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 September 30, 2005
or
Transition report pursuant to Section 13 or 15(d) of the Securities
---- Exchange Act of 1934 for the transition period from _____ to ______.
Commission File No. 0-21527
VERTRUE INCORPORATED
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1276882
------------------------ ----------------
(State of Incorporation) (IRS Employer
Identification No.)
680 Washington Boulevard
Stamford, Connecticut 06901
--------------------------------------- ----------------
(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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
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: 9,729,000 shares of Common
Stock, $0.01 par value as of October 28, 2005.
VERTRUE INCORPORATED
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2005
and June 30, 2005 1
Consolidated Statements of Operations for the Three
Months Ended September 30, 2005 and 2004 2
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Forward Looking Statements 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 6. Exhibits 29
Signatures 30
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
September 30, June 30,
2005 2005
------------- ------------
Assets
Current assets:
Cash and cash equivalents $76,235 $64,356
Restricted cash 3,084 3,411
Short-term investments 3,028 16,223
Accounts receivable 12,975 12,559
Prepaid membership materials 2,576 2,557
Prepaid expenses and other current assets 10,802 8,695
Deferred marketing costs 35,330 39,226
------------- ------------
Total current assets 144,030 147,027
Fixed assets, net 36,857 39,062
Goodwill 201,946 201,499
Intangible assets, net 44,025 46,476
Other assets 14,090 13,098
------------- ------------
Total assets $440,948 $447,162
============= ============
Liabilities and Shareholders' Deficit
Current liabilities:
Current maturities of long-term obligations $767 $686
Accounts payable 31,764 42,077
Accrued liabilities 82,682 82,157
Deferred revenues 98,747 108,117
Deferred income taxes 9,784 9,780
------------- ------------
Total current liabilities 223,744 242,817
Deferred income taxes 9,478 9,702
Other long-term liabilities 5,291 5,257
Long-term debt 237,854 237,814
------------- ------------
Total liabilities 476,367 495,590
------------- ------------
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;
19,786 shares issued (19,703 shares at June 30, 2005) 198 197
Capital in excess of par value 174,819 169,463
Retained earnings 44,321 35,680
Accumulated other comprehensive income (loss) 610 (148)
Treasury stock, 10,070 shares at cost (10,020 shares at
June 30, 2005) (255,367) (253,620)
------------- ------------
Total shareholders' deficit (35,419) (48,428)
------------- ------------
Total liabilities and shareholders' deficit $440,948 $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
September 30,
--------------------
2005 2004
---------- ---------
Revenues $157,528 $135,623
Expenses:
Marketing 73,899 68,532
Operating 35,083 24,210
General and administrative 28,454 24,605
Amortization of intangibles 2,436 1,544
---------- ---------
Operating income 17,656 16,732
Interest expense, net (4,457) (4,643)
Other expense, net (41) (135)
---------- ---------
Income before income taxes 13,158 11,954
Provision for income taxes 4,517 4,358
---------- ---------
Net income $8,641 $7,596
========== =========
Earnings per share:
Basic $0.89 $0.75
========== =========
Diluted $0.74 $0.65
========== =========
Weighted average common shares used in earnings per
share calculations:
Basic 9,714 10,174
========== =========
Diluted 12,783 12,949
========== =========
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)
Three months ended
September 30,
------------------------
2005 2004
----------- ------------
Operating activities
Net income $8,641 $7,596
Adjustments to reconcile net income to net cash provided
by operating activities:
Change in deferred revenues (9,580) (16,335)
Change in deferred marketing costs 3,990 6,348
Depreciation and amortization 6,578 5,031
Stock-based compensation 1,106 -
Deferred and other income taxes (209) 3,105
Excess tax benefit from stock-based compensation (351) 129
Other (26) 822
Change in assets and liabilities:
Restricted cash 327 1,003
Accounts receivable (416) 597
Prepaid membership materials (19) (137)
Prepaid expenses (1,124) (1,220)
Other assets (1,557) (14)
Accounts payable (10,313) (2,468)
Accrued and other liabilities 3,117 3,452
----------- ------------
Net cash provided by operating activities 164 7,909
----------- ------------
Investing activities
Acquisition of fixed assets (1,816) (719)
Purchases of short-term investments (16,325) (211,793)
Sales of short-term investments 29,636 205,980
Acquisitions of businesses, net of cash acquired, and other
investing activities (103) 304
----------- ------------
Net cash provided by (used in) investing activities 11,392 (6,228)
----------- ------------
Financing activities
Net proceeds from issuance of stock 1,620 919
Treasury stock purchases (1,747) (7,250)
Debt issuance costs - (583)
Payments of long-term obligations (182) (90)
Excess tax benefit from stock-based compensation 351 -
----------- ------------
Net cash provided by (used in) financing activities 42 (7,004)
----------- ------------
Effect of exchange rate changes on cash and cash equivalents 281 172
----------- ------------
Net increase (decrease) in cash and cash equivalents 11,879 (5,151)
Cash and cash equivalents at beginning of year 64,356 47,166
----------- ------------
Cash and cash equivalents at end of period $76,235 $42,015
=========== ============
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 consumer services
marketing company. The Company offers both subscription and transaction based
services focused on meeting consumer needs in large spending categories -
healthcare, personal property, discounts, security and insurance and personals.
The Company's service offerings provide consumers everyday savings,
event-oriented discounts, benefits that provide the consumer with peace of mind
and access to information and opportunities for self-enrichment.
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 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 months ended September 30, 2005 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 Corporate and Other.
NOTE 3 - RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation to reclassify auction rate securities from cash and cash
equivalents to short-term investments. Corresponding adjustments have been made
in the consolidated statements of cash flows for prior periods to reflect gross
purchases and sales of auction rate securities as investing activities rather
than as a component of cash and cash equivalents. The Company reclassified
$112,330,000 and $109,950,000 from cash and cash equivalents to short-term
investments at June 30, 2004 and September 30, 2004, respectively. These
reclassifications do not affect previously reported cash flows from operating or
financing activities in the consolidated statements of cash flows. For the three
months ended September 30, 2004 net cash provided by investing activities
related to auction rate securities was $2,380,000.
NOTE 4 - 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
establishes 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 required 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 months ended September 30, 2004
(in thousands, except per share data):
Net income reported $7,596
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) 979
------------------
Pro forma net income $6,617
==================
Earnings per share:
As reported
Basic $0.75
Diluted $0.65
Pro forma
Basic $0.65
Diluted $0.56
(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 in the quarter ended September 30, 2005. The following weighted
average assumptions were used to estimate the fair value of options granted
during the three months ended September 30:
Black-Scholes Option Valuation Assumptions 2005 2004
------------------------------------------ ----------- ----------
Dividend yield 0.0% 0.0%
Expected volatility (1) 65% 68%
Risk free interest rate (2) 3.8% 3.7%
Expected lives (in years) (3) 5.6 5.0
(1) Estimated based on historical experience.
(2) Based on the U.S. Treasury constant maturity interest rate with a term
consistent with the expected life of the options granted.
(3) Estimated based on historical experience and expected future results.
The weighted average fair values of options granted during the quarters ended
September 30, 2005 and 2004 estimated on the grant date using the Black-Scholes
option-pricing model with the assumptions listed above were $21.13 and $17.59,
respectively.
For the quarter ended September 30, 2005, the Company recognized $1,106,000
($727,000 net of tax) in general and administrative expenses related to stock
option compensation. As of September 30, 2005, unrecognized stock compensation
expense related to unvested options was $11,099,000, which is expected to be
recognized over a weighted average period of 3 years.
The total intrinsic value of options exercised during the three months ended
September 30, 2005 and 2004 was $1,458,000 and $861,000, respectively. The total
cash received as a result of employee stock option exercises for the three
months ended
5
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005 and 2004 was $1,620,000 and $919,000, respectively. The tax
benefits realized in connection with these exercises were $351,000 and $129,000
during the three months ended September 30, 2005 and 2004, respectively.
As of September 30, 2005, the Company had the following stock-based compensation
plans which are described below.
Under the 1996 Stock Option Plan, the Board of Directors can determine the date
on which options vest and become exercisable as well as the term of the options
granted. The 1996 Stock Option Plan is authorized to grant 5,600,000 options to
acquire shares of Common Stock. Of these options, 2,000,000 must be granted
using treasury stock.
Under the 1995 Executive Officers' Stock Option Plan and the 1995 Non-Employee
Directors' Stock Option Plan the Board is authorized to grant 360,000 and
180,000 options, respectively, to acquire shares of Common Stock at a price per
share equal to or greater than fair market value at the grant date. Under the
Executive Officers' Stock Option Plan, the Board can determine the date on which
options vest and become exercisable.
Under the stock option plans described above, options generally become
exercisable over a four to five year period and expire at the earlier of
termination of employment or ten years from the grant date.
At September 30, 2005, 3,398,000 shares of common stock were reserved for
issuance under these stock option plans, of which 411,000 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 $22.16
Granted 223 38.21
Exercised (80) 19.67
Forfeited or expired (29) 25.39
----------
Outstanding at September 30, 2005 2,986 23.40
==========
The following table summarizes the Company's stock options outstanding and
exercisable as of September 30, 2005 (shares in thousands):
Options Options
outstanding Exercisable
-------------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Remaining Average Aggregate Average Aggregate
Contractual Exercise Intrinsic Exercise Intrinsic
Exercise Price Shares Term (Yrs) Price($) Value ($) Shares Price ($) Value ($)
------------------ ------ ----------- -------- ---------- ------- --------- ----------
$4.167 - $13.05 576 5.71 11.56 14,279 425 11.22 10,680
$14.00 - $19.375 399 4.31 16.43 7,948 341 16.40 6,803
$20.31 - $26.50 666 6.11 20.73 10,403 601 20.72 9,394
$29.563 - $29.875 925 5.34 29.46 6,373 765 29.43 5,294
$30.97 - $40.40 420 9.52 37.12 (323) 17 33.14 55
------ ---------- ------- ----------
2,986 6.03 23.40 38,680 2,149 21.36 32,226
====== ========== ======= ==========
The weighted-average remaining contractual term of stock options currently
exercisable was 5.04 years.
6
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying value and accumulated amortization of goodwill and other
intangibles are as follows (in thousands):
September 30, 2005 June 30, 2005
----------------------- ---------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------- ------------ ---------- ----------------
Amortizable intangible assets:
Membership and client relationships $40,214 $17,151 $40,215 $15,184
Trade names 21,859 2,025 21,859 1,662
Other 1,504 1,343 1,518 1,237
---------- ------------ ---------- ----------------
Total amortizable intangible assets $63,577 $20,519 $63,592 $18,083
---------- ------------ ---------- ----------------
Amortizable intangible assets, net $43,058 $45,509
========== ==========
Indefinite-lived intangible assets:
Goodwill $201,946 $201,499
Intangible asset related to minimum pension
liability $967 $967
Future intangible amortization expense for the next five years is estimated to
be as follows (in thousands):
Fiscal Year
2006 8,360
2007 6,697
2008 4,681
2009 4,260
2010 3,130
Changes in the carrying amount of goodwill by segment were as follows (in
thousands) for the three months ended September 30, 2005:
Marketing Corporate
Services Personals and Other Total
----------- ---------- ---------- ----------
Balance at beginning of
period $95,917 $82,215 $23,367 $201,499
Acquisitions - - - -
Purchase adjustments and
other 442 - 5 447
----------- ---------- ---------- ----------
Balance at end of period $96,359 $82,215 $23,372 $201,946
=========== ========== ========== ==========
As required by SFAS 142, goodwill as of July 1, 2005 and 2004 was tested for
impairment during the quarters ended September 30, 2005 and 2004. 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.
NOTE 6 - FOREIGN CURRENCY INSTRUMENTS
The Company uses purchase option contracts and forward contracts to minimize its
exposure to changes in future cash flows caused by movements in foreign currency
exchange rates between the U.S. dollar and the Canadian dollar. Derivatives are
held only for the purpose of hedging such risks and are not used for speculative
purposes. Derivatives used to hedge forecasted cash flows associated with
Canadian dollar denominated forecasted transactions that meet the criteria for
hedge accounting are designated as cash flow hedges. The effective portion of
derivative gains and losses is deferred as a component of accumulated other
comprehensive income and is recognized when the underlying hedged item is
recognized in earnings.
7
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of these contracts is included in prepaid and other current
assets. As of September 30 and June 30, 2005, the fair value of these
instruments was $1,044,000 (asset) and $559,000 (asset), respectively.
Derivative gains recognized in earnings were recorded in operating expenses and
general and administrative expenses and amounted to $127,000 and $44,000 for the
quarters ended September 30, 2005 and 2004, respectively. All forecasted
transactions currently being hedged are expected to occur over the remaining
fiscal year.
NOTE 7 - ALLOWANCE FOR MEMBERSHIP CANCELLATIONS
Accrued liabilities reported in the accompanying unaudited condensed
consolidated balance sheets as of September 30, 2005 and June 30, 2005 include
an allowance for membership cancellations of $11,028,000 and $11,232,000,
respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company operates in leased facilities. Management expects that leases
currently in effect will be renewed or replaced by other leases of a similar
nature and term. Leases expiring during 2006 were renewed or replaced during the
quarter ended September 30, 2005.
The Company has an amended and restated senior secured credit facility, which
matures on March 23, 2006 and allows borrowings of up to $45,000,000. Borrowings
under the senior secured credit facility accrue interest at either the
Eurodollar rate, or the higher of the Prime rate, or the Federal Funds rate plus
an applicable margin. As of September 30, 2005, the availability under the
senior secured credit facility was reduced by an outstanding letter of credit of
$5,458,000 and was $39,542,000. There were no borrowings outstanding under this
bank credit facility as of September 30, 2005.
In connection with the acquisition of Bargain, the Company expects to make
the final contingent payment of $14,658,000 in the quarter ending December 31,
2005. 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 over the next three calendar years.
As of September 30, 2005, the Company had outstanding purchase obligations of
$15,099,000 which related to marketing agreements and maintenance contracts on
the Company's software, equipment and other assets. In addition, as of September
30, 2005, the Company had commitments of $52,837,000 related to existing
operating leases.
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 is involved in other
lawsuits and claims generally incidental to its business, including, but not
limited to, various suits, including previously disclosed suits, brought against
the Company by individual consumers seeking monetary and/or injunctive relief
relating to the marketing of the Company's programs. In addition, from time to
time in the regular course of its business, the Company receives inquiries from
various federal and/or state regulatory authorities.
On October 17, 2005, the U.S. Supreme Court declined to review the Connecticut
Supreme Court's May 10, 2005 decision against the Company to uphold an
arbitration panel's award of $5,458,000 in punitive damages and costs to
MedValUSA Health Programs, Inc. Accordingly, the Company will pay the full
amount of the award 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 settlement. As a result, payment of the award will not affect the
Company's results of operations for the quarter ending December 31, 2005.
NOTE 9 - INCOME TAX EXPENSE
Income tax expense as a percentage of pre-tax income was 34.3% and 36.5% for the
three months ended September 30, 2005 and 2004, respectively. The effective tax
rate was lower than the U.S. statutory rate for the three months ended September
30, 2005 primarily due to the impact of the Lavalife acquisition. The effective
tax rate was higher than the U.S. statutory rate for the three months ended
September 30, 2004 primarily due to state taxes and other non-deductible items.
The estimated effective tax rate for the three months ended September 30, 2005
decreased from the same period in the prior year due to the impact of the
Lavalife acquisition.
The Company has open tax years in the U.S., Canada and other jurisdictions that
are not currently under examination by the applicable tax authorities but may be
subject to examination in the future. 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.
8
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - 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
September 30,
-------------------------
2005 2004
------------ -----------
Numerator:
Income available to common shareholders used in basic earnings
per share $8,641 $7,596
Add back interest expense on convertible securities, net of tax 813 786
------------ -----------
Income available to common shareholders after assumed
conversion of dilutive securities $9,454 $8,382
============ ===========
Denominator:
Weighted average number of common shares outstanding - basic 9,714 10,174
Effect of dilutive securities:
Convertible securities 2,230 2,230
Stock options 839 545
------------ -----------
Weighted average number of common shares outstanding - diluted 12,783 12,949
============ ===========
Basic earnings per share $0.89 $0.75
============ ===========
Diluted earnings per share $0.74 $0.65
============ ===========
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 months ended September 30, 2005
and 2004 are incremental weighted average stock options of approximately 556,000
and 1,169,000, respectively.
NOTE 11 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
Three months ended
September 30,
-------------------------
2005 2004
------------ -----------
Net income 8,641 7,596
Unrealized gain on derivative assets 518 749
Foreign currency translation gain 240 98
------------ -----------
Comprehensive income $9,399 $8,443
============ ===========
NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION
During the quarter ended September 30, 2005, the Company incurred a capital
lease obligation of $231,000 to acquire equipment.
NOTE 13 - BUSINESS SEGMENTS
The operating business segments reported below are the reportable business
segments of the Company for which separate financial information is available
and for which operating results are evaluated regularly by executive management
in assessing performance and deciding how to allocate resources. The Company has
two reportable business segments: Marketing Services and Personals. The
Marketing Services business segment primarily provides discounted products and
services to consumers. The Personals business segment provides both web-based
and phone-based personals services to its customers. The Corporate and Other
business unit includes the results of MCM as well as unallocated general
corporate expenses.
9
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
September 30,
-------------------
2005 2004
--------- ---------
Revenues
Marketing Services $131,848 $117,278
Personals 18,569 18,345
Corporate and Other 7,191 -
Intersegment (80) -
--------- ---------
Total $157,528 $135,623
========= =========
Adjusted EBITDA (1)
Marketing Services $21,625 $13,900
Personals 2,230 2,560
Corporate and Other (2) (5,491) (5,094)
--------- ---------
Total $18,364 $11,366
========= =========
Capital Expenditures (3)
Marketing Services $1,545 $634
Personals 253 85
Corporate and Other 18 -
--------- ---------
Total $1,816 $719
========= =========
Depreciation and Amortization
Marketing Services $3,270 $2,162
Personals 2,355 2,359
Corporate and Other 673 100
--------- ---------
Total $6,298 $4,621
========= =========
September June 30,
30, 2005 2005
Assets --------- ---------
Marketing Services $255,584 $245,635
Personals 130,285 132,992
Corporate and Other (4) 55,079 68,535
--------- ---------
Total $440,948 $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) The Corporate and Other business unit includes the results of MCM as well
as unallocated general corporate expenses.
(3) Management does not allocate certain capital expenditures to the Corporate
and Other segment. However, the associated depreciation expense has been
allocated for purposes of evaluating performance.
(4) Includes assets of MCM and unallocated non-operating assets including
short-term investments, debt issuance costs and other.
10
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ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables reconcile Adjusted EBITDA to income before income taxes (in
thousands):
Three months ended September 30, 2005
------------------------------------------------------------------
Marketing Corporate and Consolidated
Services Personals Other Total
--------------- --------------- --------------- ---------------
Income before income taxes $13,158
Interest and other expense, net (1) 4,498
---------------
Operating income (expense) $23,699 $(60) $(5,983) $17,656
Depreciation and amortization 3,270 2,355 673 6,298
Change in deferred revenues (9,334) (65) (181) (9,580)
Change in deferred marketing costs 3,990 - - 3,990
--------------- --------------- --------------- ---------------
Adjusted EBITDA $21,625 $2,230 $(5,491) $18,364
=============== =============== =============== ===============
Three months ended September 30, 2004
------------------------------------------------------------------
Marketing Corporate and Consolidated
Services Personals Other Total
--------------- --------------- --------------- ---------------
Income before income taxes $11,954
Interest and other expense, net (1) 4,778
---------------
Operating income (expense) $21,978 $(52) $(5,194) $16,732
Depreciation and amortization 2,162 2,359 100 4,621
Change in deferred revenues (16,588) 253 - (16,335)
Change in deferred marketing costs 6,348 - - 6,348
--------------- --------------- --------------- ---------------
Adjusted EBITDA $13,900 $2,560 $(5,094) $11,366
=============== =============== =============== ===============
(1) Management does not allocate interest and other expense, net to the
individual segments.
NOTE 14 - 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 September 30 and June 30, 2005 and the
related statements of operations and cash flows for the three months ended
September 30, 2005 and 2004. 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.
11
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ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, 2005
---------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ ------------
Assets
Current assets $75,111 $59,226 $25,210 $(15,517) $144,030
Fixed assets, net 18,042 12,486 6,329 - 36,857
Goodwill - 117,749 84,197 - 201,946
Intangible assets, net 1,007 30,279 12,739 - 44,025
Other assets 11,448 149 2,493 - 14,090
Investment in subsidiaries 279,997 - - (279,997) -
---------- ------------ ------------- ------------ ------------
Total assets $ 385,605 $ 219,889 $ 130,968 $ (295,514) $ 440,948
========== ============ ============= ============ ============
Liabilities and Shareholders' (Deficit)
Equity
Current liabilities $177,443 $40,409 $21,409 $(15,517) $223,744
Deferred income taxes 2,042 7,240 196 - 9,478
Other long-term liabilities 3,685 - 1,606 - 5,291
Long-term debt 237,854 - - - 237,854
---------- ------------ ------------- ------------ ------------
Total liabilities 421,024 47,649 23,211 (15,517) 476,367
---------- ------------ ------------- ------------ ------------
Shareholders' (deficit) equity:
Preferred stock - - - - -
Common stock 198 6 3 (9) 198
Capital in excess of par value 174,819 165,285 102,519 (267,804) 174,819
Accumulated earnings (deficit) 44,321 6,532 5,153 (11,685) 44,321
Accumulated other comprehensive income
(loss) 610 417 82 (499) 610
Treasury stock (255,367) - - - (255,367)
---------- ------------ ------------- ------------ ------------
Total shareholders' (deficit) equity (35,419) 172,240 107,757 (279,997) (35,419)
---------- ------------ ------------- ------------ ------------
Total liabilities and shareholders'
(deficit) equity $385,605 $219,889 $130,968 $(295,514) $440,948
========== ============ ============= ============ ============
12
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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 (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
========== ============ ============= ============ ============
13
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three months ended September 30, 2005
---------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ ------------
Revenues $96,809 $38,809 $27,090 $(5,180) $157,528
Expenses:
Marketing 51,236 16,942 10,655 (4,934) 73,899
Operating 17,275 8,818 9,236 (246) 35,083
General and administrative 16,794 7,409 4,251 - 28,454
Amortization of intangibles 76 1,509 851 - 2,436
---------- ------------ ------------- ------------ ------------
Operating income 11,428 4,131 2,097 - 17,656
Equity in income of subsidiaries 4,134 - - (4,134) -
Interest (expense) income, net (4,719) 97 165 - (4,457)
Other income (expense), net 27 (115) 47 - (41)
---------- ------------ ------------- ------------ ------------
Income before income taxes 10,870 4,113 2,309 (4,134) 13,158
Provision for income taxes 2,229 1,465 823 - 4,517
---------- ------------ ------------- ------------ ------------
Net income $8,641 $2,648 $1,486 $(4,134) $8,641
========== ============ ============= ============ ============
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three months ended September 30, 2004
---------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
---------- ------------ ------------- ------------ ------------
Revenues $96,285 $34,506 $5,320 $(488) $135,623
Expenses:
Marketing 50,499 16,565 1,468 - 68,532
Operating 15,132 7,189 2,377 (488) 24,210
General and administrative 15,514 8,181 910 - 24,605
Amortization of intangibles - 1,544 - - 1,544
---------- ------------ ------------- ------------ ------------
Operating income 15,140 1,027 565 - 16,732
Equity in income of subsidiaries 820 - - (820) -
Interest (expense) income, net (4,700) 54 3 - (4,643)
Other (expense) income, net (93) (64) 22 - (135)
---------- ------------ ------------- ------------ ------------
Income before income taxes 11,167 1,017 590 (820) 11,954
Provision for income taxes 3,571 521 266 - 4,358
---------- ------------ ------------- ------------ ------------
Net income $7,596 $496 $324 $(820) $7,596
========== ============ ============= ============ ============
14
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended September 30, 2005
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $3,153 $60 $1,085 $(4,134) $164
Investing activities
Acquisition of fixed assets (880) (537) (399) - (1,816)
Purchases of short-term investments (16,325) - - - (16,325)
Sales of short-term investments 29,527 109 - - 29,636
Acquisitions of businesses, net of cash acquired,
and other investing activities (21) (82) - - (103)
Investment in subsidiaries (4,134) - - 4,134 -
--------- ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 8,167 (510) (399) 4,134 11,392
--------- ------------ ------------ ------------ ------------
Financing activities
Net proceeds from issuance of stock 1,620 - - - 1,620
Treasury stock purchases (1,747) - - - (1,747)
Payments of long-term obligations (85) - (97) - (182)
Excess tax benefit from stock-based compensation 351 - - - 351
-------------------------------------------------------------
Net cash provided by (used in) financing activities 139 - (97) - 42
-------------------------------------------------------------
Effect of exchange rate changes on cash and cash
equivalents - (13) 294 - 281
--------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 11,459 (463) 883 - 11,879
Cash and cash equivalents at beginning of year 24,366 29,821 10,169 - 64,356
--------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $35,825 $29,358 $11,052 $- $76,235
========= ============ ============ ============ ============
15
VERTRUE INCORPORATED
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended September 30, 2004
-------------------------------------------------------------
Guarantor Nonguarantor Consolidated
Parent Subsidiaries Subsidiaries Eliminations Total
--------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities $95,806 $(86,872) $(205) $(820) $7,909
Investing activities
Acquisition of fixed assets (435) (161) (123) - (719)
Purchases of short-term investments (211,548) (245) - - (211,793)
Sales of short-term investments 205,980 - - - 205,980
Acquisitions of businesses, net of cash acquired,
and other investing activities (358) 662 - - 304
Investment in subsidiaries (94,146) 93,326 - 820 -
--------- ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (100,507) 93,582 (123) 820 (6,228)
--------- ------------ ------------ ------------ ------------
Financing activities
Net proceeds from issuance of stock 919 - - - 919
Treasury stock purchases (7,250) - - - (7,250)
Debt issuance costs (583) - - - (583)
Payments of long-term obligations (82) (8) - - (90)
--------- ------------ ------------ ------------ ------------
Net cash provided by financing activities (6,996) (8) - - (7,004)
--------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on cash and cash
equivalents - (88) 260 - 172
--------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (11,697) 6,614 (68) - (5,151)
Cash and cash equivalents at beginning of year 18,251 26,657 2,258 - 47,166
--------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $6,554 $33,271 $2,190 $- $42,015
========= ============ ============ ============ ============
NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections - A replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). This statement requires retrospective application to prior
periods' financial statements of changes in accounting principles unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. This statement applies to all voluntary changes in
accounting principles and changes required by an accounting pronouncement that
does not include specific transition provisions. SFAS 154 is effective beginning
in the Company's first quarter of fiscal 2007. The Company does not expect the
adoption of SFAS 154 to have a material effect on its consolidated financial
position, results of operations or cash flows.
16
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, critical accounting policies and reportable business segments.
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" of this Quarterly Report on Form 10-Q. A description and
reconciliation of net income to EBITDA are disclosed in "Reconciliation of
Non-GAAP Measures" of this Quarterly Report on Form 10-Q.
Percent
Three months ended Increase
September 30, (Decrease)
--------------------------------------
(Dollars in millions) 2005 2004 '05 vs. '04
----------- ----------- -------------
Revenues $157.5 $135.6 16%
Marketing expenses 73.9 68.5 8%
Operating expenses 35.1 24.2 45%
General and administrative expenses 28.5 24.6 16%
Amortization of intangibles 2.4 1.5 60%
----------- ----------- -------------
Operating income 17.6 16.8 5%
Interest expense, net (4.5) (4.6) (2%)
Other expense, net - (0.2) (100%)
----------- ----------- -------------
Income before income taxes 13.1 12.0 9%
Provision for income taxes 4.5 4.4 2%
----------- ----------- -------------
Net income 8.6 7.6 13%
=========== =========== =============
EBITDA $24.0 $21.4 12%
=========== =========== =============
17
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:
Percent
Three months ended Increase/
September 30, (Decrease)
-------------------------------- ---------------
Revenues 2005 2004 '05 vs. '04
--------------- --------------- ---------------
Monthly payment plans $ 83.1 $ 49.5 68%
Annual payment plans:
Initial year 9.6 19.1 (50)%
Renewal year 31.1 41.9 (26)%
Other 8.0 6.8 18%
--------------- --------------- ---------------
Total Marketing Services 131.8 117.3 12%
Personals 18.5 18.3 1%
Corporate and Other 7.2 - NM
--------------- --------------- ---------------
Total $ 157.5 $ 135.6 16%
=============== =============== ===============
Revenues increased $21.9 million, or 16%, in the 2006 fiscal first quarter
primarily due to the inclusion of revenues from the Acquired Companies.
Excluding revenues from the Acquired Companies, revenues would have increased 4%
due to an increase in Marketing Services' revenues, as discussed below. Net
active members and customers increased 5% to 6.4 million at September 30, 2005
from 6.1 million at September 30, 2004.
Marketing Services' revenues increased $14.5 million, or 12%, in the 2006 fiscal
first quarter primarily due to the inclusion of revenues from Bargain. Excluding
revenues from Bargain, total marketing services revenues would have increased 5%
and revenues from members enrolled in monthly payment plans would have increased
51% over the prior year. The increase in revenues from monthly payment plans was
due to a 45% increase in average monthly members billed and a 15% 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 $0.2 million, or 1%, in the 2006 fiscal first
quarter primarily due to the incremental revenue generated from Lavalife's
growing mobile service. Corporate and Other revenues represent the revenues from
MCM.
Marketing expenses increased $5.4 million, or 8%, in the 2006 fiscal first
quarter and as a percent of revenues, were 47% 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 marketing efforts which
resulted in increased revenues, as discussed above.
Operating expenses increased $10.9 million, or 45%, in the 2006 fiscal first
quarter and, as a percent of revenue, were 22% this year versus 18% last year.
These increases were primarily due to the inclusion of expenses incurred by the
Acquired Companies in addition to increased costs of servicing the higher member
and customer base. The Acquired Companies have a higher proportion of their cost
structure included as operating expenses which resulted in an increase in the
operating expense ratio.
General and administrative expenses increased $3.9 million, or 16%, in the 2006
fiscal first 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"). Excluding this expense, general and administrative
expenses would have increased 11% and, as a percent of revenues, would have been
17% this quarter versus 18% in the prior year quarter. The increase in general
and administrative expenses was primarily due to the inclusion of expenses
incurred by the Acquired Companies.
Amortization of intangible assets increased $0.9 million, or 60%, in the 2006
fiscal first quarter due to amortization expense related to the Acquired
Companies.
Operating income increased $0.8 million, or 5%, in the 2006 fiscal first quarter
primarily due to the inclusion of the Acquired Companies' results of operations.
As a percent of revenues, operating income was 11% this year and 12% last year
and decreased primarily due to the $1.1 million charge related to the adoption
of SFAS 123R.
18
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense, net decreased $0.1 million, or 2%, in the 2006 fiscal first
quarter and included $3.6 million interest expense related to the 9.25% Senior
Notes and $1.2 million of interest expense related to the 5.5% Convertible
Notes.
The provision for income taxes increased $0.1 million, or 2%, in the 2006 fiscal
first quarter and was based on an effective tax rate of 34.3% this year versus
36.5% last year. The effective tax rate decreased from the prior year primarily
due to the impact of the Lavalife acquisition.
EBITDA increased $2.6 million, or 12%, in the 2006 fiscal first quarter
primarily due to the inclusion of the Acquired Companies' results. As a percent
of revenues, EBITDA was 15% this quarter and 16% in the prior year quarter and
decreased primarily due to the $1.1 million charge related to the adoption of
SFAS 123R. Marketing Services EBITDA increased $2.8 million, or 12%, to $27.0
million in the 2006 fiscal first quarter. Personals EBITDA remained flat at $2.3
million in the 2006 fiscal first quarter. Corporate and Other EBITDA decreased
$0.2 million, or 4%, to $(5.3) million in the 2006 fiscal first quarter.
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
decreased to $0.2 million in the 2006 fiscal first quarter from $7.9 million in
the 2005 fiscal first quarter. 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, operating expenses, general
and administrative expenses, 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" of this Quarterly Report on Form 10-Q.
The table below summarizes the components of revenues before deferral for the
three months ended September 30:
Percent
Three months ended Increase/
September 30, (Decrease)
-------------------------------- ---------------
Revenues before deferral 2005 2004 '05 vs. '04
--------------- --------------- ---------------
Monthly payment plans $ 83.6 $ 50.3 66%
Annual payment plans:
Initial year 7.4 9.6 (23)%
Renewal year 23.6 33.9 (30)%
Other 7.9 6.9 14%
--------------- --------------- ---------------
Total Marketing Services 122.5 100.7 22%
Personals 18.4 18.6 1%
Corporate and Other 7.0 - NM
--------------- --------------- ---------------
Total $ 147.9 $ 119.3 24%
=============== =============== ===============
Revenues before deferral increased 24% to $147.9 million in the 2006 fiscal
first quarter primarily due to revenues before deferral generated by the
Acquired Companies. Excluding revenues before deferral from the Acquired
Companies, revenues before deferral would have increased 11% over the prior
year. Revenues before deferral from monthly payment plans increased 66% due to a
45% increase in average monthly members billed to 2.0 million in the 2006 fiscal
first quarter and a 15% increase in the monthly weighted average program price
points which increased to $13.60 for the 2006 fiscal first quarter. The average
monthly members billed increased due to the increase in the mix of new members
enrolled in monthly payment plan programs, which was 88% during the 2006
fiscal first quarter and 83% in the 2005 fiscal first quarter. 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 $105 for the three months ended September 30, 2005 and 2004,
respectively. Personals revenue before deferral declined 1% from the prior year
due to declines in the U.S. market, which more than offset the increased
revenues before deferral related to mobile services. Corporate and Other
revenues before deferral represent the revenues from MCM in the 2006 fiscal
first quarter.
19
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marketing costs before deferral were $69.9 million and $62.2 million in the 2006
and 2005 fiscal first quarters, respectively. As a percent of revenue before
deferral, marketing costs before deferral were 47% and 52% in the 2006 and 2005
fiscal first quarters, respectively. The improved ratio is due to marketing
efficiencies achieved as a result of higher response rates and better customer
retention. Marketing costs before deferral increased 12% in the 2006 fiscal
first quarter primarily due to the inclusion of marketing costs before deferral
from the Acquired Companies.
Marketing margin before deferral was $78.0 million and $57.1 million for the
three months ended September 30, 2005 and 2004, respectively. The effect of the
increase in marketing margin before deferral in the 2006 fiscal first quarter on
net cash provided by operating activities was partially offset by increased
operating and general and administrative expenses and resulted in a $7.0
million, or 61%, increase in Adjusted EBITDA to $18.4 million for the 2006
fiscal first quarter from $11.4 million for the 2005 fiscal first quarter.
During the 2006 fiscal first quarter, tax payments of $5.2 million were made
versus $0.2 million for the 2005 fiscal first quarter. In addition, changes in
assets and liabilities resulted in a $10.0 million use of cash in the 2006
fiscal first quarter compared to $1.2 million of cash provided by changes in
assets and liabilities in the 2005 fiscal first quarter. The use of cash in 2006
primarily related to the timing of trade payments during the quarter.
Capital expenditures were $1.8 million and $0.7 million in the 2006 and 2005
fiscal first quarters, respectively. As a result, free cash flow, defined as
operating cash flow less capital expenditures, also decreased to $(1.6) million
for the 2006 fiscal first quarter from $7.2 million for the 2005 fiscal first
quarter.
Net cash provided by (used in) investing activities was $11.4 million and $(6.2)
million in the first quarters of 2006 and 2005, respectively. Net cash provided
by investing activities in the first quarter of 2006 primarily reflected $13.3
million of net proceeds from sales of short-term investments. Net cash used in
investing activities in the first quarter of fiscal 2005 primarily reflected
$5.8 million of net cash used to purchase short-term investments.
Net cash provided by (used in) financing activities was $42,000 in the first
quarter of 2006 and $(7.0) million in the first quarter of 2005. Net cash
provided by financing activities in 2006 principally reflected proceeds from the
exercise of stock options of $1.6 million and excess tax benefit from
stock-based compensation of $0.4 million, which was almost offset by the use of
$1.7 million to repurchase the Company's stock. Net cash used in financing
activities in the first quarter of 2005 principally reflected the use of $7.3
million to repurchase the Company's stock, which was partially offset by
proceeds from the exercise of stock options of $0.9 million.
Debt Issuances
As of September 30, 2005, the Company had $240.0 million of debt outstanding. In
September 2003, the Company issued $90.0 million aggregate principal amount of
5.5% convertible senior subordinated notes ("Convertible Notes") due September
2010. The Convertible Notes were registered in 2004. The Convertible Notes bear
interest at the rate of 5.5% per year, which is payable in cash semi-annually in
arrears on April 1 and October 1. Upon a change in control, holders of the
Convertible Notes may require the Company to repurchase all or part of the
Convertible Notes for cash.
In April 2004, the Company issued $150.0 million aggregate principal amount of
9.25% Senior Notes due April 2014. The Senior Notes were registered in fiscal
2005. The Senior Notes were sold at 98.418% of the principal amount which
resulted in an effective yield of 9.5%. Interest on the Senior Notes is payable
in cash semi-annually in arrears on April 1 and October 1. A portion of the
proceeds from the offering of the Senior Notes was used to repay amounts
borrowed under the senior secured credit facility to fund a portion of the
Lavalife acquisition.
Credit Facility
The Company has a senior secured credit facility, which matures on March 23,
2006 and allows borrowings of up to $45.0 million. Borrowings under the senior
secured credit facility accrue interest at either the Eurodollar rate, or the
higher of the Prime rate or the Federal Funds rate plus an applicable margin. As
of September 30, 2005, availability under the senior secured credit facility was
reduced by an outstanding letter of credit of $5.5 million and was $39.5
million. The Company expects to remove the $5.5 million letter of credit during
the quarter ended December 31, 2005. As of September 30, 2005, the effective
interest rate for borrowings under the senior secured credit facility was 6.75%.
The senior secured credit facility has certain financial covenants, including a
maximum debt coverage ratio, potential restrictions on additional borrowings and
potential restrictions on additional stock repurchases. As of September 30,
2005, the Company was in compliance with all such debt covenants.
20
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Stock Repurchase Program
The Company purchased 49,900 shares of its common stock for $1.7 million at an
average price of $35.01 per share during the first quarter of 2006 compared to
0.3 million shares for $7.3 million at an average price of $26.03 per share in
the first quarter of 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 September 30, 2005, the Company had 0.8 million shares available for
repurchase under its stock repurchase program.
Other
As of September 30, 2005, the Company had cash, cash equivalents and short-term
investments of $82.3 million in addition to its senior secured credit facility.
The Company believes that existing cash and short term investment balances
together with funds available under its senior secured credit facility will be
sufficient to meet its funding requirements for the foreseeable future.
The Company did not have any material commitments for capital expenditures as of
September 30, 2005. The Company expects to incur capital expenditures of $15.0
million in 2006. In addition, during the December 2005 quarter, the Company
expects pay $14.7 million related to the final contingent payment for the
Bargain acquisition and $5.5 million related to the payment of an arbitration
award. The Company intends to utilize cash on hand and cash generated from
operations to fulfill payment obligation requirements 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.
Revenues before deferral for the three months ended September 30, 2005 and 2004
are calculated as follows:
Three months ended September
30,
-------------------------------
2005 2004
--------------- --------------
Revenues $157.5 $135.6
Change in deferred revenues (9.6) (16.3)
--------------- --------------
Revenues before deferral $147.9 $119.3
=============== ==============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marketing costs before deferral for the three months ended September 30, 2005
and 2004 are calculated as follows:
Three months ended
September 30,
-------------------------
2005 2004
------------ -----------
Marketing expenses $73.9 $68.5
Change in deferred marketing costs (4.0) (6.3)
------------ -----------
Marketing costs before deferral $69.9 $62.2
============ ===========
Adjusted EBITDA and EBITDA are used by the Company's management to evaluate the
year over year performance of its business and to measure that performance
compared with internal budgets. Additionally, Adjusted EBITDA is used to
determine compensation under the Company's management incentive plans.
Adjusted EBITDA is useful to management and investors because it eliminates the
effects of interest and other expense, income taxes, noncash depreciation of
tangible assets, noncash amortization of intangible assets and the amortization
related to the recognition of GAAP revenues and GAAP marketing expenses and
therefore includes only membership fees billed in the current reporting period
and marketing costs paid or accrued in the current reporting period. Adjusted
EBITDA is reconciled to net cash provided by operating activities because the
Company believes that it is the most directly comparable liquidity measure.
Adjusted EBITDA is also reconciled to net income because it is also used by the
Company's management as a performance measure. EBITDA is useful to management
and investors because it eliminates the effects of interest and other expense,
income taxes, noncash depreciation of tangible assets and noncash 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 financial measure.
A limitation of Adjusted EBITDA and EBITDA is that they do not reflect the
periodic amortization of certain capitalized tangible and intangible assets used
in generating revenues in the Company's businesses nor do they reflect the
effects of interest and taxes.
These non-GAAP measures should be considered in addition to, not as a substitute
for or superior to, operating income, net income, operating cash flows or other
measures of financial performance and liquidity determined in accordance with
generally accepted accounting principles.
The following table reconciles net cash provided by operating activities to
Adjusted EBITDA for the three months ended September 30 (in millions):
Three months ended
September 30,
----------------------
2005 2004
---------- ----------
Net cash provided by operating activities $ 0.2 $ 7.9
Changes in assets and liabilities 10.0 (1.2)
Interest and other expense, net (to be paid in cash) 4.2 4.4
Taxes 5.1 1.1
Stock compensation expense (1.1) -
Other - (0.8)
---------- ----------
Adjusted EBITDA $ 18.4 $ 11.4
========== ==========
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VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables reconcile net income to EBITDA and Adjusted EBITDA for the
three months ended September 30 (in millions):
Three months ended September 30, 2005
---------------------------------------------------
Marketing Corporate and Consolidated
Services Personals Other Total
---------- ---------- ----------- --------------
Net income $8.6
Interest and other expense, net (1) 4.5
Provision for income taxes (1) 4.5
-------------
Operating income (expense) $23.7 $(0.1) $(6.0) $17.6
Depreciation and amortization 3.3 2.4 0.7 6.4
---------- ---------- ----------- -------------
EBITDA 27.0 2.3 (5.3) 24.0
Change in deferred revenues (9.3) (0.1) (0.2) (9.6)
Change in deferred marketing 4.0 - - 4.0
---------- ---------- ----------- -------------
Adjusted EBITDA $21.7 $2.2 $(5.5) $18.4
========== ========== =========== =============
Three months ended September 30, 2004
--------------------------------------------------
Marketing Corporate and Consolidated
Services Personals Other Total
---------- ----------- ----------- -----------
Net income $7.6
Interest and other expense, net (1) 4.8
Provision for income taxes (1) 4.4
-----------
Operating income (expense) $22.1 $(0.1) $(5.2) $16.8
Depreciation and amortization 2.1 2.4 0.1 4.6
---------- --------- ----------- -----------
EBITDA 24.2 2.3 (5.1) 21.4
Change in deferred revenues (16.6) 0.3 - (16.3)
Change in deferred marketing 6.3 - - 6.3
---------- --------- ----------- -----------
Adjusted EBITDA $13.9 $2.6 $(5.1) $11.4
========== ========= =========== ===========
(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 the cash that a company is able to generate after
fulfilling its requirements to maintain or expand the company's asset base. Free
cash flow is important because it allows 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 for the three months ended September 30 (in millions):
Three months ended
September 30,
----------------------
2005 2004
---------- ----------
Net cash provided by operating activities $ 0.2 $ 7.9
Capital expenditures (1.8) (0.7)
---------- ----------
Free cash flow $ (1.6) $ 7.2
========== ==========
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.
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VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Future minimum payments of contractual obligations as of September 30, 2005 are
as follows (amounts in millions):
Payments Due by Period
-------------------------------------------------------
Less than 1 1 - 3 3 - 5 After 5
Total year years years years
---------- ------------ --------- ---------- ----------
Operating leases $52.8 $9.4 $17.2 $12.4 $13.8
Capital leases 2.0 0.8 1.1 0.1 -
Long-term debt 240.0 - - 90.0 150.0
Purchase obligations 15.1 11.2 3.9 - -
Other (1) 182.9 44.9 37.7 38.0 62.3
---------- --------- ---------- ---------- ----------
Total payments due $492.8 $66.3 $59.9 $140.5 $226.1
========== ========= ========== ========== ==========
(1) Includes $14.7 million related to the final contingent payment for the
Bargain acquisition and $5.5 million related to an arbitration award that
were paid in the December 2005 quarter. Also includes interest payments on
long-term debt, pension obligations and expected contingent payments related
to the MCM acquisition.
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 are made pursuant to safe harbor provisions of 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;
24
VERTRUE INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 required by law, the Company has no
obligation and does not intend to publicly update any forward looking
statements, whether as a result of new information, future events or otherwise.
25
VERTRUE INCORPORATED
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate
The Company has a senior secured credit facility, which matures on March
23, 2006 and allows borrowings of up to $45.0 million. Borrowings under this
senior secured credit facility accrue interest at either the Eurodollar rate or
the higher of the Prime rate or the Federal Funds rate plus an applicable
margin. There were no borrowings outstanding under this senior secured credit
facility as of September 30, 2005. As of September 30, 2005, availability under
the senior secured credit facility was reduced by an outstanding letter of
credit of $5.5 million and was $39.5 million. The Company expects to remove the
$5.5 million letter of credit during the quarter ending December 31, 2005. As of
September 30, 2005, the effective interest rate for borrowings under the senior
secured credit facility was 6.75%. Management believes that an increase in the
Eurodollar rate, the Prime rate or the Federal Funds rate would not be material
to the Company's financial position or its results of operations.
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 September 30, 2005, 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 $99.0 million and $150.0
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 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.
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VERTRUE INCORPORATED
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 first 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.
27
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 is involved in other
lawsuits and claims generally incidental to its business including, but not
limited to, various suits, including previously disclosed suits, brought against
the Company by individual consumers seeking monetary and/or injunctive relief
relating to the marketing of the Company's programs. In addition, from time to
time in the regular course of its business, the Company receives inquiries from
various federal and/or state regulatory authorities.
On October 17, 2005, the U.S. Supreme Court declined to review the Connecticut
Supreme Court's May 10, 2005 decision against the Company to uphold an
arbitration panel's award of $5.5 million in punitive damages and costs to
MedValUSA Health Programs, Inc. Accordingly, the Company will pay the full
amount of the award 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 settlement. As a result, payment of the award will not affect
the Company's results of operations for the quarter ending December 31, 2005.
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:
Total Number of Maximum Number
Shares of Shares
Purchased as that May Yet
Part of Be Purchased
Total Number Average Publicly Under the
of Shares Price Paid Announced Plans Plans
Period Purchased per Share or Programs (1) or Programs
-------------------------------------------- ----------- ----------- --------------- --------------
July 1, 2005 to July 31, 2005 - $ - - 825,230
August 1, 2005 to August 31, 2005 30,000 35.24 30,000 795,230
September 1, 2005 to September 30, 2005 19,900 34.67 19,900 775,330
----------- ---------------
Total 49,900 $ 35.01 49,900 775,330
=========== ===============
(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.
28
VERTRUE INCORPORATED
PART II. OTHER INFORMATION
Item 6. Exhibits
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.
29
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: November 9, 2005 By: /s/ Gary A. Johnson
-----------------------------
Gary A. Johnson, President, Chief
Executive Officer and Director
November 9, 2005 By:/s/ James B. Duffy
----------------------------------
James B. Duffy, Executive Vice
President and Chief Financial Officer
(Principal Financial and Accounting
Officer)
30