financial Accounting Standards Board ("FASB")
Interpretation No. 46R, "Consolidation of Variable Interest Entities - an
Interpretation of ARB No. 51." All significant intercompany accounts and
transactions have been eliminated. Such statements do not include all of the
information and footnotes required by GAAP 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 consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by GAAP. The
preparation of these condensed consolidated financial statements in conformity
with GAAP requires us 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
six months ended December 31, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2007. For further
information, refer to the financial statements and footnotes thereto included in
our Annual Report on Form 10-K for the fiscal year ended June 30, 2006.
Certain prior year amounts have been reclassified to conform to the current
year's presentation. Commencing in the second quarter of fiscal 2007, we began
classifying our acquired website costs, which were previously included in fixed
assets, net, in other long-term assets. Other long-term assets included $6.1
million and $2.9 million of acquired website costs, net at December 31, 2006 and
June 30, 2006, respectively. This reclassification had no impact on results of
operations or previously reported cash flows from operations or financing
activities.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable, net at December 31, 2006 was $33.1 million and
included $22.5 million of accounts receivable and $10.6 million of notes
receivable. Accounts and notes receivable, net at December 31, 2005 was $21.0
million and included $14.0 million of accounts receivable and $7.0 million in
notes receivable. As of December 31, 2006 and June 30, 2006, we recorded notes
receivable of $14.8 million and $9.9 million, respectively, in other long-term
assets.
We estimate an allowance for accounts and notes receivable based on an aging
analysis, customer credit evaluations, collection history, and any specific,
known troubled accounts. As of December 31, 2006 and June 30, 2006, we recorded
$0.1 million of allowances for uncollectible accounts. As of December 31, 2006
and June 30, 2006, we recorded $7.4 million and $3.8 million, respectively, of
allowances for uncollectible notes.
4
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying value and accumulated amortization of goodwill and other
intangible assets are as follows:
December 31, 2006 June 30, 2006
-------------------------- -------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(Dollar amounts in thousands) Amount Amortization Amount Amortization
------------ ------------ ----------- ------------
Membership and client relationships $ 41,315 $ 25,256 $ 40,215 $ 21,881
Trade names 21,859 3,840 21,859 3,114
Other 1,664 1,507 1,504 1,448
------------ ------------ ----------- ------------
Total amortizable intangible assets $ 64,838 $ 30,603 $ 63,578 $ 26,443
------------ ------------ ----------- ------------
Amortizable intangible assets, net $ 34,235 $ 37,135
============ ===========
December 31, June 30,
(Dollar amounts in thousands) 2006 2006
------------ -----------
Goodwill $ 260,326 $ 212,187
Intangible asset related to minimum pension liability 663 663
Future intangible amortization expense for the next five years is estimated to
be as follows:
(Dollar amounts in thousands)
Fiscal Year
Remainder of 2007 $ 3,572
2008 4,808
2009 4,300
2010 3,170
2011 3,099
Changes in the carrying amount of goodwill by segment during the six months
ended December 31, 2006 were as follows:
Marketing Management
(Dollar amounts in thousands) Services Personals Services Total
-------------- ------------ ----------- ----------
Balance at beginning of period $ 96,432 $ 81,508 $ 34,247 $ 212,187
Acquisition - 2,864 - 2,864
Accrual of contingent purchase price payments - - 45,275 45,275
-------------- ------------ ----------- ----------
Balance at end of period $ 96,432 $ 84,372 $ 79,522 $ 260,326
============== ============ =========== ==========
We acquired Mobile Lifestyles, Inc., an online provider of a variety of text
alerts (i.e. daily horoscopes, jokes and relationship advice) and unlimited
ringtones during the first quarter of fiscal 2007. In connection with this
acquisition, we recorded goodwill of $2.9 million and intangible assets of $1.3
million. The net assets and results of operations of Mobile Lifestyles have been
included in our Personals segment as of the date of the acquisition.
As of December 31, 2006, we recorded $45.3 million in accrued liabilities
related to contingent payments, which were disclosed in previous quarterly
filings, in connection with our My Choice Medical, Inc. acquisition, a business
we acquired in fiscal 2005. This payment is expected to be paid during the
fourth quarter of fiscal 2007.
NOTE 5 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities reported in the accompanying unaudited condensed
consolidated balance sheets as of December 31, 2006 and June 30, 2006 include an
allowance for membership cancellations of $9.3 million.
5
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
We have 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 or Prime
rate, plus an applicable margin. There were no borrowings outstanding under this
senior secured credit facility as of December 31, 2006. This credit facility
matures on March 31, 2009.
Contingent payments related to acquisitions of up to $51.7 million may be paid
if certain performance targets, including increasing levels of revenues and
earnings, are achieved. These contingent payments may be paid by the end of
calendar 2007. Of the $51.7 million, we recorded $45.3 million during the second
quarter of fiscal 2007 in accrued liabilities related to contingent payments
from our My Choice Medical, Inc. acquisition. This payment is expected to be
paid during the fourth quarter of fiscal 2007. Additional payments under the
contingency arrangements will be considered additional purchase price.
As of December 31, 2006, we had outstanding purchase obligations of $5.5 million
primarily related to marketing agreements and contracts for our software,
equipment, and services. In addition, we had commitments of $54.3 million
related to existing operating leases.
Legal proceedings
In our opinion, there are no significant legal proceedings to which we or any of
our subsidiaries are a party or to which any of our properties are subject. We
are involved in lawsuits and claims generally incidental to our business,
including but not limited to various suits, including previously disclosed
suits, brought against us by individual consumers seeking monetary and/or
injunctive relief relating to the marketing of our programs. In addition, from
time to time in the regular course of our business, we receive inquiries from
various federal and/or state regulatory authorities.
NOTE 7 - INCOME TAX EXPENSE
Income tax expense as a percentage of pre-tax income was 40.3% and 38.0% for the
three months ended December 31, 2006 and 2005, respectively, and 38.8% and 36.1%
for the six months ended December 31, 2006 and 2005, respectively. The effective
tax rate was higher than the U.S. statutory rate for the three and six months
ended December 31, 2006 and 2005, primarily due to non-deductible items and
state income tax expense partially offset by the favorable impact of foreign
operations
We are currently under examination by the Internal Revenue Service for the
fiscal year ended June 30, 2005. No proposed adjustments or assessments have
been issued.
In addition, we have open tax years in the U.S., Canada, and other
jurisdictions. There are 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. We periodically evaluate the
adequacy of our tax reserves, taking into account open tax return positions and
tax law changes. We believe that out tax reserves are appropriate. However, the
final determination of tax audits could have a material effect on our results of
operations, financial position, and cash flow.
6
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 - EARNINGS PER SHARE
The table below reconciles the numerators and denominators used in the
computations of basic and diluted earnings per share:
Three months ended Six months ended
December 31, December 31,
--------------------- -------------------
(Amounts in thousands, except per share data) 2006 2005 2006 2005
---------- ---------- --------- ---------
Numerator:
Income available to common shareholders used in basic earnings per share $ 8,695 $ 7,664 $ 15,371 $ 16,305
Add back interest expense on convertible securities, net of tax 739 767 1,517 1,581
---------- ---------- --------- ---------
Income available to common shareholders after assumed conversion
of dilutive securities $ 9,434 $ 8,431 $ 16,888 $ 17,886
========== ========== ========= =========
Denominator:
Weighted average number of common shares outstanding - basic 9,677 9,695 9,672 9,705
Effect of dilutive securities:
Convertible securities 2,230 2,230 2,230 2,230
Stock options 787 851 804 867
---------- ---------- --------- ---------
Weighted average number of common shares outstanding - diluted 12,694 12,776 12,706 12,802
========== ========== ========= =========
Basic earnings per share $ 0.90 $ 0.79 $ 1.59 $ 1.68
========== ========== ========= =========
Diluted earnings per share $ 0.74 $ 0.66 $ 1.33 $ 1.40
========== ========== ========= =========
The diluted earnings per common share calculations exclude the effect of
potentially dilutive shares when their effect is antidilutive. The following
weighted average stock options and restricted stock awards were excluded from
the diluted share calculation above:
Three months ended Six months ended
December 31, December 31,
--------------------- -------------------
(Shares in thousands) 2006 2005 2006 2005
--------- ---------- --------- ---------
Antidilutive stock options and restricted stock awards 511 581 502 581
NOTE 9 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three months ended Six months ended
December 31, December 31,
--------------------- ----------------------
(Dollar amounts in thousands) 2006 2005 2006 2005
--------- ---------- --------- -----------
Net income $ 8,695 $ 7,664 $ 15,371 $ 16,305
Unrealized hedging (loss) gain (21) (404) (31) 114
Currency translation adjustment (456) 171 (525) 411
--------- ---------- --------- -----------
Comprehensive income $ 8,218 $ 7,431 $ 14,815 $ 16,830
========= ========== ========= ===========
NOTE 10 - BUSINESS SEGMENTS
The operating business segments reported below are our reportable business
segments for which separate financial information is available and for which
operating results are evaluated regularly by our executive management in
assessing performance and deciding how to allocate capital and other resources.
We have three reportable business segments: Marketing Services, Personals, and
Management Services. The Marketing Services business segment primarily provides
discounted products and services to consumers and generates recurring,
membership-based revenue. The Personals business segment provides web, phone,
and mobile-based personals services and primarily generates transaction-based
revenue. The Management Services business segment provides advertising and
practice management services to healthcare professionals throughout the United
States. The Corporate business unit includes unallocated general corporate
expenses.
7
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
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:
Three months ended Six months ended
(Dollar amounts in thousands) December 31, December 31,
------------------------- ---------------------
Revenues 2006 2005 2006 2005
------------ ---------- --------- ---------
Marketing Services $ 143,287 $ 134,479 $284,122 $266,327
Personals 23,873 18,664 46,538 37,233
Management Services 11,962 7,047 25,970 14,238
Intersegment (563) (60) (725) (140)
------------ ---------- --------- ---------
Total $ 178,559 $ 160,130 $355,905 $317,658
============ ========== ========= =========
Three months ended Six months ended
December 31, December 31,
------------------------- -----------------------
2006 2005 2006 2005
------------ ---------- --------- -----------
Adjusted EBITDA (1)
Marketing Services $ 26,282 $ 28,280 $ 43,738 $ 49,905
Personals 3,429 1,692 5,469 3,922
Management Services 538 395 2,751 983
Corporate (7,874) (6,377) (15,750) (12,456)
------------ ---------- --------- -----------
Total $ 22,375 $ 23,990 $ 36,208 $ 42,354
============ ========== ========= ===========
Capital Expenditures (2)
Marketing Services $ 2,451 $ 4,435 $ 4,568 $ 5,980
Personals 459 229 668 482
Management Services 101 38 260 56
Corporate - - - -
------------ ---------- --------- -----------
Total $ 3,011 $ 4,702 $ 5,496 $ 6,518
============ ========== ========= ===========
Depreciation and Amortization
Marketing Services $ 2,795 $ 3,078 $ 5,603 $ 6,348
Personals 2,446 2,396 4,902 4,751
Management Services 663 406 1,304 805
Corporate 181 282 342 556
------------ ---------- --------- -----------
Total $ 6,085 $ 6,162 $ 12,151 $ 12,460
============ ========== ========= ===========
December 31, June 30,
Assets 2006 2006
------------ ----------
Marketing Services $ 226,050 $ 214,083
Personals 132,278 124,571
Management Services 118,537 62,730
Corporate (3) 17,852 41,644
------------ ----------
Total $ 494,717 $ 443,028
============ ==========
8
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
(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 reconciliations below.
(2) Management does not allocate capital expenditures to the Corporate business
unit. Capital expenditures related to the Corporate business unit are
included within the Marketing Services segment. 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:
Three months ended December 31, 2006
-----------------------------------------------------------------
Marketing Management
(Dollar amounts in thousands) Total Services Personals Services Corporate
------------- ------------ ----------- ------------- ----------
Income before income taxes $14,571
Interest and other expense, net (1) 3,395
-------------
Operating income (expense) $ 17,966 $ 24,253 $ 1,726 $ 42 $ (8,055)
Depreciation and amortization 6,085 2,795 2,446 663 181
Change in deferred revenues (1,102) (631) (304) (167) -
Change in deferred marketing costs (574) (135) (439) - -
------------- ----------- ----------- ----------- ----------
Adjusted EBITDA $ 22,375 $ 26,282 $ 3,429 $ 538 $ (7,874)
============= =========== =========== =========== ==========
Three months ended December 31, 2005
-----------------------------------------------------------------
Marketing Management
Total Services Personals Services Corporate
------------- ------------ ----------- ------------- ----------
Income before income taxes $ 12,371
Interest and other expense, net (1) 4,507
-------------
Operating income (expense) $ 16,878 $ 24,071 $ (684) $ 150 $ (6,659)
Depreciation and amortization 6,162 3,078 2,396 406 282
Change in deferred revenues (1,031) (850) (20) (161) -
Change in deferred marketing costs 1,981 1,981 - - -
------------- ----------- ----------- ----------- ----------
Adjusted EBITDA $ 23,990 $ 28,280 $ 1,692 $ 395 $ (6,377)
============= =========== =========== =========== ==========
9
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Six months ended December 31, 2006
-----------------------------------------------------------------
Marketing Management
(Dollar amounts in thousands) Total Services Personals Services Corporate
------------- ------------- ----------- ------------ ----------
Income before income taxes $ 25,100
Interest and other expense, net (1) 6,818
-------------
Operating income (expense) $ 31,918 $ 44,651 $ 1,346 $ 2,013 $ (16,092)
Depreciation and amortization 12,151 5,603 4,902 1,304 342
Change in deferred revenues (8,901) (7,995) (340) (566) -
Change in deferred marketing costs 1,040 1,479 (439) - -
------------- ------------ ----------- ---------- ----------
Adjusted EBITDA $ 36,208 $ 43,738 $ 5,469 $ 2,751 $ (15,750)
============= ============ =========== ========== ==========
Six months ended December 31, 2005
-----------------------------------------------------------------
Marketing Management
Total Services Personals Services Corporate
------------- ------------- ----------- ------------ ----------
Income before income taxes $ 25,529
Interest and other expense, net (1) 9,005
-------------
Operating income (expense) $ 34,534 $ 47,770 $ (744) $ 520 $ (13,012)
Depreciation and amortization 12,460 6,348 4,751 805 556
Change in deferred revenues (10,611) (10,184) (85) (342) -
Change in deferred marketing costs 5,971 5,971 - - -
------------- ------------ ----------- ---------- ----------
Adjusted EBITDA $ 42,354 $ 49,905 $ 3,922 $ 983 $ (12,456)
============= ============ =========== ========== ==========
(1) Management does not allocate interest and other expense, net to the individual segments.
NOTE 11 - GUARANTOR FINANCIAL INFORMATION
In April 2004, we issued $150.0 million 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 our existing and future senior unsecured
indebtedness and senior in right of payment to all of our existing and future
subordinated indebtedness that expressly provides for its subordination to the
Senior Notes. Effective April 28, 2006, the Senior Notes are fully and
unconditionally guaranteed by substantially all of our subsidiaries that
guarantee our Credit Facility (as defined in the Indenture governing the Senior
Notes). All prior periods have been restated to conform to this presentation.
The following condensed consolidating financial information presents the balance
sheets as of December 31, 2006 and June 30, 2006, statements of operations for
the three and six months ended December 31, 2006 and 2005, and statements of
cash flows for the six months ended December 31, 2006 and 2005. The information
includes the elimination entries necessary to consolidate the Company ("Parent")
with the guarantor entities.
Investments in subsidiaries are accounted for by the Parent using the equity
method of accounting. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions.
10
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Condensed Consolidating Balance Sheets at December 31, 2006
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
---------- ------------ ------------ -----------
Assets
Current assets $ 55,417 $ 122,453 $ (45,639) $ 132,231
Fixed assets, net 21,468 15,273 - 36,741
Goodwill - 260,326 - 260,326
Intangible assets, net 663 34,235 - 34,898
Other long-term assets 9,405 21,116 - 30,521
Investment in subsidiaries 364,965 - (364,965) -
---------- ------------ ---------- -----------
Total assets $ 451,918 $ 453,403 $(410,604) $ 494,717
========== ============ ========== ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities $ 206,115 $ 80,198 $ (45,639) $ 240,674
Deferred income taxes (1,579) 7,150 - 5,571
Long-term debt 238,075 - - 238,075
Other long-term liabilities 8,382 1,090 - 9,472
---------- ------------ ---------- -----------
Total liabilities 450,993 88,438 (45,639) 493,792
---------- ------------ ---------- -----------
Shareholders' equity (deficit):
Preferred stock - - -
Common stock 203 3 (3) 203
Capital in excess of par value 193,031 324,033 (324,033) 193,031
Retained earnings 83,753 41,178 (41,178) 83,753
Accumulated other comprehensive (loss) income (342) (249) 249 (342)
Treasury stock (275,720) - - (275,720)
---------- ------------ ---------- -----------
Total shareholders' equity (deficit) 925 364,965 (364,965) 925
---------- ------------ ---------- -----------
Total liabilities and shareholders' equity (deficit) $ 451,918 $ 453,403 $(410,604) $ 494,717
========== ============ ========== ===========
11
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Condensed Consolidating Balance Sheets at June 30, 2006
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
---------- ------------ ------------ ----------
Assets
Current assets $ 37,724 $115,844 $ (21,545) $ 132,023
Fixed assets, net 22,403 15,255 - 37,658
Goodwill - 212,187 - 212,187
Intangible assets, net 675 37,123 - 37,798
Other long-term assets 10,334 13,028 - 23,362
Investment in subsidiaries 308,919 - (308,919) -
---------- --------- ---------- ----------
Total assets $ 380,055 $393,437 $(330,464) $ 443,028
========== ========= ========== ==========
Liabilities and Shareholders' (Deficit) Equity
Current liabilities $ 149,958 $ 75,891 $ (21,545) $ 204,304
Deferred income taxes (318) 7,238 - 6,920
Long-term debt 237,984 - - 237,984
Other long-term liabilities 8,600 1,389 - 9,989
---------- --------- ---------- ----------
Total liabilities 396,224 84,518 (21,545) 459,197
---------- --------- ---------- ----------
Shareholders' (deficit) equity:
Common stock 202 9 (9) 202
Capital in excess of par value 187,991 278,751 (278,751) 187,991
Retained earnings 68,382 29,890 (29,890) 68,382
Accumulated other comprehensive income 214 269 (269) 214
Treasury stock (272,958) - - (272,958)
---------- --------- ---------- ----------
Total shareholders' (deficit) equity (16,169) 308,919 (308,919) (16,169)
---------- --------- ---------- ----------
Total liabilities and shareholders' (deficit) equity $ 380,055 $393,437 $(330,464) $ 443,028
========== ========= ========== ==========
12
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Condensed Consolidating Statements of Operations for the Three Months Ended December 31, 2006
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
---------- ------------ ------------ -----------
Revenues $ 100,281 $ 82,423 $ (4,145) $ 178,559
Expenses:
Marketing 53,428 36,652 (4,142) 85,938
Operating 16,827 23,794 (3) 40,618
General and administrative 19,303 12,613 - 31,916
Amortization of intangible assets 4 2,117 - 2,121
---------- ------------ ------------ -----------
Operating income 10,719 7,247 - 17,966
Equity in income of subsidiaries 5,515 - (5,515) -
Interest (expense) income, net (5,045) 1,350 - (3,695)
Other (expense) income, net (35) 335 - 300
---------- ------------ ------------ -----------
Income before income taxes 11,154 8,932 (5,515) 14,571
Provision for income taxes 2,459 3,417 - 5,876
---------- ------------ ------------ -----------
Net income $ 8,695 $ 5,515 $ (5,515) $ 8,695
========== ============ ============ ===========
Condensed Consolidating Statements of Operations For the Three Months Ended Decenber 31, 2005
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
---------- ------------ ------------ -----------
Revenues $ 96,964 $ 67,700 $ (4,534) $ 160,130
Expenses:
Marketing 52,545 27,869 (4,144) 76,270
Operating 16,780 18,868 (390) 35,258
General and administrative 17,489 12,038 - 29,527
Amortization of intangible assets 9 2,188 - 2,197
---------- ------------ ------------ -----------
Operating income 10,141 6,737 - 16,878
Equity in income of subsidiaries 4,413 - (4,413) -
Interest (expense) income, net (4,787) 400 - (4,387)
Other expense, net (14) (106) - (120)
---------- ------------ ------------ -----------
Income before income taxes 9,753 7,031 (4,413) 12,371
Provision for income taxes 2,089 2,618 - 4,707
---------- ------------ ------------ -----------
Net income $ 7,664 $ 4,413 $ (4,413) $ 7,664
========== ============ ============ ===========
13
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Condensed Consolidating Statements of Operations for the Six Months Ended December 31, 2006
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
----------- ------------ ------------ -----------
Revenues $ 200,665 $ 164,575 $ (9,335) $ 355,905
Expenses:
Marketing 108,797 73,851 (9,327) 173,321
Operating 36,034 46,802 (8) 82,828
General and administrative 38,635 25,043 - 63,678
Amortization of intangible assets 13 4,147 - 4,160
----------- ------------ ------------ -----------
Operating income 17,186 14,732 - 31,918
Equity in income of subsidiaries 11,288 - (11,288) -
Interest (expense) income, net (10,055) 2,742 - (7,313)
Other (expense) income, net (35) 530 - 495
----------- ------------ ------------ -----------
Income before income taxes 18,384 18,004 (11,288) 25,100
Provision for income taxes 3,013 6,716 - 9,729
----------- ------------ ------------ -----------
Net income $ 15,371 $ 11,288 $ (11,288) $ 15,371
=========== ============ ============ ===========
Condensed Consolidating Statements of Operations for the Six Months Ended December 31, 2005
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
----------- ------------ ------------ -----------
Revenues $193,773 $ 133,599 $ (9,714) $ 317,658
Expenses:
Marketing 103,781 55,466 (9,078) 150,169
Operating 34,055 36,922 (636) 70,341
General and administrative 34,283 23,698 - 57,981
Amortization of intangible assets 85 4,548 - 4,633
----------- ------------ ------------ -----------
Operating income 21,569 12,965 - 34,534
Equity in income of subsidiaries 8,547 - (8,547) -
Interest (expense) income, net (9,503) 662 - (8,841)
Other income (expense), net 10 (174) - (164)
----------- ------------ ------------ -----------
Income before income taxes 20,623 13,453 (8,547) 25,529
Provision for income taxes 4,318 4,906 - 9,224
----------- ------------ ------------ -----------
Net income $ 16,305 $ 8,547 $ (8,547) $ 16,305
=========== ============ ============ ===========
14
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Condensed Consolidating Statements of Cash Flows for the Six Months Ended December 31, 2006
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
--------- ------------- ------------ ---------
Net cash provided by(used in) operating activities $ 2,288 17,128 $(11,288) $ 8,128
Investing activities
Acquisition of fixed assets (3,064) (2,432) - (5,496)
Purchases of short-term investments (11,005) (11) - (11,016)
Proceeds from maturities of short-term investments 40,724 - - 40,724
Acquisitions of businesses, net of cash acquired, and other (431) (9,335) - (9,766)
Investment in subsidiaries (11,288) - 11,288 -
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 14,936 (11,778) 11,288 14,446
--------- --------- --------- ---------
Financing activities
Net proceeds from issuance of stock 2,103 - - 2,103
Excess tax benefit from stock-based compensation 560 - - 560
Treasury stock purchases (2,762) - - (2,762)
Debt issuance costs (63) - - (63)
Payments of long-term obligations (157) (74) - (231)
--------- --------- --------- ---------
Net cash used in financing activities (319) (74) - (393)
--------- --------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents - (502) - (502)
--------- --------- --------- ---------
Net increase in cash and cash equivalents 16,905 4,774 - 21,679
Cash and cash equivalents at beginning of period 6,908 29,382 - 36,290
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 23,813 $ 34,156 $ - $ 57,969
========= ========= ========= =========
15
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Condensed Consolidating Statements of Cash Flows for the Six Months Ended December 31, 2005
Guarantor
(Dollar amounts in thousands) Parent Subsidiaries Eliminations Total
---------- ------------- ------------- -------------
Net cash provided by (used in) operating activities $ 15,537 $ 7,826 $ (8,547) $ 14,816
Investing activities
Acquisition of fixed assets (3,538) (2,980) - (6,518)
Purchases of short-term investments (50,325) - - (50,325)
Proceeds from maturities of short-term investments 49,452 378 - 49,830
Acquisitions of businesses, net of cash acquired, and other (14,717) (225) - (14,942)
Investment in subsidiaries (8,547) - 8,547 -
---------- ------------- ------------- -------------
Net cash used in investing activities (27,675) (2,827) 8,547 (21,955)
---------- ------------- ------------- -------------
Financing activities
Net proceeds from issuance of stock 2,729 - - 2,729
Excess tax benefit from stock-based compensation 560 - - 560
Treasury stock purchases (5,995) - - (5,995)
Payments of long-term obligations (195) (197) - (392)
---------- ------------- ------------- -------------
Net cash used in financing activities (2,901) (197) - (3,098)
---------- ------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents - 457 - 457
---------- ------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (15,039) 5,259 - (9,780)
Cash and cash equivalents at beginning of period 24,366 39,990 - 64,356
---------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 9,327 $ 45,249 $ - $ 54,576
========== ============= ============= =============
16
VERTRUE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 - NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and
132(R)" ("SFAS 158"). SFAS 158 requires an employer to recognize the over-funded
or under-funded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. SFAS 158 also requires the
measurement of defined benefit plan assets and obligations as of the date of the
employer's fiscal year-end (with limited exceptions). Under SFAS 158, we are
required to recognize the funded status of our defined benefit postretirement
plan and to provide the required disclosures as of the end of our fiscal 2007
year-end. We do not expect the adoption of SFAS 158 to have a material effect on
our consolidated financial statements.
Also in September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value measurements.
SFAS 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and states that a fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. SFAS 157 will become effective for us beginning
in fiscal 2009. We are currently evaluating the impact that SFAS 157 will have
on our consolidated financial statements.
Also in September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 requires entities to quantify misstatements
using both balance sheet and income statement approaches in evaluating whether
or not a misstatement is material. We are required to apply the provisions of
SAB 108 in connection with the preparation of our annual financial statements
for our fiscal year ended June 30, 2007. We do not expect the adoption of SAB
108 to have a material effect on our consolidated financial statements.
In July 2006, the FASB issued Financial Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN
48"). This interpretation clarifies the accounting for uncertainty in tax
positions and requires an entity to recognize in its financial statements the
impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective beginning in our first quarter of fiscal
2008. We are currently evaluating the impact of FIN 48 on our consolidated
financial statements.
17
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Vertrue Incorporated is a premier internet marketing services company. We
operate a diverse group of marketing businesses that share a unified mission: to
provide every consumer with access to savings and services that improve their
daily lives. Our members and customers have access to direct-to-consumer savings
across our five vertical markets of healthcare, personal property,
security/insurance, discounts, and personals, which are all offered online
through a set of diverse marketing channels. Throughout this report, we refer to
Vertrue Incorporated and its subsidiaries as the "Company", "we", "us", or
"our". We have three reportable business segments: Marketing Services,
Personals, and Management Services.
The Marketing Services business segment primarily provides discounted products
and services to consumers and generates recurring, membership-based revenue. The
Marketing Services segment offers consumers a variety of products and services
from selected vendors and service providers on a monthly or annual subscription
basis or on a fee for service basis. Revenues are derived principally from
recurring fees which are billed to the member on either a monthly or annual
basis. In the case of annually billed membership fees, we receive full payment
at or near the beginning of the membership period, but recognize the revenues as
the member's refund privilege expires. Membership fees that are billed monthly
are recognized when earned. Revenues derived from one-time fees are recognized
when the service is performed.
The Personals business segment provides web, phone, and mobile-based personals
services and primarily generates transaction-based revenue. The Personals
segment primarily employs a transactional business model in which users buy
non-refundable credits up front and spend those credits only when they want to
interact with other customers. Personals revenues are recognized when the
services are used. During the first quarter of fiscal 2007, we acquired Mobile
Lifestyles, Inc., an online provider of a variety of text alerts (i.e. daily
horoscopes, jokes and relationship advice) and unlimited ringtones. The net
assets and results of operations of Mobile Lifestyles have been included in our
Personals segment as of the date of the acquisition.
The Management Services business segment provides advertising and practice
management services to healthcare professionals throughout the United States.
Our consultants assist consumers with locating nearby board certified
physicians, schedule initial consultations, offer discounted fee schedules, and
provide financing, if needed. Management Services revenues are recognized when
the medical procedures performed by the healthcare professionals are complete.
The following discussion should be read in conjunction with Item 7,
"Management's Discussion & Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended June 30, 2006,
which describes, among other things, our critical accounting policies.
Adjusted EBITDA and EBITDA are used by our management to evaluate the
performance of our business. Management evaluates the operating results of each
reportable business segment based on Adjusted EBITDA. A discussion of Adjusted
EBITDA can be found in "Liquidity and Capital Resources" in this report. A
description and reconciliation of net income to EBITDA and Adjusted EBITDA are
disclosed in "Reconciliation of Non-GAAP Measures" in this report.
18
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
DISCUSSION OF RESULTS OF OPERATIONS
Three months ended Six months ended
December 31, December 31,
----------------- Increase/ -------------------- Increase/
(Dollar amounts in millions) 2006 2005 (Decrease) 2006 2005 (Decrease)
-------- -------- ---------- ---------- --------- -------------------
Revenues $178.6 $160.1 12% $355.9 $317.6 12%
Marketing expenses 85.9 76.3 13% 173.3 150.2 15%
Operating expenses 40.6 35.2 15% 82.8 70.3 18%
General and administrative expenses 31.9 29.5 8% 63.7 58.0 10%
Amortization of intangible assets 2.2 2.2 0% 4.2 4.6 (9%)
-------- -------- ---------- ---------- --------- -------------------
Operating income 18.0 16.9 7% 31.9 34.5 (8%)
Interest income 1.4 0.7 100% 2.9 1.3 123%
Interest expense (5.1) (5.1) 0% (10.2) (10.2) 0%
Other income (expense), net 0.3 (0.1) 400% 0.5 (0.1) 600%
-------- -------- ---------- ---------- --------- -------------------
Income before income taxes 14.6 12.4 18% 25.1 25.5 (2%)
Provision for income taxes 5.9 4.7 26% 9.7 9.2 5%
-------- -------- ---------- ---------- --------- -------------------
Net income $ 8.7 $ 7.7 13% $ 15.4 $ 16.3 (6%)
======== ======== ========== ========== ========= ===================
EBITDA $ 24.1 $ 23.0 5% $ 44.1 $ 47.0 (6%)
======== ======== ========== ========== ========= ===================
Three months ended Six months ended
December 31, December 31,
----------------- --------------------
Percentage of revenues: 2006 2005 2006 2005
-------- -------- ---------- ---------
Marketing expenses 48% 48% 49% 47%
Operating expenses 23% 22% 23% 22%
General and administrative expenses 18% 18% 18% 18%
Operating income 10% 11% 9% 11%
EBITDA 13% 14% 12% 15%
Effective tax rate 40.3% 38.0% 38.8% 36.1%
Revenues
The table below shows revenue by payment plan and by reportable segment:
Three months ended Six months ended
December 31, December 31,
------------------- Increase/ -------------------- Increase/
(Dollar amounts in millions) 2006 2005 (Decrease) 2006 2005 (Decrease)
--------- --------- ------------ --------- ---------- -----------
Monthly payment plans $107.4 $ 86.7 24% $ 210.5 $169.8 24%
Annual payment plans 25.7 37.9 (32%) 55.1 78.6 (30%)
Other 9.6 9.9 (3%) 17.8 17.9 0%
--------- --------- ------------ --------- ---------- -----------
Total Marketing Services 142.7 134.5 6% 283.4 266.3 6%
Personals 23.9 18.6 28% 46.5 37.1 25%
Management Services 12.0 7.0 71% 26.0 14.2 83%
--------- --------- ------------ --------- ---------- -----------
Total $178.6 $160.1 12% $ 355.9 $317.6 12%
========= ========= ============ ========= ========== ===========
For the Three Months Ended December 31, 2006 and 2005
Revenues increased $18.5 million in the second quarter of fiscal 2007 compared
with the second quarter of fiscal 2006. Net active retail members and customers
increased 5% to 6.7 million at December 31, 2006 from 6.4 million at December
31, 2005.
Marketing Services revenues increased $8.2 million primarily due to a $20.7
million increase in revenues from members enrolled in monthly payment plans
partially offset by a $12.2 million decrease in revenue from members enrolled in
annual payment plans. Revenues from monthly payment plans increased primarily
due to higher average monthly members billed, which grew 14% to 3.1 million, and
higher average monthly member price point, which grew 9% to $11.88 for the
19
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
second quarter of fiscal 2007 compared with the prior year quarter.* Revenues
from members enrolled in annual payment plans continue to decrease due to the
attrition of the annual renewal base and the continued shift to enrolling new
members in monthly payment programs.
Personals revenues increased $5.3 million, or 28%, primarily due to the
acquisition of Mobile Lifestyles during the first quarter of fiscal 2007. Of the
28% increase in Personals revenues, 24% was due to this acquisition and the
remaining 4% was due to the growing mobile dating business, which was partially
offset by a decrease in revenues from our interactive voice response, or IVR,
and web-based businesses.
Management Services revenues increased $5.0 million primarily due to an increase
in the number of procedures completed, as well as an increase in the mix of
higher priced procedures. These increases were due to the increase in financed
transactions.
For the Six Months Ended December 31, 2006 and 2005
Revenues increased $38.3 million in the first six months of fiscal 2007 compared
with the prior year period.
Marketing Services revenues increased $17.1 million primarily due to a $40.7
million increase in revenues from members enrolled in monthly payment plans
partially offset by $23.5 million decrease in revenue from members enrolled in
annual payment plans. Revenues from monthly payment plans increased primarily
due to higher average monthly members billed, which grew 14% to 6.0 million, and
higher average monthly member price point, which grew 9% to $11.82 for the first
six months of fiscal 2007. Revenues from members enrolled in annual payment
plans continue to decrease due to the attrition of the annual renewal base and
the continued shift to enrolling new members in monthly payment programs.
Personals revenues increased $9.4 million, or 25%, primarily due to the
acquisition of Mobile Lifestyles. Of the 25% increase in Personals revenues, 22%
was due to this acquisition and the remaining 3% was due to the growing mobile
dating business, which was partially offset by a decrease in revenues from our
IVR and web-based businesses.
Management Services revenues increased $11.8 million primarily due to an
increase in the number of procedures completed and an increase in the mix of
higher priced procedures. These increases were due to the increase in financed
transactions.
Operating Income and EBITDA
The table below shows operating income and EBITDA by reportable segment and our
corporate unit that includes unallocated general corporate expenses for the
second quarter of fiscal 2007 and 2006:
Operating Income EBITDA
--------------------------------- ------------------------------
Three months ended Three months ended
December 31, December 31,
--------------------- Increase/ ------------------ Increase/
(Dollar amounts in millions) 2006 2005 (Decrease) 2006 2005 (Decrease)
--------- ---------- --------- --------- ------- ----------
Marketing Services $24.3 $24.1 1% $27.1 $27.1 0%
Personals 1.8 (0.7) 357% 4.1 1.7 141%
Management Services - 0.2 (100%) 0.7 0.6 17%
Corporate (8.1) (6.7) (21%) (7.8) (6.4) (22%)
--------- ---------- -------- --------- ------- ----------
Total Operating Income $18.0 $16.9 7% $24.1 $23.0 5%
========= ========== ======== ========= ======= ==========
For the Three Months Ended December 31, 2006 and 2005
Operating income increased $1.1 million and, as a percentage of revenues, was
10% during the second quarter of fiscal 2007 compared to 11% in the prior year
quarter. EBITDA increased $1.1 million in the second quarter of fiscal 2007 from
the prior year quarter and, as a percentage of revenues, EBITDA was 13% this
year versus 14% prior year quarter.
Marketing Services operating income increased $0.2 million and, as a percentage
of revenues, decreased to 17% from 18% in the prior year quarter. Marketing
Services EBITDA remained flat at $27.1 million and, as a percentage of revenues,
decreased to 19% from 20% in the prior year quarter. The decreases as a
percentage of revenues were primarily due to an increase in marketing expenses,
----------------------------
*During the first quarter of fiscal 2007, we changed the methodologies for
calculating average monthly member price point and average monthly members
billed. Prior periods have been restated to conform to this presentation.
20
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
which grew $5.9 million and as a percentage of revenues were 50% for the
second quarter of fiscal 2007 compared to 49% last year. Marketing expenses as a
percentage of revenues increased due to an increase in the level of marketing
and an increase in the monthly acquisition costs per new billed member. The
monthly acquisition cost per new billed member increased 21% to $43.91 from
$36.42 in the prior year quarter. Monthly member acquisition costs represent the
cost to acquire a new monthly member who has successfully been billed and is not
expected to cancel during the reported period. We expect the increase in the
monthly acquisition cost per new billed member to be more than recovered by the
monthly new member price point which increased $1.75 to $17.38 per month during
the second quarter of fiscal 2007. In addition, we expect the increase in
marketing expenses this period to translate into expected revenue growth during
the remainder of fiscal 2007. Operating and general and administrative expenses
remained flat as a percentage of revenues.
Personals operating income increased $2.5 million and, as a percentage of
revenues, increased to 8% from (4%) in the prior year quarter. Personals EBITDA
increased $2.4 million and, as a percentage of revenues, increased to 17% from
9% in the prior year quarter. The increases in operating income and EBITDA were
primarily due to the marketing margin contributed by the Mobile Lifestyle
acquisition and lower operating expenses, which as a percentage of revenues,
decreased to 17% this quarter from 26% last year. The decrease in operating
expenses as a percentage of revenues was primarily due to tight expense control
and cost savings realized from our transition to voice over internet platform,
or VOIP.
Management Services operating income decreased $0.2 million, and as a percentage
of revenue, decreased to 0% from 3% in the prior year quarter. Management
Services EBITDA increased $0.1 million and as a percentage of revenue, decreased
to 6% from 9% in the prior year quarter. These decreases are primarily due to
higher operating expenses, which increased $4.4 million and as a percentage of
revenues, increased to 67% from 53% in the prior year quarter. Operating
expenses increased due to higher doctor and loan costs associated with the
increased number of procedures completed.
Corporate operating loss increased $1.4 million and EBITDA decreased $1.4
million primarily due to higher legal and employee related expenses.
For the Six Months Ended December 31, 2006 and 2005
The table below shows operating income and EBITDA by reportable segment and our
corporate unit that includes unallocated general corporate expenses for the
first six months of fiscal 2007 and 2006:
Operating Income EBITDA
------------------------------ ---------------------------
Six months ended Six months ended
December 31, December 31,
------------------ Increase/ --------------- Increase/
(Dollar amounts in millions) 2006 2005 (Decrease) 2006 2005 (Decrease)
-------- -------- ---------- -------- ------ ----------
Marketing Services $44.7 $47.8 (6%) $50.3 $54.1 (7%)
Personals 1.3 (0.8) 263% 6.2 4.0 55%
Management Services 2.0 0.5 300% 3.3 1.3 154%
Corporate (16.1) (13.0) (24%) (15.7) (12.4) (27%)
-------- -------- ---------- -------- ------ ----------
Total Operating Income $31.9 $34.5 (8%) $44.1 $47.0 (6%)
======== ======== ========== ======== ====== ==========
Operating income decreased $2.6 million and, as a percentage of revenues, was 9%
during the first six months of fiscal 2007 compared to 11% in the prior year
period. EBITDA decreased $2.9 million in the first six months of fiscal 2007
from the prior year period and, as a percentage of revenues, EBITDA was 12% this
year versus 15% last year.
Marketing Services operating income decreased $3.1 million and, as a percentage
of revenues, decreased to 16% from 18% in the prior year period. Marketing
Services EBITDA decreased $3.8 million and, as a percentage of revenues,
decreased to 18% from 20% in the prior year period. These decreases were
primarily due to an increase in marketing expenses, which grew $13.9 million,
and as a percentage of revenues were 51% this year compared to 49% last year,
and were in line with our expected revenue growth. Marketing expenses as a
percentage of revenues increased due to an increase in the level of marketing
and an increase in the monthly acquisition costs per new billed member. The
monthly acquisition cost per new billed member increased 22% to $44.36 from
$36.35 in the prior year period. We expect the increase in the monthly
acquisition cost per new billed member to be more than recovered by the monthly
new member price point which increased $2.10 to $17.22 per month during the
first six months of fiscal 2007. In addition, we expect the increase in
21
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
marketing expenses this period to translate into expected revenue growth during
the remainder of fiscal 2007. Operating and general and administrative expenses
remained flat as a percentage of revenues.
Personals operating income increased $2.1 million and, as a percentage of
revenues, increased to 3% from (2%) in the prior year period. Personals EBITDA
increased $2.2 million and, as a percentage of revenues, increased to 13% from
11% in the prior year period. The increases in operating income and higher
EBITDA were primarily due to the marketing margin contributed by the Mobile
Lifestyle acquisition, as well as lower operating expenses, which as a
percentage of revenues, decreased to 18% this quarter from 26% last year. The
decrease in operating expenses as a percentage of revenues was primarily due
tight expense control and cost savings realized from our transition to VOIP.
Management Services operating income increased $1.5 million, and as a percentage
of revenue, increased to 8% from 4% in the prior year period. Management
Services EBITDA increased $2.0 million and as a percentage of revenue, increased
to 13% from 9% in the prior year period. These increases are primarily due to
higher revenues and were partially offset by increases in operating expenses,
which increased $9.0 million and, as a percentage of revenues, increased to 64%
from 54% in the prior year period. The increase in operating expenses as a
percentage of revenues was due to higher doctor and loan costs associated with
the increased number of procedures completed.
Corporate operating loss increased $3.1 million and EBITDA decreased $3.3
million primarily due to higher legal and employee related expenses.
Interest Income
Interest income increased $0.7 million and $1.6 million for the second quarter
and first six months of fiscal 2007, respectively, as compared to the prior year
periods primarily due to the increase in financed transactions for the
Management Services segment partially offset by a decrease in interest earned on
our short-term investments.
Provision for Income Taxes
The provision for income taxes increased $1.2 million, or 26%, in the second
quarter of fiscal 2007 compared to the prior year quarter because of higher
income before income taxes and was based on an effective tax rate of 40.3%
versus 38.0% in the prior year quarter. The increase in the effective tax rate
for the quarter is primarily due to an increase in non-deductible items and a
decrease in the favorable impact of foreign operations. The provision for income
taxes increased $0.5 million, or 5%, in the first six months of fiscal 2007
compared to the prior year period because of an increase in non-deductible items
and a decrease in the favorable impact of foreign operations, which gave rise to
an effective tax rate of 38.8% in the first six months of fiscal 2007 versus
36.1% in the prior year period.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2006, we had cash, cash equivalents, and short-term
investments of $60.0 million in addition to our unused $50.0 million line of
credit under our senior secured credit facility. We believe that existing cash,
short-term investment balances, and funds available under our senior secured
credit facility together with cash generated from operations will be sufficient
to meet our funding requirements for the foreseeable future.
We believe 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. A discussion
of these components follows below. 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 report.
Net cash flow provided by operating activities is an important measure used to
understand our liquidity. Net cash provided by operating activities decreased to
$8.1 million in the six months ended December 31, 2006 from $14.8 million in the
six months ended December 31, 2005. The $6.7 million decrease in operating cash
flow was primarily due to a $6.2 million decrease in Adjusted EBITDA and $1.0
million related to the impact of changes in assets and liabilities.
22
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
Six months ended
December 31,
------------------------- Increase/
(Dollar amounts in millions) 2006 2005 (Decrease)
------------ ------------ -----------
Marketing Services $ 43.7 $ 49.9 (12%)
Personals 5.5 3.9 41%
Management Services 2.7 1.0 170%
Corporate (15.7) (12.4) (27%)
------------ ------------ -----------
Total Adjusted EBITDA $ 36.2 $ 42.4 (15%)
============ ============ ===========
Marketing Services Adjusted EBITDA decreased $6.2 million and as a percentage of
revenue before deferral, decreased to 16% from 19% in the prior year period.
These decreases were due to an increase in the level of marketing and an
increase in the monthly acquisition costs per new billed member, as discussed
above.
Personals Adjusted EBITDA increased $1.6 million and as a percentage of revenue
before deferral, increased to 12% from 11% in the prior year period. These
increases were primarily due to the marketing margin contributed by the
acquisition of Mobile Lifestyles, as well as lower operating expenses.
Management Services Adjusted EBITDA increased $1.7 million and as a percentage
of revenue before deferral, increased to 11% from 7% in the prior year period
primarily due to higher revenues before deferral partially offset by increases
in operating expenses. The increase in operating expenses was due to higher
doctor and loan costs associated with the increased number of procedures
completed.
Corporate Adjusted EBITDA decreased $3.3 million primarily due to higher
legal and employee related expenses.
In the first six months of fiscal 2007, cash used from changes in assets and
liabilities was $13.6 million compared to $12.8 million in the prior year
period. The increase in the cash used from changes in assets and liabilities was
primarily due to increased notes receivable partially offset by the timing of
prepaid expenses, the release of restricted cash, and the timing of accrued
liabilities. The increase in notes receivable is related to the increase in
procedures completed that are being financed in the Management Services segment.
In the first six months of fiscal 2007, capital expenditures decreased to $5.5
million from $6.5 million in the prior year period. Free cash flow, defined as
operating cash flow less capital expenditures, decreased to $2.6 million in the
first six months of fiscal 2007 compared with $8.3 million in the prior year
period. The decrease in free cash flow was primarily due to the decreased
Adjusted EBITDA and the increase in cash used from changes in assets and
liabilities discussed above.
In the first six months of fiscal 2007, net cash provided by investing
activities increased $36.4 million from the prior year period. Net cash provided
by investing activities in the first six months of fiscal 2007 reflected $29.7
million of net proceeds from maturities of short-term investments partially
offset by $9.8 million used in connection with our recent acquisition and other
investments activity. Net cash used in investing activities in the first six
months of fiscal 2006 reflected $14.9 million used in connection with business
acquisitions.
In the first six months of fiscal 2007, net cash used in financing activities
decreased $2.7 million from the prior year period. Net cash used in financing
activities in the first six months fiscal 2007 reflected the use of $2.8 million
to repurchase our common stock, which was partially offset by $2.1 million of
proceeds from the exercise of stock options and $0.6 million of excess tax
benefit from stock-based compensation. Net cash provided by financing activities
in the first six months of fiscal 2006 reflected the use of $6.0 million to
repurchase our common stock, which was partially offset by proceeds from the
exercise of stock options of $2.7 million and $0.6 million of excess tax
benefits from stock-based compensation.
Credit Facility
We have 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 or the
Prime rate, plus an applicable margin. As of December 31, 2006, the base
interest rate for borrowings under this credit facility was 8.5%. There were no
borrowings outstanding under this credit facility as of December 31, 2006. The
senior secured credit facility has certain financial covenants, including a
maximum debt coverage ratio, potential restrictions on borrowings, and potential
23
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
restrictions on additional stock repurchases. As of December 31, 2006, we were
in compliance with all such debt covenants. The senior secured credit facility
matures on March 31, 2009.
Stock Repurchase Program
In the first six months of fiscal 2007, we purchased 66,000 shares of our common
stock for $2.8 million at an average price of $41.82 per share, compared to
164,800 shares for $6.0 million at an average price of $36.38 per share in the
prior year period. We used existing cash and cash from operations and stock
issuances to repurchase these shares. In July 2006, our Board of Directors
authorized the additional repurchase of up to a 1.0 million shares of our common
stock. As of December 31, 2006, we had approximately 1.3 million shares
available for repurchase under our stock repurchase program.
Other
We expect to incur capital expenditures of $9.9 million in fiscal 2007.
Contingent payments related to acquisitions of up to $51.7 million may be paid
if certain performance targets, including increasing levels of revenues and
earnings, are achieved. These contingent payments may be paid by the end of
calendar 2007. Of the $51.7 million, we recorded $45.3 million during the second
quarter of fiscal 2007 in accrued liabilities related to contingent payments
from our My Choice Medical, Inc. acquisition, which were disclosed in previous
quarterly filings. This payment is expected to be paid during the fourth quarter
of fiscal 2007. In addition, we acquired an online marketing company during the
third quarter of fiscal 2007 for approximately $3.7 million in order to further
our internet strategy.
RECONCILIATION OF NON-GAAP MEASURES
We believe that revenues before deferral and marketing costs before deferral are
important measures of liquidity and are significant factors in understanding our
operating cash flow trends. These measures are not a substitute for or superior
to revenues and marketing expenses determined in accordance with generally
accepted accounting principles ("GAAP"). These non-GAAP measures are used by
management and our investors to understand the liquidity trends of our 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 our 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 the Staff Accounting Bulletin 104, "Revenue Recognition" ("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 the American Institute
of Certified Public Accountants Statement of Position 93-7, "Reporting on
Advertising Costs," and represent marketing costs paid or accrued during the
current reporting period. 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.
Revenues before deferral are calculated as follows:
Six months ended
December 31,
-----------------
(Dollar amounts in millions) 2006 2005
------- -------
Revenues $355.9 $317.6
Change in deferred revenues (8.9) (10.6)
------- -------
Revenues before deferral $347.0 $307.0
======= =======
24
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
Marketing costs before deferral are calculated as follows:
Six months ended
December 31,
----------------
(Dollar amounts in millions) 2006 2005
------- -------
Marketing expenses $173.3 $150.2
Change in deferred marketing costs (1.0) (6.0)
------- -------
Marketing costs before deferral $172.3 $144.2
======= =======
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.
We use EBITDA and Adjusted EBITDA to evaluate the overall performance of our
business and to measure that performance compared with internal budgets.
Additionally, we use Adjusted EBITDA as our primary measure to allocate capital
and other resources to our operating segments and assess the operating
performance of those segments (See Note 10 to the condensed consolidated
financial statements in Item 1 of this report). Adjusted EBITDA is also one of
the measures used to determine compensation under our management incentive
plans.
Adjusted EBITDA is useful to our investors and us because it provides insight
into the current period cash operating results. Adjusted EBITDA is reconciled to
net cash provided by operating activities because we believe that it is the most
directly comparable GAAP liquidity measure. We also use Adjusted EBITDA as the
primary performance measure of the business both on an overall company basis as
well as for our operating segments. Adjusted EBITDA is reconciled to net income
because we believe it is the most directly comparable GAAP performance measure.
EBITDA is useful to our investors and us 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. EBITDA is calculated
using as reported revenues and marketing expenses. EBITDA is reconciled to net
income because we believe 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 since Adjusted EBITDA and EBITDA
do not reflect the periodic amortization of certain capitalized tangible and
intangible assets used in generating revenues in our businesses, since they do
not reflect net income earned for GAAP reporting purposes, and since they
exclude the effects of interest and taxes. Additionally, Adjusted EBITDA and
EBITDA exclude the impact of working capital changes.
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
GAAP.
The following table reconciles net cash provided by operating activities to
Adjusted EBITDA:
Six months ended
December 31,
--------------------
(Dollar amounts in millions) 2006 2005
--------- ---------
Net cash provided by operating activities $8.1 $14.8
Changes in assets and liabilities (use of cash) 13.6 12.9
Interest and other expense, net (to be paid in cash) 6.2 8.5
Taxes 11.1 8.3
Stock compensation expense (2.4) (2.3)
Other (0.4) 0.2
--------- ---------
Adjusted EBITDA $36.2 $42.4
========= =========
25
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
The following tables reconcile net income to EBITDA and Adjusted EBITDA:
Three months ended December 31, 2006
-------------------------------------------------------------
(Dollar amounts in millions) Marketing Management
Total Services Personals Services Corporate
----------- ------------ ----------- ------------ -----------
Net income $ 8.7
Interest and other expense, net (1) 3.4
Provision for income taxes (1) 5.9
-----------
Operating income (expense) $ 18.0 $ 24.3 $ 1.8 $ - $ (8.1)
Depreciation and amortization 6.1 2.8 2.3 0.7 0.3
----------- ------------ ----------- ------------ -----------
EBITDA $ 24.1 $ 27.1 $ 4.1 $ 0.7 $ (7.8)
=========== ============ =========== ============ ===========
Three months ended December 31, 2005
-------------------------------------------------------------
Marketing Management
Total Services Personals Services Corporate
----------- ------------ ----------- ------------ -----------
Net income $ 7.7
Interest and other expense, net (1) 4.5
Provision for income taxes (1) 4.7
-----------
Operating income (expense) $ 16.9 $ 24.1 $ (0.7) $ 0.2 $ (6.7)
Depreciation and amortization 6.1 3.0 2.4 0.4 0.3
----------- ------------ ----------- ------------ -----------
EBITDA $ 23.0 $ 27.1 $ 1.7 $ 0.6 $ (6.4)
=========== ============ =========== ============ ===========
Six months ended December 31, 2006
-------------------------------------------------------------
Marketing Management
Total Services Personals Services Corporate
----------- ------------ ----------- ------------ -----------
Net income $ 15.4
Interest and other expense, net (1) 6.8
Provision for income taxes (1) 9.7
-----------
Operating income (expense) $ 31.9 $ 44.7 $ 1.3 $ 2.0 $ (16.1)
Depreciation and amortization 12.2 5.6 4.9 1.3 0.4
----------- ------------ ----------- ------------ -----------
EBITDA 44.1 50.3 6.2 3.3 (15.7)
Change in deferred revenues (8.9) (8.0) (0.3) (0.6) -
Change in deferred marketing costs 1.0 1.4 (0.4) - -
----------- ------------ ----------- ------------ -----------
Adjusted EBITDA $ 36.2 $ 43.7 $ 5.5 $ 2.7 $ (15.7)
=========== ============ =========== ============ ===========
Six months ended December 31, 2005
-------------------------------------------------------------
Marketing Management
Total Services Personals Services Corporate
----------- ------------ ----------- ------------ -----------
Net income $ 16.3
Interest and other expense, net (1) 9.0
Provision for income taxes (1) 9.2
-----------
Operating income (expense) $ 34.5 $ 47.8 $ (0.8) $ 0.5 $ (13.0)
Depreciation and amortization 12.5 6.3 4.8 0.8 0.6
----------- ------------ ----------- ------------------------
EBITDA 47.0 54.1 4.0 1.3 (12.4)
Change in deferred revenues (10.6) (10.2) (0.1) (0.3) -
Change in deferred marketing costs 6.0 6.0 - - -
----------- ------------ ----------- ------------ -----------
Adjusted EBITDA $ 42.4 $ 49.9 $ 3.9 $ 1.0 $ (12.4)
=========== ============ =========== ============ ===========
(1) Management does not allocate interest and other expense, net nor does it allocate provision for
income taxes to the individual segments.
26
VERTRUE INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(continued)
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 us to pursue opportunities that enhance shareholder value, such as
make acquisitions, reduce debt, repurchase stock, and develop new products. The
following table reconciles operating cash flow to free cash flow:
Six months ended
December 31,
-------------------
(Dollar amounts in millions) 2006 2005
-------- ---------
Net cash provided by operating activities $8.1 $14.8
Capital expenditures (5.5) (6.5)
-------- ---------
Free cash flow $2.6 $8.3
======== =========
COMMITMENTS
Future minimum payments of contractual obligations as of December 31, 2006 are
as follows:
Payments Due by Period
----------------------------------------------------------------
Less than 1 After 5
(Dollar amounts in millions) Total year 1 - 3 years 3 - 5 years years
------------ ------------- ----------- ------------ ------------
Operating leases $ 54.3 $ 9.2 $ 17.9 $ 11.9 $ 15.3
Capital leases 1.0 0.8 0.2 - -
Long-term debt 240.0 - - 90.0 150.0
Purchase obligations 5.4 5.4 - - -
Other:
Contingent payments 51.7 51.7 - - -
Interest payments on long-term debt 123.9 18.8 37.7 32.7 34.7
Other (1) 6.7 1.0 - 0.4 5.3
------------ ------------- ----------- ------------ ------------
Total payments due $ 483.0 $ 86.9 $ 55.8 $ 135.0 $ 205.3
============ ============= =========== ============ ============
(1) Includes pension obligations and other current obligations.
CRITICAL ACCOUNTING POLICIES
There were no material changes in our critical accounting policies during the
first six months of fiscal 2007. For further information on our critical
accounting policies, please refer to the discussion contained in the
management's discussion and analysis section of our Annual Report on Form 10-K
for the fiscal year ended June 30, 2006.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 12 to the condensed consolidated financial statements in Item 1 of this
report for a description of the effect of recently issued accounting
pronouncements.
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward looking statements that are based on
current expectations, estimates, forecasts, and projections about the industry
in which we operate and our 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. Factors that could
cause these differences include, but are not limited to, those set forth under
Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30,
2006.
27
VERTRUE INCORPORATED
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
We are exposed to potential loss from exposure to market risks represented
principally by changes in interest rates and foreign exchange rates. There were
no material changes in our market risk during the first six months of fiscal
2007. For additional information, please refer to Item 7A of our Annual Report
on Form 10-K for the fiscal year ended June 30, 2006.
Item 4. Controls and Procedures
-----------------------
Evaluation of disclosure controls and procedures
Our 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.
Changes in internal control over financial reporting
During the second quarter of fiscal 2007, 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.
28
VERTRUE INCORPORATED
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
In our opinion, there are no significant legal proceedings to which we or any of
our subsidiaries are a party or to which any of our properties are subject. We
are involved in lawsuits and claims generally incidental to our business,
including but not limited to various suits, including previously disclosed
suits, brought against us by individual consumers seeking monetary and/or
injunctive relief relating to the marketing of our programs. In addition, from
time to time in the regular course of our business, we receive inquiries from
various federal and/or state regulatory authorities.
Item 1A. Risk Factors
------------
Information regarding risk factors is included in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2006. There were no material changes in our
risk factors during the first six months of fiscal 2007.
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
------------------------------------- ----------- ------------ ---------------- ----------------
October 1, 2006 to October 31, 2006 3,400 $39.92 3,400 1,261,000
November 1, 2006 to November 30, 2006 - - - 1,261,000
December 1, 2006 to December 31, 2006 - - - 1,261,000
----------- ------------ ---------------- ----------------
Total 3,400 $39.92 3,400 1,261,000
=========== ============ ================ ================
(1) In July 2006, our Board of Directors authorized an additional 1,000,000
shares, no expiration date, to be purchased under our stock repurchase
program originally authorized during fiscal 1997. There are 261,000 shares
remaining authorized under the Board of Directors approval from October
2004.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
We held our 2006 Annual Meeting of Stockholders on November 17, 2006. At that
meeting, our stockholders elected all of the nominees for director and approved
all other proposals submitted to our stockholders for approval at the meeting,
each as described in our Proxy Statement and Notice of 2006 Annual Meeting of
Stockholders dated October 12, 2006. The results of the voting of the
stockholders with respect to these matters are provided below.
I. Election of directors.
For Withheld
--- --------
Alec L Ellison 8,742,428 106,320
Joseph A. Heid 8,740,009 108,739
Gary A. Johnson 8,770,058 78,690
Robert Kamerschen 8,598,746 250,002
Michael T. McClorey 8,691,089 157,659
Edward M. Stern 8,740,009 108,739
Marc S. Tesler 8,722,908 125,840
II. Approval of the amendment to our Certificate of Incorporation to
increase our authorized shares.
For Withheld Abstain Broker Non-Votes
--- -------- ------- ----------------
8,284,903 562,261 1,892 -
III. Approval of the adoption of the Management Incentive Plan.
29
VERTRUE INCORPORATED
PART II. OTHER INFORMATION
For Withheld Abstain Broker Non-Votes
--- -------- ------- ----------------
8,658,392 108,210 82,454 -
IV. Approval of the adoption of the 2006 Restricted Stock Plan for
Non-Employee Directors.
For Withheld Abstain Broker Non-Votes
--- -------- ------- ----------------
5,020,701 2,000,602 61,331 1,766,422
V. Ratification of the selection of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year
ending June 30, 2007.
For Against Abstain
--- ------- -------
8,774,560 72,222 2,274
Item 6. Exhibits
--------
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.
30
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: February 9, 2007 By: /s/ Gary A. Johnson
-----------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
Date: February 9, 2007 By: /s/ James B. Duffy
-------------------------------
James B. Duffy, Executive Vice President,
Chief Operating Officer, and Chief
Financial Officer (Principal Financial
and Accounting Officer)
31