Interactive Data Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business
Interactive Data Corporation (the Company) is a leading global provider of financial market data, analytics and related services to financial
institutions, active traders and individual investors. The Company offers its services to its customers through two reportable business segments: Institutional Services and Active Trader Services.
The Institutional Services segment of the Companys business primarily targets financial institutions such as banks, brokerage firms, mutual fund companies,
hedge funds, insurance companies, money management firms, financial information providers, information media companies, third-party redistributors and outsourcing organizations by providing services that may be used in determining portfolio and
individual security valuations, processing transactions, preparing account statements and other reports, addressing regulatory compliance requirements, and conducting investment research and analysis. The Institutional Services segment is composed
of three businesses, each of which was renamed in February 2007 as part of a global marketing initiative to reinforce our value proposition and emphasize the Interactive Data brand to institutional customers: Interactive Data Pricing and Reference
Data (formerly FT Interactive Data), Interactive Data Real-Time Services (formerly ComStock) and Interactive Data Fixed Income Analytics (formerly CMS BondEdge).
The Active Trader Services segment of the Companys business targets active traders, individual investors and investment community professionals, by providing real-time financial market information and access to related
decision-support tools. Active traders typically make their own investment decisions, trade frequently through online brokerage accounts and seek to earn a substantial portion of their income from trading. The Active Trader Services segment is
composed of one business: eSignal.
On February 29, 2000, Data Broadcasting Corporation completed a merger (the Merger) with
Interactive Data Corporation (now known as Interactive Data Pricing and Reference Data, Inc.), a wholly owned subsidiary of Pearson Longman, Inc. (Pearson Longman). Pearson Longman, through a series of other entities, is wholly owned by
Pearson plc (Pearson). Upon completion of the Merger, the Company issued 56,424,000 shares of its common stock to Pearson Longman that resulted in the ownership by Pearson Longman of approximately 60% of the Company as of the effective
date of the merger. On January 6, 2006, Pearson acquired an additional 1,131,000 shares of the Company common stock from one of our former directors bringing the total held by Pearson to 57,555,000 or approximately 61% of the Companys
issued and outstanding shares of common stock as of December 31, 2007. Interactive Data Corporation prior to the Merger is referred to herein as Interactive Data Pricing and Reference Data, which continues to be the Companys major
institutional services business. The Merger was accounted for as a reverse merger as discussed in Note 3, Mergers and Acquisitions in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
The shares of the Company held by Pearson Longman were subsequently transferred to Pearson DBC Holdings, Inc., another wholly owned subsidiary of Pearson Longman.
Principles of Consolidation
The consolidated financial statements include the results of the Company and all majority-owned
subsidiaries. All significant inter-company accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash deposits held at major banks, money market fund accounts and other temporary cash investments. The Company
considers all highly liquid investments with original maturities of less than three months to be cash equivalents.
Marketable Securities
The Company follows Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities in
accounting for our marketable securities. Investments consist of high-grade municipal obligations with original maturities of greater than 90 days and remaining maturities of less than one year. All marketable securities have been classified as
available-for-sale and are carried at fair market value. Unrealized gains or losses on our available-for-sale securities are included in accumulated other comprehensive income as a component of stockholders equity.
50
Marketable securities by security type at December 31, 2007 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
Municipal Obligations
|
|
$
|
73,439
|
|
$
|
41
|
|
$
|
(15
|
)
|
|
$
|
73,465
|
Marketable securities by security type at December 31, 2006 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
Municipal Obligations
|
|
$
|
43,300
|
|
$
|
1
|
|
$
|
(5
|
)
|
|
$
|
43,296
|
There were no sales of our marketable securities for the years ended December 31, 2007 and 2006.
Fair Value of Financial Instruments
The carrying amount
of cash, cash equivalents, trade receivables and trade payables approximates their fair value because of the short maturity of these investments.
Revenue
Recognition
Revenue recognition is governed by Staff Accounting Bulletin No. 104, Revenue Recognition. We recognize revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable and collectibility is reasonably assured. For customer service contracts that include a fixed subscription fee for the right to access data
over a specified contractual period, revenue is recognized on a straight line basis over the contract term. For customer contracts that include variable fees based on usage, revenue is recognized in the month that the data is delivered to customers.
Deferred revenue represents contractual billings in excess of revenue recognized.
Accounts Receivable, Concentration of Credit Risk and Uncertainties, Allowance for Doubtful Accounts
The Company is
subject to credit risk through trade receivables. Credit risk with respect to trade receivables is mitigated by the diversification of the Companys operations, as well as its large customer base and its geographical dispersion. No single
customer accounts for more than 10% of revenue or more than 10% of accounts receivable for any period presented. Ongoing credit evaluations of customers financial condition are performed although collateral is not required. The Company
maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded managements previously established estimates. At December 31, 2007, management believes that the Company had no significant concentrations
of credit risk. The Company maintains a reserve for an allowance for doubtful accounts and sales credits that is the Companys best estimate of potentially uncollectible trade receivables. Provisions are made based upon a specific review of all
significant outstanding invoices that are considered potentially uncollectible in whole or in part. For those invoices not specifically reviewed or considered uncollectible, general provisions are provided at different rates, based upon the age of
the receivable, historical experience, and other currently available evidence. The reserve estimates are adjusted as additional information becomes known or payments are made.
Income Taxes
The Company determines its income tax expense in each of the jurisdictions in which it operates. The income
tax expense includes an estimate of the current tax expense as well as a deferred tax expense which results from the determination of temporary differences arising from the different treatment of items for book and tax purposes.
Deferred tax assets and liabilities are determined based on differences between the financial reporting and the tax basis of assets and liabilities and are
measured by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. The Company currently provides income taxes on the earnings of foreign subsidiaries and associated companies to the extent these
earnings are currently taxable or expected to be remitted. Taxes have not been provided on approximately $120,000,000 of accumulated foreign unremitted earnings, which are expected to remain invested indefinitely. Quantification of the deferred tax
liability, if any, associated with indefinitely reinvested earnings is not practicable.
51
The Company recognizes future tax benefits or expenses attributable to our taxable temporary differences and net
operating loss carry forwards. The Company recognizes deferred tax assets to the extent that the recoverability of these assets satisfy the more likely than not recognition criteria in Statement of Financial Accounting Standards
No. 109 Accounting for Income Taxes. Based upon historical income and projections of future taxable income, the Company believes that the recorded deferred tax assets will be realized.
Goodwill
Goodwill is recorded in connection with business acquisitions
and represents the excess of the purchase price over the fair value of identifiable net assets at the acquisition date. The Company determines its reporting units based upon the criteria in FASB Statement No. 142, Goodwill and other
Intangibles Assets. The Company performs impairment tests of goodwill assigned to various reporting units on an annual basis or whenever events or circumstances indicate an impairment may exist. Each impairment test is based upon a comparison
of the fair value of the reporting unit to the book value of the related assets. If impairment is indicated due to the net book value being in excess of the fair value of the reporting unit, the goodwill is written down to its implied fair value.
Intangible Assets
Other intangible assets include
securities databases, computer software and technology, covenants not to compete, trademarks, service contracts and customer lists arising principally from acquisitions. Such intangibles are valued on the acquisition dates based on a combination of
replacement cost, comparable purchase methodologies and discounted cash flows and are amortized on a straight line basis, which approximate the economic consumption, for periods ranging from three months to twenty five years.
Property, Equipment and Capitalized Software
Fixed assets are recorded
at cost. Equipment is depreciated using the straight-line method over its estimated useful life of three to ten years. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives,
whichever is shorter. Maintenance and repairs are charged to operations as incurred. Retirements, sales and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with
the resulting gain or loss reflected in income.
Capitalized software costs include costs incurred in connection with the development of software and
purchased software for internal use and are capitalized in accordance with the provisions of American Institute of Certified Public Accountants Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. These costs relate to software used by subscribers to access, manage and analyze information in the Companys databases. Capitalized costs are amortized over the estimated economic life, which typically ranges from three to
five years.
Impairment of Long-Lived Assets
The Company
reviews long-lived assets whenever events or circumstances indicate that the carrying value of the assets may not be recovered or that the remaining useful lives are no longer appropriate. If an impairment is indicated, the Company compares the fair
value of the related asset, generally determined using a discounted cash flow methodology, to the carrying value of the asset and records an impairment charge to the extent that fair value is lower than the carrying value of the asset.
Translation of Foreign Currencies
The functional currency of certain
businesses within the consolidated financial statements is the local currency. Assets and liabilities of foreign companies are translated into US dollars at exchange rates in effect at the balance sheet date; income and expense items and cash flows
are translated at average exchange rates for the period. Cumulative net translation adjustments are included in stockholders equity as other comprehensive income. Gains and losses resulting from foreign currency transactions, not significant
in amount, are included in the results of operations as selling, general and administrative expense or revenue depending on the nature of the transaction.
Use of
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires the extensive use of managements estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated financial statement date.
Actual results could differ from those estimates.
52
Research and Development Costs
Expenditures for research and development are expensed as incurred. The Company recorded $5,798,000, $4,941,000 and $3,573,000 in research and development costs during the years ended December 31, 2007, 2006 and 2005, respectively,
primarily related to the development of new services. Research and development costs are included in selling, general and administrative expense in accompanying statement of operations.
Advertising Costs
Advertising expenditures consist of print media, radio, television, direct marketing and trade shows.
All advertising expenses are charged to income during the period incurred and totaled $7,447,000, $6,759,000 and $6,511,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Stock-Based Compensation
The Company follows SFAS 123(R). SFAS 123(R)
requires that all stock-based payments to employees, including grants of stock options, are recognized in the financial statements based on their fair values. Refer to Note 7, Stock-based Compensation in the Notes to the Consolidated
Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion.
Earnings per Share
We calculate earnings per share in accordance with Statement of Financial Accounting Standard No. 128, Earnings per Share (EPS) and
apply the treasury stock method in computing the weighted-average shares outstanding used in the diluted earnings per share calculation. Under the treasury stock method, the assumed proceeds calculation includes the actual proceeds to be received
from the employee upon exercise, the average unrecognized compensation cost during the period and any tax benefits credited upon exercise to additional paid-in-capital. The treasury stock method assumes that a company uses the proceeds from the
exercise of awards to repurchase common stock at the average market price for the period. Windfall tax benefits created upon the exercise of an award would be added to assumed proceeds, while shortfalls charged to additional paid in capital would be
deducted from assumed proceeds. Any shortfalls not covered by the windfall tax pool would be charged to the income statement and would be excluded from the calculation of assumed proceeds, if any.
Stock options representing the right to acquire 1,512,400, 3,515,000 and 1,700 shares of common stock during the years ended December 31, 2007, 2006 and 2005,
respectively, were outstanding but were not included in the calculation of diluted net income per share because the effect would have been antidilutive. Additionally, zero deferred and restricted stock units, 11,620 deferred and restricted stock
units and 107,316 deferred stock units were outstanding during the years ended December 31, 2007, 2006 and 2005, respectively, and were also excluded from the calculation of diluted net income per share as they were antidilutive. Although these
share based awards were antidilutive in fiscal 2007, 2006 and 2005, they may be dilutive in future quarters calculations.
Below is a
reconciliation of the weighted average number of common shares outstanding (in thousands, except per share information):
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|
|
|
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|
|
|
|
|
During the Year Ended December 31,
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|
|
2007
|
|
2006
|
|
2005
|
Numerator:
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|
|
|
|
|
|
|
|
Net income
|
|
$
|
125,983
|
|
$
|
93,362
|
|
$
|
93,864
|
|
|
|
|
Denominator:
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|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
94,038
|
|
|
93,240
|
|
|
93,204
|
Effect of dilutive securities:
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|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,823
|
|
|
2,202
|
|
|
2,704
|
Deferred and restricted stock units
|
|
|
199
|
|
|
158
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute diluted EPS
|
|
|
97,060
|
|
|
95,600
|
|
|
95,989
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1.34
|
|
$
|
1.00
|
|
$
|
1.01
|
Diluted EPS
|
|
$
|
1.30
|
|
$
|
0.98
|
|
$
|
0.98
|
53
2. New Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
On July 13, 2006, the Financial Accounting Standards Board (FASB), issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of Statement of Financial Accounting Standards Accounting for Income Taxes No. 109 (SFAS 109).
FIN 48 is effective for fiscal years beginning after December 15, 2006 with the cumulative effect of a change in accounting principle recorded as an adjustment to opening retained earnings. The provisions of FIN 48 are to be applied to all tax
positions upon initial adoption of this standard. FIN 48 requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosure, and transition attributable to the tax position. The company adopted the provisions of FIN 48 on
January 1, 2007. As a result of the implementation of FIN 48, the company recognized no material adjustment in the liability for unrecognized tax benefits. The adoption of FIN 48 did not materially impact the companys financial position,
results of operations or cash flows. Refer to Note 10, Income Taxes in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion.
Fair Value Measurements
In September 2006, the FASB issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 establishes a framework for how companies should measure the fair value of assets and liabilities and expands disclosure
about fair value measurements. Additionally, SFAS 157 formally defines fair value as the amount that would be received if an asset was sold or a liability transferred in an orderly transaction between market participants at the measurement date.
SFAS 157 is effective for the company in 2008. Based on the Companys current operations, the Company does not expect that the adoption of SFAS 157 will have a material impact on the Companys financial statements.
The Fair Value Option for Financial Assets and Financial Liabilities (as amended)
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 provides entities with an option to choose to measure eligible items at fair value at specified election dates. If elected, an entity must report unrealized gains and losses on the item in earnings at each subsequent
reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method, is irrevocable (unless a new election date occurs); and is applied only to entire
instruments and not to portions of instruments. SFAS 159 is effective for the company in 2008. We are currently evaluating if we will elect the fair value option for any of our eligible financial instruments and other items and currently the Company
does not expect that the adoption of SFAS 159 will have a material impact on the Companys financial statements.
Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards
In June 2007, the FASB ratified the consensus reached by EITF on Issue No. 06-11, Accounting
for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 addresses the issue of the manner in which income tax benefits received on dividends paid to employees holding equity-classified non-vested
shares (units or options) should be accounted for when such dividends are charged to retained earnings pursuant to SFAS 123(R). EITF 06-11 concludes that a realized income tax benefit should be recognized as a credit to additional paid-in capital
and should be included in the pool of excess tax benefits available to absorb future tax deficiencies on share-based payment awards. In addition, the amount of any tax benefits from dividends reclassified in subsequent periods from additional
paid-in capital to a reduction of income tax expense or an increase in income tax benefit should increase or decrease, but, be limited to the pool of excess tax benefits available on the reclassification date. EITF 06-11 is effective for the company
in 2008. Currently, the Company does not anticipate that EITF 06-11 will have a material impact on the Companys financial statements.
Business Combinations
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised),
Business Combinations
(SFAS 141(R)). SFAS 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for
pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the
recognition of changes in the acquirers income tax valuation allowance. SFAS 141(R) is effective for the Company in 2009, with early adoption prohibited. We are currently evaluating the potential impact of adopting SFAS 141(R).
54
Accounting and Reporting of Noncontrolling Interests
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51
(SFAS 160).
SFAS 160 changes the accounting for noncontrolling (minority) interests in consolidated financial statements including the requirements to classify noncontrolling interests as
a component of consolidated stockholders equity, and the elimination of minority interest accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings.
Additionally, SFAS 160 revises the accounting for both increases and decreases in a parents controlling ownership interest. SFAS 160 is effective for the Company in 2009, with early adoption prohibited. Currently the Company does not
anticipate that SFAS 160 will have a material impact on the Companys financial statements.
3. Mergers and Acquisitions
Merger with Data Broadcasting Corporation
In 2000, Data
Broadcasting Corporation (now known as Interactive Data Corporation) completed the merger with Interactive Data Corporation (now known as Interactive Data Pricing and Reference Data, Inc.), a wholly owned subsidiary of Pearson Longman. Pearson
Longman, through a series of other entities, is wholly owned by Pearson. Upon completion of the merger, the Company issued 56,424,000 shares of its common stock to Pearson Longman that resulted in the ownership by Pearson Longman of approximately
60% of the Company as of the effective date of the merger. On January 6, 2006, Pearson acquired an additional 1,131,000 shares of the Company common stock from one of our former directors bringing the total held by Pearson to 57,555,000 or
approximately 61% of the Companys issued and outstanding shares of common stock as of December 31, 2007. Interactive Data Corporation prior to the merger is referred to herein as Interactive Data Pricing and Reference Data, which
continues to be the Companys major institutional services business.
The merger was accounted for as a reverse acquisition. The shares of the
Company held by Pearson Longman were subsequently transferred to Pearson DBC Holdings, Inc., another wholly owned subsidiary of Pearson Longman. Accordingly, the historical financial statements of Interactive Data Pricing and Reference Data are the
historical financial statements of the Company.
Assets acquired totaled $565,373,000 and included cash, goodwill, an investment in MarketWatch, Inc.
and intangible assets. Liabilities acquired totaled $127,079,000 and included accounts payable, accrued expenses and deferred tax liabilities. Intangible assets are being amortized over periods ranging from two to eleven years. Accrued acquisition
costs include severance, relocation and lease termination costs. As of December 31, 2007, accrued acquisition costs remaining were $51,000. An additional $3,000,000 of acquisition costs were funded by Pearson and treated as additional goodwill
and a capital contribution.
Acquisition of Xcitek
On May 1, 2007, Interactive Data acquired the net assets comprising the market data division of Xcitek LLC (Xcitek), as well as the market data net assets of its affiliate Xcitax LLC (Xcitax), for $25,123,000.
This acquisition was funded from operating cash. In addition, we accrued estimated transaction and acquisition costs of $1,840,000, consisting of legal services, accounting services, severance and lease termination costs. As of December 31,
2007, $1,260,000 of these accrued costs remain unpaid. We expect the majority of the remaining costs to be paid by June 30, 2008.
The
acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standard No. 141, Business Combinations (SFAS 141). The purchase price has been assigned to the
assets acquired and liabilities assumed based on their estimated fair values. The intangible assets are being amortized over periods ranging from two to eleven years. The weighted average amortization period in total is 10.6 years. The weighted
average amortization period by major asset class is: customer list 11.0 years; securities database 8.0 years and trademark 2.0 years. In connection with the acquisition, we recorded $12,093,000 of goodwill, which has been allocated to our
Institutional Services segment. Of that total amount, $11,006,000 is expected to be deductible for tax purposes. Given the potential for future adjustments to the accrued acquisition costs, the purchase price allocation is preliminary. Our financial
statements include the results of operations of Xcitek and Xcitax subsequent to the acquisition date.
Xciteks market data business provides a
broad range of North American corporate actions data, including reorganization information, as well as cost basis and class action data. This business has been integrated into our Interactive Data Pricing and Reference Data business.
55
The acquisition was accounted for as follows (in thousands):
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|
|
|
Assets:
|
|
|
|
Accounts receivable, net
|
|
$
|
1,861
|
Prepaid expenses and other current assets
|
|
|
10
|
Customer list
|
|
|
12,200
|
Securities database
|
|
|
1,600
|
Trademark
|
|
|
100
|
Deferred tax assets, net
|
|
|
754
|
Other assets
|
|
|
12
|
Goodwill
|
|
|
12,093
|
|
|
|
|
|
|
$
|
28,630
|
Liabilities:
|
|
|
|
Accounts payable
|
|
$
|
19
|
Accrued liabilities
|
|
|
44
|
Deferred revenue
|
|
|
1,604
|
Accrued acquisition costs
|
|
|
1,840
|
|
|
|
|
|
|
$
|
3,507
|
|
|
|
|
Total Purchase Price
|
|
$
|
25,123
|
|
|
|
|
Acquisition of Quote.com
On March 6, 2006, the Company acquired the net assets of Quote.com and other related assets from Lycos, Inc. The acquired assets comprise four distinct offerings that deliver financial content and trading tools primarily
to active traders and individual investors. These include the subscription-based QCharts and LiveCharts services that provide real-time streaming data and access to decision-support tools to help active traders formulate investment strategies, as
well as Quote.com, a financial news and analysis website, and Raging Bull, an online investment community and message board site. The Company is currently integrating the Quote.com business into its eSignal business. The aggregate cash consideration
paid for the net assets was $30,000,000 and was funded from the operating cash of the Company. In addition, the Company accrued acquisition costs of $350,000, consisting primarily of legal and accounting services. As of December 31, 2007, all
acquisition costs accrued have been paid.
The acquisition was accounted for using the purchase method of accounting in accordance with SFAS 141. The
purchase price has been assigned to the assets acquired and liabilities assumed based on their estimated fair values. The intangible assets are being amortized over a period ranging from three months to ten years. The weighted average amortization
period in total is 6.7 years. The weighted average amortization period by major asset class is: customer lists 5.9 years, completed software/technology 7.2 years, and trademarks 8.0 years. In connection with the acquisition, we recorded $22,530,000
of goodwill, which has been allocated to our Active Trader segment. Of that total amount, tax deductible goodwill resulting from the Quote.com acquisition is $22,500,000. The Companys financial statements include the results of operations of
the Quote.com business subsequent to the acquisition date.
The acquisition was accounted for as follows (in thousands):
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|
|
|
Assets:
|
|
|
|
Fixed assets
|
|
$
|
205
|
Customer lists
|
|
|
3,480
|
Completed software/technology
|
|
|
4,600
|
Trademarks
|
|
|
300
|
Deferred tax assets
|
|
|
147
|
Goodwill
|
|
|
22,530
|
|
|
|
|
|
|
$
|
31,262
|
Liabilities:
|
|
|
|
Accrued liabilities
|
|
$
|
10
|
Deferred revenue
|
|
|
902
|
Accrued acquisition costs
|
|
|
350
|
|
|
|
|
|
|
$
|
1,262
|
|
|
|
|
Total Purchase Price
|
|
$
|
30,000
|
|
|
|
|
56
Acquisition of IS.Teledata AG
On December 13, 2005, Interactive Data acquired 95.1% of Germany-based IS.Teledata AG and its subsidiaries, or IS.Teledata, for $54,628,000, offset by cash acquired of $5,212,000. This acquisition was funded from the
operating cash of the Company. During 2006, the Company acquired the remaining 4.9% of IS.Teledata for $2,914,000 which increased the price paid for IS.Teledata to $57,542,000 and increased the Companys total ownership in IS.Teledata to
100.0%. In addition, the Company accrued estimated transaction and acquisition costs of $1,500,000, consisting of legal and accounting services. As of December 31, 2007, all of these costs have been paid. In the first quarter of 2006, the
Company recorded a deferred tax liability of $13,600,000 associated with the intangible assets.
The acquisition was accounted for using the purchase
method of accounting in accordance with SFAS 141. The purchase price has been assigned to the assets acquired and liabilities assumed based on their estimated fair values. The intangible assets are being amortized over periods ranging from eight to
ten years. The weighted average amortization period in total is 9.8 years. The weighted average amortization period by major asset class is: customer lists 10.0 years and computer software/technology 9.6 years. The Companys financial
statements include the results of operations of IS.Teledata subsequent to the acquisition date. In connection with the acquisition, we recorded $17,734,000 of goodwill, which has been allocated to our Institutional Services segment, of which, none
is tax deductible.
This acquisition enabled the Company to enter an adjacent market sector with a set of offerings that complement its core
portfolio of market data services. This acquisition also enabled the Company to broaden its presence in continental Europe. Following the acquisition, the Company established the Interactive Data Managed Solutions business whose offerings are based
on the technology and capabilities developed at IS.Teledata and IS.Teledata AG was renamed Interactive Data Managed Solutions AG. The Interactive Data Managed Solutions business builds and manages customized financial information systems for a range
of organizations worldwide, from retail and investment banks to online brokers, stock exchanges and media portals.
The acquisition was accounted for
as follows (in thousands):
|
|
|
|
Assets:
|
|
|
|
Cash
|
|
$
|
5,212
|
Accounts receivable, net
|
|
|
5,201
|
Prepaid expenses and other current assets
|
|
|
1,017
|
Fixed assets
|
|
|
3,251
|
Customer lists
|
|
|
14,219
|
Completed software/technology
|
|
|
19,551
|
Deferred tax assets, net
|
|
|
3,147
|
Goodwill
|
|
|
17,734
|
|
|
|
|
|
|
$
|
69,332
|
Liabilities:
|
|
|
|
Accounts payable
|
|
$
|
4,957
|
Accrued liabilities
|
|
|
4,589
|
Deferred revenue
|
|
|
956
|
Other liabilities
|
|
|
2,702
|
Accrued acquisition costs
|
|
|
1,500
|
|
|
|
|
|
|
$
|
14,704
|
|
|
|
|
Total Purchase Price
|
|
$
|
54,628
|
|
|
|
|
57
4. Property and Equipment
Property and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Useful Life
|
|
2007
|
|
|
2006
|
|
Computer, office and communication equipment
|
|
3-5 years
|
|
$
|
138,431
|
|
|
$
|
130,268
|
|
Leasehold improvements
|
|
Life of lease
|
|
|
35,203
|
|
|
|
31,688
|
|
Furniture and fixtures
|
|
5-10 years
|
|
|
30,835
|
|
|
|
31,289
|
|
Purchased and capitalized software
|
|
3-5 years
|
|
|
55,451
|
|
|
|
45,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,920
|
|
|
|
238,674
|
|
Less accumulated depreciation
|
|
|
|
|
(166,088
|
)
|
|
|
(156,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,832
|
|
|
$
|
81,988
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, the Company capitalized $9,448,000 related to the development of internal use software and recorded
related depreciation expense of $2,436,000, $3,255,000 and $2,895,000 for the years ended December 31, 2007, 2006 and 2005, respectively. The remaining book value of the software developed for internal use was $23,577,000 and $18,462,000 as of
December 31, 2007 and 2006, respectively.
Total depreciation expense was $23,110,000, $21,925,000 and $18,767,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
5. Goodwill and Intangible Assets
Intangible assets consist of the following (in thousands, except weighted average amortization period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Amortization
Period
|
|
December 31, 2007
|
|
December 31, 2006
|
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Gross
Carrying
Value
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
Non-compete agreements
|
|
2.9 years
|
|
$
|
87,500
|
|
$
|
(87,500
|
)
|
|
$
|
|
|
$
|
87,500
|
|
$
|
(87,500
|
)
|
|
$
|
|
Securities databases
|
|
4.2 years
|
|
|
12,692
|
|
|
(10,980
|
)
|
|
|
1,712
|
|
|
11,092
|
|
|
(10,817
|
)
|
|
|
275
|
Computer software
|
|
7.8 years
|
|
|
100,005
|
|
|
(66,256
|
)
|
|
|
33,749
|
|
|
97,418
|
|
|
(59,469
|
)
|
|
|
37,949
|
Customer lists
|
|
11.2 years
|
|
|
245,125
|
|
|
(135,829
|
)
|
|
|
109,296
|
|
|
231,223
|
|
|
(116,421
|
)
|
|
|
114,802
|
Service contracts
|
|
23.8 years
|
|
|
17,490
|
|
|
(4,099
|
)
|
|
|
13,391
|
|
|
17,490
|
|
|
(3,435
|
)
|
|
|
14,055
|
Trademarks
|
|
12.4 years
|
|
|
2,600
|
|
|
(879
|
)
|
|
|
1,721
|
|
|
2,500
|
|
|
(612
|
)
|
|
|
1,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
465,412
|
|
$
|
(305,543
|
)
|
|
$
|
159,869
|
|
$
|
447,223
|
|
$
|
(278,254
|
)
|
|
$
|
168,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense of intangible assets is as follows (in thousands):
|
|
|
|
For year ending 12/31/08
|
|
$
|
27,251
|
For year ending 12/31/09
|
|
$
|
27,232
|
For year ending 12/31/10
|
|
$
|
27,256
|
For year ending 12/31/11
|
|
$
|
20,704
|
For year ending 12/31/12
|
|
$
|
18,114
|
For years thereafter
|
|
$
|
39,312
|
58
The changes in the carrying amount of goodwill for the years ended December 31, 2007 and 2006 by reportable
segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
Services
|
|
|
Active Trader
Services
|
|
|
Total
|
|
Balance as of December 31, 2005
|
|
$
|
348,434
|
|
|
$
|
131,745
|
|
|
$
|
480,179
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
22,530
|
(a)
|
|
|
22,530
|
|
Purchase accounting adjustments
|
|
|
14,379
|
(b)
|
|
|
(57
|
)
|
|
|
14,322
|
|
Impact of change in foreign exchange rates
|
|
|
18,987
|
|
|
|
31
|
|
|
|
19,018
|
(c)
|
Balance as of December 31, 2006
|
|
$
|
381,800
|
|
|
$
|
154,249
|
|
|
$
|
536,049
|
|
Goodwill acquired during the year
|
|
|
12,093
|
(d)
|
|
|
|
|
|
|
12,093
|
|
Purchase accounting adjustments
|
|
|
844
|
(e)
|
|
|
(650
|
)(f)
|
|
|
194
|
|
Impact of change in foreign exchange rates
|
|
|
6,497
|
|
|
|
9
|
|
|
|
6,506
|
(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
401,234
|
|
|
$
|
153,608
|
|
|
$
|
554,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has reclassified the above information for 2006 and 2005 to disclose the components of goodwill by reportable
segment.
(a)
|
Related to our acquisition of net assets of Quote.com and other related assets from Lycos, Inc in the first quarter of 2006. Refer to Note 3, Mergers and Acquisitions, in the
Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for further discussion.
|
(b)
|
Consists primarily of additions to goodwill totaling $13,890,000 for a deferred tax adjustment primarily associated with Intangible assets related to our acquisition of Interactive Data
Managed Solutions (formerly known as IS.Teledata AG).
|
(c)
|
Foreign currency translation adjustments totaling $19,018,000 primarily reflecting the weakening of the U.S. Dollar against the UK Pound Sterling and the Euro during the twelve
months ended December 31, 2006.
|
(d)
|
Related to our acquisition of Xcitek and Xcitax in the second quarter of 2007. Refer to Note 3, Mergers and Acquisitions, in the Notes to the Consolidated Financial Statements in
Item 8 of this Annual Report on Form 10-K for further discussion.
|
(e)
|
Consists primarily of additions to goodwill of deferred tax adjustments related to our acquisition of Interactive Data Managed Solutions (formerly known as IS.Teledata AG) of $1,155,000.
|
(f)
|
Related to a purchase price adjustment pertaining to our acquisition of Quote.com.
|
(g)
|
Foreign currency translation adjustments totaling $6,506,000 primarily reflecting the weakening of the U.S. Dollar against the UK Pound Sterling and the Euro during the twelve
months ended December 31, 2007.
|
6. Accrued Liabilities
Accrued expenses consist of the following at December 31:
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
2006
|
Bonus
|
|
$
|
19,950
|
|
$
|
17,676
|
Employee related costs
|
|
|
20,760
|
|
|
21,082
|
Sales commissions
|
|
|
4,403
|
|
|
4,368
|
Professional services
|
|
|
7,249
|
|
|
6,059
|
Property costs
|
|
|
4,245
|
|
|
5,355
|
Third party commissions
|
|
|
4,185
|
|
|
3,680
|
Sales taxes
|
|
|
1,766
|
|
|
2,037
|
Data and communication charges
|
|
|
17,436
|
|
|
9,506
|
Other
|
|
|
4,712
|
|
|
5,290
|
|
|
|
|
|
|
|
|
|
$
|
84,706
|
|
$
|
75,053
|
|
|
|
|
|
|
|
7. Stock Based Compensation
Stock-based Compensation Plans:
Employee Stock Option Plan
In 2000, we adopted our 2000 Long-Term Incentive Plan (as amended, the 2000 LTIP). Under the 2000 LTIP, the Compensation Committee of our Board of
Directors can grant stock-based awards representing in the aggregate up to 20% of the total number of shares of common stock outstanding at the date of grant. As originally approved by stockholders, the 2000 LTIP had no termination date. On
February 24, 2004, the 2000 LTIP was amended to include a termination date of
59
February 22, 2010. The 2000 LTIP provides for the discretionary issuance of stock-based awards to directors, officers, and employees, as well as persons who
provide consulting or other services to us. Except with regard to eligible directors and officers required to file reports under Section 16 of the Securities Exchange Act of 1934 (Section 16 Officers), the exercise price of options
granted to eligible participants is determined at the discretion of the Compensation Committee. Our Board of Directors determines the exercise price of options granted to eligible directors. The Compensation Subcommittee, a subcommittee of the
Compensation Committee comprised solely of independent directors, determines the exercise price of options granted to Section 16 Officers and certain other members of senior management. The exercise price for all options granted to date has
been equal to the market price of the underlying common shares at the date of grant. Options expire ten years from the date of grant and generally vest over a four-year period.
Restricted Stock and Deferred Stock Units
We have
awarded restricted and deferred stock units to certain key employees, executive officers and members of the board of directors under the 2000 LTIP. Each of these units represents the contingent right to receive one share of our common stock. An
aggregate of 674,038 deferred and restricted stock units have been granted as of December 31, 2007. Pursuant to the terms of the applicable grant certificates, the underlying shares of common stock are available for distribution, at no cost, to
grantees at the end of a three-year vesting period. We charge the cost of the awards, which we determined to be the fair market value of the shares at the date of the grant, to compensation expense on a straight-line basis, ratably, over the vesting
periods. During the year ended December 31, 2007, we issued a total of 58,759 shares of common stock in connection with the settlement of deferred stock units.
Employee Stock Purchase Plan
In 2001, we adopted our 2001 Employee Stock Purchase Plan for all eligible employees
worldwide (the 2001 ESPP). The 2001 ESPP allows our employees to purchase stock at a 15% discount price at specific times. During the year ended December 31, 2007, our employees purchased an aggregate of 186,343 shares at an average
share price of $17.77. At December 31, 2007, 1,137,769 shares were reserved for future issuance under the 2001 ESPP.
Shares of common stock
that are issued in respect of the exercise of options or other equity awards granted under the 2000 LTIP and 2001 ESPP are issued from authorized, but unissued common stock.
Stock-based Compensation
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)) and related interpretations, which requires us to measure the cost of employee services received
in exchange for equity awards based on the fair value of the award as of the grant date. SFAS 123(R) supersedes Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and Accounting
Principles Board Opinion No. 25, Accounting for Stock Issues to Employees (APB 25). We adopted SFAS 123(R) using the modified prospective application transition method of adoption which required us to record compensation cost
related to unvested stock awards as of December 31, 2005 by recognizing the unamortized grant date fair value of these awards over their remaining requisite service periods. We will continue to recognize the unamortized grant date fair value of
these awards on a straight-line basis. With respect to awards granted after December 31, 2005, we have recorded compensation cost based on the grant date fair value and recognized the fair value on a straight-line basis over the requisite
service period of each award. Given we have elected the modified prospective application transition method of adoption we have not restated any of our historical reported interim or annual earnings reports.
Prior to January 1, 2006, we measured stock-based compensation expense using the intrinsic value method of accounting as prescribed in APB No. 25 and
related interpretations, in accounting for our employee stock option and employee stock purchase plan. Under this method, we did not recognize compensation expense on stock options granted to employees when the exercise price of each option was
equal to or greater than the market price of the underlying stock on the date of the grant. We disclosed in periods prior to January 1, 2006, the pro forma effects on net earnings and earnings per share as if compensation cost had been
recognized based upon the fair value-based method at the date of grant for employee stock awards and our employee stock purchase plan consistent with the provisions of SFAS 123.
Stock-based compensation expense recognized under SFAS 123(R) is based on the value of the portion of stock-based payment awards that are ultimately expected to
vest. Accordingly, stock-based compensation expense recognized in the statement of income for the years ended December 31, 2007 and 2006 reflects estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ
60
from those estimates. We estimate forfeiture rates based on our historical forfeitures of stock options. Prior to the adoption of SFAS 123(R), we recorded forfeitures
as they occurred for purposes of pro forma compensation expense under the provisions of SFAS 123.
For the years ended December 31, 2007 and
2006, we recognized stock-based compensation expense under SFAS 123(R) as follows (in thousands):
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
Cost of services
|
|
$
|
4,126
|
|
$
|
5,128
|
Selling, general and administrative
|
|
|
9,238
|
|
|
10,240
|
|
|
|
|
|
|
|
Stock-based compensation expense before income taxes
|
|
$
|
13,364
|
|
$
|
15,368
|
Income tax benefit
|
|
|
4,669
|
|
|
5,861
|
|
|
|
|
|
|
|
Stock-based compensation expense after income taxes
|
|
$
|
8,695
|
|
$
|
9,507
|
|
|
|
|
|
|
|
For the years ended December 31, 2007 and 2006, our pre-tax stock-based compensation expense included
$2,680,000 and $2,359,000, respectively, related to deferred and restricted stock units that were granted prior to and subsequent to our adoption of SFAS 123(R) and would have also been recognized as expense under APB 25.
SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are
realized tax benefits from tax deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. As a result, $4,171,000 and $1,640,000 of excess tax benefits for the years ended
December 31, 2007 and 2006 respectively have been classified as a financing cash inflow (and corresponding operating cash outflow).
Pro Forma Information
for Periods Prior to Adoption of SFAS 123(R)
The following pro forma information presents the Companys net income as if the fair value
based method had been applied to all awards:
|
|
|
|
|
(In thousands, except per share data)
|
|
Year Ended
December 31,
2005
|
|
Net income, as reported
|
|
$
|
93,864
|
|
Add: Stock-based compensation included in net income, net of related tax effects
|
|
|
934
|
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax
effects
|
|
|
(11,663
|
)
|
|
|
|
|
|
Pro forma, net income
|
|
$
|
83,135
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
Basicas reported
|
|
$
|
1.01
|
|
Basicpro forma
|
|
$
|
0.89
|
|
Dilutedas reported
|
|
$
|
0.98
|
|
Dilutedpro forma
|
|
$
|
0.87
|
|
Valuation Assumptions
The estimated fair value of the options granted during 2007 and in prior years was calculated using a Black-Scholes Merton option-pricing model (Black-Scholes model). The Black-Scholes model incorporates assumptions to value
stock-based awards. The risk-free interest rate is based on the implied yield currently available on zero-coupon U.S. Treasury issues, in effect at the time of the grant, whose remaining maturity period equals the stock awards expected term
assumption. Expected volatility of our common stock is based on the historical volatility of our stock price over the expected term of the option. Our expected term is based on an analysis of historical exercise behavior and post-vest termination
data. In February 2007, we announced that our Board of Directors authorized the initiation of a quarterly cash dividend. Therefore, commencing with grants awarded in the first quarter of 2007, we began using an expected dividend yield assumption in
our Black-Scholes model for the purpose of calculating the fair value of grants. The expected dividend yield reflects our historical dividend yield, excluding special dividends, and is calculated by annualizing the quarterly cash dividends declared
by our
61
Board of Directors divided by the closing price of our common stock on the declaration date of each dividend. The actual declaration of future dividends, and the
establishment of record and payment dates are subject to final determination by our Board of Directors.
The fair value of stock options granted
under the 2000 LTIP was estimated as of the date of grant using a Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Risk free interest rate
|
|
4.2%4.9%
|
|
4.6%5.1%
|
|
3.9%
|
Weighted average expected term (in years)
|
|
5.0
|
|
4.7
|
|
4.0
|
Weighted average expected volatility
|
|
23.4%
|
|
25.9%
|
|
24.5%
|
Expected dividend yield
|
|
1.9%
|
|
0.0%
|
|
0.0%
|
The weighted average grant-date fair value of options granted during the years ended December 31, 2007,
2006 and 2005 was $6.60, $6.57 and $5.56, respectively.
The fair value of stock issued under the 2001 ESPP was estimated as of the beginning date of
the offering period using a Black-Scholes model with the following assumptions:
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Risk free interest rate
|
|
4.3%5.1%
|
|
3.7%5.2%
|
|
2.3%
|
Expected term (in years)
|
|
0.5
|
|
0.5
|
|
0.5
|
Weighted average expected volatility
|
|
20.5%
|
|
18.3%
|
|
20.0%
|
Expected dividend yield
|
|
2.0%
|
|
0.0%
|
|
0.0%
|
The weighted average grant-date fair value of stock issued under the 2001 ESPP for the years ended
December 31, 2007, 2006 and 2005 was $4.76, $3.98, and $3.68, respectively.
Stock-based Award Activity
A summary of the status and activity for stock option awards under our 2000 LTIP for the year ended December 31, 2007, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic Value
|
|
|
(in thousands, except per share data or as noted)
|
Outstanding at January 1, 2007
|
|
10,506
|
|
|
$
|
16.33
|
|
|
|
|
|
|
Granted
|
|
1,560
|
|
|
|
27.17
|
|
|
|
|
|
|
Exercised
|
|
(1,935
|
)
|
|
|
(14.88
|
)
|
|
|
|
|
|
Forfeited
|
|
(293
|
)
|
|
|
(20.38
|
)
|
|
|
|
|
|
Expired
|
|
(11
|
)
|
|
|
(18.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
9,827
|
|
|
$
|
18.21
|
|
|
6.6
|
|
$
|
145,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and unvested expected to vest at December 31, 2007
|
|
9,463
|
|
|
$
|
18.02
|
|
|
6.6
|
|
$
|
141,829
|
Exercisable at December 31, 2007
|
|
6,199
|
|
|
$
|
15.27
|
|
|
5.4
|
|
$
|
109,982
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the
difference between our closing common stock price on the last trading day of the fourth quarter of 2007 and the exercise price, multiplied by the number of in-the-money stock options) that would have been received by the stock option holders had all
stock option holders exercised their stock options on December 31, 2007. The amount of aggregate intrinsic value will change based on the fair market value of our common stock.
62
The aggregate intrinsic value of stock options exercised during the years ended December 31, 2007, 2006 and
2005 was $25,326,000, $11,715,000 and $14,255,000, respectively, determined as of the date of exercise. Exercise of options and issuances of shares under the 2000 LTIP and 2001 ESPP during the years ended December 31, 2007, 2006 and 2005
resulted in cash receipts of $31,413,000, $19,027,000, and $19,574,000, respectively. We recognized a tax benefit of $9,224,000 and $4,196,000 for the years ended December 31, 2007 and 2006, respectively, related to the exercise of stock
options and issuance of ESPP shares, which has been recorded as an increase to additional paid-in-capital.
A summary of the status and activity for
restricted and deferred stock units under our 2000 LTIP for the year ended December 31, 2007, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Units
|
|
|
Weighted
Average
Grant Date
Fair Value
(per share)
|
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
Unvested Restricted and Deferred Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at January 1, 2007
|
|
396,284
|
|
|
$
|
20.18
|
|
|
|
|
|
|
Granted
|
|
185,197
|
|
|
|
27.07
|
|
|
|
|
|
|
Vested
|
|
(82,592
|
)
|
|
|
(17.93
|
)
|
|
|
|
|
|
Forfeited
|
|
(33,911
|
)
|
|
|
(13.72
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2007
|
|
464,978
|
|
|
$
|
23.79
|
|
|
2.1
|
|
$
|
15,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the unrecognized compensation expense, net of estimated forfeitures and the weighted average
period remaining at December 31, 2007 related to our non-vested employee stock purchase plan, stock option and deferred and restricted stock unit awards is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase
Plan
|
|
Stock
Options
|
|
Deferred and
Restricted Stock Unit
Awards
|
Unrecognized compensation expense (net of forfeitures)
|
|
$
|
290,000
|
|
$
|
17,638,000
|
|
$
|
6,357,000
|
Weighted average period remaining (in years)
|
|
|
1.3
|
|
|
2.7
|
|
|
2.1
|
The total fair value of all share awards vested during the years ended December 31, 2007, 2006 and 2005
was $13,021,000, $15,199,000 and $17,607,000, respectively.
8. Stockholders Equity
In addition to our common stock, we are authorized to issue up to 5,000,000 preferred shares, $0.01 par value per share, with terms determined by our Board of
Directors, without any further action by our stockholders. At December 31, 2007, no preferred shares have been issued.
In October 2006, our
Board of Directors authorized the repurchase of up to 2,000,000 shares of our outstanding shares of common stock. On December 11, 2007, our Board of Directors authorized an additional 2,000,000 shares under the stock buyback program. In the
fourth quarter of 2007, we repurchased 140,200 shares of outstanding common stock under the stock buyback program. As of December 31, 2007, 2,770,900 shares remained available for purchase under the stock buyback program.
In fiscal year 2007, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
Type
|
|
Date of Record
|
|
Total Amount
(in thousands)
|
|
Payment Date
|
February 15, 2007
|
|
$
|
0.125
|
|
Regular (cash)
|
|
March 1, 2007
|
|
$
|
11,706
|
|
March 30, 2007
|
May 23, 2007
|
|
$
|
0.125
|
|
Regular (cash)
|
|
June 7, 2007
|
|
$
|
11,793
|
|
June 27, 2007
|
August 30, 2007
|
|
$
|
0.125
|
|
Regular (cash)
|
|
September 6, 2007
|
|
$
|
11,787
|
|
September 26, 2007
|
November 19, 2007
|
|
$
|
0.125
|
|
Regular (cash)
|
|
December 6, 2007
|
|
$
|
11,786
|
|
December 20, 2007
|
December 11, 2007 (1)
|
|
$
|
0.500
|
|
Special (cash)
|
|
January 4, 2008
|
|
$
|
47,184
|
|
January 24, 2008
|
December 11, 2007 (2)
|
|
$
|
0.150
|
|
Regular (cash)
|
|
March 3, 2008
|
|
$
|
14,147
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
(1)
|
Unpaid dividends declared in the amount of $47,184,000 are included in dividends payable as of December 31, 2007. The unpaid dividend amount was determined based on the number of shares
of common stock outstanding on the January 4, 2008 record date.
|
(2)
|
On December 11, 2007, our Board of Directors also approved a 20% increase in the regular quarterly dividend from $0.125 to $0.15 per share of common stock, commencing with the first
quarter 2008 dividend to be paid on March 31, 2008 to all stockholders of record at the close of business on March 3, 2008. The dividend declared amount of $14,147,000 is included in dividends payable as of December 31, 2007. The
estimated liability for this declared dividend was determined based on the number of shares of common stock outstanding as of the December 11, 2007 declaration date.
|
All of the above cash dividends have been paid or will be paid from our existing cash resources.
The actual declaration of future dividends, and the establishment of record and payment dates, is subject to final determination of the Board of Directors of the
Company.
9. Commitments and Contingencies
The Company has
obligations under non-cancelable operating leases for real estate and equipment. In addition, the Company has purchase obligations for data content. Certain of the leases include renewal options and escalation clauses. Real estate leases are for the
Companys corporate headquarters, sales offices, major operating units and data centers.
Future contractual commitments and obligations, as of
December 31, 2007, are summarized in the chart below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
(In thousands)
|
|
Total
|
|
Less Than
1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More Than
5 Years
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Obligations
|
|
$
|
109,986
|
|
$
|
19,767
|
|
$
|
33,838
|
|
$
|
23,107
|
|
$
|
33,274
|
Purchase Obligations
|
|
|
25,419
|
|
|
25,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
135,405
|
|
$
|
45,186
|
|
$
|
33,838
|
|
$
|
23,107
|
|
$
|
33,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys key operating locations operate in facilities under long-term leases, the earliest of
which will expire in 2008.
Rental expense was $19,205,000, $17,433,000 and $12,652,000 for the years ended December 31, 2007, 2006 and 2005,
respectively.
In addition to the amounts shown in the table above, $18,708,000 of unrecognized tax benefits have been recorded in income taxes
payable in accordance with FIN 48, as we are uncertain if or when such amounts may be settled. Related to these unrecognized tax benefits, we have also recorded in income taxes payable $1,825,000 for potential interest and penalties at
December 31, 2007.
The Company is involved in litigation and is the subject of claims made from time to time in the ordinary course of business
with a portion of the defense and/or settlement costs in some such cases being covered by various commercial liability insurance policies. In addition, the Companys third party data suppliers audit the Company from time to time in the ordinary
course of business to determine if data the Company licenses for redistribution has been properly accounted for. In view of the Companys financial condition and the accruals established for related matters, management does not believe that the
ultimate liability, if any, related to these matters will have a material adverse effect on the Companys financial condition, results of operations or cash flows.
In connection with the provision of services in the ordinary course of business, the Company often makes representations affirming, among other things, that its services do not infringe on the intellectual property rights of
others and agrees to indemnify customers against third-party claims for such infringement. The Company has not been required to make material payments under such provisions.
64
10. Income Taxes
The
components of income before income taxes are as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
2006
|
|
2005
|
Domestic
|
|
$
|
134,598
|
|
$
|
116,821
|
|
$
|
124,443
|
Foreign
|
|
|
50,047
|
|
|
34,110
|
|
|
24,408
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
184,645
|
|
$
|
150,931
|
|
$
|
148,851
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
42,271
|
|
|
$
|
38,914
|
|
|
$
|
37,262
|
|
State
|
|
|
11,650
|
|
|
|
10,918
|
|
|
|
11,456
|
|
Foreign
|
|
|
14,534
|
|
|
|
12,119
|
|
|
|
10,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,455
|
|
|
$
|
61,951
|
|
|
$
|
59,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,704
|
)
|
|
|
(2,643
|
)
|
|
|
(1,615
|
)
|
State
|
|
|
(1,326
|
)
|
|
|
(972
|
)
|
|
|
(687
|
)
|
Foreign
|
|
|
(1,763
|
)
|
|
|
(767
|
)
|
|
|
(1,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9,793
|
)
|
|
$
|
(4,382
|
)
|
|
$
|
(4,063
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,662
|
|
|
$
|
57,569
|
|
|
$
|
54,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are determined based on differences between the financial reporting and
the tax basis of assets and liabilities and are measured by applying enacted tax rates and laws to taxable years in which such differences are expected to reverse. Income taxes are generally not provided on undistributed earnings of foreign
subsidiaries because these earnings are considered by the Company to be permanently reinvested.
65
The components of the Companys deferred income tax assets / (liabilities) recognized in the financial
statements are as follows at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Asset/ (Liability)
|
|
|
|
|
|
|
|
|
Current deferred tax:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
4,686
|
|
|
$
|
4,056
|
|
Accounts receivable allowance
|
|
|
1,412
|
|
|
|
1,858
|
|
Other
|
|
|
2,526
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,624
|
|
|
|
6,477
|
|
Less: valuation allowance
|
|
|
(3,348
|
)
|
|
|
(3,313
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
5,276
|
|
|
$
|
3,164
|
|
|
|
|
|
|
|
|
|
|
Long term deferred tax:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
4,001
|
|
|
|
3,368
|
|
Other intangible assets
|
|
|
(16,359
|
)
|
|
|
(15,762
|
)
|
Depreciation
|
|
|
(2,587
|
)
|
|
|
(1,822
|
)
|
Non compete agreements
|
|
|
10,424
|
|
|
|
12,840
|
|
Net operating loss carryforwards
|
|
|
6,209
|
|
|
|
6,179
|
|
Customer lists
|
|
|
(26,442
|
)
|
|
|
(32,995
|
)
|
Sale of MarketWatch
|
|
|
5,597
|
|
|
|
5,917
|
|
Stock based compensation
|
|
|
5,319
|
|
|
|
2,549
|
|
Software development costs
|
|
|
(7,012
|
)
|
|
|
(7,865
|
)
|
Asset impairment
|
|
|
797
|
|
|
|
795
|
|
Foreign tax credit carryforwards
|
|
|
|
|
|
|
521
|
|
Other
|
|
|
(717
|
)
|
|
|
(634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(20,770
|
)
|
|
$
|
(26,909
|
)
|
Less: valuation allowance
|
|
|
(9,015
|
)
|
|
|
(8,864
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
$
|
(29,785
|
)
|
|
$
|
(35,773
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities, net
|
|
$
|
(24,509
|
)
|
|
$
|
(32,609
|
)
|
|
|
|
|
|
|
|
|
|
The Company recorded a long-term deferred tax asset concurrently with the sale of MarketWatch, Inc. to
Pearson in 2000, which resulted from deferral of the capital loss for tax purposes. In 2005, MarketWatch, Inc. was sold by Pearson to an unrelated third-party and the capital loss became available to offset capital gains. In 2007 a decrease of
$23,000 was recorded to the deferred tax asset and the related valuation allowance due to a state tax rate change. Also in 2007 the Company recorded a decrease of $297,000 to the deferred tax asset and the related valuation allowance due to the
carryback of capital losses to prior years federal tax returns. There is uncertainty surrounding the Companys ability to realize sufficient capital gains within the 5 year carryforward period in order to utilize the remaining $5,597,000
of deferred tax asset, and as such a full valuation allowance has been established. Should the Company determine that it is able to realize future capital gains for which this capital loss carryforward would be available to offset, an adjustment to
this valuation allowance would increase income in the period such determination is made.
The Company has a long-term deferred tax asset of
$6,209,000 for various net operating loss carryforwards against which a full valuation allowance has been provided since the utilization of the carryforward is dependent upon various federal, foreign and state tax limitations. In 2007 the Company
recorded a deferred tax asset and full valuation allowance for $529,000 related to net operating losses at Interactive Data Managed Solutions AG due to the uncertainty surrounding the ability to utilize the net operating losses in future periods.
Additionally, in 2007 a decrease of $22,000 was recorded to the deferred tax asset and the related valuation allowance due to a state tax rate change related to the deferred tax asset for net operating loss carryforwards that were obtained in the
acquisition of Data Broadcasting Corporation that were set to expire in 2007.
66
Income taxes computed using the federal statutory income tax rates differ from the Companys effective tax
rate primarily due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statutory U.S. federal tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal tax benefit
|
|
4.0
|
|
|
4.6
|
|
|
4.7
|
|
Foreign income taxed at different statutory rates
|
|
(4.7
|
)
|
|
(2.1
|
)
|
|
(1.6
|
)
|
Other, net
|
|
(3.0
|
)
|
|
(0.5
|
)
|
|
(1.2
|
)
|
Stock based compensation pursuant to SFAS 123(R)
|
|
0.5
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
31.8
|
%
|
|
38.1
|
%
|
|
36.9
|
%
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2007 a discrete benefit was recorded related to (i) the release of state tax
reserves of $161,000 which was the result of concluding a state audit, (ii) a $297,000 tax benefit from a Capital Loss Carryback to prior years, and (iii) realized tax benefits related to stock-based compensation expense of $96,000.
In the second quarter the net discrete benefit amount is related to (i) interest expense charge on tax reserves for uncertain tax positions of $245,000, formerly
reported as part of the effective tax rate, offset by (ii) $173,000 of realized tax benefits related to stock-based compensation expense, and (iii) a discrete benefit of $88,000 resulting from a reduction to the net deferred tax liabilities at June
30, 2007, as a result of state tax rate reduction enacted in the second quarter.
In the third quarter we released tax reserves of $1,064,000 and
interest associated with these tax reserves of $193,000 that were no longer required as a result of the expiration of a statute of limitation. We filed our 2006 federal tax return in the third quarter and recorded a benefit of $1,479,000 principally
related to (i) an $866,200 net tax benefit related to the Research and Development Credit and (ii) $196,900 tax benefit for the Domestic Production Activities Deduction. We also realized tax benefits related to (i) stock-based compensation expense
of $73,000 and (ii) a discrete benefit of $2,535,000 related to a German tax rate reduction enacted in the third quarter that is effective in 2008. The interest expense charge on tax reserves for uncertain tax positions was $47,000 during the
quarter.
In the fourth quarter of 2007 we recorded a net discrete benefit of $375,000 related to (i) interest expense charge on tax reserves for
uncertain tax positions of $17,000, (ii) a discrete tax charge of $438,000 related to a UK tax rate reduction enacted in 2007 that is effective in 2008, offset by (iii) $66,000 of realized tax benefits related to stock-based compensation expense,
and (iv) we filed our 2006 state tax returns in the fourth quarter and recorded a benefit of $764,000 principally related to a net tax benefit for the Research and Development Credit at the state level.
The Company currently provides U.S. income taxes on the earnings of foreign subsidiaries to the extent these earnings are currently taxable or expected to be
remitted. U.S. taxes have not been provided on approximately $120,000,000 of accumulated unremitted earnings, which are expected to remain permanently invested in the foreign operations. Quantification of the deferred tax liability, if any,
associated with indefinitely reinvested earnings is not practicable.
Unrecognized Tax Benefits
On January 1, 2007, the Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (FIN 48) an interpretation of FASB Statement No. 109 (SFAS 109). As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized income tax benefits. At
the adoption date of January 1, 2007, the Company had approximately $9,177,000 of unrecognized tax benefits, of which $8,518,000 would impact the effective tax rate if recognized and $659,000 would result in an increase to goodwill. As of
December 31, 2007, the Company had approximately $15,983,000 of unrecognized tax benefits, of which $15,324,000 would impact the effective tax rate if recognized and $659,000 would result in an increase to goodwill. While it is expected that
the amount of unrecognized tax benefits will change in the next 12 months, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company. The Company has classified the
non-current unrecognized tax benefits of $7,667,000 to non-current income taxes payable on the balance sheet at December 31, 2007.
The Company
recognizes interest and penalties related to uncertain tax positions in income tax expense. As of the date of adoption, the Company had accrued interest of approximately $1,533,000 related to unrecognized tax benefits. At December 31, 2007 we
had a balance of $1,825,000 related to unrecognized tax benefits.
67
In the 2007, the Company released $1,064,000 in unrecognized tax benefits for uncertain tax positions for various
tax jurisdictions due to lapsing of statute of limitations and settled various state audits. Additionally, the Company reclassified taxes payable to unrecognized tax benefits related to prior years and 2007, of $3,604,000 and $2,353,000
respectively, for unrecognized tax benefits in the United Kingdom.
The Company files federal, state and foreign income tax returns in jurisdictions
with varying statutes of limitations. Generally, the 2004 through 2007 tax years remain subject to examination for federal, 2002 through 2007 for significant states and 2005 through 2007 for foreign tax authorities.
The following table summarizes our 2007 activity for Unrecognized Tax Benefits, pursuant to the provisions FIN 48 (in thousands):
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
11,737
|
|
Additions based on tax positions related to the current year
|
|
|
4,056
|
|
Additions based on tax positions related to prior years
|
|
|
4,470
|
|
Expiration of statute of limitations
|
|
|
(1,064
|
)
|
Reductions for tax positions of prior years
|
|
|
(247
|
)
|
Settlements
|
|
|
(244
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
18,708
|
|
|
|
|
|
|
11. Retirement Plans
Pearson,
Inc. Savings and Investment Plan
The Companys US employees are eligible to participate in a Pearson subsidiarys US 401(k) Plan (the
401(k) Plan). The 401(k) Plan allows all employees to make contributions of a specified percentage of their compensation. The Company matches up to 4.5% of the employees contributions if the employee contributes at least 6% of his
or her eligible pay, subject to statutory limits. The 401(k) Plan additionally allows certain employees to contribute amounts above the specified percentage, which are not subject to any employer match. In addition, certain employees of the Company
participate in the Pearson 401(k) Excess Plan. This plan allows those employees to set aside a portion of their compensation above the statutory limits. The employer contribution portion for this plan is the same as the Pearson 401(k) plan.
Contributions made by the Company for the 401(k) Plans are determined as a percentage of covered salary and amounted to $5,767,000, $5,045,000 and $4,600,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
In 2002, the Company introduced an additional discretionary 401(k) contribution. This contribution is expected to be equivalent to 1.25% of eligible employee
compensation. For this benefit for the years ended December 31, 2007, 2006 and 2005, the Company contributed $1,765,000, $1,640,000 and, $1,515,000, respectively. The related contributions for 2006 and 2005 have been made. The contribution for
2007 is expected to be made by April 2008.
Pearson, Inc. Pension Plan
Pearson Inc., a Pearson US subsidiary, sponsors a defined benefit plan (the Pension Plan) for Pearsons US employees and the Pension Plan also includes certain of the Companys US employees. Pension costs
are actuarially determined. The Company funds pension costs attributable to its employees to the extent allowable under IRS regulations. In 2001, the Company froze the benefits associated with this Pension Plan and no gain or loss was recorded as a
result of the curtailment. In 2002, the valuation date for the Pension Plan was changed from September to December. There was no material impact to the financial results of the Company as a result of this change.
On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158). SFAS 158 required the Company to recognize the funded status (i.e., the difference between the fair
value of plan assets and the projected benefit obligations) of its benefit plans in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income. The initial impact of the standard
due to unrecognized net actuarial gain and losses is recognized as a component of accumulated comprehensive loss. Additional minimum pension liabilities were also derecognized upon adoption of the standard. The adoption of SFAS 158 resulted in a net
adjustment to accumulated other comprehensive income of $759,000.
68
Presented below is certain financial information relating to the Companys participation in the Pension Plan:
Obligations and Funded Status:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
9,523
|
|
|
$
|
9,488
|
|
Service cost
|
|
|
|
|
|
|
|
|
Interest cost
|
|
|
512
|
|
|
|
489
|
|
Amendments
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
145
|
|
|
|
(87
|
)
|
Benefits paid
|
|
|
(441
|
)
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
9,739
|
|
|
$
|
9,523
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
9,005
|
|
|
$
|
8,240
|
|
Actual return on plan assets
|
|
|
483
|
|
|
|
1,127
|
|
Employer contribution
|
|
|
646
|
|
|
|
5
|
|
Benefits paid
|
|
|
(441
|
)
|
|
|
(367
|
)
|
Fair value of plan assets at end of year
|
|
$
|
9,693
|
|
|
$
|
9,005
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of funded status:
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
9,739
|
|
|
$
|
9,523
|
|
Fair value of plan assets at end of year
|
|
|
9,693
|
|
|
|
9,005
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
46
|
|
|
$
|
518
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
(In thousands)
|
|
2007
|
|
2006
|
Net prior service cost
|
|
$
|
23
|
|
$
|
26
|
Net losses
|
|
|
1,798
|
|
|
1,615
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
1,821
|
|
$
|
1,641
|
|
|
|
|
|
|
|
The net periodic benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Components of net periodic benefit cost (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
512
|
|
|
|
489
|
|
|
|
499
|
|
Expected return on plan assets
|
|
|
(605
|
)
|
|
|
(634
|
)
|
|
|
(574
|
)
|
Amortization of prior service costs
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Amortization of net losses
|
|
|
79
|
|
|
|
133
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
(12
|
)
|
|
$
|
(10
|
)
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
(In thousands)
|
|
2007
|
|
2006
|
Projected benefit obligation
|
|
$
|
9,739
|
|
$
|
9,523
|
Accumulated benefit obligation
|
|
$
|
9,739
|
|
$
|
9,523
|
Fair value of plan assets
|
|
$
|
9,693
|
|
$
|
9,005
|
Additional Information:
|
|
|
|
|
|
|
69
Weighted average assumptions used to determine benefit obligations at December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
6.05
|
%
|
|
5.60
|
%
|
Rate of compensation increase
|
|
4.50
|
%
|
|
4.50
|
%
|
Weighted average assumptions used to determine net periodic benefit cost for years ended December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Discount rate
|
|
5.85
|
%
|
|
5.60
|
%
|
Expected return on plan assets
|
|
7.50
|
%
|
|
8.50
|
%
|
Rate of compensation increase
|
|
4.50
|
%
|
|
4.50
|
%
|
The Companys expected long-term rate of return on plan assets is reviewed annually, taking into
consideration our asset allocation, historical returns on the types of assets held and the current economic environment.
Plan Assets:
The desired investment objective is a long-term nominal rate of return on assets. The target rate of return for the Plan has been based on an analysis of historical
returns supplemented with an economic and structural review for each asset class. Investments will be diversified within asset classes with the intent to minimize the risk of large losses to the Plan. The portfolio may be composed of mutual funds,
hedge funds, private equity funds and other asset classes.
The Companys pension plan weighted-average asset allocation by asset category is as
follows:
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Equity securities
|
|
59
|
%
|
|
60
|
%
|
Debt securities
|
|
34
|
%
|
|
33
|
%
|
Other
|
|
7
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
It is the Companys intention to meet the pension obligations as they come due. The Company employs
advisors to assist it in the determination of optimum asset allocation.
The expected cash flows from the Pension Plan for the years 2008 through
2017 is as follows:
|
|
|
|
(In thousands)
|
|
Total
|
Year
|
|
|
|
2008
|
|
$
|
1,156
|
2009
|
|
$
|
982
|
2010
|
|
$
|
1,017
|
2011
|
|
$
|
1,013
|
2012
|
|
$
|
574
|
2013 through 2017
|
|
$
|
3,133
|
The expected contribution to the Pension Plan in 2008 is $56,500.
Non- US Pension Plans
Pearson and its subsidiaries maintain certain
multi-employer pension plans for which certain non-US employees of the Company are eligible to participate. The Company accounts for its participation in this multi-employer plan by recording a pension expense in its current year results. The
pension expense incurred by the Company related to these plans for the years ended December 31, 2007, 2006 and 2005 was $5,408,000, $5,141,000 and $4,855,000, respectively. In the fourth quarter of 2007, the Company made a special funding
payment of approximately $4,900,000 which was made to Pearson, is an advance on future required contributions.
70
12. Related Party Transactions
Pearson indirectly owns approximately 61% of the Companys issued and outstanding common stock. The Company is a party to a management services agreement with Pearson that became effective as of February 29, 2000. This agreement
governs the provision of certain services between the parties and their respective subsidiaries and renews annually. Other business arrangements between the Company (and the Companys subsidiaries) and Pearson (and its subsidiaries) are covered
by separate written agreements.
Many of the services provided by Pearson afford the Company administrative convenience and the Company believes the
terms of such services are substantially equal to or more favorable to the Company than if the Company had negotiated similar arrangements with non-affiliated third parties. The services provided by Pearson include (i) administering the 401(k)
savings plan (and related excess plans), the UK pension plan, and employee health benefit plans and insurance plans in the US and UK, (ii) use of a back-up disaster recovery site in the UK, (iii) travel services, and (iv) accounting
and tax related services for certain of the Companys subsidiaries, primarily in the UK. In addition to these services, the Company also licenses an array of financial information content from certain businesses owned by or affiliated with
Pearson for internal use as well as redistribution to customers. Finally, certain of the Companys businesses from time to time purchase advertising space and other promotional services at discounted rates from certain businesses owned by or
affiliated with Pearson. The services provided by the Company to Pearson include the provision of financial data and related services. A majority of the charges for services from Pearson and its affiliates to the Company are at cost. With respect to
the services the Company provides to Pearson and its affiliates, the Company charges fees that are no less than the fees charged to similar users. The Company believes that the terms and conditions of these transactions are fair and reasonable.
Prior to entering into any service arrangement with Pearson, the Company assesses whether it would be more advantageous to obtain such services from
a third party. The Independent Committee of the Companys Board of Directors, which currently consists of four directors, none of whom are employees of Pearson or the Company, approve the related party services on the Companys behalf. The
agreements governing the related party services are amended from time to time by mutual agreement to address changes in the terms or services provided to or on the Companys behalf. The Independent Committee approves any material modifications.
From time to time, the Company assesses various of the ongoing relationships between the Company and Pearson to determine whether it would be more advantageous to secure any such services outside of Pearson.
There was no material effect on the Companys financial condition or results of operations as a result of entering into these arrangements. If the services
provided to the Company and its affiliates by Pearson or its affiliates were to be terminated, the Company would be required to seek equivalent services in the open market at potentially higher costs.
In 2001, the Company entered into a trademark license agreement with Pearsons Financial Times Group authorizing the Company to use the FT and
Financial Times trademarks and logos in its businesses. The license grants the Company the right to use the FT and Financial Times brands for one UK pound sterling. This license, which was renewed for a one-year term on March 7,
2007, automatically renews for subsequent one-year terms unless terminated. The license is subject to quality control standards, restrictions on sublicensing the trademarks to third parties and certain other restrictions. The Independent Committee
of the Companys Board of Directors approved this agreement on the Companys behalf. In February 2007, the Company commenced a re-branding campaign and in connection with this campaign, the Company ceased the active use of the
FT and Financial Times trademarks and logos in its business
Any amounts payable or receivable to and from Pearson or Pearson
affiliates are classified as an affiliate transaction on the Companys balance sheet. For the years ended December 31, 2007, 2006 and 2005, the Company recorded revenue of $772,000, $755,000 and $451,000, respectively, for services
provided to Pearson. For the years ended December 31, 2007, 2006 and 2005, the Company recorded expense of $4,682,000, $4,250,000 and $3,456,000, respectively, for services received from Pearson. The amount due to Pearson at December 31,
2007 and 2006 was $732,000 and $5,156,000, respectively, and is included in payables to affiliates.
13. Segment Information
We operate in two reportable operating segments by providing financial market data, analytics and related services to financial institutions and active traders,
individual investors and investment community professionals worldwide.
Institutional Services
Our Institutional Services segment primarily targets financial institutions such as banks, brokerage firms, mutual fund companies, hedge funds, insurance companies
and money management firms. In addition, our Institutional Services segment
71
markets its offerings to financial information providers, information media companies, third-party redistributors and outsourcing organizations, such as service
bureaus and custodian banks. The Institutional Services segment is composed of the following three businesses, each of which was renamed in February 2007 as part of a global marketing initiative to reinforce our value proposition and emphasize the
Interactive Data brand to institutional customers:
|
|
|
Interactive Data Pricing and Reference Data (formerly FT Interactive Data).
Our Pricing and Reference Data business provides financial institutions, third-party
redistributors and outsourcing organizations with historical, intraday and end-of-day pricing, evaluations and reference data for an extensive range of securities, commodities, and derivative instruments that are traded around the world.
|
|
|
|
Interactive Data Real-Time Services (formerly ComStock).
Our Real-Time Services business provides financial institutions, financial information providers and
information media companies with global real-time and delayed financial market information covering equities, derivative instruments, futures, fixed income securities and foreign exchange. Our Real-Time Services business also includes Interactive
Data Managed Solutions business which offers customized financial information portals and terminals.
|
|
|
|
Interactive Data Fixed Income Analytics (formerly CMS BondEdge).
Our Fixed Income Analytics business provides financial institutions with sophisticated fixed income
analytics.
|
Active Trader Services
Our
Active Trader Services segment targets active traders, individual investors and investment community professionals. We consider active traders to be investors who typically make their own investment decisions, trade frequently through online
brokerage accounts and seek to earn a substantial portion of their income from trading. The Active Trader Services segment is composed of the following business:
|
|
|
eSignal.
Our eSignal business provides active traders, individual investors and investment community professionals with real-time financial market information and
access to decision-support tools to assist in their analysis of securities traded on all major markets in the United States as well as a number of international markets. eSignal also operates financial websites that provide investors with free
financial information and news about global equities, options, futures and other securities.
|
The Company evaluates its segments on
the basis of revenue and income (loss) from operations. For comparative purposes, we have provided the information for the twelve months ended December 31, 2007, 2006 and 2005.
Reportable segment financial information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
Revenue (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Services
|
|
$
|
601,247
|
|
|
87
|
%
|
|
$
|
530,416
|
|
|
87
|
%
|
|
$
|
473,020
|
|
|
87
|
%
|
Active Trader Services
|
|
|
88,363
|
|
|
13
|
%
|
|
|
81,987
|
|
|
13
|
%
|
|
|
69,847
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
689,610
|
|
|
100
|
%
|
|
$
|
612,403
|
|
|
100
|
%
|
|
$
|
542,867
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations (d):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Services
|
|
$
|
248,891
|
|
|
142
|
%
|
|
$
|
221,354
|
|
|
153
|
%
|
|
$
|
202,896
|
|
|
140
|
%
|
Active Trader Services
|
|
|
27,819
|
|
|
16
|
%
|
|
|
22,828
|
|
|
16
|
%
|
|
|
16,685
|
|
|
12
|
%
|
Corporate and unallocated (a)
|
|
|
(101,090
|
)
|
|
(58
|
)%
|
|
|
(99,617
|
)
|
|
(69
|
)%
|
|
|
(75,441
|
)
|
|
(52
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
175,620
|
|
|
100
|
%
|
|
$
|
144,565
|
|
|
100
|
%
|
|
$
|
144,140
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Services
|
|
$
|
982,381
|
|
|
80
|
%
|
|
$
|
868,340
|
|
|
79
|
%
|
|
|
|
|
|
|
|
Active Trader Services
|
|
|
197,750
|
|
|
16
|
%
|
|
|
192,794
|
|
|
17
|
%
|
|
|
|
|
|
|
|
Corporate and unallocated (c)
|
|
|
48,095
|
|
|
4
|
%
|
|
|
42,670
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,228,226
|
|
|
100
|
%
|
|
$
|
1,103,804
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
The following table reconciles income (loss) from operations to income before for income taxes as of
December 31:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
2007
|
|
2006
|
|
2005
|
Income (loss) from operations (d):
|
|
$
|
175,620
|
|
$
|
144,565
|
|
$
|
144,140
|
Interest Income
|
|
|
9,025
|
|
|
6,366
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
184,645
|
|
$
|
150,931
|
|
$
|
148,851
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Corporate and unallocated loss from operations includes costs and expenses related to corporate, general and administrative activities in the U.S. and the U.K., stock-based compensation,
costs associated with our Boxborough data center and all intangible asset amortization for the Company. Effective January 1, 2007, the Company changed its method of allocation as it relates to certain US and UK costs, such as personnel, premises and
marketing and advertising costs. Specifically, such costs which had been historically allocated to the Institutional reportable segment were re-allocated to Corporate and unallocated to reflect the fact that such expenditures benefited the entire
organization. The equivalent costs for 2006 and 2005 of approximately $21,363,000 and $21,933,000 respectively, have been reclassified to Corporate and unallocated to conform to the current year presentation.
|
(b)
|
Revenue is net of any inter-segment revenue and therefore represents only revenue from external customers.
|
(c)
|
All Goodwill and Intangible assets have been allocated to the two reportable segments as of September 30, 2007. Prior year Goodwill and Intangible asset balances at December 31,
2006 which had been recorded to Corporate and unallocated in previous years have been reclassified to the two reportable segments to conform to the current year presentation.
|
(d)
|
Income (loss) from operations or the Segment profit (loss) measure reviewed by the chief operating decision maker equals income from continuing operations before interest income and income
taxes.
|
Reportable segment information for capital additions and depreciation expense for the years ending December 31, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Additions
|
|
|
|
Depreciation
|
(in thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
(in thousands)
|
|
2007
|
|
2006
|
|
2005
|
Institutional Services
|
|
$
|
23,313
|
|
$
|
21,292
|
|
$
|
15,977
|
|
Institutional Services
|
|
$
|
13,815
|
|
$
|
14,484
|
|
$
|
12,721
|
Active Trader Services
|
|
|
7,056
|
|
|
5,419
|
|
|
4,991
|
|
Active Trader Services
|
|
|
4,340
|
|
|
4,062
|
|
|
3,797
|
Corporate and unallocated
|
|
|
6,440
|
|
|
12,288
|
|
|
5,092
|
|
Corporate and unallocated
|
|
|
4,955
|
|
|
3,379
|
|
|
2,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,809
|
|
$
|
38,999
|
|
$
|
26,060
|
|
Total
|
|
$
|
23,110
|
|
$
|
21,925
|
|
$
|
18,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has allocated capital additions and depreciation expense at December 31, 2007. Prior period amounts for 2006 and
2005 have been reclassified to conform to the current year presentation.
The Companys distribution by major geographic region is as follows
for the years ending December 31:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
2006
|
|
2005
|
Revenue:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
489,185
|
|
$
|
445,351
|
|
$
|
417,533
|
United Kingdom
|
|
|
74,681
|
|
|
64,977
|
|
|
64,820
|
All other European countries
|
|
|
110,544
|
|
|
89,895
|
|
|
49,552
|
Asia Pacific
|
|
|
15,200
|
|
|
12,180
|
|
|
10,962
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
689,610
|
|
$
|
612,403
|
|
$
|
542,867
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
592,189
|
|
$
|
577,947
|
|
|
|
United Kingdom
|
|
|
139,162
|
|
|
134,025
|
|
|
|
All other European countries
|
|
|
76,517
|
|
|
71,364
|
|
|
|
Asia Pacific
|
|
|
5,192
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
813,060
|
|
$
|
788,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
14. Other Comprehensive Income
The components of accumulated other comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
Unrealized gain on securities (net of tax, $901 as of December 31, 2007 and $646 as of December 31, 2006)
|
|
$
|
1,320
|
|
|
$
|
1,044
|
|
Foreign currency translation adjustment
|
|
|
45,656
|
|
|
|
33,578
|
|
Minimum pension liability/unrecognized losses
|
|
|
(1,821
|
)
|
|
|
(1,641
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
45,155
|
|
|
$
|
32,981
|
|
|
|
|
|
|
|
|
|
|
The components of comprehensive income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
2005
|
|
Net Income
|
|
$
|
125,983
|
|
|
$
|
93,362
|
|
$
|
93,864
|
|
Unrealized gain on securities (net of tax, $188, $309 and $129 as of December 31, 2007, 2006 and 2005, respectively)
|
|
|
276
|
|
|
|
499
|
|
|
204
|
|
Pension adjustment
|
|
|
(180
|
)
|
|
|
759
|
|
|
(106
|
)
|
Foreign currency translation adjustment
|
|
|
12,078
|
|
|
|
28,295
|
|
|
(18,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
138,157
|
|
|
$
|
122,915
|
|
$
|
75,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
Interactive Data Corporation and Subsidiaries
Quarterly Financial Information (Unaudited)
(In thousands, except per share data)
The following table
presents selected unaudited financial information for the eight quarters in the period ended December 31, 2007. The results for any quarter are not necessarily indicative of future quarterly results and, accordingly, period-to-period
comparisons should not be relied upon as an indication of future performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Year Ended
December 31,
2007
|
Revenue
|
|
$
|
162,535
|
|
$
|
169,968
|
|
$
|
175,027
|
|
$
|
182,080
|
|
$
|
689,610
|
Total costs and expenses
|
|
|
123,723
|
|
|
125,988
|
|
|
127,163
|
|
|
137,116
|
|
|
513,990
|
Income from operations
|
|
|
38,812
|
|
|
43,980
|
|
|
47,864
|
|
|
44,964
|
|
|
175,620
|
Interest income
|
|
|
1,865
|
|
|
2,062
|
|
|
2,405
|
|
|
2,693
|
|
|
9,025
|
Income tax expense
|
|
|
15,058
|
|
|
16,901
|
|
|
10,930
|
|
|
15,773
|
|
|
58,662
|
Net income
|
|
$
|
25,619
|
|
$
|
29,141
|
|
$
|
39,339
|
|
$
|
31,884
|
|
$
|
125,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharebasic
|
|
$
|
0.27
|
|
$
|
0.31
|
|
$
|
0.42
|
|
$
|
0.34
|
|
$
|
1.34
|
Net income per sharediluted
|
|
$
|
0.27
|
|
$
|
0.30
|
|
$
|
0.40
|
|
$
|
0.33
|
|
$
|
1.30
|
Cash dividend declared per common share
|
|
$
|
0.125
|
|
$
|
0.125
|
|
$
|
0.125
|
|
$
|
0.775
|
|
$
|
1.15
|
|
|
|
|
Quarters Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
Year Ended
December 31,
2006
|
Revenue
|
|
$
|
143,429
|
|
$
|
151,166
|
|
$
|
156,670
|
|
$
|
161,138
|
|
$
|
612,403
|
Total costs and expenses
|
|
|
111,536
|
|
|
115,797
|
|
|
116,757
|
|
|
123,748
|
|
|
467,838
|
Income from operations
|
|
|
31,893
|
|
|
35,369
|
|
|
39,913
|
|
|
37,390
|
|
|
144,565
|
Interest income
|
|
|
1,193
|
|
|
1,406
|
|
|
1,649
|
|
|
2,118
|
|
|
6,366
|
Income tax expense
|
|
|
13,264
|
|
|
14,826
|
|
|
14,752
|
|
|
14,727
|
|
|
57,569
|
Net income
|
|
$
|
19,822
|
|
$
|
21,949
|
|
$
|
26,810
|
|
$
|
24,781
|
|
$
|
93,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per sharebasic
|
|
$
|
0.21
|
|
$
|
0.23
|
|
$
|
0.29
|
|
$
|
0.27
|
|
$
|
1.00
|
Net income per sharediluted
|
|
$
|
0.21
|
|
$
|
0.23
|
|
$
|
0.28
|
|
$
|
0.26
|
|
$
|
0.98
|
Cash dividend declared per common share
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
0.80
|
|
$
|
0.80
|
75