Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For the fiscal year ended December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-34480
VERISK ANALYTICS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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26-2994223
(I.R.S. Employer Identification No.) |
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545 Washington Boulevard Jersey City, NJ
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07310-1686 |
(Address of principal executive offices)
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(Zip Code) |
(201) 469-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Class A common stock $.001 par value
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes þ No
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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
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o Large accelerated filer
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o Accelerated filer
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þ Non-accelerated filer
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o Smaller reporting company |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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The registrant completed the initial public offering of its common stock in October 2009.
Accordingly, there was no public market for the registrants common stock as of June 30, 2009, the
last day of the registrants most recently completed second fiscal quarter. The aggregate market value of the registrants common stock held by non-affiliates of the registrant, computed by reference
to the closing sales price as quoted on March 8, 2010 was approximately $4,494,391,216.
The number of shares outstanding of each of the registrants classes of common stock, as of March 5, 2010 was:
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Class |
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Shares Outstanding |
Class A common stock $.001 par value
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125,815,600 |
Class B (Series 1) common stock $.001 par value
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27,118,975 |
Class B (Series 2) common stock $.001 par value
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27,118,975 |
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this annual report on Form 10-K is
incorporated by reference to our definitive Proxy Statement for our 2010 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December
31, 2009.
Unless the context otherwise indicates or requires, as used in this annual report on Form 10-K,
references to we, us, our or the Company refer to Verisk Analytics, Inc. and its
subsidiaries.
In this annual report on Form 10-K, all dollar amounts are expressed in thousands, unless indicated
otherwise.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Verisk Analytics, Inc., or Verisk, has made statements under the captions Business, Risk Factors,
Managements Discussion and Analysis of Financial Condition and Results of Operations,
and in other sections of this annual report on Form 10-K that are forward-looking statements. In
some cases, you can identify these statements by forward-looking words such as may, might,
will, should, expects, plans, anticipates, believes, estimates, predicts,
potential, or continue, the negative of these terms and other comparable terminology. These
forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may
include projections of our future financial performance, our anticipated growth strategies and
anticipated trends in our business. These statements are only predictions based on our current
expectations and projections about future events. There are important factors that could cause our
actual results, level of activity, performance or achievements to differ materially from the
results, level of activity, performance or achievements expressed or implied by the forward-looking
statements, including those factors discussed under the caption entitled Risk Factors. You should
specifically consider the numerous risks outlined under Risk Factors.
Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness
of any of these forward-looking statements. We are under no duty to update any of these
forward-looking statements after the date of this annual report on Form 10-K to conform our prior
statements to actual results or revised expectations.
PART I
Item 1. Business
Our Company
Verisk Analytics, Inc. enables risk-bearing businesses to better understand and manage their
risks. We provide value to our customers by supplying proprietary data that, combined with our
analytic methods, creates embedded decision support solutions. We are the largest aggregator and
provider of detailed actuarial and underwriting data pertaining to United States, or U.S., property
and casualty, or P&C, insurance risks. We offer solutions for detecting fraud in the U.S. P&C
insurance, healthcare and mortgage industries, and sophisticated methods to predict and quantify
loss in diverse contexts ranging from natural catastrophes to health insurance.
Our customers use our solutions to make better risk decisions with greater efficiency and
discipline. We refer to these products and services as solutions due to the integration among our
services and the flexibility that enables our customers to purchase components or the comprehensive
package. These solutions take various forms, including data, statistical models or tailored
analytics, all designed to allow our clients to make more logical decisions. We believe our
solutions for analyzing risk positively impact our customers revenues and help them better manage
their costs. In 2009, our U.S. customers included all of the top 100
P&C insurance providers, numerous health plans and third party
administrators, five of the six leading mortgage insurers, 14
of the top 20 mortgage lenders, and the 10 largest global reinsurers. We believe that our commitment
to our customers and the embedded nature of our solutions serve to strengthen and extend our
relationships. For example, 99 of our top 100 customers in 2009, as ranked by
revenue, have been our customers for each of the last five years. Further, from 2005 to 2009,
revenues generated from these top 100 customers grew at a compound annual growth rate, or CAGR, of
12.3%.
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We help those businesses address what we believe are the four primary decision making
processes essential for managing risk as set forth below in the Verisk Risk Analysis Framework:
The Verisk Risk Analysis Framework
These four processes correspond to various functional areas inside our customers operations:
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our loss predictions are typically used by P&C insurance and healthcare actuaries,
advanced analytics groups and loss control groups to help drive their own assessments of
future losses; |
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our risk selection and pricing solutions are typically used by underwriters as they
manage their books of business; |
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our fraud detection and prevention tools are used by P&C insurance, healthcare and
mortgage underwriters to root out fraud prospectively and by claims departments to speed
claims and find fraud retroactively; and |
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our tools to quantify loss are primarily used by claims departments, independent
adjustors and contractors. |
We add value by linking our solutions across these four key processes; for example, we use the
same modeling methods to support the pricing of homeowners insurance policies and to quantify the
actual losses when damage occurs to insured homes.
We offer our solutions and services primarily through annual subscriptions or long-term
agreements, which are typically pre-paid and represented approximately 71.0% of our revenues in
2009. For the year ended December 31, 2009, we had revenues of $1,027.1 million and net income of $126.6 million.
Prior to our initial public offering, we accelerated our Employee
Stock Ownership Plan, or ESOP, allocation resulting in a one time,
non-cash charge of $57.7 million. For the five year period ended
December 31, 2009, our revenues and net income grew at a CAGR of
12.3% and 10.3%, respectively, excluding the accelerated ESOP charge
in 2009.
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Our History
We trace our history to 1971, when Insurance Services Office, Inc., or ISO, started operations
as a not-for-profit advisory and rating organization providing services for the U.S. P&C insurance
industry. ISO was formed as an association of insurance companies to gather statistical data and
other information from insurers and report to regulators, as required by law. ISOs original
functions also included developing programs to help insurers define and manage insurance products
and providing information to help insurers determine their own independent premium rates. Insurers
used and continue to use our offerings primarily in their product development, underwriting and
rating functions. Today, those businesses form the core of our Risk Assessment segment.
Over the past decade, we have transformed our business beyond its original functions by
deepening and broadening our data assets, developing a set of integrated risk management solutions
and services and addressing new markets through our Decision Analytics segment.
Our expansion into analytics began when we acquired the American Insurance Services Group, or
AISG, and certain operations and assets of the National Insurance Crime Bureau in 1997 and 1998,
respectively. Those organizations brought to the company large databases of insurance claims, as
well as expertise in detecting and preventing claims fraud. To further expand our Decision
Analytics segment, we acquired AIR Worldwide, or AIR, in 2002, the technological leader in
catastrophe modeling. In 2004, we entered the healthcare space by acquiring several businesses that
now offer web-based analytical and reporting systems for health insurers, provider organizations
and self-insured employers. In 2005 we entered the mortgage lending sector, acquiring the first of
several businesses that now provide automated fraud detection, compliance and decision support
solutions for the U.S. mortgage industry. In 2006, to bolster our position in the claims field we
acquired Xactware, a leading supplier of estimating software for professionals involved in building
repair and reconstruction.
These acquisitions have added scale, geographic reach, highly skilled workforces, and a wide
array of new capabilities to our Decision Analytics segment. They have helped to make us a leading
provider of information and decision analytics for customers involved in the business of risk in
the U.S. and selectively around the world.
Our senior management operating team, which includes our chief executive officer, chief
financial officer, chief operating officer, general counsel, and the three senior officers who lead
our largest business units, have been with us for an average of almost twenty years. This team has
led our transformation to a successful for-profit entity, focused on growth with our U.S. P&C
insurer customers and expansion into a variety of new markets.
On May 23, 2008, in contemplation of our initial public offering, ISO formed Verisk Analytics,
Inc., or Verisk, a Delaware corporation, to be the holding company for our business. Verisk was
initially formed as a wholly-owned subsidiary of ISO. On October 6, 2009, in connection with our
initial public offering, the company effected a reorganization whereby ISO became a wholly-owned
subsidiary of Verisk. Verisk Class A common stock began trading on the NASDAQ Global Select Market
on October 7, 2009 under the symbol VRSK.
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Segments
We organize our business in two segments: Risk Assessment and Decision Analytics.
Risk Assessment Segment
Our Risk Assessment segment serves our P&C insurance customers and focuses on the first two
decision making processes in our Risk Analysis Framework: prediction of loss and selection and
pricing of risk. Within this segment, we also provide solutions to help our insurance customers
comply with their reporting requirements in each U.S. state in which they operate. Our customers
include most of the P&C insurance providers in the U.S. and we have retained approximately
99.0% of our P&C insurance customer base within the Risk Assessment segment in each of the last
five years.
Statistical Agent and Data Services
The P&C insurance industry is heavily regulated in the U.S. P&C insurers are
required to collect statistical data about their premiums and losses and to report that data to
regulators in every state in which they operate. Our statistical agent services have enabled P&C
insurers to meet these regulatory requirements for over 30 years. We aggregate the data and, as a
licensed statistical agent in all 50 states, Puerto Rico and the District of Columbia, we report
these statistics to insurance regulators. We are able to capture significant economies of scale
given the level of penetration of this service within the U.S. P&C insurance industry.
To provide our customers and the regulators the information they require, we maintain one of
the largest private databases in the world. Over the past four decades, we have developed core
expertise in acquiring, processing, managing, and operating large and comprehensive databases that
are the foundation of our Risk Assessment segment. We use our proprietary technology to assemble,
organize and update vast amounts of detailed information submitted by our customers. We supplement
this data with publicly available information.
Each year, P&C insurers send us approximately 2.9 billion detailed individual records of
insurance transactions, such as insurance premiums collected or losses incurred. We maintain a
database of over 14.5 billion statistical records, including over 5 billion commercial lines
records and approximately 9.4 billion personal lines records. We collect unit-transaction detail of
each premium and loss record, which enhances the validity, reliability and accuracy of our data
sets and our actuarial analyses. Our proprietary quality process includes almost 2,500 separate
checks to ensure that data meet our high standards of quality.
Actuarial Services
We provide actuarial services to help our customers price their risks as they underwrite. We
project future losses and loss expenses utilizing a broad set of data. These projections tend to be
more reliable than if our customers used solely their own data. We provide loss costs by coverage,
class, territory, and many other categories. Our customers can use our estimates of future loss
costs in making independent decisions about the prices charged for their policies. For most P&C
insurers, in most lines of business, we believe our loss costs are an essential input to rating
decisions. We make a number of actuarial adjustments, including loss development and loss
adjustment expenses before the data is used to estimate future loss costs. Our actuarial services
are also used to create the analytics underlying our industry-standard insurance programs described
below.
Our employees include over 200 actuarial professionals, including 43 Fellows and 26 Associates
of the Casualty Actuarial Society, as well as 145 Chartered Property Casualty Underwriters, 12
Certified and 23 Associate Insurance Data Managers, 178 members of the Insurance Data Management
Association and 145 professionals with advanced degrees, including PhDs in mathematics and
statistical modeling who review both the data and the models.
Using our large database of premium and loss data, our actuaries are able to perform
sophisticated analyses using our predictive models and analytic methods to help our P&C insurance
customers with pricing, loss reserving, and marketing. We distribute a number of actuarial products
and offer flexible services to meet our customers needs. In addition, our actuarial consultants
provide customized services for our clients that include assisting them with the development of
independent insurance programs, analysis of their own underwriting experience, development of
classification systems and rating plans, and a wide variety of other business decisions. We also
supply information to a wide variety of customers in other markets including reinsurance,
government agencies and real estate.
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Industry-Standard Insurance Programs
We are the recognized leader in the U.S. for industry-standard insurance programs
that help P&C insurers define coverages and issue policies. Our policy language, prospective loss
cost information and policy writing rules can serve as integrated turnkey insurance programs for
our customers. Insurance companies need to ensure that their policy language, rules, and rates
comply with all applicable legal and regulatory requirements. Insurers must also make sure their
policies remain competitive by promptly changing coverages in response to changes in statutes or
case law. To meet their needs, we process and interface with state regulators on average over 4,000
filings each year, ensuring smooth implementation of our rules and forms. When insurers choose to
develop their own alternative programs, our industry-standard insurance programs also help
regulators make sure that such insurers policies meet basic coverage requirements.
Standardized coverage language, which has been tested in litigation and tailored to reflect
judicial interpretation, helps to ensure consistent treatment of claimants. As a result, our
industry-standard language also simplifies claim settlements and can reduce the occurrence of
costly litigation, because our language causes the meaning of coverage terminology to become
established and known. Our policy language includes standard coverage language, endorsements and
policy writing support language that assist our customers in understanding the risks they assume
and the coverages they are offering. With these policy programs, insurers also benefit from
economies of scale. We have over 200 specialized lawyers and insurance experts reviewing
changes in each states insurance rules and regulations, including on average over 11,200
legislative bills, 1,100 regulatory actions and 2,000 court cases per year, to make any required
changes to our policy language and rating information.
To cover the wide variety of risks in the marketplace, we offer a broad range of policy
programs. For example, in the homeowners line of insurance, we maintain policy language and rules
for six basic coverages, 180 national endorsements, and 489 state-specific endorsements. Overall,
we provide policy language, prospective loss costs, policy writing
rules, and a variety of other solutions for 24 lines of insurance.
Property-Specific Rating and Underwriting Information
We gather information on individual properties and communities so that insurers can use our
information to evaluate and price personal and commercial property insurance, as well as commercial
liability insurance. Our property-specific rating and underwriting information allow our customers
to understand, quantify, underwrite, mitigate, and avoid potential loss for residential and
commercial properties. Our database contains loss costs and other vital information on
approximately 2.8 million commercial buildings in the United States and also holds information on
approximately 5.4 million individual businesses occupying those buildings. We have a staff of more
than 600 field representatives strategically located around the United States who observe and
report on conditions at commercial and residential properties, evaluate community fire-protection
capabilities and assess the effectiveness of municipal building-code enforcement. Each year, our
field staff visits over 350,000 commercial properties to collect information on new buildings and
verify building attributes.
We also provide proprietary analytic measures of the ability of individual communities to
mitigate losses from important perils. Nearly every property insurer in the U.S. uses our
evaluations of community firefighting capabilities to help determine premiums for fire insurance
throughout the country. We provide field-verified and validated data on the fire protection
services for more than 46,000 fire response jurisdictions. We also offer services to evaluate the
effectiveness of community enforcement of building codes and the efforts of communities to mitigate
damage from flooding. Further, we provide information on the insurance rating territories, premium
taxes, crime risk, and hazards of windstorm, earthquake, wildfire, and other perils. To supplement
our data on specific commercial properties and individual communities, we have assembled, from a
variety of internal and third-party sources, information on hazards related to geographic locations
representing every postal address in the U.S. Insurers use this information not only for
policy quoting but also for analyzing risk concentration in geographical areas.
Decision Analytics Segment
In the Decision Analytics segment, we support all four phases of our Risk Analysis Framework.
We develop predictive models to forecast scenarios and produce both standard and customized
analytics that help our customers better predict loss, select and price risk, detect fraud before
and after a loss event, and quantify losses.
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As we develop our models to quantify loss and detect fraud, we improve our ability to predict
the loss and prevent the fraud from happening. We believe this provides us with a significant
competitive advantage over firms that do not offer solutions which operate both before and after
loss events.
Fraud Detection and Prevention
P&C Insurance
We are a leading provider of fraud-detection tools for the P&C insurance industry. Our fraud
solutions improve our customers profitability by both predicting the likelihood that fraud is
occurring and detecting suspicious activity after it has occurred. When a claim is submitted, our
system searches our database and returns information about other claims filed by the same
individuals or businesses (either as claimants or insurers) that help our customers determine if
fraud has occurred. The system searches for matches in identifying information fields, such as
name, address, Social Security number, vehicle identification number, drivers license number, tax
identification number, or other parties to the loss. Our system also includes advanced name and
address searching to perform intelligent searches and improve the overall quality of the matches.
Information from match reports speeds payment of meritorious claims while providing a defense
against fraud and can lead to denial of a claim, negotiation of a reduced award or further
investigation by the insurer or law enforcement.
We have a comprehensive system used by claims adjusters and investigations professionals to
process claims and fight fraud. Claims databases are one of the key tools in the fight against
insurance fraud. The benefits of a single all-claims database include improved efficiency in
reporting data and searching for information, enhanced capabilities for detecting suspicious
claims and superior information for investigating fraudulent claims, suspicious individuals and
possible fraud rings. Our database contains information on more than 668 million claims and is the
worlds largest database of claims information. Insurers and other participants submit new claim
reports, more than 235,000 a day on average, across all categories of the U.S. P&C insurance
industry.
We also provide a service allowing insurers to report thefts of automobiles and property,
improving the chances of recovering those items; a service that helps owners and insurers recover
stolen heavy construction and agricultural equipment; an expert scoring system that helps
distinguish between suspicious and meritorious claims; and products that use link-analysis
technology to help visualize and fight insurance fraud.
We have begun to expand our fraud solutions to overseas markets. We built and launched a
system in Israel in 2006 that provides claims fraud detection, claims investigation support and
some underwriting services to all Israeli insurers.
Mortgage
We are a leading provider of automated fraud detection, compliance and decision-support tools
for the mortgage industry. Utilizing our own loan level application database combined with actual
mortgage loan performance data, we have established a risk scoring system which increases our
customers ability to detect fraud. We provide solutions that detect fraud through each step of the
mortgage lifecycle and provide regulatory compliance solutions that perform instant compliance
reviews of each mortgage application. Our fraud solutions can improve our customers profitability
by predicting the likelihood that a customer account is experiencing fraud. Our solution analyzes
customer transactions in real time and generates recommendations for immediate action which are
critical to stopping fraud and abuse. These applications can also detect some organized fraud
schemes that are too complex and well-hidden to be identified by other methods.
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Effective fraud detection relies on pattern identification, which in turn requires us to
identify, isolate and track mortgage applications through time. Histories of multiple loans, both
valid and fraudulent, are required to compare a submitted loan both to actual data and heuristic
analyses. For this reason, unless fraud detection solutions are fueled by comprehensive data, their
practicality is limited. Our proprietary database contains more than 13 million current and
historical loan applications collected over the past three years. This database contains data from
loan applications as well as supplementary third-party data.
Our technology employs sophisticated models to identify patterns in the data. Our solution
provides a score, which predicts whether the information provided by a mortgage applicant is
correct. Working with data obtained through our partnership with a credit bureau, we have
demonstrated a strong correlation between fraudulent information in the application and the
likelihood of both foreclosure and early payment default on loans. We believe our solution is based
upon a more comprehensive set of loan level information than any other provider in the mortgage
industry.
We also provide forensic audit services for the mortgage origination and mortgage insurance
industries. Our predictive screening tools predict which defaulted loans are the most likely
candidates for full audits for the purpose of detecting fraud. We then generate detailed audit
reports on defaulted mortgage loans. Those reports serve as a key component of the loss mitigation
strategies of mortgage loan insurers. The recent turmoil in the mortgage industry has created a
period of unprecedented opportunity for growth in demand for our services, as we believe most
mortgage insurers do not have the in-house capacity to respond to and properly review all of
their defaulted loans for evidence of fraud.
Healthcare
We offer solutions that help healthcare claims payors detect fraud, abuse and overpayment. Our
approach combines computer-based modeling and profiling of claims with analysis performed by
clinical experts. We run our customers claims through our proprietary analytic system to identify
potential fraud, abuse and overpayment, and then a registered nurse, physician or other clinical
specialist skilled in coding and reimbursement decisions reviews all suspect claims and billing
patterns. This combination of system and human review is unique in the industry and we believe
offers improved accuracy for paying claims.
We analyze the patterns of claims produced by individual physicians, physicians practices,
hospitals, dentists, and pharmacies to locate the sources of fraud. After a suspicious source of
claims is identified, our real-time analytic solutions investigate each claim individually for
particular violations, including upcoding, multiple billings, services claimed but not rendered, and
billing by unlicensed providers. By finding the individual claims with the most cost-recovery
potential and also minimizing the number of false-positive indications of fraud, we enable the
special investigation units of healthcare payors to efficiently control their claims costs while
maintaining high levels of customer service to their insurers.
We also offer web-based reporting tools that let payors take definitive action to prevent
overpayments or payment of fraudulent claims. The tools provide the documentation that helps to
identify, investigate and prevent abusive and fraudulent activity by providers.
Prediction of Loss and Selection and Pricing of Risk
P&C Insurance
We pioneered the field of probabilistic catastrophe modeling used by insurers, reinsurers and
financial institutions to manage their catastrophe risk. Our models of global natural hazards,
which form the basis of our solutions, enable companies to identify, quantify and plan for the
financial consequences of catastrophic events. We have developed models, covering natural hazards,
including hurricanes, earthquakes, winter storms, tornadoes, hailstorms, and flood, for potential
loss events in more than 50 countries. We have also developed and introduced a probabilistic
terrorism model capable of quantifying the risk in the U.S. from this emerging threat,
which supports pricing and underwriting decisions down to the level of an individual policy.
Healthcare
We are a leading provider of healthcare business intelligence and predictive modeling. We provide
analytical and reporting systems to health insurers, provider organizations and self-insured
employers. Those organizations use our solutions to review their healthcare data, including
information on claims, membership, providers and utilization, and provide cost trends, forecasts
and actuarial, financial and utilization analyses.
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For example, our solutions allow our customers to predict medical costs and improve the
financing and organization of health services. Our predictive models help our customers identify
high-cost cases for care- and disease-management intervention, compare providers adjusting for
differences in health, predict resource use for individuals and populations, establish health-based
and performance-based payments, negotiate payments and incentives, negotiate premium rates, and
measure return on investment.
We also provide our customers healthcare consulting services using complex clinical analyses
to uncover reasons behind cost and utilization increases. Physicians and hospitals are adopting and
acquiring new technologies, drugs and devices more rapidly than ever before. We provide financial
and actuarial consulting, clinical consulting, technical and implementation services and training
services to help our customers manage costs and risks to their practices.
We are also beginning to expand our healthcare business internationally. We have recently
secured an agreement with the German government to develop a risk-adjustment methodology based on
our solutions. Our diagnosis-based risk-adjustment methods and predictive modeling tools will
support the German healthcare system in the improvement of quality and efficiency of care.
Quantification of Loss
P&C Insurance
We provide data, analytic and networking products for professionals involved in estimating all
phases of building repair and reconstruction. We provide solutions for every phase of a buildings
life, including:
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estimating replacement costs during the insurance underwriting process; |
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quantifying the ultimate cost of repair or reconstruction of damaged or destroyed
buildings; |
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aiding in the settlement of insurance claims; and |
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tracking the process of repair or reconstruction and facilitating communication among
insurers, adjusters, contractors and policyholders. |
To help our customers estimate replacement costs, we also provide a solution that assists
contractors and insurance adjusters to estimate repairs using a patented plan-sketching program.
The program allows our customers to sketch floor plans, roof plans and wall-framing plans and
automatically calculates material and labor quantities for the construction of walls, floors,
footings and roofs.
We also offer our customers access to wholesale and retail price lists, which include
structural repair and restoration pricing for 467 separate economic areas in North America. We
revise this information monthly and, in the aftermath of a major disaster, we can update the price
lists as often as weekly to reflect rapid price changes. Our structural repair and cleaning
database contains more than 11,000 unit-cost line items. For each line item such as smoke cleaning,
water extraction and hazardous cleanup, we provide time and material pricing, including labor,
labor productivity rates (for new construction and restoration), labor burden and overhead,
material costs, and equipment costs. We improve our pricing data by analyzing the actual claims
experience of our customers to verify our estimates. We estimate that more than 60.0% of all
homeowners claims settled in the U.S. annually use our solution. Such a large percentage of the
industrys claims leads to accurate pricing information, which we believe is unmatched in the
industry.
We also estimate industry-wide insured losses from individual catastrophic events. We report
information on disasters and determine the extent and type of damage, dates of occurrence, and
geographic areas affected. We define a catastrophe as an event that causes $25 million or more in
direct insured losses to property and that affects a significant number of policyholders and
insurers. For each catastrophe, our loss estimate represents anticipated industry-wide insurance
payments for property lines of insurance covering fixed property, building contents, time-element
losses, vehicles, and inland marine (diverse goods and properties). We assign a serial number that
allows our customers to track losses and reserves related to a single, discrete event. Under many
reinsurance contracts and catastrophe bonds, our serial number is important for determining which
losses will trigger reinsurance coverage or payment.
Our estimates allow our customers to set loss reserves, deploy field adjusters and verify
internal company estimates. Our estimates also keep insurers, their customers, regulators, and
other interested parties informed about the total costs of disasters. We also provide our customers
access to daily reports on severe weather and catastrophes and we maintain a database of
information on catastrophe losses in the U.S. since 1950.
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Our Growth Strategy
Over the past five years, we have grown our revenues at a CAGR of 12.3% through the
successful execution of our business plan. These results reflect strong organic revenue growth,
new product development and selected acquisitions. We have made, and continue to make,
investments in people, data sets, analytic solutions, technology, and complementary businesses.
The key components of our strategy include:
Increase Sales to Insurance Customers. We expect to expand the application of our solutions in
insurance customers internal risk and underwriting processes. Building on our deep knowledge
of, and embedded position in, the insurance industry, we expect to sell more solutions to
existing customers tailored to individual insurance segments. By increasing the breadth and
relevance of our offerings, we believe we can strengthen our relationships with customers and
increase our value to their decision making in critical ways.
Develop New, Proprietary Data Sets and Predictive Analytics. We work with our customers to
understand their evolving needs. We plan to create new solutions by enriching our mix of
proprietary data sets, analytic solutions and effective decision support across the markets we
serve. We constantly seek to add new data sets that can further leverage our analytic methods,
technology platforms and intellectual capital.
Leverage Our Intellectual Capital to Expand into Adjacent Markets and New Customer Sectors. Our
organization is built on nearly four decades of intellectual property in risk management. We
believe we can continue to profitably expand the use of our intellectual capital and apply our
analytic methods in new markets, where significant opportunities for long-term growth exist. We
also continue to pursue growth through targeted international expansion. We have already
demonstrated the effectiveness of this strategy with our expansion into healthcare and
non-insurance financial services.
Pursue Strategic Acquisitions that Complement Our Leadership Positions. We will continue to
expand our data and analytics capabilities across industries. While we expect this will occur
primarily through organic growth, we have and will continue to acquire assets and businesses
that strengthen our value proposition to customers. We have developed an internal capability
to source, evaluate and integrate acquisitions that have created value for shareholders. As of
December 31, 2009, we have acquired 15 businesses in the past five years, which in the
aggregate have increased their revenue with a weighted average CAGR of 42.6% over the same
period.
Our Customers
Risk Assessment Customers
The customers in our Risk Assessment segment include the top 100 P&C insurance providers in
the United States. Our statistical agent services are used by a substantial
majority of P&C insurance providers in the U.S. to report to regulators. Our actuarial
services and industry-standard insurance programs are used by the majority of insurers and
reinsurers in the U.S. In addition, certain agencies of the federal government,
as well as county and state governmental agencies
and organizations, use our solutions to help satisfy government needs for risk assessment and
emergency response information. In 2009 our largest Risk Assessment customer accounted for 5.0% of
segment revenues and our top ten customers accounted for 28.3% of
segment revenues. See Item 13. Certain Relationships and
Related Transactions, and Director Independence Customer Relationships for more information on
our relationship with our principal stockholders.
Decision Analytics Customers
In the Decision Analytics segment, we provide our P&C insurance solutions to the majority of
the P&C insurers in the U.S. Specifically, our claims database serves thousands of
customers, representing more than 93.0% of the P&C insurance industry by premium volume, 26 state
workers compensation insurance funds, 598 self-insurers, 457 third-party administrators, several
state fraud bureaus, and many law-enforcement agencies involved in investigation and prosecution of
insurance fraud. In addition, our catastrophe modeling solutions have been used in approximately
50.0% of the dollar value of catastrophe bond securitizations through 2009. Also, P&C insurance
companies using our building and repair solutions handle over 60.0% of the property claims in the
U.S. We estimate that more than 80.0% of insurance repair contractors and service
providers in the U.S. and Canada with computerized estimating systems use our building and
repair pricing data.
In the U.S. healthcare industry, our customers include numerous health plans and third party administrators.
In 2009, our largest customer in the Decision
Analytics segment accounted for 6.2% of segment revenues and our top ten Decision Analytics
customers accounted for 23.2% of segment revenues.
In the U.S. mortgage industry, we have more than 990 customers.
We provide our solutions to 14 of the top 20 mortgage lenders and
five of the top six mortgage insurers. We have been
providing services to mortgage insurers for over 20 years.
Our Competitors
We believe no single competitor currently offers the same scope of services and market
coverage we provide. The breadth of markets we serve exposes us to a broad range of competitors.
Risk Assessment Competitors
Our Risk Assessment segment operates primarily in the U.S. P&C insurance industry, where we
enjoy a leading market presence. We have a number of competitors in specific lines or services.
We encounter competition from a number of sources, including insurers who develop internal
technology and actuarial methods for proprietary insurance programs. Competitors also include other
statistical agents, including the National Independent Statistical Service, the Independent
Statistical Service and other advisory organizations, providing underwriting rules, prospective
loss costs and coverage language such as the American Association of Insurance Services and Mutual
Services Organization.
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Competitors for our property-specific rating and underwriting information are primarily
limited to a number of regional providers of commercial property inspections and surveys, including
Overland Solutions, Inc. and Regional Reporting, Inc. We also compete with a variety of
organizations that offer consulting services, primarily specialty technology and consulting firms.
In addition, a customer may use its own internal resources rather than engage an outside firm for
these services. Our competitors also include information technology product and services vendors
including CDS, Inc., management and strategy consulting firms including Deloitte, and smaller
specialized information technology firms and analytical services firms including Pinnacle
Consulting and EMB.
Decision Analytics Competitors
In the P&C insurance claims market and catastrophe modeling market, certain products are
offered by a number of companies, including, ChoicePoint (loss histories and motor vehicle records
for personal lines underwriting), Explore Information Services (personal automobile underwriting)
and Risk Management Solutions (catastrophe modeling). We believe that our P&C insurance industry
expertise, combined with our ability to offer multiple applications, services and integrated
solutions to individual customers, enhances our competitiveness against these competitors with more
limited offerings. In the healthcare market, certain products are offered by a number of companies,
including Computer Sciences Corporation (evaluation of bodily injury and workers compensation
claims), Fair Isaac Corporation (workers compensation and healthcare claims cost containment) and
Ingenix, McKesson and Medstat (healthcare predictive modeling and business intelligence).
Competitive factors include application features and functions, ease of delivery and integration,
ability of the provider to maintain, enhance and support the applications or services and price. In
the mortgage analytics solutions market, our competitors include First American CoreLogic and
DataVerify Corporation (mortgage lending fraud identification) and ComplianceEase and Mavent
(mortgage regulatory compliance). We believe that none of our competitors in the mortgage analytics
market offers the same expertise in fraud detection analytics or forensic audit capabilities.
Development of New Solutions
We take a market-focused team approach to developing our solutions. Our operating units are
responsible for developing, reviewing and enhancing our various products and services. Our data
management and production team designs and manages our processes and systems for market data
procurement, proprietary data production and quality control. Our Enterprise Data Management, or
EDM, team supports our efforts to create new information and products from available data and
explores new methods of collecting data. EDM is focused on understanding and documenting
business-unit and corporate data assets and data issues; sharing and combining data assets across
the enterprise; creating an enterprise data strategy; facilitating research and product
development; and promoting cross-enterprise communication.
Our software development team builds the technology used in many of our solutions. As part of
our product-development process, we continually solicit feedback from our customers on the value of
our products and services and the markets needs. We have established an extensive system of
customer advisory panels, which meet regularly throughout the year to help us respond effectively
to the needs of our markets. In addition, we use frequent sales calls, executive visits, user group
meetings, and other industry forums to gather information to match the needs of the market with our
product development efforts. We also use a variety of market research techniques to enhance our
understanding of our clients and the markets in which they operate.
We also add to our offerings through an active acquisition program. Since 2005, we have
acquired 15 businesses, which have allowed us to enter new markets, offer new products and enhance
the value of existing products with additional proprietary sources of data.
When we find it advantageous, we augment our proprietary data sources and systems by forming
alliances with other leading information providers and technology companies and integrating their
product offerings into our offerings. This approach gives our customers the opportunity to obtain
the information they need from a single source and more easily integrate the information into their
workflows.
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Sales, Marketing and Customer Support
We sell our products and services primarily through direct interaction with our clients. We
employ a three-tier sales structure that includes salespeople, product specialists and sales
support. As of December 31, 2009, we had a sales force of 137 people. Within the company, several
areas have sales teams that specialize in specific products and services. These specialized sales
teams sell specific, highly technical product sets to targeted markets.
To provide account management to our largest customers, we segment the insurance market into
two groups. National Accounts constitutes our 20 largest customers and Strategic Accounts includes
all other insurance companies. Each market segment has its own sales team. Salespeople are
responsible for our overall relationship with P&C insurance companies.
Salespeople participate in both customer-service and sales activities. They provide direct
support, interacting frequently with assigned customers to assure a positive experience using our
services. Salespeople also seek out new sales opportunities and provide support to the rest of the
sales team. We believe our salespeoples product knowledge and local presence differentiates us
from our competition. Product specialists have product expertise and work with salespeople on
specific opportunities for their assigned products. Both salespeople and product specialists have
responsibility for identifying new sales opportunities. A team approach and a common customer
relationship management system allow for effective coordination between the two groups.
Sources of our Data
The data we use to perform our analytics and power our solutions are sourced through six
different kinds of data arrangements. First, we gather data from our customers within agreements
that also permit our customers to use the solutions created upon their data. These agreements
remain in effect unless the data contributor chooses to opt out and represent our primary method of
data gathering. It is very rare that contributors elect not to continue providing us data. Second,
we have agreements with data contributors in which we specify the particular uses of their data and
provide to the data contributors their required levels of privacy, protection of data and where
necessary de-identification of data. These agreements represent no cost to us and generally feature
a specified period of time for the data contributions and require renewal. Third, we mine data
found inside the transactions supported by our solutions; as an example, we utilize the claims
settlement data generated inside our repair cost estimating solution to improve the cost factors
used in our models. Again, these arrangements represent no cost to us and we obtain the consent of
our customers to make use of their data in this way. Fourth, we source data generally at no cost
from public sources including federal, state and local governments. Fifth, we gather data about the
physical characteristics of commercial properties through the direct observation of our field staff
that also perform property surveys at the request of, and facilitated by, property insurers.
Lastly, we purchase data from data aggregators under contracts that reflect prevailing market
pricing for the data elements purchased, including county tax assessor records, descriptions of
hazards such as flood plains and professional licenses. In all our modes of data collection, we are
the owners of whatever derivative solutions we create using the data. Because of the efficiency of
our data gathering methods and the lack of any cost associated with a large portion of our data,
our costs of data received from our customers were 1.9% and 1.8% of revenues for the years ended December 31, 2009 and
2008, respectively.
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Information Technology
Technology
Our information technology systems are fundamental to our success. They are used for the
storage, processing, access and delivery of the data which forms the foundation of our business and
the development and delivery of our solutions provided to our clients. Much of the technology we
use and provide to our clients is developed, maintained and supported by approximately 800
employees. We generally own or have secured ongoing rights to use for the purposes of our business
all the customer-facing applications which are material to our operations. We support and implement
a mix of technologies, focused on implementing the most efficient technology for any given business
requirement or task.
Data Centers
We have two primary data centers in Jersey City, New Jersey and Orem, Utah. In addition, we
have data centers dedicated to certain business units, including AIR and Verisk Health in Boston
and AISG Claimsearch in Israel. In addition to these key data centers, we also have a number of
smaller data centers located in other states.
Disaster Recovery
We are committed to a framework for business continuity management and carry out annual
reviews of the state of preparedness of each business unit. All of our critical databases, systems
and contracted client services are also regularly recovered. We also have documented disaster
recovery plans in place for each of our major data centers and each of our solutions. Our primary
data center recovery site is in New York State, approximately 50 miles northwest of Jersey City,
New Jersey.
Security
We have adopted a wide range of measures to ensure the security of our IT infrastructure and
data. Security measures generally cover the following key areas: physical security; logical
security of the perimeter; network security such as firewalls; logical access to the operating
systems; deployment of virus detection software; and appropriate policies and procedures relating
to removable media such as laptops. All laptops are encrypted and media leaving our premises that
is sent to a third-party storage facility is also encrypted. This commitment has led us to achieve
certification from CyberTrust (an industry leader in information security certification) since
2002.
Intellectual Property
We own a significant number of intellectual property rights, including copyrights, trademarks,
trade secrets and patents. Specifically, our policy language, insurance manuals, software and
databases are protected by both registered and common law copyrights, and the licensing of those
materials to our customers for their use represents a large portion of our revenue. We also own in
excess of 500 trademarks in the U.S. and foreign countries, including the names of our products and
services and our logos and tag lines, many of which are registered. We believe many of our
trademarks, trade names, service marks and logos to be of material importance to our business as
they assist our customers in identifying our products and services and the quality that stands
behind them. We consider our intellectual property to be proprietary, and we rely on a combination
of statutory (e.g., copyright, trademark, trade secret and patent) and contractual safeguards in a
comprehensive intellectual property enforcement program to protect them wherever they are used.
We also own several software method and processing patents and have several pending patent
applications in the U.S. that complement our products. The patents and patent applications include
claims which pertain to technology, including a patent for our Claims Outcome Advisor software, and for our Xactware Sketch product. We believe
the protection of our proprietary technology is important to our success and we will continue to
seek to protect those intellectual property assets for which we have expended substantial research
and development capital and which are material to our business.
In order to maintain control of our intellectual property, we enter into license agreements
with our customers, granting each customer a license to use our products and services, including
our software and databases. This helps to maintain the integrity of our proprietary intellectual
property and to protect the embedded information and technology contained in our solutions. As a
general practice, employees, contractors and other parties with access to our proprietary
information sign agreements that prohibit the unauthorized use or disclosure of our proprietary
rights, information and technology.
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Employees
As of December 31, 2009, we employed 4,072 full-time and 181 part-time employees. None of our
employees are represented by unions. We consider our relationship with our employees to be good and
have not experienced interruptions of operations due to labor disagreements.
Regulation
Because our business involves the distribution of certain personal, public and non-public data
to businesses and governmental entities that make eligibility, service and marketing decisions
based on such data, certain of our solutions and services are subject to regulation under federal,
state and local laws in the United States and, to a lesser extent, foreign countries. Examples of
such regulation include the Fair Credit Reporting Act, which regulates the use of consumer credit
report information; the Gramm-Leach-Bliley Act, which regulates the use of non-public personal
financial information held by financial institutions and applies indirectly to companies that
provide services to financial institutions; the Health Insurance Portability and Accountability
Act, which restricts the public disclosure of patient information and applies indirectly to
companies that provide services to healthcare businesses; the Drivers Privacy Protection Act, which
prohibits the public disclosure, use or resale by any states department of motor vehicles of
personal information about an individual that was obtained by the department in connection with a
motor vehicle record, except for a permissible purpose and various other federal, state and local
laws and regulations.
These laws generally restrict the use and disclosure of personal information and provide
consumers certain rights to know the manner in which their personal information is being used, to
challenge the accuracy of such information and/or to prevent the use and disclosure of such
information. In certain instances, these laws also impose requirements for safeguarding personal
information through the issuance of data security standards or guidelines. Certain state laws
impose similar privacy obligations, as well as obligations to provide notification of security
breaches in certain circumstances.
We are also licensed as a rating, rate service, advisory or statistical organization under
state insurance codes in all fifty states, Puerto Rico, Guam, the Virgin Islands and the District
of Columbia. As such an advisory organization, we provide statistical, actuarial, policy language
development and related products and services to property/casualty insurers, including advisory
prospective loss costs, other prospective cost information, manual rules and policy language. We
also serve as an officially designated statistical agent of state insurance regulators to collect
policy-writing and loss statistics of individual insurers and compile that information into reports
used by the regulators.
Many of our products, services and operations as well as insurer use of our services are
subject to state rather than federal regulation by virtue of the McCarran-Ferguson Act. As a
result, many of our operations and products are subject to review and/or approval by state
regulators. Furthermore, our operations involving licensed advisory organization activities are
subject to periodic examinations conducted by state regulators and our operations and products are
subject to state antitrust and trade practice statutes within or outside state insurance codes,
which are typically enforced by state attorneys general and/or insurance regulators.
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Available Information
We maintain an Investor Relations
website on the Internet at investor.verisk.com. We make available free of charge, on or through this
website, our annual, quarterly, and current reports and any amendments to those reports as soon as
reasonably practicable following the time they are electronically filed with or furnished to the
SEC. To access
these, click on the Financial Information - SEC Filings link found on our Investor Relations homepage. Verisk trades
on the NASDAQ Global Select Market under the ticker symbol VRSK. Our stock was first publicly
traded on October 7, 2009.
Item 1A Risk Factors
You should carefully consider the following risks and all of the other information set forth
in this annual report on Form 10-K before deciding to invest in shares of our Class A common stock.
If any of the following risks actually occurs, our business, financial condition or results of
operations would likely suffer. In such case, the trading price of our Class A common stock could
decline due to any of these risks, and you may lose all or part of your investment.
We could lose our access to data from external sources which could prevent us from providing our
solutions.
We depend upon data from external sources, including data received from customers and various
government and public record services, for information used in our databases. In general, we do not
own the information in these databases, and the participating organizations could discontinue
contributing information to the databases. Our data sources could withdraw or increase the price
for their data for a variety of reasons, and we could also become subject to legislative or
judicial restrictions on the use of such data, in particular if such data is not collected by the
third parties in a way which allows us to legally use and/or process the data. In addition, many of
our customers are significant stockholders of our company. Specifically, all of our Class B common
stock is owned by insurers who are also our customers and provide us with a significant percentage
of our data. If our customers percentage of ownership of our common stock decreases in the future, there can be no assurance that our customers will continue
to provide data to the same extent or on the same terms. If a substantial number of data sources,
or certain key sources, were to withdraw or be unable to provide their data, or if we were to lose
access to data due to government regulation or if the collection of data became uneconomical, our
ability to provide solutions to our customers could be impacted, which could materially adversely
affect our business, reputation, financial condition, operating results and cash flows.
Agreements with our data suppliers are short-term agreements. Some suppliers are also
competitors, which may make us vulnerable to unpredictable price increases and may cause some
suppliers not to renew certain agreements. Our competitors could also enter into exclusive
contracts with our data sources. If our competitors enter into such exclusive contracts, we may be
precluded from receiving certain data from these suppliers or restricted in our use of such data,
which would give our competitors an advantage. Such a termination or exclusive contracts could have
a material adverse effect on our business, financial position, and operating results if we were
unable to arrange for substitute sources.
We derive a substantial portion of our revenues from U.S. P&C primary insurers. If the
downturn in the U.S. insurance industry continues or that industry does not continue to accept our
solutions, our revenues will decline.
Revenues derived from solutions we provide to U.S. P&C primary insurers account for a
substantial portion of our total revenues. During the year ended December 31, 2009,
approximately 59.6% of our revenue was derived from solutions provided to U.S. P&C primary insurers. Also, sales of certain of our solutions are tied to premiums in
the U.S. P&C insurance market, which may rise or fall in any given year due to loss experience and
capital capacity and other factors in the insurance industry beyond our control. In addition, our
revenues will decline if the insurance industry does not continue to accept our solutions.
Factors that might affect the acceptance of these solutions by P&C primary insurers include the following:
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changes in the business analytics industry; |
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our inability to obtain or use state fee schedule or claims data in our insurance
solutions; |
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saturation of market demand; |
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industry consolidation; and |
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failure to execute our customer-focused selling approach. |
A continued downturn in the insurance industry or lower acceptance of our solutions by the
insurance industry could result in a decline in revenues from that industry and have a material
adverse effect on our financial condition, results of operations and cash flows.
There may be consolidation in our end customer market, which would reduce the use of our services.
Mergers or consolidations among our customers could reduce the number of our customers and
potential customers. This could adversely affect our revenues even if these events do not reduce
the aggregate number of customers or the activities of the consolidated entities. If our customers
merge with or are acquired by other entities that are not our customers, or that use fewer of our
services, they may discontinue or reduce their use of our services. The adverse effects of
consolidation will be greater in sectors that we are particularly dependent upon, for example, in
the P&C insurance services sector. Any of these developments could materially and adversely affect
our business, financial condition, operating results and cash flows.
If we are unable to develop successful new solutions or if we experience defects, failures and
delays associated with the introduction of new solutions, our business could suffer serious harm.
Our growth and success depends upon our ability to develop and sell new solutions. If we are
unable to develop new solutions, or if we are not successful in introducing and/or obtaining
regulatory approval or acceptance for new solutions, we may not be able to grow our business, or
growth may occur more slowly than we anticipate. In addition, significant undetected errors or
delays in new solutions may affect market acceptance of our solutions and could harm our business,
financial condition or results of operations. In the past, we have experienced delays while
developing and introducing new solutions, primarily due to difficulties developing models,
acquiring data and adapting to particular operating environments. Errors or defects in our
solutions that are significant, or are perceived to be significant, could result in rejection of
our solutions, damage to our reputation, loss of revenues, diversion of development resources, an
increase in product liability claims, and increases in service and support costs and warranty
claims.
We will continue to rely upon proprietary technology rights, and if we are unable to protect them,
our business could be harmed.
Our success depends, in part, upon our intellectual property rights. To date, we have relied
primarily on a combination of copyright, patent, trade secret, and trademark laws and nondisclosure
and other contractual restrictions on copying and distribution to protect our proprietary
technology. This protection of our proprietary technology is limited, and our proprietary
technology could be used by others without our consent. In addition, patents may not be issued with
respect to our pending or future patent applications, and our patents may not be upheld as valid or
may not prevent the development of competitive products. Any disclosure, loss, invalidity of, or
failure to protect our intellectual property could negatively impact our competitive position, and
ultimately, our business. Our protection of our intellectual property rights in the United States
or abroad may not be adequate and others, including our competitors, may use our proprietary
technology without our consent. Furthermore, litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets, or to determine the validity and scope
of the proprietary rights of others. Such litigation could result in substantial costs and
diversion of resources and could harm our business, financial condition, results of operations and
cash flows.
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We could face claims for intellectual property infringement, which if successful could restrict us
from using and providing our technologies and solutions to our customers.
There has been substantial litigation and other proceedings, particularly in the United
States, regarding patent and other intellectual property rights in the information technology
industry. There is a risk that we are infringing, or may in the future infringe, the intellectual
property rights of third parties. We monitor third-party patents and patent applications that may
be relevant to our technologies and solutions and we carry out freedom to operate analyses where we
deem appropriate. However, such monitoring and analysis has not been, and is unlikely in the future
to be, comprehensive, and it may not be possible to detect all potentially relevant patents and
patent applications. Since the patent application process can take several years to complete, there
may be currently pending applications, unknown to us, that may later result in issued patents that
cover our products and technologies. As a result, we may infringe existing and future third-party
patents of which we are not aware. As we expand our operations there is a higher risk that such
activity could infringe the intellectual property rights of third parties.
Third-party intellectual property infringement claims and any resultant litigation against us
or our technology partners or providers, could subject us to liability for damages, restrict us
from using and providing our technologies and solutions or operating our business generally, or
require changes to be made to our technologies and solutions. Even if we prevail, litigation is
time consuming and expensive to defend and would result in the diversion of managements time and
attention.
If a successful claim of infringement is brought against us and we fail to develop
non-infringing technologies and solutions or to obtain licenses on a timely and cost effective
basis this could materially and adversely affect our business, reputation, financial condition,
operating results and cash flows.
Regulatory developments could negatively impact our business.
Because personal, public and non-public information is stored in some of our databases, we are
vulnerable to government regulation and adverse publicity concerning the use of our data. We
provide many types of data and services that already are subject to regulation under the Fair
Credit Reporting Act, Gramm-Leach-Bliley Act, Drivers Privacy Protection Act, Health Insurance
Portability and Accountability Act, the European Unions Data Protection Directive and to a lesser
extent, various other federal, state, and local laws and regulations. These laws and regulations
are designed to protect the privacy of the public and to prevent the misuse of personal information
in the marketplace. However, many consumer advocates, privacy advocates, and government regulators
believe that the existing laws and regulations do not adequately protect privacy. They have become
increasingly concerned with the use of personal information, particularly social security numbers,
department of motor vehicle data and dates of birth. As a result, they are lobbying for further
restrictions on the dissemination or commercial use of personal information to the public and
private sectors. Similar initiatives are under way in other countries in which we do business or
from which we source data. The following legal and regulatory developments also could have a
material adverse affect on our business, financial position, results of operations or cash flows:
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amendment, enactment, or interpretation of laws and regulations which
restrict the access and use of personal information and reduce the supply of
data available to customers; |
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changes in cultural and consumer attitudes to favor further
restrictions on information collection and sharing, which may lead to
regulations that prevent full utilization of our solutions; |
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failure of our solutions to comply with current laws and regulations;
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failure of our solutions to adapt to changes in the regulatory
environment in an efficient, cost-effective manner. |
Fraudulent data access and other security breaches may negatively impact our business and harm our
reputation.
Security breaches in our facilities, computer networks, and databases may cause harm to our
business and reputation and result in a loss of customers. Our systems may be vulnerable to
physical break-ins, computer viruses, attacks by hackers and similar disruptive problems.
Third-party contractors also may experience security breaches involving the storage and
transmission of proprietary information. If users gain improper access to our databases, they may
be able to steal, publish, delete or modify confidential third-party information that is stored or
transmitted on our networks.
In addition, customers misuse of our information services could cause harm to our business
and reputation and result in loss of customers. Any such misappropriation and/or misuse of our
information could result in us, among other things, being in breach of certain data protection and
related legislation.
A security or privacy breach may affect us in the following ways:
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deterring customers from using our solutions; |
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deterring data suppliers from supplying data to us; |
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harming our reputation; |
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exposing us to liability; |
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increasing operating expenses to correct problems caused by the
breach; |
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affecting our ability to meet customers expectations; or |
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causing inquiry from governmental authorities. |
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We may detect incidents in which consumer data has been fraudulently or improperly acquired.
The number of potentially affected consumers identified by any future incidents is obviously
unknown. Any such incident could materially and adversely affect our business, reputation,
financial condition, operating results and cash flows.
We typically face a long selling cycle to secure new contracts that requires significant resource
commitments, which result in a long lead time before we receive revenues from new relationships.
We typically face a long selling cycle to secure a new contract and there is generally a long
preparation period in order to commence providing the services. We typically incur significant
business development expenses during the selling cycle and we may not succeed in winning a new
customers business, in which case we receive no revenues and may receive no reimbursement for such
expenses. Even if we succeed in developing a relationship with a potential new customer, we may not
be successful in obtaining contractual commitments after the selling cycle or in maintaining
contractual commitments after the implementation cycle, which may have a material adverse effect on
our business, results of operations and financial condition.
We may lose key business assets, including loss of data center capacity or the interruption of
telecommunications links, the internet, or power sources, which could significantly impede our
ability to do business.
Our operations depend on our ability, as well as that of third-party service providers to whom
we have outsourced several critical functions, to protect data centers and related technology
against damage from hardware failure, fire, power loss, telecommunications failure, impacts of
terrorism, breaches in security (such as the actions of computer hackers), natural disasters, or
other disasters. The on-line services we provide are dependent on links to telecommunications
providers. In addition, we generate a significant amount of our revenues through telesales centers
and websites that we utilize in the acquisition of new customers, fulfillment of solutions and
services and responding to customer inquiries. We may not have sufficient redundant operations to
cover a loss or failure in all of these areas in a timely manner. Certain of our customer contracts
provide that our on-line servers may not be unavailable for specified periods of time. Any damage
to our data centers, failure of our telecommunications links or inability to access these telesales
centers or websites could cause interruptions in operations that materially adversely affect our
ability to meet customers requirements, resulting in decreased revenue, operating income and
earnings per share.
We are subject to competition in many of the markets in which we operate and we may not be able to
compete effectively.
Some markets in which we operate or which we believe may provide growth opportunities for us
are highly competitive, and are expected to remain highly competitive. We compete on the basis of
quality, customer service, product and service selection and price. Our competitive position in
various market segments depends upon the relative strength of competitors in the segment and the
resources devoted to competing in that segment. Due to their size, certain competitors may be able
to allocate greater resources to a particular market segment than we can. As a result, these
competitors may be in a better position to anticipate and respond to changing customer preferences,
emerging technologies and market trends. In addition, new competitors and alliances may emerge to
take market share away. We may be unable to maintain our competitive position in our market
segments, especially against larger competitors. We may also invest further to upgrade our systems
in order to compete. If we fail to successfully compete, our business, financial position and
results of operations may be adversely affected.
Acquisitions could result in operating difficulties, dilution and other harmful consequences.
Our long-term business strategy includes growth through acquisitions. Future acquisitions may
not be completed on acceptable terms and acquired assets, data or businesses may not be
successfully integrated into our operations. Any acquisitions or investments will be accompanied by
the risks commonly encountered in acquisitions of businesses. Such risks include, among other
things:
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|
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failing to implement or remediate controls, procedures and policies
appropriate for a larger public company at acquired companies that prior to the
acquisition lacked such controls, procedures and policies; |
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|
paying more than fair market value for an acquired company or assets; |
|
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|
failing to integrate the operations and personnel of the acquired
businesses in an efficient, timely manner; |
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|
assuming potential liabilities of an acquired company; |
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|
managing the potential disruption to our ongoing business; |
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|
distracting management focus from our core businesses; |
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|
|
difficulty in acquiring suitable businesses; |
19
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|
|
impairing relationships with employees, customers, and strategic
partners; |
|
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|
incurring expenses associated with the amortization of intangible assets; |
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|
|
incurring expenses associated with an impairment of all or a portion of
goodwill and other intangible assets due to changes in market conditions, weak
economies in certain competitive markets, or the failure of certain acquisitions
to realize expected benefits; and |
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|
|
diluting the share value and voting power of existing stockholders. |
The anticipated benefits of many of our acquisitions may not materialize. Future acquisitions
or dispositions could result in the incurrence of debt, contingent liabilities or amortization
expenses, or write-offs of goodwill and other intangible assets, any of which could harm our
financial condition.
We
typically fund our acquisitions through our debt facilities. Although we have
capacity under our uncommitted facilities, lenders are not required to loan us any funds under such
facilities. The current disruptions in the capital markets have caused banks and other credit
providers to restrict availability of borrowing and new credit facilities. Therefore, future
acquisitions may require us to obtain additional financing, which may not be available on favorable
terms or at all.
To the extent the availability of free or relatively inexpensive information increases, the demand
for some of our solutions may decrease.
Public sources of free or relatively inexpensive information have become increasingly
available recently, particularly through the internet, and this trend is expected to continue.
Governmental agencies in particular have increased the amount of information to which they provide
free public access. Public sources of free or relatively inexpensive information may reduce demand
for our solutions. To the extent that customers choose not to obtain solutions from us and instead
rely on information obtained at little or no cost from these public sources, our business and
results of operations may be adversely affected.
Our senior leadership team is critical to our continued success and the loss of such personnel
could harm our business.
Our future success substantially depends on the continued service and performance of the
members of our senior leadership team. These personnel possess business and technical capabilities
that are difficult to replace. Members of our senior management operating team have been with us
for an average of almost twenty years. However, with the exception of Frank J. Coyne, our Chairman
and Chief Executive Officer, we do not have employee contracts with the members of our
senior management operating team. If we lose key members of our senior
management operating team, we may not be able to effectively manage our current operations or meet
ongoing and future business challenges, and this may have a material adverse effect on our
business, results of operations and financial condition.
We may fail to attract and retain enough qualified employees to support our operations, which could
have an adverse effect on our ability to expand our business and service our customers.
Our business relies on large numbers of skilled employees and our success depends on our
ability to attract, train and retain a sufficient number of qualified employees. If our attrition
rate increases, our operating efficiency and productivity may decrease. We compete for employees
not only with other companies in our industry but also with companies in other industries, such as
software services, engineering services and financial services companies, and there is a limited
pool of employees who have the skills and training needed to do our work. If our business continues
to grow, the number of people we will need to hire will increase. We will also need to increase our
hiring if we are not able to maintain our attrition rate through our current recruiting and
retention policies. Increased competition for employees could have an adverse effect on our ability
to expand our business and service our customers, as well as cause us to incur greater personnel
expenses and training costs.
We are subject to antitrust and other litigation, and may in the future become subject to further
such litigation; an adverse outcome in such litigation could have a material adverse effect on our
financial condition, revenues and profitability.
We participate in businesses (particularly insurance-related businesses and services) that are
subject to substantial litigation, including antitrust litigation. We are subject to the provisions
of a 1995 settlement agreement in an antitrust lawsuit brought by various state Attorneys General
and private plaintiffs which imposes certain constraints with respect to insurer involvement in our
governance and business. We currently are defending against several putative class action lawsuits
in which it is alleged that certain of our subsidiaries unlawfully have conspired with insurers
with respect to their payment of insurance claims. See Item 3.
Legal Proceedings. Our failure
to successfully defend or settle such litigation could result in liability that, to the extent not
covered by our insurance, could have a material adverse effect on our financial condition, revenues
and profitability. Given the nature of our business, we may be subject to similar litigation in the
future. Even if the direct financial impact of such litigation is not material, settlements or
judgments arising out of such litigation could include further restrictions on our ability to
conduct business, including potentially the elimination of entire lines of business, which could
increase our cost of doing business and limit our prospects for future growth.
20
Our liquidity, financial position and profitability could be adversely affected by further
deterioration in U.S. and international credit markets and economic conditions.
Deterioration in the global capital markets has caused financial institutions to seek
additional capital, merge with larger financial institutions and, in some cases, fail. These
conditions have led to concerns by market participants about the stability of financial markets
generally and the strength of counterparties, resulting in a contraction of available credit, even
for the most credit-worthy borrowers. Due to recent market events, our liquidity and our ability to
obtain financing may be negatively impacted if one of our lenders under our revolving credit
facilities or existing shelf arrangements fails to meet its funding obligations. In such an event,
we may not be able to draw on all, or a substantial portion, of our uncommitted credit facilities,
which would adversely affect our liquidity. Also, if we attempt to obtain future financing in
addition to, or replacement of, our existing credit facilities to finance our continued growth
through acquisitions or otherwise, the credit market turmoil could negatively impact our ability to
obtain such financing.
General economic, political and market forces and dislocations beyond our control could reduce
demand for our solutions and harm our business.
The demand for our solutions may be impacted by domestic and international factors that are
beyond our control, including macroeconomic, political and market conditions, the availability of
short-term and long-term funding and capital, the level and volatility of interest rates, currency
exchange rates and inflation. The United States economy experienced periods of contraction during 2008 and 2009 and both the
future domestic and global economic environments may continue to be less favorable than those of
recent years. Any one or more of these factors may contribute to reduced activity and prices in the
securities markets generally and could result in a reduction in demand for our solutions, which
could have an adverse effect on our results of operations and financial condition. The current
volatility in of the credit markets, and its effect on the economy, may continue to negatively
impact financial institutions. A significant additional decline in the value of assets for which
risk is transferred in market transactions could have an adverse impact on the demand for our
solutions. In addition, the decline of the credit markets has reduced the number of mortgage
originators, and therefore, the immediate demand for our related mortgage solutions. Specifically,
certain of our fraud detection and prevention solutions are directed at the mortgage market. This
decline in asset value and originations and an increase in foreclosure levels has also created
greater regulatory scrutiny of mortgage originations and securitizations. Any new regulatory regime
may change the utility of our solutions for mortgage lenders and other participants in the mortgage
lending industry and related derivative markets or increase our costs as we adapt our solutions to
new regulation.
If there are substantial sales of our common stock, our stock price could decline.
The market price of our common stock could decline as a result of sales of a large number of
shares of common stock in the market, or the perception that these sales could occur. These sales,
or the possibility that these sales may occur, also might make it more difficult for us to sell
equity securities in the future at a time and at a price that we deem attractive.
As of December 31, 2009, our stockholders,
who owned our shares prior to the IPO, continue to beneficially own in the aggregate approximately 27,819,850
shares of our Class A common stock and 54,237,950 shares of our Class B common stock, representing in aggregate
approximately 45.6% of our outstanding common stock. Such stockholders will be able to sell their common stock in the public market from time to
time without registration, and subject to
limitations on the timing, amount and method of those sales imposed by securities laws. If any of
these stockholders were to sell a large number of their common stock, the market price of our
common stock could decline significantly. In addition, the perception in the public markets that
sales by them might occur could also adversely affect the market price of our common stock.
Certain members of our management
are subject to lock-up agreements with us whereby they are not be permitted to sell any of their
common stock, subject to certain conditions, for a period of time. Also, pursuant to our amended and restated certificate of incorporation, our Class B
stockholders are not able to sell any of their common stock, subject to certain conditions, to the
public for a period of time. Each share of Class B
(Series 1) common stock shall convert automatically, without any action by the holder, into one
share of Class A common stock on April 6, 2011. Each share
of Class B (Series 2) common stock shall convert automatically, without any action by the holder,
into one share of Class A common stock on October 6, 2011.
21
Our board of directors may approve exceptions to the limitation on transfers of our Class B
common stock in their sole discretion, in connection with the sale of such Class B common stock in
a public offering registered with the Securities and Exchange Commission or in such other limited
circumstances as our board of directors may determine. Any Class B common stock sold to the public
will first be converted to Class A common stock. Such further resale of our common stock could
cause the price of our common stock to decline.
Pursuant to our equity incentive plans, options to purchase approximately 26,761,221 shares of
Class A common stock were outstanding as of March 9, 2010. We filed a registration statement under the Securities Act, which covers the
shares available for issuance under our equity incentive plans (including for such outstanding
options) as well as shares held for resale by our existing stockholders that were previously issued
under our equity incentive plans. Such further issuance and resale of our common stock could cause
the price of our common stock to decline.
Also, in the future, we may issue our securities in connection with investments and
acquisitions. The amount of our common stock issued in connection with an investment or acquisition
could constitute a material portion of our then outstanding common stock.
The holders of our Class B common stock have the right to elect up to three out of twelve of our
directors and their interests in our business may be different than yours.
Until no Class B common stock remains outstanding, the holders of our Class B common stock
will have the right to elect up to three of our directors. Stockholders of the Class B common stock
may not have the same incentive to approve a corporate action that may be favorable for the holders
of Class A common stock, or their interests may otherwise
conflict with those of Class A stockholders. For example, holders
of our Class B common stock may seek to cause us to take courses of action that, in their judgment,
could enhance their investment in us or the use of our solutions, but which might involve risks to
holders of our Class A common stock, including a potential decrease in the price of our Class A
common stock.
Our capital structure, level of indebtedness and the terms
of anti-takeover provisions under Delaware law and in our amended and restated certificate of
incorporation and bylaws could diminish the value of our common stock and could make a merger,
tender offer or proxy contest difficult or could impede an attempt to replace or remove our
directors.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General
Corporation Law may discourage, delay or prevent a change in control by prohibiting us from
engaging in a business combination with an interested stockholder for a period of three years after
the person becomes an interested stockholder, even if a change of control would be beneficial to
our existing stockholders. In addition, our certificate of incorporation and bylaws may discourage,
delay or prevent a change in our management or control over us that stockholders may consider
favorable or make it more difficult for stockholders to replace directors even if stockholders
consider it beneficial to do so. Our certificate of incorporation and bylaws:
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authorize the issuance of blank check preferred stock that could be issued by our board of directors to
increase the number of outstanding shares to thwart a takeover attempt; |
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|
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a
majority of the stock to elect some directors; |
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|
require that vacancies on the board of directors, including newly-created directorships, be filled only by
a majority vote of directors then in office; |
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|
|
limit who may call special meetings of stockholders; |
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|
|
authorize the issuance of authorized but unissued shares of common stock and preferred stock without
stockholder approval, subject to the rules and regulations of the NASDAQ Global Select Market; |
|
|
|
prohibit stockholder action by written consent, requiring all stockholder actions to be taken at a meeting
of
the stockholders; and |
|
|
|
establish advance notice requirements for nominating candidates for election to the board
of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
In addition, Section 203 of the Delaware General Corporation Law may inhibit potential
acquisition bids for us. As a public company, we are subject to Section 203, which regulates
corporate acquisitions and limits the ability of a holder of 15.0% or more of our stock from
acquiring the rest of our stock. Under Delaware law a corporation may opt out of the anti-takeover
provisions, but we do not intend to do so.
22
These provisions may prevent a stockholder from receiving the benefit from any premium over
the market price of our common stock offered by a bidder in a potential takeover. Even in the
absence of an attempt to effect a change in management or a takeover attempt, these provisions may
adversely affect the prevailing market price of our common stock if they are viewed as discouraging
takeover attempts in the future.
Item 1B. Unresolved Staff Comments
Not
Applicable.
Item 2. Properties
Our headquarters are in Jersey City, New Jersey. As of December 31, 2009, our principal
offices consisted of the following properties:
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Location |
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Square Feet |
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|
Lease Expiration Date |
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Jersey City, New Jersey |
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390,991 |
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May 21, 2021 |
Orem, Utah |
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68,343 |
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December 31, 2017 |
Boston, Massachusetts |
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59,154 |
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|
January 1, 2020 |
Agoura Hills, California |
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|
28,666 |
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|
October 30, 2011 |
South Jordan, Utah |
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|
23,505 |
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May 31, 2014 |
Waltham, Massachusetts |
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20,934 |
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|
October 31, 2011 |
We also lease
offices in 16 states in the
United States and the District of Columbia and
Puerto Rico and offices outside the United States to support our
international operations in Canada,
China, England, Israel, India, Japan, Germany and Nepal.
We believe that our properties are in good operating condition and adequately serve our
current business operations. We also anticipate that suitable additional or alternative space,
including those under lease options, will be available at commercially reasonable terms for future
expansion.
Item 3. Legal Proceedings
We are party to legal proceedings with respect to a variety of matters in the ordinary course
of business. We are unable, at the present time, to determine the ultimate resolution of or provide
a reasonable estimate of the range of possible loss attributable to these matters or the impact
they may have on our results of operations, financial position or cash flows. This is primarily
because many of these cases remain in their early stages and only limited discovery has taken
place. Although we believe we have strong defenses for the litigation proceedings described below,
we could in the future incur judgments or enter into settlements of claims that could have a
material adverse effect on our results of operations, financial position or cash flows.
Claims Outcome Advisor Litigation
Hensley, et al. v. Computer Sciences Corporation et al. was a putative nationwide class action
complaint, filed in February 2005, in Miller County, Arkansas state court. Defendants include
numerous insurance companies and providers of software products used by insurers in paying claims.
We are among the named defendants. Plaintiffs allege that certain software products, including our
Claims Outcome Advisor product and a competing software product sold by Computer Sciences
Corporation, improperly estimated the amount to be paid by insurers to their policyholders in
connection with claims for bodily injuries.
We entered into settlement agreements with plaintiffs asserting claims relating to the use of
Claims Outcome Advisor by defendants Hanover Insurance Group, Progressive Car Insurance and
Liberty Mutual Insurance Group. Each of these settlements was granted final approval by the court
and together the settlements resolve the claims asserted in this case against us with respect to
the above insurance companies, who settled the claims against them as well. A provision was made in
2006 for this proceeding and the total amount the Company paid in 2008 with respect to these
settlements was less than $2.0 million. A fourth defendant, The Automobile Club of California,
which is alleged to have used Claims Outcome Advisor was dismissed from the action. On August 18,
2008, pursuant to the agreement of the parties, the Court ordered that the claims against us be
dismissed with prejudice.
Hanover Insurance Group made a demand for reimbursement, pursuant to an indemnification
provision contained in a December 30, 2004 License Agreement between Hanover and the Company, of
its settlement and defense costs in the Hensley class action. Specifically, Hanover has demanded
$2.5 million including $0.6 million in attorneys fees and expenses. We dispute that Hanover is
entitled to any reimbursement pursuant to the License Agreement. We have entered into a tolling
agreement with Hanover in order to allow the parties time to resolve the dispute without
litigation.
Xactware Litigation
The following two lawsuits have been filed by or on behalf of groups of Louisiana insurance
policyholders who claim, among other things, that certain insurers who used products and price
information supplied by our Xactware subsidiary (and those of another provider) did not fully
compensate policyholders for property damage covered under their insurance policies. The plaintiffs
seek to recover compensation for their damages in an amount equal to the difference between the
amount paid by the defendants and the fair market repair/restoration costs of their damaged
property.
Schafer v. State Farm Fire & Cas. Co., et al. was a putative class action pending against us
and State Farm Fire & Casualty Company filed in March 2007 in the Eastern District of Louisiana.
The complaint alleged antitrust violations, breach of contract, negligence, bad faith, and fraud.
The court dismissed the antitrust claim as to both defendants and dismissed all claims against us
other than fraud, which will proceed to the discovery phase along with the remaining claims against
State Farm. Judge Duval denied plaintiffs motion to certify a class with respect to the fraud and
breach of contract claims on August 3, 2009 and the time to appeal that decision has expired. The
matter, now a single action, has been re-assigned to Judge Africk.
Mornay v. Travelers Ins. Co., et al. is a putative class action pending against us and
Travelers Insurance Company filed in November 2007 in the Eastern District of Louisiana. The
complaint alleged antitrust violations, breach of contract, negligence, bad faith, and fraud. As in
Schafer, the court dismissed the antitrust claim as to both defendants and dismissed all claims
against us other than fraud. Judge Duval stayed all proceedings in the case pending an appraisal of
the lead plaintiffs insurance claim. The matter has been re-assigned to Judge Barbier, who on
September 11, 2009 issued an order administratively closing the matter pending completion of the
appraisal process.
At this time it is not possible to determine the ultimate resolution of, or estimate the
liability related to, these matters. No provision for losses has been provided in connection with
the Xactware litigation.
iiX Litigation
In March 2007, our subsidiary, Insurance Information Exchange, or iiX, as well as other
information providers and insurers in the State of Texas, were served with a summons and class
action complaint filed in the United States District Court for the Eastern District of Texas
alleging violations of the Driver Privacy Protection Act, or the DPPA, entitled Sharon Taylor, et
al. v. Acxiom Corporation, et al. Plaintiffs brought the action on their own behalf and on behalf
of all similarly situated individuals whose personal information is contained in any motor vehicle
record maintained by the State of Texas and who have not provided express consent to the State of
Texas for the distribution of their personal information for purposes not enumerated by the DPPA
and whose personal information has been knowingly obtained and used by the defendants. The class
complaint alleges that the defendants knowingly obtained personal information for a purpose not
authorized by the DPPA and seeks liquidated damages in the amount of $2,500 for each instance of a
violation of the DPPA, punitive damages and the destruction of any illegally obtained personal
information. The Court granted iiXs motion to dismiss the complaint based on failure to state a
claim and for lack of standing. Oral arguments on the plaintiffs appeal of that dismissal were held on November
4, 2009. A decision on the appeal is not expected for several months.
Interthinx Litigation
In
September 2009, our subsidiary, Interthinx, Inc., or Interthinx, was served with a putative class action
entitled Renata Gluzman v. Interthinx, Inc. The plaintiff, a former Interthinx employee, filed the
class action on August 13, 2009 in the Superior Court of the State of California, County of Los
Angeles on behalf of all Interthinx information technology employees for unpaid overtime and missed
meals and rest breaks, as well as various related claims claiming that the information technology
employees were misclassified as exempt employees and, as a result, were denied certain wages and
benefits that would have been received if they were properly classified as non-exempt employees.
The pleadings include, among other things, a violation of Business and Professions Code 17200 for
unfair business practices which allows plaintiffs to include as class members all information
technology employees employed at Interthinx for four years prior to the date of filing the
complaint. The complaint seeks compensatory damages, penalties that are associated with the various
statutes, restitution, interest, costs and attorney fees. Although no assurance can be given
concerning the outcome of this matter, in the opinion of management the lawsuit is not expected to
have a material adverse effect on our financial condition or results of operations.
Item 4. Reserved
23
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issue Purchases of
Equity Securities.
Market Information
Verisk trades on the NASDAQ Global Select Market under the ticker symbol VRSK. Our common stock was
first publicly traded on October 7, 2009. As of March 8, 2010, the closing price of our Class A common stock was $xx per share, as reported
by the NASDAQ Global Select Market. There is no established public trading market for our Class B
common stock. As of March 8, 2010 there were approximately 69 Class A and 56 Class B
stockholders of record. We believe the number of beneficial owners is substantially greater than the number of record holders, because a large portion of Class A common stock is held in street name by brokers.
We have not paid or declared any cash dividends on our Class A or Class B common stock during the
two most recent fiscal years and we currently do not intend to pay dividends on our Class A or
Class B common stock. We do not have a publicly announced share repurchase plan and have not
repurchased any shares since our initial public offering. As of December 31, 2009, we had
357,037,900 shares of treasury stock.
The following table shows the quarterly range of the closing high and low per share sales prices for our
common stock as reported by the NASDAQ Global Select Market.
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2009 |
|
High |
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Low |
|
Fourth Quarter (beginning October 7, 2009)
|
|
$ |
31.18 |
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|
$ |
26.10 |
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Performance Graph
The graph below compares the cumulative total stockholder
return on $100 invested in our common stock, with the cumulative total return (assuming reinvestment of dividends)
on $100 invested in each of the NASDAQ Composite Index, S&P 500 Index and an
aggregate of peer issuers in the information industry since
October 7, 2009, the date our Class A common stock was
first publicly traded. The peer issuers used for this graph are Dun & Bradstreet Corporation, Equifax Inc., Factset Research Systems Inc.,
Fair Isaac Corporation, Morningstar, Inc., MSCI Inc., RiskMetrics Group, Inc., and Solera Holdings, Inc. Each peer
issuer was weighted according to its respective market capitalization on October 7, 2009.
Recent Sales of Unregistered Securities.
On June 2, 2008 we issued an aggregate of
100 shares of our common stock, par value $.01 per share, to Insurance Services Office, Inc. for $.01 per
share. The issuance of such shares was not registered under the Securities Act because the shares
were offered and sold in a transaction exempt from registration under Section 4(2) of the Securities Act.
Since December 31, 2006,
Insurance Services Office, Inc. has issued to directors, officers and employees options to purchase
9,475,000 shares of Class A common stock with per share exercise prices ranging from $17.84 to $15.10,
and has issued 6,276,495 shares of Class A common stock upon exercise of outstanding options. The
issuance of stock options and the common stock issuable upon the exercise of such options to directors,
officers and employees were determined to be exempt from registration under the Securities Act in reliance
on Rule 701 as promulgated under the Securities Act.
24
Item 6. Selected Financial Data
The following selected historical financial data should be read in conjunction with, and are
qualified by reference to, Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations and the consolidated financial statements and notes thereto included elsewhere in
this annual report on Form 10-K. The consolidated statement of operations data for the years ended
December 31, 2009, 2008 and 2007 and the consolidated balance sheet data as of December 31, 2009
and 2008 are derived from the audited consolidated financial statements included elsewhere in this
annual report on Form 10-K. The consolidated statement of operations
data for the year ended December 31, 2006 and the consolidated balance sheet
data as of December 31, 2007 are derived from audited consolidated financial
statements that are not included in this annual report on Form 10-K. The consolidated
statement of operations data for the year ended December 31, 2005 and the consolidated
balance sheet data as of December 31, 2006 and 2005 are derived from unaudited
consolidated financial statements that are not included in this
annual report on Form 10-K.
Results for the year ended December 31, 2009 are not
necessarily indicative of results that may be expected in any other future period.
Between January 1, 2005 and December 31, 2009 we acquired 15 businesses, which may affect the
comparability of our financial statements.
25
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Year Ended December 31, |
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|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands, except for share and per share data) |
|
Statement of income data: |
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|
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|
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|
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|
Revenues : |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment revenues |
|
$ |
523,976 |
|
|
$ |
504,391 |
|
|
$ |
485,160 |
|
|
$ |
472,634 |
|
|
$ |
448,875 |
|
Decision Analytics revenues |
|
|
503,128 |
|
|
|
389,159 |
|
|
|
317,035 |
|
|
|
257,499 |
|
|
|
196,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
1,027,104 |
|
|
|
893,550 |
|
|
|
802,195 |
|
|
|
730,133 |
|
|
|
645,660 |
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Expenses: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
491,294 |
|
|
|
386,897 |
|
|
|
357,191 |
|
|
|
331,804 |
|
|
|
294,911 |
|
Selling, general and administrative expenses |
|
|
162,604 |
|
|
|
131,239 |
|
|
|
107,576 |
|
|
|
100,124 |
|
|
|
88,723 |
|
Depreciation and amortization of fixed assets |
|
|
38,578 |
|
|
|
35,317 |
|
|
|
31,745 |
|
|
|
28,007 |
|
|
|
22,024 |
|
Amortization of intangible assets |
|
|
32,621 |
|
|
|
29,555 |
|
|
|
33,916 |
|
|
|
26,854 |
|
|
|
19,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
725,097 |
|
|
|
583,008 |
|
|
|
530,428 |
|
|
|
486,789 |
|
|
|
425,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
302,007 |
|
|
|
310,542 |
|
|
|
271,767 |
|
|
|
243,344 |
|
|
|
220,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
195 |
|
|
|
2,184 |
|
|
|
8,451 |
|
|
|
6,476 |
|
|
|
2,905 |
|
Realized
(losses)/gains on securities, net |
|
|
(2,332 |
) |
|
|
(2,511 |
) |
|
|
857 |
|
|
|
(375 |
) |
|
|
27 |
|
Interest expense |
|
|
(35,265 |
) |
|
|
(31,316 |
) |
|
|
(22,928 |
) |
|
|
(16,668 |
) |
|
|
(10,465 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(37,402 |
) |
|
|
(31,643 |
) |
|
|
(13,620 |
) |
|
|
(10,567 |
) |
|
|
(7,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations before income taxes |
|
|
264,605 |
|
|
|
278,899 |
|
|
|
258,147 |
|
|
|
232,777 |
|
|
|
212,669 |
|
Provision for income taxes |
|
|
(137,991 |
) |
|
|
(120,671 |
) |
|
|
(103,184 |
) |
|
|
(91,992 |
) |
|
|
(85,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
126,614 |
|
|
|
158,228 |
|
|
|
154,963 |
|
|
|
140,785 |
|
|
|
126,947 |
|
Loss from discontinued operations, net of tax (1) |
|
|
|
|
|
|
|
|
|
|
(4,589 |
) |
|
|
(1,805 |
) |
|
|
(2,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
126,614 |
|
|
$ |
158,228 |
|
|
$ |
150,374 |
|
|
$ |
138,980 |
|
|
$ |
124,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net
income/(loss) per share (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
|
$ |
0.87 |
|
|
$ |
0.77 |
|
|
$ |
0.68 |
|
|
$ |
0.60 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.72 |
|
|
$ |
0.87 |
|
|
$ |
0.75 |
|
|
$ |
0.67 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income/(loss) per share (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.70 |
|
|
$ |
0.83 |
|
|
$ |
0.74 |
|
|
$ |
0.65 |
|
|
$ |
0.57 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
(0.01 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.70 |
|
|
$ |
0.83 |
|
|
$ |
0.72 |
|
|
$ |
0.64 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
174,767,795 |
|
|
|
182,885,700 |
|
|
|
200,846,400 |
|
|
|
206,548,100 |
|
|
|
212,949,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
182,165,661 |
|
|
|
190,231,700 |
|
|
|
209,257,550 |
|
|
|
215,143,350 |
|
|
|
223,105,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
financial operating data below sets forth the information we believe
is useful for investors in evaluating our overall financial performance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment EBITDA |
|
$ |
210,928 |
|
|
$ |
222,706 |
|
|
$ |
212,780 |
|
|
$ |
202,872 |
|
|
$ |
195,951 |
|
Decision Analytics EBITDA |
|
|
162,278 |
|
|
|
152,708 |
|
|
|
124,648 |
|
|
|
95,333 |
|
|
|
66,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
373,206 |
|
|
$ |
375,414 |
|
|
$ |
337,428 |
|
|
$ |
298,205 |
|
|
$ |
262,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a
reconciliation of income from continuing operations to EBITDA: |
Income from
continuing operations |
|
$ |
126,614 |
|
|
$ |
158,228 |
|
|
$ |
154,963 |
|
|
$ |
140,785 |
|
|
$ |
126,947 |
|
Depreciation and amortization |
|
|
71,199 |
|
|
|
64,872 |
|
|
|
65,661 |
|
|
|
54,861 |
|
|
|
41,824 |
|
Investment
income and realized losses/(gains) on securities, net |
|
|
2,137 |
|
|
|
327 |
|
|
|
(9,308 |
) |
|
|
(6,101 |
) |
|
|
(2,932 |
) |
Interest expense |
|
|
35,265 |
|
|
|
31,316 |
|
|
|
22,928 |
|
|
|
16,668 |
|
|
|
10,465 |
|
Provision for income taxes |
|
|
137,991 |
|
|
|
120,671 |
|
|
|
103,184 |
|
|
|
91,992 |
|
|
|
85,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
373,206 |
|
|
$ |
375,414 |
|
|
$ |
337,428 |
|
|
$ |
298,205 |
|
|
$ |
262,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth
our consolidated balance sheet data as of December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,527 |
|
|
$ |
33,185 |
|
|
$ |
24,049 |
|
|
$ |
99,152 |
|
|
$ |
42,822 |
|
Total assets |
|
$ |
996,953 |
|
|
$ |
928,877 |
|
|
$ |
830,041 |
|
|
$ |
739,282 |
|
|
$ |
466,244 |
|
Total debt (4) |
|
$ |
594,169 |
|
|
$ |
669,754 |
|
|
$ |
438,330 |
|
|
$ |
448,698 |
|
|
$ |
276,964 |
|
Redeemable common stock (5) |
|
$ |
|
|
|
$ |
749,539 |
|
|
$ |
1,171,188 |
|
|
$ |
1,125,933 |
|
|
$ |
901,089 |
|
Stockholders deficit |
|
$ |
(34,949 |
) |
|
$ |
(1,009,823 |
) |
|
$ |
(1,203,348 |
) |
|
$ |
(1,123,977 |
) |
|
$ |
(940,843 |
) |
|
|
|
(1) |
|
As of December 31, 2007, we discontinued operations of our claim consulting business located
in New Hope, Pennsylvania and the United Kingdom. There was no impact of discontinued
operations on the results of operations for the years ended December 31, 2009 and 2008. |
|
(2) |
|
In conjunction with the initial public offering, the stock of Insurance Services Office, Inc.
converted to stock of Verisk Analytics, Inc, which effected a fifty-to-one stock split of its
common stock. The numbers in the above table reflect this stock split. |
|
(3) |
|
EBITDA is the financial measure which management uses to evaluate the performance of our
segments. EBITDA is defined as net income before investment income and realized
losses/(gains) on securities, net, interest expense, provision for income taxes, and
depreciation and amortization of fixed and intangible assets. In addition, Managements
Discussion and Analysis includes references to EBITDA margin, which is computed as EBITDA
divided by revenues. See Note 18 of our consolidated financial statements included in this annual report on Form
10-K. |
|
|
|
Although EBITDA is a non-GAAP financial measure, EBITDA is frequently used by securities
analysts, lenders and others in their evaluation of companies, EBITDA has limitations as an
analytical tool, and should not be considered in isolation, or as a substitute for an analysis
of our results of operations or cash flow from operating activities reported under GAAP.
Management uses EBITDA in conjunction with traditional GAAP operating performance measures as
part of its overall assessment of company performance. Some of these limitations are: |
|
EBITDA does not reflect our cash expenditures, or future requirements for
capital expenditures or contractual commitments; |
|
|
EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
|
|
Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized often will have to be replaced in the future and EBITDA does not
reflect any cash requirements for such replacements; and |
|
|
Other companies in our industry may calculate EBITDA differently than we do, limiting
its usefulness as a comparative measure. |
|
(4) |
|
Includes capital lease obligations. |
|
(5) |
|
Prior to our corporate reorganization, we were required to record our Class A common stock
and vested options at redemption value at each balance sheet date as the redemption of these
securities was not solely within our control, due to our contractual obligations to redeem
these shares. We classified this redemption value as redeemable common stock. After our
initial public offering, we were no longer obligated to redeem these shares and therefore we
reversed the redeemable common stock balance. See Note 14 to our consolidated financial statements included in this
annual report on Form 10-K for further information. |
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our historical financial
statements and the related notes included elsewhere in this annual report on Form 10-K, as well as
the discussion under Selected Consolidated Financial Data. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual results may differ
materially from those discussed in or implied by any of the forward-looking statements as a result
of various factors, including but not limited to those listed under Risk Factors and Special
Note Regarding Forward-Looking Statements.
We enable risk-bearing businesses to better understand and manage their risks. We provide
value to our customers by supplying proprietary data that, combined with our analytic methods,
creates embedded decision support solutions. We are the largest aggregator and provider of data
pertaining to U.S. property and casualty, or P&C, insurance risks. We offer solutions for detecting
fraud in the U.S. P&C insurance, mortgage and healthcare industries and sophisticated methods to
predict and quantify loss in diverse contexts ranging from natural catastrophes to health
insurance.
26
Our customers use our solutions to make better risk decisions with greater efficiency and
discipline. We refer to these products and services as solutions due to the integration among our
products and the flexibility that enables our customers to purchase components or the comprehensive
package of products. These solutions take various forms, including data, statistical models or
tailored analytics, all designed to allow our clients to make more logical decisions. We believe
our solutions for analyzing risk positively impact our customers revenues and help them better
manage their costs.
On May 23, 2008, in contemplation of our initial public offering, Insurance Service
Office, Inc., or ISO, formed Verisk Analytics,
Inc., or Verisk, a Delaware corporation, to be the holding company for our business. Verisk was
initially formed as a wholly-owned subsidiary of ISO. On
October 6, 2009 in connection with our initial public offering, we effected a reorganization
whereby ISO became a wholly-owned subsidiary of Verisk.
We organize our business in two segments: Risk Assessment and Decision Analytics. Our Risk
Assessment segment provides statistical, actuarial and underwriting data for the U.S. P&C insurance
industry. Our Risk Assessment segment revenues represented approximately 51.0% and 56.4% of our
revenues for the years ended December 31, 2009 and 2008, respectively. Our Decision Analytics
segment provides solutions our customers use to analyze the four processes of the Verisk Risk
Analysis Framework: Prediction of Loss, Selection and Pricing of Risk, Detection and Prevention of
Fraud, and Quantification of Loss. Our Decision Analytics segment revenues represented
approximately 49.0% and 43.6% of our revenues for the years ended December 31, 2009 and 2008,
respectively.
Executive Summary
Key Performance Metrics
We believe our businesss ability to generate recurring revenue and positive cash flow is the
key indicator of the successful execution of our business strategy. We use year over year revenue
growth and EBITDA margin as metrics to measure our performance. EBITDA and EBITDA margin are
non-GAAP financial measures (see Note 3. within Item 6. Selected Financial Data section of
Managements Discussion and Analysis of Financial Condition and Results of Operations).
Revenue growth. We use year over year revenue growth as a key performance metric. We assess
revenue growth based on our ability to generate increased revenue through increased sales to
existing customers, sales to new customers, sales of new or expanded solutions to existing and new
customers and strategic acquisitions of new businesses.
EBITDA margin. We use EBITDA margin as a metric to assess segment performance and scalability
of our business. We assess EBITDA margin based on our ability to increase revenues while
controlling expense growth.
Revenues
We earn revenues through subscriptions, long-term agreements and on a transactional basis.
Subscriptions for our solutions are generally paid in advance of rendering services either
quarterly or in full upon commencement of the subscription period, which is usually for one year
and automatically renewed each year. As a result, the timing of our cash flows generally precedes
our recognition of revenues and income and our cash flow from operations tends to be higher in the
first quarter as we receive subscription payments. Examples of these arrangements include
subscriptions that allow our customers to access our standardized coverage language or our
actuarial services throughout the subscription period. In general, we experience minimal
seasonality within the business. Our long-term agreements are generally for periods of three to
seven years. We recognize revenue from subscriptions ratably over the term of the subscription and
most long-term agreements are recognized ratably over the term of the agreement.
Certain of our solutions are also paid for by our customers on a transactional basis. For
example, we have solutions that allow our customers to access fraud detection tools in the context
of an individual mortgage application, obtain property-specific rating and underwriting information
to price a policy on a commercial building, or compare a P&C insurance, medical or workers
compensation claim with information in our databases. For the years ended December 31, 2009 and
2008, 29.0% and 24.4% of our revenues, respectively, were derived from providing transactional
solutions. We earn transactional revenues as our solutions are delivered or services performed. In
general, transactions are billed monthly at the end of each month.
More than 83.8% and 81.7% of the revenues in our Risk Assessment segment for the years ended
December 31, 2009 and 2008, respectively, were derived from subscriptions and long-term agreements
for our solutions. Our customers in this segment include most of the P&C insurance providers in the
United States, and we have retained approximately 99% of our P&C insurance customer base in each of
the last five years. More than 57.7% and 67.6% of the revenues in our Decision Analytics segment,
for the years ended December 31, 2009 and 2008, respectively, were derived from subscriptions and
long-term agreements for our solutions.
27
Principal Operating Costs and Expenses
Personnel expenses are the major component of both our cost of revenues and selling, general
and administrative expenses. Personnel expenses include salaries, benefits, incentive compensation,
equity compensation costs (described under Equity Compensation Costs below), sales commissions,
employment taxes, recruiting costs, and outsourced temporary agency
costs, which represented 67.6%
and 63.5% of our total expenses for the years ended December 31, 2009 and 2008, respectively.
The increased percentage of personnel expenses in 2009 is primarily
related to the accelerated ESOP allocation that occured prior to our
initial public offering. The accelerated ESOP allocation resulted in
a one time, non-cash charge of $57.7 million. Excluding this accelerated ESOP allocation, personnel expenses
represented 64.8% of our total expenses for the year ended December 31, 2009.
We allocate personnel expenses between two categories, cost of revenues and selling, general
and administrative costs, based on the actual costs associated with each employee. We categorize
employees who maintain our solutions as cost of revenues, and all other personnel, including
executive managers, sales people, marketing, business development, finance, legal, human resources,
and administrative services, as selling, general and administrative expenses. A significant portion
of our other operating costs, such as facilities and communications, are also either captured
within cost of revenues or selling, general and administrative expense based on the nature of the
work being performed.
While we expect to grow our headcount over time to take advantage of our market opportunities,
we believe that the economies of scale in our operating model will allow us to grow our personnel
expenses at a lower rate than revenues. Historically, our EBITDA margin has improved because we
have been able to increase revenues without a proportionate corresponding increase in expenses.
Cost of Revenues. Our cost of revenues consists primarily of personnel expenses. Cost of
revenues also includes the expenses associated with the acquisition and verification of data, the
maintenance of our existing solutions and the development and enhancement of our next-generation
solutions. Our cost of revenues excludes depreciation and amortization.
Selling, General and Administrative Expense. Our selling, general and administrative expense
also consists primarily of personnel costs. A portion of the other operating costs such as
facilities, insurance and communications are also allocated to selling, general and administrative
costs based on the nature of the work being performed by the employee. Our selling, general and
administrative expenses excludes depreciation and amortization.
Description of Acquisitions
We
acquired six businesses since January 1, 2008. As a result of these acquisitions, our
consolidated results of operations may not be comparable between periods.
On February 26, 2010,
we acquired 100% of the common stock of Strategic Analytics, Inc., or Strategic Analytics, a privately
owned provider of credit risk and capital management solutions to consumer and mortgage lenders, for
a net cash purchase price of $7.7 million of which $1.5 million was used to fund the indemnity escrows.
The preliminary allocation of the purchase price resulted in tangible
assets of $2.5 million, and we are
still evaluating the allocation of the purchase price related to intangible assets and goodwill. Within
our Decision Analytics segment, Strategic Analytics solutions and application set will allow our customers
to take advantage of state-of-the-art loss forecasting, stress testing, and economic capital requirement tools
to better understand and forecast the risk associated within their
credit portfolios. As this business was acquired after
December 31, 2009, the financial results of this business are not
included in this annual report on Form 10-K.
On October 30, 2009, we acquired the net assets of Enabl-u Technology Corporation, Inc, or
Enabl-u, a privately owned provider of data management, training and communication solutions to
companies with regional, national or global work forces. We believe this acquisition will enhance
our ability to provide solutions for customers to measure loss prevention and improve asset
management through the use of software and software services.
On July 24, 2009, we acquired the net assets of TierMed Systems, LLC, or TierMed, a privately
owned provider of Healthcare Effectiveness Data and Information Set, or HEDIS, solutions to
healthcare organizations that have HEDIS or quality-reporting needs. We believe this acquisition
will enhance our ability to provide solutions for customers to measure and improve healthcare
quality and financial performance through the use of software and software services.
On January 14, 2009, we acquired 100% of the stock of D2 Hawkeye, Inc., or D2, a
privately-owned provider of data mining, decision support, clinical quality analysis, and risk
analysis tools for the healthcare industry. We believe this acquisition will enhance our position
in the healthcare analytics and predictive modeling market by providing new market, cross-sell, and
diversification opportunities for the Companys expanding healthcare solutions.
On November 20, 2008, we acquired 100% of the stock of Atmospheric and Environmental
Research, Inc., or AER. AER provides research and consulting services to further understanding of
the global environment and to enable better decision making in response to weather and climate
risk. The purchase includes a contingent payment provision subject to the achievement of certain
predetermined financial results for the years ended 2010 and 2011. We believe the acquisition of
AER further enhances our environmental and scientific research and predictive modeling.
On November 14, 2008, we acquired the net assets of ZAIOs two divisions, United Systems
Software Company and Day One Technology. The assets associated with this acquisition further
enhance the capability of our appraisal software offerings within our Risk Assessment segment.
28
Equity Compensation Costs
We have a leveraged ESOP, funded with intercompany debt that includes 401(k), ESOP and profit
sharing components to provide employees with equity participation. We make quarterly cash
contributions to the plan equal to the debt service requirements. As the debt is repaid, shares are
released to the ESOP to fund 401(k) matching and profit sharing contributions and the remainder is
allocated annually to active employees in proportion to their eligible compensation in relation to
total participants eligible compensation.
We accrue compensation expense over the reporting period equal to the fair value of the shares
to be released to the ESOP. Depending on the number of shares released to the plan during the
quarter and the fluctuation in the fair value of the shares, a corresponding increase or decrease
in compensation expense will occur. The amount of our equity compensation costs recognized for the
years ended December 31, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401(k) matching contribution expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment |
|
$ |
4,273 |
|
|
$ |
5,408 |
|
|
$ |
4,914 |
|
Decision Analytics |
|
|
3,331 |
|
|
|
3,162 |
|
|
|
2,788 |
|
|
|
|
|
|
|
|
|
|
|
Total 401(k) matching contribution expense |
|
|
7,604 |
|
|
|
8,570 |
|
|
|
7,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit sharing contribution expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment |
|
|
995 |
|
|
|
720 |
|
|
|
473 |
|
Decision Analytics |
|
|
144 |
|
|
|
421 |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
Total profit sharing contribution expense |
|
|
1,139 |
|
|
|
1,141 |
|
|
|
741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP allocation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Risk Assessment |
|
|
38,373 |
|
|
|
7,927 |
|
|
|
8,807 |
|
Decision Analytics |
|
|
28,949 |
|
|
|
4,636 |
|
|
|
4,997 |
|
|
|
|
|
|
|
|
|
|
|
Total ESOP allocation expense |
|
|
67,322 |
|
|
|
12,563 |
|
|
|
13,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ESOP cost |
|
$ |
76,065 |
|
|
$ |
22,274 |
|
|
$ |
22,247 |
|
|
|
|
|
|
|
|
|
|
|
In connection with our initial public offering, on October 6, 2009, we accelerated our future ESOP allocation contribution through the end of the ESOP in 2013, to all
participants
eligible for a contribution in 2009. This resulted in a non-recurring non-cash charge of approximately $57.7 million in the fourth
quarter of 2009. As a result, subsequent to the offering, the
non-cash ESOP allocation expense will be
substantially reduced. Excluding the ESOP allocation, expense relating specifically to our 401(k) and profit sharing plans
were $8.7 million, $9.7
million and $8.4 million for the years ended December 31, 2009,
2008 and 2007, respectively.
In addition, the portion of the ESOP allocation expense related to the appreciation of the
value of the shares in the ESOP above the value of those shares when the ESOP was first established
is not tax deductible. Therefore, we believe the accelerated ESOP allocation in the fourth quarter
of 2009 will result in a reduction of approximately 1.4% to our effective tax rate in years
subsequent to the completion of our initial public offering.
In connection with our initial public offering, on October 6, 2009, we granted options to purchase 2,875,871 shares of our Verisk Class A
common stock to our directors, officers and employees. Assuming that
all of the service conditions are met,
we expect the related expense will be approximately $6.0 million, $6.0 million, $5.4
million, and $2.7 million for 2010, 2011, 2012, and 2013, respectively.
Prior to our initial public offering, our Class A stock and vested stock options were recorded
within redeemable common stock at full redemption value at each balance sheet date, as the
redemption of these securities was not solely within the control of the Company (see Note 14 of our
consolidated financial statements). Effective with the corporate reorganization that occurred on
October 6, 2009, we are no longer obligated to redeem Class A stock and therefore are not required
to present our Class A stock and vested stock options at redemption value. Our financial results
for the fourth quarter of 2009 reflect a reversal of the redeemable
common stock. The reversal of the
redeemable common stock of $1,064.9 million on October 6, 2009 resulted in the elimination of accumulated deficit of
$440.6 million, an increase of $0.1 million to Class A
common stock at par value, an increase of $624.3
million to additional paid-in-capital, and a reclassification of the
ISO Class A unearned common stock KSOP shares balance of
$1.3 million to unearned KSOP contribution. See Note 16 in our
consolidated financial statements.
29
Public Company Expenses
Beginning in 2008, our selling, general and administrative costs increased as we prepared for
our initial public offering. These costs were $7.0 million and $6.5 million for the years ended
December 31, 2009 and 2008, respectively. These costs negatively affected our EBITDA margins by
0.7% for each year ended December 31, 2009 and 2008. Following our initial
public offering, we incurred additional selling, general and administrative expenses related to
operating as a public company, such as increased legal and accounting expenses, the cost of an
investor relations function, costs related to Section 404 of the Sarbanes-Oxley Act of 2002, and
increased director and officer insurance premiums.
Trends Affecting Our Business
A portion of our revenues is related to changes in historical insurance premiums; therefore,
our revenues could be positively or negatively affected by growth or declines in premiums for the
lines of insurance for which we perform services. The pricing of these solutions is based on an
individual customers premiums in a prior period, so the pricing is fixed at the inception of each
calendar year. The impact of insurance premiums has a more significant impact on the Risk
Assessment segment than it does on the Decision Analytics segment. Since 2005, premium growth in
the P&C insurance industry has slowed and we expect little or no growth for most insurance lines
during 2010. A significant portion of our revenues is from insurance companies. Although business
and new sales from these companies have generally remained strong, the current economic environment
could negatively impact buying demand for our solutions.
A portion of our revenues in the Decision Analytics segment is tied to the volume of
applications for new mortgages or refinancing of existing mortgages. Turmoil in the mortgage market
since 2007 has adversely affected revenue in this segment of our business. This trend began to
reverse in late 2008 spurred by lower mortgage interest rates. As a result of the rise in
foreclosures and early pay defaults, we have seen and expect to see in the future an increase in
revenues from our solutions that help our customers focus on improved underwriting quality of
mortgage loans. These solutions help to ensure the application data is accurate and identify and
rapidly settle bad loans, which may have been originated based upon fraudulent information.
Recent events within the United States economy have resulted in further tightening in credit
availability, which has resulted in higher interest rates for corporate borrowers. Due to recent
market events, our liquidity and our ability to obtain financing may be negatively impacted if one
of our lenders fails to meet its funding obligations. Borrowings under our long-term debt facilities are at fixed
interest rates. While we expect future borrowings will be at higher interest rates, which will
translate into higher interest expense in the future, we do not expect this to have a material
impact on our business in the near-term. We have been able to
adequately secure credit arrangements for the financing of our business
and have recently entered into a $420.0 million committed syndicated
revolving credit facility with Bank of America, N.A., as
administrative agent, which matures on July 2, 2012. Interest is
payable on borrowings under this credit facility at variable rates of
interest based on LIBOR plus 2.50%. We will continue to explore financing alternatives in
order to fund future growth opportunities.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Consolidated Results of Operations
Between January 1, 2008 and December 31, 2009 we acquired five businesses, which may affect
the comparability of our financial statements.
Revenues
Revenues were $1,027.1 million for the year ended December 31, 2009 compared to $893.6 million
for the year ended December 31, 2008, an increase of $133.5 million or 14.9%. The acquisitions in
the second half of 2008 and the three acquisitions in 2009 accounted for an increase of $33.2
million in revenues for the year ended December 31, 2009. Excluding these acquisitions, revenues
increased $100.3 million, which included an increase in our Risk Assessment segment of $19.6
million and an increase in our Decision Analytics segment of $80.7 million.
Cost of Revenues
Cost of revenues was $491.3 million
for the year ended December 31, 2009 compared to $386.9
million for the year ended December 31, 2008, an increase of
$104.4 million or 27.0%. The increase was primarily due to the
accelerated ESOP allocation, which resulted in a non-recurring
non-cash charge of $44.4 million prior to our intial public offering
and costs related to the newly acquired companies of $17.7 million.
Excluding the accelerated ESOP allocation and the effect of the newly
acquired companies, our cost of revenues increased $42.3 million or
10.9%. The increase was primarily due to costs related to an increase
in salaries and employee benefits costs of $32.2 million, which include annual salary increases,
medical costs, and pension cost. Pension cost represents $15.0 million of the salaries and employee
benefit costs increase due to the decline in the market values of
pension investments as a result of the global economic downturn in
2008. Other increases include third party data costs of $10.5 million primarily in our
Decision Analytics segment and office maintenance fees of $1.4 million. These increases were
partially offset by a decrease in other operating expenses of $1.8 million, which include
travel and auto related costs.
30
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $162.6 million for the year ended December
31, 2009 compared to $131.2 million for the year ended December 31, 2008, an increase of $31.4
million or 23.9%. The increase was primarily due to the accelerated
ESOP allocation, which resulted in a non-recurring non-cash charge of
$13.3 million prior to our initial public offering and costs related
to the newly acquired companies of $12.7 million. Excluding the
accelerated ESOP allocation and the effect of the newly acquired
companies, our selling, general and administrative expenses increased $5.4 million or 4.1%. The increase was primarily due to an increase in salaries and
employee benefits costs of $10.3 million, which include annual salary increases, medical costs,
commissions and pension costs across a relatively constant
employee headcount. Pension costs represent $3.1 million of the
increases in salaries and employee benefit costs due to the decline
in the market values of pension investments as a result of
the global economic downturn in 2008.
Other increases were attributed to other
general expenses of $0.9 million. These increases were partially offset by a decrease in legal
costs of $3.8 million and an insurance cost recovery of $2.0 million.
Depreciation and Amortization of Fixed Assets
Depreciation and amortization of fixed assets was $38.6 million for the year ended December
31, 2009 compared to $35.3 million for the year ended December 31, 2008, an increase of $3.3
million or 9.2%. Depreciation and amortization of fixed assets includes depreciation of furniture
and equipment, software, computer hardware, and related equipment.
Amortization of Intangible Assets
Amortization of intangible assets was $32.6 million for the year ended December 31, 2009
compared to $29.6 million for the year ended December 31, 2008, an increase of $3.0 million or
10.4%. The increase is the result of the amortization of intangibles from our new
acquisitions,
partially offset by certain intangible assets having been fully amortized in 2008. We amortize intangible assets obtained through acquisitions over the periods that we
expect to derive benefit from such assets.
Investment Income and Realized (Losses)/Gains on Securities, Net
Investment income and realized (losses)/gains on securities, net was $(2.1) million for the
year ended December 31, 2009 compared to $(0.3) million for the year ended December 31, 2008, an
increased loss of $1.8 million. Investment income for the year ended December 31, 2009 includes
$0.3 million of investment income, partially offset by $2.4 million of other-than temporary
impairment primarily related to a cost basis private equity investment in a telematics business. Investment income for the year ended December 31, 2008 consisted of $2.2
million of investment income, partially offset by a $(2.5) realized loss on sale of securities. The
decrease in investment income was primarily the result of the termination of the shareholder loan
program in 2008.
Interest Expense
Interest expense was $35.3 million for the year ended December 31, 2009 compared to $31.3
million for the year ended December 31, 2008, an increase of $4.0 million or 12.6%. This increase
is primarily due to an increase in the weighted average interest rate on our outstanding borrowings
during the year ended December 31, 2009.
Provision for Income Taxes
The
provision for income taxes was $138.0 million for the year ended December 31, 2009
compared to $120.7 million for the year ended December 31,
2008, an increase of $17.3 million or
14.4%. The effective tax rate was 52.2% for the year ended December 31, 2009 compared to 43.3% for
the year ended December 31, 2008. The 2009 rate is higher due to the non-recurring, non-cash costs associated with
the accelerated ESOP allocation and certain initial public offering related costs that are not tax deductible.
EBITDA Margin
The EBITDA margin for our consolidated results was 36.3% for the year ended December 31, 2009
compared to 42.0% for the year ended December 31, 2008. Included in the calculation of our EBITDA
margin for the year ended December 31, 2009 are non-recurring,
non-cash costs of $57.7 million associated with the
accelerated ESOP allocation prior to our initial public offering, representing a 5.6% negative impact in EBITDA margin, and
increased pension costs of $18.1 million, representing a 1.8% negative impact on our EBITDA margin.
Also included in the calculation of our EBITDA margin are costs of $7.0 million and $6.5 million associated
with the preparation for our initial public offering for the years ended December 31, 2009 and 2008, respectively, which represents a 0.7% negative impact
in EBITDA margin for each period.
31
Risk Assessment Results of Operations
Revenues
Revenues for our Risk Assessment segment were $524.0 million for the year ended December 31,
2009 compared to $504.4 million for the year ended December 31, 2008, an increase of $19.6 million
or 3.9%. The increase was primarily due to an increase in the sales of our industry-standard
insurance programs and property-specific rating and underwriting information. The increase in our
industry-standard insurance programs primarily resulted from an increase in prices derived from
continued enhancements to the content of our solutions and the addition of new customers. The
increase in our property-specific rating and underwriting information is particularly due to sales of
our rate making and policy administration solutions. Our revenue by category for the periods
presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Percentage |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry standard insurance programs |
|
$ |
341,079 |
|
|
$ |
329,858 |
|
|
|
3.4 |
% |
Property-specific rating and underwriting information |
|
|
132,027 |
|
|
|
125,835 |
|
|
|
4.9 |
% |
Statistical agency and data services |
|
|
28,619 |
|
|
|
27,451 |
|
|
|
4.3 |
% |
Actuarial services |
|
|
22,251 |
|
|
|
21,247 |
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment |
|
$ |
523,976 |
|
|
$ |
504,391 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for our Risk Assessment segment was $230.5 million for the year ended
December 31, 2009 compared to $199.9 million for the year ended December 31, 2008, an increase of
$30.6 million or 15.3%.
The increase was primarily due to the accelerated
ESOP allocation, which resulted in a non-recurring non-cash charge of
$25.4 million prior to our initial public offering.
Excluding the accelerated ESOP allocation, our cost of revenues
increased $5.2 million or 2.6%. The increase was primarily due to an increase in salaries and
employee benefits costs of $10.1 million, primarily related to
pension costs of $12.7 million resulting from the global economic downturn experienced in 2008, partially offset by a decrease in
salaries due to a slight reduction in headcount. There was also an increase in office maintenance
fees of $0.3 million. The increase was partially offset by a decrease in other operating expenses
of $3.8 million, which include decreases in travel and auto related costs, and a decrease in
data and consultant costs of $1.4 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Risk Assessment segment were $82.5
million for the year ended December 31, 2009 compared to $81.8 million for the year ended December
31, 2008, an increase of $0.7 million or 0.9%.
Included within the increase in selling, general and administrative
expenses is the accelerated ESOP allocation, which resulted in a
non-recurring non-cash charge of $7.5 million.
Excluding this accelerated ESOP charge, our selling,
general and administrative expenses decreased $6.8 million or 8.2%. The decrease was primarily due
to lower legal costs of $4.1 million primarily associated with the preparation for our initial
public offering in 2008, an insurance cost recovery of $1.7 million and other general expenses of $1.4
million. These decreases was partially offset by an increase in salaries and employee benefit costs
of $0.4 million, which include increased pension costs of $2.4
million offset by a decrease in salaries and other employee
benefits.
EBITDA Margin
The EBITDA margin for our
Risk Assessment segment was 40.3% for the year ended December 31,
2009 compared to 44.2% for the year ended December 31, 2008. Included in the calculation of our
EBITDA margin for the year ended December 31, 2009, are
non-recurring, non-cash costs of $32.9 million associated
with the accelerated ESOP allocation prior to our initial public offering, representing a 6.3% negative impact in EBITDA margin, and
increased pension costs of $15.1 million, representing a 2.8% negative impact on our EBITDA
margin. Also included in the calculation of our EBITDA margin are
costs of $4.1 and $5.8 million
associated with the preparation for our initial public offering for the year ended December 31,
2009 and December 31, 2008, respectively, representing a 0.8%
and 1.1% negative impact, respectively, in EBITDA margin for each period.
32
Decision Analytics Results of Operations
Revenues
Revenues for our Decision Analytics segment were $503.1 million for the year ended December
31, 2009 compared to $389.2 million for the year ended December 31, 2008, an increase of $113.9
million or 29.3%. In 2008 and 2009, we acquired two companies and three companies, respectively.
These acquisitions accounted for $1.3 million and $34.5 million of additional revenues for the
years ended December 31, 2008 and 2009, respectively. The increase in revenue relating to the
acquisitions was $33.2 million, of which $33.1 million relates to the loss prediction category and
$0.1 million relates to the fraud and detection solutions category. Excluding the impact of these
acquisitions, revenues increased $80.7 million for the year ended December 31, 2009. Our fraud and
detection solutions revenue increased $59.1 million primarily in our fraud detection and forensic
audit services for the home mortgage and mortgage insurance industries as well as in response to
the increased scrutiny and refinancing within the mortgage industry. Increased revenue in our loss
prediction solutions primarily resulted from our acquisitions and increased penetration of our
existing customers. Our loss quantification revenues increased as a result of new customer
contracts and volume increases associated with natural disasters experienced in the United States.
Our revenue by category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Percentage |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fraud identification and detection solutions |
|
$ |
273,103 |
|
|
$ |
213,994 |
|
|
|
27.6 |
% |
Loss prediction solutions |
|
|
137,328 |
|
|
|
95,128 |
|
|
|
44.4 |
% |
Loss quantification solutions |
|
|
92,697 |
|
|
|
80,037 |
|
|
|
15.8 |
% |
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics |
|
$ |
503,128 |
|
|
$ |
389,159 |
|
|
|
29.3 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for our Decision Analytics
segment was $260.8 million for the year ended December 31, 2009 compared to $187.0 million for the year
ended December 31, 2008, an increase of
$73.8 million or 39.5%.
The increase was primarily due to the accelerated ESOP allocation,
which resulted in a non-cash non-recurring charge of $19.0 million
prior to our initial public offering and costs related to the newly
acquired companies of $17.7 million. Excluding the accelerated ESOP
allocation and the effect of the newly acquired companies, our cost
of revenues increased $37.1 million or 19.8%.
The increase is primarily due to
an increase in salaries and employee benefits of $22.1
million, which includes annual salary increases, medical costs and equity compensation and pension
costs. This increase in salaries and employee benefit costs is related to a modest increase in
employee headcount relative to the 27.6% revenue growth in our fraud identification and detection
solutions and to an increase pension cost of $2.3 million due to
the global economic downturn experienced in 2008.
Other increases include third party data costs of $11.9 million, an increase in other
operating expenses of $2.0 million, which
include technology costs, and an increase in office maintenance costs of $1.1 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $80.1 million for the year ended December
31, 2009 compared to $49.4 million for the year ended
December 31, 2008, an increase of $30.7
million or 62.2%.
The increase is primarily due to the accelerated ESOP allocation,
which resulted in a non-cash non-recurring charge of $5.8 million
prior to our initial public offering and costs related to the newly
acquired companies of $12.7 million. Excluding the accelerated ESOP
allocation and the effect of the newly acquired companies, our
selling, general and administrative expenses increased $12.2 million
or 24.7%.
The increase was primarily due to
an increase in salaries and employee benefits
costs of $9.9 million, which include annual salary increases, medical costs and pension cost of $0.7
million. Other increases include an increase in legal costs of
$0.3 million, and other general expenses of $2.3 million, partially offset by an insurance cost
recovery of $0.3 million.
EBITDA Margin
The EBITDA margin for our Decision Analytics segment was 32.3% for the year ended December 31,
2009 compared to 39.2% for the year ended December 31, 2008. Included in the calculation of our
EBITDA margin for the year ended December 31, 2009 are
non-recurring non-cash costs of $24.8 million associated
with the accelerated ESOP allocation prior to our initial public offering, representing a 4.9% negative impact in EBITDA margin, and
increased pension costs of $3.0 million, representing a 0.6% negative impact on our EBITDA margin.
Also included in the calculation of our EBITDA margin are costs of
$2.9 and $0.7 million associated
with the preparation for our initial public offering
for the years ended December 31, 2009 and December 31, 2008
representing a 0.6% and 0.2%
negative impact, respectively, in EBITDA margin.
33
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Consolidated Results of Operations
Revenues
Revenues were $893.6 million for the year ended December 31, 2008 compared to $802.2 million
for the year ended December 31, 2007, an increase of $91.4 million or 11.4%. The acquisitions in
the latter part of 2007 and the two acquisitions in 2008 accounted for an increase of $38.6 million
in revenues for the year ended December 31, 2008. Excluding these acquisitions, revenues increased
$52.8 million, which included an increase in our Risk Assessment segment of $19.2 million and an
increase in our Decision Analytics segment of $33.6 million.
Cost of Revenues
Cost of revenues was $386.9 million for the year ended December 31, 2008 compared to $357.2
million for the year ended December 31, 2007, an increase of $29.7 million or 8.3%. The increase
was primarily due to costs attributable to the newly acquired companies of $25.4 million and an
increase in salaries and employee benefits costs of $1.1 million, which include annual salary
increases, medical costs and long-term incentive plans across a relatively constant employee
headcount. Other increases include office maintenance fees of $2.8 million, software and data costs
of $3.4 million and other operating expenses of $0.8 million. These increases were partially offset
by losses on disposal of assets that were $0.5 million less in the current period as compared to
the year ended December 31, 2007. In addition, acquisition contingent payments, which are treated
as compensation when tied to continuing employment, were $3.3 million less in the current period as
compared to the year ended December 31, 2007 due to a decrease in the amount of potential
acquisition contingent payments in 2008 compared to 2007. As a percentage of revenue, cost of
revenues decreased to 43.3% for the year ended December 31, 2008 from 44.5% for the year ended
December 31, 2007.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $131.2 million for the year ended December
31, 2008 compared to $107.6 million for the year ended December 31, 2007, an increase of $23.6
million or 22.0%. The increase was primarily due to increased salaries and employee benefits costs
of $13.5 million, which include annual salary increases, medical costs and long-term incentive
plans across a relatively constant employee headcount, an increase in legal costs of $7.8 million,
primarily resulting from the preparation for our initial public offering, costs attributable to the
newly acquired companies of $0.9 million, and other general expenses of $2.5 million. This increase
was partially offset by lower advertising and marketing costs of $1.1 million. As a percentage of
revenues, selling, general and administrative expenses increased to 14.7% for the year ended
December 31, 2008 from 13.4% for the year ended December 31, 2007.
Depreciation and Amortization of Fixed Assets
Depreciation and amortization of fixed assets were $35.3 million for the year ended December
31, 2008 compared to $31.7 million for the year ended December 31, 2007, an increase of $3.6
million or 11.3%. Depreciation and amortization of fixed assets includes depreciation of furniture
and equipment, software, computer hardware, and related equipment. As a percentage of revenues,
depreciation and amortization of fixed assets was 4.0% for both the years ended December 31, 2007
and 2008.
Amortization of Intangible Assets
Amortization of intangible assets was $29.6 million for the year ended December 31, 2008
compared to $33.9 million for the year ended December 31, 2007, a decrease of $4.3 million or
12.9%. The decrease is the result of certain intangible assets having been fully amortized in 2007,
partially offset by the increased amortization of intangibles that resulted from our new
acquisitions. We amortize intangible assets obtained through acquisitions over the periods that we
expect to derive benefit from such assets. As a percentage of revenues, amortization of intangible
assets decreased to 3.3% for the year ended December 31, 2008 from 4.2% for the year ended December
31, 2007.
Investment Income and Realized Gains/(Losses) on Securities, Net
Investment income and realized gains/(losses) on securities, net was $(0.3) million for the
year ended December 31, 2008 compared to $9.3 million for the year ended December 31, 2007, a
decrease of $9.6 million. Investment income and realized gains/(losses) on securities, net consists
of interest income we receive from our cash and cash equivalents and stockholder loans, dividend
income from our available-for-sale securities held with certain financial institutions as well as
realized amounts associated with the sale of available-for-sale securities. The decrease primarily
resulted from reduced interest income of $4.6 million coupled with the loss on sales of securities
of $1.3 million and other than temporary impairment of securities of $1.2 million for the year
ended December 31, 2008 as compared to a gain on our investment portfolio of $2.3 million for the
period
ended December 31, 2007. As a percentage of revenues, investment income and realized
gains/(losses) on securities, net decreased to 0.0% for the year ended December 31, 2008 from 1.2%
for the year ended December 31, 2007.
34
Interest Expense
Interest expense was $31.3 million for the year ended December 31, 2008 compared to $22.9
million for the year ended December 31, 2007, an increase of $8.4 million or 36.6%. This increase
is primarily due to greater debt outstanding of $669.8 million at December 31, 2008 as compared to
$438.3 million at December 31, 2007. As a percentage of revenue interest expense increased to 3.5%
for the year ended December 31, 2008 from 2.9% for the year ended December 31, 2007.
Provision for Income Taxes
The provision for income taxes was $120.7 million for the year ended December 31, 2008
compared to $103.2 million for the year ended December 31, 2007, an increase of $17.5 million or
16.9%. The effective tax rate was 43.3% for the year ended December 31, 2008 compared to 40.0% for
the year ended December 31, 2007. The 2008 rate is higher due to an increase in FIN 48 uncertain
tax positions and certain initial public offering related costs that are not tax deductible. As a
percentage of revenues, provision for income taxes increased to 13.5% for the year ended December
31, 2008 from 12.9% for the year ended December 31, 2007.
Loss from Discontinued Operations, Net of Tax
Loss from discontinued operations, net of tax was $4.6 million for the year ended December 31,
2007, resulting from costs of $2.9 million to support customer contracts in our claim consulting
business that were terminated in 2007, and a goodwill impairment charge of $1.7 million. These
costs were partially offset by a net tax benefit of $1.5 million. There was no loss from
discontinued operations, net of tax in the year ended December 31, 2008. As a percentage of
revenues, loss from discontinued operations, net of tax was 0.6% for the year ended December 31,
2007.
EBITDA Margin
The EBITDA margin for our consolidated results was 42.0% for the year ended December 31, 2008
compared to 42.1% for the year ended December 31, 2007. Included within the decrease in our EBITDA
margin are costs of $6.5 million associated with the preparation for our initial public offering,
representing a 0.7% negative impact in EBITDA margin.
Risk Assessment Results of Operations
Revenues
Revenues for our Risk Assessment segment were $504.4 million for the year ended December 31,
2008 compared to $485.2 million for the year ended December 31, 2007, an increase of $19.2 million
or 4.0%. The increase was primarily due to an increase in the sales of our industry-standard
insurance programs and actuarial services. The increase in our industry-standard insurance programs
primarily resulted from an increase in prices derived from continued enhancements to the content of
our solutions and the addition of new customers. These increases were partially offset by decreases
within property-specific rating and underwriting information, particularly in rate making and
policy administration solutions and sales of our auto premium leakage identification solutions, due
to a softening in the auto insurance market. Our revenue by category for the periods presented is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Percentage |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry standard insurance programs |
|
$ |
329,858 |
|
|
$ |
311,087 |
|
|
|
6.0 |
% |
Property-specific rating and underwriting information |
|
|
125,835 |
|
|
|
126,291 |
|
|
|
-0.4 |
% |
Statistical agency and data services |
|
|
27,451 |
|
|
|
27,282 |
|
|
|
0.6 |
% |
Actuarial services |
|
|
21,247 |
|
|
|
20,500 |
|
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
Total Risk Assessment |
|
$ |
504,391 |
|
|
$ |
485,160 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for our Risk Assessment segment was $199.9 million for the year ended
December 31, 2008 compared to $204.2 million for the year ended December 31, 2007, a decrease of
$4.3 million or 2.1%. The decrease was primarily due to a decrease in salaries and employee
benefits costs of $3.2 million, due to a temporary reallocation of resources to selling, general
and administrative projects, and a decrease in other operating expenses of $1.3 million. This
reallocation of resources is temporary and does not impact the headcount. In addition, there was a
loss on disposal of assets of $1.3 million in the year ended December 31, 2007. The decrease was
partially offset by an increase in office maintenance fees of $1.1 million and an increase in
software and data costs of $0.4 million. As a percentage of Risk Assessment revenues, cost of
revenues decreased to 39.6% for the year ended December 31, 2008 from 42.1% for the year ended
December 31, 2007.
35
Selling, General and Administrative Expenses
Selling, general and administrative expenses for our Risk Assessment segment were $81.8
million for the year ended December 31, 2008 compared to $68.2 million for the year ended December
31, 2007, an increase of $13.6 million or 20.0%. The increase was primarily due to an increase in
salaries and employee benefit costs of $7.0 million, which include annual salary increases, medical
costs and long-term incentive plans across a relatively constant employee headcount, an increase in
legal fees of $4.9 million partially associated with the preparation for our initial public
offering, and other general expenses of $2.0 million. The increase was partially offset by lower
advertising and marketing costs of $0.3 million. As a percentage of Risk
Assessment revenues, selling, general and administrative expenses increased to 16.2% for the year
ended December 31, 2008 from 14.1% for the year ended December 31, 2007.
EBITDA Margin
The EBITDA margin for our Risk Assessment segment was 44.2% for the year ended December 31,
2008 compared to 43.9% for the year ended December 31, 2007. The increase in EBITDA margin occurred
despite the inclusion of costs totaling $5.8 million associated with the preparation for our
initial public offering, representing a 1.1% negative impact in EBITDA margin.
Decision Analytics Results of Operations
Revenues
Revenues for our Decision Analytics segment were $389.2 million for the year ended December
31, 2008 compared to $317.0 million for the year ended December 31, 2007, an increase of $72.2
million or 22.7%. In 2007 and 2008, we acquired three companies and two companies, respectively.
These acquisitions accounted for $3.9 million and $42.5 million of additional revenues for the
years ended December 31, 2007 and 2008, respectively. The increase in revenue relating to the
acquisitions was $38.6 million, of which $37.0 million relates to the fraud and detection solutions
category and $1.6 million relates to the loss prediction category. Excluding the impact of these
acquisitions, revenues increased $33.6 million for the year ended December 31, 2008. Our loss
quantification revenues increased as a result of new customer contracts and volume increases
associated with recent floods, hurricanes and wildfires experienced in the United States. Increased
revenue in our loss prediction solutions resulted from sales to new customers as well as increased
penetration of our existing customers. Excluding acquisitions, our fraud and detection solutions
revenue increased $9.0 million due to an increase in subscription revenues resulting from
enhancements to the content of our claim solutions, partially offset by a decrease of $4.8 million
in revenues in our mortgage analytic solutions due to adverse market conditions in that industry.
Our revenue by category for the periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
|
|
|
December 31, |
|
|
Percentage |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fraud identification and detection solutions |
|
$ |
213,994 |
|
|
$ |
172,726 |
|
|
|
23.9 |
% |
Loss prediction solutions |
|
|
95,128 |
|
|
|
81,110 |
|
|
|
17.3 |
% |
Loss quantification solutions |
|
|
80,037 |
|
|
|
63,199 |
|
|
|
26.6 |
% |
|
|
|
|
|
|
|
|
|
|
Total Decision Analytics |
|
$ |
389,159 |
|
|
$ |
317,035 |
|
|
|
22.7 |
% |
|
|
|
|
|
|
|
|
|
|
Cost of Revenues
Cost of revenues for our Decision Analytics segment was $187.0 million for the year ended
December 31, 2008 compared to $153.0 million for the year ended December 31, 2007, an increase of
$34.0 million or 22.2%. The increase included $25.4 million in costs attributable to the newly
acquired companies. Excluding the impact of these acquisitions, the cost of revenues increased $8.6
million, primarily due to an increase in salaries and employee benefits of $4.3 million across a
relatively
constant employee headcount, which includes annual salary increases, medical costs and equity
compensation costs, an increase in software and data costs of $3.0 million, an increase in other
operating expenses of $2.9 million and an increase in office maintenance costs of $1.7 million.
These increases were partially offset by lower acquisition contingent payments of $3.3 million
associated with acquisitions recorded in the comparable prior period. As a percentage of Decision
Analytics revenues, cost of revenues decreased to 48.1% for the year ended December 31, 2008 from
48.3% for the year ended December 31, 2007.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $49.4 million for the year ended December
31, 2008 compared to $39.4 million for the year ended December 31, 2007, an increase of $10.0
million or
25.5%. The increase was due to an increase in salaries and employee benefits costs of $6.5 million,
which include annual salary increases, medical costs and long-term incentive plans across a
relatively constant employee headcount, an increase in legal costs of $2.9 million of which $0.8
million relates to initial public offering costs, costs attributable to the newly acquired
companies of $0.9 million, and other general expenses of $0.5 million. This increase was partially
offset by lower advertising and marketing costs of $0.8 million. As a percentage of Decision
Analytics revenues, selling, general and administrative expenses increased to 12.7% for the year
ended December 31, 2008 from 12.4% for the year ended December 31, 2007.
36
EBITDA Margin
The EBITDA margin for our Decision Analytics segment was 39.2% for the year ended December 31,
2008 compared to 39.3% for the year ended December 31, 2007. Included within the decrease in our
EBITDA margin are costs of $0.7 million associated with the preparation for our initial public
offering, representing a 0.2% negative impact in EBITDA margin.
Quarterly Results of Operations
The following table sets forth our quarterly unaudited consolidated statement of operations
data for each of the eight quarters in the period ended December 31, 2009. In managements opinion,
the data has been prepared on the same basis as the audited consolidated financial statements
included in this annual report on Form 10-K, and reflects all necessary adjustments for a fair
presentation of this data. The results of historical periods are not necessarily indicative of the
results of operations for a full year or any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
For the Quarter Ended |
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
Full Year |
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
Full Year |
|
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Statement of income data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
245,751 |
|
|
$ |
257,916 |
|
|
$ |
258,311 |
|
|
$ |
265,126 |
|
|
$ |
1,027,104 |
|
|
$ |
215,618 |
|
|
$ |
222,072 |
|
|
$ |
224,391 |
|
|
$ |
231,469 |
|
|
$ |
893,550 |
|
Operating income |
|
$ |
87,203 |
|
|
$ |
87,851 |
|
|
$ |
84,795 |
|
|
$ |
42,158 |
|
|
$ |
302,007 |
|
|
$ |
77,686 |
|
|
$ |
78,937 |
|
|
$ |
77,724 |
|
|
$ |
76,195 |
|
|
$ |
310,542 |
|
Net income/(loss) |
|
$ |
44,915 |
|
|
$ |
45,939 |
|
|
$ |
42,205 |
|
|
$ |
(6,445 |
) |
|
$ |
126,614 |
|
|
$ |
41,026 |
|
|
$ |
39,923 |
|
|
$ |
40,840 |
|
|
$ |
36,439 |
|
|
$ |
158,228 |
|
Basic net income/(loss) per share: |
|
$ |
0.26 |
|
|
$ |
0.27 |
|
|
$ |
0.24 |
|
|
$ |
(0.04 |
) |
|
$ |
0.72 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.22 |
|
|
$ |
0.21 |
|
|
$ |
0.87 |
|
Diluted net income/(loss) per share: |
|
$ |
0.25 |
|
|
$ |
0.26 |
|
|
$ |
0.23 |
|
|
$ |
(0.03 |
) |
|
$ |
0.70 |
|
|
$ |
0.21 |
|
|
$ |
0.21 |
|
|
$ |
0.22 |
|
|
$ |
0.20 |
|
|
$ |
0.83 |
|
Liquidity and Capital Resources
As of December 31, 2009 and 2008, we had cash and cash equivalents and available-for sale
securities of $77.0 million and $38.3 million, respectively. Subscriptions for our solutions are
billed and generally paid in advance of rendering services either quarterly or in full upon
commencement of the subscription period, which is usually for one year. Subscriptions are
automatically renewed at the beginning of each calendar year. We have historically generated
significant cash flows from operations. As a result of this factor, as well as the availability of
funds under our syndicated revolving credit facility, we believe we will have sufficient cash to
meet our working capital and capital expenditure needs, including acquisition contingent payments.
We have historically managed the business with a working capital deficit due to the fact that,
as described above, we offer our solutions and services primarily through annual subscriptions or
long-term contracts, which are generally prepaid quarterly or annually in advance of the services
being rendered. When cash is received for prepayment of invoices, we record an asset (cash and cash
equivalents) on our balance sheet with the offset recorded as a current liability (fees received in
advance). This current liability is deferred revenue that does not require a direct cash outflow
since our customers have prepaid and are obligated to purchase the services. In most businesses,
growth in revenue typically leads to an increase in the accounts receivable balance causing a use
of cash as a company grows. Unlike these businesses, our cash position is favorably affected by
revenue growth, which results in a source of cash due to our customers prepaying for most of our
services.
37
Our capital expenditures, which include non-cash purchases of fixed assets, as a percentage of
revenues for the years ended December 31, 2009 and 2008, were 4.3% and 3.7%, respectively. We
estimate our capital expenditures for 2010 to be approximately $43 million, which primarily include
expenditures on our technology infrastructure and our continuing investments in developing and
enhancing our solutions. Expenditures related to developing and enhancing our solutions are
predominately related to internal use software and are capitalized in accordance with ASC 350-40,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. The amounts
capitalized in accordance with ASC 985-20, Software to be Sold, Leased or Otherwise Marketed, are
not significant to the financial statements.
To provide liquidity to our stockholders, we have also historically used our cash for
repurchases of our common stock from our stockholders. For the year ended December 31, 2009 and
2008 we repurchased or redeemed $46.7 million and $392.6 million, respectively, of our common
stock. A substantial portion of the share redemption included in the totals above were completed
pursuant to the terms of the Insurance Service Office, Inc. 1996 Incentive Plan (the Option
Plan). The obligation to redeem shares issued under the Option Plan terminated upon completion of
our initial public offering. Therefore, we do not expect to continue our historical practice of
using cash for common stock repurchases to provide liquidity to our stockholders.
We provide pension
and postretirement benefits to certain qualifying active employees and retirees. Based on the pension
funding policy, we expect to contribute approximately $22.0 million to the pension plan in 2010. Under the
postretirement plan, we provide certain healthcare and life insurance benefits to qualifying participants;
however, participants are required to pay a stated percentage of the premium coverage. We expect to contribute
approximately $5.0 million to the postretirement plan in 2010. See Note 17 to our consolidated financial statement
included in this annual report on Form 10-K.
Financing and Financing Capacity
We had total debt, excluding capital lease and other obligations, of $585.0 million and $659.0
million at December 31, 2009 and 2008, respectively, of which, approximately $525.0 million of this
debt at December 31, 2009 was held under long-term loan facilities drawn to finance our stock
repurchases and acquisitions. The remaining $60.0 million was held pursuant to our syndicated
revolving credit facility, which matures on July 2, 2012.
As of December 31, 2009, all of our long-term loan facilities are uncommitted facilities and
our syndicated revolving credit facility is a committed facility. We have financed and expect to
finance our short-term working capital needs and acquisition contingent payments through cash from
operations and borrowings from a combination of our long-term loan facilities and our syndicated
revolving credit facility, which are made at variable rates of interest based on LIBOR plus 2.50%.
We had $60.0 million and $114.0 million in short-term revolving credit facility borrowings
outstanding as of December 31, 2009 and 2008, respectively. We had additional capacity
of $358.5 million in our syndicated revolving credit facility at December 31, 2009. On January 19,
2010 and January 25, 2010, we paid $10.0 million and $50.0 million, respectively, of our
outstanding borrowings from our syndicated revolving credit facility
as of December 31, 2009.
We have long-term loan facilities under uncommitted master shelf agreements with Prudential
Capital Group (Prudential), New York Life and Aviva Investors North America (Aviva) with
available capacity at December 31, 2009 in the amount of $115.0 million, $15.0 million and $20.0
million, respectively. We can borrow under the Prudential facility until February 28, 2010, under
the New York Life facility until March 16, 2010, and under the Aviva facility until December 10,
2011.
Notes outstanding under these facilities mature over the next seven years. Individual
borrowings are made at a fixed rate of interest and interest is payable quarterly. The weighted
average rate of interest with respect to our outstanding long-term borrowings was 6.11% and 5.64%
for the years ended December 31, 2009 and 2008, respectively.
On July 2, 2009, we entered into a $300.0 million syndicated revolving credit facility with
Bank of America, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A., and Wells Fargo Bank,
N.A. that matures on July 2, 2012. On August 21, 2009, PNC Bank, N.A., Sovereign Bank, RBS
Citizens, N.A., and SunTrust Bank joined the syndicated revolving credit facility increasing the
availability to $420.0 million. This facility is committed with a one time fee of approximately
$4.5 million and ongoing unused facility fee of 0.375%. Interest is payable at maturity at a rate
of LIBOR plus 2.50%. The syndicated revolving credit facility replaces our previous revolving
credit facilities with Bank of America, N.A., JPMorganChase Bank, N.A., Morgan Stanley Bank, N.A.,
and Wachovia Bank, N.A. The credit facility contains certain customary financial and other
covenants that, among other things, impose certain restrictions on indebtedness, liens,
investments, and capital expenditures. These covenants also place restrictions on mergers, asset
sales, sale and leaseback transactions, payments between us and our subsidiaries, and certain
transactions with affiliates. The financial covenants require that, at the end of any fiscal
quarter, we have a consolidated interest coverage ratio of at least 3.0 to 1.0 and that during any
period of our four fiscal quarters we maintain a consolidated funded debt leverage ratio of below
3.0 to 1.0. We are in compliance with these debt covenants as of
December 31, 2009, due to our low leverage and strong operating
performance, and we have additional liquidity under our debt
covenants.
On June 15, 2009, we repaid our $100.0 million Prudential Series D senior notes. In order to
pay the Prudential Series D senior notes, we issued Series J senior promissory notes under the uncommitted
master shelf agreement with Prudential in the aggregate principal
amount of $50.0 million due June
15, 2016 and borrowed $50.0 million from our revolving credit facility with Bank of America N.A.
Interest on the Prudential Series J senior notes is payable quarterly at a fixed rate of 6.85% on
the senior promissory notes.
On April 27, 2009, we issued a senior promissory note under an uncommitted master shelf
agreement with Aviva. in the aggregate principal amount of $30.0 million due April 27, 2013.
Interest is payable quarterly at a fixed rate of 6.46%.
38
The uncommitted master shelf agreements contain certain covenants that limit our ability to
create liens, enter into sale and leaseback transactions and consolidate, merge or sell assets to
another company. The uncommitted master shelf agreements also contain financial covenants that
require us to maintain a fixed charge coverage of no less than 275.0% and a leverage ratio of no
more than 300.0%. We were in compliance with all debt covenants as of
December 31, 2009, due to our low leverage and strong operating
performance, and we have additional liquidity under our debt
covenants.
Cash Flow
The following table summarizes our cash flow data for the years ended December 31, 2009, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Net cash provided by operating activities |
|
$ |
326,401 |
|
|
$ |
247,906 |
|
|
$ |
248,521 |
|
Net cash used in investing activities |
|
$ |
(185,340 |
) |
|
$ |
(130,466 |
) |
|
$ |
(110,831 |
) |
Net cash used in financing activities |
|
$ |
(102,809 |
) |
|
$ |
(107,376 |
) |
|
$ |
(212,591 |
) |
Operating Activities
Net cash provided by operating activities increased to $326.4 million for the year ended
December 31, 2009 compared to $247.9 million for the year ended December 31, 2008. The increase in
net cash provided by operating activities was principally due to an increase in cash receipts of
$141.5 million, a decrease in excess tax benefit from exercised stock options of $6.1 million, a
decrease in payments of acquisition related liabilities of $1.9 million, and a decrease in salary
and employee related payments of $10.2 million due to an additional pay-cycle that occurred in
2008. Our payroll is processed on a bi-weekly basis thereby requiring an additional pay-cycle once
every ten years. This increase in net cash provided by operating activities was partially offset by
an increase in operating expense related payments of $63.6 million, an increase in tax payments of
$12.1 million and an increase in interest payments of $5.2 million.
Net cash provided by operating activities decreased to $247.9 million for the year ended
December 31, 2008 from $248.5 million for the year ended December 31, 2007. The decrease in net
cash provided by operating activities was principally due to an additional pay-cycle of $10.2
million that occurred in 2008. In addition, we had a $5.0 million minimum required funding to our
pension plan and one-time payments associated with the preparation for our initial public offering.
This decrease was mitigated by growth in net income of $7.9 million and decreased payments
associated with acquisition related liabilities of $11.5 million.
Investing Activities
Net cash used in investing activities was $185.3 million for the year ended December 31, 2009
and $130.5 million for the year ended December 31, 2008. The increase in net cash used in investing
activities was principally due to increased cash paid for acquisitions, including escrow funding, of $48.5 million and
an increase in purchase of fixed assets of $8.0 million.
Net cash used in investing activities was $130.5 million for the year ended December 31, 2008
and $110.8 million for the year ended December 31, 2007. The increase in net cash used in investing
activities was principally due to the payment of acquisition related liabilities of $98.1 million,
resulting from achievement of post-acquisition performance targets, and the purchase of cost-method
investments of $5.8 million. These increases are partially offset by decreases in purchases of
available-for-sale securities of approximately $43.7 million, cash paid for acquisitions of $31.7
million and cash inflows related to the termination of the stockholder loan program of $3.9
million.
Financing Activities
Net cash used in financing activities was $102.8 million for the year ended December 31, 2009
and $107.4 million for the year ended December 31, 2008. The decrease in net cash used in financing
activities was principally due to a decrease in the repurchases of stock of $345.8 million,
partially offset by a decrease in net proceeds from the issuance of long-term and short-term debt of
$312.5 million, a decrease in proceeds from stock options exercised of $22.6 million and a decrease
in excess tax benefit from stock options exercised of $6.1 million.
Net cash used in financing activities was $107.4 million for the year ended December 31, 2008
and $212.6 million for the year ended December 31, 2007. The decrease in net cash used in financing
activities was principally due to an increase in proceeds from the issuance of long-term debt and
short-term debt of $65.0 million and $84.0 million, respectively, proceeds from the repayment of
exercise price loans of $29.5 million and a decrease in the repayment of short-term debt of $100.7
million. These increases were partially offset by additional repurchases of common stock of $187.8
million compared to 2007.
39
Contractual Obligations
The following table summarizes our contractual obligations and commercial commitments at
December 31, 2009, and the future periods in which such obligations are expected to be settled in
cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
|
|
More than 5 |
|
|
|
Total |
|
|
year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
|
|
(In thousands) |
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
654,777 |
|
|
$ |
31,869 |
|
|
$ |
179,259 |
|
|
$ |
214,251 |
|
|
$ |
229,398 |
|
Capital lease obligations |
|
|
7,779 |
|
|
|
5,638 |
|
|
|
1,951 |
|
|
|
190 |
|
|
|
|
|
Operating leases |
|
|
195,002 |
|
|
|
22,501 |
|
|
|
44,135 |
|
|
|
38,892 |
|
|
|
89,474 |
|
Earnout and contingent payments |
|
|
3,344 |
|
|
|
|
|
|
|
3,344 |
|
|
|
|
|
|
|
|
|
Pension and postretirement plans (1) |
|
|
254,664 |
|
|
|
27,208 |
|
|
|
65,187 |
|
|
|
59,169 |
|
|
|
103,100 |
|
Other long-term liabilities (2) |
|
|
12,843 |
|
|
|
740 |
|
|
|
748 |
|
|
|
8,086 |
|
|
|
3,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (3) |
|
$ |
1,128,409 |
|
|
$ |
87,956 |
|
|
$ |
294,624 |
|
|
$ |
320,588 |
|
|
$ |
425,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our funding policy is to contribute at least equal to the minimum legal funding
requirement. |
|
(2) |
|
Other long-term liabilities consist of our ESOP contributions and
employee-related deferred compensation plan. We also have a deferred compensation
plan for our board of directors; however, based on past performance and the
uncertainty of the dollar amounts to be paid, if any, we have excluded such
amounts from the above table. |
|
(3) |
|
Unrecognized tax benefits of approximately $27.3 million have been recorded as
liabilities in accordance with ASC 740, which have been omitted from the table
above, and we are uncertain as to if or when such amounts may be settled, with the
exception of those amounts subject to a statute of limitation. Related to the
unrecognized tax benefits, we also have recorded a liability for potential
penalties and interest of $7.4 million. |
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our managements discussion and analysis of financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these
financial statements require management to make estimates and judgments that affect reported
amounts of assets and liabilities and related disclosures of contingent assets and liabilities at
the dates of the financial statements and revenue and expenses during the reporting periods. These
estimates are based on historical experience and on other assumptions that are believed to be
reasonable under the circumstances. On an ongoing basis, management evaluates its estimates,
including those related to revenue recognition, goodwill and intangible assets, pension and other
post retirement benefits, stock-based compensation, and income taxes. Actual results may differ
from these assumptions or conditions.
Revenue Recognition
The Companys revenues are primarily derived from sales of services and revenue is recognized
as services are preformed and information is delivered to our customers. Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
fees and/or price are fixed or determinable and collectability is reasonably assured. Revenues for
subscription services are recognized ratably over the subscription term, usually one year. Revenues
from transaction-based fees are recognized as information is delivered to customers, assuming all
other revenue recognition criteria are met.
The Company also has term based software licenses where the only remaining undelivered element
is post-contract customer support or PCS, including unspecified upgrade rights on a when and if
available basis. The Company recognizes revenue for these licenses ratably over the duration of the
license term. The Company also provides hosting or software solutions that provide continuous
access to information and include PCS and recognizes revenue ratably over the duration of the
license term. In addition, the determination of certain of our services revenues requires the use
of estimates, principally related to transaction volumes in instances where these volumes are
reported to us by our clients on a monthly basis in arrears. In these instances, we estimate
transaction volumes based on average actual volumes reported by our customers in the past.
Differences between our estimates and actual final volumes reported are recorded in the period in
which actual volumes are reported. We have not experienced significant variances between our
estimates of these services revenues reported to us by our customers and actual reported volumes in
the past.
40
We invoice our customers in annual, quarterly, or monthly installments. Amounts billed and
collected in advance are recorded as fees received in advance on the balance sheet and are
recognized as the services are performed and revenue recognition criteria are met.
Stock-Based Compensation
On
January 1, 2005, we adopted the new accounting standard for Share Based Payment using a prospective approach, which required us to
record compensation expense for all awards granted after the date of
adoption based on the grant date fair value. As the majority of
annual grants have a four year vesting term, the compensation expense
for 2005 through 2007 is not comparable in subsequent periods, as
there is no compensation expense recorded for the vesting of awards
granted from 2002 through 2004. The following table
illustrates the amount of annual compensation expense resulting from the
implementation of this standard using
the prospective approach for the years ended December 31, 2009,
2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
December 31 |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 grants |
|
$ |
757 |
|
|
$ |
2,209 |
|
|
$ |
2,424 |
|
2006 grants |
|
|
1,730 |
|
|
|
1,870 |
|
|
|
2,512 |
|
2007 grants |
|
|
2,056 |
|
|
|
2,561 |
|
|
|
3,308 |
|
2008 grants |
|
|
2,669 |
|
|
|
3,241 |
|
|
|
|
|
2009 grants |
|
|
5,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based
compensation |
|
$ |
12,744 |
|
|
$ |
9,881 |
|
|
$ |
8,244 |
|
The fair value of equity awards is measured on the date of grant using a Black-Scholes
option-pricing model, which requires the use of several estimates, including expected term,
expected risk-free interest rate, expected volatility and expected dividend yield.
Stock-based compensation cost is measured at the grant date, based on the fair
value of the awards granted, and is recognized as expense over the requisite service period. Option
grants are expensed ratably over the four-year vesting period. We follow the substantive vesting
period approach for awards granted after January 1, 2005, which requires that stock-based
compensation expense be recognized over the period from the date of grant to the date when the
award is no longer contingent on the employee providing additional service.
We estimate expected forfeitures of equity awards at the date of grant and recognize
compensation expense only for those awards expected to vest. The forfeiture assumption is
ultimately adjusted to the actual forfeiture rate.
Prior
to our initial public offering, the fair value of the common stock
underlying the stock-based compensation was determined
quarterly on or about the final day of the quarter. The valuation
methodology was based on a variety
of qualitative and quantitative factors including the nature of the business and history of the
enterprise, the economic outlook in general, the condition of the specific industries in which we
operate, the financial condition of the business, our ability to generate free cash flow, and
goodwill or other intangible asset value.
The
fair value of our common stock was determined using generally accepted valuation
methodologies, including the use of the guideline company method. This determination of fair market
value employs both a comparable company analysis, which examines the valuation multiples of public
companies deemed comparable, in whole or in part, to us and a discounted cash flow analysis that
determines a present value of the projected future cash flows of the business. The comparable
companies are comprised of a combination of public companies in the financial services information
and technology businesses. These methodologies have been consistently applied since 1997. We
regularly assess the underlying assumptions used in the valuation methodologies, including the
comparable companies to be used in the analysis, the future forecasts of revenue and earnings, and
the impact of market conditions on factors such as the weighted average cost of capital. These
assumptions are reviewed quarterly, with a more comprehensive evaluation performed annually. For
the comparable company analysis, the share price and financial
performance of these comparables were
updated quarterly based on the most recent public information. Our
stock price was also impacted by
the number of shares outstanding. As the number of shares outstanding has declined over time, our
share price has increased. The determination of the fair value of our
common stock required us to
make judgments that were complex and inherently subjective. If different assumptions are used in
future periods, stock-based compensation expense could be materially impacted in the future.
41
Goodwill and Intangibles
Goodwill represents the excess of acquisition costs over the fair value of tangible net assets
and identifiable intangible assets of the businesses acquired. Goodwill and intangible assets
deemed to have indefinite lives are not amortized. Intangible assets determined to have definite
lives are amortized over their useful lives. Goodwill and intangible assets with indefinite lives
are subject to impairment testing annually as of June 30, or whenever events or changes in
circumstances indicate that the carrying amount may not be fully recoverable, using the guidance
and criteria described in the accounting for Goodwill and Other Intangible Assets. This testing compares
carrying values to fair values and, when appropriate, the carrying value of these assets is reduced
to fair value.
As
of December 31, 2009, we had goodwill and net intangible assets of $599.4 million, which
represents 60.1% of our total assets. During fiscal year 2009, we performed an impairment test as
of June 30, 2009 and confirmed that no impairment charge was necessary. There are many assumptions
and estimates used that directly impact the results of impairment testing, including an estimate of
future expected revenues, earnings and cash flows, useful lives and discount rates applied to such
expected cash flows in order to estimate fair value. We have the ability to influence the outcome
and ultimate results based on the assumptions and estimates we choose for determining the fair
value of our reporting units. To mitigate undue influence, we set criteria and benchmarks that are
reviewed and approved by various levels of management and reviewed by other independent parties.
The determination of whether or not goodwill or indefinite-lived acquired intangible assets have
become impaired involves a significant level of judgment in the assumptions and estimates
underlying the approach used to determine the value of our reporting units. Changes in our strategy
or market conditions could significantly impact these judgments and require adjustments to recorded
amounts of intangible assets and goodwill. Neither our initial valuation nor our subsequent valuations
have indicated any impairment of our goodwill asset of $490.8 million as of December 31, 2009.
Pension and Postretirement
We
account for our pension and postretirement benefit plans in
accordance with the accounting standard for Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans. This standard requires that employers recognize on a prospective
basis the funded status of their defined benefit pension and other postretirement benefit plans on
their consolidated balance sheets and recognize as a component of other
comprehensive income (loss), net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognized as components of net periodic benefit
cost. Additional minimum pension liabilities and related intangible assets are also derecognized
upon adoption of the new standard.
As
of December 31, 2009, we adopted the new disclosure requirements
that require disclosures about postretirement benefit plan assets
including how investment allocation decisions are made; including the factors that are pertinent to
an understanding of investment policies and strategies, the major categories of plan assets, the
inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair
value measurements using significant unobservable inputs (Level 3) on changes in plan assets for
the period and significant concentrations of risk within the plan assets. We adopted ASC 715 as of
December 31, 2009. See
Note 17 to our consolidated financial statements included in this annual report on Form 10-K.
Certain assumptions are used in the determination of our annual net period benefit cost and
the disclosure of the funded status of these plans. The principal assumptions concern the discount
rate used to measure the projected benefit obligation, the expected return on plan assets and the
expected rate of future compensation increases. We revise these assumptions based on an annual
evaluation of long-term trends and market conditions that may have an impact on the cost of
providing retirement benefits.
In determining the discount rate, we utilize quoted rates from long-term bond indices, and
changes in long-term bond rates over the past year, cash flow models and other data sources we
consider reasonable based upon the profile of the remaining service life of eligible employees. As
part of our evaluation, we calculate the approximate average yields on securities that were
selected to match our separate projected cash flows for both the pension and postretirement plans.
Our separate benefit plan cash flows are input into actuarial models that include data for
corporate bonds rated AA or better at the measurement date. The output from the actuarial models
are assessed against the prior years discount rate and quoted rates for long-term bond indices.
For our pension plan at December 31, 2009, we determined this rate to be 5.74%, a decrease of 0.26%
from the 6.0% rate used at December 31, 2008. Our postretirement rate is consistent with our
pension plan rate at December 31, 2009.
42
The
expected return on plan assets of 8.25% as of December 31, 2009 is determined by taking into consideration our analysis of
our actual historical investment returns to a broader long-term forecast adjusted based on our
target investment allocation, and the current economic environment. Our investment guidelines
target an investment portfolio allocation of 40.0% debt securities and 60.0% equity securities. As
of December 31, 2009, the plan assets were allocated 39.0% debt,
58.0% equity securities, and 3.0%
to other investments. We have used our target investment allocation to derive the expected return
as we believe this allocation will be retained on an ongoing basis that will be commensurate with the
projected cash flows of the plan. The expected return for each investment category within our
target investment allocation is developed using average historical rates of return for each
targeted investment category, considering the projected cash flow of the pension plan. The
difference between this expected return and the actual return on plan assets is generally deferred
and recognized over subsequent periods through future net periodic benefit costs. During 2008, the
market values of these investments declined in conjunction with the global economic downturn.
Although the global economic downturn had a significant effect on the fair value of the plan assets
at December 31, 2008, we believe that the use of the average historical rates of returns is
consistent with the timing and amounts of expected contributions to the plans and benefit payments
to plan participants. This decline in market value is the principal reason that net periodic
benefit pension cost for the year ended December 31, 2009 is $19.8 million as compared to $1.7
million for the year ended December 31, 2008, an increase of
$18.1 million. We
will have significantly greater funding obligations in 2010 of
approximately $20.0 million and thereafter until the market
value of the plan assets fully
recovers. We believe these considerations provide the basis for reasonable assumptions with respect
to the expected long-term rate of return on plan assets.
The rate of compensation increase is based on our long-term plans for such increases. The
measurement date used to determine the benefit obligation and plan assets is December 31. The
future benefit payments for the postretirement plan are net of the federal medical subsidy.
A one percent change in discount rate, future rate of return on plan assets and the rate of
future compensation would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1% Decrease |
|
|
1% Increase |
|
|
|
|
|
|
|
Projected Benefit |
|
|
|
|
|
|
Projected Benefit |
|
|
|
Benefit Cost |
|
|
Obligation |
|
|
Benefit Cost |
|
|
Obligation |
|
|
|
(In thousands) |
|
Discount Rate |
|
$ |
2,295 |
|
|
$ |
39,735 |
|
|
$ |
(2,035 |
) |
|
$ |
(33,686 |
) |
Expected return on asset |
|
$ |
2,221 |
|
|
$ |
|
|
|
$ |
(2,221 |
) |
|
$ |
|
|
Rate of compensation |
|
$ |
(500 |
) |
|
$ |
(2,061 |
) |
|
$ |
472 |
|
|
$ |
2,165 |
|
A one percent change in assumed healthcare cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
1% Decrease |
|
|
1% Increase |
|
|
|
(In thousands) |
|
Effect on total of service and interest cost components |
|
$ |
12 |
|
|
$ |
(13 |
) |
Effect on the healthcare component of the accumulated
postretirement benefit obligation |
|
$ |
133 |
|
|
$ |
(186 |
) |
Income Taxes
In projecting future taxable income, we develop assumptions including the amount of future
state, federal and foreign pretax operating income, the reversal of temporary differences, and the
implementation of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are consistent with the plans
and estimates we use to manage the underlying businesses. The calculation of our tax liabilities
also involves dealing with uncertainties in the application and evolution of complex tax laws and
regulations in other jurisdictions.
On
January 1, 2007, we adopted Accounting for
Uncertainty in Income Taxes an interpretation of ASC 740,
which addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under this interpretation, we may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained upon examination by the
taxing authorities, based on the technical merits of the position. As a result of the
implementation of this interpretation, we recognized an increase in the liability for unrecognized tax benefits
of approximately $10.3 million, which was accounted for as an increase to the January 1, 2007
balance of retained earnings/(accumulated deficit).
We
recognize and adjust our liabilities when
our judgment changes as a result of the evaluation of new information not previously available. Due
to the complexity of some of these uncertainties, the ultimate resolution may result in a payment
that is materially different from our current estimate of the tax liabilities. These differences
will be reflected as increases or decreases to income tax expense in the period in which they are
determined.
43
As of December 31, 2009 we have federal and state income tax net operating loss carryforwards
of $75.1 million, which will expire at various dates from 2010 through 2029. Such net operating loss
carryforwards expire as follows:
|
|
|
|
|
|
|
(In thousands) |
|
2010 - 2017 |
|
$ |
38,525 |
|
2018 - 2022 |
|
|
434 |
|
2023 - 2029 |
|
|
36,142 |
|
|
|
|
|
|
|
$ |
75,101 |
|
|
|
|
|
The significant majority of the state net operating loss carryforwards were generated by a
subsidiary that employs our internal staff as a result of favorable tax deductions from the
exercise of employee stock options for the years ended
December 31, 2006 and 2005. This
subsidiarys state net operating loss carryforwards are expected
to be fully utilized as the subsidiary generates sufficient taxable
income to utilize losses.
We
estimate unrecognized tax positions of $3.5 million that may be recognized by December 31,
2010, due to expiration of statutes of limitations and resolution of audits with taxing
authorities, net of additional uncertain tax positions.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, refer to note 2(r) to the audited
consolidated financial statements included elsewhere in this annual report on Form 10-K.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Interest Rate Risk
We are exposed to market risk from fluctuations in interest rates. At December 31, 2009 we had
borrowings outstanding under our syndicated revolving credit facility of $60.0 million, which bear
interest at variable rates based on LIBOR plus 2.50%. A change in interest rates on this variable
rate debt impacts our pre-tax income and cash flows, but does not impact the fair value of the
instruments. Based on our overall interest rate exposure at December 31, 2009, a one percent change
in interest rates would result in a change in annual pretax interest expense of approximately $0.6
million based on our current level of borrowings.
Item 8. Consolidated Financial Statements and Supplementary Data
The information required by this Item is set forth on pages 50 through 95 of this annual
report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
We will be required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 when we file
our annual report on Form 10-K for the year ending December 31, 2010.
Evaluation of Disclosure Controls and Procedures
We are required to maintain disclosure controls and procedures (as that term is defined in
Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that
are designed to ensure that information required to be disclosed in our reports under the Exchange
Act is recorded, processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
annual report on Form 10-K. Based upon the foregoing assessments, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of December 31, 2009, our disclosure controls and
procedures were effective.
Managements Report on Internal Control Over Financial Reporting
This annual report on Form 10-K does not include a report of managements
assessment regarding internal control over financial reporting or an attestation
report of the companys registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public companies.
44
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The
information required to be furnished by this Item 10. is incorporated herein by reference to our Notice of Annual Meeting of
Stockholders and Proxy Statement to be filed within 120 days December
31, 2009 (the Proxy Statement).
Item 11. Executive Compensation
The information
required to be furnished by this Item 11. is
incorporated herein by reference from our Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required
to be furnished by this Item 12. is incorporated herein by
reference to our Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required to be
furnished by this Item 13. is incorporated herein by reference to our Proxy
Statement.
Item 14. Principal Accountant Fees and Services
The information required to
be furnished by this Item 14. is incorporated herein by reference to our Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following of documents are filed as part of this report.
(1) Financial
Statements. See Index to Financial Statements and Schedules in Part II, Item 8. on this Form 10-K.
(2) Financial
Statement Schedules. See Schedule II. Valuation and Qualifying Accounts
and Reserves.
(3) Exhibits.
See Index to Exhibits in this annual report on Form 10-K.
(b) Exhibits.
See Index to Exhibits in this annual report on Form 10-K.
45
Item 8.
Financial Statement and Supplementary Data
Index to Financial
Statements and Schedules
Verisk Analytics, Inc. Consolidated Financial Statements as of December 31, 2009 and 2008 and for the Years Ended December 31, 2009, 2008, and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
Financial Statement Schedule
Schedule II, Valuation and Qualifying Accounts and Reserves |
|
|
93 |
|
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Verisk Analytics, Inc.
Jersey City, New Jersey
We have audited the accompanying consolidated balance sheets of Verisk Analytics, Inc. and
subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders deficit, and cash flows for each of the three
years in the period ended December 31, 2009. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Verisk Analytics, Inc. and subsidiaries as of December 31, 2009
and 2008, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2009, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to
the consolidated financial statements, the Company completed its corporate reorganization and initial
public offering in October 2009.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2007,
the Company adopted the new accounting standard for the Accounting for
Uncertainty in Income Taxes.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 9, 2010
47
VERISK ANALYTICS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except for share and per share data) |
|
ASSETS |
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
71,527 |
|
|
$ |
33,185 |
|
Available-for-sale securities |
|
|
5,445 |
|
|
|
5,114 |
|
Accounts
receivable, net (including amounts from related parties of $1,353 and
$3,421) (1) |
|
|
89,436 |
|
|
|
83,941 |
|
Prepaid expenses |
|
|
16,155 |
|
|
|
13,010 |
|
Deferred
income taxes, net |
|
|
4,405 |
|
|
|
4,490 |
|
Federal and foreign income taxes receivable |
|
|
16,721 |
|
|
|
12,311 |
|
State and local income taxes receivable |
|
|
|
|
|
|
689 |
|
Other current assets |
|
|
21,656 |
|
|
|
16,187 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
225,345 |
|
|
|
168,927 |
|
|
|
|
|
|
|
|
|
|
Noncurrent assets: |
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
89,165 |
|
|
|
82,587 |
|
Intangible assets, net |
|
|
108,526 |
|
|
|
112,713 |
|
Goodwill |
|
|
490,829 |
|
|
|
447,372 |
|
Deferred
income taxes, net |
|
|
66,257 |
|
|
|
100,256 |
|
State income taxes receivable |
|
|
6,536 |
|
|
|
8,112 |
|
Other assets |
|
|
10,295 |
|
|
|
8,910 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
996,953 |
|
|
$ |
928,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES,
REDEEMABLE COMMON STOCK AND STOCKHOLDERS DEFICIT |
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
101,401 |
|
|
$ |
83,381 |
|
Acquisition related liabilities |
|
|
|
|
|
|
82,700 |
|
Short-term debt and current portion of long-term debt |
|
|
66,660 |
|
|
|
219,398 |
|
Pension and postretirement benefits, current |
|
|
5,284 |
|
|
|
5,397 |
|
Fees
received in advance (including amounts from related parties of $439 and
$3,699) (1) |
|
|
125,520 |
|
|
|
114,023 |
|
State and local income taxes payable |
|
|
1,414 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
300,279 |
|
|
|
504,899 |
|
|
|
|
|
|
|
|
|
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
527,509 |
|
|
|
450,356 |
|
Pension benefits |
|
|
102,046 |
|
|
|
133,914 |
|
Postretirement benefits |
|
|
25,108 |
|
|
|
23,798 |
|
Other liabilities |
|
|
76,960 |
|
|
|
76,194 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,031,902 |
|
|
|
1,189,161 |
|
|
|
|
|
|
|
|
|
|
Redeemable common stock: |
|
|
|
|
|
|
|
|
ISO Class A redeemable common stock, stated at redemption value, $.0002
par value; 335,000,000 shares authorized; 150,388,050 shares issued and
37,306,950 outstanding as of December 31, 2008 and vested options at
intrinsic value (2) |
|
|
|
|
|
|
752,912 |
|
ISO Class A unearned common stock KSOP shares |
|
|
|
|
|
|
(3,373 |
) |
|
|
|
|
|
|
|
Total redeemable common stock |
|
|
|
|
|
|
749,539 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders
deficit: |
|
|
|
|
|
|
|
|
Verisk Class A common stock, $.001 par value; 1,200,000,000 shares
authorized; 125,815,600 shares issued and outstanding as
of December 31, 2009 (2) |
|
|
30 |
|
|
|
|
|
ISO Class B common stock, $.0002 par value; 1,000,000,000 shares
authorized; 500,225,000 shares issued and 143,187,100 outstanding as of
December 31, 2008 (2) |
|
|
|
|
|
|
100 |
|
Verisk Class B (Series 1) common stock, $.001 par value; 400,000,000
shares authorized; 205,637,925 shares issued and 27,118,975 outstanding
as of December 31, 2009 (2) |
|
|
50 |
|
|
|
|
|
Verisk Class B (Series 2) common stock, $.001 par value; 400,000,000
shares authorized; 205,637,925 shares issued and 27,118,975 outstanding
as of December 31, 2009 (2) |
|
|
50 |
|
|
|
|
|
Unearned KSOP contributions |
|
|
(1,305 |
) |
|
|
|
|
Additional paid-in capital |
|
|
652,573 |
|
|
|
|
|
Treasury
stock, at cost, 357,037,900 shares as of December 31, 2009 and 2008 (2) |
|
|
(683,994 |
) |
|
|
(683,994 |
) |
Retained earning/(accumulated deficit) |
|
|
51,275 |
|
|
|
(243,495 |
) |
Accumulated other comprehensive loss |
|
|
(53,628 |
) |
|
|
(82,434 |
) |
|
|
|
|
|
|
|
Total stockholders deficit |
|
|
(34,949 |
) |
|
|
(1,009,823 |
) |
|
|
|
|
|
|
|
Total liabilities, redeemable common stock and stockholders deficit |
|
$ |
996,953 |
|
|
$ |
928,877 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 19. Related Parties for further information. |
|
(2) |
|
All share and per share data throughout this report has been adjusted to reflect a
fifty-for-one stock split. See Note 1 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
48
VERISK ANALYTICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except for share and per share data) |
|
Revenues
(including amounts from related parties of $60,192, $90,227 and
$84,891)(1) |
|
$ |
1,027,104 |
|
|
$ |
893,550 |
|
|
$ |
802,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (exclusive of items shown separately below) |
|
|
491,294 |
|
|
|
386,897 |
|
|
|
357,191 |
|
Selling, general and administrative |
|
|
162,604 |
|
|
|
131,239 |
|
|
|
107,576 |
|
Depreciation and amortization of fixed assets |
|
|
38,578 |
|
|
|
35,317 |
|
|
|
31,745 |
|
Amortization of intangible assets |
|
|
32,621 |
|
|
|
29,555 |
|
|
|
33,916 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
725,097 |
|
|
|
583,008 |
|
|
|
530,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
302,007 |
|
|
|
310,542 |
|
|
|
271,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
195 |
|
|
|
2,184 |
|
|
|
8,451 |
|
Realized (losses)/gains on securities, net |
|
|
(2,332 |
) |
|
|
(2,511 |
) |
|
|
857 |
|
Interest expense |
|
|
(35,265 |
) |
|
|
(31,316 |
) |
|
|
(22,928 |
) |
|
|
|
|
|
|
|
|
|
|
Total other expense, net |
|
|
(37,402 |
) |
|
|
(31,643 |
) |
|
|
(13,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
264,605 |
|
|
|
278,899 |
|
|
|
258,147 |
|
Provision for income taxes |
|
|
(137,991 |
) |
|
|
(120,671 |
) |
|
|
(103,184 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
126,614 |
|
|
|
158,228 |
|
|
|
154,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax benefit of
$1,496 in 2007 |
|
|
|
|
|
|
|
|
|
|
(4,589 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
126,614 |
|
|
$ |
158,228 |
|
|
$ |
150,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income/(loss) per share of Class A and Class B (2): |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
|
$ |
0.87 |
|
|
$ |
0.77 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.72 |
|
|
$ |
0.87 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income/(loss) per share of Class A and Class B (2): |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.70 |
|
|
$ |
0.83 |
|
|
$ |
0.74 |
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.70 |
|
|
$ |
0.83 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic (2) |
|
|
174,767,795 |
|
|
|
182,885,700 |
|
|
|
200,846,400 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (2) |
|
|
182,165,661 |
|
|
|
190,231,700 |
|
|
|
209,257,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 19. Related Parties for further information. |
|
(2) |
|
All share and per share data throughout this report has been adjusted to reflect a
fifty-for-one stock split. See Note 1 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
49
VERISK ANALYTICS INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS DEFICIT
For The Years Ended December 31, 2007, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Accumulated |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
Additional |
|
|
|
|
|
Deficit)/ |
|
|
Other |
|
|
Total |
|
|
|
Common Stock Issued (1) |
|
|
|
|
|
|
KSOP |
|
|
Paid-in |
|
|
Treasury |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Verisk Class A |
|
|
ISO Class B |
|
|
Verisk Class B (Series 1) |
|
|
Verisk Class B (Series 2) |
|
|
Par Value |
|
|
Contributions |
|
|
Capital |
|
|
Stock |
|
|
Earnings |
|
|
Loss |
|
|
Deficit |
|
|
|
(In thousands, except for share data) |
|
|
|
|
|
Balance, January 1, 2007 |
|
|
|
|
|
|
500,225,000 |
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(642,883 |
) |
|
$ |
(465,177 |
) |
|
$ |
(16,017 |
) |
|
|
(1,123,977 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,374 |
|
|
|
|
|
|
|
150,374 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,318 |
|
|
|
7,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired Class B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,110 |
) |
|
|
|
|
|
|
|
|
|
|
(36,110 |
) |
Stock options exercised for 72,083 shares
(including tax benefit of $12,798) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,655 |
) |
|
|
|
|
|
|
(36,655 |
) |
Cumulative effect adjustment to adopt ASC 740-10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,338 |
) |
|
|
|
|
|
|
(10,338 |
) |
Increase in redemption value of ISO Class A common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,960 |
) |
|
|
|
|
|
|
(153,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
|
|
|
|
500,225,000 |
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(678,993 |
) |
|
$ |
(515,756 |
) |
|
$ |
(8,699 |
) |
|
$ |
(1,203,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,228 |
|
|
|
|
|
|
|
158,228 |
|
Other comprehensive losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,735 |
) |
|
|
(73,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock acquired ISO Class B common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,001 |
) |
|
|
|
|
|
|
|
|
|
|
(5,001 |
) |
Decrease in redemption value of ISO Class A common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,033 |
|
|
|
|
|
|
|
114,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
|
|
|
|
500,225,000 |
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(683,994 |
) |
|
$ |
(243,495 |
) |
|
$ |
(82,434 |
) |
|
$ |
(1,009,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,614 |
|
|
|
|
|
|
|
126,614 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,806 |
|
|
|
28,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in redemption value of ISO Class A common
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272,428 |
) |
|
|
|
|
|
|
(272,428 |
) |
Conversion of ISO Class B common stock upon
corporate reorganization (Note 14) |
|
|
88,949,150 |
|
|
|
(500,225,000 |
) |
|
|
205,637,925 |
|
|
|
205,637,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of ISO Class A redeemable common stock upon
corporate reorganization |
|
|
34,768,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
(1,305 |
) |
|
|
624,282 |
|
|
|
|
|
|
|
440,584 |
|
|
|
|
|
|
|
1,063,591 |
|
KSOP shares earned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
725 |
|
Stock options exercised (including tax benefit
of $18,253) |
|
|
2,097,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,348 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
125,815,600 |
|
|
|
|
|
|
|
205,637,925 |
|
|
|
205,637,925 |
|
|
$ |
130 |
|
|
$ |
(1,305 |
) |
|
$ |
652,573 |
|
|
$ |
(683,994 |
) |
|
$ |
51,275 |
|
|
$ |
(53,628 |
) |
|
$ |
(34,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All share and per share data throughout this report has been adjusted to reflect a
fifty-for-one stock split. See Note 1 for further information. |
The accompanying notes are an integral part of these consolidated financial statements.
50
VERISK ANALYTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
126,614 |
|
|
$ |
158,228 |
|
|
$ |
150,374 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of fixed assets |
|
|
38,578 |
|
|
|
35,317 |
|
|
|
31,843 |
|
Amortization of intangible assets |
|
|
32,621 |
|
|
|
29,555 |
|
|
|
33,916 |
|
Amortization of debt issuance costs |
|
|
785 |
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
|
916 |
|
|
|
1,536 |
|
|
|
3,286 |
|
KSOP compensation expense |
|
|
76,065 |
|
|
|
22,274 |
|
|
|
22,247 |
|
Acquisition related compensation expense |
|
|
|
|
|
|
300 |
|
|
|
3,605 |
|
Stock-based compensation |
|
|
12,744 |
|
|
|
9,881 |
|
|
|
8,244 |
|
Non-cash charges/(credits) associated with performance based
appreciation awards |
|
|
4,039 |
|
|
|
(91 |
) |
|
|
2,182 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
1,744 |
|
Interest income on notes receivable from stockholders |
|
|
|
|
|
|
(1,050 |
) |
|
|
(2,454 |
) |
Proceeds from repayment of interest on notes receivable from
stockholders |
|
|
|
|
|
|
2,318 |
|
|
|
|
|
Realized losses/(gains) on securities, net |
|
|
2,332 |
|
|
|
2,511 |
|
|
|
(857 |
) |
Deferred income taxes |
|
|
12,190 |
|
|
|
19,895 |
|
|
|
(5,698 |
) |
Other operating |
|
|
222 |
|
|
|
284 |
|
|
|
298 |
|
Loss on disposal of assets |
|
|
810 |
|
|
|
1,082 |
|
|
|
1,791 |
|
Non-cash charges associated with lease termination |
|
|
196 |
|
|
|
|
|
|
|
|
|
Excess tax benefits from exercised stock options |
|
|
(19,976 |
) |
|
|
(26,099 |
) |
|
|
(12,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,990 |
) |
|
|
3,609 |
|
|
|
3,908 |
|
Prepaid expenses and other assets |
|
|
(1,839 |
) |
|
|
(6,486 |
) |
|
|
2,213 |
|
Federal and foreign income taxes |
|
|
13,662 |
|
|
|
5,969 |
|
|
|
18,137 |
|
State and local income taxes |
|
|
5,710 |
|
|
|
(5,977 |
) |
|
|
(5,075 |
) |
Accounts payable and accrued liabilities |
|
|
2,986 |
|
|
|
3,075 |
|
|
|
1,759 |
|
Acquisition related liabilities |
|
|
(300 |
) |
|
|
(2,200 |
) |
|
|
(13,658 |
) |
Fees received in advance |
|
|
10,460 |
|
|
|
(1,042 |
) |
|
|
3,751 |
|
Other liabilities |
|
|
9,576 |
|
|
|
(4,983 |
) |
|
|
(237 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
326,401 |
|
|
|
247,906 |
|
|
|
248,521 |
|
The accompanying notes are an integral part of these consolidated financial statements.
51
VERISK ANALYTICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For The Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired of $9,477, $365 and $120,
respectively |
|
|
(61,350 |
) |
|
|
(18,951 |
) |
|
|
(50,658 |
) |
Purchase of cost-based investments |
|
|
|
|
|
|
(5,800 |
) |
|
|
|
|
Earnout payments |
|
|
(78,100 |
) |
|
|
(98,100 |
) |
|
|
(3,191 |
) |
Proceeds from release of contingent escrows |
|
|
129 |
|
|
|
558 |
|
|
|
3,039 |
|
Escrow funding associated with acquisitions |
|
|
(7,636 |
) |
|
|
(1,500 |
) |
|
|
(4,375 |
) |
Purchases of available-for-sale securities |
|
|
(575 |
) |
|
|
(361 |
) |
|
|
(44,101 |
) |
Proceeds from sales and maturities of available-for-sale securities |
|
|
886 |
|
|
|
21,724 |
|
|
|
22,872 |
|
Purchases of fixed assets |
|
|
(38,694 |
) |
|
|
(30,652 |
) |
|
|
(32,941 |
) |
Proceeds from repayment of notes receivable from stockholders |
|
|
|
|
|
|
3,863 |
|
|
|
301 |
|
Issuance of notes receivable from stockholders |
|
|
|
|
|
|
(1,247 |
) |
|
|
(1,777 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(185,340 |
) |
|
|
(130,466 |
) |
|
|
(110,831 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of short-term debt, net |
|
|
|
|
|
|
114,000 |
|
|
|
30,000 |
|
Proceeds from issuance of long-term debt |
|
|
80,000 |
|
|
|
150,000 |
|
|
|
85,000 |
|
Redemption of ISO Class A common stock |
|
|
(46,740 |
) |
|
|
(387,561 |
) |
|
|
(168,660 |
) |
Repurchase of ISO Class B common stock |
|
|
|
|
|
|
(5,001 |
) |
|
|
(36,110 |
) |
Repayment of current portion of long-term debt |
|
|
(100,000 |
) |
|
|
|
|
|
|
|
|
Repayment of short-term debt, net |
|
|
(59,244 |
) |
|
|
(35,287 |
) |
|
|
(136,008 |
) |
Debt issuance cost |
|
|
(4,510 |
) |
|
|
|
|
|
|
|
|
Excess tax benefits from exercised stock options |
|
|
19,976 |
|
|
|
26,099 |
|
|
|
12,798 |
|
Proceeds from repayment of exercise price loans classified as a
component of redeemable common stock |
|
|
|
|
|
|
29,482 |
|
|
|
|
|
Proceeds from stock options exercised |
|
|
7,709 |
|
|
|
892 |
|
|
|
389 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(102,809 |
) |
|
|
(107,376 |
) |
|
|
(212,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes |
|
|
90 |
|
|
|
(928 |
) |
|
|
(202 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents |
|
|
38,342 |
|
|
|
9,136 |
|
|
|
(75,103 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
33,185 |
|
|
|
24,049 |
|
|
|
99,152 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
71,527 |
|
|
$ |
33,185 |
|
|
$ |
24,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures: |
|
|
|
|
|
|
|
|
|
|
|
|
Taxes paid |
|
$ |
111,458 |
|
|
$ |
99,323 |
|
|
$ |
94,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
34,201 |
|
|
$ |
28,976 |
|
|
$ |
22,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans made to directors and officers in connection with the
exercise of stock options |
|
$ |
|
|
|
$ |
(20,148 |
) |
|
$ |
(15,130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock used to repay maturities of
notes receivable from stockholders |
|
$ |
|
|
|
$ |
42,202 |
|
|
$ |
32,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock used to fund the exercise of
stock options |
|
$ |
2,326 |
|
|
$ |
4,281 |
|
|
$ |
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KSOP stock redemption funded in the prior year |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax (liability)/asset established on date of acquisition |
|
$ |
(5,728 |
) |
|
$ |
(2,963 |
) |
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
$ |
3,659 |
|
|
$ |
2,610 |
|
|
$ |
9,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures included in accounts payable and accrued
liabilities |
|
$ |
1,388 |
|
|
$ |
|
|
|
$ |
4,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in goodwill due to finalization of acquisition related
liabilities |
|
$ |
(4,300 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual of acquisition related liabilities |
|
$ |
|
|
|
$ |
82,400 |
|
|
$ |
98,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in goodwill due to acquisition related escrow
distributions |
|
$ |
181 |
|
|
$ |
4,388 |
|
|
$ |
4,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
52
VERISK ANALYTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data, unless otherwise stated)
1. Organization and Initial Public Offering:
Verisk Analytics, Inc. and its consolidated subsidiaries (Verisk or the Company) enable
risk-bearing businesses to better understand and manage their risks. The Company provides its
customers proprietary data that, combined with analytic methods, creates embedded decision support
solutions. The Company is one of the largest aggregators and providers of data pertaining to
property and casualty (P&C) or P&C insurance risks in the United States of America (U.S.). The
Company offers solutions for detecting fraud in the U.S. P&C insurance, mortgage and healthcare
industries and sophisticated methods to predict and quantify loss in diverse contexts ranging from
natural catastrophes to health insurance. The Company provides solutions, including data,
statistical models or tailored analytics, all designed to allow clients to make more logical
decisions.
Verisk was established on May 23, 2008 to serve as the parent holding company of Insurance
Services Office, Inc. (ISO) upon completion of the initial public offering (the IPO). ISO was formed in 1971 as an advisory
and rating organization for the P&C insurance industry to provide statistical and actuarial
services, to develop insurance programs and to assist insurance companies in meeting state
regulatory requirements. Over the past decade, the Company has broadened its data assets, entered
new markets, placed a greater emphasis on analytics, and pursued strategic acquisitions. On
October 6, 2009, ISO effected a corporate reorganization whereby the Class A and Class B
common stock of ISO were exchanged by the current stockholders for the common stock of Verisk on a
one-for-one basis. Verisk immediately thereafter effected a fifty-for-one stock split of its Class
A and Class B common stock and equally sub-divided the Class B
common stock into two new series of stock, Verisk Class B (Series 1)
and Verisk Class B (Series 2). Except as the context otherwise requires, all share and per share
information in the consolidated financial statements gives effect to the fifty-for-one stock split
that occurred immediately after the reorganization.
On October 9, 2009, the Company completed its IPO. Upon completion of the IPO, the selling
stockholders sold 97,995,750 shares of Class A common stock of Verisk, which included the
12,745,750 over-allotment option, at the IPO price of $22.00 per share. The Company did not
receive any proceeds from the sales of common stock in the offering. Verisk trades on the NASDAQ
Global Select Market under the ticker symbol VRSK.
2. Basis of Presentation and Summary of Significant Accounting Policies:
The accompanying consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States of America (U.S. GAAP). The
preparation of financial statements in conformity with these accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods.
Significant estimates include acquisition purchase price allocations, the fair value of goodwill,
the realization of deferred tax assets, acquisition related liabilities, fair value of stock based
compensation, liabilities for pension and postretirement benefits, fair value of the Companys redeemable
common stock, and the estimate for the allowance for doubtful accounts. Actual results may
ultimately differ from those estimates. Certain reclassifications have been made related to
other income/(expense) within the consolidated statements of operations in 2008 and 2007 and
related to the current and non-current portions of deferred tax assets and liabilities within
the notes to the consolidated financial statements in 2008 to conform to the respective 2009
presentation. Significant accounting policies include the following:
(a) Intercompany Accounts and Transactions
The consolidated financial statements include the accounts of Verisk. All intercompany
accounts and transactions have been eliminated.
(b) Revenue Recognition
The following describes the Companys primary types of revenues and the applicable revenue
recognition policies. The Companys revenues are primarily derived from sales of services and
revenue is recognized as services are performed and information is delivered to our customers.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, fees and/or price is fixed or determinable, and collectability
is reasonably assured. Revenue is recognized net of applicable sales tax withholdings.
53
Industry Standard Insurance Programs, Statistical Agent and Data Services and Actuarial
Services
Industry standard insurance programs, statistical agent and data services and actuarial
services are sold to participating insurance company customers under annual agreements covering
a calendar year where the price is determined at the inception of the agreement. In accordance
with Accounting Standards Codification (ASC) 605, Revenue Recognition, the Company recognizes
revenue ratably over the term of these annual agreements, as services are performed and
continuous access to information is provided over the entire term of the agreements.
Property-Specific Rating and Underwriting Information
The Company provides property specific rating information through reports issued for
specific commercial properties, for which revenue is recognized when the report is delivered to
the customer, provided that all other revenue recognition criteria are met.
In addition, the Company provides hosting or software solutions that provide continuous
access to information about the properties being insured and underwriting information in the
form of standard policy forms to be used by customers. As the customer has a contractual right
to take possession of the software without significant penalty, revenues from these arrangements
are recognized ratably over the contract period from the time when the
customer had access to the solution in accordance with ASC 985-605, Software Revenue Recognition (ASC 985-605). The
Company recognizes software license revenue when the arrangement does not require significant
production, customization or modification of the software and the following criteria are met:
persuasive evidence of an agreement exists, delivery has occurred, fees are fixed or
determinable, and collections are probable. These software arrangements include post-contract
customer support (PCS). The Company recognizes software license revenue ratably
over the duration of the annual license term as vendor specific objective evidence (VSOE) of
PCS, the only remaining undelivered element, cannot be established in accordance with ASC
985-605.
Fraud Identification and Detection Solutions
Fraud identification and detection solutions are comprised of transaction-based fees
recognized as information is delivered to customers, provided that all other revenue recognition
criteria have been met.
Loss Prediction
Loss prediction solutions consist of term-based software licenses and revenues are
recognized in accordance with ASC 985-605. These software arrangements include PCS, which
includes unspecified upgrades on a when-and-if available basis. The Company recognizes software
license revenue ratably over the duration of the annual license term as VSOE of PCS, the only
remaining undelivered element, cannot be established in accordance with ASC 985-605.
The Company also provides software hosting arrangements to customers whereby the customer
does not have the right to take possession of the software. Revenues from these contracts are
recognized in accordance with ASC 985-605. As these arrangements include PCS throughout the
hosting term, revenues from these multiple element arrangements are
recognized in accordance
with ASC 605-25, Revenue Recognition Multiple Element Arrangements (ASC 605-25). The Company
recognizes revenue ratably over the duration of the license term, which ranges from one to five
years, since the contractual elements do not have stand alone value.
The Company services long-term contract arrangements with certain customers. For these
arrangements, revenue is recognized in accordance with ASC 605-35, Revenue Recognition
Construction Type and Certain Production-Type Contracts, using the percentage-of-completion
method, which requires the use of estimates. In such instances, management is required to
estimate the input measures, based on hours incurred to date compared to total estimated hours
of the project, with consideration also given to output measures, such as contract milestones,
when applicable. Adjustments to estimates are made in the period in which the facts requiring
such revisions become known. Accordingly, recognized revenues and profits are subject to
revisions as the contract progresses to completion. The Company considers the contract
substantially complete when there is compliance with all performance specifications and there
are no remaining costs or potential risk.
Loss Quantification Solutions
Loss quantification solutions consist of term-based software subscription licenses and
revenues are recognized in accordance with ASC 985-605. These software arrangements include PCS,
which includes unspecified upgrades on a when-and-if available basis. Customers are billed for
access on a monthly basis and the Company recognizes revenue accordingly.
54
With respect to an insignificant percentage of revenues, the Company uses contract
accounting, as required by ASC 985-605, when the arrangement with the customer includes
significant customization, modification or production of software. For these elements, revenue
is recognized in accordance with ASC 605-35, Revenue Recognition Construction Type and Certain
Production-Type Contracts, using the percentage-of-completion method as noted above.
(c) Fees Received in Advance
The Company invoices its customers in annual, quarterly, monthly, or milestone
installments. Amounts billed and collected in advance of contract terms are recorded as Fees
received in advance in the accompanying consolidated balance sheets and are recognized as the
services are performed and the applicable revenue recognition criteria are met.
(d) Fixed Assets and Finite-lived Intangible Assets
Property and equipment, internal-use software and finite-lived intangibles are stated at
cost less accumulated depreciation and amortization, which are computed on a straight-line basis
over their estimated useful lives. Leasehold improvements are amortized over the shorter of the
useful life of the asset or the lease term.
The Companys internal software development costs primarily relate to internal-use
software. Such costs are capitalized in the application development stage in accordance with ASC
350-40, Internal-use Software. Software development costs are amortized on a straight-line basis
over a three year period, which management believes represents the useful life of these
capitalized costs.
In accordance with ASC 340, Property, Plant & Equipment, whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets and finite-lived intangible
assets may not be recoverable, the Company reviews its long-lived assets and finite-lived
intangible assets for impairment by first comparing the carrying value of the assets to the sum
of the undiscounted cash flows expected to result from the use and eventual disposition of the
assets. If the carrying value exceeds the sum of the assets undiscounted cash flows, the
Company estimates an impairment loss by taking the difference between the carrying value and
fair value of the assets.
(e) Capital and Operating Leases
The Company leases various property, plant and equipment. Leased property is accounted for
under ASC 840, Leases (ASC 840). Accordingly, leased property that meets certain criteria is
capitalized and the present value of the related lease payments is recorded as a liability.
Amortization of assets under capital leases is computed utilizing the straight-line method over
the shorter of the remaining lease term or the estimated useful life (principally 3 to 4 years
for computer equipment and automobiles).
All other leases are accounted for as operating leases. Rent expense for operating leases,
which may have rent escalation provisions or rent holidays, are recorded on a straight-line
basis over the non-cancelable bases lease period in accordance with ASC 840. The initial lease
term generally includes the build-out period, where no rent payments are typically due under the
terms of the lease. The difference between rent expense and rent paid is recorded as deferred
rent. Construction allowances received from landlords are recorded as a deferred rent credit and
amortized to rent expense over the term of the lease.
(f) Investments
The Companys investments at December 31, 2009 and 2008 included registered investment
companies and private equity securities. The Company accounts for short-term investments in
accordance with ASC 320, Investments-Debt and Equity Securities (ASC 320). The appropriate
classification of all short term investments is determined as of each balance sheet date.
There were no investments classified as trading securities at December 31, 2009 or 2008.
All investments with readily determinable market values are classified as available-for-sale.
While these investments are not held with the specific intention to sell them, they may be sold
to support the Companys investment strategies. All available-for-sale investments are carried
at fair value. The cost of all available-for-sale investments sold is based on the specific
identification method, with the exception of mutual fund-based investments, which is based on
the weighted average cost method. Dividend income is accrued on the ex-dividend date.
55
The Company performs periodic reviews of its investment portfolio when individual holdings
have experienced a decline in fair value below their respective cost. The Company considers a
number of factors in the evaluation of whether a decline in value is other-than-temporary
including: (a) the financial condition and near term prospects of the issuer; (b) the Companys
ability and intent to retain the investment for a period of time sufficient to allow for an
anticipated recovery in value; and (c) the period and degree to which the market value has been
below cost. Where the decline is deemed to be other-than-temporary, a charge is recorded to
Realized (losses)/gains on securities, net in the accompanying consolidated statements of
operations, and a new cost basis is established for the investment.
The Companys investments in private equity securities are included in Other assets in
the accompanying consolidated balance sheets. Those securities are carried at cost, as the
Company owns less than 20% and does not otherwise have the ability to exercise significant
influence. These securities are written down to their estimated realizable value when management
considers there is an other-than-temporary decline in value based on financial information
received and the business prospects of the entity.
(g) Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted the provisions of ASC 820-10, Fair Value
Measurements (ASC 8210-10), which defines fair value, establishes a framework for measuring
fair value under U.S. GAAP and expands fair value measurement disclosures. Effective January
1, 2008, the Company has adopted the provisions of ASC 820-10 for its financial assets and
liabilities recognized or disclosed at fair value on a recurring basis. Effective January 1,
2009, the Company has adopted the provisions of ASC 820-10 for its non-financial assets and
liabilities recognized or disclosed at fair value.
(h) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is generally recorded at the invoiced amount. The allowance for
doubtful accounts is estimated based on an analysis of the aging of the accounts receivable,
historical write-offs, customer payment patterns, individual customer creditworthiness, current
economic trends, and/or establishment of specific reserves for customers in adverse financial
condition. The Company reassesses the adequacy of the allowance for
doubtful accounts on a quarterly basis.
(i) Foreign Currency
The Company has determined local currencies are the functional currencies of the foreign
operations. The assets and liabilities of foreign subsidiaries are translated at the period-end
rate of exchange and statement of operations items are translated at the average rates prevailing
during the year. The resulting translation adjustment is recorded as a component of Accumulated
other comprehensive loss in the accompanying consolidated
statements of changes in stockholders
deficit.
(j) Stock Based Compensation
The Company follows ASC 718, Stock Compensation (ASC 718). Under ASC 718, stock-based
compensation cost is measured at the grant date, based on the fair value of the options granted,
and is recognized as expense over the requisite service period. On January 1, 2005, the Company
adopted ASC 718 using a prospective approach, as required under ASC 718. Under this
application, the Company is required to record compensation expense for all awards granted after
the date of adoption.
Prior
to January 1, 2008, the expected term (estimated
period of time outstanding) was estimated using the
simplified method as defined in ASC 718, in which the expected term equals the average of graded
vesting term and the contractual term. Subsequent to January 1, 2008,
the expected term was primarily estimated based on studies of
historical experience and projected exercise behavior. However,
certain awards granted, for which no historical exercise patterns
exist, the expected term was estimated using the simplified method. The risk-free interest rate is based on the yield of
U.S. Treasury zero coupon securities with a maturity equal to the expected term of the equity
award. Expected volatility for awards prior to January 1, 2008 was based on the Companys
historical volatility for a period equal to the stock options expected term, ending on the day
of grant, and calculated on a quarterly basis for purposes of the ISO 401(k) Savings and
Employee Stock Ownership Plan (KSOP). For awards granted after January 1, 2008, the volatility
factor was based on an average of the historical stock prices of a group of the Companys peers
over the most recent period commensurate with the expected term of the stock option award. Prior
to 2008, the expected dividend yield was not included in the fair value calculation as the
Company did not pay dividends. For awards granted after January 1, 2008, the expected dividends
yield was based on the Companys expected annual dividend rate on the date of grant.
56
The Company estimates expected forfeitures of equity awards at the date of grant and
recognizes compensation expense only for those awards expected to vest. The forfeiture
assumption is ultimately adjusted to the actual forfeiture rate. Changes in the forfeiture
assumptions may impact the total amount of expense ultimately recognized over the requisite
service period, and may impact the timing of expense recognized over the requisite service
period.
(k)
Research and Development Costs
Research and development costs, which primarily relate to the personnel and related
overhead costs incurred in developing new services for our customers, are expensed as incurred.
Such costs were $14,109, $11,054 and $8,944 for the years ended December 31, 2009, 2008 and
2007, respectively, and were included in Selling, general and administrative expenses in the
accompanying consolidated statements of operations.
(l) Income Taxes
The Company accounts for income taxes under the asset and liability method under ASC 740,
Income Taxes (ASC 740), which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. The
effect of a change in tax rates on deferred tax assets and liabilities is recognized in income
in the period that includes the enactment date.
Deferred tax assets are recorded to the extent these assets are more likely than not to be
realized. In making such determination, the Company considers all available positive and
negative evidence, including future reversals of existing taxable temporary differences,
projected future taxable income, tax planning strategies and recent financial operations.
Valuation allowances are recognized to reduce deferred tax assets if it is determined to be more
likely than not that all or some of the potential deferred tax assets will not be realized.
In July 2006, the FASB issued ASC 740-10, Income Taxes (ASC 740-10), which clarifies the
accounting for uncertainty in income taxes recognized in the financial statements in accordance
with ASC 740. ASC 740-10 provides that a tax benefit from an uncertain tax position may be
recognized based on the technical merits when it is more likely than not that the position will
be sustained upon examination, including resolutions of any related appeals or litigation
processes. Income tax positions must meet a more likely than not recognition threshold at the
effective date to be recognized upon the adoption of ASC 740-10 and in subsequent periods. This
interpretation also provides guidance on measurement, derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
The Company adopted the provisions of ASC 740-10 on January 1, 2007. As a result of the
implementation of ASC 740-10, the Company recognized approximately a $10,338 increase in the
liability for unrecognized tax benefits, which was accounted for as an increase to the
January 1, 2007, balance of retained earnings/(accumulated
deficit). The balance sheet line items impacted by this
increase are as follows:
|
|
|
|
|
Increase in non-current deferred income taxes |
|
$ |
13,933 |
|
Decrease in federal and state taxes payable |
|
$ |
7,620 |
|
Increase in other liabilities |
|
$ |
31,891 |
|
Increase in retained earnings/(accumulated
deficit) |
|
$ |
10,338 |
|
The Company recognizes interest and penalties related to unrecognized tax benefits
within the income tax expense line in the accompanying consolidated statements of operations.
Accrued interest and penalties are included within Other liabilities on the accompanying
consolidated balance sheets.
57
(m) Earnings Per Share
Basic and diluted earnings per share (EPS) are determined in accordance with ASC 260,
Earnings per Share, which specifies the computation, presentation and disclosure requirements
for EPS. Basic EPS excludes all dilutive common stock equivalents. It is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS, as calculated using
the treasury stock method, reflects the potential dilution that would occur if the Companys
dilutive outstanding stock options were exercised. For purposes of
calculating EPS, Class A, Class B (Series 1) and Class B
(Series 2) common shares are combined since both classes have identical rights to earnings.
(n) Pension and Postretirement Benefits
The Company accounts for its pension and postretirement benefits under ASC 715,
Compensation Retirement Benefits (ASC 715). ASC 715 requires the recognition of the funded
status of a benefit plan in the balance sheet, the recognition in other comprehensive income of
gains or losses and prior service costs or credits arising during the period, but which are not
included as components of periodic benefit cost, and the measurement of defined benefit plan
assets and obligations as of the balance sheet date. The Company utilizes a valuation date of
December 31.
(o) Product Warranty Obligations
The Company provides warranty coverage for certain of its products. The Company recognizes
a product warranty obligation when claims are probable and can be reasonably estimated. As of
December 31, 2009 and 2008, product warranty obligations were not significant.
In the ordinary course of business, the Company enters into numerous agreements that
contain standard indemnities whereby the Company indemnifies another party for breaches of
confidentiality, infringement of intellectual property or gross negligence. Such
indemnifications are primarily granted under licensing of computer software. Most agreements
contain provisions to limit the maximum potential amount of future payments that the Company
could be required to make under these indemnifications, however, the Company is not able to
develop an estimate of the maximum potential amount of future payments to be made under these
indemnifications as the triggering events are not subject to predictability.
(p) Loss Contingencies
The Company accrues for costs relating to litigation, claims and other contingent matters
when such liabilities become probable and reasonably estimable. Such estimates are based on
managements judgment. Actual amounts paid may differ from amounts estimated, and such
differences will be charged to operations in the period in which the final determination of the
liability is made.
(q) Goodwill
Goodwill represents the excess of acquisition
costs over the fair value of tangible net assets and identifiable intangible assets of the
businesses acquired. Goodwill and intangible assets deemed to have indefinite lives are not
amortized. Intangible assets determined to have finite lives are amortized over their useful
lives. Goodwill and intangible assets with indefinite lives are subject to impairment testing
annually as of June 30 or whenever events or changes in circumstances indicate that the
carrying amount may not be fully recoverable. The Company completed the required annual
impairment test as of June 30, 2009, which resulted in no impairment of goodwill in 2009. This
test compares the carrying value of each reporting unit to its fair value. If the fair value
of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned
to that reporting unit, goodwill is not impaired. If the carrying value of the reporting
units net assets, including goodwill, exceeds the fair value of the reporting unit, then the
Company will determine the implied fair value of the reporting units goodwill. If the
carrying value of a reporting units goodwill exceeds its implied fair value, then an
impairment loss is recorded for the difference between the carrying amount and the implied fair
value of the goodwill.
(r) Recent Accounting Pronouncements
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162
(ASC 105). ASC 105 will become the source of authoritative U.S. GAAP recognized by the FASB
to be applied by non-governmental entities. Rules and interpretive releases of the SEC, under
the authority of federal securities laws, are also sources of authoritative U.S. GAAP for SEC
registrants. On the effective date of this statement, the codification will supersede all then-existing
non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting
literature not included in the codification will become non-authoritative. This statement is
effective for financial statements issued for interim and annual reporting periods ending after
September 15, 2009. The Companys adoption of ASC 105, effective September 30, 2009,
impacted the consolidated financial statements and related disclosures as all references to
authoritative accounting literature reflect the newly adopted codification.
58
In February 2010, the FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements
(ASU No. 2010-09). ASU No. 2010-09 establishes that an entity that is an SEC filer is required to evaluate
subsequent events through the date that the financial statements are issued. An entity that is an SEC filer is not
required to disclose the date through which subsequent events have been evaluated. The amendments in ASU No. 2010-09
are effective upon issuance of the final update, except for the use of the issued date for conduit debt obligors. That
amendment is effective for interim or annual periods ending after June 15, 2010. Effective with the adoption of ASU
No. 2010-09 on December 31, 2009, the Company no longer discloses the date though which subsequent events have been
evaluated, as the Company evaluated subsequent events through the date the financial statements were issued.
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair
Value Measurements and Disclosures (ASU No. 2010-06). ASU No. 2010-06 provides guidance on
improving disclosures on fair value measurements, such as the transfers between Level 1, Level
2 and Level 3 inputs and the disaggregated activity in the rollforward for Level 3 fair value
measurements. ASU No. 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about the disaggregated activity in the
rollforward for Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those fiscal periods.
The Company is currently evaluating the impact of ASU No. 2010-06 on its consolidated financial
statements.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU No. 2009-13). ASU No. 2009-13 establishes the accounting and reporting
guidance for arrangements under which the vendor will perform multiple revenue-generating
activities. Specifically, ASU No. 2009-13 addresses how to separate deliverables and how to
measure and allocate arrangement consideration to one or more units of accounting. ASU No.
2009-13 is effective prospectively for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company
has elected not to early adopt and is currently evaluating the impact of ASU No. 2009-13 on its
consolidated financial statements.
In June 2009, the FASB issued ASC 860-10-50, Accounting for Transfers of Financial Assets
an amendment of FASB Statement No. 140 (ASC 860-10-50). ASC 860-10-50 was issued to
improve the relevance, representational faithfulness and comparability of the information that
a reporting entity provides in its financial statements about a transfer of financial assets;
the effects of a transfer on its financial position, financial performance and cash flows; and
a transferors continuing involvement, if any, in the transferred financial assets. ASC
860-10-50 is effective for an entitys first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. Earlier application is prohibited. The Company is
currently evaluating the impact of ASC 860-10-50 on its consolidated financial statements.
In June 2009, the FASB issued ASC 810-10-50, Amendments to FASB Interpretation No. 46(R)
(ASC 810-10-50). ASC 810-10-50 was issued to address the effects on certain provisions of
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities
(FIN No. 46(R)), as a result of the elimination of the qualifying special-purpose entity
concept in ASC 860-10-50 and constituent concerns about the application of certain key
provisions of FIN No. 46(R), including those in which the accounting and disclosures under the
interpretation do not always provide timely and useful information about an enterprises
involvement in a variable interest entity. ASC 810-10-50 is effective for an entitys first
annual reporting period that begins after November 15, 2009. The adoption of ASC 810-10-50 is
not expected to have a significant effect on the consolidated financial statements.
In May 2009, the FASB issued ASC 855-10-20, Subsequent Events (ASC 855-10-20). ASC
855-10-20 establishes the principles and requirements for subsequent events in the period
after the balance sheet date during which management of a reporting entity shall evaluate
events or transactions that may occur for potential recognition or disclosure in the financial
statements. ASC 855-10-20 is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of ASC 855-10-20 did not have any impact on the Companys consolidated
financial statements.
In April 2009, the FASB issued ASC 805-20-25, Recognition (ASC 805-20-25), to provide
further guidance on assets acquired and liabilities assumed in a business combination that
arise from contingencies that would be within the scope of ASC 805, Business Combinations (ASC
805), if not acquired or assumed in a business combination, except for assets or liabilities
arising from contingencies that are subject to specific guidance in ASC 805. ASC 805-20-25 is
effective for assets or liabilities arising from contingencies in business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The adoption of ASC 805-20-25, effective January 1,
2009, did not have any impact on the acquisitions of D2 Hawkeye, Inc. (D2), TierMed Systems,
LLC (TierMed) and Enabl-u Technologies Corporation (Enabl-u). The majority of the impact of adopting ASC
805-20-25 will be dependent on the business combinations that the Company may pursue and
complete after its effective date.
59
In December 2008, the FASB released ASC 715-20-65, Employers Disclosure about
Postretirement Benefit Plan Assets (ASC 715-20-65). ASC 715-20-65 amends FAS No. 132
(revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits, to
provide guidance on an employers disclosures about plan assets of a defined benefit pension or
other postretirement plan. ASC 715-20-65 is effective for financial statements issued for
fiscal years ending after December 15, 2009. The Companys adoption of ASC 715-20-65,
effective December 31, 2009, impacted the consolidated financial statements and related
disclosures as the Company updated its disclosures in Note 17 about plan assets of a
defined benefit pension or other postretirement plan in accordance with ASC 715-20-65.
In October 2008, the FASB issued ASC 820-10-35, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active (ASC 820-10-35). ASC 820-10-35 clarifies
the application of ASC 820-10, Fair Value Measurements and Disclosure (ASC 820-10), in a
market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not
active. ASC 820-10-35 was effective upon issuance, including prior periods for which financial
statements had not been issued. Effective January 1, 2009, the Company has adopted the
disclosure provisions of ASC 820-10-35 for its non-recurring non-financial assets and
liabilities, except those recognized or disclosed at fair value on a recurring basis.
In February 2008, the FASB issued ASC 820-10-15, Effective Date of FASB Statement No. 157
(ASC 820-10-15), which delays the effective date of FAS No. 157, Fair Value Measurements, for
non-recurring non-financial assets and liabilities, except those recognized or disclosed at
fair value in the financial statements on a recurring basis, until fiscal years beginning after
November 15, 2008. Non-financial assets and liabilities include, among others: intangible
assets acquired through business combinations; long-lived assets when assessing potential
impairment; and liabilities associated with restructuring activities. Effective January 1,
2009, the Company has adopted the disclosure provisions of ASC 820-10-15 for its non-recurring
non-financial assets and liabilities.
In December 2007, the FASB issued ASC 805, Business Combinations (ASC 805). ASC 805
primarily requires an acquirer to recognize the assets acquired and the liabilities assumed,
measured at their fair values as of that date. This replaces FAS No. 141(R)s, Business
Combination, cost-allocation process, which required the cost of an acquisition to be allocated
to the individual assets acquired and liabilities assumed based on their estimated fair values.
Generally, ASC 805 will become effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008, except for tax provisions which apply to business combinations regardless of
acquisition date. As the Company had expensed all in-process acquisition related costs
incurred during the year ended December 31, 2008, the adoption of ASC 805 on January 1, 2009
had no impact on the Companys consolidated financial statements. The Company made three
acquisitions during the year ended December 31, 2009 and accounted for these acquisitions under
ASC 805.
3. Concentration of Credit Risk:
Financial instruments that potentially expose the Company to credit risk consist primarily of
cash and cash equivalents, available for sale securities and accounts receivable, which are
generally not collateralized. The Company maintains, in cash and cash equivalents, higher credit
quality financial institutions in order to limit the amount of credit exposure. The total cash
balances are insured by the Federal Deposit Insurance Corporation (FDIC) to a maximum amount of
$250 per bank at December 31, 2009 and 2008. At December 31, 2009 and 2008, the Company had cash
balances on deposit with four banks and six banks, respectively, that exceeded the balance insured
by the FDIC limit by approximately $54,339 and $20,917, respectively. At December 31, 2009 and
2008, the Company also had cash on deposit with foreign banks of approximately $16,130 and $11,311,
respectively.
The Company considers the concentration of credit risk associated with its trade accounts
receivable to be commercially reasonable and believes that such concentration does not result in
the significant risk of near-term severe adverse impacts. The Companys top fifty customers for
the years ended December 2009, 2008 and 2007, represent approximately 45%, 45% and 44% of revenue,
respectively, with no individual customer accounting for more than 4% of revenue during the years
ended December 31, 2009, 2008 and 2007. No individual customer comprised more than 10% of accounts
receivable at December 31, 2009 and 2008.
4. Cash and Cash Equivalents:
Cash and cash equivalents consist of cash in banks, money market funds, commercial paper, and
other liquid instruments with original maturities of 90 days or less at the time of purchase.
60
5. Accounts Receivable:
Accounts Receivable consist of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Billed receivables |
|
$ |
88,048 |
|
|
$ |
81,302 |
|
Unbilled receivables |
|
|
5,232 |
|
|
|
9,036 |
|
|
|
|
|
|
|
|
Total receivables |
|
|
93,280 |
|
|
|
90,338 |
|
Less allowance for doubtful accounts |
|
|
(3,844 |
) |
|
|
(6,397 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
89,436 |
|
|
$ |
83,941 |
|
|
|
|
|
|
|
|
6. Investments:
The following is a summary of available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Adjusted |
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
$ |
4,530 |
|
|
$ |
905 |
|
|
$ |
|
|
|
$ |
5,435 |
|
Equity securities |
|
|
14 |
|
|
|
|
|
|
|
(4 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale
securities |
|
$ |
4,544 |
|
|
$ |
905 |
|
|
$ |
(4 |
) |
|
$ |
5,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies |
|
$ |
5,162 |
|
|
$ |
|
|
|
$ |
(48 |
) |
|
$ |
5,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has investments in private equity securities in which the Company acquired
non-controlling interests and no readily determinable market value exists. These securities were
accounted for under the cost method in accordance with ASC 232-10-25, The Equity Method of
Accounting for Investments in Common Stock (ASC 232-10-25). At December 31, 2009 and 2008, the
carrying values of such securities were $3,841 and $5,853, respectively, and have been included in
Other assets in the accompanying consolidated balance sheets.
Realized
(losses)/gains on securities, net, including write downs related to
other-than-temporary impairments of available-for-sale securities and other assets, were as follows
for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Gross realized gains/(losses) on sale of
registered investment securities |
|
$ |
66 |
|
|
$ |
(1,306 |
) |
|
$ |
922 |
|
Other-than-temporary impairment of registered
investment securities |
|
|
(386 |
) |
|
|
(1,205 |
) |
|
|
|
|
Gross realized gains on U.S. common stock |
|
|
|
|
|
|
|
|
|
|
135 |
|
Other-than-temporary impairment of cost-based
investments |
|
|
(2,012 |
) |
|
|
|
|
|
|
(200 |
) |
|
|
|
|
|
|
|
|
|
|
Realized (losses)/gains on securities, net |
|
$ |
(2,332 |
) |
|
$ |
(2,511 |
) |
|
$ |
857 |
|
|
|
|
|
|
|
|
|
|
|
61
Investment income during the years ended December 31, 2009, 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Interest and other income |
|
$ |
127 |
|
|
$ |
848 |
|
|
$ |
4,107 |
|
Interest income from notes receivable
from stockholders |
|
|
|
|
|
|
1,050 |
|
|
|
2,454 |
|
Dividend income |
|
|
68 |
|
|
|
286 |
|
|
|
435 |
|
Gain on call premuims |
|
|
|
|
|
|
|
|
|
|
1,455 |
|
|
|
|
|
|
|
|
|
|
|
Investment income |
|
$ |
195 |
|
|
$ |
2,184 |
|
|
$ |
8,451 |
|
|
|
|
|
|
|
|
|
|
|
7. Fair Value Measurements
Certain assets and liabilities of the Company are reported at fair
value in the accompanying consolidated balance sheets. Such assets
and liabilities include amounts for both financial and non-financial
instruments. To increase consistency and comparability of assets and
liabilities recorded at fair value, ASC 820-10 establishes a
three-level fair value hierarchy to prioritize the inputs to
valuation techniques used to measure fair value. ASC 820-10 requires
disclosures detailing the extent to which companies measure assets and liabilities at fair value,
the methods and assumptions used to measure fair value and the effect of fair value measurements on
earnings. In accordance with ASC 820-10, the Company applied the following fair value hierarchy:
|
Level 1 |
|
Assets or liabilities for which the identical item is traded on an active exchange,
such as publicly-traded instruments. |
|
Level 2 |
|
Assets and liabilities valued based on observable market data for similar
instruments. |
|
Level 3 |
|
Assets or liabilities for which significant valuation assumptions are not
readily observable in the market; instruments valued based on the best available data,
some of which is internally-developed, and considers risk premiums that a market
participant would require. |
The following tables provide information for such assets and
liabilities as of December 31, 2009 and 2008.
The fair values of cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, acquisition related liabilities, and short-term debt approximate their
carrying amounts because of the short-term maturity of these instruments. The fair value of the
long-term debt was estimated at $578,804 and $569,699 as of December 31, 2009 and 2008,
respectively, and is based on an estimate of interest rates available to the Company for debt with
similar features, the Companys current credit rating and spreads applicable to the Company.
These assets and liabilities are not presented in the following
table.
62
The following table summarizes fair value measurements by level at December 31, 2009 and 2008
for assets and other balances measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active Markets |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
Total |
|
|
Assets (Level 1) |
|
|
Inputs (Level 2) |
|
|
Inputs (Level 3) |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies (1) |
|
$ |
5,435 |
|
|
$ |
5,435 |
|
|
$ |
|
|
|
$ |
|
|
Equity securities (1) |
|
$ |
10 |
|
|
$ |
10 |
|
|
$ |
|
|
|
$ |
|
|
Cost based
investment recorded at fair value on a non-recurring basis (2) |
|
$ |
1,809 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,809 |
|
Contingent
consideration under ASC 805 (3) |
|
$ |
(3,344 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(3,344 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registered investment companies (1) |
|
$ |
5,114 |
|
|
$ |
5,114 |
|
|
$ |
|
|
|
$ |
|
|
Class A
redeemable common stock (4) |
|
$ |
752,912 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
752,912 |
|
|
|
|
(1) |
|
Registered investment companies and equity securities are classified as available-for-sale
securities and are valued using quoted prices in active markets multiplied by the number of
shares owned. |
|
(2) |
|
Cost based investment consists of a non-controlling interest
in a private equity security with no readily determinable market
value. This investment was recorded at fair value on a non-recurring
basis as a result of an other-than temporary impairment of $2,012 at
December 31, 2009. In establishing the estimated fair value of this
investment, the Company took into consideration the financial condition and
operating results of the underlying company and other indicators of
fair values, such as the fair value utilized for the Companys
private equity offering. |
|
(3) |
|
Under ASC 805, contingent consideration is recognized at fair value at the end of each
reporting period. Subsequent changes in the fair value of contingent consideration is
recorded in the statement of operations. See Note 10 for further information regarding the
2009 acquisitions. For the year ended December 31, 2009, no adjustments to the initial
assessment were required. |
|
(4) |
|
The fair value of ISOs Class A redeemable common stock was established for purposes of the
ISO 401(K) Savings and Employee Stock Ownership Plan (KSOP) generally on the final day of
the quarter and prior to the Companys IPO, such price was utilized for all share transactions
in the subsequent quarter. The then-current valuation in effect for the KSOP was also considered
the fair value for ISO Class A redeemable common stock and related transactions within the
Insurance Services Office, Inc. 1996 Incentive Plan. Upon consummation of the
corporate reorganization on October 6, 2009, the Company is no longer obligated to redeem ISO
Class A common shares; therefore, it is not required to record redeemable common stock. The
fair value of ISO Class A redeemable common stock prior to the
conversion was determined based
on the IPO price of $22.00 per share. See Note 14 for a description of the valuation
process. |
63
The table below includes a rollforward of ISO Class A redeemable common stock for the
year ended December 31, 2009:
|
|
|
|
|
|
|
ISO Class A |
|
|
|
Redeemable |
|
|
|
Common Stock |
|
Balance, December 31, 2008 |
|
$ |
752,912 |
|
Redemptions and exercise of stock, net |
|
|
(43,965 |
) |
Increase in fair value (1) |
|
|
355,949 |
|
Transfer out
due to conversion upon corporate reorganization (2) |
|
|
(1,064,896 |
) |
|
|
|
|
Balance, December 31, 2009 |
|
$ |
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 14 for a description of the valuation process. |
|
(2) |
|
The fair value of the Companys Class A redeemable common stock prior to the
reversal was determined based on the IPO price of $22.00 per share. |
The table below includes a rollforward of the Companys contingent consideration under ASC
805 for the year ended December 31, 2009:
|
|
|
|
|
|
|
Contingent |
|
|
|
Consideration |
|
Balance, December 31, 2008 |
|
$ |
|
|
Acquisition of D2 (1) |
|
|
2,800 |
|
Acquisition of TierMed (1) |
|
|
544 |
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
3,344 |
|
|
|
|
|
|
|
|
(1) |
|
Under ASC 805, contingent consideration is recognized at fair value at the end of each
reporting period. |
|
|
|
Subsequent changes in the fair value of contingent consideration is recorded
in the statement of operations. |
|
|
|
See Note 10 for further information regarding the 2009 acquisitions. |
The following table includes a rollforward of the Companys cost based investment recorded at
fair value on a non-recurring basis for the year ended December 31, 2009:
|
|
|
|
|
|
|
Cost Based |
|
|
|
Investment |
|
Balance, December 31, 2008 |
|
$ |
|
|
Transfer of cost based investment prior to other-than temporary
impairment |
|
|
3,821 |
|
Other-than temporary impairment |
|
|
(2,012 |
) |
|
|
|
|
Balance, December 31, 2009 |
|
$ |
1,809 |
|
|
|
|
|
64
8. Fixed Assets
The following is a summary of fixed assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and |
|
|
|
|
|
|
Useful Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and office equipment |
|
3-10 years |
|
|
$ |
101,067 |
|
|
$ |
(72,434 |
) |
|
|
28,633 |
|
Leasehold improvements |
|
Lease term |
|
|
|
28,065 |
|
|
|
(12,019 |
) |
|
|
16,046 |
|
Purchased software |
|
3 years |
|
|
|
45,214 |
|
|
|
(33,306 |
) |
|
|
11,908 |
|
Software development costs |
|
3 years |
|
|
|
86,324 |
|
|
|
(59,018 |
) |
|
|
27,306 |
|
Leased equipment |
|
3-4 years |
|
|
|
18,370 |
|
|
|
(13,098 |
) |
|
|
5,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets |
|
|
|
|
|
$ |
279,040 |
|
|
$ |
(189,875 |
) |
|
$ |
89,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and office equipment |
|
3-10 years |
|
|
$ |
97,900 |
|
|
$ |
(74,429 |
) |
|
|
23,471 |
|
Leasehold improvements |
|
Lease term |
|
|
|
27,624 |
|
|
|
(9,920 |
) |
|
|
17,704 |
|
Purchased software |
|
3 years |
|
|
|
41,419 |
|
|
|
(30,869 |
) |
|
|
10,550 |
|
Software development costs |
|
3 years |
|
|
|
78,046 |
|
|
|
(55,304 |
) |
|
|
22,742 |
|
Leased equipment |
|
3-4 years |
|
|
|
17,556 |
|
|
|
(9,436 |
) |
|
|
8,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets |
|
|
|
|
|
$ |
262,545 |
|
|
$ |
(179,958 |
) |
|
$ |
82,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization of fixed assets for the years ended December
31, 2009, 2008 and 2007, were $38,578, $35,317 and $31,745, of which $9,394, $10,091 and $7,584
were related to amortization of software development costs, respectively. Leased equipment
includes amounts held under capital leases for automobiles, computer software and computer
equipment.
9. Goodwill and Intangible Assets:
Goodwill represents the excess of acquisition costs over the fair value of tangible net assets
and identifiable intangible assets of the businesses acquired. Goodwill and intangible assets
deemed to have indefinite lives are not amortized. Intangible assets determined to have finite
lives are amortized over their useful lives. The Company completed the required annual impairment
test as of June 30, 2009 and 2008, which resulted in no impairment of goodwill. For the year ended
December 31, 2007, the Company recorded an impairment charge of $1,744 included in Loss from
discontinued operations, net of tax in the accompanying consolidated statements of operations.
65
The following is a summary of the change in goodwill from December 31, 2007 through December
31, 2009, both in total and as allocated to the Companys operating segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk |
|
|
Decision |
|
|
|
|
|
|
Assessment |
|
|
Analytics |
|
|
Total |
|
Goodwill at
December 31, 2007 (1) |
|
$ |
27,908 |
|
|
$ |
311,983 |
|
|
$ |
339,891 |
|
Accrual of acquisition related liabilities |
|
|
|
|
|
|
82,400 |
|
|
|
82,400 |
|
Current year acquisitions |
|
|
|
|
|
|
12,845 |
|
|
|
12,845 |
|
Purchase accounting reclassifications |
|
|
|
|
|
|
7,848 |
|
|
|
7,848 |
|
Escrow distribution |
|
|
|
|
|
|
4,388 |
|
|
|
4,388 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill at
December 31, 2008 (1) |
|
$ |
27,908 |
|
|
$ |
419,464 |
|
|
$ |
447,372 |
|
|
|
|
|
|
|
|
|
|
|
Current year acquisitions |
|
|
|
|
|
|
49,776 |
|
|
|
49,776 |
|
Finalization of acquisition related liabilities |
|
|
|
|
|
|
(4,300 |
) |
|
|
(4,300 |
) |
Purchase accounting reclassifications |
|
|
|
|
|
|
(2,600 |
) |
|
|
(2,600 |
) |
Acquisition related escrow funding |
|
|
|
|
|
|
400 |
|
|
|
400 |
|
Finalization of acquisition related escrows |
|
|
|
|
|
|
181 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill at
December 31, 2009 (1) |
|
$ |
27,908 |
|
|
$ |
462,921 |
|
|
$ |
490,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These balances are net of accumulated impairment charges of $3,244
that occured prior to 2008. |
The
finalization, excluding the final resolution of indemnity escrows and contingent consideration, of the purchase accounting for the acquisition of AER during the third quarter of 2009 resulted in an increase in
intangible assets of $3,203, an increase in deferred tax liabilities of $885, a decrease in
accounts payable and accrued expenses of $282, and a corresponding decrease to goodwill of $2,600.
The Company recorded an acquisition related liability of $67,200 for the Xactware acquisition
as of December 31, 2008. The Company recorded a reduction of $4,300 to goodwill and acquisition
related liabilities as of March 31, 2009. In May 2009, the Company finalized the Xactware
acquisition contingent liability and made a payment of $62,900. In May 2009, the Company also paid
the NIA Consulting, LTD (NIA) acquisition contingent liability of $15,200, which was also
included in acquisition related liabilities as of December 31, 2008.
During the second quarter of 2008, the Company finalized the purchase price allocation
associated with the acquisitions of HealthCare, Insight, LLC (HCI) and NIA. The finalization of
the purchase accounting for HCI resulted in a reduction primarily of customer-related intangible
assets and corresponding increase to goodwill of $7,009, and the final working capital adjustment
of $825. The finalization of the purchase accounting for NIA, which includes the final working
capital and other adjustments resulted in an increase to goodwill of $9. During the fourth quarter
of 2008, the Company adjusted the purchase price allocation associated with the acquisition of
Predicted Solutions, which resulted in an increase to goodwill of $5.
66
The Companys intangible assets and related accumulated amortization consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Useful Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based |
|
6 years |
|
$ |
174,973 |
|
|
$ |
(117,986 |
) |
|
$ |
56,987 |
|
Marketing-related |
|
4 years |
|
|
35,104 |
|
|
|
(24,690 |
) |
|
|
10,414 |
|
Contract-based |
|
6 years |
|
|
6,555 |
|
|
|
(6,092 |
) |
|
|
463 |
|
Customer-related |
|
12 years |
|
|
67,534 |
|
|
|
(26,872 |
) |
|
|
40,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
284,166 |
|
|
$ |
(175,640 |
) |
|
$ |
108,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Useful Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology-based |
|
5 years |
|
$ |
164,127 |
|
|
$ |
(98,810 |
) |
|
$ |
65,317 |
|
Marketing-related |
|
4 years |
|
|
31,733 |
|
|
|
(18,363 |
) |
|
|
13,370 |
|
Contract-based |
|
6 years |
|
|
6,555 |
|
|
|
(5,940 |
) |
|
|
615 |
|
Customer-related |
|
12 years |
|
|
53,317 |
|
|
|
(19,906 |
) |
|
|
33,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
255,732 |
|
|
$ |
(143,019 |
) |
|
$ |
112,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated amortization expense related to intangible assets for the years ended
December 31, 2009, 2008 and 2007, was approximately $32,621, $29,555 and $33,916, respectively.
Estimated amortization expense in future periods through 2014 and thereafter for intangible assets
subject to amortization is as follows:
|
|
|
|
|
Year |
|
Amount |
|
2010 |
|
$ |
27,411 |
|
2011 |
|
$ |
21,425 |
|
2012 |
|
$ |
17,441 |
|
2013 |
|
$ |
11,278 |
|
2014 |
|
$ |
4,260 |
|
Thereafter |
|
$ |
26,711 |
|
10. Acquisitions and Discontinued Operations:
2009 Acquisitions
On October 30, 2009, the Company acquired the net assets of Enabl-u, a privately owned
provider of data management, training and communication solutions to companies with regional,
national or global work forces, for a net cash purchase price of $2,502 and the Company funded $136
of indemnity escrows and $100 of contingency escrows. The Company believes this acquisition will
enhance the Companys ability to provide solutions for customers to measure loss prevention and
improve asset management through the use of software and software services.
On July 24, 2009, the Company acquired the net assets of TierMed, a privately owned provider
of Healthcare Effectiveness Data and Information Set (HEDIS) solutions to healthcare
organizations that have HEDIS or quality-reporting needs, for a net cash purchase price of $7,230
and the Company funded $400 of indemnity escrows. The Company believes this acquisition will
enhance the Companys ability to provide solutions for customers to measure and improve healthcare
quality and financial performance through the use of software and software services.
On January 14, 2009, the Company acquired 100% of the stock of D2, a privately-owned provider
of data mining, decision support, clinical quality analysis, and risk analysis tools for the
healthcare industry, for a net cash purchase price of $51,618 and the Company funded $7,000 of
indemnity escrows. The Company believes this acquisition will enhance the Companys position in
the healthcare analytics and predictive modeling market by providing new market, cross-sell, and
diversification opportunities for the Companys expanding healthcare solutions.
67
The total net cash purchase price of these three acquisitions was $61,350 and the Company
funded $7,636 of escrows, of which $7,000 and $236 is currently included in Other current assets
and Other assets, respectively, in the accompanying consolidated balance sheets. The preliminary
allocation of purchase price, including working capital adjustments, resulted in accounts
receivable of $4,435, current assets of $573, fixed assets of $2,387, finite lived intangible
assets with no residual value of $25,265, goodwill of $49,776,
current liabilities of $4,879, other
liabilities of $10,479, and deferred tax liabilities of $5,728. Other liabilities consist of a
$7,236 payment due to the sellers of D2 and Enabl-u at the conclusion
of the escrows funded at close, assuming no pre-acquisition indemnity claims arise
subsequent to the acquisition date, and $3,344 of contingent consideration, which was estimated as
of the acquisition date by averaging the probability of achieving each of the specific
predetermined EBITDA and revenue targets, which could result in a payment ranging from $0 to
$65,700 for the fiscal year ending December 31, 2011 for D2 and a payment ranging from $0 to $6,000
for the fiscal year ending December 31, 2010 for TierMed. Under ASC 805, contingent consideration
is recognized at fair value at the end of each reporting period. Subsequent changes in the fair
value of contingent consideration is recorded in the statement of operations. For the year ended
December 31, 2009, the Company incurred legal expenses related to these acquisitions of $799
included within Selling, general and administrative expenses in the accompanying consolidated
statements of operations.
The amounts assigned to intangible assets by type for current year acquisitions are summarized in
the table below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Useful Life |
|
|
Total |
|
Technology-based |
|
12 years |
|
$ |
9,282 |
|
Marketing-related |
|
5 years |
|
|
4,698 |
|
Customer-related |
|
8 years |
|
|
11,285 |
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
25,265 |
|
|
|
|
|
|
|
|
|
The preliminary allocation of the purchase price to intangible assets, goodwill, accrued
liabilities, and the determination of an ASC 740-10-25, Accounting for Uncertainty in Income Taxes
(ASC 740-10-25), liability is subject to revisions, which may have a material impact on the
consolidated financial statements. As the values of such assets and liabilities are preliminary in
nature, they are subject to adjustment as additional information is obtained about the facts and
circumstances that existed as of the acquisition date. In accordance with ASC 805, the allocation
of the purchase price will be finalized once all information is obtained, but not to exceed one
year from the acquisition date. The value of goodwill associated with these acquisitions is
currently included within the Decision Analytics segment. The goodwill for the D2 acquisition is
not deductible for tax purposes. The goodwill for the TierMed and Enabl-u acquisitions are
expected to be deductible for tax purposes over fifteen years. Included within the consolidated
statements of operations for the year ended December 31, 2009 are revenues of $18,681 and an
operating loss of $3,817, associated with these acquisitions.
2008 Acquisitions
In 2008, the Company acquired two entities for an aggregate cash purchase price of
approximately $19,270 and funded indemnity escrows totaling $1,500. At December 31, 2009, these
escrows have been included in Other current assets in the accompanying consolidated balance
sheets. These acquisitions were accounted for under the purchase method. Accordingly, the purchase
price, excluding indemnification escrows, was allocated to assets acquired based on their estimated
fair values as of the acquisition dates. Each entitys operating results have been included in the
Companys consolidated results from the respective dates of acquisition. A description of the two
entities purchased in 2008 is as follows:
On November 20, 2008, the Company acquired 100% of the stock of AER. The purchase includes a
contingent payment provision subject to the achievement of certain predetermined financial results
for the years ended 2010 and 2011. The acquisition of AER further enhances the Companys
environmental and scientific research and predictive modeling. Excluding the final resolution of
indemnity escrows and contingent consideration, the Company finalized the purchase accounting for
AER during the third quarter of 2009, which resulted in an increase in intangible assets of $3,203,
an increase in deferred tax liabilities of $885, a decrease in accounts payable and accrued
expenses of $282, and a corresponding decrease to goodwill of $2,600.
68
On November 14, 2008, the Company acquired the net assets of ZAIOs two divisions, United
Systems Software Company and Day One Technology. The assets associated with this acquisition
further enhance the capability of the Companys appraisal software offerings. The purchase
allocation related to this acquisition was finalized as of December 31, 2008.
2007 Acquisitions
In 2007, the Company acquired five entities for an aggregate cash purchase price of
approximately $50,824 and funded indemnity and contingent payment escrows totaling $3,344 and
$1,031, respectively. At December 31, 2009, these escrows amounted to $202 and have been included
in Other current assets in the accompanying consolidated balance sheets. At December 31, 2008,
these escrows amounted to $1,010 and have been included in Other current assets in the
accompanying consolidated balance sheets. These acquisitions were accounted for under the purchase
method. Accordingly, the purchase price, excluding contingency escrows, was allocated to assets
acquired based on their estimated fair values as of the acquisition dates. Each entitys operating
results have been included in the Companys consolidated results from the respective dates of
acquisition. A description of the five entities purchased in 2007 is as follows:
On December 19, 2007, the Company acquired 100% of the net assets of Predicted Solutions, a
leading provider of computer software applications and algorithms for commercial and
governmental health plans and Medicaid to help health plan administrators detect and recover
losses due to fraud, waste and abuse. The acquisition integrates with the Companys analytic
methodology to provide customers with the information needed to ensure their program integrity
through better pharmacy and payment analysis.
On October 12, 2007, the Company acquired 100% of the net assets of NIA, a Mason, TX based
company, which is a leading provider of fraud detection and forensic audit services for the home
mortgage and mortgage insurance industries. Adding NIA and its proprietary database to the
Companys fraud protection solution strengthens the Companys search capacity and positions the
Company to incorporate more real-world fraud schemes into the Companys automated solutions. The
purchase includes a contingent payment provision subject to the achievement of certain
predetermined financial results for 2008.
On October 3, 2007, the Company acquired 100% of the net assets of HCI, a Salt Lake City,
UT based company whose solutions enable healthcare claims payors to prevent fraud, abuse, and
overpayment. The acquisition of HCI further supports the Companys objective as the leading
provider of data, analytics, and decision-support solutions for healthcare claims payors. The
purchase includes a contingent payment provision subject to the achievement of certain
predetermined financial results for 2008. HCI combines automated modeling and profiling of
claims with the enhanced accuracy available through clinical validation.
On March 23, 2007, the Company acquired the rights, title, and interest of the name, trade
name, and service mark, Rex Depot and other intangible assets of Smith Sekelsky Web Products,
LLC. The assets associated with this acquisition further enhance the capability of the Companys
appraisal software offerings.
On January 11, 2007, the Company acquired the remaining 20% of the stock of National
Equipment Register (NER), resulting in 100% ownership, in order to more closely align
operations with existing businesses. The purchase includes a contingent payment provision
subject to the achievement of certain predetermined financial results for 2007 and 2008. NER is
a provider of solutions to increase the recovery rate of stolen equipment and reduce the costs
associated with theft for owners and insurers.
The allocation of purchase price for the 2007 acquisitions, including the finalization of
purchase accounting in 2008, resulted in finite lived intangible assets of $28,349 with no residual
value, goodwill of $22,005, and fair value of tangible assets acquired of $470. The goodwill
associated with the 2007 acquisitions is included within the Decision Analytics segment. The
Company did not assume significant liabilities related to these acquisitions. The goodwill for all
acquisitions is expected to be deductible for tax purposes over 15 years. In 2008, the Company
finalized the Rex Depot, HCI, NIA, and Predicted Solutions purchase allocations.
69
The amounts assigned to intangible assets by type for the 2007 acquisitions are summarized in
the table below:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Useful Life |
|
|
Total |
|
Technology-based |
|
4 years |
|
$ |
6,181 |
|
Marketing-related |
|
4 years |
|
|
8,856 |
|
Customer-related |
|
23 years |
|
|
13,312 |
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
28,349 |
|
|
|
|
|
|
|
|
|
Acquisition Contingent Payments
A condition of the additional payments for certain of the acquisitions, is the continued
employment of key employees resulting in the treatment of such additional payments as compensation
expense. Compensation expense related to earn out payments for the years ended December 31, 2008
and 2007 was $300 and $3,605, respectively. There were no scheduled acquisition contingent
payments for which the condition of continuing employment was
required for the year ended December 31, 2009. These amounts, which are included in Acquisition
related liabilities in the accompanying consolidated balance sheets, were paid the year after they
were accrued.
Acquisition Escrows
Pursuant to the related acquisition agreements, the Company has funded various escrow accounts
to satisfy pre-acquisition indemnity and tax claims arising subsequent to the acquisition date, as
well as a portion of the contingent payments. At December 31, 2009 and 2008, the current portion
of the escrows amounted to $20,142 and $12,724, respectively, and has been included in Other current
assets in the accompanying consolidated balance sheets at
December 31, 2009 and 2008. The indemnification portion of these escrows were
$20,142 and $11,918 at December 31, 2009 and 2008, respectively, of which $10,928 relates to Xactware. At December 31, 2009 and 2008, the
noncurrent portion of the escrow amounted to $236 and $1,501, respectively. The indemnification
portion of these escrows were $135 and $1,501, respectively, at December 31, 2009 and 2008. The
final resolution of these escrows in future years may result in additional purchase accounting
adjustments.
Discontinued Operations
As of December 31, 2007, the Company discontinued operations of its claims consulting business
located in New Hope, Pennsylvania and the United Kingdom. The results for this business were
accounted for as discontinued operations in the consolidated financial statements for the year
ended December 31, 2007. Within the 2007 pre-tax loss are $2,786 of expenses directly related to
the exit activity, which primarily consist of goodwill impairment of $1,744, other current asset
write-off of $445, fixed asset disposals of $265, and employee separation costs of $119. The
summarized, combined statements of operations from discontinued operations for the year ended
December 31, 2007 is follows:
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
Revenues |
|
$ |
2,352 |
|
|
|
|
|
Pre-tax loss |
|
$ |
(6,085 |
) |
Tax benefit |
|
|
1,496 |
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
$ |
(4,589 |
) |
|
|
|
|
Depreciation expenses related to the discontinued operations for the years ended December
31, 2007 was $98. There was no impact of discontinued operations on the results of operations for
the years ended December 31, 2009 and 2008.
70
11. Income Taxes:
The components of the provision for income taxes for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign |
|
$ |
98,886 |
|
|
$ |
93,522 |
|
|
$ |
96,277 |
|
State and local |
|
|
26,603 |
|
|
|
12,358 |
|
|
|
17,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,489 |
|
|
|
105,880 |
|
|
|
114,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal and foreign |
|
|
11,603 |
|
|
|
9,789 |
|
|
|
(7,041 |
) |
State and local |
|
|
899 |
|
|
|
5,002 |
|
|
|
(3,895 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,502 |
|
|
|
14,791 |
|
|
|
(10,936 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
137,991 |
|
|
$ |
120,671 |
|
|
$ |
103,184 |
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax benefit for discontinued operations for the years ended December
31, 2009, 2008 and 2007 were $0, $0 and $1,496, respectively.
The reconciliation between the Companys effective tax rate on income from continuing
operations and the statutory tax rate is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and local taxes, net of federal tax benefit |
|
|
6.9 |
% |
|
|
5.0 |
% |
|
|
3.2 |
% |
Non-deductible KSOP expenses |
|
|
9.8 |
% |
|
|
2.7 |
% |
|
|
2.9 |
% |
State tax adjustments |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(0.3 |
%) |
Other |
|
|
0.5 |
% |
|
|
0.6 |
% |
|
|
(0.8 |
%) |
|
|
|
|
|
|
|
|
|
|
Effective tax rate for continuing operations |
|
|
52.2 |
% |
|
|
43.3 |
% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
|
The increase in the effective tax rate in 2009 compared to 2008 was due to the non-recurring, non-cash costs associated with the accelerated ESOP allocation
and certain IPO related costs that are not deductible.
The tax effects of significant items comprising the Companys deferred tax assets as of
December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred income tax asset: |
|
|
|
|
|
|
|
|
Employee wages, pensions and other benefits |
|
$ |
74,986 |
|
|
$ |
80,279 |
|
Deferred revenue adjustment |
|
|
3,243 |
|
|
|
8,979 |
|
Deferred rent adjustment |
|
|
4,481 |
|
|
|
4,508 |
|
Net operating loss carryover |
|
|
3,085 |
|
|
|
1,772 |
|
State tax adjustments |
|
|
7,134 |
|
|
|
8,283 |
|
Capital and other unrealized losses |
|
|
4,611 |
|
|
|
3,460 |
|
Other |
|
|
4,877 |
|
|
|
7,564 |
|
|
|
|
|
|
|
|
Total |
|
|
102,417 |
|
|
|
114,845 |
|
Less valuation allowance |
|
|
(2,110 |
) |
|
|
(2,098 |
) |
|
|
|
|
|
|
|
Deferred income tax asset |
|
|
100,307 |
|
|
|
112,747 |
|
|
|
|
|
|
|
|
|
|
Deferred income tax liability: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(28,558 |
) |
|
|
(7,683 |
) |
Other |
|
|
(1,087 |
) |
|
|
(318 |
) |
|
|
|
|
|
|
|
Deferred income tax liability |
|
|
(29,645 |
) |
|
|
(8,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net |
|
$ |
70,662 |
|
|
$ |
104,746 |
|
|
|
|
|
|
|
|
The deferred income tax asset and liability has been classified in Deferred income taxes, net in
the accompanying consolidated balance sheets as of December 31, as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Current
deferred income tax asset, net |
|
$ |
4,405 |
|
|
$ |
4,490 |
|
Non-current
deferred income tax asset, net |
|
|
66,257 |
|
|
|
100,256 |
|
|
|
|
|
|
|
|
Deferred
income taxes, net |
|
$ |
70,662 |
|
|
$ |
104,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of certain realization requirements
of ASC 718, the table of net deferred tax
assets shown above does not include certain deferred tax assets as of December 31,
2009 and 2008 that arose directly from tax deductions related to equity compensation in excess of
compensation recognized for financial reporting. Equity will be
increased by $3,742 and $5,076, respectively, if and when such
deferred tax assets are ultimately realized. The Company uses tax law ordering for purposes of
determining when excess tax benefits have been realized.
As
of December 31, 2009, a deferred tax liability in the amount of
$5,728 was recorded in
connection with the acquisition of D2. As of December 31, 2008 a deferred tax liability in the
amount of $2,963 was recorded in the connection of the acquisition of
AER. Excluding the final resolution of indemnity escrows and
contingent considerations, the Company finalized the purchase
accounting for AER during the third quarter of 2009, which resulted
in an increase in deferred tax liabilities of $885. The ultimate
realization of the deferred tax assets depends on the Companys ability to generate sufficient
taxable income in the future.
The Company has provided for a valuation allowance against the
deferred tax asset associated with the capital loss carryforwards
expiring in 2012 and the net
operating losses of certain foreign subsidiaries in the United
Kingdom (U.K.). The Companys net operating loss carryforwards
expire as follows:
|
|
|
|
|
Years |
|
Amount |
|
2010-2017 |
|
$ |
38,525 |
|
2018-2022 |
|
|
434 |
|
2023-2029 |
|
|
36,142 |
|
|
|
|
|
|
|
$ |
75,101 |
|
|
|
|
|
A valuation allowance has been established based on managements evaluation of the
likelihood of utilizing the capital loss carryforwards and foreign net operating losses before they
expire. Management has determined that the generation of future U.K. taxable income to realize
the deferred tax assets is uncertain. Other than these items, management has determined, based on
the Companys historical operating performance, that taxable income of the Company will more likely
than not be sufficient to fully realize the deferred tax assets.
71
In general, it is the practice of the Company to permanently reinvest the undistributed
earnings of its foreign subsidiaries in those operations. As of December 31, 2009 the Company has
not made a provision for U.S. or additional foreign withholdings
taxes on approximately $4,032 of the
unremitted earnings. Generally, such amounts become subject to U.S. taxation upon the remittance
of dividends and under other certain circumstances. It is not practicable to estimate the amount
of deferred tax liability related to investments in its foreign subsidiaries.
Effective January 1, 2007, the Company adopted ASC 740-10, which prescribes a comprehensive
model for the financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns. For each tax
position, the Company must determine whether it is more likely than not that the position will be
sustained upon examination based on the technical merits of the position, including resolution of
any related appeals or litigation. A tax position that meets the more likely than not recognition
threshold is then measured to determine the amount of benefit to recognize within the financial
statements. No benefits may be recognized for tax positions that do not meet the more likely than
not threshold. A reconciliation of the beginning and ending amount of unrecognized tax benefit is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Unrecognized tax benefit at January 1 |
|
$ |
31,659 |
|
|
$ |
32,030 |
|
|
$ |
27,052 |
|
Gross increase in tax positions in prior period |
|
|
1,317 |
|
|
|
5,958 |
|
|
|
|
|
Gross decrease in tax positions in prior period |
|
|
(3,508 |
) |
|
|
(3,548 |
) |
|
|
|
|
Gross increase in tax positions in current period |
|
|
2,052 |
|
|
|
4,454 |
|
|
|
7,662 |
|
Settlements |
|
|
(2,143 |
) |
|
|
(3,240 |
) |
|
|
|
|
Lapse of statute of limitations |
|
|
(2,055 |
) |
|
|
(3,995 |
) |
|
|
(2,684 |
) |
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefit at December 31 |
|
$ |
27,322 |
|
|
$ |
31,659 |
|
|
$ |
32,030 |
|
|
|
|
|
|
|
|
|
|
|
72
Of
the total unrecognized tax benefits at December 31, 2009, 2008 and
2007, $15,644, $18,575 and $24,368, respectively, represent the amount that, if recognized, would
have a favorable effect on the Companys effective tax rate in
any future periods.
The total gross amount of accrued interest and
penalties at December 31, 2009, 2008 and 2007 was $7,384, $8,116 and
$7,033, respectively. The Companys practice is to recognize interest
and penalties associated with income taxes as a component of Provision for income taxes in the accompanying consolidated statements of operations.
The Company does not expect a significant
increase in unrecognized benefits related to state tax exposures within the coming year. In
addition, the Company believes that it is reasonably possible that
approximately $3,455 of its
currently remaining unrecognized tax positions, each of which is individually insignificant, may be
recognized by the end of 2010 as a results of a combination of audit settlements and lapses of
statute of limitations, net of additional uncertain tax positions.
The Company is subject to tax in the U.S. and in various state and foreign jurisdictions. The
Company joined by its domestic subsidiaries, files a consolidated income tax return for the Federal
income tax purposes. With few exceptions, the Company is no longer subject to U.S. federal, state
and local or non-U.S. income tax examinations by tax authorities for
tax years before 2006. In Massachusetts, the Company is being audited for the years
2003 through 2005 with a statute extension to June 30, 2010. In New York, the Company is being audited for the years
2003 through 2006 with a statute extension to December 17, 2010. The
Internal Revenue Service commenced an examination of the Companys U.S. consolidated income tax
return for the 2006 and 2007 tax years. The Company does not expect that the results of these examinations
will have a material effect on its financial position or results of operations.
12. Composition of Certain Financial Statement Captions:
The following tables present the components of Other current asset, Accounts payable and
accrued liabilities and Other liabilities at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Other
current assets: |
|
|
|
|
|
|
|
|
Acquisition related escrows |
|
$ |
20,142 |
|
|
$ |
12,724 |
|
Other current assets |
|
|
1,514 |
|
|
|
3,463 |
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
21,656 |
|
|
$ |
16,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities: |
|
|
|
|
|
|
|
|
Accrued salaries, benefits and other related costs |
|
$ |
56,114 |
|
|
$ |
44,913 |
|
Other current liabilities |
|
|
45,287 |
|
|
|
38,468 |
|
|
|
|
|
|
|
|
Total accounts payable and accrued liabilities |
|
$ |
101,401 |
|
|
$ |
83,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: |
|
|
|
|
|
|
|
|
Unrecognized tax benefits |
|
$ |
34,706 |
|
|
$ |
39,735 |
|
Deferred rent |
|
|
12,244 |
|
|
|
11,883 |
|
Other liabilities |
|
|
30,010 |
|
|
|
24,576 |
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
76,960 |
|
|
$ |
76,194 |
|
|
|
|
|
|
|
|
73
13. Debt:
The following table presents short-term and long-term debt by issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance |
|
Maturity |
|
December 31, |
|
|
December 31, |
|
|
|
Date |
|
Date |
|
2009 |
|
|
2008 |
|
Short-term debt and current portion of long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Bank of
America |
|
12/15/2008 |
|
1/15/2009 |
|
$ |
|
|
|
$ |
5,000 |
|
Bank of America |
|
12/17/2008 |
|
1/17/2009 |
|
|
|
|
|
|
30,000 |
|
Bank of America |
|
12/22/2008 |
|
1/22/2009 |
|
|
|
|
|
|
15,000 |
|
Bank of America |
|
12/24/2008 |
|
1/24/2009 |
|
|
|
|
|
|
5,000 |
|
JPMorgan Chase |
|
12/1/2008 |
|
1/2/2009 |
|
|
|
|
|
|
10,000 |
|
JPMorgan Chase |
|
12/12/2008 |
|
1/12/2009 |
|
|
|
|
|
|
4,000 |
|
JPMorgan Chase |
|
12/18/2008 |
|
1/20/2009 |
|
|
|
|
|
|
20,000 |
|
JPMorgan Chase |
|
12/24/2008 |
|
1/24/2009 |
|
|
|
|
|
|
20,000 |
|
JPMorgan Chase |
|
12/29/2008 |
|
1/29/2009 |
|
|
|
|
|
|
5,000 |
|
Syndicated Revolving Credit Facility |
|
12/16/2009 |
|
1/19/2010 |
|
|
10,000 |
|
|
|
|
|
Syndicated Revolving Credit Facility |
|
12/23/2009 |
|
1/25/2010 |
|
|
50,000 |
|
|
|
|
|
Prudential senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
4.46% Series D senior notes |
|
6/14/2005 |
|
6/13/2009 |
|
|
|
|
|
|
100,000 |
|
Capital lease obligations |
|
Various |
|
Various |
|
|
5,488 |
|
|
|
5,058 |
|
Other |
|
Various |
|
Various |
|
|
1,172 |
|
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt and current portion of long-term debt |
|
|
|
|
|
$ |
66,660 |
|
|
$ |
219,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
|
Prudential senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
4.60% Series E senior notes |
|
6/14/2005 |
|
6/13/2011 |
|
$ |
50,000 |
|
|
$ |
50,000 |
|
6.00% Series F senior notes |
|
8/8/2006 |
|
8/8/2011 |
|
|
25,000 |
|
|
|
25,000 |
|
6.13% Series G senior notes |
|
8/8/2006 |
|
8/8/2013 |
|
|
75,000 |
|
|
|
75,000 |
|
5.84% Series H senior notes |
|
10/26/2007 |
|
10/26/2013 |
|
|
17,500 |
|
|
|
17,500 |
|
5.84% Series H senior notes |
|
10/26/2007 |
|
10/26/2015 |
|
|
17,500 |
|
|
|
17,500 |
|
6.28% Series I senior notes |
|
4/29/2008 |
|
4/29/2013 |
|
|
15,000 |
|
|
|
15,000 |
|
6.28% Series I senior notes |
|
4/29/2008 |
|
4/29/2015 |
|
|
85,000 |
|
|
|
85,000 |
|
6.85% Series J senior notes |
|
6/15/2009 |
|
6/15/2016 |
|
|
50,000 |
|
|
|
|
|
Principal senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
6.03% Series A senior notes |
|
8/8/2006 |
|
8/8/2011 |
|
|
50,000 |
|
|
|
50,000 |
|
6.16% Series B senior notes |
|
8/8/2006 |
|
8/8/2013 |
|
|
25,000 |
|
|
|
25,000 |
|
New York Life senior notes: |
|
|
|
|
|
|
|
|
|
|
|
|
5.87% Series A senior notes |
|
10/26/2007 |
|
10/26/2013 |
|
|
17,500 |
|
|
|
17,500 |
|
5.87% Series A senior notes |
|
10/26/2007 |
|
10/26/2015 |
|
|
17,500 |
|
|
|
17,500 |
|
6.35% Series B senior notes |
|
4/29/2008 |
|
4/29/2015 |
|
|
50,000 |
|
|
|
50,000 |
|
Aviva Investors North America: |
|
|
|
|
|
|
|
|
|
|
|
|
6.46% Series A senior notes |
|
4/27/2009 |
|
4/27/2013 |
|
|
30,000 |
|
|
|
|
|
Other obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
Various |
|
Various |
|
|
2,094 |
|
|
|
4,723 |
|
Other |
|
Various |
|
Various |
|
|
415 |
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
|
|
|
$ |
527,509 |
|
|
$ |
450,356 |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest associated with the Companys outstanding debt obligations was $4,371
and $4,092 as of December 31, 2009 and 2008, respectively. Consolidated interest expense
associated with the Companys outstanding debt obligations was $35,021, $30,863 and $22,590 for the
years ended December 31, 2009, 2008 and 2007, respectively.
74
Prudential Master Shelf Agreement
On June 13, 2003, the Company authorized the issuance of senior promissory notes (Prudential
Shelf Notes) under an uncommitted master shelf agreement with Prudential Capital Group
(Prudential) in the aggregate principal amount of $200,000. On February 1, 2005, the Company
amended the shelf agreement to increase the authorization of additional senior promissory notes in
the aggregate principal amount by $150,000. On February 1, 2007, the Company amended the shelf
agreement to increase the authorization of additional senior promissory notes in the aggregate
principal amount by $100,000. Prudential Shelf Notes may be issued and sold until the earliest of
(i) February 28, 2010; (ii) the thirtieth day after receiving written notice to terminate; or (iii)
the last closing day after which there is no remaining facility available. Interest is payable at a
fixed rate or variable floating rate. Fixed rate Prudential Shelf Notes are subject to final
maturities not to exceed ten years and, in the case of floating rate Prudential Shelf Notes, not to
exceed five years. The Prudential Shelf Note agreement is uncommitted with a one time facility fee
of $50. The net proceeds from the notes were utilized to repurchase Class B Company stock, to repay
certain maturing notes and revolving credit facilities and to fund acquisitions. Interest on the
notes is payable quarterly. On June 15, 2009, the Company repaid its $100,000 Prudential Series D
senior notes by issuing Series J senior promissory notes under the uncommitted master shelf agreement with
Prudential in the aggregate principal amount of $50,000 due June 15, 2016 and borrowing $50,000
from its syndicated revolving credit facility. Interest on the Series J senior notes is payable
quarterly at a fixed rate of 6.85%.
As of December 31, 2009 and 2008, $335,000 and $385,000, respectively, was outstanding under
this agreement. The Prudential Shelf Notes contain covenants that, among other things, require the
Company to maintain certain leverage and fixed charge ratios.
Principal Master Shelf Agreement
On July 10, 2006, the Company authorized the issuance of senior promissory notes (Principal
Shelf Notes) under an uncommitted master shelf agreement with Principal Global Investors, LLC
(Principal) in the aggregate principal amount of $75,000. Principal Shelf Notes may be issued and
sold until the earliest of (i) July 10, 2009; (ii) the thirtieth day after receiving written notice
to terminate; or (iii) the last closing day after which there is no remaining facility available.
Interest is payable at a fixed rate or variable floating rate. Fixed rate Principal Shelf Notes are
subject to final maturities not to exceed ten years and, in the case of floating rate Principal
Shelf Notes, not to exceed five years. The Principal Shelf Note is uncommitted with a one time
facility fee of $25, no fees for the first issuance and fees in the amount equal to 0.125% of the
aggregate principal amount for subsequent issuances. The net proceeds from the notes issued were
utilized to fund acquisitions. Interest on the notes is payable quarterly.
As of December 31, 2009 and 2008, $75,000 was outstanding under this agreement. The Principal
Shelf Notes contain covenants that, among other things, require the Company to maintain certain
leverage and fixed charge ratios.
New York Life Master Shelf Agreement
On March 16, 2007, the Company authorized the issuance of senior promissory notes (New York
Life Shelf Notes) under an uncommitted master shelf agreement with New York Life in the aggregate
principal amount of $100,000. New York Life Shelf Notes may be issued and sold until the earliest
of (i) March 16, 2010; (ii) the thirtieth day after receiving written notice to terminate; or (iii)
the last closing day after which there is no remaining facility available. Interest is payable at a
fixed rate or variable floating rate. Fixed rate New York Life Shelf Notes are subject to final
maturities not to exceed ten years and, in the case of floating rate Shelf Notes, not to exceed
five years. The New York Life Shelf Note is uncommitted with no fees for the first issuance and
fees in the amount equal to 0.125% of the aggregate principal amount for subsequent issuances.
The net proceeds from the notes issued were utilized to fund acquisitions. Interest on the notes is
payable quarterly.
As of December 31, 2009 and 2008, $85,000 was outstanding under this agreement. The New York
Life Shelf Notes contain covenants that, among other things, require the Company to maintain
certain leverage and fixed charge ratios.
Aviva Master Shelf Agreement
On December 10, 2008, the Company entered into a $50,000 uncommitted master shelf agreement
with Aviva Investors North America, Inc. (Aviva). Aviva shelf notes may be issued and sold
until the earliest of (i) December 10, 2011; (ii) the thirtieth day after receiving written notice
to terminate; or (iii) the last closing day after which there is no remaining facility available.
The Aviva master shelf is uncommitted with a one time facility fee of $25 and additional fees in
the amount equal to 0.125% of the aggregate principal amount for subsequent issuances. The
interest rate will be determined at the time of the borrowing. On April 27, 2009, the Company
issued Series A senior promissory notes under an uncommitted master shelf agreement with Aviva in
the aggregate principal amount of $30,000 due April 27, 2013. Interest is payable quarterly at a
fixed rate of 6.46%.
75
As of December 31, 2009 and 2008, $30,000 and $0, respectively were outstanding under
this agreement. The Aviva master shelf agreement contains certain covenants that, among other
things, require the Company to maintain certain leverage and fixed charge ratios.
Syndicated Revolving Credit Facility
On July 2, 2009, the Company entered into a $300,000 syndicated revolving credit facility with
Bank of America, N.A., JPMorgan Chase, N.A., Morgan Stanley Bank, N.A., and Wells Fargo Bank, N.A.,
which matures on July 2, 2012. Interest is payable at maturity at a rate to be determined at the
time of borrowing. The syndicated revolving credit facility replaces the Companys previous
revolving credit facilities with Bank of America, N.A., JPMorgan Chase, N.A., Morgan Stanley Bank,
N.A., and Wachovia Bank, N.A. On August 21, 2009, PNC Bank, N.A., Sovereign Bank, RBS Citizens,
N.A., and SunTrust Bank joined the syndicated revolving credit facility increasing the availability
to $420,000. This facility is committed with a one-time fee of $4,510, which will be amortized
over a three year period, and ongoing unused facility fees of 0.375%. As of December 31, 2009, the
interest on the outstanding borrowings under the syndicated revolving credit facility is payable at
a weighted average interest rate of 2.73%. On January 19, 2010 and January 25, 2010, the Company
paid $10,000 and $50,000, respectively, of its outstanding borrowings from its
syndicated revolving credit facility as of December 31, 2009.
Debt Maturities
The following table reflects the Companys debt maturities:
|
|
|
|
|
Year |
|
Amount |
|
|
|
|
|
|
2010 |
|
$ |
66,660 |
|
2011 |
|
$ |
126,671 |
|
2012 |
|
$ |
649 |
|
2013 |
|
$ |
180,187 |
|
2014 |
|
$ |
2 |
|
2015 and thereafter |
|
$ |
220,000 |
|
14. Redeemable Common Stock:
On November 18, 1996, the Company authorized 335,000,000 shares of ISO Class A redeemable
common stock. Prior to the IPO, the ISO Class A stock was reserved for the use in incentive plans
for key employees and directors under the Insurance Services Office,
Inc. 1996 Incentive Plan (the Option Plan) and for issuance to the KSOP. The Class A
stock has voting rights to elect nine of the twelve members of the board of directors. Prior to the
reorganization, the Companys certificate of incorporation limited those who may own ISO Class A stock
to current and former employees or directors, the KSOP and trusts by or for the benefit of
immediate family members of employees and former employees.
Under the
terms of the Option Plan, ISO Class A stock resulting from exercised options that
are held by the employee for more than six months and one day may be put to the Company and
redeemed at the then current fair value at the date of the redemption request of the ISO Class A
stock. For options granted in 2002 through 2004, the Company had the ability to defer the cash
settlement of the redemption up to one year. For options granted after 2004, the Company had the
ability to defer the cash settlement of the redemption for up to two years. Under the terms of the
KSOP, eligible participants may elect to diversify 100% of their 401(k) and up to 35% of their ESOP
contributions that were made in the form of ISO Class A stock. In addition, upon retirement or
termination, participants in the KSOP were required to liquidate their ownership in ISO Class A
common stock. Since the ISO Class A stock distributed under the Option Plan and KSOP is subject to
the restrictions set forth above, up until the reorganization on October 6, 2009, the participant had the
right to require the Company to repurchase stock based on the then current fair value of the ISO
Class A stock.
76
Prior
to the corporate reorganization on October 6, 2009, the Company
followed ASC 480-10-S99-1, Presentation in Financial
Statements of Preferred Redeemable Stock (ASC 480-10-S99-1). ASC 480-10-S99-1 required the
Company to record ISO Class A stock and vested stock options at full redemption value at each
balance sheet date as the redemption of these securities was not solely within the control of the
Company. Subsequent changes to the redemption value of the securities was charged first to retained
earnings; once retained earnings was depleted, then to additional paid-in-capital, and if additional
paid-in-capital was also depleted, then to accumulated deficit. Redemption value for the ISO Class
A stock was determined quarterly on or about the final day of the quarter for purposes of the KSOP.
Prior to September 30, 2009, the valuation methodology was based on a variety of qualitative and
quantitative factors including the nature of the business and history of the enterprise, the
economic outlook in general and the condition of the specific industries in which the Company
operates, the financial condition of the business, the Companys ability to generate free cash
flow, and goodwill or other intangible asset value. This determination of the fair market value
employed both a comparable public company analysis, which examines the valuation multiples of
companies deemed comparable, in whole or in part, to the Company, and a discounted cash flow
analysis that determined a present value of the projected future cash flows of the business. The
Company regularly assessed the underlying assumptions used in the valuation methodologies. As a
result, the Company had utilized this quarterly fair value for all its ISO Class A redeemable
common stock transactions, as required by terms of the KSOP and the Option Plan. The fourth
quarter 2008 valuation was finalized on December 31, 2008, which resulted in a fair value per share
of $15.56. The fair value calculated for the second quarter 2009 was $17.78 per share and was used
for all ISO Class A stock transactions for the three months
ended September 30, 2009. At September 30, 2009, the
Companys fair value per share used was determined based on the
subsequent observable IPO price of $22.00 on October 7, 2009. The use
of the IPO price rather than the valuation methodology described
above was based on the short period of time between September 30, 2009
and the IPO date.
In connection with the corporate reorganization on October 6, 2009, the Company is no longer
obligated to redeem ISO Class A shares and is therefore no longer
required to record the ISO Class A stock
and vested stock options at redemption value under ASC 480-10-S99-1.
The redemption value of the ISO
Class A redeemable common stock and vested options at intrinsic value at October 6, 2009 and
December 31, 2008 totaled $1,064,896 and $752,912, which includes $299,983 and $172,408,
respectively, of aggregate intrinsic value of outstanding unexercised vested stock options. The
reversal of the redeemable common stock balance is first applied against accumulated deficit; once
the accumulated deficit is depleted, then to additional paid-in-capital up to the amount equal to
the additional paid-in-capital of the Company as if ASC 480-10-S99-1 was never required to be
adopted. Any remaining balance is credited to retained
earnings. The reversal of the
redeemable common stock of $1,064,896 on October 6, 2009 resulted in the elimination of accumulated deficit of
$440,584, an increase of $30 to Class A common stock at par
value, an increase of $624,282 to
additional paid-in-capital, and a reclassification of the ISO Class A
unearned common stock KSOP shares balance of $1,305 to unearned KSOP
contributions. See Note 16 for further discussion.
During the years ended December 31, 2009, 2008 and 2007, 3,032,850, 25,121,750 and 12,842,100 of
ISO Class A shares were redeemed by the Company at a weighted average price of $16.18, $17.28 and
$16.07 per share, respectively. Included in ISO Class A repurchased shares were $805, $19,734 and
$16,906 for shares primarily utilized to satisfy minimum tax withholdings on options exercised
during the years ended December 31, 2009, 2008 and 2007, respectively.
Additional
information regarding the changes in redeemable common stock prior to
the corporate reorganization effective October 6, 2009 is provided in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Total |
|
|
|
ISO Class A Common Stock |
|
|
Receivable |
|
|
Redeemable |
|
|
|
Shares |
|
|
Redemption |
|
|
Unearned |
|
|
Additional |
|
|
from |
|
|
Common |
|
|
|
Issued |
|
|
Value |
|
|
KSOP |
|
|
Paid-in-Capital |
|
|
Stockholders |
|
|
Stock |
|
Balance, January 1, 2007 |
|
|
67,377,000 |
|
|
$ |
1,183,049 |
|
|
$ |
(4,913 |
) |
|
$ |
|
|
|
$ |
(52,203 |
) |
|
$ |
1,125,933 |
|
Redemption of ISO Class A common stock |
|
|
(12,842,100 |
) |
|
|
(190,336 |
) |
|
|
|
|
|
|
|
|
|
|
24,708 |
|
|
|
(165,628 |
) |
KSOP shares earned |
|
|
|
|
|
|
|
|
|
|
784 |
|
|
|
21,463 |
|
|
|
|
|
|
|
22,247 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,244 |
|
|
|
|
|
|
|
8,244 |
|
Stock options exercised (including tax benefit of $12,798) |
|
|
3,604,150 |
|
|
|
28,526 |
|
|
|
|
|
|
|
12,798 |
|
|
|
(15,130 |
) |
|
|
26,194 |
|
Other stock issuances |
|
|
14,250 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238 |
|
Increase in redemption value of ISO Class A common stock |
|
|
|
|
|
|
196,465 |
|
|
|
|
|
|
|
(42,505 |
) |
|
|
|
|
|
|
153,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
58,153,300 |
|
|
$ |
1,217,942 |
|
|
$ |
(4,129 |
) |
|
$ |
|
|
|
$ |
(42,625 |
) |
|
$ |
1,171,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock |
|
|
(25,121,750 |
) |
|
|
(434,044 |
) |
|
|
|
|
|
|
|
|
|
|
62,773 |
|
|
|
(371,271 |
) |
KSOP shares earned |
|
|
|
|
|
|
|
|
|
|
756 |
|
|
|
21,518 |
|
|
|
|
|
|
|
22,274 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,881 |
|
|
|
|
|
|
|
9,881 |
|
Stock options exercised (including tax benefit of $26,099) |
|
|
4,262,800 |
|
|
|
25,324 |
|
|
|
|
|
|
|
26,099 |
|
|
|
(20,148 |
) |
|
|
31,275 |
|
Other stock issuances |
|
|
12,600 |
|
|
|
225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225 |
|
Decrease in redemption value of ISO Class A common stock |
|
|
|
|
|
|
(56,535 |
) |
|
|
|
|
|
|
(57,498 |
) |
|
|
|
|
|
|
(114,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
37,306,950 |
|
|
$ |
752,912 |
|
|
$ |
(3,373 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
749,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of ISO Class A common stock |
|
|
(3,032,850 |
) |
|
|
(49,066 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,066 |
) |
KSOP shares earned |
|
|
|
|
|
|
|
|
|
|
2,068 |
|
|
|
73,272 |
|
|
|
|
|
|
|
75,340 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,526 |
|
|
|
|
|
|
|
8,526 |
|
Stock options exercised (including tax benefit of $1,723) |
|
|
485,550 |
|
|
|
4,939 |
|
|
|
|
|
|
|
1,723 |
|
|
|
|
|
|
|
6,662 |
|
Other stock transactions |
|
|
9,100 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
Increase in redemption value of ISO Class A common stock |
|
|
|
|
|
|
355,949 |
|
|
|
|
|
|
|
(83,521 |
) |
|
|
|
|
|
|
272,428 |
|
Conversion of redeemable common stock upon
corporate reorganization |
|
|
(34,768,750 |
) |
|
|
(1,064,896 |
) |
|
|
1,305 |
|
|
|
|
|
|
|
|
|
|
|
(1,063,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2009 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
15. Stockholders Deficit:
On November 18, 1996, the Company authorized 335,000,000 shares of ISO Class A redeemable
common stock. Effective with the corporate reorganization on October 6, 2009, the ISO Class A
redeemable common stock and all Verisk Class B shares sold into the IPO were converted to Verisk Class A
common stock on a one-for-one basis. In addition, the Verisk Class A common stock authorized was
increased to 1,200,000,000 shares. The Verisk Class A common shares have rights to any dividend
declared by the board of directors, subject to any preferential or other rights of any outstanding
preferred stock, and voting rights to elect nine of the twelve members of the board of directors.
The twelfth seat on the board of directors is held by the CEO of the Company. The Company did not
repurchase any Verisk Class A shares from the reorganization date through December 31, 2009. All Verisk
Class A common shares that existed at the date of the IPO are not transferable until 180 days after
the IPO date.
On November 18,
1996, the Company authorized 1,000,000,000 ISO Class B shares and issued
500,225,000 shares. On October 6, 2009,
the Company completed a corporate reorganization whereby
the ISO Class B common stock and treasury stock was converted to Verisk
Class B common stock on a one-for-one basis. All Verisk
Class B shares sold into the IPO were converted to Verisk Class A common stock on a one-for-one
basis. In addition, the Verisk Class B common stock authorized was reduced to 800,000,000 shares,
sub-divided into 400,000,000 shares of Class B-1 and 400,000,000 of Class B-2. Each share of Class
B-1 common stock shall convert automatically, without any action by the stockholder, into one share
of Verisk Class A common stock 18 months after the date of the IPO. Each share of Class B-2 common
stock shall convert automatically, without any action by the stockholder, into one share of Verisk
Class A common stock 24 months after the date of the IPO. The Class B shares have the same rights
as Verisk Class A shares with respect to dividends and economic ownership, but have voting rights
to elect three of the twelve directors. The Company did not repurchase any Class B shares during
the year ended December 31, 2009. The Company repurchased 483,500 and 3,624,400 ISO Class B shares at
an average price of $10.34 and $9.96 during the years ended December 31, 2008 and 2007,
respectively.
On October 6, 2009, the Company authorized 80,000,000 shares of preferred stock, par value
$0.001 per shares, in connection with the reorganization. The preferred shares have preferential
rights over the Verisk Class A and Class B common shares with respect to dividends and net
distribution upon liquidation. The Company did not issue any preferred shares from the
reorganization date through December 31, 2009.
Earnings Per Share
As
disclosed in Note 1 Organization and Initial Public
Offering on October 6, 2009 Verisk became the new parent
holding company for ISO. In connection with the IPO, the stock of ISO was exchanged for the stock
of Verisk on a one-for-one basis and Verisk effected a fifty-for-one stock split of its Verisk
Class A and Class B common stock. As a result of the stock split, all share and per share data
throughout this report has been adjusted to reflect a fifty-for-one stock split.
Basic earnings per common share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during the period less the
weighted average Employee Stock Ownership Plan (ESOP) shares of common stock that have not been
committed to be released. The computation of diluted EPS is similar to the computation of basic EPS
except that the denominator is increased to include the number of additional common shares that
would have been outstanding, using the treasury stock method, if the dilutive potential common
shares, such as stock awards and stock options, had been issued.
78
The following is a reconciliation of the numerators and denominators of the basic and diluted
EPS computations for the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator used in basic and diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
126,614 |
|
|
$ |
158,228 |
|
|
$ |
154,963 |
|
Loss from discontinued operations, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
(4,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
126,614 |
|
|
$ |
158,228 |
|
|
$ |
150,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in basic EPS |
|
|
174,767,795 |
|
|
|
182,885,700 |
|
|
|
200,846,400 |
|
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Potential Class A common stock issuable
upon the exercise of stock options |
|
|
7,397,866 |
|
|
|
7,346,000 |
|
|
|
8,411,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and
dilutive potential common shares used in diluted
EPS |
|
|
182,165,661 |
|
|
|
190,231,700 |
|
|
|
209,257,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.72 |
|
|
$ |
0.87 |
|
|
$ |
0.77 |
|
Loss from discontinued operations, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
0.72 |
|
|
$ |
0.87 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.70 |
|
|
$ |
0.83 |
|
|
$ |
0.74 |
|
Loss from discontinued operations, net of tax benefit |
|
|
|
|
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.70 |
|
|
$ |
0.83 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
The
potential shares of common stock that were excluded from diluted EPS
were 9,054,022, 5,091,350 and 3,030,550 for the years ended December 31, 2009, 2008 and 2007, respectively, because
the effect of including these potential shares was antidilutive.
Accumulated Other Comprehensive Loss
The following is a summary of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Unrealized gains/(losses) on investments |
|
$ |
526 |
|
|
$ |
(31 |
) |
Unrealized foreign currency losses |
|
|
(683 |
) |
|
|
(773 |
) |
Pension and postretirement unfunded liability adjustment |
|
|
(53,471 |
) |
|
|
(81,630 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(53,628 |
) |
|
$ |
(82,434 |
) |
|
|
|
|
|
|
|
79
The before tax and after tax amounts for these categories, and the related tax
benefit/(expense) included in other comprehensive gain/(loss) are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Benefit/ |
|
|
|
|
|
|
Before Tax |
|
|
(Expense) |
|
|
After Tax |
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investments arising during the year |
|
$ |
563 |
|
|
$ |
(231 |
) |
|
$ |
332 |
|
Reclassification adjustment for amounts included in net income |
|
|
386 |
|
|
|
(161 |
) |
|
|
225 |
|
Unrealized foreign currency gains |
|
|
90 |
|
|
|
|
|
|
|
90 |
|
Pension and postretirement unfunded liability adjustment |
|
|
43,050 |
|
|
|
(14,891 |
) |
|
|
28,159 |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain |
|
$ |
44,089 |
|
|
$ |
(15,283 |
) |
|
$ |
28,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investments arising during the year |
|
$ |
(1,687 |
) |
|
$ |
666 |
|
|
$ |
(1,021 |
) |
Reclassification adjustment for amounts included in net income |
|
|
2,325 |
|
|
|
(923 |
) |
|
|
1,402 |
|
Unrealized foreign currency losses |
|
|
(927 |
) |
|
|
|
|
|
|
(927 |
) |
Pension and postretirement unfunded liability adjustment |
|
|
(122,714 |
) |
|
|
49,525 |
|
|
|
(73,189 |
) |
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
$ |
(123,003 |
) |
|
$ |
49,268 |
|
|
$ |
(73,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investments arising during the year |
|
$ |
(2,250 |
) |
|
$ |
885 |
|
|
$ |
(1,365 |
) |
Reclassification adjustment for amounts included in net income |
|
|
1,057 |
|
|
|
(422 |
) |
|
|
635 |
|
Unrealized foreign currency losses |
|
|
(203 |
) |
|
|
|
|
|
|
(203 |
) |
Pension and postretirement unfunded liability adjustment |
|
|
12,577 |
|
|
|
(4,326 |
) |
|
|
8,251 |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain |
|
$ |
11,181 |
|
|
$ |
(3,863 |
) |
|
$ |
7,318 |
|
|
|
|
|
|
|
|
|
|
|
16. Compensation Plans:
KSOP
The Company has established the KSOP for the benefit of eligible employees in the U.S. and
Puerto Rico. The KSOP includes both an employee savings component and an employee stock ownership
component. The purpose of the combined plan is to enable the Companys employees to participate in
a tax-deferred savings arrangement under Code Sections 401(a) and 401(k), and to provide employee
equity participation in the Company through the ESOP accounts.
Under the KSOP, eligible employees may make pre-tax and after-tax cash contributions as a
percentage of their compensation, subject to certain limitations under the applicable provisions of
the Code. The maximum pre-tax contribution that can be made to the 401(k) account as determined
under the provisions of Code Section 401(g) is $17, $16 and $16 for 2009, 2008 and 2007,
respectively. Certain eligible participants (age 50 and older) may contribute an additional $6, $5
and $5 on a pre-tax basis for 2009, 2008 and 2007, respectively. After-tax contributions are
limited to 10% of a participants compensation. The Company provides quarterly matching
contributions in Class A common stock. The quarterly matching contributions are equal to 75% of the
first 6% of the participants contribution.
The Company established the ESOP component as a funding vehicle for the KSOP. This leveraged
ESOP acquired 57,190,000 shares of the Companys Class A common stock at a cost of approximately
$33,170 ($0.58 per share) in January 1997. The ESOP borrowed $33,170 from an unrelated third party
to finance the purchase of the KSOP shares. The common shares were pledged as collateral for its
debt. The Company makes annual cash contributions to the KSOP equal to the ESOPs debt service. As
the debt is repaid, shares are released from collateral and are allocated to active employees in
proportion to their annual salaries in relation to total participant salaries. The Company accounts
for its ESOP in accordance with ASC 718-40, Employee Stock Ownership Plans (ASC 718-40) and ASC
480-10, Distinguishing Liabilities from Equity (ASC 480-10). Accordingly, the unreleased shares pledged as
collateral are reported as ISO Class A unearned common stock KSOP shares in the
accompanying consolidated balance sheets. As shares are committed to be released from collateral,
the Company reports compensation expense at the current fair value of the shares, and the shares
become outstanding for EPS computations.
80
In 2004, the Company renegotiated the ESOP loan to require interest only payments for the
third and fourth quarters of 2004. In December 2004, the Company repaid the ESOP loan and issued a
new loan agreement between the Company and the KSOP, thereby extending the allocation of the
remaining unreleased shares as of July 1, 2004 through 2013.
On October 6, 2009, the Company accelerated the release
of 2,623,600 shares to the ESOP account. This resulted in a non-recurring non-cash charge of $57,720 in October 2009, which will
primarily be non-deductible for tax purposes.
Effective with the IPO, the KSOP trustee sold 5,000,000
shares of Verisk Class A common stock, of which 2,754,600 shares were released-unallocated shares and 2,245,400 were unreleased shares
pledged as collateral against the intercompany ESOP loan. The sale of the released-unallocated shares resulted in cash proceeds to the
KSOP of $58,177. The sale of the unreleased shares resulted in cash proceeds
to the KSOP of $47,423, all of which is pledged as collateral against the intercompany ESOP loan. The cash proceeds received by the
KSOP can be used to repurchase shares diversified or distributed by KSOP participants subsequent to the IPO. All shares repurchased
during this period will be repurchased first from the cash proceeds from the sale of the released-unallocated shares; once these
proceeds are depleted and replaced with shares of Verisk Class A common stock, then all further share diversifications or distributions
will be repurchased from the proceeds received from the sale of the
unreleased shares. In accordance with ASC 718-40, the balance of the
Class A common stock unearned KSOP shares was reclassified from
redeemable common stock to Unearned
KSOP contributions, a contra-equity account within the
accompanying consolidated balance sheets. As the intercompany ESOP loan is repaid, a percentage of the
ESOP loan collateral will be released and allocated to active participants in proportion to their annual salaries in relation to
total participant salaries. As of December 31, 2009, the intercompany ESOP loan collateral consisted of cash equivalents
totaling $47,423 and no shares of Verisk Class A common stock.
In 2005, the Company established the ISO Profit Sharing Plan (the Profit Sharing Plan), a
defined contribution plan, to replace the pension plan for all eligible employees hired on or after
March 1, 2005. The Profit Sharing Plan is a component of the KSOP. Eligible employees will
participate in the Profit Sharing Plan if they complete 1,000 hours of service each plan year and
are employed on December 31 of that year. The Company will make an annual contribution to the
Profit Sharing Plan based on the Companys performance. Participants vest once they have completed
four years and 1,000 hours of service. In 2007, 2008 and 2009, the profit sharing contribution was funded
using Class A common stock.
The
Class A common stock issued under the KSOP as of December 31, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Shares released for ESOP allocation |
|
|
47,033,232 |
|
|
|
43,997,400 |
|
Shares released for 401(k) match |
|
|
7,749,099 |
|
|
|
7,260,250 |
|
Shares released for the Profit Sharing Plan |
|
|
162,269 |
|
|
|
116,350 |
|
Unreleased shares |
|
|
2,245,400 |
|
|
|
5,816,000 |
|
|
|
|
|
|
|
|
Total KSOP shares |
|
|
57,190,000 |
|
|
|
57,190,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of unreleased shares |
|
$ |
|
|
|
$ |
90,497 |
|
|
|
|
|
|
|
|
Cash
proceeds from sale of unreleased shares pledged as collateral on intercompany ESOP loan |
|
$ |
47,423 |
|
|
|
|
|
|
|
|
|
|
|
|
Prior
to the IPO, the fair value of the Class A shares was determined quarterly as determined for purposes
of the KSOP. At December 31, 2009 and 2008, the fair value was $30.28 and $15.56 per share,
respectively. KSOP compensation expense for 2009, 2008 and 2007 was approximately $76,065, $22,274
and $22,247, respectively.
Stock Option Plan
During 1998, the Company adopted the Option Plan. The Option Plan provides for the granting of options to key employees and
directors of the Company. Options granted have varying vesting dates within four years after the
grant date and expire ten years from the grant date. During the years ended December 31, 2009 and
2008, stock options granted had an exercise price equal to fair value of the Class A common stock
on date of grant.
In connection with the IPO, Verisk adopted the Verisk Analytics, Inc. 2009 Equity Incentive
Plan (the Incentive Plan). The Incentive Plan replaces the Option Plan. All stock options
granted under the Option Plan was transferred to Verisk, without modification to the terms of the
options other than that such options will be exercisable for Class A common stock of Verisk and the
strike price of each outstanding option has been adjusted for the impact of the fifty-for-one stock
split. Awards under the Incentive Plan may include one or more of the following types: (i) stock
options (both nonqualified and incentive stock options), (ii) stock appreciation rights, (iii)
restricted stock, (iv) restricted stock units, (v) performance awards, (vi) other share-based
awards, and (vii) cash. Employees, directors and consultants are eligible for awards under the
Incentive Plan. The Incentive Plan reserved an aggregate of 13,750,000 shares of Class A common
stock for future issuances. On October 6, 2009, Verisk granted options to purchase 2,875,871
shares of Verisk Class A common stock to its directors, officers and key employees. These
options have an exercise price equal to the IPO price of $22.00 and a ten year contractual term and the majority of the awards have a four
year vesting term; however, certain awards have a three year vesting term. As of December 31, 2009, there are 10,874,129 shares of
Class A common stock reserved and available for future issuance. Cash received from stock option
exercises for the years ended December 31, 2009, 2008 and 2007 was $7,709, $892 and $389,
respectively.
81
The fair value of the stock options granted during the years ended December 31, 2009, 2008 and
2007 were estimated on the date of grant using a Black-Scholes option valuation model that uses the
assumptions noted in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Option pricing model |
|
Black-Scholes |
|
|
Black-Scholes |
|
|
Black-Scholes |
|
Expected volatility |
|
|
31.81 |
% |
|
|
28.02 |
% |
|
|
13.40 |
% |
Risk-free interest rate |
|
|
2.16 |
% |
|
|
2.58 |
% |
|
|
4.54 |
% |
Expected term in years |
|
|
5.5 |
|
|
|
5.0 |
|
|
|
6.19 |
|
Dividend yield |
|
|
0.51 |
% |
|
|
1.81 |
% |
|
|
|
|
Weighted average grant
date fair value per
stock option |
|
$ |
5.96 |
|
|
$ |
4.13 |
|
|
$ |
4.21 |
|
The
expected term for a majority of the awards granted was estimated
based on studies of historical experience and projected exercise
behavior. However, certain awards granted, for which no historical
exercise patterns exist, the expected term was estimated using the simplified method. The risk-free interest
rate is based on the yield of U.S. Treasury zero coupon securities with a maturity equal to the
expected term of the equity award. The volatility factor was based on the average volatility of the
Companys peers, calculated using historical daily closing prices over the most recent period that
commensurates with the expected term of the stock option award. The expected dividend yield was
based on the Companys expected annual dividend rate on the date of grant.
Exercise prices for options outstanding and exercisable at December 31, 2009 ranged from $1.84
to $22.00 as outlined in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
Average |
|
|
Stock |
|
|
Weighted- |
|
|
Average |
|
|
Stock |
|
|
Average |
|
Range of |
|
Remaining |
|
|
Options |
|
|
Average |
|
|
Remaining |
|
|
Options |
|
|
Exercise |
|
Exercise Prices |
|
Contractual Life |
|
|
Outstanding |
|
|
Exercise Price |
|
|
Contractual Life |
|
|
Exercisable |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.84 to $2.20 |
|
|
0.9 |
|
|
|
1,700,900 |
|
|
$ |
2.15 |
|
|
|
0.9 |
|
|
|
1,700,900 |
|
|
$ |
2.15 |
|
$2.21 to $2.96 |
|
|
3.1 |
|
|
|
2,083,600 |
|
|
$ |
2.84 |
|
|
|
3.1 |
|
|
|
2,083,600 |
|
|
$ |
2.84 |
|
$2.97 to $4.62 |
|
|
3.4 |
|
|
|
5,574,750 |
|
|
$ |
3.58 |
|
|
|
3.4 |
|
|
|
5,574,750 |
|
|
$ |
3.58 |
|
$4.63 to $8.90 |
|
|
5.3 |
|
|
|
4,304,050 |
|
|
$ |
8.30 |
|
|
|
5.3 |
|
|
|
4,304,050 |
|
|
$ |
8.30 |
|
$8.91 to $13.62 |
|
|
6.3 |
|
|
|
1,826,950 |
|
|
$ |
11.82 |
|
|
|
6.3 |
|
|
|
1,335,075 |
|
|
$ |
11.93 |
|
$13.63 to $15.10 |
|
|
7.2 |
|
|
|
1,839,700 |
|
|
$ |
15.10 |
|
|
|
7.2 |
|
|
|
824,700 |
|
|
$ |
15.10 |
|
$15.11 to $17.78 |
|
|
8.8 |
|
|
|
6,296,700 |
|
|
$ |
16.65 |
|
|
|
8.1 |
|
|
|
830,950 |
|
|
$ |
17.17 |
|
$17.79 to $22.00 |
|
|
9.7 |
|
|
|
3,134,571 |
|
|
$ |
21.66 |
|
|
|
8.5 |
|
|
|
236,200 |
|
|
$ |
17.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,761,221 |
|
|
|
|
|
|
|
|
|
|
|
16,890,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
A
summary of options outstanding under the Incentive Plan as of December 31, 2009 and
changes during the three years then ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
Number |
|
|
Average |
|
|
Intrinsic |
|
|
|
of Options |
|
|
Exercise Price |
|
|
Value |
|
Outstanding at January 1, 2007 |
|
|
26,188,400 |
|
|
$ |
5.35 |
|
|
$ |
255,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
2,798,950 |
|
|
$ |
15.21 |
|
|
|
|
|
Exercised |
|
|
(3,604,150 |
) |
|
$ |
5.15 |
|
|
$ |
36,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(545,550 |
) |
|
$ |
9.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007 |
|
|
24,837,650 |
|
|
$ |
6.41 |
|
|
$ |
269,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,147,350 |
|
|
$ |
17.30 |
|
|
|
|
|
Exercised |
|
|
(4,262,800 |
) |
|
$ |
5.94 |
|
|
$ |
48,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(564,950 |
) |
|
$ |
14.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008 |
|
|
23,157,250 |
|
|
$ |
7.79 |
|
|
$ |
179,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
6,451,521 |
|
|
$ |
18.80 |
|
|
|
|
|
Exercised |
|
|
(2,583,250 |
) |
|
$ |
3.89 |
|
|
$ |
44,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled or expired |
|
|
(264,300 |
) |
|
$ |
15.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
26,761,221 |
|
|
$ |
10.74 |
|
|
$ |
522,914 |
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2009 |
|
|
16,890,225 |
|
|
$ |
6.64 |
|
|
$ |
399,281 |
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2008 |
|
|
16,449,700 |
|
|
$ |
5.08 |
|
|
$ |
172,408 |
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested options as of December 31, 2009,
2008 and 2007 and changes during the three years then ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average |
|
|
|
Number |
|
|
Grant-Date |
|
|
|
of Options |
|
|
Fair Value |
|
Nonvested balance at January 1, 2007 |
|
|
11,807,550 |
|
|
$ |
1.88 |
|
Granted |
|
|
2,798,950 |
|
|
$ |
4.21 |
|
Vested |
|
|
(5,698,450 |
) |
|
$ |
1.54 |
|
Cancelled or expired |
|
|
(545,550 |
) |
|
$ |
2.35 |
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2007 |
|
|
8,362,500 |
|
|
$ |
2.86 |
|
|
|
|
|
|
|
|
Granted |
|
|
3,147,350 |
|
|
$ |
4.13 |
|
Vested |
|
|
(4,237,350 |
) |
|
$ |
2.48 |
|
Cancelled or expired |
|
|
(564,950 |
) |
|
$ |
3.70 |
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2008 |
|
|
6,707,550 |
|
|
$ |
4.41 |
|
|
|
|
|
|
|
|
Granted |
|
|
6,451,521 |
|
|
$ |
5.96 |
|
Vested |
|
|
(3,023,775 |
) |
|
$ |
3.28 |
|
Cancelled or expired |
|
|
(264,300 |
) |
|
$ |
4.06 |
|
|
|
|
|
|
|
|
Nonvested balance at December 31, 2009 |
|
|
9,870,996 |
|
|
$ |
5.27 |
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options outstanding at December 31, 2009 was
$522,914. The aggregate intrinsic value of stock options currently exercisable at December 31,
2009 was $399,281. Intrinsic value for stock options is calculated based on the exercise price of
the underlying awards and the quoted price of Verisks common stock as of the reporting date.
83
The Company estimates expected forfeitures of equity awards at the date of grant and
recognizes compensation expense only for those awards that the Company expects to vest. The
forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Changes in the
forfeiture assumptions may impact the total amount of expense ultimately recognized over the
requisite service period and may impact the timing of expense recognized over the requisite service
period.
As of December 31, 2009, there was $43,340 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Incentive Plan. That cost is
expected to be recognized over a weighted-average period of 2.94 years. As of December 31, 2009,
there are 9,870,996 nonvested stock options, of which 8,751,561 are expected to vest. The total
grant date fair value of shares vested during the years ended December 31, 2009, 2008 and 2007 was
$9,918, $11,803 and $8,763, respectively.
Performance Based Appreciation Awards
In connection with the Companys acquisition of Applied Insurance Research Inc., Intellicorp,
Ltd, AscendantOne, Inc, DxCG, Appintelligence, and Sysdome, the Company issued performance based
appreciation awards to key employees of these companies. These awards represent the right to
receive cash equal to an amount by which each companys award unit value exceeds the award unit
value on the date of grant. Performance is measured on income from continuing operations before
interest expense and investment income, income taxes, depreciation, and amortization (EBITDA).
Each companys award unit value is based on a multiple of EBITDA. Units granted prior to December
31, 2004 vest at 25% per year and expire after ten years. Units granted after December 31, 2004
vest at 25% per year and expire after four years. In the years ended December 31, 2009, 2008 and
2007, compensation expense related to these units amounted to $2,509, $(117) and $2,296,
respectively. Payments for the years ended December 31, 2009, 2008 and 2007 were $1,436, $858 and
$342, respectively. The liability associated with these performance
based awards of $4,235 and
$3,162 at December 31, 2009 and 2008, respectively.
Phantom ESOP Plan
In 2001, the Company established the ISO Phantom ESOP (phantom ESOP) for eligible employees
of the Companys foreign subsidiaries. Eligible employees will participate in the phantom ESOP if
they complete 1,000 hours of service each plan year and are employed on December 31st of that year.
The Company provides annual contributions to eligible participants in notional shares based on the
value of Class A common stock. Participants vest once they have completed four years and 1,000
hours of service. In the years ended December 31, 2009, 2008 and 2007, compensation expense related
to the phantom ESOP amounted to $1,530, $26 and $228 respectively. A phantom ESOP liability of
$3,262 and $1,732 at December 31, 2009 and 2008, respectively, is included Accrued salaries,
benefits and other related costs within Accounts payable and accrued liabilities in the
accompanying consolidated balance sheets.
17. Pension and Postretirement Benefits:
Prior to January 1, 2002, the Company maintained a qualified defined benefit pension plan for
substantially all of its employees through membership in the Pension Plan for Insurance
Organizations (the Pension Plan), a multiple-employer trust. The Company has applied the
projected unit credit cost method for its pension plan, which attributes an equal portion of total
projected benefits to each year of employee service. Effective January 1, 2002, the Company amended
the Pension Plan to determine future benefits using a cash balance formula. Under the cash balance
formula, each participant has an account, which is credited annually based on salary rates
determined by years of service, as well as the interest earned on their previous year-end cash
balance. Prior to December 31, 2001, pension plan benefits were based on years of service and the
average of the five highest consecutive years earnings of the last ten years. Effective March 1,
2005, the Company established the Profit Sharing Plan, a defined contribution plan, to replace the
Pension Plan for all eligible employees hired on or after March 1, 2005. The Company also has a
non-qualified supplemental cash balance plan (SERP) for certain employees. The SERP is funded
from the general assets of the Company.
The Pension Plans funding policy is to contribute annually at an amount between the minimum
funding requirements set forth in the Employee Retirement Income Security Act of 1974 and the
maximum amount that can be deducted for federal income tax purposes. The Company contributed $292,
$542 and $178 to the SERP in 2009, 2008 and 2007, respectively, and expects to contribute $494 in
2010. The minimum required funding for the Pension Plan for the years ended December 31, 2009, 2008
and 2007 was $5,471, $5,029 and $0, respectively. The Company expects to contribute $21,803 to the
Pension Plan in 2010.
84
The expected return on the plan assets for 2009 and 2008 is 8.25%, which is determined by
taking into consideration the Companys analysis of its actual historical investment returns to a
broader long-term forecast adjusted based on the its target investment allocation, and the current
economic environment. The Companys investment guidelines target investment allocation of 40% debt
securities and 60% equity securities. The Pension Plan assets consist primarily of investments in
various fixed income and equity funds. Investment guidelines are established with each investment
manager. These guidelines provide the parameters within which the investment managers agree to
operate, including criteria that determine eligible and ineligible securities, diversification
requirements and credit quality standards, where applicable. Investment managers are prohibited
from entering into any speculative hedging transactions. The investment objective is to achieve a
maximum total return with strong emphasis on preservation of capital in real terms. The domestic
equity portion of the total portfolio should range between 40% and 60%. The international equity
portion of the total portfolio should range between 10% and 20%. The fixed income portion of the
total portfolio should range between 20% and 40%. The asset allocation at December 31, 2009 and
2008, and target allocation for 2010 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
|
Percentage of Plan Assets |
|
Asset Category |
|
Allocation |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
60 |
% |
|
|
58 |
% |
|
|
51 |
% |
Debt securities |
|
|
40 |
% |
|
|
39 |
% |
|
|
46 |
% |
Other |
|
|
0 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
The Company has used the target investment allocation to derive the expected return as
the Company believes this allocation will be retained on an ongoing basis that will commensurate
with the projected cash flows of the plan. The expected return for each investment category within
the target investment allocation is developed using average historical rates of return for each
targeted investment category, considering the projected cash flow of the pension plan. The
difference between this expected return and the actual return on plan assets is generally deferred
and recognized over subsequent periods through future net periodic benefit costs. The Company
believes that the use of the average historical rates of returns is consistent with the timing and
amounts of expected contributions to the plans and benefit payments to plan participants. The
Company believes these considerations provide the basis for reasonable assumptions with respect to
the expected long-term rate of return on plan assets.
The Company also provides certain healthcare and life insurance benefits for both active and
retired employees. The Postretirement Health and Life Insurance Plan (the Postretirement Plan) is
contributory, requiring participants to pay a stated percentage of the premium for coverage. As of
October 1, 2001, the Postretirement Plan was amended to freeze benefits for current retirees and
certain other employees at the January 1, 2002 level. Also, as of October 1, 2001, the
Postretirement Plan had a curtailment, which eliminated retiree life insurance for all active
employees and healthcare benefits for almost all future retirees, effective January 1, 2002. The
Company expects to contribute $4,911 to the Postretirement Plan in 2010.
85
The following tables set forth the changes in the benefit obligations and the plan assets, the
unfunded status of the Pension Plan and Postretirement Plan, and the amounts recognized in the
Companys consolidated balance sheets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan |
|
|
Postretirement Plan |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
366,921 |
|
|
$ |
363,840 |
|
|
$ |
28,640 |
|
|
$ |
28,340 |
|
Service cost |
|
|
7,375 |
|
|
|
7,789 |
|
|
|
|
|
|
|
|
|
Interest cost |
|
|
21,196 |
|
|
|
21,698 |
|
|
|
1,728 |
|
|
|
1,689 |
|
Actuarial loss/(gain) |
|
|
7,407 |
|
|
|
(4,869 |
) |
|
|
2,732 |
|
|
|
2,650 |
|
Plan participants contributions |
|
|
|
|
|
|
|
|
|
|
3,534 |
|
|
|
2,738 |
|
Benefits paid |
|
|
(24,710 |
) |
|
|
(21,537 |
) |
|
|
(7,532 |
) |
|
|
(6,777 |
) |
Federal subsidy on benefits paid |
|
|
|
|
|
|
|
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
378,189 |
|
|
$ |
366,921 |
|
|
$ |
29,911 |
|
|
$ |
28,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at end of year |
|
$ |
368,229 |
|
|
$ |
356,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions as of December 31,
used to determine benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
|
5.74 |
% |
|
|
6.00 |
% |
|
|
4.50 |
% |
|
|
6.00 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
232,452 |
|
|
$ |
346,013 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets, net of expenses |
|
|
62,157 |
|
|
|
(97,595 |
) |
|
|
|
|
|
|
|
|
Employer contributions |
|
|
5,763 |
|
|
|
5,571 |
|
|
|
3,991 |
|
|
|
4,039 |
|
Plan participants contributions |
|
|
|
|
|
|
|
|
|
|
2,732 |
|
|
|
2,738 |
|
Benefits paid |
|
|
(24,710 |
) |
|
|
(21,537 |
) |
|
|
(7,532 |
) |
|
|
(6,777 |
) |
Subsidies received |
|
|
|
|
|
|
|
|
|
|
809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
275,662 |
|
|
$ |
232,452 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status at end of year |
|
$ |
102,527 |
|
|
$ |
134,469 |
|
|
$ |
29,911 |
|
|
$ |
28,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pre-tax components affecting accumulated other comprehensive loss as of December 31,
2009 and 2008 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan |
|
|
Postretirement Plan |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Transition obligation |
|
$ |
|
|
|
$ |
|
|
|
$ |
499 |
|
|
$ |
665 |
|
Prior service benefit |
|
|
(2,515 |
) |
|
|
(3,316 |
) |
|
|
|
|
|
|
|
|
Actuarial losses |
|
|
87,381 |
|
|
|
134,183 |
|
|
|
8,361 |
|
|
|
5,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
other
comprehensive
loss, pretax |
|
$ |
84,866 |
|
|
$ |
130,867 |
|
|
$ |
8,860 |
|
|
$ |
5,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
The components of net periodic benefit cost and the amounts recognized in other
comprehensive (income)/losses are summarized below for the years ended December 31, 2009, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan |
|
|
Postretirement Plan |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
7,375 |
|
|
$ |
7,789 |
|
|
$ |
8,152 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
21,196 |
|
|
|
21,698 |
|
|
|
20,952 |
|
|
|
1,729 |
|
|
|
1,689 |
|
|
|
1,669 |
|
Amortization of transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166 |
|
|
|
166 |
|
|
|
166 |
|
Recognized net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417 |
|
|
|
241 |
|
|
|
2 |
|
Expected return on plan assets |
|
|
(18,327 |
) |
|
|
(27,441 |
) |
|
|
(27,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
(801 |
) |
|
|
(801 |
) |
|
|
(801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
|
10,380 |
|
|
|
499 |
|
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
19,823 |
|
|
$ |
1,744 |
|
|
$ |
1,417 |
|
|
$ |
2,312 |
|
|
$ |
2,096 |
|
|
$ |
1,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition obligation |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(166 |
) |
|
$ |
(166 |
) |
|
$ |
(166 |
) |
Amortization of actuarial gains |
|
|
(501 |
) |
|
|
(499 |
) |
|
|
(572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service benefit |
|
|
801 |
|
|
|
801 |
|
|
|
801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss recognized |
|
|
(9,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
(gains)/losses |
|
|
(36,422 |
) |
|
|
120,167 |
|
|
|
(13,079 |
) |
|
|
3,117 |
|
|
|
2,411 |
|
|
|
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in other comprehensive (income)/losses |
|
|
(46,001 |
) |
|
|
120,469 |
|
|
|
(12,850 |
) |
|
|
2,951 |
|
|
|
2,245 |
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic cost and other
comprehensive (income)/losses |
|
$ |
(26,178 |
) |
|
$ |
122,213 |
|
|
$ |
(11,433 |
) |
|
$ |
5,263 |
|
|
$ |
4,341 |
|
|
$ |
2,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amounts in accumulated other comprehensive loss that is expected to be
recognized as components of net periodic benefit cost during 2010 are summarized below: