Item 1. Business
We are a leading provider of financial market data, analytics and related solutions. Thousands of financial institutions, as well as hundreds of software and service providers subscribe to our services. We are one of the world’s largest providers of financial data, serving the mutual fund, bank, asset management, hedge fund, securities and financial instrument processing and administration sectors. We distribute our financial data and related offerings directly to customers and indirectly through value-added resellers (“VARs”), including software providers, processors and custodians.
On July 29, 2010, Interactive Data Corporation (“we” or “us”) was acquired in a merger (the “Merger”) by investment funds managed by Silver Lake Group, LLC and Warburg Pincus LLC (the “Sponsors”). As further discussed in Note 1 “Summary of Significant Accounting Polices” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, we are wholly owned by Igloo Intermediate Corporation (“Intermediate”), which is wholly owned by Igloo Holdings Corporation (“Holdings”). Approximately 96% of the capital stock of Holdings is owned by investment funds affiliated with, and a co-investment vehicle controlled by, the Sponsors. This Business Section and our consolidated financial statements following the Merger exclude the accounts of Intermediate and Holdings.
Our financial reporting is currently based on two reportable operating segments: Pricing and Reference Data, and Trading Solutions. The Pricing and Reference Data segment represents our evaluated pricing, reference data and fixed income analytics service areas. The Trading Solutions segment represents our real-time data feeds, trading infrastructure managed services, hosted web applications and workstations. Please refer to Note 12 “Segment Information” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Pricing and Reference Data
Our Pricing and Reference Data segment provides an extensive range of financial market data services and analytics to thousands of customers worldwide including banks, brokerage firms, mutual fund companies, exchange traded fund (“ETF”) sponsors, hedge funds, pension funds, insurance companies and asset management firms. In addition, our offerings are also used by financial information providers, information media companies, and VARs such as software providers, processors, custodians and other outsourcing organizations. The Pricing and Reference Data segment has three primary offerings: (1) evaluated pricing services, which are daily opinions of value, on approximately 2.7 million fixed income securities, international equities and other hard-to-value financial instruments; (2) reference data, which encompasses listed markets pricing and descriptive information covering over 10 million global financial instruments for use across the securities and financial instrument processing lifecycle; and (3) fixed income portfolio analytics and fixed income data to help manage risks and analyze the sources of investment risk and return. This segment accounted for $639.6 million, or 70.7%, of our revenue for the year ended December 31, 2013.
Trading Solutions
Our Trading Solutions segment provides thousands of customers worldwide with products and services that support a range of trading, wealth management and other investment applications. The Trading Solutions segment has two primary offerings: 1) real-time market data feeds and trading infrastructure managed services used by banks, brokerage firms, asset managers, hedge funds, proprietary trading firms and VARs in order to facilitate and support low latency electronic trading across a range of asset classes as well as support other applications such as portfolio pricing, risk and compliance; and 2) customized hosted web applications and workstations that facilitate access to market data and related analytics and tools for financial advisors, energy and commodity professionals, active traders and individual investors, other investment community professionals, and a range of corporate clients. This segment accounted for $265.5 million, or 29.3%, of our revenue for the year ended December 31, 2013.
For revenue, income from operations, identifiable assets and the relevant percentages for each of our segments, in addition to revenue and long-lived assets by geographic region, please refer to Note 12 “Segment Information” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), are made throughout this Annual Report on Form 10-K. Any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, among other things, the information concerning our possible future results of operations including revenue, costs of goods sold, and gross margin, future profitability, future economic improvement, business and growth strategies, financing plans, our competitive position and the effects of competition, the projected growth of the industries in which we operate, and our ability to consummate strategic acquisitions and other transactions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “plan,” “may,” “should,” “will,” “would,” “project,” and similar expressions. These forward-looking statements are based upon information currently available to us and are subject to a number of risks, including those detailed under the heading, “Risk Factors” in Item 1A
Item 1A. Risk Factors
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements appearing just before “Corporate History” above.
Risks Related to Our Indebtedness
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent the interest rate on our variable rate debt increases and prevent us from meeting our obligations under our senior unsecured notes due 2018 (the “Senior Notes”).
As a result of completing the Merger and related financing transactions on July 29, 2010 (the “Transactions”), we became highly leveraged. As of December 31, 2013, our total indebtedness was $2.0 billion. We also had an additional $159.4 million available for borrowing under our Revolving Credit Facility at that date (after giving effect to $0.6 million of letters of credit that were outstanding as of December 31, 2013 related to certain operating leases). The following table shows our level of indebtedness and certain other information as of December 31, 2013. For more information on our Revolving Credit Facility, Term Loan Facility and Senior Notes, please refer to Note 16 “Debt” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
(1) Our Revolving Credit Facility, which matures July 2015, provides for borrowing up to $160.0 million aggregate principal amount (without giving effect to $0.6 million of letters of credit that were outstanding as of December 31, 2013).
(2) In February 2013, we refinanced our Term Loan Facility resulting in a decrease of the applicable margin to (i) 1.75% with respect to term loans bearing interest at ABR (with a minimum ABR “floor” of 2.00%) and (ii) 2.75% with respect to term loans bearing interest at LIBOR (with a minimum LIBOR “floor” of 1.00%). Based upon these changes, our interest rate on our Term Loan Facility is currently 3.75%. Upon consummation of the refinancing, our outstanding principal on our Term Loan Facility was increased from $1.303 billion to $1.305 billion. The maturity date of February 11, 2018 was not changed as part of the refinancing.
(3) Our Senior Notes have a maturity date of August 1, 2018.
Our high degree of leverage could have important consequences for holders of Senior Notes, including:
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making it more difficult for us to make payments on the Senior Notes;
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increasing our vulnerability to general economic and industry conditions;
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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Secured Credit Facilities will be at variable rates of interest;
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restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
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limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and
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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.
We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our Revolving and Term Loan (the “Senior Secured Credit Facilities”) and the indenture governing the Senior Notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
For the year ended December 31, 2013, we recorded interest expense related to these debt obligations of $137.6 million in our Consolidated Statement of Operations.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
Our Senior Secured Credit Facilities and the indenture governing the Senior Notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things:
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incur additional indebtedness or issue certain preferred shares;
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pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
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make certain investments;
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sell or transfer assets;
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create liens;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
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enter into certain transactions with our affiliates.
In addition, under our Senior Secured Credit Facilities we are required to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control. We may not meet those ratios and tests. A breach of any of these covenants could result in a default under each of our Senior Secured Credit Facilities. Upon the occurrence of an event of default under our Senior Secured Credit Facilities, the lenders under our Senior Secured Credit Facilities could elect to declare all amounts outstanding under our Senior Secured Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our Senior Secured Credit Facilities could proceed against the collateral granted to them to secure each such indebtedness. We have pledged substantially all of our assets as collateral under our Senior Secured Credit Facilities. If any of the lenders under our Senior Secured Credit Facilities accelerate the repayment of borrowings, we cannot assure holders of Senior Notes that we will have sufficient assets to repay our Senior Secured Credit Facilities and the Senior Notes.
The Sponsors control us and the Sponsors have and will continue cause us to distribute our cash to service debt that is not our debt.
The Sponsors, and a co-investment vehicle controlled by the Sponsors, indirectly own, through their ownership in Holdings and Intermediate, our parent companies, approximately 96% of our capital stock. In addition, pursuant to a stockholders agreement by and among us, our parent companies, the Sponsors, and the co-investment vehicle controlled by
the Sponsors, the Sponsors have the right to designate a majority of the members of our board of directors and the boards of directors of our parent companies. As a result, the Sponsors have control over our decisions. Our parent companies have incurred debt from the issuance of $350.0 million of 8.25%/9.00% Senior PIK Toggle Notes (the “Toggle Notes”) issued by Holdings which mature on December 15, 2017, and may incur additional indebtedness in the future. Our parent companies currently have no separate operations and no separate assets other than their investment in us. While covenants in our Senior Secured Credit Agreements and the Indenture to our Senior Notes limit the amount of cash that we are able to distribute to our parent companies, to the extent cash is available, the Sponsors will cause us to distribute cash to Holdings in order to enable Holdings to service the Toggle Notes and any other debt that our parent companies may incur in the future. The declaration of dividends to Holdings to enable servicing of Holdings debt could have certain consequences for us, including:
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requiring us to dedicate a portion of our cash flow from operating activities to declare dividends to Holdings to service the debt of our parent companies;
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reducing our funds available for working capital, capital expenditures and other general corporate expenses and potentially limiting our ability to plan or react to changing market conditions and fund our business strategy;
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placing us at a disadvantage compared to our competitors who have greater discretion in using their cash flow; and
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limiting our ability to make certain, voluntary payments under our Senior Secured Credit Facilities or the Senior Notes.
Risks Related to Our Business
The impact of cost-cutting pressures across the industry we serve could lower demand for our services.
Customers continue their focus on controlling or reducing spending as a result of the continued financial challenges and market uncertainty many of them continue to face. For example, in 2013, many large financial institutions took measures to control or contain their operational spending. Customers within the financial services industry that strive to reduce their operating costs may seek to further reduce their spending on financial market data and related services. If a large number of smaller customers or a critical number of larger customers reduce their spending with us, our results of operations could be materially and adversely affected. Alternatively, customers may use other strategies to reduce their overall spending on financial market data services, by consolidating their spending with fewer vendors, by selecting other vendors with lower-cost offerings or by self-sourcing their need for financial market data. If customers elect to consolidate their spending on financial market data services with other vendors and not us, if we lose business to lower priced competitors, or if customers elect to self-source their financial market data needs, our results of operations could be materially and adversely affected.
Consolidation of financial services within and across industries, or the failure of financial services firms, could lower demand for our services.
There continues to be consolidation among some participants in the financial markets as well as continued collapse of others. We continue to see ongoing consolidations between participants in the financial markets, and there may be additional consolidations or failures in the future. As consolidation occurs and synergies are achieved, there may be fewer potential customers for our services. When two companies that separately subscribe to or use our services combine, they may terminate or reduce duplicative subscriptions for our services, or if they are billed on a usage basis, usage may decline due to synergies created by the business combination. We experienced cancellations and/or service downgrades in prior years as a result of this trend and these consolidations and cancellations may continue. A large number of cancellations, or lower utilization on an absolute dollar basis resulting from consolidations, could have a material adverse effect on our revenue. In addition, if a customer who accounts for a material percentage of our revenue or profit ceases operations as a result of bankruptcy such event could have a material adverse effect on our results of operations.
Declining activity levels in the securities markets, weak or declining financial performance of financial market participants or the failure of market participants, could lower demand for our services.
Our business is dependent upon the health of the global financial markets as well as the financial well-being of the participants in those markets. Many financial institutions continue to focus on cost containment or reduction, including market data and related services costs. These factors have impacted trading volumes and new issuance of securities in certain asset classes. Some of the demand for financial market data and related services is dependent upon activity levels in the securities markets and the financial health of financial institutions and other market participants while other demand is static and is not dependent on such factors. Downturns in global financial markets that result in prolonged, significant declines in activity levels in the securities markets could have a material adverse effect on our revenue. For example, although we have continued to generate organic revenue growth during the past several years, certain clients have initiated cost-reduction activities that have either reduced their spending on, or use of, our products and services. In addition, weaker financial
markets can lead firms to alter their asset investment strategies, which can impact usage levels by institutional clients. Because many customers subscribe to our offerings over a multi-year period or annually, our performance can lag the cyclical nature of the financial markets by 12 to 24 months.
We face intense competition.
We operate in highly competitive markets in which we compete with numerous large and small vendors of financial market data, analytics and related services. We expect competition to continue to be intense. Some of our competitors and potential competitors have significantly greater financial, technical and marketing resources than we have. Because we are highly leveraged we currently incur significant cash expenditures to service the debt. These competitors may be able to expand their offerings and data content more effectively, use their financial resources to sustain aggressive pricing or respond more rapidly than us to new or emerging technologies, changes in the industry or changes in customer needs. They may also be in a position to devote greater resources to the development, promotion and distribution of their services. Increased competition in the future or our inability to compete effectively could adversely affect our market share or profit margins and could have a material adverse effect on our financial condition or results of operations.
A prolonged outage at one of our data centers or a disruption of our computer operations or those of our suppliers, or our failure to timely deliver high-quality services due to other reasons, could result in the loss of customers.
Our customers rely on us for the delivery of time-sensitive, up-to-date and high-quality financial market data, analytics and related solutions. Our timely, reliable delivery of high-quality services is subject to an array of technical production processes that enable our delivery platforms to leverage an extensive range of content databases. Further, significant portions of the data we deliver to customers we obtain from stock exchanges and other third-party sources and we are reliant on these sources delivering high-quality data. Our business is dependent on our ability to rapidly and efficiently process substantial volumes of data and calculations on our computer-based networks and systems. Our computer operations and those of our suppliers and customers are vulnerable to interruption by fire, natural disaster, power loss, telecommunications failure, terrorist attacks, acts of war, Internet failures, computer viruses, cyber attacks, and other events beyond our reasonable control. The occurrence of any of these events could significantly disrupt our operations or result in a significant interruption or delay in the delivery of our services. Any such event could induce our customers to reduce or terminate services, and could harm our reputation and impact our ability to compete for new business. In addition, If any of the data we distribute is not of sufficient quality, if any of our production processes are compromised, or if any of our delivery platforms are impaired, the delivery of our data may fail to meet the time requirements of our customers or the quality standards set by our customers, either of which could adversely affect our ability to compete for new customers or induce existing customers to seek alternative service suppliers. Loss of a large number of smaller customers or a critical number of larger customers as a result of any such events could have a material adverse effect on our results of operations.
If we are unable to maintain relationships with key suppliers and providers of market data, we would not be able to provide our services to our customers.
We depend on key suppliers for the data we provide to our customers. Some of this data is exclusive to particular suppliers, such as national stock exchanges, such as the New York Stock Exchange, Tokyo Stock Exchange or the London Stock Exchange, and in some cases cannot be obtained from other suppliers. In other cases, although the data may be available from secondary sources, the secondary source may not be as adequate or reliable as the primary or preferred source, or we may not be able to obtain replacement data from an alternative supplier without undue cost and expense, if at all. The disruption or termination of one or more of our major data supplier relationships could disrupt our operations and could have a material adverse effect on our results of operations. In addition, our third-party data suppliers perform audits on us from time to time in the ordinary course of business (including audits currently underway) to determine if data we license for redistribution has been properly accounted for in accordance with the terms of the applicable license agreement. As a result of these audits, if we incorrectly account for amounts owed in connection with these licensing arrangements, we may incur additional expenses and such additional expenses could be material and have a material adverse effect on our results of operations and financial condition.
If we are unable to maintain relationships with service bureaus and custodian banks, our revenue will decrease.
Part of our strategy is to serve as a major data supplier to service bureaus and custodian banks and thereby to benefit from the trend of major financial institutions in North America outsourcing their back office operations to such entities. While we believe the importance of back office operations will continue to increase, if this trend shifts or any of our relationships with service bureaus or custodian banks are disrupted or terminated, any such event could have a material adverse effect on our results of operations.
New offerings by competitors or new technologies or other industry changes could cause our services to become less competitive or obsolete or we may not be able to develop new or enhanced service offerings.
We operate in an industry that is characterized by rapid and significant technological change, frequent new service introductions (including in response to technological changes), data content and coverage enhancements, and evolving industry standards and customer needs. Without the timely introduction of new services, or the expansion or enhancement of our data content and coverage, our services could become obsolete or inadequate over time, in which case our revenue and results of operations would suffer. We expect our competitors to continue to improve the performance of their current services, to enhance data content and coverage and to introduce new services and technologies. These competitors may adapt to new technologies, changes in the industry and changes in customers’ requirements more quickly than we can. If we fail to adequately and accurately anticipate industry trends and customers’ needs, we will be unable to introduce new services into the market and our existing services may become obsolete. Further, we may be unsuccessful at developing and introducing new services (including in response to technological changes), that are appealing to customers, with acceptable prices and terms, or any such new services may not be made available in a timely manner. Any of these events could adversely impact our ability to compete effectively and could have a material adverse effect on our results of operations. Related to this, a key part of our strategy is expanding into new markets around the world, as well as continuing to grow our existing international businesses. In order to do so, we must develop new region specific services, or add to our existing services so that they meet the needs of customers in specific geographic locations. Any new services or data content that we may develop and introduce may not achieve market acceptance. Lack of market acceptance of our services could have a material adverse effect on our results of operations.
New legislation or changes in governmental or quasi-governmental rules, regulations, directives or standards may reduce demand for our services, prevent us from offering certain services or increase our expenses.
Our customers must comply with governmental and quasi-governmental rules, regulations, directives and standards. We develop, configure and market services to assist customers in meeting these requirements. New legislation, or a significant change in rules, regulations, directives or standards, including some of those introduced to mitigate systemic risk in major financial markets, as well as ones that may in the future be introduced, could impact where and how financial services invest, thereby causing our services to become obsolete, reducing demand for our services or increasing our expenses in order to continue providing services to customers, any of which event could have a material adverse impact on our results of operations. Furthermore, we may become subject to new legislation or rules with regard to the services we offer which could cause us to be prohibited from providing certain services or make provision of affected services more expensive, either of which event could have a material adverse effect on our results of operations.
The new unified technology platform we are developing may not meet our expectations.
Our business strategy includes advancement of programs designed to further improve our technical infrastructure, increase our operational efficiency and optimize our cost structure. More specifically, we have made substantial progress toward developing and deploying a unified technical architecture that we believe will enable us to consolidate our delivery platforms and the majority of our legacy technology infrastructure, and facilitate cost-effective collection, aggregation and distribution of the content that supports our evaluated pricing, reference data and real-time feed services as well as various other offerings. The development and deployment of a unified technology platform is a substantial and complex undertaking. We believe completion of development and deployment of this infrastructure can be achieved without significantly compromising product quality, sales effectiveness or customer service. However, notwithstanding our efforts, we may not be able to fully complete development and implement this infrastructure successfully; we may encounter unexpected challenges, and we may not fully realize the projected benefits of this project in the timeframe we desire. The costs we have incurred to date on this initiative have exceeded our original expectations, and the costs to complete the remaining work may exceed our current expectations for those costs. If we are unable to realize the anticipated operational benefits, including cost reductions, our profitability may be adversely affected. Moreover, our implementation of the new infrastructure may disrupt our operations and could have an adverse effect on our results of operations. While we expect this project to result in significant cost savings, our estimated savings are based on many different assumptions, any or all of which may prove to be inaccurate, and as a result we may not realize these cost savings.
We are subject to regulatory oversight and we provide services to financial institutions that are subject to significant regulatory oversight, and any investigation of us or our customers relating to our services could be expensive, time consuming and harm our reputation.
The securities laws and other regulations that govern certain of our activities and the activities of our customers are complex. Compliance with these regulations may be reviewed by federal agencies, including the SEC, state authorities and other governmental entities both in the United States and foreign countries. To the extent any of our customers become the subject of a regulatory investigation or a civil lawsuit relating to actual or alleged violations of one or more of their
regulatory obligations, we could also become subject to intense scrutiny. This intense scrutiny could involve an examination by regulators of whether the services we provided to the customer during the time period of the alleged violation were related to or contributed to the commission of the alleged or actual violation or result in a claim or civil lawsuit filed against us by the customer or the customer’s customers seeking damages. Any investigation by a regulatory agency of one of our customers or us, whether or not founded, or a claim or civil lawsuit filed against us could cause us to incur substantial costs and would distract our management from our business. In addition, the negative publicity associated with any public investigation could adversely affect our ability to attract and/or retain customers and could have a material adverse effect on our results of operations.
Certain of our subsidiaries and certain of our services are or may become subject to complex regulations and licensing requirements.
Our Interactive Data Pricing and Reference Data subsidiary is a registered investment adviser with the SEC and is subject to significant regulatory obligations under the Investment Advisers Act of 1940. Our Interactive Data (Australia) Pty Ltd subsidiary is licensed by the Australian Securities and Investment Commission, or ASIC, to provide certain financial services in Australia under the Corporations Act 2001. Our U.K. Desktop Solutions business, which was formerly known as eSignal, is registered with the United Kingdom Financial Conduct Authority, or FCA. The laws and regulations that govern our regulated activities are complex. Compliance with the Investment Advisers Act gives rise to costs and expenses; we have employees whose duties relate primarily to ensuring we meet our legal and compliance obligations under the Act. Significant changes to applicable regulations may increase our costs. If we were to fail to maintain or otherwise forfeit any required regulatory licenses or registrations, we may not be able to continue offering the services or operating those portions of our business that require the license to be held or registration to be maintained, and we could be subject to fines and penalties. Such event could have a material adverse effect on our results of operations. In addition, in order to offer new services we could be required to extend our existing or obtain new licenses or regulatory authorizations, which may be at the discretion of the government agencies and we may not be able to secure the required licenses or registrations. If this resulted in us not being able to provide one or more of our services, or resulted in us not being able to compete as effectively, depending on the services affected, this could have a material adverse effect on our results of operations.
We are subject to the risks of doing business internationally.
For the year ended December 31, 2013, approximately 28.9% of our revenue was generated outside of the United States. Our growth strategy includes expanding our business outside of the United States. Because we sell our services outside the United States, our business is subject to risks associated with doing business internationally. Accordingly, a variety of factors could have a material adverse effect on our results of operation including, without limitation:
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fluctuations in foreign currency exchange rates;
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failure to comply with internal controls and procedures established to ensure compliance with anti-bribery laws such as the Foreign Corrupt Practices Act of 1977 (“FCPA”) and similar anti-bribery laws in other jurisdictions;
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difficulty in establishing, staffing and managing non-U.S. operations including differing jurisdictional labor regulations;
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changes in political conditions or economic instability including inflation or interest rate fluctuations;
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changes in local laws and regulatory requirements;
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difficulty of effective enforcement of contractual provisions in some local jurisdictions;
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the inadequate intellectual property protection laws in some local jurisdictions;
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trade-protection measures, trade sanctions such as those enforced by the U.S. Treasury Department Office of Foreign Asset Control or similar international authorities, import or export licensing requirements such as the Export Administration Regulations promulgated by the U.S. Department of Commerce and fines, penalties or suspension or revocation of export privileges; and
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changes in or interpretations of local tax law or policy.
We are involved in intellectual property disputes from time to time and we may be involved in additional such disputes in the future. These disputes divert management’s attention, cause us to incur costs, which in some cases can be significant, and could, under certain circumstances, prevent us from providing, or increase our costs to provide, certain services.
Third parties assert intellectual property infringement claims against us from time to time. While we believe that our services, processes and operations do not infringe in any material respect upon proprietary rights of other parties and that meritorious defenses would be available with respect to any assertions to the contrary (or would be available with respect to any future assertions to the contrary), our services may be found to infringe on the proprietary rights of others. Any claims
that our services processes and operations infringe third parties’ rights, regardless of their merit or final resolution, are costly to investigate and to defend against and would divert the efforts and attention of our management and technical personnel from our day-to-day operations and the advancement of our strategic objectives and could have a material adverse impact on our results of operations. Intellectual property disputes involve complex technical issues and the inherent uncertainties in intellectual property litigation. If any such proceedings against us result in an adverse outcome, or if we otherwise elect to seek a resolution short of a final adjudication, we could be required, among other things, to pay substantial damages, to cease providing certain services if no license could be obtained on commercially reasonable terms, or pay significant license fees, any of which could have a material adverse effect on our results of operation.
We may fail to adequately protect customer data.
Some of our offerings involve the storage and transmission of proprietary information and sensitive or confidential customer data, including limited customer portfolio information. Misappropriation of customer data by an employee or an external third party, via cyber attack or other methods, could occur and may result in claims against us and liability for customer losses resulting from such misappropriation. Regardless of their merit or final resolution, allegations of misappropriation would be costly to investigate and to defend against and would divert the efforts and attention of our management and technical personnel from our day-to-day operations and the advancement of our strategic objectives. Any such occurrence or allegation of occurrence could result in the loss of existing or potential customers, damage to our brand and reputation, impact our ability to compete and could have a material adverse effect on our results of operation.
We may face liability for content contained in our services.
We may be subject to claims for defamation, libel, copyright or trademark infringement, fraud or negligence, or based on other theories of liability, in each case relating to the data, articles, commentary, ratings, information or other content we distribute in our services. We could also be subject to claims based upon the content that is accessible from our corporate website or those websites that we own and operate through links to other websites. Costs to defend or liability arising as a result of such claims could have a material adverse effect on our results of operation.
Our cost-saving plans may not be effective which may adversely affect our financial results.
Our business strategy and priorities involve improving our cost structure and driving efficiencies. While we have implemented and will continue to implement programs related to this strategy, we may not be able to do so successfully and we may not fully realize the projected benefits of these or any other cost-saving plans that we may seek to implement in the future. If we are unable to realize these anticipated cost reductions, our results of operation may be adversely affected. Moreover, our continued implementation of cost-saving plans and facilities integration may disrupt our operations and adversely impact our profitability. While we expect our cost-saving initiatives to result in significant cost savings throughout our organization, our estimated savings are based on several assumptions that may prove to be inaccurate, and as a result we may not realize these cost savings. The failure to achieve our estimated cost savings would constrain our ability to increase the profitability of our business.
Our success is dependent in part upon our ability to attract and retain a qualified management team and other key personnel.
We depend on our ability to attract and retain a qualified management team and other key personnel to operate and expand our business, and we may not be able to retain the services of our key personnel. In the event of any departures, our ability to replace key personnel may be difficult and may take an extended period of time because of the limited number of key personnel in the financial market data industry with the breadth of skills and experience required to operate and expand a business such as ours successfully or perform the key business functions we require. Competition to hire from this limited pool of human resources is intense, and we may not be able to hire or retain such personnel. We have entered into agreements with some members of our management team and other key personnel regarding their employment with us. While these employment agreements may mitigate some of the risks we face in retaining key personnel, we still face risk in this area. If we are unable to retain, attract and hire key personnel, such failure could have a material adverse effect on our operations and our results of operations.
We may fail to realize the anticipated benefits from acquisitions we complete and /or strategic alliances that we enter into.
We may complete acquisitions of assets and /or businesses that complement or augment our existing services. We may not be able to identify and successfully complete acquisition or strategic business alliance transactions. Any acquisition we may complete may be made at a substantial premium over the fair value of the net assets of the acquired business. The success of any acquisition depends in part on our ability to integrate the acquired business or assets, including customers, employees, operating systems, operating procedures and information technology systems. We may not be able to effectively
integrate and may experience difficulty managing the operations of any acquired business. In addition, the process of integrating acquired businesses or assets may involve unforeseen difficulties and integration could take longer than anticipated. Integrating any newly acquired businesses may require a disproportionate amount of management’s attention and financial and other resources, and detract from the resources remaining for our pre-existing business. Further, we may not be able to maintain or improve the historical financial performance of acquired businesses. Finally, we may not fully derive all of the anticipated benefits from our acquisitions, such as supply cost synergies or reduced operating costs due to centralized or shared technical infrastructure. In addition, strategic alliances have been and may continue to be important to expanding our customer base and expanding our offerings. We have established strategic business alliances with companies who redistribute our services to their customers or who provide us with additional content that we can redistribute to our customers. The success of our strategic alliances depends in part on our ability to work collaboratively with these business partners to jointly market our services and content. We may not be able to effectively or efficiently deliver our services to these business partners or redistribute their content under financial terms that are mutually satisfactory, or achieve the desired benefits from these alliances.
Our stockholder controls us and our stockholder may have conflicts of interest with us or holders of our debt in the future.
The Sponsors, and a co-investment vehicle controlled by the Sponsors, indirectly own, through their ownership in our parent companies, approximately 96% of our capital stock. In addition, pursuant to a stockholder’s agreement by and among us, our parent companies, the Sponsors, and the co-investment vehicle controlled by the Sponsors, the Sponsors have the right to designate a majority of the members of our board of directors and the boards of directors of our parent companies. As a result, the Sponsors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of the board of directors or stockholders of us or any of the parent companies, regardless of whether such transaction may be in the best interests of the holders of our Senior Notes. For example, the Sponsors could cause us to (i) make acquisitions that increase the amount of indebtedness that is secured by our assets or (ii) sell some of our assets. These or other actions implemented by the Sponsors could impair our ability to make payments under our Senior Secured Credit Facilities or the Senior Notes. Additionally, the Sponsors are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities of businesses in our market space and, as a result, those acquisition opportunities may not be available to us. So long as investment funds affiliated with, and the co-investment vehicle controlled by, the Sponsors continue to indirectly own a significant amount of the outstanding shares of our common stock, even if such amount is less than 50%, the Sponsors will continue to be able to strongly influence or effectively control our decisions.
Examination and audits by tax authorities, including the Internal Revenue Service, could result in additional tax payments.
Our tax returns are subject to examination by various tax authorities, including the U.S. Internal Revenue Service (“IRS”) which may result in adjustments. We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions. It is our intention to vigorously defend our prior tax returns. However, the calculation of our tax liabilities involves the application of complex tax regulations to our global operations in many jurisdictions. Therefore, any dispute with any tax authority may result in a payment that is materially different from our current estimate of the tax liabilities associated with our returns from these periods. If our estimate of tax liabilities proves to be less than the amount for which we are ultimately liable, we would incur additional charges to expense and such charges could have a material adverse effect on our results of operations and financial condition.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
We own no real estate but lease the following principal facilities for use as corporate headquarters, sales offices and data centers:
^ PRD refers to the businesses in our Pricing and Reference Data reportable segment.
# Some of our leases have terms that allow breakage prior to the lease expiration date; however, as we currently do not intend to terminate any of our leases under these terms, the actual lease expiration date is reflected herein.
* The Madrid lease that expired in January 2014 is currently being renegotiated with the landlord and, pursuant to the terms of the expiring lease, the terms of the expiring lease will remain in place until a new agreement is executed.
We have excluded leased properties with less than 1,500 square feet and we have excluded our Boston leased property which is currently under a sublease with a term expiring December 2016, and currently not used by any of our operations. We believe our facilities are in good condition, and are suitable and adequate for our current and currently planned operations. If we are unable to renew any of the leases that are due to expire in 2014, we believe that suitable replacement properties are available on commercially reasonable terms.
Item 3.
Item 3. Legal Proceedings
We are involved in litigation and are subject to claims made from time to time with a portion of the defense and/or settlement cost being covered, in some cases, by various commercial liability insurance policies and third party indemnifications. We believe that there is no litigation pending against us that would have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows.
Item 4.
Item 4. Mine Safety Disclosures
Not Applicable
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
We are a privately held company with no established public trading market for our common stock. As of March 7, 2014, we had one record holder of our common stock, Igloo Intermediate Corporation; Igloo Intermediate Corporation had one holder of its common stock, Igloo Holdings Corporation; Igloo Holdings Corporation had nineteen (19) stockholders of record of its common stock. See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for additional information about the ownership of Igloo Holdings Corporation’s common stock.
Stockholder
As of March 7, 2014, there were 10 outstanding shares of our common stock held by one stockholder of record.
Dividends
The Senior Secured Credit Facilities and the indenture governing our Senior Notes contain covenants limiting our ability to pay dividends. Any future determination to pay dividends will depend upon, among other factors, our results of operations, financial condition, capital requirements, any contractual restrictions and any other considerations our Board deems relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Note 16 “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Igloo Dividends
In December 2012, we paid a dividend of $100.0 million to Intermediate, which in turn paid a dividend of $100.0 million to Holdings. Holdings used this dividend as well as net proceeds of $339.0 million from the Toggle Notes issued by Holdings to fund a cash dividend to its stockholders and related cash distributions to its option holders. Our cash dividend to Intermediate was accounted for in our Consolidated Financial Statements as a return of capital.
In the year ended December 31, 2013, we paid two dividends in the amounts of $14.3 million and $14.4 million, respectively, to Intermediate, which in turn paid dividends in the same amounts to Holdings. Holdings used these dividends to service Holdings’ June 15 and December 15 interest payments related to the Toggle Notes. Each of these 2013 cash dividends to Holdings were accounted for in our Consolidated Financial Statements as a dividend to our parent company. For further information see Note 16 “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and the “Igloo Holdings Senior PIK Toggle Notes Due 2017” section below.
Item 6.
Item 6. Selected Financial Data
The selected consolidated financial data set forth below should be read in conjunction with our consolidated financial statements and notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Form 10-K. The selected consolidated statement of operations data for the years ended December 31, 2013, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013 and 2012 have been derived from our audited consolidated financial statements, which are included in Item 8 of this Annual Report on Form 10-K. The selected consolidated statement of operations data for the periods from January 1, 2010 through July 29, 2010 and from July 30, 2010 through December 31, 2010 and the fiscal year ended December 31, 2009, and the selected consolidated balance sheet data as of December 31, 2010, and 2009 have been derived from other audited consolidated financial statements not included herein. The year ended December 31, 2009 and the period from January 1, 2010 through July 29, 2010 are considered the “Predecessor” periods, as they are the periods prior to the Merger and the period from July 30 to December 31, 2010 and the years ended December 31, 2011, December 31, 2012, and December 31, 2013 all of which are subsequent to the Merger are considered the “Successor” periods. The selected financial data below also includes the sum of the results of the 2010 Predecessor and Successor periods on a combined basis, referred to as Combined 2010. This combined presentation is not in accordance with accounting principles generally accepted in the United States (“GAAP”). Due to purchase accounting adjustments, Combined 2010 results may not be strictly comparable to 2011, 2012 or 2013 results; however, we believe that presentation and discussion of Combined 2010 results is meaningful to investors as it enables a reasonable comparison to the comparable years ended December 31, 2011, 2012 and 2013.
We recorded a $10.9 million out-of-period accounting adjustment in the second quarter of 2009 related to the write-down of certain assets and the accrual of certain liabilities associated with our European real-time market data services operation. Our European real-time market data services operation represented approximately five percent of our total revenue in 2008. The out-of-period accounting adjustment decreased second quarter 2009 revenue by $2.3 million, increased second quarter 2009 cost of services expense by $7.5 million, most of which related to data acquisition expenses, and increased second quarter 2009 selling, general and administrative expenses by $1.1 million which was mainly associated with sales commissions, commissions paid to third parties, and premises costs. The revenue and expenses associated with this out-of-period adjustment were not properly recorded in prior periods, primarily in 2008 and the first quarter of 2009. This matter has not had a significant impact on our ongoing operations. All expenses related to this out-of-period accounting adjustment have been paid, and our relationships with our customers and business partners have been unaffected. We recorded the out-of-period accounting adjustment after various management reviews were conducted following the departure of an accountant within the European real-time market data services operation. Based on management’s review, we concluded that this former employee incorrectly recorded certain journal entries and that these errors were limited to the European real-time market data services operation. We took action to enhance the control structure including the clarification and centralization of the financial reporting lines within our various business units, and the recruitment of additional senior-level financial management and staff to our finance team.
Based upon an evaluation of all relevant quantitative and qualitative factors, we do not believe that the effects of the out-of-period accounting adjustment had a material effect on our full-year 2009 financial results. We also do not believe that the out-of-period accounting adjustment, individually or in the aggregate, is material to any previously issued annual or quarterly financial statements. Because the out-of-period accounting adjustment, both on an individual account basis and in the aggregate, was not material to any of the prior year’s consolidated financial statements and is not material to the full-year
2009 financial results, the out-of-period accounting adjustment was recorded in our consolidated financial statements for the second quarter of 2009. As a result of all of these factors, we have not restated our previously issued annual financial statements or interim financial data.
The table below shows the total impact of the out-of-period accounting adjustment in the second quarter of 2009 by revenue and total expenses, as it relates to prior reporting periods, recorded in the second quarter of 2009 at the actual monthly average foreign exchange rates in effect at the time of the errors:
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with Item 6 “Selected Financial Data” and our consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data”. Dollar amounts presented in the tables in this Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), including footnotes to the tables, are shown in thousands, except per share data.
Overview
We are a leading provider of financial market data, analytics and related solutions. Thousands of financial institutions, as well as hundreds of software and service providers subscribe to our services. We are one of the world’s largest providers of financial data, serving the mutual fund, bank, asset management, hedge fund, securities and financial instrument processing and administration sectors. We distribute our financial data and related offerings directly to customers and indirectly through VARs, including software providers, processors and custodians.
This MD&A excludes the accounts of Intermediate and Holdings and reflects only our accounts, as the surviving corporation following the Merger. Refer to Note 1 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K for additional information.
The Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K are presented for the years ended December 31, 2011, December 31, 2012 and December 31, 2013.
Our financial reporting is currently based on two reportable operating segments: Pricing and Reference Data, and Trading Solutions. The Pricing and Reference Data segment represents our evaluated pricing, reference data and fixed income analytics service areas. The Trading Solutions segment represents our real-time data feeds, trading infrastructure managed services, hosted web applications and workstations. Please refer to Note 12 “Segment Information” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Pricing and Reference Data
Our Pricing and Reference Data segment provides an extensive range of financial market data services and analytics to thousands of customers worldwide including banks, brokerage firms, mutual fund companies, exchange traded fund (“ETF”) sponsors, hedge funds, pension funds, insurance companies and asset management firms. In addition, our offerings are also used by financial information providers, information media companies, and VARs such as software providers, processors, custodians and other outsourcing organizations. The Pricing and Reference Data Segment has three core offerings: 1) evaluated pricing services, which are daily opinions of value, on approximately 2.7 million fixed income securities, international equities and other hard-to-value financial instruments; 2) reference data, which encompasses listed markets pricing and descriptive information covering over 10 million global financial instruments for use across the securities and financial instrument processing lifecycle; and 3) fixed income portfolio analytics and fixed income data to help manage risks and analyze the sources of investment risk and return. This segment accounted for $639.6 million, or 70.7%, of our revenue for the year ended December 31, 2013.
Trading Solutions
Our Trading Solutions segment provides thousands of customers worldwide with products and services that support a range of trading, wealth management and other investment applications. The Trading Solutions segment has two primary offerings: 1) real-time market data feeds and trading infrastructure managed services used by banks, brokerage firms, asset managers, hedge funds, proprietary trading firms and VARs in order to facilitate and support low latency electronic trading across a range of asset classes as well as support other applications such as portfolio pricing, risk and compliance; and 2) customized hosted web applications and workstations that facilitate access to market data and related analytics and tools for financial advisors, energy and commodity professionals, active traders and individual investors, other investment community professionals, and a range of corporate clients. This segment accounted for $265.5 million, or 29.3%, of our revenue for the year ended December 31, 2013.
Business and Market Trends
The global financial markets have experienced extreme volatility and disruption in recent years. As a result, financial institutions globally have acted to control or reduce operational spending. Nevertheless, during this time, we have maintained positive overall revenue growth, although certain of our business areas have experienced declining revenue.
We expect that uncertainty with respect to spending on financial information and related services will persist into 2014. While in some areas the anticipated impact of current trends may lead to reduced demand for market data and related services, we believe overall spending on financial information services will grow modestly over the next several years. At this time, however, it remains unclear which segments of the financial market data industry will be most impacted by the current market and regulatory environment and the continued focus on controlling or reducing spending.
We believe that the following trends will influence the growth of the financial information services industry in general and certain of our offerings in particular.
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Increased regulation, continued changes to accounting standards and growing emphasis on risk management within financial services: We believe that increased regulation, and greater oversight and scrutiny by regulators worldwide, combined with potentially greater use of fair value accounting standards globally and an intensifying focus on risk management and transparency, will increase demand for our Pricing and Reference Data offerings and analytical decision-support tools. However, it is unclear at this time how and to what degree these trends will impact our business.
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Increased focus on cost containment and operational efficiency: In recent years, a number of large financial institutions took actions to downsize their organizations and reduce or contain spending. Related to this, there has been and continues to be an industry trend for financial institutions to outsource various financial market data applications and services. In addition to outsourcing specific applications, many North American financial institutions outsource their back-office operations to service bureaus and custodian banks. The cost containment and outsourcing trends, individually or in combination with each other, may impact our business either positively through increased adoption of our products and services as customers seek to consolidate their spending with us or outsource certain operations by leveraging our services; or adversely through longer sales cycles, increased cancellations, service downgrades, reductions in the growth of usage-related revenue, and increased pricing pressure.
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Growth in global assets under management: Over the past several years, global assets under management have increased largely due to rising net flow of investment and strong performance in major equity and fixed income markets. Periods of high fund flows and strong market performance typically lead to the creation of new funds and new firms to manage investment demand while low fund flows, poor market performance and net redemptions often result in a reduction in the number of funds and firms that manage investment assets. Although our revenue is not directly linked to assets under management, these trends help highlight the overall health of the global financial markets and the financial health of the participants in those markets. As a result, these trends can be indicative of a firm’s overall capacity to purchase market data and related solutions.
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Continued innovation in electronic trading systems: Financial institutions are increasingly deploying automated algorithmic and electronic trading applications to more efficiently execute their trading strategies. These applications require connectivity to stock exchanges and trading venues with minimal latency. We believe we are well positioned to assist financial institutions seeking to outsource their connectivity and related infrastructure in support of their low latency electronic trading applications. In addition, the trend toward algorithmic and other electronic trading programs is contributing to significant growth in market data volumes, thereby requiring both market data suppliers like ourselves and financial institutions to increase network capacity to address these volume issues.
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Consolidation within and across the financial services industry: Over the past decade, there have been a considerable number of merger and acquisition (“M&A”) transactions involving financial institutions of varying sizes. The merger of two or more financial institutions can often lead to the elimination of redundant data sources. Our experience is that the integration of two or more financial institutions that merge may take up to two or more years, and can present us with both opportunity and risk for our future revenue as a result. The opportunity is that we may gain a larger customer that may seek to spend more with us across their consolidated operations. The risk is that we may lose revenue if the combined entity either elects to consolidate data services with another vendor or eliminates data sourcing that is redundant. We deliver market data services to a number of customers involved in recent M&A activity. It remains unclear how our customers’ recent M&A activity will affect their near and long-term spending on our offerings. M&A activity within the financial services industry may adversely impact our future revenue.
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Confluence of dynamics within the wealth management sector: We believe that there are a myriad of changes that have occurred to influence how financial services companies manage their global wealth management capabilities, including the ways in which they utilize market data and related solutions. Among the key demographic trends are the long-term growth in savings and investments related to the population born in the years following World War II (referred to as the baby boom generation), the privatization of various pension programs, and significant wealth accumulation in certain emerging markets. Key sector specific trends within
wealth management include significant market volatility, increased and evolving regulation, consolidation among broker workstation vendors, consolidation of broker-dealers and clearing firms that typically service smaller retail and regional brokerage firms, increasing client asset shifts toward independent registered investment advisors and online brokers, downsizing and other cost-reduction initiatives by brokerage firms, and intensified competition for active trader subscribers. Overall, we expect the combination of these trends to have a favorable impact on our offerings for the wealth management sector, although certain aforementioned trends such as downsizing and cost reduction initiatives, and intensified competition for active trader subscribers have potential to adversely impact our future revenue.
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Recent and anticipated innovation in structuring financial instruments: The complexity of financial instruments escalated during the past decade, although new issuances of certain asset classes slowed significantly in the wake of the recent financial crisis. We believe that there will be continued innovation in the types of financial instruments being issued and we expect that this will provide us with additional growth opportunities. Determining the fair value of highly complex instruments that trade infrequently, if at all, in secondary markets requires specialized expertise, and the firms trading these instruments often seek to obtain data and services from independent third-party providers like ourselves to assist them in their valuation of these instruments. Although new issuance of certain complex fixed income financial instruments has recovered, it is unclear whether such recovery is sustainable should interest rates rise or new regulations be implemented that would curb demand for these instruments.
Our Pricing and Reference Data segment continued to grow throughout 2013 primarily due to expansion within our evaluated pricing and reference data product areas in North America. Key drivers within these product areas were strong revenue retention rates; increased demand from existing customers and, to a lesser extent, new customers that have resulted in new subscriptions, modestly higher usage revenue related to the addition of new end-user customers through our VAR channel, new fund launches, support of evolving investment strategies and other activities that require new data sets or data for an increased number of securities; certain one-time sales related to specific content sets and/or the evolving use of data to support a broader set of business activities; and the effect of annual price increases. Maintaining existing business and closing new sales are dependent on our ability to meet the current and evolving needs of our customers, particularly as regulatory changes occur and as financial instruments become more numerous.
We have historically achieved high revenue retention rates within our Pricing and Reference Data segment due primarily to the strength of our offerings, the way in which our services often support workflow-centric applications, as well our responsive account management and support. We measure revenue retention rates for this segment by using the following formula: we divide the dollar magnitude of cancellations (including service downgrades and renegotiations) we received during the prior 12 months by the annualized quarterly revenue entering that same 12-month period. We then subtract this percentage from 100% to derive the annualized quarterly revenue retention rate. Our annualized quarterly revenue retention rate for our Pricing and Reference Data segment has averaged approximately 94% since 2007, and it was approximately 94% as of December 31, 2013 and 2012. We have revised our calculation for all periods presented to now include service downgrades and renegotiations. The timing and magnitude of cancellations (including service downgrades and renegotiations) have the potential to distort annualized revenue retention rates in any segment or product area for any given period.
The revenue performance within our Trading Solutions segment in recent years has been impacted by challenging market conditions, which have continued to affect the segment’s new sales and cancellation levels to varying degrees across both product areas. During 2013, we have experienced extended sales cycles, particularly for larger, more strategic engagements, while cancellations have increased in certain product areas, such as hosted web applications, due in part to cost pressures facing certain clients resulting in the business being shifted to lower priced alternatives or a decision to host the web application internally. In our workstations product area, our success in expanding the subscriber base for our workstations in the North American wealth management sector in recent quarters has helped to offset challenges in retaining subscribers for our workstations targeting the active trader segment. Growth in our Trading Solutions segment is dependent, in large part, on a combination of the following: increasing real-time feeds sales, driving continued adoption of our trading infrastructure managed services, expanding our presence in the wealth management sector, attracting new subscribers for our active trader, and energy and commodity workstations, and strengthening overall customer retention.
Within our Trading Solutions segment, we report the total number of global subscribers across our range of workstations. As of December 31, 2013, our workstations and related services supported approximately 81,700 total subscribers worldwide, compared with approximately 81,000 total subscribers as of December 31, 2012. Please note that the total number of subscribers now includes certain subscribers who use modified versions of our workstations that offer fewer features and limited content (these subscribers had not been included in prior quarterly or annual filings during 2011 or 2012). The total number of subscribers as of December 31, 2012 was updated so as to be comparable to December 31, 2013. Period-to-period changes in the total number of global subscribers, as well as shifts in the mix of subscribers by service type can also impact future revenue.
Across each of our businesses, regardless of business segment, we contract with customers through fixed fee subscriptions (on either a multi-year, annual, quarterly or monthly basis), variable fees based on usage or a combination of fixed fee subscription and usage-based fees. In addition, some of our services generate one-time or non-recurring revenue, such as one-time purchases of historical data or installations (including product upgrades, set-up services or other related customized development, or hardware-related infrastructure implementations). Our contracts typically renew automatically unless canceled by one of the parties.
Results of Operations
Selected Financial Data
Impact of Foreign Exchange
On a quarterly and annual basis, we calculate the impact of the change in foreign exchange rates between the current reporting period and the respective prior year reporting period. We provide the U.S. dollar impact resulting from the change in foreign exchange rates on current period revenue, cost of services, selling, general and administrative, depreciation, and amortization expenses. We calculate this impact by comparing the average foreign exchange rates for each operating currency for the current reporting period to the average foreign exchange rates for such operating currency for the respective year-ago reporting period. Additionally, when determining our growth rate, we use constant foreign exchange rates in order to view business results without the impact of changing foreign exchange rates. Foreign currency fluctuations are outside our control and the impact on results of operations of currency fluctuations may not be indicative of the underlying performance of the business. Generally, when the U.S. Dollar either strengthens or weakens against other currencies, the growth at constant foreign exchange rates will be higher or lower than growth reported at actual exchange rates. In 2013, the value of the U.S. Dollar generally strengthened against the Euro and the British Pound.
This presentation using constant foreign exchange rates is considered a Non-GAAP measure; however, management believes that providing this information to investors facilitates period-to-period comparisons of our underlying business and results of operations.
2013 VERSUS 2012
Revenue
Total revenue for the year ended December 31, 2013 increased by $25.0 million, or 2.8%, to $905.1 million compared with the year ended December 31, 2012. The change in foreign exchange rates decreased total revenue by $4.4 million in the year ended December 31, 2013. Excluding the impact of foreign exchange, total revenue increased by $29.4 million or 3.3% to $909.5 million. The impact of foreign exchange is primarily related to fluctuations of the U.S. dollar against the British Pound and the Euro.
Pricing and Reference Data
Revenue within the Pricing and Reference Data segment increased by $27.2 million, or 4.4%, to $639.6 million in the year ended December 31, 2013 compared with the year ended December 31, 2012. The change in foreign exchange rates decreased Pricing and Reference Data revenue by $3.9 million in the year ended December 31, 2013. Excluding the impact of foreign exchange, Pricing and Reference Data revenue increased by $31.1 million, or 5.1%, to $643.5 million. This increase primarily reflects growth in our evaluated pricing and reference data services in North America from a combination of steady retention levels, new sales to existing customers and increases in usage revenue primarily from existing customers, one-time sales and the effect of an annual price increase.
Trading Solutions
Revenue within the Trading Solutions segment decreased by $2.3 million, or 0.8%, to $265.5 million in the year ended December 31, 2013 compared with the year ended December 31, 2012. The change in foreign exchange rates decreased Trading Solutions revenue by $0.5 million in the year ended December 31, 2013. Excluding the impact of foreign exchange, Trading Solutions revenue decreased by $1.8 million, or 0.7%, to $266.0 million. Lower revenue in the hosted web applications product area related to a combination of continued new sales softness and higher erosion was mostly offset by modest growth in our trading infrastructure managed services and, to a lesser extent, our real-time feeds product area.
Cost of Services
Cost of services expenses are composed mainly of personnel-related expenses, communication, data acquisition, outside professional services and expenditures associated with software and hardware maintenance agreements.
Cost of services expenses increased by $5.0 million, or 1.7%, to $297.4 million during the year ended December 31, 2013 compared with the year ended December 31, 2012. The change in foreign exchange rates decreased cost of services expense by $2.4 million. Excluding the impact of foreign exchange, cost of services expenses increased by $7.4 million, or 2.5%. The increase to expenses in the year ended December 31, 2013 compared with the same period in 2012 is primarily related to (1) an increase of $2.5 million in hardware costs related to 7ticks customer implementations; (2) an increase of $2.5 million in data acquisition expense primarily due to the addition of new data sources and higher license fees; and (3) an increase of $1.4 million in communications expense due to a data center expansion project. These increases were partially offset by a decrease in personnel-related expenses of $1.2 million due to increased capitalization of costs for internal development projects. Cost of services as a percentage of revenue was 32.9% in the year ended December 31, 2013 compared with 33.2% in the year ended December 31, 2012.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are composed mainly of personnel-related expense, outside professional services, advertising and marketing expenses, occupancy-related expenses, and commissions paid to third parties for distribution of our data to customers.
During the year ended December 31, 2013, selling, general and administrative expenses decreased by $4.1 million, or 1.5%, to $272.3 million compared with the year ended December 31, 2012. The change in foreign exchange rates decreased selling, general, and administrative expenses by $3.5 million. Excluding the impact of foreign exchange, selling, general and administrative expenses decreased by $0.7 million or 0.2%. The decrease to expenses in the year ended December 31, 2013 compared with the same period in 2012 is primarily related to (1) receipt of insurance proceeds of $2.9 million in 2013 related to our 2012 claim associated with losses due to the impacts of Hurricane Sandy; (2) a $1.5 million decrease due to reduced franchise taxes; (3) a $1.3 million decrease in transactional foreign exchange losses on operating activities; (4) a $1.0 million decrease in advertising and marketing expense related to lower media advertising costs; and (5) a $1.0 million decrease in other professional services due in part to fewer tax and special projects in 2013 as compared to 2012.
These decreases were partially offset by an increase in personnel-related expenses of $3.8 million resulting from an increase in salaries, sales commissions, incentive compensation and related fringe costs totaling approximately $13.9 million in 2013 being mostly offset by a $10.1 million decrease in stock-based compensation expense in 2013. The decrease in stock-based compensation expense in 2013 is attributed to lower stock based compensation costs being incurred in 2013 related to cash distributions paid to employees as a result of the December 2012 Holdings recapitalization transaction. Selling, general, and administrative expenses as a percentage of revenue was 30.1% in the year ended December 31, 2013, compared with 31.4% for the year ended December 31, 2012. For further information regarding the recapitalization transaction, see the heading “Holdings 2012 Recapitalization” Note 6 “Stock-based Compensation” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Depreciation
During the year ended December 31, 2013, depreciation expense increased by $1.1 million, or 2.6%, to $42.5 million compared with the year ended December 31, 2012. The change in foreign exchange rates decreased depreciation expense by $0.5 million. Excluding the impact of foreign exchange, depreciation expense increased by $1.6 million, or 3.9%. The increase is primarily related to an approximately $0.8 million increase due to the additional depreciation expense recognized on internal development projects placed in service late in 2012 and during the year ended December 31, 2013.
In addition, in the fourth quarter of 2012, we adjusted the estimated useful lives of certain information technology assets with a cost basis of approximately $10.9 million to reflect shorter estimated useful lives, resulting from a review of in process information technology initiatives. This change in accounting estimate resulted in accelerated depreciation on these assets from October 1, 2012 through the end of their estimated useful lives determined to be December 31, 2013. The impact on our full year 2013 and 2012 results were increases in depreciation expense of approximately $2.5 million and $0.8 million, respectively. In May 2013, continued review of our information technology initiatives resulted in an extension of the estimated useful lives of these identified assets from December 31, 2013 to December 31, 2014. This change in accounting estimate resulted in a decrease in depreciation expense of $2.5 million for the year ended December 31, 2013. Therefore, the net impact for the year ended December 31, 2013 of these 2012 and 2013 changes in useful lives was inconsequential. In December 2013, we determined that scope changes to our information technology initiatives would further extend a portion of the estimated useful lives of the identified assets to December 31, 2015. The scope changes were identified in December 2013 and it was determined that any impact from extending the estimated useful lives would have been immaterial on our 2013 consolidated financial statements taken as a whole. Therefore, the adjustment to the estimated useful lives resulting from the identified scope changes will be accounted for as a change in accounting estimate commencing in 2014.
Amortization
During the year ended December 31, 2013, amortization expense decreased by $21.2 million, or 15.3%, to $116.9 million compared with the year ended December 31, 2012. The change in foreign exchange rates decreased amortization expense by $0.7 million. Excluding the impact of foreign exchange, amortization expense decreased by $20.5 million, or 14.8%. The decrease in amortization is the result of the following factors: (1) a $11.0 million decrease from the impact of assets that are being amortized using the economic benefit method nearing the end of their useful lives, and consequently having lower amortization rates than in the prior year; (2) a $8.7 million decrease due to the change in the estimated useful lives of completed technologies related to our in-process development initiatives; and (3) a $0.8 million decrease due to assets that had become fully amortized during 2013 and therefore include a full year of amortization in the year ended December 31, 2012, but less amortization for the year ended December 31, 2013. For further information on the extension of the useful lives refer to Note 4 “Intangible Assets and Goodwill” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Interest Expense
Net interest expense was $137.6 million for the year ended December 31, 2013 compared with $149.5 million for the year ended December 31, 2012. The year-over-year difference results from lower interest expense as a result of (1) a decrease in the applicable Term Loan interest rate following the refinancing of our Term Loan that occurred in February 2013, with the lower rate realized for eleven months of the year ended December 31, 2013 and not during the same period in 2012; and (2) a decrease due to the write-off of a portion of the Term Loan original issue discount and deferred financing costs related to the debt extinguishment in connection with the February 2013 refinancing. This write-off was reflected as part of the loss on extinguishment of debt in the year ended December 31, 2013 instead of as a component of interest expense. For further information on our Term Loan Facility, see Note 16 “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Loss on Extinguishment of Debt
A loss on extinguishment of debt of $10.2 million was realized during year ended December 31, 2013, with no such activity in the year ended December 31, 2012. The loss on extinguishment related to the February 2013 refinancing of our Term Loan. The loss on extinguishment included the write-off of $3.6 million of unamortized debt financing costs, $3.9 million of unamortized original issue discount and $2.7 million of direct issuance costs incurred to complete the February 2013 refinancing.
Income Taxes
For the year ended December 31, 2013, our effective tax rate was a 17.6% benefit, as compared with a 106.0% benefit for the year ended December 31, 2012. For the year ended December 31, 2013, we recorded an income tax benefit of $5.0 million, compared with a benefit of $17.9 million for the year ended December 31, 2012.
For the year ended December 31, 2013, our effective tax rate before discrete items was a 19.9% expense, as compared with a benefit of 54.3% for the year ended December 31, 2012. The change in our effective tax rate before discrete items is primarily due to a shift in pre-tax income from our foreign subsidiaries to the U.S. during 2013 that is taxed at a higher federal and state tax rate, reduced in part by increased U.S. research and development credits when compared with 2012. In 2012 there was no benefit recorded for the research credit which was extended by the American Taxpayer Relief Act of 2012 (ATRA”) enacted on January 3, 2013.
The year ended December 31, 2013 included a discrete benefit of $10.7 million. The discrete benefit was primarily attributable to a reduction of the U.K. tax rate enacted in July 2013 by Her Majesty’s Revenue and Customs (“HMRC”) which resulted in a $7.8 million benefit during the year. The discrete benefit also included a benefit for the 2012 U.S. Research and Development Credit which was extended by The American Taxpayer Relief Act of 2012 (“ATRA”) enacted on January 3, 2013, and the release of tax reserves, being partially offset by tax provision to tax return adjustments with respect to filing of prior year’s returns in U.S. and foreign jurisdictions and an interest expense charge on tax reserves for unrecognized tax benefits. The year ended December 31, 2012 included a discrete benefit of $8.7 million, primarily related to tax rate changes in foreign jurisdictions, and tax provision to return adjustments.
As of December 31, 2013, we had approximately $12.2 million of net unrecognized tax benefits ($22.7 million on a gross basis) which would affect our effective tax rate if recognized. We believe that it is reasonably possible that approximately $0.2 million of our current remaining net unrecognized tax positions may be recognized within the next twelve months as a result of the lapse of the statute of limitations in various tax jurisdictions.
We recognize net interest and penalties related to uncertain tax positions in income tax expense. Net interest and penalties of $0.1 million were provided in income tax expense for uncertain tax positions for each of the years ended December 31, 2013 and 2012. As of December 31, 2013 and December 31, 2012, gross reserves for interest and penalties were $1.2 million and $1.0 million, respectively.
We file federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business, we are subject to examination by taxing authorities in various jurisdictions. Our federal tax returns for the tax years 2008 through 2012 are currently under examination by the Internal Revenue Service. Our state tax returns, for certain states, remain subject to examination for tax years 2006 through 2012. We will begin a German audit in 2014 for tax years 2010 through 2012.
We recognize future tax benefits or expenses attributable to our taxable temporary differences and net operating loss carry forwards. Recognition of deferred tax assets is subject to our determination that realization is more likely than not. Based on taxable income projections, we believe that the recorded deferred tax assets will be realized.
We were not a U.S. Federal or U.K. cash taxpayer for the year ended December 31, 2013 and we expect we will maintain such status as it pertains to U.S. Federal taxes through 2014, however we expect that we will be a U.K. cash taxpayer in 2014, based on our results of operations to date and expected results for the remainder of fiscal 2014, including our use of net operating loss carry-forwards in the U.S. and our prepaid tax position in the U.K.
2012 VERSUS 2011
Revenue
Total revenue for the year ended December 31, 2012 increased by $12.4 million, or 1.4%, to $880.2 million compared with the year ended December 31, 2011. The change in foreign exchange rates decreased total revenue by $6.6 million in the year ended December 31, 2012 and the purchase price allocation adjustment to deferred revenue decreased total revenue by $0.9 million in the year ended December 31, 2011. Excluding the impact of foreign exchange and the purchase price allocation adjustment to deferred revenue, total revenue increased by $18.2 million or 2.1% to $886.8 million. The impact of foreign exchange is primarily related to fluctuations of the US dollar against the British Pound and the Euro.
Pricing and Reference Data
Revenue within the Pricing and Reference Data segment increased by $20.5 million, or 3.5%, to $612.4 million in the year ended December 31, 2012 compared with the year ended December 31, 2011. The change in foreign exchange rates decreased Pricing and Reference Data revenue by $2.1 million in the year ended December 31, 2012 and the purchase price allocation adjustment to deferred revenue decreased Pricing and Reference Data revenue by $0.6 million in the year ended December 31, 2011. Excluding the impact of foreign exchange and the purchase price allocation adjustment to deferred revenue, Pricing and Reference Data revenue increased by $22.0 million, or 3.7%, to $614.5 million primarily due to expansion within our evaluated pricing and reference data product areas in the U.S. and the Asia-Pacific regions, due to increased demand from existing customers and, to a lesser extent, new customers, as well as the impact of annual price increases, and improved performance within our fixed income analytics product area.
Trading Solutions
Revenue within the Trading Solutions segment decreased by $8.1 million, or 2.9%, to $267.7 million in the year ended December 31, 2012 compared with the year ended December 31, 2011. The change in foreign exchange rates decreased Trading Solutions revenue by $4.5 million in the year ended December 31, 2012 and the purchase price allocation adjustment to deferred revenue decreased Trading Solutions revenue by $0.3 million in the year ended December 31, 2011. Excluding the impact of foreign exchange and the purchase price allocation adjustment to deferred revenue, Trading Solutions revenue decreased by $3.8 million, or 1.4%, to $272.3 million as continued growth in our trading infrastructure managed services and, to a lesser extent, our hosted web applications was more than offset by lower revenue in the real-time feeds and workstations product areas.
Cost of Services
Cost of services expenses are composed mainly of personnel-related expenses, communication, data acquisition, outside professional services and expenditures associated with software and hardware maintenance agreements.
Cost of services expenses decreased by $1.1 million, or 0.4%, to $292.4 million during the year ended December 31, 2012 compared with the year ended December 31, 2011. The change in foreign exchange rates decreased cost of services expense by $4.0 million. Excluding the impact of foreign exchange, cost of services expenses increased by $2.9 million, or 1.0%. During the year ended December 31, 2012, salary and personnel related expense increased by $3.3 million reflecting the net impact of annual salary and headcount increases partially offset by increased capitalization of salary and personnel expense related to ongoing internal development and technical infrastructure initiatives. Outside professional services increased by $2.4 million and communications expense related to ongoing technical infrastructure initiatives increased by $1.5 million. These increases in cost of services were partially offset by a decrease in hardware expense of $4.3 million related to large third party hardware sales by our 7ticks business that occurred in the year ended December 31, 2011 and did not recur in 2012. Cost of services as a percentage of revenue was 33.2% in the year ended December 31, 2012 compared with 33.8% in the year ended December 31, 2011.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are composed mainly of personnel-related expense, outside professional services, advertising and marketing expenses, occupancy-related expenses, and commissions paid to third parties for distribution of our data to customers.
During the year ended December 31, 2012, selling, general and administrative expenses increased by $18.4 million, or 7.1%, to $276.4 million compared with the year ended December 31, 2011. The change in foreign exchange rates decreased selling, general, and administrative expenses by $2.5 million. Excluding the impact of foreign exchange, selling, general and administrative expenses increased by $20.8 million or 8.1%. During the year ended December 31, 2012, there was an increase in selling, general and administrative related stock-based compensation expense of $13.3 million when compared with the year ended December 31, 2011. The increase in stock-based compensation expense was primarily due to a non-recurring charge related to the accounting treatment of the cash dividend paid by Holdings and cash distributions paid by Holdings to option holders. Other than the increase in stock-based compensation expense, the remaining $5.1 million increase in selling, general and administrative expenses in the year ended December 31, 2012 when compared with the year ended December 31, 2011 is primarily due to a $2.1 million impairment charge recorded in 2012 related to the impact of Hurricane Sandy, an increase in transactional foreign exchange losses on operating activities of $1.8 million, an increase of $1.7 million in severance costs, and an increase in commissions paid to third parties for distribution of our data to customers of $1.6 million due to changes in contractual terms and increased usage. Selling, general, and administrative expenses as a percentage of revenue was 31.4% in the year ended December 31, 2012, compared with 29.7% for the year ended December 31, 2011.
Depreciation
During the year ended December 31, 2012, depreciation expense increased by $2.1 million, or 5.2%, to $41.5 million compared with the year ended December 31, 2011. The change in foreign exchange rates decreased depreciation expense by $0.4 million. Excluding the impact of foreign exchange, depreciation expense increased by $2.4 million, or 6.1% primarily due to increases in depreciation related to internal development projects and a large leasehold improvement project being
placed in service in the year ended December 31, 2012 coupled with increased depreciation expense of approximately $0.8 million related to the acceleration of depreciation on certain computer hardware that will become obsolete upon the completion of our infrastructure development initiatives.
Amortization
During the year ended December 31, 2012, amortization expense decreased by $37.0 million, or 21.2%, to $138.0 million compared with the year ended December 31, 2011. The change in foreign exchange rates decreased amortization expense by $1.0 million. Excluding the impact of foreign exchange, amortization expense decreased by $36.1 million, or 20.6%. The decrease in amortization is primarily attributable to the change in estimate of the useful lives of certain of our completed technologies impacted by our infrastructure development initiatives that occurred in the third quarter of 2011.
Other Consolidated Financial Information
Net interest expense was $149.5 million for the year ended December 31, 2012 compared with net interest expense of $157.1 million for the year ended December 31, 2011. The year-over-year difference results from a decrease in the interest rate on our Term Loan Facility due to the refinancing that occurred in February 2011 having been realized for the full year in 2012 versus 10.5 months in 2011 and an additional 0.25% decrease in our Term Loan Facility interest rate due to our achievement of certain leverage ratios in the second quarter of 2012 having been realized during 2012 and not 2011. Additionally, we recorded a $25.5 million loss on extinguishment of debt related to the refinancing of our Term Loan Facility in the year ended December 31, 2011 that did not recur in 2012. For further information on our Term Loan Facility, see Note 16 “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Other income (expense), net increased by $4.5 million to $0.8 million in the year ended December 31, 2012 from ($3.7) million in the year ended December 31, 2011 primarily related to a $4.0 million increase in the contingent consideration related to our acquisition of 7ticks during the year ended December 31, 2011 that did not recur in 2012, coupled with a reduction in this contingent consideration estimate of $0.4 million in the year ended December 31, 2012. For further information on the contingent consideration related to the acquisition of 7ticks, see Note 14 “Fair Value Measurements” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Income Taxes
We recognized income tax benefits of $17.9 million and $55.3 million, respectively, on losses before income taxes of $16.9 million and ($84.6 million, respectively, for the years ended December 31, 2012 and 2011. Our effective tax rates were 106.0% and 65.3%, respectively, for the years then ended. In the year ended December 31, 2012, our benefit from income generated in foreign jurisdictions was 35.7%.
We recognize net interest and penalties related to uncertain tax positions in income tax expense. Net interest and penalties of $0.1 million and $0.3 million were provided in income tax expense for uncertain tax positions for the years ended December 31, 2012 and 2011, respectively. Gross reserves for interest and penalties of $1.0 million were provided at each of the years ended December 31, 2012 and 2011.
Liquidity and Capital Resources
Sources and Uses of Cash and Cash Equivalents
We expect cash generated from our operating activities to continue to serve as our primary source of liquidity for the next several years. As of December 31, 2013, we had cash and cash equivalents of $356.7 million, short-term investments of $3.4 million and had $159.4 million available under our Revolving Credit Facility. Our cash needs arise from our debt obligations, the purchase of equipment, our intention to pay dividends to our parent companies, improvements of facilities (including investments in our underlying infrastructure to increase the efficiency and capacity of business operations as well as the technology platforms that support our services such as our data centers and ticker plants), working capital requirements and certain acquisitions. Management believes our future uses of cash and cash equivalents will remain largely consistent and that our cash and cash equivalents, combined with expected cash flows generated by operating activities, will be sufficient to meet our operating cash needs for the next several years.
Debt Servicing
In connection with the Merger, we incurred indebtedness totaling $2.0 billion. Note 16 “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, and the discussion below in the Debt related to the Merger section provide additional information regarding our debt obligations.
The following table shows our level of indebtedness and certain other information as of December 31, 2013:
(1) Our Revolving Credit Facility, which matures July 2015, provides for borrowing up to $160.0 million aggregate principal amount (without giving effect to $0.6 million of letters of credit that were outstanding as of December 31, 2013).
(2) In February 2013, we refinanced our Term Loan Facility resulting in a decrease of the applicable margin to (i) 1.75% with respect to term loans bearing interest at ABR (with a minimum ABR “floor” of 2.00%) and (ii) 2.75% with respect to term loans bearing interest at LIBOR (with a minimum LIBOR “floor” of 1.00%). Based upon these changes, our interest rate on our Term Loan Facility is currently 3.75%. Upon consummation of the refinancing, our outstanding principal on our Term Loan Facility was increased from $1.303 billion to $1.305 billion. The maturity date of February 11, 2018 was not changed as part of the refinancing.
(3) Our Senior Notes have a maturity date of August 1, 2018.
Foreign Subsidiaries
Of our $356.7 million of cash and cash equivalents at December 31, 2013, $188.8 million, or 52.9%, is held by our foreign subsidiaries with the U.K. holding the largest share ($111.9 million). Due to statutory limitations imposed by local governments, portions of our cash and cash equivalents held at our foreign subsidiaries are not available for repatriation. We believe that the cash generated from our U.S. operations and funds available under our revolving credit facility will be sufficient to support the liquidity needs of our U.S. based operations; therefore it is our current practice and intent to permanently reinvest our foreign cash and cash equivalents outside the U.S. If the facts and circumstances changed, and we concluded these funds would be needed to support the liquidity needs of our U.S. based operations, we would be required to accrue and pay U.S. taxes to repatriate these funds. For further information see Note 9 “Income Taxes” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
The following table summarizes our cash flow activities for the periods indicated:
Operating Activities
When compared with the year ended December 31, 2012, net cash provided by operating activities increased by $52.2 million, or 30.0%, to $226.2 million in the year ended December 31, 2013. The largest contributor to the increase in operating cash flows was a $24.4 million increase in customer receipts in the year-ended December 31, 2013 when compared with 2012. Other items contributing to the increase in operating cash flow in 2013 are: (1) a $9.6 million increase in cash
flows due to decreased incentive compensation payments made in 2013 when compared with 2012; (2) a $8.9 million increase in operating cash flows related to decreased cash interest payments in 2013, due to our 2013 Term Loan refinancing resulting in a lower interest rate for 10.5 months of 2013;(3) an increase of $1.9 million due to decreased cash distributions to option holders occurring in 2013; (4) an increase of $1.1 million due to reduced cash severance payments in 2013 and (5) a $1.0 million increase as a result of insurance proceeds received in the year ended December 31, 2013 related to the Hurricane Sandy claims made in 2012.
These increases in our operating cash flows were partially offset by a decrease in cash flows of $7.1 million due to lease incentives received in the year ended December 31, 2012 for which similar incentives were not received in the year ended December 31, 2013. The remaining change of $12.4 million is due to higher cash generation driven by a net decrease in other non-cash working capital accounts.
We were not a U.S. Federal or U.K. cash taxpayer for the year ended December 31, 2013 and we expect we will maintain such status for the U.S. through 2014, based on our results of operations to date and expected results for fiscal 2014, including our use of net operating loss carry-forwards in the U.S. We anticipate we will begin paying taxes in the U.K. during 2014.
Investing Activities
When compared with the year ended December 31, 2012, net cash used in investing activities decreased by $24.9 million, or 29.4%, to $59.8 million in the year ended December 31, 2013. This decrease is primarily due to (1) the purchase of only $3.3 million in short-term investments in the year ended December 31, 2013 as compared to purchases of $23.5 million in short-term investments in the year ended December 31, 2012; (2) proceeds from maturities and sales of short-term investments of $22.9 million in the year ended December 31, 2013 compared to proceeds of only $0.3 million in the year ended December 31, 2012; and (3) the receipt of $2.5 million of insurance settlement proceeds in the year ended December 31, 2013 related to our 2012 claim associated with property and equipment that was damaged due to the impacts of Hurricane Sandy. This decrease is partially offset by an increase in purchases of property and equipment of $20.4 million, of which $18.2 million related to technical infrastructure initiatives in the year ended December 31, 2013 when compared to the year ended December 31, 2012.
Financing Activities
When compared with the year ended December 31, 2012, net cash used in financing activities decreased by $95.3 million, or 73.5%, to $34.3 million in the year ended December 31, 2013. The decrease is primarily due to lower dividend payments ($28.7 million of dividend payments to Intermediate, which in turn paid the amounts to Holdings in the year ended December 31, 2013 as compared to a $100.0 million dividend paid to Intermediate (which again then paid the $100.0 million dividend to Holdings) in the year ended December 31, 2012) and a $22.2 million reduction in Term Loan principal payments in the year ended December 31, 2013 as compared to those made in the year ended December 31, 2012.
There was one Term Loan principal payment of $3.7 million made in the first quarter of 2013 which was the annual excess cash flow mandatory prepayment (“ECF”) payment related to 2012, and the first two quarterly Term Loan principal installments of $2.9 million and $3.3 million were made in the third and fourth quarters of 2013. Comparatively, in the first quarter of 2012, the ECF payment related to 2011 was $32.3 million, and no other principal installments were made. Our 2013 ECF payment was less than our 2012 payment due to: (1) our achievement of certain leverage ratios in 2013 reduced the percentage of ECF we were required to offer (from 50% to 25% of ECF) coupled with (2) a higher percentage of ECF payment refusals in 2013 ($16.6 million of refusals related to the $20.3 million 2012 ECF payment, as compared to $14.3 million of refusals related to the $43.0 million 2011 ECF payment).
The various covenants of our debt agreements, including our Senior Secured Credit Facilities and the indenture governing the Senior Notes, restrict our ability to pay dividends. Any future determination to pay dividends will depend upon, among other factors, our results of operations, financial conditions, capital requirements, any contractual restrictions and any other considerations our Board deems relevant. Furthermore, if the payment of a dividend would cause us to exceed the permitted dividend or the restricted payment limitations of our debt agreements, the dividend would require the consent of our secured credit facility lenders or the holders of our Senior Notes, as applicable.
In December 2012, we paid a dividend of $100.0 million to Intermediate, which in turn paid a dividend of $100.0 million to Holdings. Holdings used this dividend as well as net proceeds of $339.0 million from the issuance of $350.0 million of 8.25%/9.00% Senior PIK Toggle Notes (the “Toggle Notes”) issued by Holdings which mature on December 15, 2017, pursuant to an indenture, dated as of December 18, 2012 (the “Toggle Notes Indenture”) to fund a cash dividend to its stockholders and related cash distributions to its option holders. Our cash dividend to Intermediate was accounted for in our Consolidated Financial Statements as a return of capital.
In the year ended December 31, 2013, we paid two cash dividends in the amounts of $14.3 million and $14.4 million, respectively, to Intermediate, which in turn paid the amounts via a dividend to Holdings, to enable Holdings to service the June 15 and December 15 Toggle Notes interest payments. Each of these 2013 cash dividends to Intermediate were accounted for in our Consolidated Financial Statements as a dividend to our parent company. Withstanding any limitations placed upon us by our covenants, we expect to pay Holdings, via dividends through Intermediate, the funds required to service the Toggle Notes on at least a semi-annual basis. Refer to the Holdings Senior PIK Toggle Notes Due 2017 section below for further information on the Toggle Notes.
Debt
Senior Secured Credit Facilities
On February 6, 2013, we completed a refinancing of our Senior Secured Credit Facilities through a second amendment to the credit agreement (the “Amendment”). The Amendment provides for, among other things, the following:
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a reduction of the LIBOR borrowing rate from LIBOR plus 3.25% to LIBOR plus 2.75%;
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a reduction of the LIBOR floor from 1.25% to 1.00%; and
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an extension of the commencement date for amortization payments on the Term Loan Facility to June 30, 2013 (not giving consideration to application of the 2012 ECF payment).
We also have a Revolving Credit Facility (the “Revolving Credit Facility”) in an aggregate principal amount of $160.0 million available in U.S. Dollars, Euros and U.K Pounds with a term of five years expiring July 2015.
Interest Rate and Fees
Borrowings under the Term Loan Facility bear interest at a rate equal to, at our option, either (a) the LIBOR rate plus an applicable margin or (b) the highest of (1) the prime commercial lending rate publicly announced by Bank of America as the “prime rate,” (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, plus an applicable margin. Regardless of whether actual LIBOR rates fall below 1.00% (as they have in recent periods), for purposes of determining the Term Loan Facility interest rate, the LIBOR rate is subject to a floor of 1.00%. Prior to the February 2013 refinancing, the LIBOR applicable margin was 3.25%. Following the February 2013 refinancing, the applicable margin is 2.75%. The highest of the three rates in (b) was 5.00% for the quarter ended December 31, 2013. Since the inception of the Term Loan Facility, we have elected the three-month LIBOR rate. At December 31, 2013, the Term Loan Facility interest rate was 3.75%, composed of a LIBOR floor of 1.00% plus an applicable margin of 2.75%.
In September 2010, we designated as accounting hedges three forward starting interest rate caps related to the Senior Secured Credit Facilities with notional amounts up to $700.0 million declining to $450.0 million over three years, to receive interest at variable rates equal to LIBOR and pay interest at fixed rates of 2.00% starting on September 30, 2011 and increasing to 4.00% by September 30, 2014. On September 28, 2012, the notional amount of our interest rate caps was reduced from $700.0 million to $575.0 million and the fixed rate interest rate increased from 2.00% to 2.50%. On March 28, 2013 the fixed interest rate increased from 2.50% to 3.00%. The notional amount was further reduced to $450.0 million on September 30, 2013. The interest rate caps became effective on September 30, 2011; however, because the cap strike price is higher than the 3 month LIBOR at December 31, 2013, there was no impact on the interest rate during the year ended December 31, 2013.
As part of the refinancing of our Term Loan Facility we reevaluated the interest rate cap agreements and determined that the hedging relationship remained highly effective.
In addition to paying interest on outstanding principal amounts, we are required to pay the lenders a commitment fee of 0.75% per annum on the unutilized commitment of the Revolving Credit Facility. The commitment fee percentage may be reduced to 0.50% subject to us reducing our total leverage ratio to 5.0:1.0. As of December 31, 2013, our total leverage ratio was below 5.0:1.0, resulting in a commitment fee percentage of 0.50%.
Refer to Note 15 “Derivatives” and Note 16 “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Installment Payments under the Term Loan Facility
We are required to pay equal quarterly principal installments in aggregate annual amounts equal to 1% of the original funded principal debt of the Senior Secured Credit Facilities with the balance being payable on the final maturity date. This equates to quarterly principal installments of approximately $3.3 million with the first installment under our refinanced Term Loan due on June 30, 2013. However, during the year ended December 31, 2013, we made a $3.7 million principal payment
related to the 2012 ECF payment, which reduced our June 30, 2013 principal payment to zero and our September 30, 2013 principal payment to $2.9 million. We paid our September 30, 2013 and December 31, 2013 principal payments as required and future quarterly installment payments will revert back to $3.3 million unless impacted by future ECF payments.
Prepayments
The Senior Secured Credit Facilities contain certain mandatory prepayment requirements. These include: (i) a percentage of annual excess cash flow (ECF), (ii) payments related to certain asset sales and (iii) payments of the cash proceeds of certain types of newly incurred debt. Determination of any mandatory prepayment amount is based on pre-established formulas as set forth in the credit agreement. The percentage of ECF we are required to pay is variable depending on our total leverage ratio and is due 90 days after the end of each fiscal year. Because we achieved a total leverage ratio of 4.75:1.0 in the year ended December 31, 2012, the percentage of 2012 ECF we were required to pay as a mandatory prepayment was 25% of ECF. For fiscal 2012, the percentage was 50%. If we achieve a leverage ratio of 4.0:1.0 the percentage is reduced to zero. Accepted ECF payment amounts are offset against future principal payments due on the Term Loan. The amounts determined to be payable as ECF payments at December 31, 2013 and December 31, 2012 were $25.4 million and $20.3 million, respectively, and accordingly these amounts were reflected as current liabilities in our Condensed Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012.
Pursuant to the terms of the credit agreement, individual lenders may opt to refuse their proportionate share of any ECF payment. In the first quarter of 2013, but after the filing of our Annual Report on Form 10-K for the year ended December 31, 2012 with the Securities and Exchange Commission, certain lenders elected to refuse their portion of the 2012 ECF payment. These refusals totaled approximately $16.6 million. The aggregate refused amount was reclassified and reflected as long-term liabilities in our Consolidated Balance Sheet in the first quarter of 2013.
Because we currently cannot reliably estimate or deem probable what portion of the 2013 ECF payment will be refused, we are assuming that 100% of the 2013 ECF payment will be accepted. If 100% is accepted, the 2013 ECF payment will be applied to satisfy all of the scheduled quarterly principal payments on our Term Loan in fiscal 2014 and fiscal 2015 and our next required quarterly principal payment will be due in March 2016.
We may voluntarily repay the outstanding loans under the Senior Secured Credit Facilities at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
Guarantees
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by Intermediate and each of our existing and subsequently acquired or organized direct or indirect wholly-owned domestic restricted subsidiaries (subject to certain exceptions). The Senior Secured Credit Facilities contain a number of covenants that, among other things, restrict our ability to incur additional indebtedness, create liens, enter into sale and leaseback transactions, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions or repurchase its capital stock, make investments, loans or advances, prepay certain subordinated indebtedness, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements governing certain subordinated indebtedness, and change our fiscal year. The Senior Secured Credit Facilities also require us to maintain a maximum senior secured leverage ratio and a minimum cash interest coverage ratio, and contain certain customary affirmative covenants and events of default, including a change of control.
Senior Notes due 2018
On July 29, 2010, we issued $700.0 million of Senior Notes due 2018 bearing annual interest at 10.25% (the “Senior Notes”) of the aggregate principal amount. Interest payments are due semi-annually on February 1 and August 1 of each year until maturity, on August 1, 2018. The first interest payment on the Senior Notes was made on February 1, 2011. During the year ended December 31, 2013, we paid $71.8 million in interest payments related to our Senior Notes representing both of our required payments for the year.
The Senior Notes are our senior unsecured obligations that rank senior in right of payment to future debt; rank equally in right of payment with all of our existing and future senior indebtedness; are effectively subordinated in right of payment to our existing and future secured obligations, including indebtedness under our Senior Secured Credit Facilities, to the extent of the value of the assets securing such obligations; and are effectively subordinated in right of payment to all existing and future indebtedness and other liabilities of our non-guarantor subsidiaries (other than indebtedness and liabilities owed to us or one of our guarantor subsidiaries).
Guarantees
The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of our existing and future direct or indirect wholly owned domestic subsidiaries that guarantee our obligations under its Senior Secured Credit Facilities. The indenture contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability and the ability of our restricted subsidiaries to incur additional debt or issue certain preferred shares, pay dividends on or make other distributions in respect of our capital stock or make other restricted payments, make certain investments, sell or transfer certain assets, create liens on certain assets to secure debt, consolidate, merge, sell or otherwise dispose of all or substantially all of the our assets, enter into certain transactions with our affiliates and designate our subsidiaries as unrestricted subsidiaries. The indenture provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Notes due 2018 to become or to be declared due and payable. The indenture also contains certain customary affirmative covenants pertaining to notice and filings with the Trustee.
Optional Redemption
The Senior Notes are redeemable in whole or in part, at our option, at any time at varying redemption prices that generally include premiums, which are defined in the indenture. Refer to Note 16, “Debt” in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional information. In addition, upon a change of control, we are required to make an offer to redeem all of the Senior Notes at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest.
Future minimum principal payment obligations due per our Senior Secured Credit Facilities and Senior Notes are as follows (in thousands):
(a) Pursuant to the terms of our credit agreement, individual lenders may opt to refuse their share of any ECF payment. This balance assumes that there will be no refusals; however, the actual payment may differ from this amount depending on the final decisions of the individual lenders. As discussed above, accepted ECF payments are applied to reduce quarterly installments in reverse order of maturity.
Covenant Compliance
Under the credit agreement and indenture governing the Senior Notes due 2018, certain limitations, restrictions and defaults could occur if we are not able to satisfy and remain in compliance with specified financial covenants. There are two principal financial covenants: Total Leverage Ratio and Interest Coverage Ratio. As of December 31, 2013 and 2012, we were in compliance with our covenants.
Total Leverage Ratio
Under the credit agreement, we have agreed that we will not permit our Total Leverage Ratio as of the last day of any fiscal quarter ending on any date during any period set forth in the below table to be greater than the ratio set forth below opposite such period. Total Leverage Ratio is defined in the credit agreement as the ratio of Consolidated Net Debt to Consolidated Adjusted EBITDA, which terms are likewise defined terms under the credit agreement.
Interest Coverage Ratio
Under the credit agreement, we have agreed that we will not permit our Interest Coverage Ratio for any period of four consecutive fiscal quarters to be less than the ratio set forth in the table below opposite such period. Interest Coverage Ratio is defined in the credit agreement as the ratio of Consolidated Adjusted EBITDA to Consolidated Cash Interest Expense, which terms are likewise defined terms under the credit agreement.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Covenant EBITDA
Covenant EBITDA (also referred to as Pro Forma adjusted EBITDA) as defined in the credit agreement governing the Senior Secured Credit Facilities and the indenture governing the Senior Notes due 2018 is used to determine our compliance with certain covenants. EBITDA is calculated by adding back to GAAP net (loss) income the following items, interest and other financing costs, net, income taxes, and depreciation and amortization. We also refer to Covenant EBITDA as Pro Forma Adjusted EBITDA (1). Covenant EBITDA is a non-GAAP measure calculated by adding back to EBITDA unusual or non-recurring charges and certain non-cash charges, as well as certain pro forma expected cost savings as permitted under the credit agreement. We believe that presenting Covenant EBITDA is appropriate to provide additional information to investors regarding our compliance with our credit agreement. Any breach of the credit agreement covenants that are based on ratios involving Covenant EBITDA could result in a default under that agreement, and the lenders could elect to declare all amounts borrowed to be due and payable. Any such acceleration would also result in a default under the indenture. Additionally, under the debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Covenant EBITDA.
The calculations of EBITDA and Covenant EBITDA (which are both considered non-GAAP measures) under the credit agreement are as follows:
(1) Interactive Data’s Pro Forma adjusted EBITDA excludes items that are either not part of its ongoing core operations, do not require a cash outlay or are not otherwise expected to recur in the ordinary course. In addition to excluding the aforementioned items, Interactive Data’s Pro Forma adjusted EBITDA also reflects other adjustments permitted under our Senior Secured Credit Facilities. Our Pro Forma adjusted EBITDA measure is based on the definition of EBITDA set forth in the agreements governing our Senior Secured Credit Facilities.
(2) Other non-recurring charges include the impact of the deferred revenue adjustment, the loss on extinguishment of debt ($10.2 million in the year ended December 31, 2013), certain severance and retention expenses, and facility consolidation costs.
(3) Other charges include insurance recoveries, management fees, earn-out revaluation expense, non-cash foreign exchange expense, acquisition-related adjustments, and other costs. The primary changes from 2012 to 2013 are driven by the non-cash foreign exchange expense and insurance recoveries related to Hurricane Sandy.
(4) Pro Forma cost savings of up to a maximum of $30.0 million annually is an adjustment permitted under our credit agreements, as described below, for activities that may include, but are not limited to, the consolidation of a number of legacy organizational silos, technology platforms and content databases.
EBITDA and Covenant EBITDA are not recognized terms under GAAP, and are considered Non-GAAP measures under Item 10 of Regulation S-K. EBITDA and Covenant EBITDA are not intended to be presented as an alternative to GAAP net income or income from continuing operations as a measure of operating performance or to GAAP cash flows from operating activities as a measure of liquidity. Additionally, EBITDA and Covenant EBITDA are not a measure of free cash flow available for management’s discretionary use. Certain cash requirements such as interest payments, tax payments and debt service requirements are added back to GAAP net income for the purpose of calculating EBITDA. The presentation of EBITDA and Covenant EBITDA should not be considered in isolation, or as a substitute for analysis of our results as reported in accordance with GAAP. We believe EBITDA and Covenant EBITDA provide useful information to investors.
EBITDA provides useful information about underlying core business trends as it excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on, among other things, long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. In addition, EBITDA is a defined term under our credit agreement and is a critical component of determining Covenant EBITDA (also defined in the credit agreement) which in turn is used to calculate key credit agreement financial covenants.
Covenant EBITDA, as defined in the credit agreement, includes certain near term cost savings and excludes certain non-recurring charges or allows for other adjustments. Covenant EBITDA was contractually agreed between us and our lenders and is used for the purposes of determining our compliance with financial covenants under the credit agreement. The breach of covenants in our Senior Secured Credit Facilities that are tied to ratios based on Covenant EBITDA could result in a default and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under the indenture governing our Senior Notes due 2018. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Covenant EBITDA.
We believe that the inclusion of information on the adjustments to EBITDA applied in determining Covenant EBITDA is useful additional information to investors regarding certain items we believe will materially impact future results of operations, that we do not expect to reoccur or that we do not expect will continue at the same level in the future. The exclusion of items from Covenant EBITDA is not intended to indicate that management does not believe such items will occur in the future. Covenant EBITDA includes a cost savings allowance related to projected cost savings expected to be achieved in the future. Specifically, Covenant EBITDA can include up to $30.0 million of projected cost savings for specified actions initiated on or prior to July 29, 2012, to the extent we believe such savings will be realized prospectively and are not already realized in EBITDA. The aggregate amount of cost savings added back when determining Covenant EBITDA in any four consecutive quarters is calculated on a pro forma basis as though such cost savings had been realized on the first day of the consecutive four quarter period. EBITDA and Covenant EBITDA are also used by management as measures of liquidity.
Since not all companies use identical EBITDA or Covenant EBITDA calculations, our EBITDA and Covenant EBITDA may not be comparable to other similarly titled metrics used by other companies. We believe the non-GAAP financial measures we provide to investors supplement GAAP results to provide a more complete understanding of the factors and trends affecting our business than GAAP results alone.
Igloo Holdings Senior PIK Toggle Notes Due 2017
On December 18, 2012, Holdings issued $350.0 million Toggle Notes (the “Toggle Notes”) which mature on December 15, 2017, pursuant to an indenture, dated as of December 18, 2012. We are not an obligor under the Indentures governing the Toggle Notes, which are not included on our balance sheet. The Toggle Notes are structurally subordinated to indebtedness and other liabilities of subsidiaries of Holdings that do not guarantee the Toggle Notes. Claims of creditors of such subsidiaries, including trade creditors, and claims of preferred stockholders of such subsidiaries will have priority with respect to the assets and earnings of such subsidiaries over the claims of Holdings’ creditors, including the holders of the Toggle Notes. In addition, the Toggle Notes are unsecured, and, as such, none of our assets, or any of our subsidiaries’ assets, are pledged to secure the obligations under this agreement. However, Holdings is our indirect parent company with no material operations of its own and only limited assets or operations other than the indirect ownership of all of our capital stock. Accordingly, Holdings is dependent upon the distribution of the earnings of its subsidiaries, whether in the form of dividends, advances, payments on account of intercompany obligations or otherwise, to service its debt obligations. Therefore, subject to any limitations placed upon us by our covenants, on at least a semi-annual basis, we will pay dividends to Intermediate who will in turn pay dividends to Holdings, to enable Holdings to service the Toggle Notes. Interest payments are due June 15 and December 15 of each year until maturity. The amount of the semi-annual dividend we expect to pay Holdings (subject to compliance with our own debt covenants) is $14.4 million, which is equal to the semi-annual Toggle Note interest payment.
The first two Holdings Toggle Notes interest payments were due on June 15, 2013 and December 31, 2013, and we paid Intermediate (which in turn paid the same amounts to Holdings) dividends in the amounts of $14.3 million (due to the interest period not covering a full six months) and $14.4 million, respectively, to enable Holdings to service these interest payments.
Off-Balance Sheet Arrangements
As of December 31, 2013, we had no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. For a detailed discussion on the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to stock-based compensation, revenue recognition, goodwill and intangible assets, accrued liabilities and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies require our most significant judgments and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable and collectability is reasonably assured. Revenue for subscription based contracts is recognized ratably over the life of the contract and revenue for usage based contracts is recognized in the month that the products/services are provided. Certain of our businesses collect fees for installation/set-up services which, if deemed a separate deliverable with standalone value, are recognized upon delivery as long as the remaining criteria for recognition of revenue have been achieved. Revenue for installation/set-up services that do not meet the criteria for separation, is recognized ratably either over the contractual term or the expected customer relationship life depending on the professional literature relevant to the transaction. Revenue for professional services is recognized as the services are provided and revenue for hardware is recognized when the installation is complete and the related services go-live.
Some contracts include multiple elements for which we determine whether the various elements meet the applicable criteria to be accounted for as separate elements and make estimates regarding their relative fair values. Revenue for elements
that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement has been met or over the period that our obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria to do so.
We also evaluate all contracts in order to determine appropriate gross versus net revenue reporting.
Deferred revenue represents contractual billings in excess of revenue recognized. We record revenue net of applicable sales tax collected and remitted to state and local taxing jurisdictions. Taxes collected from customers are recorded as a liability in the balance sheet.
Our allowance for doubtful accounts and sales credit reserves are not material to our consolidated revenues or our consolidated financial statements taken as a whole and are not expected to become material in the foreseeable future.
No individual customer accounts for more than 10% of our consolidated revenues.
Goodwill
We perform impairment tests of goodwill assigned to our reporting units in the fourth quarter of each fiscal year, or whenever events or circumstances indicate impairment may exist.
At December 31, 2013, we had two reportable segments: Pricing and Reference Data and Trading Solutions. Within the Pricing and Reference Data segment, there are two reporting units: Pricing and Reference Data Services and BondEdge Solutions. Within the Trading Solutions segment, there are four reporting units: Real-Time Services, 7ticks, Desktop Solutions and Managed Solutions. All of these reporting units have been determined to represent operating segments. In the fourth quarter of 2013, in connection with its periodic review of segment information, we concluded that the 7ticks business should now be classified as a standalone operating segment/reporting unit. Previously 7ticks was classified as a component of the Real-Time Services operating segment/reporting unit. We allocated a portion of the goodwill assigned to the legacy Real-Time Services reporting unit to the 7ticks reporting unit using the relative fair value approach based on the fair value determined in the 2013 annual impairment analysis, for which 7ticks was treated as a standalone reporting unit. Other than the classification of 7ticks as a standalone operating segment/reporting unit in 2013, we did not identified any other changes to the composition of our operating segments or reporting units compared with the year ended December 31, 2012.
In performing goodwill assessments, we rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill impairment. Since judgment is involved in performing goodwill valuation analyses, there is risk that the carrying value of our goodwill may be overstated or understated. We calculate our goodwill valuations using two separate income approach models based on the present value of future cash flows of each reporting unit. One model uses perpetual free cash flows in the calculation of the present value of future cash flows and the other model uses an exit multiple based on consideration of guideline companies adjusted for profitability of our individual reporting units. These cash flows are then discounted at an implied rate of return that we believe a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. This approach incorporates many assumptions including future growth rates, discount factors and income tax rates. Such assumptions take into account numerous factors including historical experience, anticipated economic and market conditions for purposes of determining market value from a market participant perspective. If the estimated fair value of the reporting unit exceeds the respective carrying value of the reporting unit’s assigned assets and liabilities, no impairment is recorded and no further analysis is performed.
If the estimated fair value of a reporting unit is less than the carrying value of the reporting unit’s assigned assets and liabilities, we would perform the Step 2 calculation required under authoritative accounting literature. In Step 2, the implied fair value of the reporting unit’s goodwill would be determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
Based on our annual assessment, including application of the assumptions described above, no impairment in any reporting unit existed and all reporting units had estimated fair values at least 20% in excess of their assigned carrying values.
Although changes in economic and operating conditions impacting our assumptions used to complete the fiscal 2013 goodwill impairment analysis could result in goodwill impairment in future periods, based upon the analysis performed for the year ended December 31, 2013, including consideration of reasonably likely adverse changes in assumptions, we believe it is not reasonably likely that an impairment will occur over the next twelve months.
Commitments and Contingencies
We have obligations under non-cancelable operating leases for real estate and equipment. Real estate leases are for our corporate headquarters, sales offices, and major operating units and data centers. Certain of the leases include renewal options and escalation clauses. In addition, we have purchase obligations for data content.
Our known contractual obligations on a combined basis as of December 31, 2013 are summarized in the table below:
We expect to satisfy our contractual obligations from our existing cash as well as our cash flow from operations. Our key operating locations operate in facilities under long-term leases, the earliest of which will expire in 2014. If we are unable to renew any of the leases that are due to expire in 2014, we believe that suitable replacement properties are available on commercially reasonable terms.
Rental expense was $23.9 million for the year ended December 31, 2013, $20.9 million for the year ended December 31, 2012, and $23.7 million for the ended December 31, 2011.
Purchase Obligations include our estimate of the minimum outstanding obligations under agreements to purchase goods or services that we believe are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable at any time without penalty.
Long Term Debt Obligations in the above table include our obligations under the Senior Secured Credit Facilities and the Senior Notes due 2018, including outstanding letters of credit. Fixed Interest Rate Obligations in the table above include our interest obligations under the Senior Notes due 2018 which are stated at fixed interest rate of 10.25%. We also have variable interest rate obligations under the Senior Secured Credit Facilities which are not included in the table above. Outstanding letters of credit totaled $0.6 million at December 31, 2013. The letters of credit principally secure performance obligations, and allow the holder to draw funds up to the face amount of the letter of credit, bank guarantee or surety bond if the applicable business unit does not perform as contractually required. Excluded from the above table are any payments related to the Toggle Notes, as that debt is not our obligation. Although we are not a party in the Toggle Notes indenture, withstanding any limitations placed upon us by our covenants, we will provide Intermediate who will in turn provide Holdings, through the payment of dividends, the funds required by Holdings to service the Toggle Notes on at least a semi-annual basis. Toggle Note interest payments are due June 15 and December 15 of each year until maturity. The amount of the semi-annual dividend we intend to declare and pay (subject to compliance with our own debt covenants) is $14.4 million, which is equal to the semi-annual Toggle Note interest payment. The first two interest payments were due on June 15, 2013 and December 31, 2013. We declared and paid to Intermediate, who in turn declared and paid to Holdings on such dates dividends in the amount of $14.3 million (due to the interest period not covering a full six months) and $14.4 million, respectively, in order for Holdings to service these interest payments.
In addition, out of the $22.7 million of gross unrecognized tax benefits, $13.3 million and $9.4 million have been recorded in income taxes payable and long-term deferred tax liabilities, respectively, 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 $1.2 million for potential gross interest and penalties at December 31, 2013, which are not included in the table above.
In connection with the provision of services in the ordinary course of business, we may be required to indemnify customers against third-party claims that our services infringe upon such third-party’s intellectual property rights. We have not been required to make material payments under such provisions. We are involved in litigation and are the subject of claims made from time to time, including with respect to intellectual property rights. A portion of the defense and/or settlement costs in some such cases is covered by various commercial liability insurance policies. In other cases, the defense and/or settlement costs are paid from our existing cash resources. In addition, our third-party data suppliers audit us from time to time in the ordinary course of business (including audits underway) to determine if data we license for redistribution has been properly accounted for in accordance with the terms of the applicable license agreement. In view of our financial condition and the accruals established for related matters, management does not believe that the ultimate liability, if any, related to any of these matters will have a material adverse effect on our financial condition, results of operations or cash flows.
Inflation
Although management believes that inflation has not had a material effect on the results of operations during the past three years, there can be no assurance that results of operations will not be affected by inflation in the future.
Seasonality and Market Activity
Historically, we have not experienced any material seasonal fluctuations in our business and we do not expect to experience seasonal fluctuations in the future. However, financial information market demand is largely dependent upon activity levels in the securities markets. In the event that the U.S. or international financial markets were to suffer a prolonged downturn that results in a significant decline in investor activity in trading securities, our sales and revenue could be adversely affected. This was the case with regard to the recent global financial crisis, which did adversely affect our sales and revenue results, as previously described within this MD&A. Our exposure in the U.S. could be mitigated in part by non-U.S. markets sales and revenue, and vice versa.
Recently Issued Accounting Pronouncements
Refer to Note 2 “New Accounting Pronouncements” in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in currency exchange rates and interest rates which could affect its future results of operations and financial condition.
Foreign Currency Risk
A portion of our business is conducted outside the United States through our foreign subsidiaries and branches. We have foreign currency risk exposure related to our operations in non-U.S. markets where we transact business in currencies other than the U.S. dollar. Accordingly, we are subject to exposure from adverse movements in currency exchange rates. Our foreign subsidiaries maintain their accounting records in their respective local currencies. Consequently, changes in currency exchange rates may impact the translation of international statements of operations into U.S. dollars, which may in turn affect our consolidated statements of operations. Due to the significant size of our operations in Europe, our primary exposure currently rests with the British Pound and the Euro to U.S. dollar exchange rates. Historically we have not entered into forward currency exchange rate contracts. To date, the effect of foreign currency risk on our business has varied from quarter to quarter as a result of the impact of global economic events on currency exchange rates and we expect it will continue to do so.
Please refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the impact of foreign exchange on our business and results of operation.
Total revenue for the periods below by geographic region outside the United States, was as follows:
Long-lived assets by geographic region outside the United States were as follows:
Interest Rate Risk
We have interest rate risk due to our Term Loan which is variable rate debt with the interest rate determined by reference to a floating rate index. This risk is hedged by interest rate caps. As of December 31, 2013, the Term Loan had an outstanding principal balance of $1.3 billion. We are party to forward starting interest rate cap agreements that hedge the interest rate risk exposure on $700.0 million of the principal amount. The interest rate as of December 31, 2013 was 3.75% (1.00% LIBOR floor plus an applicable LIBOR margin of 2.75%). An increase of 1% in our Term Loan interest rate above our December 31, 2013 rate of 3.75% would increase our interest expense over the subsequent four-quarter period by approximately $13.1 million. As of December 31, 2013, approximately 35% of our total outstanding variable-rate debt exposure is hedged by the interest rate caps. Please refer to Note 15 “Derivatives” and Note 16 “Debt” in the Notes to the Consolidated Financial Statements in Item 8
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of
Interactive Data Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Interactive Data Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), stockholder’s equity and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interactive Data Corporation and subsidiaries at December 31, 2013 and December 31, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 13, 2014
PART I-FINANCIAL INFORMATION
Financial Statements
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
The accompanying notes are an integral part of these consolidated financial statements.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY
(In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Business
Interactive Data Corporation and Subsidiaries (“the Company”) is a leading provider of financial market data, analytics and related solutions. Thousands of financial institutions, as well as hundreds of software and service providers subscribe to the Company’s services. The Company is one of the world’s largest providers of financial data, serving the mutual fund, bank, asset management, hedge fund, securities and financial instrument processing and administration sectors. The Company distributes its financial data and related offerings directly to customers and indirectly through value-added resellers (“VARs”), including software providers, processors and custodians.
The Company’s financial reporting is currently based on two reportable operating segments: Pricing and Reference Data, and Trading Solutions. The Pricing and Reference Data segment represents the Company’s evaluated pricing, reference data and fixed income analytics service areas. The Trading Solutions segment represents the Company’s real-time data feeds, trading infrastructure managed services, hosted web applications and workstations.
The Pricing and Reference Data segment provides an extensive range of financial market data services and analytics to thousands of customers worldwide including banks, brokerage firms, mutual fund companies, exchange traded fund (“ETF”) sponsors, hedge funds, pension funds, insurance companies and asset management firms. In addition, Pricing and Reference Data offerings are also used by financial information providers, information media companies, and VARs such as software providers, processors, custodians and other outsourcing organizations. The Pricing and Reference Data Segment has three core offerings: 1) evaluated pricing services, which are daily opinions of value, on approximately 2.7 million fixed income securities, international equities and other hard-to-value financial instruments; 2) reference data, which encompasses listed markets pricing and descriptive information covering over 10 million global financial instruments for use across the securities and financial instrument processing lifecycle; and 3) fixed income portfolio analytics and fixed income data to help manage risks and analyze the sources of risk and return.
The Trading Solutions segment provides thousands of customers worldwide with products and services that support a range of trading, wealth management and other investment applications. The Trading Solutions segment has two primary offerings: 1) real-time market data feeds and trading infrastructure managed services used by banks, brokerage firms, asset managers, hedge funds and proprietary trading firms in order to facilitate low latency electronic trading as well as support other applications such as portfolio pricing, risk and compliance; and 2) customized hosted web applications and workstations that are used by financial advisors, energy and commodity professionals, active traders and individual investors, other investment community professionals, and a range of corporate clients.
On May 3, 2010, the Company entered into an agreement to be acquired by investment funds managed by Silver Lake Group, LLC and Warburg Pincus LLC (collectively, the “Sponsors”). Pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Igloo Merger Corporation (“Merger Sub”) and Hg Investors LLC, on July 29, 2010, the Company completed its merger (the “Merger”) with Merger Sub. The Company was the surviving corporation in the Merger. Hg Investors LLC was subsequently merged into Igloo Intermediate Corporation (“Intermediate”). As a result of the Merger, and the subsequent merger of Hg Investors LLC into Intermediate, the Company is now wholly-owned by Intermediate, which in turn, is wholly owned by Igloo Holdings Corporation (“Holdings”).
As of March 7, 2014, approximately 96% of the capital stock of Holdings was beneficially owned by investment funds affiliated with, and a co-investment vehicle controlled by, the Sponsors. As of March 7, 2014, approximately 4% of the capital stock of Holdings was beneficially owned by executives, directors and employees of the Company who acquired the shares subsequent to the closing of the Merger.
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.
The consolidated financial statements of the Company do not include the operating results and financial positions of Intermediate or Holdings.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist primarily of cash deposits held at major financial institutions and money market fund investments. The Company considers all highly liquid investments with original maturities of less than three months to be cash equivalents.
Cash and cash equivalents by type at December 31, 2013 were as follows:
Cash and cash equivalents by type at December 31, 2012 were as follows:
At December 31, 2013, the Company had short-term investments with a total value of $3.4 million, composed of a $3.4 million interest bearing term deposit recorded in Short-term investments on the Company’s Consolidated Balance Sheet at December 31, 2013. The Company has classified the term deposit as held to maturity as it has an original maturity of one year. Interest on the term deposit is recorded within interest income within the Company’s Consolidated Statement of Operations.
At December 31, 2012, the Company’s investments included a $9.1 million held to maturity interest bearing term deposit and $14.5 million in available for sale U.S. Treasury Bills. Both of these investments are recorded in Short-term investments on the Company’s Consolidated Balance Sheet at December 31, 2012.
Fair Value of Financial Instruments
Refer to the discussion in Note 14, “Fair Value Measurements” below for further discussion surrounding the fair value of the Company’s financial instruments.
The Company currently invests excess cash balances primarily in cash deposits held at major banks, money market fund accounts, and other short-term investments. The carrying amounts of cash deposits, short-term investments, trade receivables, trade payables and accrued liabilities, as reported on the Consolidated Balance Sheets as of December 31, 2013 and 2012, approximate their fair value because of the short maturity of those instruments. The carrying value of borrowings outstanding on the Company’s Senior Secured Facilities bear interest at a variable rate and are considered to approximate fair value. The carrying value of the Company’s Senior Notes due 2018, which bear interest at a fixed rate, differ from their fair value as determined based on market based information available from public sources. Refer to Note 14 “Fair Value Measurements”, Note 15 “Derivatives” and Note 16 “Debt” below for further discussion.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable and collectability is reasonably assured. Revenue for subscription based contracts is recognized ratably over the life of the contract and revenue for usage based contracts is recognized in the month that the products/services are provided. Certain of the Company’s businesses collect fees for installation/set-up services which, if deemed a separate deliverable with standalone value, are recognized upon delivery as long as the remaining criteria for recognition of revenue have been achieved. Revenue for installation/set-up services that do not meet the criteria for separation, is recognized ratably either over the contractual term or the expected customer relationship life. Revenue for professional services is recognized as the services are provided. Revenue for hardware is recognized when installation is completed and the related services go-live.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Some contracts include multiple elements for which the Company determines whether the various elements meet the applicable criteria to be accounted for as separate elements and makes estimates regarding the relative fair values. Revenue for elements that cannot be separated is recognized once the revenue recognition criteria for the entire arrangement have been met or over the period that the Company’s obligation to perform is fulfilled. Consideration for elements that are deemed separable is allocated to the separate elements at the inception of the arrangement on the basis of their relative selling price and recognized based on meeting authoritative criteria to do so.
The Company also evaluates all contracts in order to determine appropriate gross versus net revenue reporting.
Deferred revenue represents contractual billings in excess of revenue recognized. The Company records revenue net of applicable sales tax collected and remitted to state and local taxing jurisdictions. Taxes collected from customers are recorded as a liability in the balance sheet.
The Company’s allowance for doubtful accounts and sales credit reserves are not material to the Company’s consolidated revenues or consolidated financial statements taken as a whole and are not expected to become material in the foreseeable future.
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 Company’s 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. Credit losses, in the aggregate, for all periods reported did not exceed management’s previously established estimates. At December 31, 2013, management believes that the Company had no significant concentrations of credit risk. The Company maintains an allowance for doubtful accounts and sales credits that is the Company’s 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. In determining income for financial statement purposes, the Company must make certain estimates and apply judgment. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
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. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating its ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including its past operating results, the existence of cumulative losses in the most recent years and its forecast of future taxable income. In estimating future taxable income, the Company develops assumptions including the amount of future state, federal and international pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company uses to manage the underlying businesses.
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 net accumulated foreign unremitted earnings. Quantification of the deferred tax liability associated with indefinitely reinvested earning is not practicable.
The Company recognizes future tax benefits or expenses attributable to its 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. Based upon income and projections of future taxable income, the Company believes that the recorded deferred tax assets will be realized.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50% likely of being realized upon resolution of the uncertainty. To the extent a full benefit is not realized on the uncertain tax position, an income tax liability is established. The Company adjusts these liabilities as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from its current estimate of the tax liabilities. A significant portion of the Company’s potential tax liabilities are recorded in non-current income taxes payable on its Consolidated Balance Sheets as payment is not expected within one year.
The calculation of the Company’s tax liabilities involves inherent uncertainties as the result of the application of complex tax regulations in a multitude of jurisdictions due to the Company’s global operations. Changes in tax laws and rates could affect the Company’s recorded deferred tax assets and liabilities in the future. The Company’s management is not aware of any such changes, however, which would have a material effect on the Company’s results of operations, financial condition or cash flows.
Goodwill
The Company performs impairment tests of goodwill assigned to the Company’s reporting units in the fourth quarter of each fiscal year, or whenever events or circumstances indicate impairment may exist.
At December 31, 2013, the Company had two reportable segments: Pricing and Reference Data and Trading Solutions. Within the Pricing and Reference Data segment, there are two reporting units: Pricing and Reference Data Services and BondEdge Solutions. Within the Trading Solutions segment, there are four reporting units: Real-Time Services, 7ticks, Desktop Solutions and Managed Solutions. All of these reporting units have been determined to represent operating segments. In the fourth quarter of 2013, in connection with its periodic review of segment information, the Company concluded that the 7ticks business should now be classified as a standalone operating segment/reporting unit. Previously 7ticks was classified as a component of the Real-Time Services operating segment/reporting unit. The Company has allocated a portion of the goodwill assigned to the legacy Real-Time Services reporting unit to the 7ticks reporting unit using the relative fair value approach based on the fair value determined in the 2013 annual impairment analysis, for which 7ticks was treated as a standalone reporting unit. Other than the classification of 7ticks as a standalone operating segment/reporting unit in 2013, the Company has not identified any other changes to the composition of its operating segments or reporting units compared with the year ended December 31, 2012.
In performing goodwill assessments, the Company’s management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and judgment in applying them to the analysis of goodwill impairment. Since judgment is involved in performing goodwill valuation analyses, there is risk that the carrying value of the Company’s goodwill may be overstated or understated. The Company calculates their goodwill valuations using two separate income approach models based on the present value of future cash flows of each reporting unit. One model uses perpetual free cash flows in the calculation of the present value of future cash flows and the other model uses an exit multiple based on consideration of guideline companies adjusted for profitability of the Company’s individual reporting units. These cash flows are then discounted at an implied rate of return that the Company believes a market participant would require for an investment in a company having similar risks and business characteristics to the reporting unit being assessed. This approach incorporates many assumptions including future growth rates, discount factors and income tax rates. Such assumptions take into account numerous factors including historical experience, anticipated economic and market conditions for purposes of determining market value from a market participant perspective. If the estimated fair value of the reporting unit exceeds the respective carrying value of the reporting unit’s assigned assets and liabilities, no impairment is recorded and no further analysis is performed.
If the estimated fair value of a reporting unit is less than the carrying value of the reporting unit’s assigned assets and liabilities, the Company would perform the Step 2 calculation required under authoritative accounting literature. In Step 2, the implied fair value of the reporting unit’s goodwill would be determined by assigning a fair value to all of the reporting unit’s assets and liabilities, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination at fair value. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to that excess.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Intangible assets include securities data and databases, completed technology, trademarks (definite and indefinite lived), exchange relationships 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 over their respective economic benefit periods which range from four years to twenty five years. The Company evaluates the remaining useful life of intangible assets subject to amortization on a periodic basis to determine whether events and circumstances warrant a revision to the remaining useful life. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. Intangible assets not subject to amortization are reviewed for impairment annually in conjunction with the Company’s goodwill impairment calculation or whenever events or circumstances indicate that impairment may exist.
Capitalized Development Costs
The Company capitalizes qualifying costs incurred as part of the development of internal-use software. Internal-use software projects have the following characteristics: the software is internally developed, acquired, or modified solely to meet the entity’s internal needs and during the development or modification of the software, there is no substantive plan or expectation that the software will be marketed externally. Qualifying costs which are capitalized are incurred during the application development stage. The application development stage is when the Company is designing the software configuration and interfaces, coding, installing the software, and performing testing of the software. Qualifying costs that were capitalized during the fiscal years ending December 31, 2013 and December 31, 2012 primarily consisted of personnel related expenses for employees and third-party consultants working on software development, coding, and testing. Costs incurred during the preliminary project stage (prior to any actual designing of the software) and in the post-implementation/operation stage (after the software has been initially implemented) are expensed as incurred. On-going development projects are evaluated for potential impairment in the event it is no longer probable that software will be completed and placed into service. Capitalized development costs are amortized on a straight-line basis over the useful life of the software, which is generally 3 to 5 years with certain exceptions where projects have estimated useful lives in excess of this range. The Company adjusts the useful lives of software in the event that new development projects are expected to replace the existing software.
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 management’s 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.
Stock-Based Compensation
The Company recognizes all employee stock-based compensation, including grants of stock options, in the financial statements based on their fair values at the grant date. Expense associated with stock-based awards that have service-based vesting provisions are recognized on a straight-line basis over the requisite service period, which typically coincides with the vesting period of the grant. Expense associated with awards that have performance based vesting provisions are recognized when the performance objective is considered probable. Refer to Note 6 “Stock-based Compensation” below for further discussion.
Derivative Financial Instruments
The Company is exposed to certain risks arising from its business operations as well as general economic conditions. The Company manages some of its exposure to interest rate risks by the use of derivative financial instruments. The Company currently uses derivatives for risk management, and does not use derivatives for speculative purposes. The Company recognizes all derivative financial instruments in the Consolidated Balance Sheets as assets or liabilities at fair value. Such amounts are currently recorded in the Other assets caption in the Consolidated Balance Sheets. The Company currently has only entered into cash flow hedges. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in accumulated other comprehensive income (“AOCI”), to the extent the derivative is effective at offsetting the changes in cash flow being hedged until the hedged item affects earnings. To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings in the Other income (expense) line in the Consolidated Statements of Operations during the period of the change. Refer to Note 15 “Derivatives” below for further discussion.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. New Accounting Pronouncements
Intangibles - Goodwill and Other
In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU 2012-02”), regarding ASC Topic 350, “Intangibles - Goodwill and Other”. ASU 2012-02 allows an entity the option of first assessing qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. Under the provisions of ASU 2012-02, if after assessing the totality of the events or circumstances, an entity determines that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, performance of an annual impairment test is unnecessary. ASU 2012-02 was effective for fiscal years beginning after September 15, 2012. ASU 2012-02 became effective for the Company on January 1, 2013 and did not have a material impact on the Company’s financial position, results of operations or cash flows.
Comprehensive Income
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”), regarding ASC Topic 220 “Comprehensive Income.” ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts such as in cases where a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. ASU 2013-02 became effective for the Company on January 1, 2013 and did not have a material impact on the Company’s financial position, results of operations or cash flows.
Liabilities
In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date” (“ASU 2013-04”), regarding ASC Topic 405 “Liabilities.” ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, as a sum of 1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and 2) any additional amount the reporting entity expects to pay on behalf of its co-obligors. This update also requires the entity to disclose the nature and amount of the obligation as well as other information about the obligation. ASU 2013-04 is effective for the Company for fiscal years and interim periods within those years that begin after December 15, 2013, with early adoption permitted, and must be applied retrospectively to all prior periods presented. The Company does not believe the adoption of ASU 2013-04 will have a material impact on its financial position, results of operations or cash flows.
Income Taxes
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”), regarding ASC Topic 740 “Income Taxes.” ASU 2013-11 provides explicit guidance on the presentation of unrecognized tax benefits, as well as provides guidance on how an entity should settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. ASU 2013-11 is effective for the Company for fiscal years and interim periods within those years that begin after December 15, 2013, with early adoption permitted. The Company has early-adopted this ASU and has determined that ASU 2013-11 did not have a material impact on the Company’s financial position, results of operations or cash flows.
Definition of a Public Business Entity
In December 2013, the FASB issued ASU 2013-12, “Definition of a Public Business Entity” (“ASU 2013-12”), regarding an addition to the Master Glossary. ASU 2013-12 improves U.S. GAAP by providing a single definition of public business entity for use in future financial accounting and reporting guidance, but does not affect existing requirements. ASU 2013-12 specifies that an entity that is required by the SEC to file or furnish financial statements with the SEC, or does file or furnish financial statements with the SEC, is considered a public business entity. ASU 2013-12 is effective for all new guidance issued starting in 2014. Therefore, for any new financial accounting and reporting guidance issued in 2014 and beyond, the Company will be considered to be a Public Business Entity.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. Property and Equipment
Property and equipment consisted of the following at December 31:
(a) Amortization of assets under capital leases is included in depreciation expense.
In connection with the purchase price allocations relating to the Merger, the Company increased the carrying value of property and equipment by $12.2 million. This amount is being depreciated over the remaining life of the related assets which range from 3.7 to 7.7 years. In the years ended December 31, 2013, 2012 and 2011, the Company recorded additional depreciation expense of $1.9 million, $2.7, million and $2.9 million, respectively, associated with this increase in carrying value.
For the years ended December 31, 2013, 2012 and 2011, the Company capitalized $41.7 million, $24.6 million, and $15.7 million, respectively, related to internal-use and other software development costs and recorded depreciation expense related to internal development projects that have been placed in service of $5.6 million, $5.5 million, and $6.3 million for the respective years and periods. The remaining book value of the software developed for internal use was $75.6 million and $39.6 million as of December 31, 2013 and 2012, respectively.
For the year ended December 31, 2012, the Company wrote off $2.0 million of property and equipment destroyed as a result of storm damage that occurred during a hurricane that impacted the U.S. Eastern Seaboard in October 2012 and $0.4 million related to an internal-use software project at the Pricing and Reference Data segment that the Company determined would not produce the future cash flow necessary to recover its carrying value. These losses are included within Selling, general and administrative costs in the Consolidated Statement of Operations.
In the fourth quarter of 2012, the Company adjusted the estimated useful lives of certain information technology assets with a cost basis of approximately $10.9 million to reflect shorter estimated useful lives, resulting from a review of information technology initiatives in process at the Company. This change in accounting estimate resulted in accelerated depreciation on these assets from October 1, 2012 through the end of their estimated useful lives determined to be December 31, 2013. The impacts on the Company’s full year 2013 and 2012 results were increases in depreciation expense of approximately $2.5 million and $0.8 million, respectively. In May 2013, continued review of the Company’s information technology initiatives resulted in an extension of the estimated useful lives of these identified assets from December 31, 2013 to December 31, 2014. This change in accounting estimate resulted in a decrease in depreciation expense of $2.5 million for the year ended December 31, 2013. Therefore, the net impact for the year ended December 31, 2013 of these 2012 and 2013 changes in useful lives was inconsequential. In December 2013, Company management determined that scope changes to its information technology initiatives would further extend a portion of the estimated useful lives of the identified assets to December 31, 2015. The scope changes were identified in December 2013 and it was determined that any impact from extending the estimated useful lives would have been immaterial on the Company’s 2013 consolidated financial statements taken as a whole. Therefore, the adjustment to the estimated useful lives resulting from the identified scope changes will be accounted for as a change in accounting estimate commencing in 2014.
The Company records depreciation over the useful lives of assets using the straight-line method.
In the years ended December 31, 2013 and 2012, the Company capitalized interest of $2.4 million and $1.6 million related to long-term capital projects.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. Intangible Assets and Goodwill
Intangible assets consisted of the following (in thousands, except weighted average amortization period):
(1) The Company’s on-going information technology initiatives are expected to replace certain of the Company’s completed technology assets. As such, the remaining useful lives of these assets are based on the estimated completion date of those initiatives. In August 2011, the Company determined based on a review of development efforts completed at that time and a review of initiatives to be completed, that the Company’s completed technologies estimated useful lives should be extended through December 31, 2013. In May 2013, continued review of the Company’s in-process development initiatives resulted in a further extension of the estimated useful lives of these completed technologies through December 31, 2014. This change in accounting estimate was accounted for during the quarter ended June 30, 2013 and the impact of extending the lives of the completed technologies resulted in an increase in Income from Operations of approximately $8.7 million in the Company’s Consolidated Statement of Operations from the date of the change through December 31, 2013 due to decreased amortization expense being recorded. Additionally, the change in accounting estimate had an approximate $5.5 million favorable impact on the Company’s net income for the year ended December 31, 2013. Finally, the extension of the estimated useful lives resulted in the weighted average amortization period for completed technologies increasing to 4.4 years from 3.6 years.
In December 2013, Company management determined that additional changes to the timeline of its in-process development initiatives would further extend a portion of the estimated useful lives of the completed technologies to December 31, 2015. The change in the estimated go-live date was identified in December 2013 and it was determined that any impact from extending the estimated useful lives would have been immaterial on the Company’s 2013 consolidated financial statements taken as a whole. Therefore, the adjustment to the estimated useful lives resulting from the identified scope changes will be accounted for as a change in accounting estimate commencing in 2014. The estimated impact of the change in estimate is reflected in the future amortization expense below.
The estimated amortization expense of definite-lived intangible assets is as follows (in thousands):
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The changes in the carrying amount of goodwill for the year ended December 31, 2013 by reportable segment were as follows (in thousands):
(a) Foreign currency translation adjustments resulted in a decrease of $3.3 million in the year ending December 31, 2013 and an increase of $8.2 million in the year ended December 31, 2012, and primarily reflected the continued volatility of the U.S. Dollar against the British Pound and the Euro.
(b) In the year ended December 31, 2012, the Company recorded unbilled receivable adjustments related to the accounting period prior to the Merger.
5. Accrued Liabilities
Accrued expenses consist of the following at December 31:
6. Stock-Based Compensation
Stock-based Compensation Plans:
Employee Stock Option Plan
On August 4, 2010, Holdings adopted its 2010 Stock Incentive Plan (the “Plan”). The Plan, as amended on September 15, 2010, January 5, 2011, and in September 2013, reserves 160.4 million shares of Holdings’ Common Stock (subject to adjustment for certain corporate transactions) for issuances of stock-based awards to employees and other service providers as well as employees and service providers of any other direct or indirect subsidiaries of Holdings. The Plan provides Holdings with the ability to grant stock options, restricted stock awards, and other equity-based incentive awards as a means of providing long-term incentive compensation. Shares of Holdings Common Stock acquired pursuant to awards granted under the Plan will be subject to certain transfer restrictions and repurchase rights set forth in the Plan.
All stock options granted to date are subject to either time-based vesting or performance-based vesting, or a combination thereof. The time-based options vest over a five year period. The vesting of performance based options are based on the return received (or deemed received) by the Sponsors on their initial equity investment in Holdings upon the occurrence of certain events, including a change in control of Holdings. Shares of Holdings Common Stock acquired upon the exercise of such stock options are subject to both transfer restrictions and repurchase rights following a termination of employment. The stock options expire on the tenth anniversary of the date of grant.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The employees that have received option grants in the period through December 31, 2013 are employees of the Company and given that the Company is a wholly owned and controlled subsidiary of Holdings, the compensation expense will be recognized over the determined service period in the Company’s Consolidated Statement of Operations.
Restricted Stock
Subsequent to the Merger, certain executives purchased or were granted an aggregate of 36.9 million shares of Holdings Common Stock for one dollar ($1.00) per share. These shares are subject to certain transfer restrictions and repurchase rights, which allow the Company in certain circumstances where the holder’s employment is terminated to repurchase the shares from the employees at the lower of cost or fair market value. As a result of these repurchase features, the Company has determined the proceeds Holdings received for these shares should be recorded as a restricted stock liability. Accordingly, the proceeds from the sales of these shares of $36.9 million have been recorded in Other liabilities on the Company’s Consolidated Balance Sheets as of December 31, 2013, and 2012. Furthermore, due to these repurchase features, 34.5 million of these share purchases are treated as early exercises of stock options for accounting purposes and are assigned a grant date fair value. The repurchase rights lapse on a change in control or public offering of Holdings Common Stock, at which point compensation expense associated with these awards, will be recognized by the Company.
The holders of the remaining 2.4 million shares have contingent put rights which would require the Company to repurchase the shares at fair value in the event the executive is terminated without cause or resigns for reasons considered acceptable in the share purchase agreement. The accounting for these contingent repurchase rights requires that the proceeds from these share purchases be presented outside of stockholder’s equity, accordingly the Company has recorded the proceeds from these purchases within Other liabilities on the Company’s Consolidated Balance Sheets as of December 31, 2013, and 2012.
Stock-based Compensation Expense and Valuation Assumptions
For the years ended December 31, 2013 and 2012, the Company recognized stock-based compensation expense as follows (in thousands):
(a) During the years ended December 31, 2013 and 2012, total stock compensation expense before income taxes was $7.8 million and $18.4 million, respectively, prior to the capitalization of $0.8 million and $0.8 million, respectively, as part of ongoing development initiatives. Stock-based compensation expense included $3.1 million and $14.2 million for the years ended December 31, 2013 and 2012, respectively, related to cash distributions paid to employee holders of Holdings stock options in connection with the December 2012 Holdings recapitalization transaction for options that vested during those respective periods. Of the $3.1 million for the year ended December 31, 2013, $0.5 million is recorded in “Accrued liabilities” on the Company’s Consolidated Balance Sheet at December 31, 2013, as it relates to cash distribution owed for options vested as of December 31, 2013. Further information regarding these payments is set forth below under the heading “Holdings 2012 Recapitalization.”
During the year ended December 31, 2013, there were no excess tax benefits related to the exercise of stock options. There were no excess tax benefits realized during the year ended December 31, 2012 as no stock-related activity that would result in an excess benefit occurred.
The estimated fair value of stock options granted with service-based conditions is calculated using a Black-Scholes model. The estimated fair value of the options granted with performance-based vesting conditions were estimated on the date of grant using the Monte Carlo Simulation Approach. Key assumptions used in estimating the grant date fair value of options are as follows: the fair value of Holdings Common Stock, dividend yield, expected volatility, risk-free interest rate, expected term and forfeiture rate.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock options with performance-based vesting conditions generally become exercisable based on the completion of a liquidity event that results in specified returns on the Sponsors’ investment. For awards with performance-based vesting conditions, the Company must also evaluate a range of possible future stock values to construct a distribution of where future stock prices might be.
For stock options with performance-based vesting conditions such as a change in control or a public offering of Holdings Common Stock, the Company considers the probability of the condition being achieved. For awards with service-based vesting conditions, the expected term is based on when employees are expected to exercise awards based on the period of vesting and the timing of a potential change in control or public offering of Holdings Common Stock.
As the Holdings Common Stock is not traded on any public market, the Company reviews the unlevered historical and implied volatility of peer companies within its industry and utilizes the resulting implied volatility, adjusted for the Company’s debt structure, to calculate the fair value of the options. The determined risk-free interest rate is based on the yield for a U.S. Treasury Security having a maturity similar to the expected life of the option. The assumed forfeiture rate is determined based on historical forfeiture data as well as future expectations. The dividend yield and estimated time to complete a liquidity event are based on the Company’s judgment with input from the Holdings Board of Directors.
For share-based awards granted during the three-month periods ended March 31, 2013, June 30, 2013, and September 30, 2013, the Board of Directors of the Company valued Holdings Common Stock at $1.00, $1.08 and $1.16 per share, respectively. These share prices were based on the results of a valuation analysis performed as of December 19, 2012, April 30, 2013 and August 31, 2013, respectively, which valued Holdings Common Stock on a non-marketable, minority interest basis. The valuation process undertaken used generally accepted valuation methodologies to perform the valuation of Holdings Common Stock using both the income (discounted cash flows methodology) and market (guideline-company and comparable transaction methodologies) approaches. A lack of marketability discount derived from empirical studies and theoretical models was then applied to the resulting share price to arrive at the final share price used for determining compensation cost related to share-based options issued during the applicable periods.
The last grant during the year ended December 31, 2013 occurred on October 29, 2013 and there were no indicators present at that date, or any time leading up to that date, that suggested that the fair market value (“FMV”) of $1.16 per share, determined using the August 31, 2013 Holdings Common Stock value, was not reasonable upon grant of the options.
For share-based awards granted during the three-month periods ended March 31, 2012 and June 30, 2012, December 31, 2012, the Board of Directors of the Company valued Holdings Common Stock at $1.15, $1.18, and $1.19 per share, respectively. There were no share-based awards granted during the three-month period ended September 30, 2012. These share prices were based on the results of a valuation analysis performed as of December 31, 2011, April 30, 2012, and August 31, 2012 respectively.
The Company recognizes share-based compensation expense net of estimated forfeitures and, therefore, only recognizes compensation cost for those awards expected to vest over the service period of the awards. The Company has applied a forfeiture rate of 7% for non-executive employees who received grants of less than 1 million shares, and 0% for executives who received grants in excess of 1 million shares, to all unvested options as of December 31, 2013. This estimate is re-evaluated periodically and the forfeiture rate is adjusted as necessary.
No expense was recognized during the years ended December 31, 2013, 2012 or 2011, for options with performance-based vesting features, except as noted below related to the Holdings 2012 Recapitalization. These options become exercisable on a change in control or public offering of Holdings Common Stock. Compensation expense associated with these awards will be recognized upon such an event.
Furthermore, certain executive options are subject to call rights exercisable by Holdings which allow Holdings to call any shares exercised under these option awards at the lower of exercise price or fair value if the executive voluntarily terminates his employment. These call rights lapse on a change in control or public offering of Holdings Common Stock.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of stock options granted to date under the Plan was estimated as of the date of grant using the Black-Scholes model for service-based options or Monte Carlo simulation model for awards with performance-based conditions, with the following assumptions:
The weighted average grant-date fair value of options granted under the Plan for the year ended December 31, 2013, 2012 and 2011 was $0.40, $0.58, and $0.56, respectively.
The expected term of options granted under the Plan represents a weighted average term derived from the Monte Carlo simulation models used for each performance-based award and the service period and, to the extent established or known, the potential timing of a change in control or initial public offering of Holdings Common Stock for awards which vest based on service conditions.
Holdings 2012 Recapitalization
In December 2012, Holdings completed a recapitalization transaction that resulted in the holders of Holdings Common Stock and certain holders of Holdings stock options, due to the terms of the Plan, receiving a dividend and/or cash distribution payment equal to approximately $0.3095 per share/option. Holders of Holdings Common Stock and holders of Holdings stock options with service-based vesting conditions received a cash dividend (in the case of holders of common stock) and a cash distribution payment (in the case of option holders). Holders of Holdings stock options with performance-based vesting conditions, received a reduction in the strike price of their options equal to $0.30 per share, other than the performance-based options held by one of the Company’s executives, which received a reduction in strike price equal to $0.20 per share. The total calculated dividend payment from Holdings to the holders of common stock was $423.0 million, which was paid on December 19, 2012, and the total cash distribution to option holders was calculated as $16.0 million, of which $6.5 million was paid in December 2012, $2.7 million was paid in the year ended December 31, 2013, $0.8 million was accrued for as of December 31, 2013 (related to options that vested during the fourth quarter of 2013, and which was paid out in January 2014) and the remaining $6.0 million will be paid as the options vest. Under professional accounting literature, this transaction resulted in a modification of all of Holdings outstanding stock options. Based on this modification treatment, Holdings revalued its Common Stock on December 19, 2012, to derive the FMV of Holdings Common Stock immediately preceding the dividend transaction and immediately after its consummation. The resulting pre-and post-dividend values were $1.25 and $1.00 per share, respectively. These share prices were then used to similarly revalue all of the outstanding Holdings stock options on December 19, 2012 pre- and post-dividend. Options with service-based vesting conditions were valued using a Black-Scholes option-pricing model and options with performance-based vesting conditions were valued using a Monte Carlo simulation model.
The following are the assumptions used to value the options using both the Black-Scholes model and the Monte Carlo simulation model:
The valuation of the Holdings stock options resulted in reductions from the pre-dividend values to the post-dividend values ranging from $0.18 to $0.21 per share for options with service-based vesting conditions and $0.05 to $0.10 per share for options with performance-based vesting conditions. As the fair value of options with service-based vesting conditions generally declined in all cases as a result of the modification, and these options were deemed probable of vesting, the stock compensation expense calculated at the grant date, as documented above, will continue to be recognized over the vesting period as disclosed. Conversely, although the fair value of options with performance-based vesting conditions also declined in all cases as a result of the modification, these options were not deemed probable of vesting before or after the modification and therefore the unrecognized stock compensation expense related to these options was recalculated using the new fair values resulting from the modification.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In addition, for the options with service-based vesting conditions, holders incurred additional stock-based compensation expense, equal to the per share value of the cash distribution less any loss of option value. This totaled approximately $10.0 million, of which $3.5 million related to options that were vested as of December 19, 2012 and is included in the Company’s consolidated results of operations for the year ended December 31, 2012. The remaining $6.5 million is being recognized ratably as these options continue to vest and the cash distributions are made by Holdings.
In the year ended December 31, 2013, $2.2 million of additional stock-based compensation expense was recognized related to options that vested during the period. The portion of the cash distribution payment which represents the loss of option value (ranging from $0.18 to $0.21 per share) totaled approximately $6.0 million and is being recognized as a reduction in capital, of which $3.0 million related to options that were vested as of December 19, 2012 and is included in the Company’s consolidated financial statements for the year ended December 31, 2012. An additional $1.3 million was recognized as a reduction in capital related to options that vested during the year ended December 31, 2013, and the remaining $1.7 million will be recognized as a reduction of capital ratably as the options vest and the cash distributions are made. As holders of Holdings stock options with performance-based vesting conditions received no consideration, no additional stock-based compensation expense was recognized related to these awards.
The receipt of cash dividends by certain holders of the 34.5 million shares of Holdings Common Stock accounted for as early exercise of stock options resulted in approximately $10.7 million of additional stock-based compensation to the Company in the year ending December 31, 2012. No stock-based compensation expense had previously been recognized related to these awards as the vesting conditions that would trigger recognition of expense, a change in control or public offering of Holdings Common Stock, were not deemed probable at the date of the dividend or at December 31, 2012; therefore, the entire value of the dividend received by the holders of these shares was deemed to benefit the holder and resulted in stock-based compensation expense to the Company.
Stock-based Award Activity
A summary of the status and activity for stock option awards under the Plan for the year ended December 31, 2013, is presented below:
A summary of the status and activity for restricted stock units for the year ended December 31, 2013 is presented below:
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The value of the Company’s restricted stock was determined using methods similar to those used for options.
Total unrecognized compensation expense, net of forfeitures, related to stock based awards and unpaid cash distributions to option holders at December 31, 2013 was $79.8 million. Of this amount, $51.0 million related to Holdings’ non-vested employee stock option plan, of which $13.1 million related to awards which become exercisable based on service-based vesting conditions that will be recognized over an implicit and/or explicit weighted average service period of 3.1 years and $37.9 million of unrecognized compensation expense related to stock option awards that vest upon meeting certain performance conditions (a change in control or a public offering of Holdings Common Stock). Compensation expense for these awards will be recognized upon attainment of a performance condition. Of the remaining $28.8 million of unrecognized compensation expense, $25.3 million relates to Holdings restricted stock and $3.5 million relates to unpaid cash distributions on unvested options resulting from the Holdings 2012 recapitalization transaction discussed above. Compensation expense for Holdings restricted stock will be recognized upon a change in control or public offering of Holdings common stock, and compensation expense related to the Holdings 2012 recapitalization transaction will be recognized as the associated options vest.
7. Stockholder’s Equity
As of December 31, 2013 and 2012, 10 shares of the Company’s common stock were issued and outstanding to Intermediate at $0.01 par value.
When shares of Holdings Common Stock are issued and cash proceeds are remitted to the Company, the number of shares of the Company’s stock outstanding does not change and the proceeds are treated as a capital contribution for accounting purposes.
In December 2012, the Company paid a dividend of $100.0 million to Intermediate, which in turn paid a dividend of $100.0 million to Holdings. Prior to this dividend, Holdings issued $350.0 million of 8.25%/9.00% Senior PIK Toggle Notes (the “Toggle Notes”) which mature on December 15, 2017, pursuant to an indenture dated as of December 18, 2012 (the “Toggle Notes Indenture”). Holdings used this dividend as well as the net proceeds of $339.0 million from this debt issuance to fund both a cash dividend to its stockholders and related cash distributions to its option holders. The Company’s cash dividend to Intermediate was accounted for in the Consolidated Financial Statements as a return of capital. The Holdings recapitalization and associated dividend to shareholders and cash distribution to option holders also resulted in additional stock-compensation expense being recorded by the Company in the year ended December 31, 2013 and the fourth fiscal quarter of the year ended December 31, 2012. During the year ended December 31, 2013, the company recorded additional stock-based compensation expense in the amount of $3.1 million related to cash distributions paid and owed to option holders. For further information on the stock based compensation impacts of the Holdings recapitalization transaction, refer to Note 6 “Stock-Based Compensation” above.
In October 2013, the Company received $8.2 million in capital contributions from Holdings. $5.0 million related to the September 2013 cash purchase of Holdings Common Stock by the Company’s CEO, $0.5 million related to proceeds from the exercise of Holdings Common Stock options, and the remaining $2.7 million was composed of Holdings excess operating cash balances.
Furthermore, subject to the limitations placed upon the Company by its debt covenants, the Company intends to declare and pay dividends to Holdings on an ongoing semi-annual basis to enable Holdings to service the Toggle Notes. The Company paid the first and second of these dividends in the amount of $14.3 million and $14.4 million in June and December 2013 respectively. For further information on the Toggle Notes, refer to Note 16 “Debt” below.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. Commitments and Contingencies
The Company has obligations under non-cancelable operating leases for real estate and equipment. Real estate leases are for the Company’s corporate headquarters, sales offices, major operating units and data centers. In addition, the Company has purchase obligations for data content. Certain of the leases include renewal options and escalation clauses.
Future contractual commitments and obligations, as of December 31, 2013, are summarized in the chart below.
The Company expects to satisfy its lease and other contractual obligations from cash on hand and existing cash flows. Key operating locations operate in facilities under long-term leases, the earliest of which will expire in 2014. The Company believes that were it to be unable to renew any of the leases that are due to expire in 2014, suitable replacement properties are available on commercially reasonable terms.
Rental expense was $23.9 million for the year ended December 31, 2013, $20.9 million for the year ended December 31, 2012, and $23.7 million for the year ended December 31, 2011. The Company records rent expense for leases with escalating payment terms or free-rent periods on a straight-line basis. The difference between the straight-line expense and cash payments resulted in a deferred-rent liability. This deferred-rent liability was $14.5 million and $13.9 million as of December 31, 2013 and 2012, respectively.
Purchase Obligations include the Company’s estimate of the minimum outstanding obligations under agreements to purchase goods or services that the Company believes are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable at any time without penalty.
Long-Term Debt Obligations in the above table include the Company’s obligations under the Senior Secured Credit Facilities and the Senior Notes due 2018, including outstanding letters of credit. Fixed Rate Interest Obligations in the table above include the Company’s interest obligations under the Senior Notes due 2018 which are stated at fixed interest rate of 10.25%. The Company also has variable interest rate obligations under the Senior Secured Credit Facilities which are not included in the table above. Outstanding letters of credit totaled $0.6 million at December 31, 2013. Excluded from the above table are any payments related to the Holdings Toggle Notes, as that debt is not the Company’s obligation. Although the Company is not a party in the Toggle Notes indenture, withstanding any limitations placed upon the Company’s under its covenants, the Company intends to provide Holdings, through the payment of dividends, the funds required to service the Toggle Notes on at least a semi-annual basis. These interest payments are due June 15 and December 15 of each year until maturity. The Company expects to provide Holdings dividends in the amount of $14.4 million ($28.8 million annually) to fund these payments on an ongoing basis.
On February 6, 2013, the Company refinanced its Term Loan. Refer to Note 16 “Debt” for additional information.
In connection with the provision of services in the ordinary course of business, the Company may be required to indemnify customers against third-party claims that the Company’s products or services infringe on the intellectual property rights of others. The Company has not been required to make material payments under such provisions. The Company is involved in litigation and is the subject of claims made from time to time, including with respect to intellectual property rights. A portion of the defense and/or settlement costs in some such cases is covered by various commercial liability insurance policies. In other cases, the defense and/or settlement costs are paid from the Company’s existing cash resources. In addition, the Company’s third-party data suppliers audit the Company from time to time in the ordinary course of business
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(including audits underway) to determine if data the Company licenses for redistribution has been properly accounted for in accordance with the terms of the applicable license agreement. In view of the Company’s financial condition and the accruals established for related matters, management does not believe that the ultimate liability, if any, related to any of these matters will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
In addition to the amounts shown in the table above, $22.7 million of gross unrecognized tax benefits have been recorded in income taxes, as the Company is uncertain if or when such amounts may be settled. Related to these unrecognized tax benefits, the Company also recorded income taxes payable of $1.2 million for potential gross interest and penalties at December 31, 2013, not included in the table above.
9. Income Taxes
The components of income (loss) before income taxes are as follows (in thousands):
Income tax benefit consists of the following (in thousands):
The Company has entered into a tax sharing agreement with Holdings. The agreement provides that Holdings file a consolidated federal tax return, and that any determined tax liability/benefit shall be apportioned between Holdings and the Company, as if the Company had filed a return on a stand-alone basis.
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.
On September 13, 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under Internal Revenue Code Sections 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. The Company has evaluated these regulations and determined they will not have a material impact on its consolidated results of operations, cash flows or financial position.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of the Company’s deferred income tax assets (liabilities) in the Consolidated Financial Statements are as follows at December 31 (in thousands):
At December 31, 2013, the Company has recorded a deferred tax asset for the U.S. federal net operating loss carryforward of $2.6 million that will be carried forward to 2014. The current portion of the federal net operating loss is approximately $2.6 million. The limitation with respect to net operating losses in the U.S. is 20 years and the Company expects to utilize all net operating losses within that period. The Company also recorded a deferred tax asset for various state net operating loss carryforwards of $5.6 million at December 31, 2013. The current portion of these state net operating losses is approximately $2.5 million with the remaining $3.1 million classified as long term. The Company expects to utilize the state net operating losses within the various statutory carryforward periods on a state by state basis. The Company also has various long term foreign net operating losses of $2.2 million. The Company recorded a German net operating loss carryforward of $0.5 million (subject to a full valuation allowance) at December 31, 2013. The Company recorded a Hong Kong net operating loss carryforward of $1.2 million (subject to a valuation allowance of $0.4 million) at December 31, 2013. The Company recorded a deferred tax asset for the carryforward of U.S. foreign tax credits of $15.2 million at December 31, 2013 that it expects to utilize within the statutory 10 year carryforward period.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The differences between the statutory federal income tax rate and the effective tax rate expressed as a percentage of income (loss) from operations before income taxes were as follows:
The Company’s 2013 effective tax rate primarily differs from the statutory rate due to a reduction of the U.K. statutory tax rate enacted in July 2013 by Her Majesty’s Revenue and Customs (“HMRC”), a benefit associated with income generated in lower tax jurisdictions and the 2013 Research and Development Credit, offset by utilization of state net operating losses and tax provision to tax return adjustments with respect to the filing of prior year’s returns. Included in the Research and Development Credit for 2013 is a benefit of 5.0% for the 2012 credit. The American Taxpayer Relief Act of 2012 (“ATRA”) which extended the Research and Development Credit was not enacted until January 3, 2013; therefore, the benefit for the Research and Development Credit was recorded as a discrete item in the first quarter of 2013. The Company has an income tax receivable balance of $6.8 million at December 31, 2013. This balance is comprised of a U.S. tax receivable of $5.9 million related to carryback claims filed in September 2011 for foreign tax credits and $0.9 million related to the filing of amended income tax returns for prior years in certain foreign jurisdictions. The full balance is expected to be received within the next twelve months and is classified as current in the Company’s Consolidated Balance Sheet at December 31, 2013.
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 net accumulated foreign unremitted earnings. The cumulative amount of net undistributed earnings of the Company’s foreign subsidiaries held for investment is approximately $337.9 million at December 31, 2013. Quantification of the deferred tax liability associated with permanently invested earnings is not practicable.
Unrecognized Tax Benefits
During 2013, the Company’s balance of gross unrecognized tax benefits increased by $3.0 million and $8.8 million for current year and prior years’ build, respectively, for tax uncertainties. Pursuant to ASC Topic 740 “Income Taxes” the Company has changed its presentation with respect to transfer pricing from a net basis to a gross basis in the US. These increases were offset by a decrease of $ 1.1 million and $0.3 million upon release of reserves and settlements, respectively, related to various foreign and state tax audits, and decreased $0.4 million upon the lapse of the statute of limitations in various tax jurisdictions. As of December 31, 2013, the Company had approximately $12.2 million of net uncertain tax positions which would affect its effective tax rate if recognized ($22.7 million on a gross basis). The Company believes that it is reasonably possible that a decrease of up to $6.8 million in net unrecognized tax benefits related to federal ($5.2 million), state ($1.0 million) and foreign ($0.6 million) exposure may be necessary within the coming year. The Company believes that it is reasonably possible that approximately $0.2 million of its currently remaining net unrecognized tax positions may be recognized within the next twelve months as a result of the lapse of the statute of limitations in various tax jurisdictions.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity for Gross Unrecognized Tax Benefits for the periods presented:
The Company recognizes net interest and penalties related to uncertain tax positions in income tax expense. Interest and penalties of $0.1 million, $0.1 million and $0.3 million were provided in income tax expense for uncertain tax positions for the years ended December 31, 2013, 2012 and 2011, respectively. Gross reserves for interest and penalties of $1.2 million and $1.0 million have been provided at December 31, 2013 and 2012, respectively.
The Company files federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business, the Company is subject to examination by taxing authorities in various jurisdictions. The Company is currently under examination by the Internal Revenue Service for tax years 2008 through 2012. Other tax years that remain subject to examination include 2006 through 2012 for significant states and 2010 through 2012 for Germany.
10. Retirement Plans
Interactive Data 401(k) Plan (U.S.)
The Company’s U.S. employees are eligible to participate in a 401(k) Plan (the “Plan”) effective July 30, 2010. The Plan allows all employees to make contributions of a specified percentage of their compensation. The Company matches up to 4.5% of the employee’s eligible pay if the employee contributes at least 6.0% of his or her eligible pay, subject to statutory limits. The 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 Interactive Data Non-Qualified Savings Plan (the “Savings Plan”) effective July 30, 2010. This Savings Plan allows those employees to set aside a portion of their compensation above the statutory limits. The employer contribution portion for the Savings Plan is the same as the Plan. Contributions made by the Company for the Plan are determined as a percentage of covered salary and amounted to $6.3 million, $6.0 million and $5.7 million for the years ended December 31, 2013, 2012 and 2011, respectively.
The Plan includes an additional discretionary contribution and this contribution is expected to be equivalent to 1.25% of eligible employee compensation. For this benefit for the years ended December 31, 2013, 2012 and 2011, the Company contributed $2.1 million, $2.2 million and $1.9 million, respectively. The 2012 contribution was made in April 2013 and is reflected in Accrued liabilities on the Company’s Consolidated Balance Sheet at December 31, 2012. The 2013 contribution is expected to be made by April 2014 and is reflected in Accrued liabilities on the Company’s Consolidated Balance Sheet at December 31, 2013.
Interactive Data Pension Plan (U.K.)
The Company’s U.K. employees are eligible for an Interactive Data Pension Plan (the “U.K. Plan”) effective October 1, 2010. The U.K. Plan is a defined contribution plan that matches employee contributions depending on hire date and age band up to a maximum amount. The Company recorded expense in the Statements of Operations of $3.0 million, $3.0 million and $3.2 million for the years ended December 31, 2013, 2012 and 2011, respectively, related to the U.K. Plan.
11. Related Party Transactions
Management Agreement
On July 29, 2010, prior to the consummation of the Merger, certain affiliates of the Sponsors entered into a Transaction and Management Fee Agreement (the “Management Agreement”) with Merger Sub, which was assumed by the Company following the consummation of the Merger. Pursuant to the terms of the Management Agreement, such affiliates will provide monitoring, advisory and consulting services to the Company and its subsidiaries. Pursuant to the Management Agreement,
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
such affiliates are entitled to receive an aggregate annual management fee of $3.0 million which may increase in the event that the Company or any of its subsidiaries enter into any business combination with another entity that is large enough to constitute a “significant subsidiary” of the Company under Regulation S-X as promulgated by the SEC. The Company recorded management fees in the statement of operations under the Management Agreement of $3.0 million for both the years ended December 31, 2013 and 2012. The amount due to such affiliates of the Sponsors at December 31, 2013 and 2012 was approximately $0.4 million and $0.4 million, respectively, and is included in Accrued liabilities on the Company’s Consolidated Balance Sheets.
The Management Agreement also provides for the reimbursement of out-of-pocket expenses incurred by the Sponsors and their affiliates in connection with the provision of services pursuant to the Management Agreement, the making of any regulatory filings related to the ownership, directly or indirectly, of the Company’s and its subsidiaries’ equity securities and the ownership or sale of such equity securities. The Management Agreement has an initial term expiring on the eight year anniversary of the Management Agreement, provided that the term will be extended for successive one-year terms unless the Company or each affiliate of the Sponsors provides notice to the other of their desire not to automatically extend the term.
Furthermore, in the event of an initial public offering of Holdings common stock or certain other circumstances, including a change of control transaction and other financing, acquisition and disposition transactions, such affiliates may also receive certain additional fees in amounts to be agreed. The Management Agreement also contains customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.
As of December 31, 2013, certain executives have purchased an aggregate of 36.9 million shares of Holdings common stock for $1.00 per share, and 8.6 million shares of Holdings common stock for $1.16 per share. These individuals are employees of the Company and the Company is a consolidated subsidiary of Holdings. The 36.9 million shares purchased for $1.00 per share were recorded as restricted stock liabilities within the Company’s Condensed Consolidated Balance Sheet. Refer to Note 6 “Stock Based Compensation” for further discussion of the Company’s associated long-term restricted stock liability.
Executive Stock Purchase Agreement
Under the terms of the Employment Agreement dated September 12, 2013 between the Company and its newly appointed Chief Executive Officer, the Chief Executive Officer was provided the right to execute a subscription agreement to purchase $10.0 million worth of Holdings common stock, or 8.6 million shares at $1.16 per share. The subscription agreement was subsequently executed on September 26, 2013. The consideration for the purchase is composed of $5.0 million cash and a $5.0 million secured, recourse promissory note issued by the Chief Executive Officer to Holdings on September 26, 2013. The promissory note matures upon the earlier to occur of (i) the termination of the Chief Executive Officer’s employment for “cause” (as defined in the Employment Agreement), (ii) two business days prior to the anticipated occurrence of any event (as reasonably determined by Holdings) with respect to the Chief Executive Officer, which, in any such case if the promissory note were to be outstanding on and/or after such date, would result in the Note violating Section 402 of the Sarbanes-Oxley Act of 2002, and (iii) the eighteen (18) month anniversary of the promissory note issuance date. In connection with the purchase, the Chief Executive Officer became a party to the Shareholders Agreement dated as of July 29, 2010, by and among, Holdings, the Company, Intermediate and certain stockholders of Holdings. The acquired shares are subject to transfer restrictions and repurchase rights following termination of employment.
Tax Sharing Agreement
The Company has entered into a tax sharing agreement with Holdings. The agreement provides that Holdings file a consolidated federal tax return, and that any determined tax liability/benefit shall be apportioned between Holdings and the Company, as if the Company had filed a return on a stand-alone basis.
12. Segment Information
The Company operates in two reportable operating segments by providing financial market data, analytics and related services to financial institutions and active traders and investment community professionals worldwide.
Pricing and Reference Data
The Pricing and Reference Data segment provides an extensive range of financial market data services and analytics to customers worldwide including banks, brokerage firms, mutual fund companies, ETF sponsors, hedge funds, pension funds, insurance companies and asset management firms. In addition, Pricing and Reference Data offerings are also used by
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
financial information providers, information media companies, and VARs such as software providers, processors, custodians and other outsourcing organizations. The Pricing and Reference Data Segment has three core offerings: 1) Evaluated pricing services, which are daily opinions of value, on approximately 2.7 million fixed income securities, international equities and other hard-to-value financial instruments; and 2) Reference data, which encompasses listed markets pricing and descriptive information covering over ten million global financial instruments for use across the securities and financial instrument processing lifecycle; and 3) Fixed income portfolio analytics and fixed income data to help manage risks and analyze the sources of risk and return.
Trading Solutions
The Trading Solutions segment provides thousands of customers worldwide with products and services that support a range of trading, wealth management and other investment applications. The Trading Solutions segment has two primary offerings: 1) real-time market data feeds and trading infrastructure managed services used by banks, brokerage firms, asset managers, hedge funds, proprietary trading firms and VARs in order to facilitate and support low latency electronic trading across a range of asset classes as well as support other applications such as portfolio pricing, risk and compliance; and 2) customized hosted web applications and workstations that facilitate access to market data and related analytics and tools for financial advisors, energy and commodity professionals, active traders and individual investors, other investment community professionals, and a range of corporate clients. Reportable segment financial information is as follows (in thousands):
The following table reconciles income from operations to income (loss) before income taxes for the periods below:
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(a) Revenue is net of any inter-segment revenue and therefore represents only revenue from external customers.
(b) 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.
(c) 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 the Boxborough data center and all intangible asset amortization for the Company.
(d) All goodwill and intangible assets have been allocated to the two reportable segments.
The following table presents the Company’s revenue by product areas for the periods below:
The Company does not have the capability to separately track revenues for its evaluated pricing and reference data services which are often sold together to clients under a single contract and collectively represent 94.2% of the Pricing and Reference Data segment total revenue; therefore, revenue information for this segment is presented on a consolidated basis. Within the Trading Solutions segment, revenues are presented based on groupings of similar products.
Reportable segment information for purchases of property and equipment and depreciation expense is as follows for the periods below:
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company’s distribution by major geographic region of revenue and long-lived assets is as follows for the periods below:
13. Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income for the years ended December 31, 2013, 2012 and 2011 are as follows:
The tax impact on the components of accumulated other comprehensive income (loss) were as follows (in thousands):
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. Fair Value Measurements
The fair value hierarchy prioritizes the inputs used to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
The three levels of the fair value hierarchy in order of priority are as follows:
Level 1:
Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2:
Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs that reflect the Company’s assumptions about the assumptions that market participants would use in pricing the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide a summary of the fair values of the Company’s assets and liabilities as of December 31:
(1) Consists of mutual fund assets held in a rabbi trust included in other current assets, and a corresponding non-qualified deferred compensation plan liability included in accrued liabilities. The fair value of the mutual fund assets and related liability are based on each fund’s quoted market price at the reporting date.
(2) The estimated fair values of the Company’s interest rate cap derivative instruments are based on market prices obtained from an independent third party valuation specialist. Such quotes represent the estimated amounts the Company would receive to terminate the contracts. Derivative instruments are included in Other assets, within the Company’s Consolidated Balance Sheet at December 31, 2012. The balance related to this item at December 31, 2013 in deemed immaterial. Refer to Note 15, “Derivatives,” below for further discussion and information.
(3) Represents the calculated value of the additional contingent consideration (“Earn-Out”) liability related to the Company’s January 2010 acquisition of the assets of 7ticks, LLC, deemed current and recorded in Accrued liabilities on the Consolidated Balance Sheet at December 31, 2012. This amount represents the final payment due under the Earn-Out clause of the purchase agreement and is deemed to approximate its fair value as it is calculated using observable inputs and was paid in early 2013.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The carrying value of borrowings outstanding on the Company’s Senior Secured Credit Facilities bear interest at a variable rate and are considered to approximate fair value. The carrying value of the Company’s Senior Notes due 2018, which bear interest at a fixed rate, differ from their fair values as follows:
(1) Excludes original issue discount.
The fair value of the Company’s Senior Notes due 2018 is based on market-based information available from public sources representing a Level 1 valuation.
15. Derivatives
Interest Rate Cap - Cash Flow Hedge
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company manages its exposure to some of its interest rate risks by the use of derivative financial instruments. The Company currently uses derivatives for risk management purposes and not for speculative purposes.
On September 13, 2010, the Company entered into three separate interest rate cap agreements to help mitigate the interest rate volatility associated with the variable rate interest on its Senior Secured Credit Facilities. Interest rate cap agreements provide the right to receive cash if a reference interest rate rises above a contractual rate. The value increases as the reference interest rate rises. The aggregate premium of the cap agreements is $5.0 million, including a deferred financing charge of approximately $0.5 million. This aggregate premium is payable quarterly over twelve quarters, beginning September 30, 2011.
The critical terms of the interest rate caps were designed to mirror the terms of the Company’s LIBOR based borrowings under its Senior Secured Credit Facilities and as part of the refinancing of the Company’s Senior Secured Credit Facilities discussed in Note 16, the Company reevaluated the interest rate cap agreements and determined that the hedging relationship remained highly effective. Based on this, the Company re-designated these derivatives as cash flow hedges of the variability of a portion of the LIBOR based interest payments as follows:
•
Up to $700.0 million of principal payments during the period September 30, 2011 to September 30, 2012,
•
Up to $575.0 million of principal payments during the period October 1, 2012 to September 30, 2013, and
•
Up to $450.0 million of principal payments during the period October 1, 2013 to September 30, 2014.
To the extent the cash flow hedge is effective at offsetting the changes in cash flow being hedged, changes in its fair value are recognized in accumulated other comprehensive income (“AOCI”), until the hedged item affects earnings. Changes in fair value relating to the ineffective portion are immediately recognized in earnings. Changes in the fair value of derivatives that are not designated as hedges are recorded in earnings each period. As of December 31, 2013 and December 31, 2012, the Company determined that the existence of hedge ineffectiveness, if any, was immaterial and all changes in the fair value of the caps are recorded in the Consolidated Statements of Comprehensive Income as a component of AOCI.
The aggregate fair value of these interest rate caps was determined to be approximately $4.5 million at inception and less than $0.01 million at December 31, 2013 and 2012, and is included in Other assets on the Company’s Consolidated Balance Sheets. Refer to Note 14 “Fair Value Measurements” above for related fair value disclosures.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The tables below present the location of the Company’s derivative financial instruments on the Consolidated Balance Sheets and the loss recognized in AOCI related to the interest rate caps for the following reporting periods ended (in thousands):
During the years ended December 31, 2013, 2012 and 2011, $1.5 million, $1.5 million, and $0.4 million, respectively, was reclassified from AOCI to the Company’s Consolidated Statements of Operations related to the derivative financial instruments. The Company expects to similarly reclassify approximately $1.1 million from AOCI to the Consolidated Statement of Operations in the next twelve months.
16. Debt
Senior Secured Credit Facilities
On July 29, 2010, in connection with the Merger, the Company entered into a credit agreement (the “Senior Secured Credit Facilities”) that provided $1.5 billion of Senior Secured Credit Facilities including:
•
a Term Loan Facility (the “July 2010 Term Loan Facility”) in an aggregate principal amount of $1.330 billion with a term of six and one half years due January 2017; and
•
a Revolving Credit Facility (the “Revolving Credit Facility”) in an aggregate principal amount of $160.0 million available in US dollars, Euros and British Pounds with a term of five years expiring July 2015.
On February 6, 2013, the Company completed a second refinancing of its Term Loan Facility (the “Term Loan Facility”) through an amendment (the “Amendment”) to its credit agreement (the “Senior Secured Credit Facilities”). The terms of the Amendment provide for, among other things, the following:
•
a reduction of the Company’s LIBOR borrowing rate from LIBOR plus 3.25% to LIBOR plus 2.75%;
•
a reduction of the LIBOR floor from 1.25% to 1.00%; and
•
an extension of the commencement date for amortization payments on the Term Loan Facility to June 30, 2013 (not giving consideration to application of the 2012 ECF payment).
As of the date of the refinancing, the Company’s outstanding borrowings under the Term Loan Facility were $1.3 billion. The Company determined that the refinancing resulted in a modification of approximately $1.1 billion of the outstanding balance due and an extinguishment of approximately $180.9 million of the outstanding balance due.
Prior to the February 2013 refinancing, the Company had debt financing costs and original issue discount (“OID”) specific to its Term Loan Facility of $26.0 million and $27.9 million, respectively, recorded in its Condensed Consolidated Balance Sheet. The debt financing costs were included within Deferred financing cost, net and the OID was included within Borrowings, net of current portion and original issue discount and both balances were being amortized as non-cash interest expense over the remaining term of the Term Loan Facility using the effective interest rate method. In connection with the February 2013 refinancing, the Company incurred additional debt financing costs of $3.1 million, all of which represented direct issuance costs. Of this amount $2.7 million was expensed as loss on extinguishment of debt during the year ended December 31, 2013 and $0.4 million is being amortized as a non-cash interest expense over the remaining term of the amended Term Loan Facility using the effective interest rate method.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As a result of the February 2013 refinancing, the Company recorded a $10.2 million charge in its Condensed Consolidated Statement of Operations as an extinguishment of debt for the year ended December 31, 2013. This charge included $3.6 million of debt financing costs, $3.9 million of OID and $2.7 million of direct issuance costs as described above.
At December 31, 2013 and 2012, the Company has recorded debt financing costs of $21.5 million and $31.1 million, respectively, in its Consolidated Balance Sheets within Deferred financing costs, net, and $19.6 million and $28.5 million, respectively, comprised of early payment fees paid to lenders and OID included within Borrowings, net of current portion and original issue discount. These amounts are being amortized as a non-cash interest expense over the remaining amended term of the amended Term Loan Facility using the effective interest rate method.
Total amortization of deferred financing costs and original issue discounts related to the Senior Secured Credit Facilities in the years ended December 31, 2013, 2012 and 2011 was approximately $11.4 million, $13.0 million and $13.1 million, respectively, and is recorded as interest expense in the Company’s Consolidated Statements of Operations.
The Senior Secured Facilities include a Revolving Credit Facility providing for aggregate borrowings of up to $160.0 million with sub-limits of $40.0 million for letters of credit and $30.0 million for same-day notice borrowings. As of December 31, 2013 and December 31, 2012, the Company had $0.6 million and $4.5 million, respectively, of letters of credit outstanding related to certain operating leases and no other borrowings outstanding under the Revolving Credit Facility. The initial applicable margin for Revolving Credit Facility borrowings was 5.00%. The applicable margin decreases to 4.75% upon the Company attaining a total-leverage ratio of 5:1. During the second quarter of the year ended December 31, 2012 the Company attained a leverage ratio below the established threshold and its applicable margin was reduced to 4.75%. The Company has retained a leverage ratio below the established threshold for the year ended December 31, 2013. Interest on the outstanding borrowings and a commitment fee on the unutilized portion of the Revolving Credit Facility are payable at the end of each calendar quarter. Principal amounts outstanding under the Revolving Credit Facility are due and payable in full at maturity.
During each of the years ended December 31, 2013, 2012 and 2011, the Company recorded and paid commitment fees on letters of credit of $0.2 million.
Borrowings under the Term Loan Facility bear interest at a rate equal to, at the Company’s option, either (a) the LIBOR rate plus an applicable margin or (b) the highest of (1) the prime commercial lending rate publicly announced by Bank of America as the “prime rate,” (2) the federal funds effective rate plus 0.50% and (3) the one-month LIBOR rate plus 1.00%, plus an applicable margin. Regardless of whether actual LIBOR rates fall below 1.00% (as they have in recent periods), for purposes of determining the Term Loan Facility interest rate, the LIBOR rate is subject to a floor of 1.00%. The initial applicable margin was 3.50%. The applicable margin reduces to 3.25% upon the Company’s achievement of a total leverage ratio of 5.75:1 or less. Prior to the February 2013 refinancing, the LIBOR applicable margin was 3.25%. Following the February 2013 refinancing, the LIBOR applicable margin is 2.75%. As of December 31, 2013, the Company’s total leverage ratio was below 5.75:1 resulting in an applicable margin of 2.75%. The highest of the three rates in (b) was 5.00% for the year ended December 31, 2013. Since the inception of the Term Loan Facility, the Company has elected the three-month LIBOR rate. At December 31, 2013, the Term Loan Facility interest rate was 3.75%, composed of a LIBOR floor of 1.00% plus an applicable margin of 2.75%.
During the years ended December 31, 2013, 2012 and 2011, the Company recorded and paid interest on the Term Loan Facility of $50.5 million, $60.1 million, and $66.2 million, respectively.
Pursuant to the February 6, 2013 refinancing, the Company is required to pay equal quarterly principal installments in aggregate annual amounts equal to 1% of the funded principal amount of the Term Loan Facility beginning with the quarter ending June 30, 2013, (subject to the application of the 2012 annual excess cash flow mandatory prepayment described below) with any remaining unpaid principal balance being payable on the February 11, 2018 maturity date. During the year ended December 31, 2013, due to the application of 2012 annual excess cash flow mandatory prepayment (“ECF payment”) to the Company’s Term Loan Facility scheduled amortization payments, the Company made three scheduled principal payments for a total of $9.8 million related to the Term Loan Facility.
In addition to paying interest on outstanding principal under the Senior Secured Credit Facilities, the Company is required to pay a commitment fee of 0.75% per annum to the lenders under the Revolving Credit Facility for the amount of unutilized commitments. The commitment fee percentage may be reduced to 0.50% subject to the Company reducing its total leverage ratio, as defined in the Senior Secured Credit Facilities agreement, to 5.0:1.0. During the year ended December 31, 2013, the Company’s total leverage ratio was below the 5.0:1.0 threshold and the commitment fee was reduced to 0.50%. The Company is also required to pay customary letter of credit fees.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2013, 2012 and 2011, the Company recorded and paid commitment fees on the Revolving Credit Facility of $0.8 million, $0.9 million, and $1.2 million, respectively.
The Senior Secured Credit Facilities contain certain mandatory prepayment requirements. These include: (i) a percentage of annual excess cash flow, (ii) payments related to certain asset sales and (iii) payments of the cash proceeds of certain types of newly incurred debt. Determination of any mandatory prepayment amount is based on pre-established formulas as set forth in the credit agreement. The determination of the ECF payment was made for the Company’s fiscal years ended December 31, 2013 and December 31, 2012, with the prepayments due 90 days from that date. Because the Company achieved a total leverage ratio of 4.75:1.0, the ECF payment percentage was stepped down from 50% of ECF to 25% of ECF. These amounts are offset against future principal payments due on the Term Loan. The amounts determined to be payable as ECF payments at December 31, 2013 and December 31, 2012 were $25.4 million and $20.3 million, respectively, and accordingly were reflected as current in the Company’s Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012.
Pursuant to the terms of the credit agreement, individual lenders may opt to refuse their share of any ECF payment. In the first quarter of 2013, but after the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 with the Securities and Exchange Commission, certain lenders elected to refuse their portion of the 2012 ECF payment. These refusals totaled approximately $16.6 million. The aggregate refused amount was reclassified and reflected as long-term in the Company’s Consolidated Balance Sheet in the first quarter of 2013.
In accordance with the terms of the credit agreement, ECF payments that are not refused are applied toward future scheduled quarterly principal amortization payments in direct order of maturity. Consequently, the $3.7 million 2012 ECF payment made during the three months ended March 31, 2013 satisfied the $3.3 million June 30, 2013 quarterly principal installment, and the remaining $0.4 million was applied toward the September 30, 2013 quarterly principal installment, reducing the required September 2013 installment from $3.3 million to $2.9 million.
The Company may voluntarily repay the outstanding loans under the Senior Secured Credit Facilities at any time without premium or penalty, other than customary breakage costs with respect to LIBOR loans.
All obligations under the Senior Secured Credit Facilities are unconditionally guaranteed by Intermediate and each existing and subsequently acquired or organized direct or indirect wholly owned material domestic restricted subsidiary of the Company (subject to certain exceptions).
All obligations under the Senior Secured Credit Facilities and the guarantees of such obligations are secured, subject to permitted liens and other exceptions, by substantially all of the assets of the Company and each subsidiary guarantor, including (i) a perfected pledge of all the equity interests of the Company and each wholly owned subsidiary of the Company directly held by the Company or a subsidiary guarantor (limited to 65% of voting stock in the case of foreign subsidiaries) and (ii) perfected security interests in substantially all tangible and intangible personal property and material fee-owned real property of the Company and the subsidiary guarantors (subject to certain exclusions).
The Senior Secured Credit Facilities contain a number of covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, create liens, enter into sale and leaseback transactions, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions or repurchase its capital stock, make investments, loans or advances, prepay certain subordinated indebtedness, make certain acquisitions, engage in certain transactions with affiliates, amend material agreements governing certain subordinated indebtedness, and change its fiscal year. The Senior Secured Credit Facilities also require the Company to maintain a maximum senior secured debt leverage ratio and a minimum cash interest coverage ratio, and contain other customary affirmative covenants and events of default.
In addition, beginning with the Company’s quarter ended December 31, 2010, under the Senior Secured Credit Facilities, the Company is required to maintain and report quarterly to the lenders the following financial covenants:
•
A minimum cash interest coverage ratio; and
•
A maximum net total leverage ratio.
The Senior Secured Credit Facilities also contain certain customary affirmative covenants and events of default, including a change of control. If an event of default occurs, the lenders under the Senior Secured Credit Facilities will be entitled to take various actions, including the acceleration of all amounts due under the Senior Secured Credit Facilities and all actions permitted to be taken by a secured creditor.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013 and December 31, 2012, the Company was in compliance with its Senior Secured Credit Facilities covenants.
Senior Notes due 2018
On July 29, 2010, the Company issued $700.0 million 10.25% senior notes (the “Senior Notes”) which mature on August 1, 2018, pursuant to an indenture, dated as of July 29, 2010 (the “Indenture”), among the Company, the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee.
The Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any future subordinated indebtedness; rank equally in right of payment with all of the Company’s existing and future senior indebtedness; are effectively subordinated in right of payment to the Company’s existing and future secured obligations, including indebtedness under the Company’s Senior Secured Credit Facilities, to the extent of the value of the assets securing such obligations; and are effectively subordinated in right of payment to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to the Company or one of the Company’s guarantor subsidiaries).
The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future direct or indirect wholly owned domestic subsidiaries that guarantee the Company’s obligations under its Senior Secured Credit Facilities.
Each subsidiary guarantee ranks senior in right of payment to all future subordinated indebtedness of the subsidiary guarantor; ranks equally in right of payment with all existing and future senior indebtedness of the subsidiary guarantor; is effectively subordinated in right of payment to all existing and future secured obligations of the subsidiary guarantors, including their guarantee of indebtedness under the Company’s Senior Secured Credit Facilities, to the extent of the value of the assets securing such indebtedness; and is effectively subordinated in right of payment to all existing and future indebtedness and other liabilities, including trade payables, of any subsidiary that is not also a guarantor of the Senior Notes. Any subsidiary guarantee of the Senior Notes will be released in the event such guarantee is released under the Senior Secured Credit Facilities. The Senior Notes are unsecured, and, as such, no assets are pledged for this agreement.
Interest on the Senior Notes accrues at the rate of 10.25% per annum and is payable semi-annually in arrears on February 1 and August 1, to holders of the notes of record on the immediately preceding January 15 and July 15. During the year ended December 31, 2013, 2012 and 2011, the Company made interest payments on its Senior Notes of $71.8 million, $71.8 million, and $72.1 million, respectively.
Optional Redemption
At any time prior to August 1, 2014, the Company may redeem all or a part of the Senior Notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus the greater of (1) 1.0% of the principal amount of the notes; and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of the notes at August 1, 2014 (as set forth in the table appearing below), plus (ii) all required interest payments due on the notes through August 1, 2014 (excluding accrued but unpaid interest to such redemption date), computed using a discount rate equal to the applicable treasury rate as of such redemption date plus 50 basis points; over (b) the then outstanding principal amount of the notes (as of, and accrued and unpaid interest and additional interest, if any, to the date of redemption), subject to the rights of holders of notes on the relevant record date to receive interest due on the relevant interest payment date.
On and after August 1, 2014, the Company may redeem the Senior Notes in whole or in part, at the redemption prices (expressed as percentages of the principal amount of the notes to be redeemed) set forth below, plus accrued and unpaid interest thereon and additional interest, if any, to the applicable redemption date, subject to the right of holders of record of the Senior Notes on the relevant record date to receive interest due on the relevant interest payment date, if redeemed during the twelve-month period beginning on August 1 of each of the years indicated below:
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Upon the occurrence of a change of control, which is defined in the Indenture, each holder of the Senior Notes has the right to require the Company to repurchase some or all of such holder’s Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.
The Indenture contains covenants limiting the Company’s ability and the ability of its restricted subsidiaries to incur additional debt or issue certain preferred shares, pay dividends on or make other distributions in respect of the Company’s capital stock or make other restricted payments, make certain investments, sell or transfer certain assets, create liens on certain assets to secure debt, consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets, enter into certain transactions with the Company’s affiliates, and designate the Company’s subsidiaries as unrestricted subsidiaries.
The Indenture also provides for other customary warranties and nonfinancial covenants which, if violated, would create events of default and would permit or require the principal of and accrued interest on the Senior Notes to become or to be declared due and payable.
As of December 31, 2013 and December 31, 2012, the Company was in compliance with the covenants included in the Indenture.
In connection with the Senior Notes, the Company incurred debt financing costs of $19.2 million, of which $10.5 million represented direct issuance costs and commitment fees paid to the underwriters and $8.7 million represented transaction costs incurred with third parties. These costs were capitalized as deferred financing costs and reported in Deferred financing costs, net on the Consolidated Balance Sheets, net of amortization, for the years ended December 31, 2013 and 2012. These costs are being amortized from the merger date over the remaining term of each debt instrument using the effective interest rate method.
At both December 31, 2013 and December 31, 2012, the Company had $29.9 million of unpaid interest on the Senior Notes accrued in its Consolidated Balance Sheets. During each of the years ended December 31, 2013, 2012 and 2011, the Company recorded $4.6 million of amortized interest expense, related to the capitalized debt financing costs and debt discount accretion, in its Consolidated Statement of Operations. The original issue discount with regard to the Senior Notes totaled $17.5 million at July 29, 2010. The original issue discount is being amortized over the life of the loan using the effective interest rate method.
Total borrowings consisted of the following at December 31:
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The future minimum principal payment obligations due per the Senior Secured Credit Facilities and Senior Notes due 2018 are as follows (in thousands):
(a) Pursuant to the terms of the credit agreement, individual lenders may opt to refuse their share of any ECF payment. This balance assumes that there will be no refusals; however, the actual payment may differ from this amount depending on the final decisions of the individual lenders.
Igloo Holdings Senior PIK Toggle Notes Due 2017
On December 18, 2012, Holdings issued $350.0 million 8.25%/9.00% Senior PIK Toggle Notes (the “Toggle Notes”) which mature on December 15, 2017, pursuant to an indenture, dated as of December 18, 2012 (the “Toggle Notes Indenture).
The Toggle Notes are structurally subordinated to the Senior Notes and any other indebtedness and other liabilities of the Company and other subsidiaries of Holdings. Claims of creditors of the Company and such other Holdings subsidiaries, including trade creditors, the Senior Secured Credit Facilities lenders and claims of preferred stockholders will have priority with respect to the assets and earnings over the claims of Holdings’ creditors, including the holders of the Toggle Notes. The Company and its subsidiaries are not guarantors or obligors of the Toggle Notes. In addition, the Toggle Notes are unsecured. None of the Company’s assets, or any of its subsidiaries’ assets, are pledged to secure the Toggle Notes. Holdings is the Company’s indirect parent company with no material operations of its own and only limited assets or operations other than the indirect ownership of all of the Company’s capital stock. Accordingly, Holdings is dependent upon the distribution of the earnings of its subsidiaries, whether in the form of dividends, advances, payments on account of intercompany obligations or otherwise, to service its debt obligations. Therefore, subject to the limitations placed upon the Company by the covenants under the Senior Secured Credit Facilities and the Indenture governing the Senior Notes due 2018, the Company plans to provide Holdings, through the declaration and payment of cash dividends, the funds required by Holdings to service the Toggle Notes on at least a semi-annual basis. The first such dividend was declared and paid in June 2013. Semi-annual interest payments on the Toggle Notes are due June 15 and December 15 of each year commencing June 2013 and continuing until the December 15, 2017 maturity date. The amount of the semi-annual dividend that the Company plans to pay Holdings, subject to compliance with its own debt covenants, is $14.4 million, which is equal to the semi-annual Toggle Note interest payment. The first and second dividend payments made on June 15, 2013 and December 15, 2013 equated to $14.3 million (due to the interest period not covering a full 6 months), and $14.4 million, respectively.
17. Subsequent Events
The Company has evaluated all events and transactions that occurred after the balance sheet date of December 31, 2013 up through the issuance of these consolidated financial statements and no events occurring subsequent to December 31, 2013, other than disclosed herein, were identified that would require disclosure.
On March 4, 2014, the Company received notice that the results of the United States Internal Revenue Service audits of the Company’s U.S. tax returns for the years 2008-2010 were accepted by the Congressional Joint Committee on Taxation. As a result of this acceptance, the Company expects to receive a U.S. tax cash refund of approximately $3.9 million in the first or second fiscal quarter of 2014. This refund is approximately $2.0 million less than the amount disclosed as an income tax receivable on the Company’s Consolidated Balance Sheet at December 31, 2013 as the remainder represents tax credits that will be applied to tax returns within the next 12 months. Additionally, as a result of the completed audit, the Company will release approximately $5.8 million of uncertain tax positions in the 1st quarter of 2014. The expected net impact on the Company’s Q1 2014 results of operations as a result of recording these adjustments and after applying any associated deferred tax impact, is the recognition of a $4.4 million discrete benefit.
18. Guarantor Subsidiaries
On July 29, 2010, in connection with the Merger, the Company issued $700.0 million aggregate principal amount of Senior Notes as described in Note 16. The Senior Notes are jointly and severally, fully and unconditionally guaranteed on a senior unsecured basis by each of the Company’s existing and future direct and indirect domestic subsidiaries that guarantees the Company’s obligations under the Senior Secured Credit Facilities described in Note 16 (collectively, the “Guarantors”).
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Each of the Guarantors is 100% owned, directly or indirectly, by the Company. Subsidiaries of the Company, either direct or indirect, that do not guarantee the Senior Notes are referred to as “Non-Guarantors”. The Guarantors also unconditionally guaranteed the Senior Secured Credit Facilities, described in Note 16.
The following condensed consolidating financial statements are presented for the information of the holders of the Senior Notes and present the condensed consolidating balance sheets as of December 31, 2013 and 2012, the condensed consolidating statements of operations, comprehensive income, and cash flows for the years ended December 31, 2013, 2012, and 2011, of the parent companies, including but not limited to Interactive Data Corporation (which is the issuer of the Notes), the Guarantors, the Non-Guarantors, and the elimination entries necessary to consolidate the issuer with the Guarantors and Non-Guarantors.
Investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. Separate financial statements and other disclosures with respect to the subsidiary guarantors have not been provided as management believes the following information is sufficient, as the guarantor subsidiaries are 100% owned by the parent and all guarantees are full and unconditional, subject to the customary automatic release provisions described in Note 16.
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2013
(In thousands)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2012
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2011
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2013
(In thousands)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2012
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2011
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2013
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2012
(In thousands)
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2013
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2012
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2011
INTERACTIVE DATA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, 2013. 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.
For the Years Ended December 31, 2013, 2012 and 2011
Schedule II Valuation and Qualifying Accounts
(A) Currency translation adjustments for foreign entities and general reserves for credits.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of December 31, 2013. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of December 31, 2013, the Company’s disclosure controls and procedures were effective, in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, reported and accumulated and communicated to the Company’s management, including the Company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting.
The Company’s management, including the Company’s chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, the Company’s management concluded that, as of December 31, 2013, the Company’s internal control over financial reporting was effective.
On May 14, 2013 COSO issued its 2013 update (the “Updated Framework”) to its original Internal Control - Integrated Framework issued in 1992 (the “1992 Framework”) requiring full transition to the Updated Framework by December 15, 2014. The Company’s assessment of its internal control over financial reporting for the year ended December 31, 2013 was based on the 1992 Framework. The Company has started the process to transition to the Updated Framework and expects to be fully transitioned by December 15, 2014.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Our Board of Directors is presently fixed at nine persons, with eight persons currently serving as directors and one vacancy. Our directors are: Michael Bingle, Cary Davis, Sean Delehanty, James Neary, Joseph Osnoss, Andrew Prozes, Chandler Reedy and Mason Slaine. All directors hold office (subject to our by-laws) until their successors have been duly elected and qualified or until the director’s earlier resignation or removal.
Biographical information regarding our officers and directors is as follows:
Stephen C. Daffron (58) our President and Chief Executive Officer, joined the company in September 2013. From 2008 to 2013, he served as Global Head of Operations and Technology for Morgan Stanley. Prior to that role he spent more than two decades on Wall Street holding senior leadership positions at Renaissance Technologies Corp., Citigroup and Goldman Sachs & Co. Prior to his career in finance, he served as an Associate Professor at the United States Military Academy at West Point, and in various command and staff positions in the U.S. Army around the world. Dr. Daffron graduated with a B.S. from the United States Military Academy in West Point, New York and earned his M.B.A, M.A., M.Ph., and Ph.D. from Yale University in New Haven, Connecticut.
Mason Slaine (60) is executive chairman and serves as the chairman of our Board. Mr. Slaine joined the company in August 2010 as executive chairman and was appointed president and chief executive officer in September 2010. Mr. Slaine served as our president and chief executive officer from September 2010 to September 2013. From 2006 to 2011 Mr. Slaine served as Chairman of MLM Information Services, LLC, a leading vendor of corporate tax compliance software and services, which he founded in partnership with Warburg Pincus. From 1997 to 2004, Mr. Slaine served as Chairman and CEO of Information Holdings, Inc., an electronic publisher in the intellectual property and health care fields, which he founded in partnership with Warburg Pincus and which was listed on the New York Stock Exchange in 1998 and acquired by Thomson Reuters Corporation in 2004. From 1994 to 1996, he was President and CEO of Thomson Financial (formerly a division of Thomson Reuters Corporation) and held various positions at Thomson Financial from 1991 to 1993. From 1987 to 1991, he was Chairman and CEO of Securities Data Corporation, a leading financial market database, until its acquisition by Thomson Financial. From 1982 to 1986, Mr. Slaine was President and CEO of Dealers’ Digest, Inc. until its acquisition by Extel Financial Ltd. (a predecessor to Interactive Data Corporation). Mr. Slaine is a Senior Director and currently serves on the Audit and Compensation Committees of iParadigms LLC, a private company. Mr. Slaine graduated magna cum laude from Amherst College (AB) and earned his MBA at Harvard University.
Michael Bingle (41) has been a director since July 2010. Mr. Bingle joined Silver Lake in 2000 and is a Managing Partner and Managing Director. He has significant private equity investing experience in the technology and financial services industries. Prior to joining Silver Lake, Mr. Bingle was a principal at Apollo Advisors, L.P., where he evaluated and executed a variety of private equity investments. He previously worked as an investment banker in the Leveraged Finance Group of Goldman, Sachs & Co. Mr. Bingle serves on the boards of Gartner, Inc., Gerson Lehrman Group, Inc., IPC Systems, Inc., Mercury Payment Systems, LLC and Virtu Financial, LLC and on the board of Visitors of the Duke University School of Engineering. Previously Mr. Bingle was a director of Ameritrade Holding Corp., Datek Online Holdings, Inc. and Instinet, Inc. He holds a B.S.E. in Biomedical Engineering from Duke University.
Vincent Chippari (53) has served as senior vice president and chief financial officer since October 2010. Prior to joining Interactive Data, he served as chief financial officer of two private-equity backed pre-IPO technology businesses, FleetMatics Group and NameMedia, Inc. He was at Fleetmatics from January 2009 to October 2010 and NameMedia from August 2006 to January 2009. Before NameMedia, Mr. Chippari was employed by The Thomson Corporation (now Thomson Reuters). He was chief strategy officer of Thomson Healthcare, responsible for corporate strategy, mergers and acquisitions and business development from May 2005 to August 2006. Previous positions Mr. Chippari held at Thomson included senior vice president and chief financial officer of Thomson Business Information from 1990 to 1996. From 1998 to 2004, he was executive vice president and chief financial officer of Information Holdings Inc., a NYSE-listed information solutions business that was acquired by Thomson Reuters Corporation in 2004. Mr. Chippari began his career as an auditor at Price Waterhouse. He is a CPA and holds degrees from Bryant University (BSBA) and the University of Connecticut (MBA).
Cary Davis (47) has been a director since July 2010. Mr. Davis has been with Warburg Pincus since 1994 and is responsible for technology, media, and telecommunications investments in the software and financial technology sectors. He received a B.A. in economics from Yale University and an M.B.A. from Harvard Business School. Prior to joining Warburg Pincus, he was executive assistant to Michael Dell at Dell Inc. and a consultant at McKinsey & Company. Mr. Davis is a director of CrowdStrike Holdings, Inc. and GT News. In addition, he has been involved in a number of prior investments including OpenVision Technologies, Inc. (merged with VERITAS Software Corporation) and BEA Systems, Inc. Mr. Davis has been an adjunct professor at the Columbia University Graduate School of Business. He is Chairman Emeritus of the Jewish Community House of Bensonhurst and a Trustee of the American Academy in Rome.
Sean Delehanty (36) has been a director since July 2010. Mr. Delehanty has been with Silver Lake since 2003 and is a Director. Prior to joining Silver Lake, Mr. Delehanty worked in the Investment Banking Group at Lehman Brothers Holdings Inc., where he focused on mergers and financings in the technology industry. Mr. Delehanty graduated from Duke University with a B.S.E. in Mechanical Engineering.
Alexander Goor (42) has served as our chief information officer since September 2010. From April 2005 to June 2007, he was co-chief executive officer and chief information officer of Instinet, Inc. Previously, he was president of Inet ATS, Inc., Instinet Group’s electronic marketplace subsidiary established in November 2003, and also supervised the merger between Instinet, LLC and Island Holding Company. Before joining Instinet, Mr. Goor was the chief strategy officer of Datek Online Holdings Corporation (DOHC). He was also president of Watcher Technologies, a DOHC technology development and licensing subsidiary catering to professional traders and before that was president of Datek Online Brokerage Services, the firm’s online brokerage subsidiary. Mr. Goor currently serves on the technology committee of New York Presbyterian Hospital and is a graduate of Columbia University.
Lori Hannay (57) has served as our chief human resources officer since December 2008. Ms. Hannay joined the company from TRC Companies an engineering, consulting and construction management company, where she most recently held the role of vice president of human resources. She also served for more than 10 years as the vice president of global human resources and vice president of worldwide human resources and corporate services with technology firms Enterasys Networks, Inc. and GenRad, Inc., respectively. At those firms, she helped lead re-engineering initiatives, acquisition-driven integration projects, the development of global stock option and performance-based incentive plans, and the implementation of global information technology systems. Her experience also includes a decade of experience in the financial services industry as vice president and corporate secretary at First Inter-Bancorp, which was subsequently acquired by First Fidelity.
Andrew Hausman (46) has served as president of our Pricing and Reference Data business since January 2014. He joined the company in July of 2012, and prior to his current role, he served as the president of our BondEdge Solutions business. Previously, Mr. Hausman was an executive vice president managing the $1.1 billion Fixed Income & Foreign Exchange business of Thomson Reuters Corporation. Upon joining Reuters in October 2004 he headed the FX Prime Brokerage. Mr. Hausman also spent 12 years at Bloomberg where his responsibilities included managing the Electronic Trading businesses for Energy, Fixed Income, FX and Exchange Traded Derivatives. Before Bloomberg, Mr. Hausman was a manager at Bankers Trust in New York. Andrew holds a B.A. in Finance and Economics from Michigan State University. He currently resides in New Jersey with his wife and three children.
Mark Hepsworth (54) has served as president, Europe since January 2014. From September 2007 until January 2014, Mr. Hepsworth served as president, Pricing and Reference Data. In this role, he was responsible for our Pricing and Reference Data business and our BondEdge Solutions business. From October 2005 until September 2007, Mr. Hepsworth served as president of Interactive Data Real-Time Services. His experience includes a decade as Managing Director for Interactive Data Real-Time Services (formerly known as ComStock) in Europe. Mr. Hepsworth joined ComStock in Europe as General Manager in 1995.
Jay Nadler (49) is our chief operating officer with operational responsibility for both Pricing and Reference Data and Trading Solutions. Prior to joining Interactive Data in October 2010, he was president of MLM Information Services, a leading vendor of corporate tax compliance software and services, from 2005 to 2010. Prior to MLM, Mr. Nadler was employed by Information Holdings from 2000 to 2005 where he served in a variety of corporate roles, as well as president and CEO of several of the Company’s subsidiaries. Information Holdings was a NYSE-listed information vendor in the intellectual property, science, and health care fields. From 1988 to 2000, Mr. Nadler served in various roles at Thomson Financial (now Thomson Reuters), including president and chief executive officer of individual and multiple divisions. During this period, he managed businesses in a number of markets, including investment banking, investment management, investor relations, sales and trading, and wealth management. Mr. Nadler serves on the Executive Committee of iParadigms LLC, a private company. He holds a Bachelor’s degree from The Wharton School at the University of Pennsylvania.
James Neary (49) has been a director since July 2010. Mr. Neary has been with Warburg Pincus since 2000 and has served as co-head of the consumer, industrial and services team since June 2013. Mr. Neary also is a member of the firm’s executive management group. From 2010 to 2013, Mr. Neary led the firm’s late-stage efforts in the technology and business services sectors in the U.S. From 2004 to 2010, he was co-head of the technology, media and telecommunications
investment efforts in the U.S. From 2000 to 2004, Mr. Neary led the firm’s Capital Markets activities. Prior to joining Warburg Pincus, he was a managing director at Chase Securities and worked in the leveraged finance group at Credit Suisse First Boston. Mr. Neary received a B.A. in economics and political science from Tufts University and an M.B.A. from the J.L. Kellogg Graduate School of Management at Northwestern University, where he was the Eugene Lerner Finance Scholar. Mr. Neary is the chairman of both Endurance International Group and CROSSMARK, and a director of Alert Global Media Holdings, Coyote Logistics Holdings and InComm Holdings. Mr. Neary also is on the Board of Trustees of The Brearley School in New York City and of Continuum Health Partners, which unites six New York- area teaching hospitals, including Beth Israel, St. Luke’s and Roosevelt Hospital.
Joseph Osnoss (36) has been a director since August 2010. Mr. Osnoss joined Silver Lake in 2002 and is a Managing Director. He is currently based in London, where he helps to oversee the firm’s activities in Europe, the Middle East and Africa. Mr. Osnoss is a director of Global Blue SA, Mercury Payment Systems, LLC, Sabre Corporation and Virtu Financial LLC, and previously served on the board of Instinet Incorporated. Prior to joining Silver Lake, Mr. Osnoss worked in investment banking at Goldman, Sachs & Co., where he focused on mergers and financings in technology and related industries. Mr. Osnoss graduated summa cum laude from Harvard College with an A.B. in Applied Mathematics-Economics and a citation in French language. He is a Visiting Professor at the London School of Economics, where he participates in teaching and research activities within the Department of Finance.
Andrew Prozes (68) has been a director since May 2011. Mr. Prozes currently serves as Executive Chairman of Alert Global Media Holdings, LLC (ACAMS) and Chairman of Scribestar Limited. Mr. Prozes served on the Board of Directors of Reed Elsevier PLC and Reed Elsevier NV from 2000 until December, 2010. He also served as the Chief Executive Officer of LexisNexis from 2000 until 2010. Today, he serves on the boards of Interactive Data Corporation, TransUnion Holding Company Inc., Quality Solicitors, Aptidata Inc., Ethoca Limited, and Asset International Inc. He also serves as a Director and Chair of the Human Resources Compensation Committee for Cott Corporation. Prior to joining Reed Elsevier, Mr. Prozes served as Executive Vice President and Chief Operating Officer of West Group, part of the Thomson Reuters Corporation from 1997 to 2000. Mr. Prozes is a past Chairman of The US Information Industry Association and has served on the boards of the Information Technology Association of Canada and the Canadian Newspaper Association. He is also an Executive Committee Member of The Atlantic Council of the United States, and a Director of the National Executive Service Corps (NESC). Mr. Prozes joined Southam Inc. in 1988, Canada’s largest newspaper company as President, City Newspapers and New Media. Until recently, Mr. Prozes also served as Senior Adviser to Warburg Pincus.
Chandler Reedy (33) has been a director since August 2010. He joined Warburg Pincus in 2004, and is responsible for late stage investments in technology and business services. He received an A.B. cum laude in Economics from Harvard College. Prior to joining Warburg Pincus, he was with UBS Investment Bank in the Financial Sponsors and the Mergers and Acquisitions groups. He is also a director of Coyote Logistics Holdings, LLC, Endurance International Group and Multi-View, Inc.
Carol Sweeney (61) is senior vice president and general counsel. She joined Interactive Data in 2003 as deputy general counsel. Prior to Interactive Data, Ms. Sweeney was first vice president, office of general counsel at Merrill Lynch. Ms. Sweeney held various other roles during her nearly 20 year career at Merrill Lynch, including senior counsel in Merrill Lynch’s corporate law department and director for their Y2K compliance program. Prior to joining Merrill Lynch, she worked in the Mayor’s Office of Economic Development in New York City and was an associate at the Proskauer Rose law firm. Ms. Sweeney is a graduate of New York University and New York Law School.
Daniel Videtto (54) is managing director for Asia Pacific. Based in Hong Kong, he is responsible for client relationships, business strategy, and driving growth in the Asia Pacific region. Prior to joining Interactive Data, he was chief operating officer for Deutsche Bank’s Japan business, where he was responsible for 480 front office staff in the Global Markets and Investment banking divisions. From 1994 to 2002, Mr. Videtto held senior management positions with Thomson Financial in Tokyo and New York. He served as chief executive officer for two group companies of NYSE-listed Information Holdings, Inc. He started his career with Salomon Brothers in New York, and transferred to Tokyo in 1988. Mr. Videtto holds a Bachelor’s degree from the California State University, Long Beach, and a Masters in Information Management from the Thunderbird School of Global Management.
Board Composition and Governance
Our Board of Directors currently consists of eight directors. Our by-laws provide that our Board of Directors consist of between one and ten persons. The exact number of members on our Board of Directors is determined from time to time by resolution of a majority of our Board of Directors. On July 29, 2010, we completed a merger (the “Merger”) with Igloo
Merger Corporation (“Merger Sub”) pursuant to the terms of the Agreement and Plan of Merger, dated May 3, 2010 (the “Merger Agreement”), by and among us, Merger Sub and Hg Investors LLC (“Hg LLC”). Following the Merger, Hg LLC merged with and into Igloo Intermediate Corporation (“Intermediate”). We were the surviving corporation in the Merger and as a result of the Merger, we are now wholly-owned by Intermediate, a direct subsidiary of Igloo Holdings Corporation (“Holdings”). Approximately 96% of the capital stock of Holdings is owned by investment funds affiliated with, and a co-investment vehicle controlled by, Silver Lake Group L.L.C. and Warburg Pincus LLC (collectively, the “Sponsors”). The remaining approximately 4% is primarily held by management.
Following the consummation of the Merger, pursuant to the terms of the Merger Agreement, the then current directors of Merger Sub, Messrs. Bingle, Davis, Neary, and Delehanty became our directors, with the Company as the surviving corporation to the Merger. In August 2010, Messrs. Osnoss, Reedy and Slaine were elected to the Company’s Board of Directors. In May 2011, Mr. Prozes was appointed by the Board to serve as a director, with the consent of the Sponsors.
The Sponsors are party to a Shareholders Agreement that, among other things, contains agreements with respect to the composition of our Board of Directors as well as the board of directors of Holdings and Intermediate, stock ownership, voting and other matters and restrictions on the transfer of Holdings’ equity securities, including tag along and drag along rights, preemptive rights and rights of first offer. Pursuant to the Shareholders Agreement, each of our Sponsors has the right to nominate, and have nominated, three directors to serve on the Board of Directors. For more information regarding the rights of the Sponsors to nominate directors and other related arrangements, see “Certain Relationships and Related Party Transactions - Shareholders Agreement.” Because of these requirements, as well as because Holdings owns 100% of our common stock, we do not currently have a policy or procedures with respect to shareholder recommendations for nominees to our Board of Directors.
The terms of Mr. Slaine’s employment agreement with the Company and Holdings require that Mr. Slaine be appointed to serve as a director of Holdings. Holdings is the parent company of Igloo Intermediate Corporation. Igloo Intermediate Corporation is our parent company.
Presently, none of our directors are considered by our Board of Directors to be independent (as independence is defined by the New York Stock Exchange (NYSE) listing standards). Following the Merger, our common stock was no longer listed on NYSE.
None of our directors (other than Mr. Slaine) currently holds any position with us. Except as disclosed elsewhere in this Annual Report, none of the directors or any of his affiliates (1) has a familial relationship with any of our directors or executive officers or (2) has been involved in any transactions with us or any of its directors, officers or affiliates that is required to be disclosed in this Annual Report pursuant to the rules and regulations of the SEC.
Director Qualifications
The Shareholders Agreement provides that each Sponsor has the right to designate three directors. Any directors nominated to fill the directorships selected by the Sponsors are chosen by the applicable Sponsor.
Because we are privately held and because the Shareholders Agreement addresses the topic of composition of our Board, our Board does not have a standing nominating committee. We believe that our Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow our Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure. In that regard, we believe that our Sponsors consider all factors they deem appropriate, including the information discussed in each of the board members’ biographical information set forth above when designating directors to our Board. Our Board of Directors and the Board of Directors of Holdings are comprised of the same individuals.
When considering whether the directors have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board to satisfy its oversight responsibilities effectively in light of our business and structure, our Board focused primarily on the information discussed in each of the Board member’s and biographical information set forth above. Each of the Company’s directors possesses high ethical standards. Each is committed to employing their skills and abilities to aid the long-term interests of our stakeholders. In addition, our directors are knowledgeable and experienced in one or more business endeavors, which further qualify them for service as members of our Board.
Each of the Directors appointed by our Sponsors was elected to the Board pursuant to the Shareholders Agreement. Pursuant to such agreement, Messrs. Bingle, Delehanty, and Osnoss were appointed to the Board as a consequence of their respective relationships with Silver Lake. Messrs. Davis, Neary, and Reedy were appointed to the Board as a consequence
of their respective relationships with Warburg Pincus. Mr. Prozes was appointed to the Board by unanimous consent of the Board, with the consent of the Sponsors. As a group, the directors possess experience in owning and managing enterprises like the Company and are familiar with corporate finance, and strategic business planning activities. Mr. Slaine brings leadership and his broad strategic vision for Interactive Data to the Board. In addition, Messrs. Prozes and Slaine bring extensive business, operating and policy experience, and knowledge of our industry to the Board. Each of Messrs. Bingle, Delehanty, and Osnoss is a partner, member or employee of an entity affiliated with or controlled by Silver Lake Group, L.L.C. and generally is entitled to be indemnified by such entity for his service on our Board pursuant to such entities’ governing documents or other arrangements, in each case in accordance with such entities’ policies. Likewise, each of Messrs. Davis, Neary, and Reedy is a partner, member or employee of an entity affiliated with or controlled Warburg Pincus LLC and generally is entitled to be indemnified by such entity for his service on our Board pursuant to such entities’ governing documents or other arrangements, in each case in accordance with such entities’ policies.
Our Board of Directors currently has one standing committee, the Audit Committee.
Audit Committee Financial Expert
Our Audit Committee is composed of Mr. Delehanty and Mr. Reedy. In light of our status as a privately held company, our Board has not designated any member of the Audit Committee as an audit committee financial expert as such term is defined in SEC rules. Further, though not formally considered by our Board given that our securities are not traded on any national securities exchange, based upon the listing standards of the New York Stock Exchange, the national securities exchange upon which our common stock was listed prior to the Merger, we do not believe that either Mr. Delehanty or Mr. Reedy would be considered independent because of their relationships with certain affiliates of the Sponsors which hold significant interests in Holdings, which indirectly owns 100% of our outstanding common stock.
Compensation Committee Interlocks and Insider Participation
We do not currently have a designated Compensation Committee. Compensation decisions for our executive officers are made by the Board of Directors and Compensation Committee of the Board of Directors of Holdings. The Board of Directors of Holdings has appointed Messrs. Bingle and Neary, who are also members of our Board of Directors, to serve on the Holdings Compensation Committee. None of our executive officers has served as a member of the Holdings Compensation Committee (or other committee serving an equivalent function) of any other entity, whose executive officers served as a director of our company or members of the Holdings Compensation Committee. Mr. Bingle is affiliated with Silver Lake and Mr. Neary is affiliated with Warburg Pincus. As of March 1, 2013, our Sponsors control approximately 96% of the outstanding common stock of Holdings. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Certain Relationships and Related Transactions, and Director Independence.”
Section 16(a) Beneficial Owner Reporting Compliance
Currently, we do not have any class of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, and consequently Section 16(a) is not currently applicable to our executive officers, directors or stockholders.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. Our Code of Business Conduct and Ethics is posted on our website, www.interactivedata.com, under the heading “Company - Corporate Governance.” A printed copy of our Code of Business Conduct and Ethics is also available free of charge upon request to our Corporate Secretary at 32 Crosby Drive, Bedford, Massachusetts 01730. We intend to satisfy all disclosure requirements required by law or regulation regarding any amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our website or by filing or furnishing with the Securities and Exchange Commission a Current Report on Form 8-K.
Item 11.
Item 11. Executive Compensation
COMPENSATION DISCUSSION AND ANALYSIS
Named Executive Officers
Our “named executive officers” for the 2013 fiscal year consisted of the following individuals:
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Stephen C. Daffron, currently our President and Chief Executive Officer;
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Mason Slaine, currently our Executive Chairman and Chairman of our Board (and formerly our President and Chief Executive Officer);
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Vincent Chippari, currently our Senior Vice President and Chief Financial Officer;
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Alexander Goor, currently our Chief Information Officer;
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Jay Nadler, currently our Chief Operating Officer; and
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Daniel Videtto, currently our Managing Director, Asia Pacific.
Compensation Overview and Objectives
Compensation decisions with respect to our named executive officers have generally been based on the goal of achieving performance at levels necessary to provide meaningful returns to the primary stockholders of our ultimate parent, Holdings, upon a liquidity event. To that end, in addition to the typical need to attract, motivate, and retain talented executives, our global compensation programs are specifically designed to motivate our named executive officers to substantially increase Holdings’ equity value and to make Holdings an attractive candidate for either a public offering of its shares or a sale of Holdings to financial or strategic buyers, and to provide our named executive officers with meaningful compensation in connection with such an event. Our compensation programs are heavily weighted toward performance-based compensation, with particular emphasis on equity-based compensation, such that our named executive officers’ compensation has a direct link to the returns achieved by Holdings’ stockholders.
Determination of Compensation
The Board of Directors of Holdings (the “Holdings Board”), in consultation with Holdings’ primary stockholders, is responsible for establishing and making decisions with respect to our compensation and benefit plans generally, including all compensation decisions relating to our named executive officers. Mr. Slaine, our Executive Chairman and Mr. Daffron, our Chief Executive Officer, have significant influence on compensation decisions for our named executive officers. The Holdings Compensation Committee acts under the authority of the Holdings Board, and on occasion as requested or directed by the Holdings Board, compensation decisions may be considered and/or made by the Holdings Compensation Committee, which decisions may or may not be subject to further review and approval of the full Holdings Board.
Upon initial hiring, Holdings’ primary stockholders separately engaged in arms-length negotiations with each of our named executive officers. Each of these negotiations resulted in the execution of employment, non-interference, and equity award agreements, each of which is described in more detail below under the “Narrative Disclosure Relating to Summary Compensation Table and Grant of Plan-Based Awards Table” header. The Holdings Board determined that the amounts and benefits payable pursuant to these agreements were necessary to entice the named executive officers to join the Company and also to ensure that the named executive officers remain properly motivated during their tenures with the Company. None of our named executive officers participated in any discussions of the Holdings Board concerning his own compensation, though both Mr. Slaine and Mr. Goor corresponded with individual members of the Holdings Board in negotiating their own agreements. Mr. Slaine was involved in the negotiations with Messrs. Chippari, Goor, Nadler, and Videtto.
In determining the levels and mix of compensation, the Holdings Board has not generally relied on formulaic guidelines but rather sought to maintain a flexible compensation program that allows it to adapt components and levels of compensation to motivate and reward individual executives within the context of our desire to maximize value for Holdings’ stockholders. Subjective factors considered in compensation determinations include an executive’s skills and capabilities and whether the total compensation potential and structure is sufficient to ensure the retention of an executive when considering the compensation potential that may be available elsewhere. In making its determination, the Holdings Board has not undertaken any formal benchmarking or reviewed any formal surveys of compensation for our competitors. The Holdings Board also considered the prevalent labor market for executive talent generally, and evaluated internal pay equity among executives and considered each individual executive’s responsibilities, effectiveness, industry experience, other business experience, ability to impact corporate financial performance, where applicable, and ability to impact maximization of value for Holdings’ stockholders when determining compensation levels.
Our compensation programs are generally designed to provide fixed compensation within market competitive ranges, to provide variable compensation to motivate our executives to achieve performance goals that maximize growth, and to motivate our executives to achieve one or more liquidity events for Holdings’ stockholders. The fixed components of our compensation program - including base salary and benefits - enable us to compensate our executives at market compensation levels, which is necessary to attract and retain top talent. Our annual bonus programs provide variable compensation opportunities to our employees and enable us to pay for performance based on achievement of company-wide performance targets, as well as individual goals. Finally, Holdings’ stock incentive plan enables us to promote executive retention and to align the interests of our executives with those of Holdings’ primary stockholders through the grant of stock options to purchase shares of Holdings common stock that, until an initial public offering or a change in control, are subject to repurchase by Holdings following a termination of employment and that otherwise remain illiquid until Holdings’ stockholders obtain liquidity.
Components of Compensation Established for the 2013 Fiscal Year
For the 2013 fiscal year, the compensation provided to our named executive officers generally consisted of base salary, annual bonuses, retirement benefits, and, in some cases, stock option grants and perquisites, each of which is described in more detail below. We believe that the relationship of fixed to variable compensation was properly balanced and provided us with an effective means to attract, motivate and retain our named executive officers, as well as reward them for creation of Holdings stockholder value.
Base Salary
The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. Base salary amounts for each of our named executive officers were initially established under the named executive officer’s employment agreement. This initial amount forms the basis for base salary throughout a named executive officer’s tenure, with adjustments being made by the Holdings Board as and when appropriate, based on its consideration of, among other factors, the scope of the executive’s responsibilities, individual performance for the prior year, the mix of fixed compensation to overall compensation, and competitive market practices. Effective January 1, 2013 the annual base salaries of each of Messrs. Slaine, Chippari, Goor, Nadler and Videtto were increased by the Holdings Compensation Committee by 2%. In determining to make such increases, the Holdings Compensation Committee and Mr. Slaine, as applicable, reviewed the 2012 compensation levels of these executives, including base salary, and considered, among other factors, the intense competition for executives with the specialized experience and expertise required to implement the Company’s business plan and to expand the business, the key role of the executives to the Company’s continuing success, competitive compensation data and cost-of-living changes. Mr. Daffron’s base salary was established at his time of hire based on the Holdings Compensation Committee’s consideration of factors such as the scope of his roles and responsibilities, our overall compensation program and competitive market practices.
Annual Bonus
All of the named executive officers participated in the 2013 Corporate Bonus Plan. The Corporate Bonus Plan covers bonus-eligible corporate level employees (those employees whose business functions are not tied to a single business unit or geographic region). In his prior capacity as our Chief Executive Officer and as Chairman of our Board, Mr. Slaine was primarily responsible for the design of the 2013 Corporate Bonus Plan. Mr. Slaine worked closely with Mr. Chippari to develop 2013 fiscal year financial performance targets for the 2013 Corporate Bonus Plan, which were set at levels that corresponded to our 2013 corporate budget amounts. The proposed performance targets as well as the other features of the 2013 Corporate Bonus Plan were presented to and discussed with Messrs. Bingle and Neary (who are the two directors who constitute the Holdings Compensation Committee) as well as with certain other members of the Holdings Board. The Company’s Compensation Overview and Objectives (as further described above) were considered both in the selection of the performance measures (Bonus Plan Adjusted Revenue and Bonus Plan Adjusted EBITDA) as well as in the assessment of the appropriate level of growth over 2012 performance to be reflected in 2013 fiscal year performance targets. The Company fiscal year 2013 performance targets were set at levels that were aggressive and at a high level of expected performance based on the information available at the time the targets were established.
The 2013 Corporate Bonus Plan provides for an annual cash incentive opportunity for participants equal to a specified percentage of base salary. After completion of discussions with the various directors regarding the overall parameters of the 2013 Corporate Bonus Plan, Mr. Slaine approved the individual bonus potential guidelines under the 2013 Corporate Bonus
Plan for each of our named executive officers. For 2013, the target bonus potential for each named executive officer was as follows: 100% of base salary for Mr. Daffron (prorated based on the number of days worked in 2013), 93% of base salary for Mr. Slaine, 70% of base salary for Mr. Chippari, 100% of base salary for Mr. Goor, 100% of base salary for Mr. Nadler, and 50% of base salary for Mr. Videtto. The 2013 percentages for Messrs. Daffron, Slaine, Goor, Nadler and Videtto were consistent with the percentages determined based on pre-employment arm’s length negotiations and specified in their respective employment contracts, and Mr. Chippari’s target bonus percentage was increased to 70% in 2012. All percentages reflect Mr. Slaine and/or the Holdings Compensation Committee’s consideration of factors such as the scope of his roles and responsibilities, our overall compensation program, and competitive market practice.
In 2013, two financial performance measures were specified under the 2013 Corporate Bonus Plan for our named executive officers: (i) Bonus Plan Adjusted Revenue, and (ii) Bonus Plan Adjusted EBITDA, weighted as follows:
We believe that the two financial performance measures are consistent with the overall goals and long-term strategic direction that the Holdings’ stockholders and the Holdings Board have set for our Company and are closely related to or reflective of financial performance, operational improvements, growth and return to stockholders. Further, the combination of these performance measures limits the ability of an executive officer to be rewarded for taking excessive risk that may harm our company because manipulation of one performance measure could have the opposite effect on the other performance measures, and performance under all of these measures is required to maximize bonus payout.
The Bonus Plan Adjusted Revenue measure is intended to support our strategy to increase revenue through organic growth and, if applicable in any given year, targeted acquisitions. Bonus Plan Adjusted EBITDA measures our operating profitability and our cash generation strength. The higher weighting of the Bonus Plan Adjusted EBITDA measure supports our emphasis on the attainment of our operating profit goals.
Bonus Plan Adjusted EBITDA is calculated by adding to Net Income interest, income taxes, depreciation and amortization, stock-based compensation expenses, restructuring charges and benefits, adjustments related to the amortization of acquisition-related deferred revenue, and other non-cash, non-operational or non-recurring items. The Bonus Plan Adjusted Revenue and Bonus Plan Adjusted EBITDA are calculated using pre-determined, constant foreign exchange rates that eliminate the positive or negative impact during the performance period resulting from market fluctuations of foreign exchange rates. In addition, in calculating these amounts, transactional foreign exchange gain or loss is deducted. Transactional foreign exchange gain or loss is the foreign exchange gain or loss associated with transactions completed in a currency that differs from the functional currency of a particular business unit. Currency movements are not in the control of the Company or its management and, consequently we believe that it is reasonable that executives should be neither penalized nor rewarded for impacts caused by foreign exchange fluctuations. Likewise, and for similar reasoning, we believe that executives should not be penalized or rewarded for purchase price accounting impacts. In determining Bonus Plan Adjusted EBITDA, we also make the additional adjustments that track the adjustments that are permitted under our senior secured credit agreement for the purpose of calculating Adjusted EBITDA as defined in the credit agreement. Credit agreement Adjusted EBITDA figures prominently in our various credit agreement compliance covenants.
Company financial performance against the objective quantitative Company financial performance targets is considered by Mr. Slaine and Mr. Daffron and the Holdings directors when determining the aggregate Corporate Bonus Pool funding level. The amount the Corporate Bonus Pool is funded is established at the sole discretion of the Holdings Compensation Committee. When making the bonus pool funding determination, in addition to consideration of actual performance against the two financial performance targets, the Holdings Compensation Committee considers Mr. Daffron’s and Mr. Slaine’s recommendations on funding provided to the Holdings Board in their capacities as Chief Executive Officer and Executive Chairman, respectively, including their overall subjective assessments of the Company’s performance and the performance of the executive team as a whole. The Holdings Board also considers other factors it deems relevant in its business judgment. When making its determination of aggregate bonus pool funding, the Holdings Compensation Committee considers a non-binding guideline that 65% of the potential aggregate funding of the bonus pool is tied to the Company’s actual performance against the financial performance measures set forth above and the remaining potential 35% of aggregate funding is determined at the discretion of the Holdings Board based on factors it considers relevant.
In addition to overall bonus pool funding discretion, the bonus awarded to any individual under the 2013 Corporate Bonus Plan may be reduced or increased at the discretion of Mr. Slaine, Mr. Daffron and the Holdings Board. The exercise of discretion in any given case is based on assessment of the named executive officer’s performance against individual performance goals communicated to the executive from time to time, performance relative to the group of executive officers, important contributions made during the year, and other factors the decision makers deem relevant it its or their business judgment. Individual performance goals are designed for the purpose of encouraging our named executive officers to focus on activities and initiatives that support our corporate strategy and overall Company financial performance.
Because of these elements of discretion, if the Company meets or exceeds established quantitative financial performance measure, the amount of bonus paid to any named executive officer may be less than his target opportunity. The same is true in reverse. That is, notwithstanding the failure of the Company to meet one or more established quantitative financial performance measures, the Chief Executive Officer and the Holdings Board may determine in its or his discretion to pay a bonus to one or more named executive officers.
The 2013 Company Financial Performance measures are as follows:
Actual 2013 Company Performance was as follows:
For 2013, the Company did not meet the quantitative Company financial performance target for Adjusted Revenue, but did achieve the target for Adjusted EBITDA. Accordingly, applying the non-binding guideline, the minimum funding of the Corporate Bonus Plan for 2013 based on quantitative financial measures was 48.75% (being 75% weighting for 65% of the pool). In consideration of the Company having achieved 99% of the Adjusted Revenue target and numerous non-financial objectives, the Holdings Compensation Committee made a determination to exercise its discretion under the Corporate Bonus Plan to fund the bonus pool for bonus eligible employees at a level equal to approximately 85% of the funding that would have occurred had all targets been met. The Holdings Compensation Committee made a determination to pay Messrs. Daffron, Slaine, Chippari, Goor, Nadler, and Videtto discretionary annual bonuses in the amounts of $152,384 (pro rated based on the number of days worked by Mr. Daffron in 2013), $566,303, $432,290, $474,700, $479,760 and $132,500, respectively, based on Mr. Slaine’s, Mr. Daffron’s and the Holdings Compensation Committee’s assessment of the named executive officer’s performance of his duties and individual contributions (other than in the case of Messrs. Slaine and Daffron, with respect to whom such assessment was made solely by the Holdings Compensation Committee) during 2013. Individual performance was assessed based on the executive’s effectiveness in carrying out his duties, individual performance relative to peers, and his contributions made during the year to Company financial performance and advancement of Company strategy. Measures considered included an executive’s (1) successful and timely advancement of key initiatives such as the development of a unified technology infrastructure and the achievement of operational efficiencies; (2) development and implementation of revenue growth strategies (both domestic and international); (3) new or enhanced product innovation, efficient product development and time to market; (4) efficient allocation of capital resources; (5) market penetration; (6) new customer development and customer retention; (6) development and management of key employees; (7) improvement of operational administration; and (8) supporting and coordinating activity across business lines and functional areas.
Equity Compensation
Holdings maintains the Igloo Holdings Corporation 2010 Stock Incentive Plan, the terms of which are described below under the “Narrative Disclosure Relating to Summary Compensation Table and Grant of Plan-Based Awards Table” header. All stock option grants made under the plan are intended to provide our named executive officers with a vested interest in the success of the Company and to align their interests with those of Holdings’ stockholders. The stock options generally vest partially based on continued service during a fixed period of time and partially based on the achievement of certain net return or internal rate of return (IRR) thresholds by Holdings’ primary stockholders upon the occurrence of one or more liquidity events. The Holdings Board believes that these vesting conditions properly motivate management to maximize the return received by Holdings’ primary stockholders and also will serve as a means of retaining key
management talent. Each of our named executive officers was given an initial stock option grant under the plan at his time of hire. These grants were designed to be grants of a significant and meaningful equity interest. The Holdings Board has determined that annual stock option grants are not necessary to motivate the named executive officers. While the Holdings Board generally believes that the initial grants were set at levels that will appropriately motivate our named executive officers to achieve a liquidity event for Holdings’ stockholders, given that their holdings will remain illiquid until the occurrence of such a liquidity event, from time to time, the Holdings Board reviews the outstanding existing equity grants held by the named executive officers for the purpose of assessing if an executive’s current grant size continues to be appropriate based on changes to the named executives duties and responsibilities, changes to the competitive market for similar executive talent, or internal pay equity considerations among the named executive officers and other key members of management. In 2013, the Holdings Compensation Committee granted stock options to Mr. Daffron in connection with his hire, and to Messrs. Chippari and Nadler as a result of its review of their outstanding existing equity grants as described above. The terms of these stock options are described in more detail below under the “Grant of Plan-Based Awards” header. Pursuant to the plan, our named executive officers may, at the Holdings Compensation Committee’s discretion, be subject to clawback provisions with respect to their stock option grants in the event that they engage in certain competitive activities during their employment or within six months following a termination of employment. These provisions serve to protect our intellectual property, and to help further ensure that our named executive officers act in the best interest of Holdings’ stockholders.
Employment Agreements
We have entered into employment agreements with each of our named executive officers, which are described in more detail below under the “Narrative Disclosure Relating to Summary Compensation Table and Grant of Plan-Based Awards Table” header. We determined that it was advisable and appropriate to enter into these agreements to attract and retain our named executive officers, to ensure that the compensation and benefits provided to our named executive officers is competitive and to ensure that we have adequate protection in the form of restrictive covenants following a termination of employment.
Retirement Benefits
In 2013, we provided retirement benefits to our named executive officers through a defined contribution 401(k) plan. 401(k) matching contributions earned by each named executive officer in 2013 are shown in the “Summary Compensation Table” and the associated footnotes below. Our named executive officers are not eligible to participate in any other pension, deferred compensation or supplemental executive retirement plans.
Other Benefits
In 2013, our named executive officers were eligible to receive the same basic benefits that were available to our other employees. We also provide certain perquisites to Mr. Videtto who was asked to relocate to Hong Kong in 2012, which include a housing allowances and cost of living adjustments. We determined that these benefits were necessary to entice Mr. Videtto to accept the position in Hong Kong.
Compensation Risk Management
The Holdings Board has reviewed our overall compensation policies and practices to determine whether those policies and practices are reasonably likely to have a material adverse effect on us and has concluded that they are not reasonably likely to have a material effect on us.
Changes in Base Salaries Effective January 1, 2014
In December 2013, the Holdings Compensation Committee voted to increase the base salaries of Messrs. Chippari, Nadler and Videtto by 8.78%, 7.08% and 0.65%, respectively, effective January 1, 2014. In making these determinations, the Holdings Compensation Committee and Messrs. Slaine and Daffron reviewed and considered the current compensation levels of these executives, including base salary as well as such additional information as the decision maker deemed necessary or relevant to an assessment of the base salaries of the executives, including, without limitation, the intense competition for executives with the specialized experience and expertise required to implement the Company’s business plan and to expand the business, the key role of the executives to the Company’s continuing success, competitive compensation data and cost-of-living changes. Effective January 1, 2014, Mr. Slaine’s base salary was adjusted to $338,293, in light of the revised scope of his duties and responsibilities associated with his role as our Executive Chairman.
COMPENSATION COMMITTEE REPORT
The Holdings Board has reviewed and discussed with management the Compensation Discussion and Analysis, or CD&A, for the fiscal year ended December 31, 2013. Based on the review and discussion, the Holdings Board recommended to our Board that the CD&A be included in this Form 10-K.
Respectfully submitted,
BOARD OF DIRECTORS OF IGLOO
HOLDINGS CORPORATION
Mason Slaine, Chairman
Michael Bingle
Cary Davis
Sean Delehanty
James Neary
Joseph Osnoss
Andrew Prozes
Chandler Reedy
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows compensation of our principal executive officer, our principal financial officer and other named executive officers for the fiscal years ended December 31, 2013, 2012, and 2011.
(1) Mr. Daffron joined us as our president and chief executive officer in September 2013; represents salary for the period September 20 to December 31, 2013.
(2) Amounts reported represent the aggregate grant date fair value of option awards granted to the named executive officers in 2013. For information on the valuation assumptions with respect to awards made, refer to Note 7 in “Stock Based Compensation” in our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
(3) The table below shows the components of this column for 2013, which include our contributions under our 401(k) qualified defined contribution plan and perquisites:
(a) As of the end of 2013, the named executive officers were vested in the following portions of the company contributions to their 401(k) accounts: Messrs. Slaine, Chippari, Goor, and Nadler - 100%; Mr. Videtto - 33.34%; and Mr. Daffron - 0%.
(b) Includes: (i) a $25,023 tax gross-up in respect of Mr. Videtto’s cost of living adjustment and (ii) a $85,927 tax gross-up in respect of Mr. Videtto’s housing allowance.
(c) Includes: (i) a $192,000 housing allowance and (ii) a $90,000 cost of living adjustment, each related to Mr. Videtto’s relocation to Hong Kong.
Grant of Plan-Based Awards
The following table sets forth summary information regarding all grants of plan-based awards made to our named executive officers for the fiscal year ended December 31, 2013:
SIP - Igloo Holdings Corporation 2010 Stock Incentive Plan
(1) The securities underlying each option award are shares of Holdings common stock, par value $0.01 per share.
(2) Represents the aggregate grant date fair value of option awards granted to Messrs. Daffron, Chippari and Nadler in 2013, determined under FASB ASC Topic 718. For information on the valuation assumptions with respect to awards made, refer to Note 8 in “Stock Based Compensation” in our Consolidated Financial Statements included in Item 7 of this Annual Report on Form 10-K. One-third of Messrs. Daffron and Nadler’s options, and one-half of Mr. Chippari’s options, will vest over 5 years based on continued service with the Company, and two-thirds of Messrs. Daffron and Nadler’s options, and one-half of Mr. Chippari’s options, will vest based on both continued service through, and the return on invested capital received by Holdings’ private equity sponsors upon, the occurrence of certain “liquidity events” set forth in the applicable option agreements. Messrs. Slaine, Goor and Videtto did not receive option grants in 2013.
Narrative Disclosure Relating to Summary Compensation Table and Grants of Plan-Based Awards Table
2010 Stock Incentive Plan
Holdings maintains its 2010 Stock Incentive Plan, (as amended on September 15, 2010, January 5, 2011 and September 5, 2013) pursuant to which 160,396,876 shares of Holdings’ common stock (subject to adjustment for certain corporate transactions) are reserved for issuances of stock-based awards to our employees and other service providers as well as employees and service providers of any other direct or indirect subsidiaries of Holdings. The 2010 Stock Incentive Plan provides Holdings with the ability to grant stock options, restricted stock awards, and other equity-based incentive awards as a means of providing long-term incentive compensation. Shares of stock acquired pursuant to awards granted under the 2010 Stock Incentive Plan are subject to certain transfer restrictions and repurchase rights set forth in the 2010 Stock Incentive Plan and a stockholders agreement between Holdings and its stockholders. See the “Grant of Plan Based Awards” table and the “Equity Compensation” section of the “Compensation Discussion and Analysis” above for details on option grants to named executive officers in 2013.
Employment and Non-Interference Agreements
The Company or one of its subsidiaries is party to employment agreements with each of our named executive officers, each described in more detail below. The employment agreements provide that our named executive officers will be entitled to receive certain severance payments and benefits following a change in control and/or a termination of employment under certain conditions. See the “Potential Payments Upon a Termination or Change in Control” section for details on these provisions. Each of our named executive officers has entered into a confidentiality and non-interference agreement with the
Company. Under those agreements, the named executive officers are subject to restrictions on competition and interference during their employment with the Company and for a period of between 12 and 24 months thereafter. The agreements also contain standard confidentiality, invention assignment and non-disparagement covenants.
Slaine Employment Agreement Terms
Pursuant to his employment agreement with the Company and Holdings, Mr. Slaine was entitled to receive an annual base salary of not less than $644,000 in 2013, and has a target annual bonus opportunity equal to 93% of his base salary, payable upon the achievement of annual corporate and individual performance objectives for each such year (as established by the compensation committee in consultation with Mr. Slaine). In September 2013, Mr. Slaine entered into a letter agreement with the Company and Holdings regarding the appointment of Mr. Daffron as the Company’s President and Chief Executive Officer, pursuant to which Mr. Slaine agreed that his title and role with the Company would revert to that of Executive Chairman, and that his employment would continue to be governed by the terms of the employment agreement. Mr. Slaine is also entitled to receive, in lieu of any adjustment to his options, an additional bonus any time Holdings declares and pays a dividend to the holders of its common stock in an amount equal to the product of the number of shares of stock underlying outstanding options held by Mr. Slaine as of the date of such dividend and the per-share amount of the dividend. Mr. Slaine received a one-time bonus equal to $740,741 following the effective date of the Merger, and prior to the occurrence of a liquidity event, Mr. Slaine and the Company have agreed to negotiate a liquidity event bonus of at least $300,000.
Daffron/Chippari/Goor/Nadler/Videtto Employment Agreement Terms
Pursuant to their employment agreements with the Company, Messrs. Daffron, Chippari, Goor, Nadler and Videtto are entitled to receive an annual base salary of no less than $600,000, $350,000, $500,000, $400,000 and $375,000, respectively, and have a target annual bonus opportunity equal to 100%, 70% (increased from 50% in 2012), 100%, 100% and 50%, respectively, of their base salary, which is payable subject to the achievement of annual corporate and individual performance objectives established for each such year. Pursuant to his employment agreement, Mr. Videtto is also entitled to receive the following benefits related to his assignment in Hong Kong: (i) a cost-of-living adjustment of up to $90,000 (subject to annual review and adjustment for significant changes), (ii) a housing allowance of up to $16,000 per month, (iii) payment of reasonable relocation costs associated with Mr. Videtto’s move to Hong Kong, (iv) payment of repatriation costs associated with Mr. Videtto’s return to the United States upon completion of his Hong Kong assignment, (v) two round-trip “home leave” airplane tickets per year for each of himself, his spouse, and their children, and (vi) a tax equalization benefit for the duration of his Hong Kong assignment.
Outstanding Equity Awards at Fiscal Year End
The following table sets forth summary information regarding the outstanding equity awards held by our named executive officers as of December 31, 2013.
(1) The securities underlying each option award are shares of Holdings common stock, par value $0.01 per share.
(2) The exercise prices of our stock options were set at the fair market value of a share of our stock at the time of the grant, with fair market values being determined by the Board in good faith, based on all available facts and circumstances, including the price paid by Holdings’ primary shareholders for each share of Holdings’ common stock in connection with the Merger.
(3) One-third of the options vest over 5 years based on continued service with the company, and two-thirds vest based on both continued service through, and the return on invested capital received by Holdings’ private equity sponsors upon the occurrence of certain “liquidity events” set forth in the applicable option agreement.
(4) Mr. Slaine’s options are subject to time and performance-based vesting, both dependent on the total return received (or deemed received) by the Igloo Holdings Corporation private equity sponsors on their initial investment in Holdings on the occurrence of certain events, such as a change in control or an initial public offering of Igloo Holdings Corporation.
(5) These time-based options vest over 5 years based on continued service with the Company.
(6) These performance-based options vest based on both continued service through, and the return on invested capital received by Holdings’ private equity sponsors upon the occurrence of certain “liquidity events” set forth in the applicable option agreements.
(7) In connection with the extraordinary cash dividend declared by the Holdings Board on December 18, 2012, the options then-held by the named executive officers (other then Mr. Slaine) were equitably adjusted by (i) reducing the per share exercise price of each performance-based option by $0.30, and (ii) providing each of the named executive officers with a cash payment of $0.309 per share (the aggregate amount of the extraordinary cash dividend that a named executive officer would have received had such named executive officer exercised all time-based options with respect to all the underlying shares (whether vested or unvested) immediately prior to the extraordinary dividend record date) in lieu of a reduction in the per share exercise price of each time-based option. The portion of the cash payment attributable to vested time-based options was paid following the extraordinary dividend record date, and the named executive officers shall vest in the remaining portions of the cash payment on each subsequent vesting date for the underlying options, in each case, in an amount equal to the portion of the cash payment attributable to the time-based options that vest on such vesting date, subject to such named executive officer’s continued employment with Holdings on each such date.
(8) One-half of the options vest over 5 years based on continued service with the company, and one-half vest based on both continued service through, and the return on invested capital received by Holdings’ private equity sponsors upon the occurrence of certain “liquidity events” set forth in the applicable option agreement.
(9) In connection with the extraordinary dividend declared on December 18, 2012, Holdings entered into a letter agreement with Mr. Slaine, which amended the terms of his employment agreement and the option agreement between Holdings and Mr. Slaine to provide that, in connection with the extraordinary cash dividend, the options held by Mr. Slaine would be equitably adjusted by (i) reducing the per share exercise price of such options by $0.20 and (ii) by providing Mr. Slaine with a cash payment of $4,126,427, which payment will vest and become non-forfeitable on each monthly anniversary of July 29, 2010, subject to Mr. Slaine’s continued employment with Holdings on each such date.
Option Exercises in 2013
The following table sets forth the value realized by each of our named executive officers as a result of the exercise of options during the fiscal year ended December 31, 2013.
(1) The amount shown in the Value Realized on Exercise column equals the number of options exercised multiplied by the difference between the fair value of a share of Holdings common stock at the time of exercise and the stock option exercise price. On March 12, 2013, Mr. Nadler exercised 300,000 options with an exercise price of $1.00 and a fair value as of date of exercise of $1.00.
Potential Payments Upon a Termination or Change in Control
Pursuant to the employment agreements with our named executive officers, upon certain terminations of employment, our named executive officers are entitled to payments of compensation and benefits as described below. The table below reflects the amount of compensation and benefits payable to each named executive officer in the event of (i) a change in control (as such term is defined in the Holdings 2010 Stock Incentive Plan), (ii) any resignation without good reason, (iii) an involuntary termination without cause or a resignation for good reason, (iv) a termination by reason of an executive’s death or disability and (v) a termination for cause. The amounts shown assume that the applicable triggering event occurred on December 31, 2013, and therefore are estimates of the amounts that would be paid to the named executive officers upon the occurrence of such triggering event.
Under the terms of their respective employment agreements, if any of Messrs. Daffron, Slaine, Chippari, Goor, Nadler and Videtto is terminated by the Company without cause or by the executive for good reason, the executive will be entitled to receive, subject to his execution of a general release in favor of the Company and its affiliates and continued compliance with the terms of his confidentiality and non-interference agreement, (i) continuation of base salary (or in the case of Mr. Goor, an amount equal to two times the sum of his base salary and the greater of his annual bonus for the year prior to termination and $500,000) for 12 months following the date of termination (or, in the case of Mr. Slaine, for a period of up to 24 months if his noncompete is extended), (ii) any unpaid bonus from a previous completed fiscal year, and (iii) reimbursement of COBRA premiums for up to 12 months. Under such circumstances, Messrs. Daffron, Slaine and Nadler are also entitled to receive a pro rata bonus for the year of termination, assuming certain performance targets are met. If any of Messrs. Daffron, Slaine, Chippari, Goor, Nadler and Videtto is terminated on account of death or disability, he will, subject to his (or his estate’s) execution of a general release in favor of the Company and its affiliates, be entitled to any accrued obligations and any unpaid bonus for the completed fiscal year that has ended prior to the date of termination, and in the case of Messrs. Daffron, Slaine and Nadler, a pro rata bonus for the year of termination, based on the achievement of target performance for such year.
Pursuant to the terms of the named executive officers’ option agreements, performance-based options vest upon the occurrence of certain liquidity events based on either (i) the total return received (or deemed received) by Holdings’ private equity sponsors on their initial investment in Holdings (in the case of Mr. Slaine) or (ii) the return on invested capital received by Holdings’ private equity sponsors (in the case of the other named executive officers), in each case in connection with such event. In addition, performance-based options held by Messrs. Daffron, Chippari, Nadler and Videtto will vest upon a termination without cause or for good reason (good reason only applies to Mr. Nadler and one of Mr. Chippari’s grants) within the one-year period following a change in control which does not constitute a liquidity event pursuant to the terms of the option agreements. For a discussion of the treatment of time-based options upon certain terminations of employment, please refer to the table below and the associated footnotes.
The table does not include any amounts related to vested options that the named executive officer would have been entitled to receive on December 31, 2013, regardless of whether a termination event occurred December 31, 2013. The number of vested options held by each named executive officer as of December 31, 2013 is set forth in the “Outstanding Equity Awards at Fiscal Year-End Table” above.
1) The default provision under Mr. Slaine’s employment agreement entitles him to continue to receive his base salary for a period of 12 months following a termination by the Company without cause or by Mr. Slaine for good reason, and the table above is based on the default. However, the Company may elect to extend Mr. Slaine’s non-competition obligations, in which case he will receive continuation of base salary for 24 months following termination and his cash severance would then equal $1,353,172, based on his $676,586 annual base salary in effect on December 31, 2013. Effective January 1, 2014, Mr. Slaine’s annual base salary was adjusted to $338,293, in light of the revised scope of his duties and responsibilities associated with his role as our Executive Chairman.
2) Upon a termination without cause, for good reason or as a result of death or disability, Messrs. Daffron, Slaine and Nadler are entitled to a pro rata target bonus for the year of termination. The pro rata bonus amounts listed represent Mr. Slaine’s and Mr. Nadler’s 2013 target Annual Bonuses. Mr. Daffron’s bonus amount reflects his target bonus potential of 100%, pro rated based on his number of days worked in 2013.
3) Represents the estimated cost to provide health, dental, and vision care (where applicable) to the executive (and family where applicable) for 12 months, and in the case of Mr. Goor represents the estimated cost to provide health care to Mr. Goor and his family for a period of 24 months following termination.
4) Represents the value of unvested cash payments awarded in respect of the named executive officers’ time-based options (or, in the case of Mr. Slaine, all options) in connection with the extraordinary dividend, which payments will vest and be paid upon the occurrence of a change in control.
5) Upon a termination without cause or for good reason, Messrs. Daffron, Chippari, Nadler and Videtto will be entitled to a continuation of their base salary for 12 months.
6) Pursuant to the terms of the stock option grant agreements with Messrs. Daffron, Chippari, Nadler and Videtto, upon a termination without cause within the one-year period following a change in control, all time-vesting stock options that had not previously vested prior to the date of termination shall vest in full. In the case of Mr. Goor, upon the occurrence of a change in control, all time-vesting stock options that had not previously vested prior to the date of the change in control shall vest in full. In the event a change in control had occurred on December 31, 2013, such event would have resulted in the vesting of time-based stock options to purchase 2,858,379 shares of Holdings common stock for Mr. Goor. In the event a change in control had occurred on December 31, 2013 and the named executive officer was terminated without cause (or in the case of the October 2010 grants to Messrs. Chippari and Nadler, and the September 2013 grant to Mr. Daffron the named executive officer resigned for good reason), such event(s) would have resulted in the vesting of time-based stock options to purchase 6,666,667 shares of Holdings common stock for Mr. Daffron, 808,334 shares of Holdings common stock for Mr. Chippari, 991,667 shares of Holdings common stock for Mr. Nadler, and 523,334 shares of Holdings common stock for Mr. Videtto. The amount shown is this row is the number of shares underlying time-based stock option(s) that were unvested as of December 31, 2013 multiplied by the positive difference between the estimated fair market value of a share of Holdings common stock on December 31, 2013 ($1.57 per share) and the per share exercise price Estimated fair market value of a share of Holdings common stock for purposes of the amounts included in the table was determined by management using the same methodology used to determine grant date fair value, however, no discount was applied for lack of marketability. For information on the valuation assumptions with respect grant date fair value, refer to Note 8 in “Stock Based Compensation” in our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The marketability discount was not applied because if a change in control is assumed to have occurred on December 31, 2013, a marketability discount would de facto not be applicable.
7) Upon a termination without cause or for good reason, Mr. Goor is entitled to an amount equal to two times the sum of (i) his then current base salary, and (ii) the greater of the annual bonus earned in the calendar year prior to termination and $500,000, payable in monthly installments over the 24-month period following his termination of employment.
8) In the event that Mr. Slaine’s employment terminated without cause, for good reason or due to death or disability as of, or a change in control had occurred on, December 31, 2013, the internal rate of return deemed to have been received by the stockholders of Holdings in connection with such event would have resulted in the vesting of stock options to purchase 39,761,865 shares of Holdings’ common stock. The amount shown is this row is the number of shares underlying these stock options multiplied by positive difference between the fair market value of a share of Holdings’ common stock on December 31, 2013 ($1.57 per share) and the per share exercise price of the stock options ($0.80 per share). The number of shares deemed vested as of December 31, 2013 was determined by reference to the vesting percentage formula set forth in the option grant agreement and management’s estimation of the annual compounded internal rate of return to the Sponsors as of December 31, 2013.
9) In the event that a change in control had occurred on December 31, 2013, the return deemed to have been received by the stockholders of Holdings in connection with such change in control would have resulted in the vesting of exit vesting stock options to purchase 302,322 shares of Holdings common stock for Mr. Chippari, 3,969,304 shares of Holdings common stock for Mr. Goor, 1,062,707 shares of Holdings common stock for Mr. Nadler, and 175,896 shares of Holdings common stock for Mr. Videtto. The amount shown is this row is the number of shares underlying the stock option(s) multiplied by the positive difference between the estimated fair market value of a share of Holdings common stock on December 31, 2013 ($1.57 per share) and the per share exercise price. Estimated fair market value of a share of Holdings common stock determined by management using the same methodology used to determine grant date fair value, however, no discount was applied for lack of marketability. For information on the valuation assumptions with respect grant date fair value, refer to Note 8 in “Stock Based Compensation” in our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The marketability discount was not applied because if a change in control is assumed to have occurred on December 31, 2013, a marketability discount would de facto not be applicable. The number of shares deemed vested as of December 31, 2013 was determined by reference to the vesting percentage formula set forth in the applicable option grant agreement and management’s estimation of the Sponsors’ net return on invested capital as of December 31, 2013.
DIRECTOR COMPENSATION
We did not provide any compensation to non-employee members of our board of directors for service on our board of directors and none of our non-employee directors received any cash or equity compensation during the year ended December 31, 2013.
Mr. Prozes serves on the Boards of Directors of Igloo Holdings, Igloo Intermediate and Interactive Data Corporation. On May 13, 2011, Holdings granted to Mr. Prozes 400,000 shares of restricted common stock of Holdings pursuant to the Holdings 2010 Stock Incentive Plan (the “Prozes Restricted Shares”), subject to a Restricted Stock Grant Notice and Agreement entered into by Mr. Prozes and Holdings (the “Prozes Grant Agreement”). Twenty percent of the Prozes Restricted Shares vested on May 13, 2012, with the remainder vesting in 48 substantially equal monthly installments thereafter, subject to his continued service on the Holdings board of directors through each vesting date. All of the Prozes Restricted Shares will vest in full upon a change in control of Holdings. Such shares are subject to transfer restrictions and repurchase rights following a termination of employment in accordance with the terms of the Holdings 2010 Stock Incentive Plan. In connection with the grant of the Prozes Restricted Shares, Mr. Prozes also entered into a confidentiality agreement. The Company has concluded that under US GAAP, primarily as a result of Mr. Prozes’s relationship with Holdings as well as the terms of the Prozes Grant Agreement, the Prozes Restricted Stock Units are not to be accounted for in the financial statements of the Company. |Pursuant to the terms of the Prozes Grant Agreement, as of December 31, 2013, of the 400,000 restricted shares subject to the grant, Mr. Prozes held 193,333 shares of unvested and 206,667 shares of vested restricted common stock of Holdings.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Igloo Intermediate Corporation directly owns all of our issued and outstanding stock. All of the issued and outstanding capital stock of Igloo Intermediate Corporation is directly owned by Igloo Holdings Corporation, which we refer to as Holdings. All of the issued and outstanding capital stock of Igloo Holdings Corporation is owned, directly or indirectly, by the Sponsors and certain other investors to whom the Sponsors syndicated their investments through Igloo Co-Invest, LLC, whom we collectively refer to as the Investors, and certain members of our management and board of directors, whom we refer to as the Management Participants. See Item 13, “Certain Relationships and Related Transactions, and Director Independence.”
The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct
disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities with respect to which such person has no economic interest.
All of Interactive Data Corporation’s issued and outstanding shares of capital stock have been pledged by Igloo Intermediate Corporation as collateral to the lenders under our senior secured credit facilities. If we were to default on our senior secured credit facilities, the lenders could foreclose on these shares of our common stock, which would result in a change of control.
The following table sets forth as of March 1, 2014 certain information regarding the beneficial ownership of the voting securities of Holdings by (a) each person known by us to beneficially own more than a five percent equity interest in of Holdings, (b) each member of our Board of Directors and Holdings’ Board of Directors, (c) all of our executive officers named in the “Summary Compensation Table” , and (d) all of our executive officers and our directors and the directors of Holdings, as a group.
* Indicates beneficial ownership of less than one percent of the outstanding shares of common stock of Igloo Holdings Corporation.
(1) The shares of common stock of Igloo Holdings Corporation that are attributed to Silver Lake and affiliates consist of an aggregate of 555,880,073 shares directly held by Silver Lake Partners III, L.P. (“SLP III”) and 5,873,152 shares directly held by Silver Lake Technology Investors III, L.P. (“SLTI III” and, together with SLP III, “Silver Lake”) and 260,001,000 shares directly held by Igloo Co-Invest, LLC, a Delaware limited liability company (“Igloo Co-Invest”). The general partner of each of SLP III and SLTI III is Silver Lake Technology Associates III, L.P. (“SLTA III”). The general partner of SLTA III is SLTA III (GP), L.L.C. The sole member of SLTA III (GP), L.L.C. is Silver Lake Group, L.L.C. (“Silver Lake Group”). The managing member of Silver Lake Management Company III L.L.C. is Silver Lake Technology Management, L.L.C. (“SLTM”). The sole member of SLTM is Silver Lake Technology Management, L.P. (“SLTM LP”). The general partner of SLTM LP is SLTM GP, L.L.C. (“SLTM GP”). Silver Lake
Group and SLTM GP are controlled by Michael Bingle, James Davidson, Egon Durban, Kenneth Hao, and Greg Mondre. As such, they may be deemed to have voting or investment power over the securities held by SLP III and SLTI III. Each of them, however, disclaims beneficial ownership of such securities, except to the extent of any pecuniary interest therein. The address of the Silver Lake entities is 2775 Sand Hill Road Suite 100, Menlo Park, CA 94025. The managing member of Igloo Co-Invest is Igloo Manager Co-Invest, LLC, a Delaware limited liability company (“Igloo Manager”). SLTA III and Warburg Pincus X, LLC each have the right to appoint one of the two members of the management committee of Igloo Manager. Due to its right to designate one of the two members of the management committee of Igloo Manager, Silver Lake Technology Associates III, L.P. may be deemed to beneficially own the 260,001,000 shares of common stock of Igloo Holdings Corporation held by Igloo Co-Invest. Silver Lake Technology Associates III, L.P. disclaims beneficial ownership of all shares held by Igloo Co-Invest except to the extent of any pecuniary interest therein.
(2) The shares of common stock of Igloo Holdings Corporation that are attributed to Warburg Pincus and affiliates consist of an aggregate of 489,552,882 shares directly held by Warburg Pincus Private Equity X, L.P. and 15,661,650 shares directly held by Warburg Pincus X Partners, L.P., both Delaware limited partnerships (together, “WP X”) and 260,001,000 shares directly held by Igloo Co-Invest. Warburg Pincus X, L.P., a Delaware limited partnership (“WP X GP”), is the general partner of the WP X entities. Warburg Pincus X, LLC, a Delaware limited liability company (“WP X LLC”), is the general partner of WP X GP. Warburg Pincus Partners, LLC, a New York limited liability company (“WP Partners”), and a direct subsidiary of Warburg Pincus & Co., a New York general partnership (“WP”), is the sole member of WP X LLC. WP is the managing member of WP Partners. Warburg Pincus LLC, a New York limited liability company (“WP LLC”), is the manager of the WP X entities. Charles R. Kaye and Joseph P. Landy are Managing General Partners of WP and Managing Members and Co-Presidents of WP LLC and may be deemed to control the Warburg Pincus entities. Messrs. Kaye and Landy disclaim beneficial ownership of all shares held by the Warburg Pincus entities except to the extent of any pecuniary interest therein. The address of the Warburg Pincus entities is 450 Lexington Avenue, New York, New York 10017. The managing member of Igloo Co-Invest is Igloo Manager. WP X GP and SLTA III each have the right to appoint one of the two members of the management committee of Igloo Manager. Due to its right to designate one of the two members of the management committee of Igloo Manager, WP X GP may be deemed to beneficially own the 260,001,000 shares of common stock of Igloo Holdings Corporation held by Igloo Co-Invest. WP X GP disclaims beneficial ownership of all shares held by Igloo Co-Invest except to the extent of any pecuniary interest therein.
(3) Igloo Co-Invest, LLC is a Delaware limited liability company. The managing member of Igloo Co-Invest is Igloo Manager. Silver Lake Technology Associates III, L.P. and Warburg Pincus X, LLC each have the right to appoint one of the two members of the management committee of Igloo Manager. Due to this right, each of Silver Lake Technology Associates III, L.P. and Warburg Pincus X, LLC may be deemed to beneficially own the 260,001,000 shares of common stock of Igloo Holdings Corporation held by Igloo Co-Invest. The current member of the management committee appointed by Silver Lake is Mr. Bingle. The current member of the management committee appointed by Warburg Pincus is Mr. Neary. Silver Lake Technology Associates III, L.P., Warburg Pincus X, LLC and Messrs. Bingle and Neary disclaim beneficial ownership of all shares held by Igloo Co-Invest except to the extent of any pecuniary interest therein.
(4) Mr. Slaine is the executive chairman of our Board of Directors. The shares of common stock of Igloo Holdings Corporation that are attributed to Mason Slaine consist of 21,000,000 shares directly held by Mr. Slaine, 4,000,000 shares directly held by 2013 Slaine Family Investment Trust and 2,500,000 shares directly held by The David Slaine 2010 Trust, both trusts of which Mr. Slaine is the sole trustee. Mr. Slaine is the executive chairman of the company.
(5) Mr. Daffron is the president and CEO of the Company. Mr. Daffron’s ownership consists of 8,620,689 shares directly held by him.
(6) Mr. Goor is the chief information officer of the Company. Mr. Goor’s ownership consists of (i) 7,000,000 shares directly held by him, and (ii) 6,769,843 shares issuable upon the exercise of options which are exercisable as of April 29, 2014.
(7) Messrs. Bingle, Delehanty and Osnoss, directors of the company, are each directors or managing directors of several Silver Lake entities. Mr. Bingle is a manager of Igloo Manager, as described in footnote 3. All shares indicated as owned by Messrs. Bingle, Delehanty and Osnoss are included because of their affiliation with the Silver Lake entities. Messrs. Bingle, Delehanty and Osnoss disclaim beneficial ownership of all shares held by the Silver Lake entities and Igloo Co-Invest except to the extent of any pecuniary interest therein.
(8) Mr. Chippari is a senior vice president and the chief financial officer of the company. Mr. Chippari’s ownership consists of 766,666 shares issuable upon the exercise of options which are exercisable as of April 29, 2014.
(9) Messrs. Davis and Neary, directors of the Company, are Managing Directors and Members of WP LLC. Mr. Neary is a manager of Igloo Manager, as described in footnote 3. All shares indicated as owned by Messrs. Davis and Neary are included because of their affiliation with the Warburg Pincus entities. Messrs. Davis and Neary disclaim beneficial ownership of all shares held by the Warburg Pincus entities and Igloo Co-Invest except to the extent of any pecuniary interest therein.
(10) Mr. Prozes is a director of the Company. Mr. Prozes’s ownership consists of (i) 2,000,000 shares directly held by him plus (ii) the 233,333 shares that are vested as of April 29, 2014 under his May 13, 2011 restricted stock grant.
(11) Mr. Reedy is a director of the Company and a principal of WP LLC.
(12) Mr. Nadler is the chief operating officer of the Company. Mr. Nadler’s ownership consists of (i) 1,050,000 shares held by Mr. Nadler directly and (ii) 1,350,000 shares directly held by Nadler Family Investments LLC, of which Mr. Nadler is the sole member, and (iii) 525,000 shares issuable upon the exercise of options that are exercisable as of April 29, 2014.
(13) Mr. Videtto is the Company’s managing director, Asia Pacific. Mr. Videtto’s ownership consists of 330,000 shares issuable upon the exercise of options that are exercisable as of April 29, 2014.
The following provides certain aggregate information with respect to our equity compensation plans in effect as of December 31, 2013.
(1) Since Holdings, our indirect parent is a privately held corporation, the Holdings Board, and not the Holdings stockholders, have approved all decisions related to equity-based compensation, including the approval of the 2010 Stock Incentive Plan of Holdings in August 2010 and the amendments thereto.
(2) Represents options to purchase shares of common stock of Holdings and restricted stock units under the 2010 Stock Incentive Plan. Includes 193,334 shares of unvested restricted stock units granted to Mr. Prozes.
(3) Represents shares reserved for issuance under the 2010 Stock Incentive Plan, as of December 31, 2013.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Registration Rights Agreement
On July 29, 2010, in connection with the consummation of the Merger, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Intermediate, Holdings, the Sponsors and certain other indirect investors in Holdings. The Registration Rights Agreement provides (i) the Sponsors and their assignees with certain demand and “piggyback” registration rights and (ii) the other direct and indirect investors in Holdings that are a party to the Registration Rights Agreement with certain “piggyback” registration rights, in each case with respect to the common stock issued in connection with an initial public offering of Holdings, the Company or any other subsidiary of Holdings.
Shareholders Agreement
On July 29, 2010, in connection with the consummation of the Merger, the Sponsors and certain other investors entered into a Shareholders Agreement (the “Shareholders Agreement”) with Holdings, Intermediate and us. The Shareholders Agreement, among other things, contains agreements among the parties with respect to the composition of the board of directors of Holdings, Intermediate and the Company, stock ownership, voting and other matters and restrictions on the transfer of Holdings’ equity securities, including tag along and drag along rights, and other special corporate governance provisions (including the right of our Sponsors to approve various corporate actions).
Management Agreement
On July 29, 2010, prior to the consummation of the Merger, certain affiliates of the Sponsors entered into a Transaction and Management Fee Agreement (the “Management Agreement”) with Merger Sub, The Management Agreement was assumed by the Company following the consummation of the Merger. Pursuant to the terms of the Management Agreement, such affiliates will provide monitoring, advisory and consulting services to the Company and its subsidiaries. Pursuant to the Management Agreement, such affiliates are entitled to receive an aggregate annual management fee of $3 million, which amount may increase in the event that the Company or any of its subsidiaries enter into any business combination with another entity that is large enough to constitute a “significant subsidiary” of the Company under Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”). The Management Agreement also provides for the reimbursement of out-of-pocket expenses incurred by the Sponsors and their affiliates in connection with the provision of services pursuant to the Management Agreement, the making or any regulatory filings related to the ownership, directly or indirectly, of the Company’s and its subsidiaries’ equity securities and the ownership or sale of such equity securities. The Management Agreement has an initial term expiring on the eight year anniversary of the Management Agreement, provided that the term will be extended for successive one-year terms unless the Company or each affiliate of the Sponsors provides notice to the other of their desire not to automatically extend the term. In addition, pursuant to the Management Agreement, such affiliates of the Sponsors also received aggregate transaction fees of $50 million at the closing of the Merger in connection with certain services provided in connection with the Merger and related transactions. In the event of an initial public offering or certain other circumstances, including a change of control transaction and other financing, acquisition and disposition transactions, such affiliates may also receive certain additional fees in amounts to be agreed. The Management Agreement also contains customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.
Director Indemnification Agreements and Sponsor Agreement
We entered into indemnification agreements with the directors who are affiliated with the Sponsors to provide them with certain indemnification and related rights. We also entered into an agreement with the Sponsors to clarify our indemnification obligations with respect to the Sponsors and their affiliates. This agreement clarifies that we have the primary obligation to indemnify the Sponsors and their affiliates for expenses and indemnification obligations that we, Holdings and Intermediate provide to our officers and directors.
Management Employment Agreements
Each of Messrs. Slaine, Daffron, Chippari, Goor and Nadler entered into an employment agreement with us and/or Holdings. See Item 11, Executive Compensation - Employment Agreements.
Employment of Matthew Kim
Matthew Kim, the brother-in-law of Alexander Goor, our Chief Information Officer, was hired in September 2010 to serve as Senior Business Analyst and his title was subsequently changed to Director, Data Collection Operations of our pricing and reference data business. His current annual salary is $125,460. Mr. Kim earned an annual bonus for 2013 in the amount of $49,500 and received 401(k) retirement plan matching contributions in the amount of $7,076, with an additional annual basic company 401(k) retirement plan contribution of $2,363 to be paid in March 2014. Mr. Kim is entitled to future annual bonuses as well as company matching and basic annual contributions under our 401(k) retirement plan.
Nookco Foundation IP Agreement
In November 2010, the Company entered into an agreement (the “Nookco Agreement”) with Nookco LLC (“Nookco”) a limited liability company owned 50% by our chief information officer, Alex Goor. The Nookco Agreement confirms the Company and Nookco’s rights with respect to certain ticker plant and message processing software that Nookco agreed to develop, pursuant to a term sheet that was executed before Mr. Goor became a Company employee.
Pursuant to the Nookco Agreement, the Company is the sole owner of all rights in the ticker plant software developed by Nookco. With respect to the message processing software, the Company and Nookco will jointly own the portion of such software that is developed before a date to be specified, which will be no later than July 11, 2011. The Company will own all rights in any message processing software developed after such date. Nookco has agreed not to use or license to customers any jointly-owned message processing software: (i) in perpetuity, in any field or business that competes with the Company and/or in any transaction with specified Company competitors or (ii) until the one-year anniversary of the termination of a key programmer’s employment with the Company, in any other fields or businesses. Before Nookco or Nookco’s rights in the jointly-owned software (the “Nookco Rights”) can be sold, Nookco must notify the Company and give the Company the first opportunity to make the purchase. If at the time of the above notice, the key programmer of the jointly-owned software is still employed by the Company (or has resigned, but stayed with the Company beyond a specified date), has been
terminated by the Company without cause, has died or become disabled, should the Company, in its sole discretion, elect to exercise such purchase right, the Company would be required to pay a purchase price of $5,000,000 to acquire the Nookco Rights. If the programmer was terminated for cause or resigned from the Company before a specified date, the Company may acquire the Nookco Rights at no cost.
The Nookco Agreement acknowledges that the Sponsors have already paid Nookco $337,500 under a term sheet that was superseded by the Nookco Agreement. No other compensation is due to Nookco or Mr. Goor under the term sheet or under the Nookco Agreement, except for the potential $5 million payment to Nookco described above.
Policies and Procedures Regarding Transactions with Related Persons
Any related person transaction or arrangement that is reportable by the Company under Item 404(a) of Regulation S-K is disclosed to the full board of directors and is reviewed in accordance with applicable law. A related person transaction is one in which we are a participant, the amount involved exceeds $120,000 and the related person has a direct or indirect material interest. The term “related person” has the same meaning as set forth in Item 404(a) of Regulation S-K. Any director with any interest in the transaction would be asked to recuse himself from any Board of Directors approval or ratification of any such transactions or arrangement. In addition, our indenture governing our Senior Notes due 2018 contains provisions restricting our ability to enter into certain transactions with affiliates. Under the terms of our indenture, any such transaction that has aggregate payments or consideration in excess $10,000,000 must be made on terms no less favorable to us than it would be if we entered into a similar relationship with an unaffiliated third party. Other than the provisions in the indenture governing our Senior Notes due 2018, we do not have written policies and procedures setting forth the foregoing policy and procedures. The entire board is responsible for overseeing the application of this policy and these procedures.
Director Independence
The terms of the Shareholders Agreement described above require that certain members of our Board of Directors be comprised of persons affiliated with us. Our employment agreement with Mr. Slaine requires him to be appointed as a member of the Board of Directors of our parent company, Holdings. Because we are a privately-held company we are not subject to any listing standards of any national exchange. However, were we to apply the standards of NYSE, no members of our Board of Directors or Audit Committee would be considered “independent” under such standards.
Item 14.
Item 14. Principal Accountant Fees and Services
Independent Public Accounting Firm Fees and Services
The aggregate fees billed for professional services provided to us by Ernst & Young LLP, our independent registered public accounting firm, with respect to services performed in 2012 and 2013 were:
In the above table:
•
“audit fees” are fees for professional services for the audit of our consolidated financial statements included in our Annual Report on Form 10-K and reviews of financial statements included in our Quarterly Reports on Form 10-Q, or for services that are normally provided by the registered independent public accounting firm in connection with statutory and regulatory filings or engagements;
•
“audit-related fees” are fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and which are not reported under audit fees.
•
“tax fees” are fees for tax compliance, tax advice, and tax planning services. Tax advice and tax planning services relate to certain international and domestic tax planning advice or tax return review.
•
“all other fees” are fees for any services not included in the first three categories.
Amounts disclosed do not include any amounts payable to Ernst & Young for services performed for Igloo Holdings Corporation financial statements.
The fees for 2013 in the above table have not yet all been billed by Ernst & Young LLP and reflect Ernst & Young LLP’s estimate of fees for 2013.
The Audit Committee has reviewed the fees paid (or estimated to be paid) to Ernst & Young LLP as part of its review of Ernst & Young LLP’s independence.
Pre-Approval Policies
Our Audit Committee has established written policies and procedures related to the pre-approval of all audit and non-audit services that are to be performed by our independent registered public accounting firm. Under these policies, no audit or non-audit services may be undertaken by our independent registered public accounting firm unless the engagement is specifically approved in advance by our Audit Committee or the services are included within a category of services which has been pre-approved by our Audit Committee. The maximum dollar amount for services is established by the Audit Committee on an annual or per project basis when the specific engagement or the category of services is approved or pre-approved. Fee amounts are updated to the extent necessary at each quarterly meeting of the Audit Committee.
Our Audit Committee will not approve engagements of our independent registered public accounting firm to perform non-audit services for us if doing so will cause our independent registered public accounting firm to cease to be independent within the meaning of SEC rules and regulations. In other circumstances, our Audit Committee considers, among other things, whether our independent registered public accounting firm is able to provide the required services in a more or less effective and efficient manner than other available service providers.
In 2013 and 2012, all services for which we engaged our independent registered public accounting firm were pre-approved by our Audit Committee, and no fees were provided under the de minimis exception to the Audit Committee pre-approval requirements in accordance with SEC rules and regulations.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this annual report:
1. Financial Statements
The financial statements and report of an independent registered public accounting firm required by this item are included in Part II, Item 8.
2. Financial Statement Schedule
Schedule II, Valuation and Qualifying Accounts, is included in Part II, Item 8.
All other schedules are omitted because they are not applicable or not required, or because the required information is shown either in the financial statements or in the notes thereto.
(b). Exhibits
The exhibits to this Form 10-K are listed below.
Exhibits followed by a parenthetical are previously filed and incorporated by reference from the document described.
** Indicates Management contract or compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTERACTIVE DATA CORPORATION
By:
/S/ STEPHEN C. DAFFRON
Stephen C. Daffron
President and Chief Executive Officer
March 13, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, as of March 13, 2014.