| INTERSECTIONS INC ITEM 1A RISK FACTORS 9 Item 1A Risk Factors We believe the following risk factors, as well as the other information contained in this Annual Report on Form 10-K, are material to an understanding of our company |
| Any of the following risks as well as other risks and uncertainties discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our stock to decline |
| Additional risks and uncertainties that we are unaware of, or that are currently deemed immaterial, also may become important factors that affect us |
| Risks Related to Our Business We must replace the subscribers we lose in the ordinary course of business and if we fail to do so our revenue and subscriber base will decline |
| A substantial number of our subscribers cancel their subscriptions each year |
| Cancellations may occur due to numerous factors, including: • changing subscriber preferences; • competitive price pressures; • general economic conditions; • subscriber dissatisfaction; • cancellation of subscribers due to credit card declines; and • credit or charge card holder turnover |
| The number of cancellations within the first 90 days as a percentage of new subscribers was 29dtta0prca in 2003, 24dtta3prca in 2004, and 29dtta3prca in 2005 |
| We analyze subscriber cancellations during the first 90 days because we believe this time period affords the subscriber the opportunity to evaluate the service |
| The number of cancellations after the first 90 days, as a percentage of the number of subscribers at the beginning of the year plus the net of new subscribers and cancellations within the first 90 days, was 28dtta6prca in 2003, 29dtta7prca in 2004, and 25dtta6prca in 2005 |
| 9 _________________________________________________________________ If we fail to replace subscribers we lose in the ordinary course of business, our revenue may decline, causing a material adverse impact on the results of our operations |
| Because of the large number of subscribers we need to replace each year, there can be no assurance that we can successfully replace them |
| We historically have depended upon a few clients to derive a significant portion of our revenue, and the loss of any of these clients could have a material adverse effect on our growth strategy and prospects |
| Revenue from subscribers obtained through our largest clients in 2004 and 2005, as a percentage of our total revenue, was: American Express —22prca and 22prca, Capital One (directly and through our relationship with Equifax) —24prca and 12prca, Discover —17prca and 16prca; Citibank —11prca and 12prca, and MBNA — 6prca and 11prca, respectively |
| Our existing agreement with American Express expired on December 31, 2005, and we entered into a Services Transition Agreement with American Express |
| As a result of the Services Transition Agreement, after May 31, 2006, we will cease servicing approximately 95prca of our subscribers obtained through American Express, which accounts for approximately 95prca of the revenue generated through the American Express relationship |
| In order to maintain and continue to grow our revenue, we will have to offset this loss of revenue from existing and new client relationships and other products and services |
| Any failure to do so could have a material adverse affect on our revenue, results of operations and financial condition |
| There can be no assurance that one or more of these other key clients or other clients will not terminate their relationship with us |
| The termination or non-renewal of a key client relationship could have a material adverse effect on our future revenue from existing services of which such client’s customers are subscribers and on our ability to further market new or existing services through such client |
| If one or more of our agreements with clients were to be terminated or expire, or one or more of our clients were to reduce the marketing of our services, we would lose access to prospective subscribers and could lose sources of revenue |
| Many of our key client relationships are governed by agreements that may be terminated without cause by our clients upon notice of as few as 60 days without penalty |
| Under many of these agreements, our clients may cease or reduce their marketing of our services |
| If one or more of our agreements with clients were to be terminated or expire, or one or more of our clients were to reduce the marketing of our services, we would lose access to prospective subscribers |
| Our typical direct marketing arrangement contracts provide that after termination or expiration of the contract we may continue to provide our services to existing subscribers under the same economic arrangements that existed before termination or expiration |
| Under certain of our agreements, however, including some of our indirect marketing arrangement contracts, the clients may require us to cease providing services under existing subscriptions after time periods ranging from 90 days to three years after termination or expiration of the contract |
| Our shared marketing agreement with American Express expired on December 31, 2005, and we maintain the right under the Services Transition Agreement to continue to provide our current consumer services to substantially all of the existing Amex subscribers until May 31, 2006; thereafter, we will cease servicing approximately 95prca of our subscribers obtained through the American Express relationship |
| Clients under certain contracts also may require us to cease providing services to their customers under existing subscriptions if the contract is terminated for material breach by us |
| If one or more of these clients were to terminate our agreements with them or such agreement were to expire, and require us to cease providing our services to subscribers, then we would lose significant sources of revenue |
| We are substantially dependent upon our consumer identity theft protection and credit management services for a significant portion of our revenue, and market demand for these services could decrease |
| Approximately 92prca of our revenue in 2005 was derived from consumer identity theft protection and credit management services, with the balance coming from our subsidiary American Background Information Services |
| We expect to remain dependent on revenue from these services for the foreseeable future |
| Any significant downturn in the demand for these services would materially decrease our revenue |
| If we lose our ability to purchase data from any of the three major credit reporting agencies, each of which is a competitor of ours, demand for our services could decrease |
| We rely on the three major credit reporting agencies, Equifax, Experian and TransUnion, to provide us with essential data for our consumer identity theft protection and credit management services |
| We recently amended our agreements with Equifax to extend the term of each of the agreements until November 26, 2008, with automatic renewal for an additional 2 year renewal term unless either party gives notice of non-renewal 10 months or more prior to expiration of the original term |
| Our agreements with Experian and TransUnion may be terminated by them on 30 days and 60 days notice, respectively |
| 10 _________________________________________________________________ Each of the three major credit reporting agencies owns its consumer credit data and is a competitor of ours in providing credit information directly to consumers, and may decide that it is in their competitive interests to stop supplying data to us |
| Any interruption, deterioration or termination of our relationship with one or more of the three credit reporting agencies would be disruptive to our business and could cause us to lose subscribers |
| If we experience system failures or interruptions in our telecommunications or information technology infrastructure, our revenue could decrease and our reputation could be harmed |
| Our operations depend upon our ability to protect our telecommunications and information technology systems against damage or system interruptions from natural disasters, technical failures and other events beyond our control |
| We receive credit data electronically, and this delivery method is susceptible to damage, delay or inaccuracy |
| A significant portion of our business involves telephonic customer service as well as mailings, both of which depend upon the data generated from our computer systems |
| Unanticipated problems with our telecommunications and information technology systems may result in a significant system outage or data loss, which could interrupt our operations |
| Our infrastructure may also be vulnerable to computer viruses, hackers or other disruptions entering our systems from the credit reporting agencies, our clients and subscribers or other authorized or unauthorized sources |
| Our business could be materially adversely affected if there is any damage to our telecommunications and information technology systems, failure of communication links or other loss that causes interruption in, or damage to, our operations |
| We and our clients outsource telemarketing to third parties who may take actions that lead to negative publicity and consumer dissatisfaction |
| We and our clients solicit some of our subscribers through outbound telemarketing that we outsource to third-party contractors |
| In outbound telemarketing, the third-party contractors make the initial contact with potential subscribers |
| We attempt to control the level and quality of the services provided by these third parties through a combination of contractual provisions, monitoring, on-site visits and records audits |
| In arrangements where we bear the marketing cost, which represented 24prca of new subscribers acquired in 2005, approximately 78prca of new subscribers were obtained through outbound telemarketing by our vendors |
| In arrangements where the clients bear the marketing cost, which represented 76prca of new subscribers acquired in 2005, approximately 16prca of new subscribers were obtained through outbound telemarketing by outsourced vendors |
| Any quality problems could result in negative publicity and customer dissatisfaction, which could cause us to lose clients and subscribers and decrease our revenue |
| We may lose subscribers and significant revenue if our existing services become obsolete, or if we fail to introduce new services with broad consumer appeal or fail to do so in a timely or cost-effective manner |
| Our growth depends upon developing and successfully introducing new services that generate client and consumer interest, including new data sources, advanced tools and analytical capabilities, more timely notification of activities and more useable content |
| We have made or may make significant investments in these new services, including development costs and prepayment of royalties and fees to third party providers |
| Our failure to introduce these services or to develop new services, or the introduction or announcement of new services by competitors, could render our existing services noncompetitive or obsolete |
| Although we have a limited history of developing and introducing services outside the areas of identity theft protection and consumer credit management, we are currently developing or introducing new services in the area of small business credit information and fraud detection |
| There can be no assurance that we will be successful in developing or introducing these or any other new services |
| Our failure to develop, introduce or expand our services could harm our business and prospects |
| We may not be able to develop and maintain relationships with third party data and analytics providers on which we will be substantially dependent for our fraud protection and small business services, and failures by those third parties could harm our business and prospects |
| Our fraud protection and small business services are substantially dependent on third party data and analytics providers |
| Our failure to develop and maintain these third party relationships could harm our ability to provide those services |
| Failure of those third party providers to perform under our agreements with them, or to provide effective and competent services, could cause us to have liability to others or otherwise harm our business and prospects |
| 11 _________________________________________________________________ We expect that our revenue, expenses and operating results may be subject to significant fluctuations, which could contribute to wide fluctuations in period-to-period performance and could have a material adverse effect on the price of our stock |
| These fluctuations may be attributable to a number of factors, many of which are beyond our control, including: • the timing and rate of subscription cancellations and additions; • our ability to introduce new services on a timely basis; • the introduction of competing services by our competitors; • market acceptance of our services; • the demand for consumer subscription services generally; • the ability of third parties to market and support our services; • the timing of our clients’ marketing of our services; and • general economic conditions |
| Any one or a combination of these factors could contribute to wide fluctuations in period-to-period performance and have an adverse effect on our stock price |
| We may be unable to meet our future capital requirements to grow our business, which could adversely impact our financial condition and growth strategy |
| We may need to raise additional funds in the future in order to operate and expand our business |
| There can be no assurance that additional funds will be available on terms favorable to us, or at all |
| Our inability to obtain additional financing could have a material adverse effect on our financial condition |
| We may raise additional funds in the future, which could cause dilution to our existing stockholders or adversely affect their voting or other rights |
| We may seek additional funding in the future through public or private financings and the terms of these financings may adversely affect the holdings or the rights of our stockholders |
| If we raise funds by selling more stock, our existing stockholders will be diluted, and we may grant future investors rights superior to those of the common stock |
| If additional funds are raised by issuing debt, we may be subject to covenants limiting our operations |
| If we are not able to hire and retain qualified personnel, our ability to grow and maintain our business could be adversely affected |
| Our success depends on the continued services of our key senior management and our marketing, customer service and technology personnel |
| If one or more of these individuals were unable or unwilling to continue in their present positions, our business could be materially adversely affected |
| In addition, we do not maintain key person life insurance on our senior management other than Michael R Stanfield, our chairman and chief executive officer |
| We also believe that our future success will depend, in part, on our ability to attract, retain and motivate skilled managerial, marketing and other personnel |
| We may not be able to attract, assimilate or retain highly qualified employees in the future, which could result in increased labor costs and operating expenses and diminished customer service, any of which would have a material adverse effect on our results of operations and ability to grow and maintain our business |
| 12 _________________________________________________________________ If we are found liable in the consumer class action litigation that has been brought against us or in any other litigation to which we may be subject in the future, we may be required to pay damages and/or change our business practices, any of which could have a material adverse effect on our revenue and profitability |
| Because we operate in a highly regulated industry and must comply with various federal, state and local laws, we may be subject to claims and legal proceedings in the ordinary course of our businesses and our clients’ businesses |
| These legal actions might include lawsuits styled as class actions and alleging violations of various federal and state consumer and privacy protection laws |
| On December 23, 2005, an action captioned Mary Gay v |
| Credit Inform, Capital One Services, Inc |
| and Intersections, Inc, was commenced in the US District Court for the Eastern District of Pennsylvania, alleging that the Credit Inform credit monitoring service marketed by Capital One and provided by us violates certain procedural requirements under the federal Credit Repair Organizations Act (“CROA”) and the Pennsylvania Credit Services Act (“PA CSA”) |
| Plaintiff contends that we and Capital One are “credit repair organizations” under the CROA and “credit services organizations” under the PA CSA Plaintiff seeks certification of a class on behalf of all individuals who purchased such services from defendants within the five-year period prior to the filing of the complaint |
| Plaintiff seeks an unspecified amount of damages, including all fees paid by the class members for the services, attorneys’ fees and costs |
| Defendants have filed a motion to dismiss plaintiff’s action |
| We deny any liability or wrongdoing, deny that a class action is appropriate, and will vigorously defend against all claims |
| While it is impossible to estimate with certainty the ultimate legal and financial liability with respect to this or any future legal proceedings, an adverse judgment in this or one or more other legal proceedings may have a material adverse financial effect on us |
| If we determine in the future that we are required to establish reserves or we incur liabilities for any litigation that has been or may be brought against us, our results of operations, cash flow and financial condition could be materially and adversely affected |
| We have not established reserves for any of the legal proceedings in which we are currently involved and we are unable to estimate at this time the amount of charges, if any that may be required to provide reserves for these matters in the future |
| We may determine in the future that a reserve or a charge for all or a portion of any of our legal proceedings is required, including charges related to legal fees |
| In addition, we may be required to record an additional charge if we incur liabilities in excess of reserves that we have previously recorded |
| Such charges, particularly in the event we may be found liable in a large class-action lawsuit, could be significant and could materially and adversely affect our results of operations, cash flow and financial condition and result in a significant reduction in the value of our shares of common stock |
| We may not be able to consummate future acquisitions or joint ventures or successfully integrate these into our business |
| We continually consider and evaluate businesses, joint ventures, technologies, products, services or assets that complement our business |
| A principal component of our strategy going forward is to selectively acquire complementary assets in order to increase cash flow and earnings |
| Our ability to do so will be dependent upon a number of factors, including our ability to identify acceptable acquisition candidates, consummate acquisitions on favorable terms, successfully integrate acquired assets and obtain financing to support our growth, and many other factors beyond our control |
| We may not be successful in implementing our acquisition strategy and, even if implemented, such strategy may not improve our operating results |
| In addition, the financing of future acquisitions may require us to incur indebtedness, which could limit our financial flexibility |
| In connection with acquisitions, we may experience unforeseen operating difficulties as we integrate the acquired assets into our existing operations |
| These difficulties may require significant management attention and financial resources that would otherwise be available for the ongoing development or expansion of existing operations |
| Any acquisition by us involves risks, including: • unexpected losses of key employees, customers and suppliers of the acquired operations; • difficulties in integrating the financial, technological and management standards, processes, procedures and controls of the acquired businesses with those of our existing operations; • challenges in managing the increased scope, geographic diversity and complexity of our operations; and • mitigating contingent or assumed liabilities |
| Risks Related to Our Industry Our failure to protect private data could damage our reputation and cause us to expend capital and resources to protect against future security breaches or other unauthorized access |
| Our services are based upon the collection, distribution and protection of sensitive private data |
| Unauthorized users might access that data or human error might cause the wrongful dissemination of that data |
| If we experience a security breach or other unauthorized access to information, the integrity of our services may be affected |
| 13 _________________________________________________________________ We have incurred and may incur in the future significant costs to protect against the threat of a security breach or other unauthorized access to information or to alleviate problems caused by a breach or other unauthorized access |
| Moreover, any public perception that we have engaged in the unauthorized release of, or have failed to adequately protect, private information could adversely affect our ability to attract and retain clients and subscribers and could subject us to legal claims from clients or subscribers |
| We cannot make assurances that we would prevail in such litigation |
| In addition, unauthorized third parties might alter information in our databases, which would adversely affect both our ability to market our services and the credibility of our information |
| We are subject to government regulation and increasing public scrutiny, which could impede our ability to market and provide our services and have a material adverse effect on our business |
| Our business and activities, or the information we use in our business and activities, are subject to a variety of regulation by federal, state and local authorities in the US and Canada, including the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act and similar laws in Canada |
| We incur significant costs to operate our business and monitor our compliance with these laws |
| In addition, if we expand our business to other parts of the world, we might become subject to the laws and regulations of those countries |
| Any of these laws and regulations are subject to revision, and we cannot predict the impact of legislative or regulatory changes on our business |
| Any changes to the existing applicable laws and regulations or any determination that other laws and regulations are applicable to us could increase our costs or impede our ability to provide our services to our customers, which might have a material adverse effect on our business and results of operations |
| Laws requiring the free issuance of credit reports by credit reporting agencies could impede our ability to obtain new subscribers or maintain existing subscribers and could have a material adverse effect on our revenue |
| The Fair Credit Reporting Act provides consumers the ability to receive one free consumer credit report per year from each major consumer credit reporting agency, and requires each major consumer credit reporting agency to provide the consumer a credit score along with his or her credit report for a reasonable fee as determined by the Federal Trade Commission |
| Laws in several states, including Colorado, Georgia, Illinois, Maine, Maryland, Massachusetts, New Jersey and Vermont, require consumer reporting agencies to provide each consumer one credit report per year (or two credit reports, in the case of Georgia) upon request without charge |
| We are not required to comply with these requirements because we are not a consumer reporting agency |
| These laws do apply to the three major credit reporting agencies from which we purchase data for our services |
| The rights of consumers to obtain free annual credit reports from consumer reporting agencies, and credit scores for a fee, could cause consumers to perceive that the value of our services is reduced or replaced by those free credit reports, which could have a material adverse effect on our business |
| The major credit reporting agencies that are obligated to provide free credit reports are required to maintain a centralized source through which consumers may request their free credit reports |
| The Federal Trade Commission has promulgated rules which allow the credit reporting agencies to advertise their paid products on the centralized source |
| The Federal Trade Commission’s rules restrict the manner of such advertising, and also prohibit the credit reporting agencies from using for marketing purposes the consumer information gathered through the centralized source |
| Nevertheless, advertising by the credit reporting agencies through the centralized source may compete with the marketing of our services |
| A significant downturn in the charge or credit card industry or a trend in that industry to reduce or eliminate marketing programs could harm our business |
| We depend upon clients in the charge and credit card industry |
| Services marketed through our charge and credit card issuer clients have accounted for substantially all of our revenue |
| Therefore, a significant downturn in the charge and credit card industry could harm our business |
| The reduction or elimination of marketing programs within our charge and credit card issuer clients could materially adversely affect our ability to acquire new subscribers and to expand the range of services offered to current subscribers |
| Competition could reduce our market share or decrease our revenue |
| Several of our competitors offer services that are similar to, or that directly compete with, our services |
| Competition for new subscribers is also intense |
| Even after developing a client relationship, we compete within the client organization with other services for appropriately targeted customers because client organizations typically have only limited capacity to market third-party services like ours |
| Many of our competitors have greater financial and other resources than we do |
| We compete directly with the credit reporting agencies that control the credit file data that we use to provide our services |
| 14 _________________________________________________________________ We believe that the major credit reporting agencies currently market and deliver their services primarily online and generally do not provide client branded services that meet our clients’ specifications and needs |
| We have no assurance, however, that the major credit reporting agencies will not expand their marketing channels or strategies or develop capabilities competitive with ours, which, if successful, could have a material adverse effect on our business, results of operations and financial condition |
| There also can be no assurance that our current or future competitors will not provide services comparable or superior to those provided by us, or at lower prices, adapt more quickly to evolving industry trends or changing market requirements, increase their emphasis on services similar to ours, enter the market in which we operate or introduce competing services |
| If we are unable to enforce or defend our ownership and use of our intellectual property, our competitive position and operating results could be harmed |
| The success of our business depends in part on the intellectual property involved in our processes, systems, methodologies, materials and software |
| We rely on a combination of trade secret, patent, copyright, trademark and other laws, license agreements and nondisclosure, noncompetition and other contractual provisions and technical measures to protect our intellectual property rights |
| However, current law may not provide for adequate protection of our intellectual property |
| In addition, legal standards relating to the validity, enforceability and scope of protection of proprietary rights are uncertain and evolving, and we cannot assure you of the future viability or value of any of our proprietary rights |
| Our business could be harmed if we are not able to protect our intellectual property |
| The same would be true if a court found that our services infringe another party’s intellectual property rights |
| Any intellectual property lawsuits, in which we are involved, either as a plaintiff or as a defendant, could cost us a significant amount of time and money and detract management’s attention from operating our business |
| In addition, if we do not prevail on any intellectual property claims, this could result in a change to our processes, systems, methodologies, materials and software and could reduce our profitability |
| Risks Related to the Common Stock Our stock price fluctuates and may continue to fluctuate |
| In the past our stock price has declined in response to period-to-period fluctuations in our revenue, expenses and operating results and other factors which are beyond our control, and our stock price may continue to fluctuate significantly in the future |
| The stock market in general has recently experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of listed companies |
| These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of our shares |
| In addition, in certain periods where our historical operating results have been below the expectations of analysts and investors, the price of our common stock has decreased following earnings announcements |
| It is possible that in some future periods this might happen again and the price of our stock may decrease and fluctuate significantly in a short period of time |
| A large number of shares of our common stock may be sold in the market, which could cause the market price of our common stock to decline |
| Our sale, or the sale or resale by our stockholders, of shares of our common stock, or the perception that such sales may occur, could cause the market price of the common stock to decline |
| We have 16cmam706cmam512 shares of common stock outstanding as of February 27, 2006 |
| Of these shares, approximately 8cmam000cmam000 shares are freely transferable without restriction except for any shares held by our “affiliates” as defined in Rule 144 of the Securities Act |
| The remaining shares of common stock are “restricted securities” and eligible for public sale when registered or when they qualify for an exemption from registration under the Securities Act |
| The holders of substantially all of these “restricted securities” have the right under specified circumstances to require us to register their shares for resale to the public or to participate in a registration of shares by us |
| 15 _________________________________________________________________ Insiders have substantial control over us and could delay or prevent a change in corporate control, which may harm the market price of our common stock |
| Our directors, executive officers and principal stockholders, together with their affiliates, own, in the aggregate, approximately 53prca of our outstanding common stock |
| These stockholders may have interests that conflict with other stockholders and, if acting together, may have the ability to determine the outcome of matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets |
| In addition, these stockholders, acting together, may have the ability to control the management and affairs of our company |
| Accordingly, this concentration of ownership may harm the market price of our common stock by: • delaying, deferring or preventing a change in control of our company; • impeding a merger, consolidation, takeover or other business combination involving our company; or • discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company |
| Provisions in our certificate of incorporation and bylaws and under Delaware law could prevent or delay transactions that stockholders may favor |
| We are incorporated in Delaware |
| Our certificate of incorporation and bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management that a stockholder might consider favorable, including a provision which authorizes our board of directors to issue preferred stock with such voting rights, dividend rates, liquidation, redemption, conversion and other rights as our board of directors may fix without further stockholder action |
| If a change in control or change in management is delayed or prevented, the market price of our common stock could decline |
| Delaware law also prohibits a corporation from engaging in a business combination with any holder of 15prca or more of its capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction |
| This provision may prevent changes in our management or corporate structure |
| Also, under applicable Delaware law, our board of directors is permitted to and may adopt additional anti-takeover measures in the future |