10-K 1 d646262d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 001-31555

 

 

Interactive Data Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   13-3668779

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

32 Crosby Drive

Bedford, Massachusetts

  01730
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (781) 687-8500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  x    No  ¨

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x*

 

* The Registrant is a voluntary filer.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§323.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 30, 2013, there was no established public trading market for any of the common stock of the registrant. As of March 7, 2014, there were 10 shares of common stock of the registrant outstanding, all of which were owned by Igloo Intermediate Corporation.

 

 

Documents Incorporated by Reference: None

 

 

 


Table of Contents

TABLE OF CONTENTS

 

            Page  

PART I

       

Item 1.

    

Business

     3   

Item 1A.

    

Risk Factors

     14   

Item 1B.

    

Unresolved Staff Comments

     21   

Item 2.

    

Properties

     21   

Item 3.

    

Legal Proceedings

     22   

Item 4.

    

Mine Safety Disclosures

     22   

PART II

       

Item 5.

    

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     23   

Item 6.

    

Selected Financial Data

     23   

Item 7.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 7A.

    

Quantitative and Qualitative Disclosures about Market Risk

     47   

Item 8.

    

Financial Statements and Supplementary Data

     49   

Item 9.

    

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

     101   

Item 9A.

    

Controls and Procedures

     101   

Item 9B.

    

Other Information

     101   

PART III

       

Item 10.

    

Directors, Executive Officers and Corporate Governance

     102   

Item 11.

    

Executive Compensation

     107   

Item 12.

    

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     121   

Item 13.

    

Certain Relationships and Related Transactions, and Director Independence

     124   

Item 14.

    

Principal Accountant Fees and Services

     126   

PART IV

       

Item 15.

    

Exhibits and Financial Statement Schedules

     127   

 

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PART I

 

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

 

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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 in Part I, uncertainties, and other factors that could cause our actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and investors should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of the filing of this report.

Corporate History

On February 29, 2000, Interactive Data Corporation was created through the merger of Data Broadcasting Corporation, which included the eSignal suite of workstations and the BondEdge fixed income analytics offerings, and the business then known as Interactive Data Corporation, which included historical and end-of-day pricing, evaluations and financial information, an entity which has been in the financial data business for over 45 years. On July 29, 2010, we were acquired by investment funds managed by the Sponsors (the “Merger”).

Since the merger of Data Broadcasting Corporation and Interactive Data Corporation in 2000 through January 2010, we have completed a dozen acquisitions of varying sizes. Acquisitions such as ComStock in 2003, IS. Teledata in 2005 and 7ticks in 2010 enabled us to enter adjacent real-time markets. Acquisitions such as Merrill Lynch’s Securities Pricing Service in 2002, FutureSource in 2004, Xcitek in 2007 and NDF in 2008 strengthened and expanded our existing pricing, reference data and active trader services by bringing to us, among other things, complementary content and capabilities, new customers, and broader distribution capabilities in certain geographic regions.

Industry Background

Financial industry participants utilize financial market data and information services and solutions to support critical business functions across the enterprise of their organizations, including the valuation of financial instruments, risk management, compliance with regulatory requirements, investment decision-making and trading. The financial market data required to support these applications encompasses real-time, intraday, end-of-day and historic pricing and evaluation information; reference data such as dividends, corporate actions and key descriptive information about securities; and other related business or financial content. This market data is integrated into an expansive range of proprietary and third-party tools, applications, systems and solutions that support mission-critical activities such as investment research, the development and execution of trading strategies, risk management, compliance, sales and marketing, and customer support.

It is costly and complex for financial institutions, information media companies and others to directly obtain, aggregate, store, normalize, cleanse, analyze and distribute financial market data from the securities exchanges and other financial markets worldwide. In addition, financial institutions and other organizations using financial market data typically strive to consistently obtain their content in a timely manner without sacrificing quality or security. Extensive expertise and technical knowledge about the financial market data industry are required to effectively obtain, aggregate, store, normalize, cleanse, analyze and distribute the volume and diversity of financial content utilized within the financial services industry. This expertise and knowledge is highly specialized and expansive, as are the underlying technical infrastructure and related systems for delivering such content to customers. In addition, considerable domain and technological expertise is needed to develop and deploy systems and solutions that integrate this content and effectively address customer requirements.

For these reasons, financial institutions and other organizations contract with financial market data service providers like ourselves that specialize in aggregating and delivering financial content directly from many sources around the world, including securities exchanges; other financial markets that encompass fixed income, foreign exchange and derivatives including options and futures; and information providers such as news services. Aggregating this data requires establishing relationships with each of these sources to acquire this data, and creating a global technical infrastructure capable of collecting the source data and incorporating it into a uniform structure so that it can be delivered in a reliable and consistent manner whenever the customer requires it (in real-time, at specified intervals during the day, on demand or at the end of the day). In addition, specialized financial market data vendors like us invest significant resources to identify and cleanse source or other errors in reporting, collecting, aggregating, storing and distributing information to customers. Further, specialized financial market data vendors like ourselves develop proprietary methodologies, models and systems that are used to produce content such as evaluations that can assist financial institutions in their efforts to value their holdings, particularly fixed

 

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income financial instruments, that trade infrequently, if at all, in the secondary market. Related to this, financial institutions may find it valuable to obtain this data from an independent third party like us who is not involved in the underlying securities transactions.

In addition, as financial institutions seek to cost-effectively and efficiently develop, deploy and execute sophisticated automated trading programs, they are increasingly looking for specialist providers like us to offer low latency connectivity between their trading systems and stock exchanges and trading venues. Financial institutions may also seek third-party solutions providers like us to help them design, build and host certain parts of their web sites, extranets or intranets. These customized, hosted web-based solutions typically aggregate content from third-party providers like us, and combine that with internal information as required, to cost-effectively support the wealth management, sales and marketing, customer service and various other activities of a financial institution. Moreover, to make timely decisions in support of their investment strategies, many customers access financial information portals and workstations that integrate financial content from an extensive range of sources as well as provide access to sophisticated analytics, decision-support tools, and order execution platforms.

Services and Customers

We offer our financial market data services, analytics and related solutions to financial institutions, as well as software and service providers. Our products and services address the needs of these customers by providing time-sensitive, high-quality information regarding securities, commodities and derivative instruments as well as sophisticated decision-support tools and other related services.

Our customer base is both diverse and global in scope. Our customer base includes many of the world’s largest financial institutions, including 48 of the top 50 U.S. banks, 49 of the top 50 global asset managers, all of the top 50 U.S. mutual funds, all of the top ten global custodians and 33 of the top 50 global hedge funds. The number of customers includes all legal entities directly subscribing to our offerings. Certain units, divisions, regional affiliates and certain business units within a single legal entity or organization are considered by us to be distinct customers when they separately subscribe to our services. The number of customers within any given segment may vary from year to year based on several factors, including sales to new customers, new customers resulting from acquisitions, customer cancellations, and the impact of the consolidation of customers. In addition, through our VAR relationships, we maintain interfaces to over 500 software applications, technology solutions, outsourcing-related services and web portals. These VARs sublicense or redistribute data typically to medium and small institutions, and individual investors.

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 funds companies, 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 risk and return.

Evaluated Pricing:

 

    We deliver an extensive range of daily opinions of value on approximately 2.7 million fixed income securities, international equities and other hard-to-value financial instruments. Our evaluated prices are the result of developing and refining our proprietary processes and methodologies that combine sophisticated modeling techniques developed by our quantitative methodologists including math, finance, physics and statistics PhDs; information from an extensive range of market sources; and a team of approximately 200 skilled evaluators, analysts and support staff who integrate relative credit information, observed market movements and sector news into our evaluated pricing applications and models. Given that many fixed income securities and other financial instruments trade infrequently, if at all, in the secondary market, our evaluations are market-based measurements that represent our good faith opinion as to what the holder would receive in an orderly transaction (typically in an institutional round lot position) under current market conditions.

 

   

Our evaluated pricing coverage includes securities and financial instruments issued in North America (i.e. corporate, government, municipal and agency fixed income securities, convertible bonds, debentures, pass-through

 

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securities and structured products), and instruments issued in markets outside of North America (e.g. convertible bonds, debentures, Eurobonds and sovereign and corporate bonds). Pricing and Reference Data’s evaluated pricing services also include our Fair Value Information Service through which we provide evaluations for certain international equity securities, equity options, and equity index futures. The Fair Value Information Service is designed to provide customers with information that can be used to estimate a price for an international security that would likely prevail in a liquid market in view of information available at the time of evaluation. Our evaluated pricing services are typically used by customers along with our listed markets pricing to support back-office applications for asset and portfolio valuation, such as end-of-day mutual fund net asset values (“NAVs”), and middle-office applications such as risk management. We are also in the process of developing continuous fixed income evaluations, which we believe will enable this information to be used to support a broad range of front-office activities such as trading and investment research.

 

    We also provide applications and information services that complement our evaluated pricing services such as VantageSM, our web application that provides transparency into the fixed income markets and Interactive Data’s evaluation services and facilitates client workflows to support valuation and risk management processes. Vantage allows clients to better understand our evaluated prices within the context of a broad range of relevant market information, including public and proprietary market data inputs used in the evaluated pricing process. These inputs feature our assumptive data and proprietary market color, including anonymous trades, quotes, dealer runs and market posts. We also provide clients with a range of information resources that provide insight into our evaluated pricing and daily market conditions, along with workflow tools to help clients prepare for various regulatory and accounting-driven obligations.

Reference Data:

 

    Complementing our evaluated pricing services is a range of listed markets pricing and descriptive information covering over 10 million global financial instruments for use across the financial instrument processing lifecycle. This content is supported by a global team of over 235 reference data collection professionals with language skills including English, German, French, Spanish, Portuguese, Italian, Mandarin, Japanese, Korean, Thai and Indonesian. Our reference data covers:

 

    Listed and Non-listed Markets Pricing: extensive, high-quality intraday, end-of-day and historical global pricing for securities;

 

    Corporate Actions: end-of-day and intraday corporate actions and income-related information such as capitalization changes, dividends, stock splits, earnings, shares outstanding and changes in credit ratings for fixed income and equity securities;

 

    Terms and Conditions: key terms and conditions for fixed income financial instruments such as call, put and interest payment information; and

 

    Identification Information: name, ticker symbol, CUSIP®, SEDOL®, etc.

Our listed and non-listed markets pricing information, evaluated pricing and other descriptive reference data services are often used in tandem by financial institutions worldwide to facilitate mission-critical functions including portfolio valuation, client reporting, regulatory compliance, risk management, and investment research. For example, each U.S. mutual fund has a regulatory obligation to determine the fund’s NAV each trading day. The NAV is the price per share for all investments in and redemptions from the mutual fund for that day. Many mutual funds consider the pricing and evaluation data we provide to them as an important input to their own daily valuation determinations, and we believe that we are the leading provider of market data that supports the NAV calculation processes within the U.S. mutual fund industry. Financial institutions also utilize our content to support an array of other applications. For example, our reference data is used by financial services firms in the settlement process that occurs in connection with purchases and sales of financial instruments, and in the preparation of reports and account statements internally and for their end clients. In addition, financial institutions utilize Pricing and Reference Data’s securities information as they perform activities required to meet various regulatory requirements. Intraday, end-of-day and historical data from this business is also used by customers to research investment decisions.

To support our evaluated pricing and reference data offerings, we have developed proprietary methods for receiving, aggregating, delivering and displaying source data. In addition, when practicable, teams of professionals work to enhance the quality and completeness of the data before it is delivered to customers. Our customers receive a majority of their data through computer-to-computer links and Internet-based applications. We also work closely with redistributors who typically use their own delivery systems or serve as an interface between their clients’ and our delivery systems to redistribute and/or process our data. We design our data feeds to be compatible with third-party software applications and standard industry protocols to allow institutional customers to integrate these data feeds into their infrastructures. At the same time, our

 

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offerings are typically tightly integrated into our customers’ systems and workflows, often as the result of significant historical investment by these customers. We continue to refine and enhance our proprietary methodologies for evaluating fixed income financial instruments by combining sophisticated modeling techniques, information from market sources and teams of skilled evaluators who integrate relative credit information, observed market movements and sector news into the evaluated pricing applications and models.

To capitalize on growth opportunities for our evaluated pricing and reference data services, we actively seek to enhance our existing services and develop new offerings by establishing business alliances, automating key data collection processes, refining and automating our evaluation processes, expanding our data coverage, (particularly in the area of hard-to-value financial instruments), increasing the delivery frequency and flexibility of our services, and adding new capabilities including those designed to assist customers with their operational workflow and regulatory compliance challenges.

Fixed Income Analytics:

 

    Our fixed income analytic offerings, led by our flagship solution BondEdge®, provides financial institutions with fixed income data and sophisticated fixed income portfolio analytics to help manage risks and analyze the sources of risk and return. These offerings are used by fixed income professionals to simulate various fixed income market environments to help forecast performance, validate investment strategies against a variety of benchmark indices, conduct stress testing, generate dynamic risk measures, analyze asset cash flows and support compliance with certain state regulatory reporting requirements. BondEdge’s advanced risk/reward analysis tools are supported by proprietary quantitative modeling techniques that access our comprehensive terms and conditions information for fixed-income securities. BondEdge, which is offered via an array of delivery options, interfaces with many of the major third-party accounting and asset/liability software packages, in order to reduce duplicate manual data entry and to facilitate improved accuracy and efficiency within an organization. We also provide complementary services that leverage BondEdge’s core capabilities, and are currently advancing development activities to further expand the use of our analytics for new asset classes and market segments.

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.

Real-Time Feeds and Trading Infrastructure Managed Services:

 

    Our real-time feeds offerings provide cost-effective access to disparate real-time data sources without having to maintain direct connections. Through our Consolidated Feed service (formerly known as PlusFeed), customers receive consolidated real-time and/or delayed financial data from over 450 global exchanges, trading venues and data sources covering listed and OTC securities. We offer a variety of delivery methods for Consolidated Feed, including client site deployed solutions with leased-line connectivity, hosted Internet delivery via a secure virtual private network and a secure leased-line connection for cost-effective access to a specified “watch-list” of instruments. Our Consolidated Feed service is complemented by our Tick History Service, which provides financial institutions with access to tick and trade data for global securities in order to assist them in their compliance with “best execution” requirements, transaction cost analysis and advanced charting applications.

 

    We also provide trading infrastructure managed services such as direct exchange access, proximity hosting and support services that enable access to raw real-time exchange data and facilitate low latency electronic trading. Customers use these managed services to outsource key aspects of their electronic trading operations to us including the build out, management and monitoring of the network infrastructure, and the connectivity between their automated trading systems and stock exchanges and trading venues around the world.

We continually seek to strengthen our Real-Time Feeds and Trading Infrastructure Managed Services offerings within the Trading Solutions segment. More specifically, we work closely with customers to ensure that our offerings can support or leverage various technology environments in order to effectively manage rising market data volumes, reduce data latency or further facilitate their low latency trading strategies. We also continue to add new financial markets, particularly those outside of North America, and content, and further extend our 7ticks networks coverage globally.

 

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Hosted Web Applications and Workstations:

 

    We are focused on designing, building and hosting customized, web-based financial information solutions primarily to address the specific requirements of clients in the wealth management and information media sectors. Our web-based hosted financial information solutions, such as PrimePortal, utilize flexible web services architecture, and consist of financial market data, decision-support tools and hosting services. Customers use the web portals, financial web pages and web modules that we develop and host on our technical infrastructure to effectively and efficiently provide relevant information and tailored functionality in easy-to-use interfaces while helping facilitate investment and advisory processes, and streamline workflows.

 

    We also market a range of workstations that primarily target the wealth management, energy and commodity and active trader sectors. Our workstations help our customers analyze and make investment decisions about financial instruments traded on major markets worldwide, including equities, futures and commodities. Our primary wealth management workstations are PrimeTerminal and Market-Q, which are hosted market data workstations sold in Europe and North America, respectively. Along with our web-based hosted solutions, these workstations aggregate content that may be sourced from both the customer and from a number of information providers, including us, and then tailor the visual display of the content to the needs and specifications of clients. By using a software as a service (“SaaS”) business model for our web-based hosted solutions, we enable customers to lower expenses by reducing the need for owning and maintaining costly IT infrastructures and managing market data volumes. Under our eSignal® and FutureSource® brands, we provide workstations and related offerings that deliver real-time financial market information and provide decision-support tools that address the needs of active traders, energy and commodity professionals, and other investors. These workstations are complemented by services for wireless access to real-time streaming market data. 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.

Within our Hosted Web Applications and Workstations offerings, we seek to enhance our services by providing access to news, pricing and information, and adding new tools for displaying and analyzing investment portfolios. Those activities are complemented and augmented by initiatives aimed at developing new capabilities to enhance the investment decision-making process across a range of different securities, and by creating new statistical and analytics tools designed to enable customers to better track the performance of their investments.

Business Strategy

We are focused on expanding our position as a trusted leader in the financial information services market, and the following key priorities underpin our business strategy:

Commercial Expansion of our Business:

Enhance Breadth and Scope of Product Offerings to Cater to Customers’ Needs. A key element of our strategy involves working closely with our largest direct institutional customers and redistributors to better understand and address their current and future financial market data needs. By better understanding customer needs, we believe we can develop enhancements to existing services and introduce new services that will expand our presence in key market segments and extend our reach into new ones. Accordingly, we plan to develop new and enhanced services, tools and solutions that further strengthen and expand existing customer relationships, and attract new customers and strategic partners worldwide. As part of our efforts to build strong customer relationships, we continue to invest significant resources in our people, processes and underlying systems in order to provide high-quality, responsive customer support and service. We believe that our combination of strong account management and responsive customer support has contributed to our high customer retention rates as well as enhanced our ability to attract new customers.

The following are among the 2013 milestones related to our initiatives aimed at enhancing the breadth and scope of our offerings, accelerating the development of innovative, new products and services, expanding market coverage and enhancing the delivery of our services:

Pricing and Reference Data:

 

    Continued development of our web-based transparency and workflow offering, Vantage, including new transparency into the fixed income markets and our evaluated pricing, and new pricing validation workflow enhancements;

 

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    Expanded our pricing coverage via a redistribution relationship with a third party for valuations of collateralized debt obligations and collateralized loan obligations;

 

    Announced plans to develop continuous fixed income evaluations, highlighted by the ability to delivery intraday evaluated pricing at multiple intervals throughout the day, which we believe will further expand our fixed income pricing services;

 

    Continued development of various delivery capabilities for Apex, an innovative suite of pricing and reference data delivery options and managed services aimed at helping firms more easily and rapidly integrate our content across their enterprises while also increasing workflow efficiency and reducing operational costs;

 

    Introduced new reference data services to assist clients in their efforts to comply with new tax reporting regulatory requirements; and

 

    Completed additional enhancements to the BondEdge fixed income analytics platform, including the integration of third-party prepayment and credit models, as well as the development of new capabilities that we expect will further expand the appeal of BondEdge into new market segments.

Trading Solutions:

Real-Time Feeds and Trading Infrastructure Managed Services

 

    Enhanced our Consolidated Feed service (formerly known as PlusFeed) by increasing the number of stock exchanges and other market sources that clients can access, further leveraging our own reference data content, and expanding our technical and support staff to enhance overall quality and support; and

 

    Continued development of additional managed services to help clients better monitor the performance of their trading applications and related systems.

Hosted Web Applications and Workstations

 

    Added new content and analytic capabilities for our range of workstations (FutureSource, Market-Q, eSignal and PrimeTerminal);

 

    Launched new mobile versions of our workstations in support of various smartphones and tablet devices; and

 

    Developed a comprehensive suite of web analytics tools, and the introduction of PrimeTerminal mobile for Apple iOS and Android smartphone devices.

Deliver Customer Service Excellence. As part of our efforts to build strong customer relationships, we continue to invest significant resources in our people, processes and underlying systems in order to provide high-quality, responsive customer support and service. We believe that our combination of strong account management and responsive customer support has contributed to our high customer retention rates as well as enhanced our ability to attract new customers.

Expand our Business Internationally. The market for financial information services is global and many of our largest clients operate in multiple geographic regions. We are working to generate revenue growth outside of North America by extending our industry-leading capabilities across a wider range of multi-national and international clients and geographic regions. In order to achieve this, we have continued to direct additional resources in growth-oriented international markets including recruiting local management for certain international markets, advancing the local market relevancy and capabilities of our offerings and continuing to pursue third-party relationships, potential acquisitions and strategic alliances internationally.

Pursue Opportunistic Strategic Acquisitions. In the past, strategic acquisitions and alliances have complemented our internal investment activities, and we may elect to pursue certain strategic acquisitions or alliances in the future in order to achieve key business objectives.

Operational Control and Efficiency

Create a Unified Technology Platform. We continue to maintain a broad range of delivery platforms and legacy technology infrastructures as a result of supporting long-standing client relationships and completing numerous acquisitions over the years. We have made substantial progress during the past year toward developing and deploying a unified technical architecture that will enable us to consolidate our content databases, delivery platforms and legacy technology infrastructures, 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. Key 2013 highlights included bringing key asset classes, including U.S. Treasuries, U.S. Treasury Strips, leveraged loans and municipal securities (accounting for more than one million securities), into production to support our evaluated pricing workflows and delivery. We believe that this initiative will enable us to more effectively support our service offerings, accelerate time to market for new services and better leverage the combined capabilities of the different service groups across our organization.

 

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Improve Cost Structure and Drive Efficiencies. We continue to implement programs that can further improve our technical infrastructure, optimize our cost structure, increase our operational efficiency, and facilitate future revenue growth. Specifically, we focused on:

 

    Technology & Operations: As discussed above, we are reengineering our product technology and replacing legacy product systems with a new unified technical architecture. We believe that this initiative will help us to reduce operating and capital expenses. As we make progress on this initiative, we also are leveraging initiatives to contain data acquisition and communications costs.

 

    Procurement & Vendor Sourcing: We have continued to focus on driving greater efficiencies and lowering or controlling costs in a number of areas such as communications, benefit plans, consulting and travel.

 

    Organizational Optimization: We have continued to advance initiatives aimed at realigning staffing in various functional areas including technology, operations, sales, and corporate as well as consolidating certain facilities. In addition, we continued to evaluate opportunities to outsource certain operations or relocate them to lower-cost regions.

Marketing

To support the sales efforts of our businesses, we are implementing a range of promotional and lead-generating campaigns such as publishing white papers and newsletters; undertaking direct mail and email initiatives; advertising in leading industry publications and other marketing channels; participating in targeted industry conferences, trade shows and other customer-oriented events (both in person and in online forums); generating coverage of our company in leading business and trade publications through press releases, executive and staff interviews, and other public relations tactics. When possible, our businesses coordinate sales, marketing and development activities to cost-effectively address various needs of our customers in a timely manner. Our sales teams possess specialized industry and product expertise that facilitate on-site and remote demonstrations of our services and direct interaction with our customers and prospects. We also work closely with VARs and other business partners to jointly market our services to current and prospective customers. In 2014, we intend to continue to monitor changes in our industry and the evolving needs of our customers, and plan to adjust our sales and marketing activities accordingly. We will also continue to foster our long-standing customer relationships and work closely with our customers to identify new sales opportunities, and better leverage and coordinate selling efforts across our global customer base.

Competition

The market for providing financial market data, analytics and related services is highly competitive in each of our core service areas. Some of our established competitors have greater financial, technical, sales, marketing, and support resources, and are able to devote more significant resources to the research and development of new services than we can. In addition, these competitors may have diverse offerings that allow them the flexibility to price their services more aggressively. Some of our competitors also have more extensive customer bases and broader customer relationships than we do, including relationships with customers in their local geographies. Another challenge includes customers self-sourcing financial data and news directly from brokers, exchanges and news services. Across our businesses, we believe that our primary competitive advantages include the following:

 

    Our extensive expertise and knowledge about the financial market data industry;

 

    Our experience and expertise in valuing hard to price securities;

 

    Our timely and reliable delivery coupled with the quality and breadth of coverage of our data and related services compared with those of our competitors;

 

    Our ability to expand and customize our data and related services to meet the current and evolving needs of our customers;

 

    Our technical expertise and experience which enables us to deliver our data and related services using a variety of delivery platforms and technologies, and to cost-effectively integrate our data and related services into the operational workflow of our customers;

 

    Our ability to innovate and keep pace with evolving needs of our customers as well as our ability to timely launch new services that meet the needs of our customers;

 

    Our independence as a provider of services which are not affiliated with a traditional investment bank, brokerage or asset management firms;

 

    Our high-quality customer service and support;

 

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    Our VAR network, which adds significant distribution scale and enables us to contract, either directly or indirectly, with small – and medium-sized customers;

 

    Our reputation as a leader in the industry; and

 

    Our strong customer relationships.

Pricing and Reference Data

Competition within our Pricing and Reference Data segment ranges from large, established suppliers of news and financial data to smaller, more specialized vendors. The main competitors with respect to our evaluated pricing and reference data offerings include large global suppliers of financial and business news and financial market data such as Thomson Reuters Corporation, SIX Financial Information, Markit Group Limited, S&P Valuation Services (a unit within the S&P Capital IQ division of McGraw-Hill) and Bloomberg L.P. Additionally, specialized competitors in structured products, derivatives and other complex, securities include J.P. Morgan Pricing Direct, and SuperDerivatives. In the fixed income analytics product area, our BondEdge offerings compete against other financial services analytical software companies such as FactSet Research Systems Inc., The Yield Book, Inc., (a wholly owned subsidiary of Citigroup Capital Markets), Barclays Bank PLC’s POINT® and Wilshire Associates Incorporated. Other competition unique to this product area includes the use of specialized spreadsheet applications, and financial institutions that develop their own in-house software solutions.

Trading Solutions

Competition within our Trading Solutions segment varies from large, established suppliers of news and financial data to smaller, more specialized vendors. The main competitors with respect to real-time data feeds include Thomson Reuters Corporation, Bloomberg L.P., NYSE Technologies, SIX Financial Information, S&P Capital IQ’s QuantHouse Inc. business, Morningstar, and Activ Financial. Competitors in the trading infrastructure managed services area include specialized managed service providers that facilitate low latency electronic trading such as Fixnetix, OptionsIT and NYSE Technologies, global connectivity and managed services providers, and major stock exchanges.

Competitors in the hosted web applications sector include firms such as Markit Group Limited, Morningstar and Quote Media. Competition for wealth management workstations includes Thomson Reuters Corporation, SIX Financial Information, Morningstar, FactSet, and other smaller niche providers. In the energy and commodity, and active trader sectors, workstation competition can vary from large, established suppliers of news and financial data such as Thomson Reuters and Bloomberg L.P., to smaller, more specialized vendors, as well as online and traditional brokerage businesses that have developed their own analytics tools. In addition to the advantages cited above, we also believe that our other competitive advantages with respect to our workstation offerings include price, ease of use, compatibility with third-party software packages and analytics that are independent of a brokerage or asset management firm yet provide access to these firms.

Technology Infrastructure

Our global technology infrastructure and operations support the offerings within each segment of our business. In addition to our initiative to develop and deploy a unified technical architecture (as described in more detail above), we are also continuing to enhance our global real-time network and related processing capabilities. Across all segments of our business, we invest in technology oriented initiatives designed to further enhance the quality and expand the breadth of coverage in our data offerings, as well as the features and functionality of various offerings.

Our technology infrastructure is designed to facilitate the reliable and efficient processing and delivery of data and analytics to customers worldwide. Our systems contain multiple layers of redundancy to enhance system performance, including maintaining, processing and storing data at multiple data centers. This reduces the risks that a single site failure, isolated equipment problem or a regional disaster will result in a prolonged failure to deliver content. We have designed our systems so that we have the capacity to handle the additional load through the remaining data centers; however, we may not be successful in all instances as no amount of planning or investment can result in a 100% fail safe delivery environment. We continue to be focused on maintaining a global technical infrastructure that allows us to securely, efficiently and reliably support our growth by providing data and analytics using various delivery methods designed to meet the needs of our customers worldwide.

Intellectual Property

We maintain a portfolio of intellectual property, including registered and common law trademarks, service marks and copyrights. We have rights to approximately 60 trademarks and service marks. Additionally, we have five U.S. patents issued and two U.S. patents pending. Two of our issued patents expire in 2021, another in 2022, one in 2026 and one in 2027. We place significant emphasis on our branding and consider our trademark and service mark portfolio to be an important part of

 

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our ongoing branding initiative. In addition, we own the copyrights to our internally developed software applications and data delivery services (with the exception of certain rights unrelated to our business that we jointly own with Nookco LLC as described below under the heading, “Related Party Transactions” in Part III of this Annual Report on Form 10-K). Other than with respect to the value of service marks and trademarks, no single trademark, service mark, copyright, or patent, if lost, would materially adversely affect our business or our results of operations. License agreements, both as licensor with our customers and as licensee with suppliers of data, are important to our business.

Geographic Areas

We conduct business in numerous countries outside of the United States. Our international businesses are subject to risks customarily encountered in international operations including fluctuations in foreign currency exchange rates, import and export controls, and other laws, policies and regulations of local governments.

During the past three years, our revenue by geographic region was as follows:

 

                                                     

(In thousands)

   Year Ended
December 31,
2013
     Year Ended
December 31,
2012
     Year Ended
December 31,
2011
 

Revenue:

        

North America

   $ 643,780       $ 608,307       $ 596,836   

United Kingdom

     81,617         88,998         88,688   

All other European countries

     126,455         120,740         126,891   

Asia Pacific

     40,587         48,908         42,699   

Rest of World

     12,674         13,208         12,609   
  

 

 

    

 

 

    

 

 

 

Total

   $ 905,113       $ 880,161       $ 867,723   
  

 

 

    

 

 

    

 

 

 

Long-lived assets by geographic region are as follows:

 

                                                     

(In thousands)

   As of
December 31,
2013
     As of
December 31,
2012
     As of
December 31,
2011
 

Long-lived assets:

        

North America

   $ 2,565,901       $ 2,621,874       $ 2,723,355   

United Kingdom

     587,483         598,589         589,793   

All other European countries

     145,025         144,182         149,949   

Asia Pacific

     132,526         159,960         174,223   
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,430,935       $ 3,524,605       $ 3,637,320   
  

 

 

    

 

 

    

 

 

 

Employees

We had approximately 2,600 employees as of December 31, 2013.

Regulation

Interactive Data Pricing and Reference Data, LLC, one of our subsidiaries, is registered with the Securities and Exchange Commission 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 Interactive Data Desktop Solutions (Europe) Limited subsidiary is registered with the United Kingdom Financial Conduct Authority.

Disclosure Pursuant to Section 13(r) of the Securities Exchange Act of 1934

Pursuant to Section 13(r) of the Securities Exchange Act of 1934, we are required to disclose in our annual and quarterly reports filed with the SEC, whether we or any of our “affiliates” knowingly engaged in certain activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by U.S. economic sanctions. Disclosure

 

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is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Because the SEC defines the term “affiliate” broadly, it includes any entity under common “control” with us (and the term “control” is also construed broadly by the SEC).

The description of the activities below has been provided to the us by Warburg Pincus LLC (“WP”), affiliates of which: (i) beneficially own more than 10% of our outstanding common stock and/or are members of our board of directors and (ii) beneficially own more than 10% of the equity interests of, and have the right to designate members of the board of directors of, Endurance International Group (“EIG”) and Santander Asset Management Investment Holdings Limited, (“SAMIH”). EIG and SAMIH may therefore be deemed to be under common “control” with us; however, this statement is not meant to be an admission that common control exists.

The disclosure below relates solely to activities conducted by EIG and its affiliates. The disclosure does not relate to any activities conducted by us or by WP and does not involve our or WP’s management. Neither we nor WP has had any involvement in or control over the disclosed activities of EIG, and neither we nor WP has independently verified or participated in the preparation of the disclosure. Neither we nor WP is representing as to the accuracy or completeness of the disclosure nor do we or WP undertake any obligation to correct or update it.

We understand that EIG’s affiliates intend to disclose in their next annual or quarterly SEC report that:

“Our business activities are subject to various restrictions under U.S. export controls and trade and economic sanctions laws, including the U.S. Commerce Department’s Export Administration Regulations and economic and trade sanctions regulations maintained by the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC. If we fail to comply with these laws and regulations, we could be subject to civil or criminal penalties and reputational harm. In addition, if our third-party resellers fail to comply with these laws and regulations in their dealings, we could face potential liability or penalties for violations. Furthermore, U.S. export control laws and economic sanctions laws prohibit certain transactions with U.S. embargoed or sanctioned countries, governments, persons and entities.

Although we take precautions to prevent transactions with U.S. sanctions targets, we have in the past identified limited instances of non-compliance with these rules and believe we have taken appropriate corrective actions in such instances. For example, on May 1, 2013, during a routine compliance scan of our new and existing subscriber accounts, we discovered a new subscriber account that was created on April 6, 2013 with information matching ORT France, identified by OFAC as a Specially Designated National, or SDN, under the Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594. We had charged the subscriber $114.10 for web hosting and domain name registration services at the time the account was opened and without knowledge of any SDN issue. Upon discovery of the potential SDN match, we promptly suspended the subscriber account, deactivated the website, locked the domain name to prevent it from being transferred and ceased providing services to the subscriber. We also promptly reported the potential SDN match to OFAC. To date, we have not received any correspondence from OFAC regarding the matter.

Although we have implemented compliance measures that are designed to prevent transactions with U.S. sanction targets, there is risk that in the future we or our resellers could provide our solutions or services to such targets despite such compliance measures. This could result in negative consequences to us, including government investigations, penalties and reputational harm.

Changes in our solutions or changes in export and import regulations may create delays in the introduction and sale of our solutions in international markets, prevent our subscribers with international operations from deploying our solutions or, in some cases, prevent the export or import of our solutions to certain countries, governments or persons altogether. Any change in export or import regulations, shift in the enforcement or scope of existing regulations, or change in the countries, governments, persons or technologies targeted by such regulations, could result in decreased use of our solutions or decreased ability to export or sell our solutions to existing or potential subscribers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions could adversely affect our business, financial condition and operating results.”

The disclosure below relates solely to activities conducted by SAMIH and its non-U.S. affiliates. The disclosure does not relate to any activities conducted by us or by WP and does not involve our or WP’s management. Neither we nor WP has had any involvement in or control over the disclosed activities of SAMIH, and neither we nor WP has independently verified or participated in the preparation of the disclosure. Neither we nor WP is representing to the accuracy or completeness of the disclosure nor do we or WP undertake any obligation to correct or update it.

 

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We understand that SAMIH’s affiliates intend to disclose in their next annual or quarterly SEC report that an Iranian national, resident in the U.K., who is currently designated by the U.S. and the U.K. under the Iran Sanctions regime, holds two investment accounts with Santander Asset Management UK Limited, a subsidiary of SAMIH and part of the Banco Santander group. The accounts have remained frozen throughout 2013. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue in connection with the investment accounts in 2013 was £247 and net profits in 2013 were negligible relative to the overall profits of Banco Santander, S.A.

Internet Address and SEC Reports

We file certain periodic information, documents and reports pursuant to the requirements of Sections 13 and 15(d) of the Securities and Exchange Act of 1934 with the Securities and Exchange Commission (“SEC”). The trustee or holders of our Senior Notes due 2018 may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, from which the trustee or holders of our Senior Notes due 2018 can electronically access our SEC filings.

Our internet website is www.interactivedata.com. We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the SEC. We will also provide a copy of these documents free of charge to the trustee or holders of our Senior Notes due 2018 upon request.

 

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.

 

(in thousands)

   As of December 31,
2013
 

Revolving Credit Facility(1)

   $ —    

Term Loan Facility(2)

     1,295,214   

Senior Notes(3)

     700,000   
  

 

 

 

Total indebtedness

   $ 1,995,214   
  

 

 

 

 

(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.

 

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Our high degree of leverage could have important consequences for holders of Senior Notes, including:

 

    making it more difficult for us to make payments on the Senior Notes;

 

    increasing our vulnerability to general economic and industry conditions;

 

    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;

 

    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;

 

    restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

    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

 

    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:

 

    incur additional indebtedness or issue certain preferred shares;

 

    pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

    make certain investments;

 

    sell or transfer assets;

 

    create liens;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

    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

 

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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:

 

    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;

 

    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;

 

    placing us at a disadvantage compared to our competitors who have greater discretion in using their cash flow; and

 

    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

 

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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.

 

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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

 

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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:

 

    fluctuations in foreign currency exchange rates;

 

    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;

 

    difficulty in establishing, staffing and managing non-U.S. operations including differing jurisdictional labor regulations;

 

    changes in political conditions or economic instability including inflation or interest rate fluctuations;

 

    changes in local laws and regulatory requirements;

 

    difficulty of effective enforcement of contractual provisions in some local jurisdictions;

 

    the inadequate intellectual property protection laws in some local jurisdictions;

 

    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

 

    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

 

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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

 

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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. Unresolved Staff Comments

None.

 

Item 2. Properties

We own no real estate but lease the following principal facilities for use as corporate headquarters, sales offices and data centers:

 

Location

  

Unit/Segment^

   Square
Feet
     2014
Annual
Rental
Rate
     Expiration Date(#)  

Bedford, MA

   PRD and Corporate      103,716       $ 2,601,000         June 2016   

Boxborough, MA

   PRD, Trading Solutions and Corporate      100,226         777,000         September 2018   

Channel Islands, UK

   PRD      2,301         91,000         December 2018   

 

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Location

  

Unit/Segment^

   Square
Feet
     2014
Annual
Rental
Rate
     Expiration Date(#)  

Cheltenham, UK

   Trading Solutions      3,500         38,000         May 2016   

Chicago, IL

   PRD and Trading Solutions      17,075         429,000         September 2021   

Cologne, Germany

   Trading Solutions      9,182         220,000         December 2016   

Dublin, Ireland

   PRD      8,756         134,000         July 2023   

Frankfurt, Germany

   PRD and Trading Solutions      79,388         2,441,000         December 2016   

Hayward, CA

   Trading Solutions      50,298         797,000         June 2016   

Hong Kong

   PRD and Trading Solutions      7,898         495,000         June 2017   

Lombard, IL

   Trading Solutions      7,284         41,000         May 2014   

London, UK

   PRD and Trading Solutions      68,943         3,728,000         April 2025   

Luxembourg

   PRD      3,368         189,000         December 2015   

Madrid, Spain*

   Trading Solutions      3,315         2,000         January 2014   

Melbourne, Australia

   PRD and Trading Solutions      4,828         154,000         November 2015   

Melbourne, Australia

   PRD and Trading Solutions      3,305         120,000         October 2015   

Milan, Italy

   Trading Solutions      2,799         94,000         December 2015   

Minneapolis, MN

   Trading Solutions      6,741         67,000         May 2016   

New York, NY

   PRD and Trading Solutions      66,986         2,478,000         December 2015   

New York, NY

   PRD and Corporate      64,529         2,725,000         November 2024   

Paris, France

   PRD and Trading Solutions      2,670         191,000         December 2014   

Parsippany, NJ

   Corporate      2,584         59,000         February 2016   

Rome, Italy

   PRD      8,396         276,000         February 2024   

Santa Monica, CA

   PRD      22,877         850,000         November 2017   

Singapore

   Trading Solutions      2,530         221,000         October 2015   

Tokyo, Japan

   PRD and Trading Solutions      5,978         299,000         September 2014   

White Plains, NY

   Trading Solutions      46,000         1,258,000         October 2019   

Zurich, Switzerland

   Trading Solutions      3,305         200,000         June 2015   

 

^ 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. 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. Mine Safety Disclosures

Not Applicable

 

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PART II

 

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. 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.

 

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     Successor           Predecessor  

(In thousands, except per share amounts)

   For the Year
Ended
December 31,
2013
     For the Year
Ended
December 31,
2012
     For the Year
Ended
December 31,
2011
    Combined
2010
(Non-
GAAP)
    Period from
July 30
through
December 31,
2010
          Period
from
January 1
through
July 29,
2010
     2009 (1)  

Revenue

   $ 905,113       $ 880,161       $ 867,723      $ 796,645      $ 342,101           $ 454,544       $ 757,218   

Income (loss) from operations

     175,988         131,851         101,718        (7,092     (46,571          39,479         207,749   

Net income (loss) attributable to Interactive Data Corporation

     33,506         1,017         (29,316     (71,789     (94,263          22,474         141,234   

Net income per common share

                      

Basic

     N/A         N/A         N/A        N/A        N/A             N/A         1.50   

Diluted

     N/A         N/A         N/A        N/A        N/A             N/A         1.47   

Weighted average common shares

                      

Basic

     N/A         N/A         N/A        N/A        N/A             N/A         94,001   

Diluted

     N/A         N/A         N/A        N/A        N/A             N/A         96,200   

Cash dividends declared per common share

     N/A         N/A         N/A        N/A        N/A           $ 0.20       $ 0.60   

 

     Successor            Predecessor  

(In thousands)

   2013      2012      2011      2010            2009  

Total assets

   $ 3,968,358       $ 3,962,308       $ 4,093,671       $ 4,133,877            $ 1,281,171   

Borrowings, net of current portion and original issue discount

     1,940,150         1,941,887         1,929,784         1,959,365              —    

Stockholder’s equity (Interactive Data Corporation)

     1,178,906         1,163,867         1,219,905         1,252,471              1,082,106   

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

 

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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:

 

(in thousands)

   Three Months
Ended
March 31,
2009
    

 

Year Ended

     Total  
      December 31,
2008
     December 31,
2007
     December 31,
2006
    

Decrease in revenue

   $ 191       $ 1,694       $ 200       $ 209       $ 2,294   

Increase in total costs and expenses

     1,308         6,554         611         122         8,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total – pretax impact on current period income

   $ 1,499       $ 8,248       $ 811       $ 331       $ 10,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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.

 

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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.

 

    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.

 

    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.

 

    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.

 

    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.

 

    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.

 

   

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

 

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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.

 

    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.

 

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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

 

                 Year Ended
December 31,
2011
    % Change  

(audited, in thousands)

   Year Ended
December 31,
2013
    Year Ended
December 31,
2012
      2013 vs. 2012     2012 vs.
2011
 

REVENUE

   $ 905,113      $ 880,161      $ 867,723        2.8     1.4

COSTS AND EXPENSES:

          

Cost of services

     297,423        292,378        293,472        1.7     (0.4 )% 

Selling, general and administrative

     272,289        276,436        258,065        (1.5 )%      7.1

Depreciation

     42,537        41,456        39,391        2.6     5.2

Amortization

     116,876        138,040        175,077        (15.3 )%      (21.2 )% 
  

 

 

   

 

 

   

 

 

     

Total costs and expenses

     729,125        748,310        766,005        (2.6 )%      (2.3 )% 
  

 

 

   

 

 

   

 

 

     

INCOME FROM OPERATIONS

     175,988        131,851        101,718        33.5     29.6

Interest expense, net

     (137,628     (149,526     (157,120     (8.0 )%      (4.8 )% 

Other income (expense), net

     347        824        (3,719     (57.8 )%      (122.2 )% 

Loss on extinguishment of debt

     (10,213     —         (25,450     100.0     (100.0 )% 
  

 

 

   

 

 

   

 

 

     

INCOME (LOSS) BEFORE INCOME TAXES

     28,494        (16,851     (84,571     (269.1 )%      (80.1 )% 

Income tax benefit

     (5,012     (17,868     (55,255     (71.9 )%      (67.7 )% 
  

 

 

   

 

 

   

 

 

     

NET INCOME (LOSS)

   $ 33,506      $ 1,017      $ (29,316     3,194.6     (103.5 )% 
  

 

 

   

 

 

   

 

 

     

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.

 

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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

 

(In thousands)

   2013      2012      % Change     2013
Foreign
Exchange
    2013
Adjusted
Revenue
(Non-
GAAP)
     2013
Adjusted
Revenue
(Non-
GAAP) %
Change
 

Pricing and Reference Data

   $ 639,631       $ 612,422         4.4   $ 3,889      $ 643,520         5.1
  

 

 

    

 

 

      

 

 

   

 

 

    

Trading Solutions:

               

Real-Time Feeds and Trading Infrastructure

   $ 112,843       $ 110,305         2.3   $ 1,446      $ 114,289         3.6

Hosted Web Applications and Workstations

   $ 152,639       $ 157,434         (3.0 )%    $ (949   $ 151,690         (3.6 )% 
  

 

 

    

 

 

      

 

 

   

 

 

    

Total Trading Solutions

   $ 265,482       $ 267,739         (0.8 )%    $ 497      $ 265,979         (0.7 )% 
  

 

 

    

 

 

      

 

 

   

 

 

    

TOTAL REVENUE

   $ 905,113       $ 880,161         2.8   $ 4,386      $ 909,499         3.3
  

 

 

    

 

 

      

 

 

   

 

 

    

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.

 

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       For the Year Ended December 31,  

(In thousands)

   2013      2012      % Change     2013
Foreign
Exchange
     2013
Adjusted
COS
(Non-GAAP)
     Adjusted %
Change
 

COST OF SERVICES

   $ 297,423       $ 292,378         1.7   $ 2,386       $ 299,809         2.5

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.

 

     For the Year Ended December 31,  

(In thousands)

   2013      2012      % Change     2013
Foreign
Exchange
     2013
Adjusted
SG&A
(Non-GAAP)
     Adjusted %
Change
 

SELLING, GENERAL AND ADMINISTRATIVE

   $ 272,289       $ 276,436         (1.5 )%    $ 3,467       $ 275,756         (0.2 )% 

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.

 

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Depreciation

 

     For the Year Ended December 31,  

(In thousands)

   2013      2012      % Change     2013
Foreign
Exchange
     2013
Adjusted
Depreciation
(Non-GAAP)
     Adjusted %
Change
 

DEPRECIATION

   $ 42,537       $ 41,456         2.6   $ 524       $ 43,061         3.9

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

 

     For the Year Ended December 31,  

(In thousands)

   2013      2012      % Change     2013
Foreign
Exchange
     2013
Adjusted
Amortization
(Non-GAAP)
     Adjusted %
Change
 

AMORTIZATION

   $ 116,876       $ 138,040         (15.3 )%    $ 692       $ 117,568         (14.8 )% 

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.

 

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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.

 

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2012 VERSUS 2011

Revenue

 

(In thousands)

   2012      2011      % Change     Effects of
Deferred
Revenue
Adjustment
2011
     2012
Foreign
Exchange
     2012
Adjusted
Revenue
(Non-
GAAP)
     2011
Adjusted
Revenue
(Non-
GAAP)
     2012
Adjusted
Revenue
(Non-
GAAP) %
Change
 

Pricing and Reference Data

   $ 612,422       $ 591,920         3.5   $ 600       $ 2,092       $ 614,514       $ 592,520         3.7
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

Trading Solutions:

                      

Real-Time Feeds and Trading Infrastructure

   $ 110,305       $ 114,300         (3.5 )%    $ 14       $ 338       $ 110,643       $ 114,314         (3.2 )% 

Hosted Web Applications and Workstations

   $ 157,434       $ 161,503         (2.5 )%    $ 288       $ 4,202       $ 161,636       $ 161,791         (0.1 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

Total Trading Solutions

   $ 267,739       $ 275,803         (2.9 )%    $ 302       $ 4,540       $ 272,279       $ 276,105         (1.4 )% 
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

TOTAL REVENUE

   $ 880,161       $ 867,723         1.4   $ 902       $ 6,632       $ 886,793       $ 868,625         2.1
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

    

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.

 

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     For the Year Ended December 31,  

(In thousands)

   2012      2011      % Change     2012
Foreign
Exchange
     2012
Adjusted
COS
(Non-GAAP)
     Adjusted %
Change
 

COST OF SERVICES

   $ 292,378       $ 293,472         (0.4 )%    $ 3,984       $ 296,362         1.0

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.

 

     For the Year Ended December 31,  

(In thousands)

   2012      2011      % Change     2012
Foreign
Exchange
     2012
Adjusted
SG&A
(Non-GAAP)
     Adjusted %
Change
 

SELLING, GENERAL AND ADMINISTRATIVE

   $ 276,436       $ 258,065         7.1   $ 2,472       $ 278,908         8.1

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

 

     For the Year Ended December 31,  

(In thousands)

   2012      2011      % Change     2012
Foreign
Exchange
     2012
Adjusted
Depreciation
(Non-GAAP)
     Adjusted %
Change
 

DEPRECIATION

   $ 41,456       $ 39,391         5.2   $ 350       $ 41,806         6.1

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

 

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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

 

     For the Year Ended December 31,  

(In thousands)

   2012      2011      % Change     2012
Foreign
Exchange
     2012
Adjusted
Amortization
(Non-GAAP)
     Adjusted %
Change
 

AMORTIZATION

   $ 138,040       $ 175,077         (21.2 )%    $ 963       $ 139,003         (20.6 )% 

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.

 

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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:

 

(in thousands)

   As of December 31, 2013  

Revolving Credit Facility(1)

   $ —    

Term Loan Facility(2)

     1,295,214   

Senior Notes(3)

     700,000   
  

 

 

 

Total indebtedness

   $ 1,995,214   
  

 

 

 

 

(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:

 

     Years Ended December 31,  

(in thousands)

   2013     2012     2011  

Cash flow provided by (used in):

      

Operating activities

   $ 226,232      $ 174,021      $ 188,387   

Investing activities

     (59,845     (84,733     (50,207

Financing activities

     (34,320     (129,662     2,705   

Effect of exchange rates on cash balances

     69        2,819        (2,437
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 132,136      $ (37,555   $ 138,448   
  

 

 

   

 

 

   

 

 

 

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

 

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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.

 

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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:

 

    a reduction of the 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).

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

 

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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).

 

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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):

 

Year Ending December 31,

   Principal
Payments
(in thousands)
 

2014 (a)

   $ 25,356   

2015

     744   

2016

     13,050   

2017

     13,050   

2018

     1,943,014   
  

 

 

 

Total

   $ 1,995,214   
  

 

 

 

 

(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.

 

Fiscal Year

   First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

2010

     NA         NA         NA         7.85:1   

2011

     7.85:1         7.85:1         7.85:1         7.85:1   

2012

     7.85:1         7.75:1         7.75:1         7.50:1   

2013

     7.25:1         7.00:1         7.00:1         6.75:1   

2014

     6.50:1         6.50:1         6.25:1         6.00:1   

2015

     5.75:1         5.75:1         5.50:1         5.50:1   

2016

     5.25:1         5.25:1         5.00:1         5.00:1   

2017

     5.00:1         5.00:1         5.00:1         5.00:1   

 

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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.

 

Fiscal Year

   First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

2010

     NA         NA         NA         1.40:1   

2011

     1.40:1         1.40:1         1.40:1         1.40:1   

2012

     1.40:1         1.45:1         1.45:1         1.45:1   

2013

     1.45:1         1.50:1         1.50:1         1.50:1   

2014

     1.50:1         1.55:1         1.55:1         1.55:1   

2015

     1.55:1         1.60:1         1.60:1         1.60:1   

2016

     1.60:1         1.65:1         1.65:1         1.65:1   

2017

     1.65:1         1.65:1         1.65:1         1.65:1   

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:

 

     Year Ended December 31,
($ in thousands)
 
     2013     2012     2011  

Net income (loss)

   $ 33,506      $ 1,017      $ (29,316

Interest expense

     137,628        149,526        157,120   

Other (income) expense

     (347     (824     3,719   

Income tax benefit

     (5,012     (17,868     (55,255

Depreciation and amortization

     159,413        179,496        214,468   
  

 

 

   

 

 

   

 

 

 

EBITDA

     325,188        311,347        290,736   

Adjustments:

      

Stock-based compensation

     3,946        14,108        4,229   

Other non-recurring charges (2)

     18,178        8,353        29,892   

Other charges (3)

     1,083        8,821        4,483   

Pro forma cost savings (4)

     30,000        30,000        30,000   
  

 

 

   

 

 

   

 

 

 

Pro Forma Adjusted EBITDA (Covenant EBITDA) (1)

   $ 378,395      $ 372,629      $ 359,340   
  

 

 

   

 

 

   

 

 

 

 

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(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.

 

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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

 

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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.

 

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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:

 

     Payment Due by Period  

(In thousands)

   Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 

Contractual Obligations

              

Long Term Debt Obligations

   $ 1,995,214       $ 25,356       $ 26,844       $ 1,943,014       $ —     

Operating Lease Obligations

     132,079         22,354         38,869         22,739         48,117   

Purchase Obligations

     41,838         41,838         —           —          —    

Fixed Rate Interest Obligations

     329,450         71,750         143,500         114,200      

Interest Rate Cap Premium Installments

     1,247         1,247         —           —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,499,828       $ 162,545       $ 209,213       $ 2,079,953       $ 48,117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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. 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.

 

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Total revenue for the periods below by geographic region outside the United States, was as follows:

 

(In thousands)

   For the year
ended
December 31,
2013
     For the year
ended
December 31,
2012
     For the year
ended
December 31,
2011
 

Revenue:

        

United Kingdom

   $ 81,617       $ 88,998       $ 88,688   

All other European countries

     126,455         120,740         126,891   

Asia Pacific

     40,587         48,908         42,699   

Rest of World

     12,674         13,208         12,609   
  

 

 

    

 

 

    

 

 

 

Total

   $ 261,333       $ 271,854       $ 270,887   
  

 

 

    

 

 

    

 

 

 

Long-lived assets by geographic region outside the United States were as follows:

 

(In thousands)

   As of
December 31,
2013
     As of
December 31,
2012
     As of
December 31,
2011
 

United Kingdom

   $ 587,483       $ 598,589       $ 589,793   

All other European countries

     145,025         144,182         149,949   

Asia Pacific

     132,526         159,960         174,223   
  

 

 

    

 

 

    

 

 

 

Total

   $ 865,034       $ 902,731       $ 913,965   
  

 

 

    

 

 

    

 

 

 

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 of this Annual Report on Form 10-K for further discussion of our debt and derivatives.

 

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Table of Contents
Item 8. Financial Statements and Supplementary Data

 

     Page  

Index to Consolidated Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     50   

Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011

     51   

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2013, 2012 and 2011

     52   

Consolidated Balance Sheets as of December 31, 2013 and 2012

     53   

Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011

     54   

Consolidated Statements of Stockholder’s Equity for the years ended December 31, 2013, 2012 and 2011

     56   

Notes to Consolidated Financial Statements

     57   

Quarterly Financial Information (Unaudited)

     99   

Index to Financial Statement Schedule:

  

Schedule II Valuation and Qualifying Accounts

     100   

 

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Table of Contents

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

 

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PART I—FINANCIAL INFORMATION

Financial Statements

INTERACTIVE DATA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

REVENUE

   $ 905,113      $ 880,161      $ 867,723   

COSTS AND EXPENSES:

      

Cost of services

     297,423        292,378        293,472   

Selling, general and administrative

     272,289        276,436        258,065   

Depreciation

     42,537        41,456        39,391   

Amortization

     116,876        138,040        175,077   
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     729,125        748,310        766,005   
  

 

 

   

 

 

   

 

 

 

INCOME FROM OPERATIONS

     175,988        131,851        101,718   

Interest expense, net

     (137,628     (149,526     (157,120

Other income (expense), net

     347        824        (3,719

Loss on extinguishment of debt

     (10,213     —         (25,450
  

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     28,494        (16,851     (84,571

Income tax benefit

     (5,012     (17,868     (55,255
  

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 33,506      $ 1,017      $ (29,316
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

INTERACTIVE DATA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

     Year Ended
December 31,
    Year Ended
December 31,
    Year Ended
December 31,
 
     2013     2012     2011  

Net income (loss)

   $ 33,506      $ 1,017      $ (29,316
  

 

 

   

 

 

   

 

 

 

Other comprehensive income:

      

Unrealized gain (loss) on securities, net of tax

     79        88        (100

Foreign currency translation adjustments

     (4,781     22,534        (6,862

Pension adjustment, net of tax

     1,605        (759     600   

Less: reclassification adjustment for amortization of pension costs included in net income, net of tax

     (199     49        (269

Change in value of hedged interest rate caps, net of tax

     (8     (336     (3,071

Less: reclassification adjustment for interest rate cap related interest expense included in net income, net of tax

     892        892        223   
  

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income, net of tax

     (2,412     22,468        (9,479
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 31,094      $ 23,485      $ (38,795
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

INTERACTIVE DATA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share information)

 

     December 31,
2013
    December 31,
2012
 
ASSETS     

Assets:

    

Cash and cash equivalents

   $ 356,733      $ 224,597   

Short-term investments

     3,445        23,581   

Accounts receivable, net of allowance for doubtful accounts and sales credits of $7,708 and $5,718 at December 31, 2013 and December 31, 2012, respectively

     133,997        134,855   

Prepaid expenses and other current assets

     25,733        25,021   

Income tax receivable

     6,804        6,253   

Deferred tax assets

     10,711        23,396   
  

 

 

   

 

 

 

Total current assets

     537,423        437,703   
  

 

 

   

 

 

 

Property and equipment, net

     185,552        142,920   

Goodwill

     1,637,202        1,640,541   

Intangible assets, net

     1,569,903        1,690,652   

Deferred financing costs, net

     32,737        44,854   

Other assets

     5,541        5,638   
  

 

 

   

 

 

 

Total Assets

   $ 3,968,358      $ 3,962,308   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Liabilities:

    

Accounts payable, trade

   $ 20,282      $ 17,323   

Accrued liabilities

     105,842        87,347   

Borrowings, current

     25,356        20,258   

Interest payable

     30,233        30,310   

Income taxes payable

     3,057        5,578   

Deferred revenue

     19,639        22,608   
  

 

 

   

 

 

 

Total current liabilities

     204,409        183,424   
  

 

 

   

 

 

 

Income taxes payable

     13,566        10,992   

Deferred tax liabilities

     573,780        604,322   

Other liabilities

     57,547        57,816   

Borrowings, net of current portion and original issue discount

     1,940,150        1,941,887   
  

 

 

   

 

 

 

Total Liabilities

     2,789,452        2,798,441   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

    

Equity:

    

Stockholder’s equity:

    

Common stock, $0.01 par value, 1,000 shares authorized, 10 issued and outstanding at December 31, 2013 and 2012

     —          —    

Additional paid-in-capital

     1,237,766        1,253,821   

Accumulated loss

     (89,056     (122,562

Accumulated other comprehensive income

     30,196        32,608   
  

 

 

   

 

 

 

Total stockholder’s equity

     1,178,906        1,163,867   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 3,968,358      $ 3,962,308   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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INTERACTIVE DATA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Cash flows provided by (used in) operating activities:

      

Net income (loss)

   $ 33,506      $ 1,017      $ (29,316

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     159,413        179,496        214,468   

Amortization of deferred financing costs and accretion of debt discounts

     16,059        17,597        17,741   

Deferred income taxes

     (17,461     (25,787     (63,232

Non-cash stock-based compensation

     3,946        14,108        4,229   

Non-cash interest expense

     1,507        1,507        376   

Provision (recovery) for doubtful accounts and sales credits

     1,866        492        (1,605

Loss on extinguishment of debt

     10,213        —         25,450   

Loss on dispositions of property and equipment

     27        2,415        513   

Portion of insurance settlement related to property and equipment

     (2,485     —          —     

Changes in operating assets and liabilities, net

      

Accounts receivable

     (605     (11,232     (10,068

Prepaid expenses and other current assets

     (424     1,766        (6,314

Accounts payable, interest payable and income taxes payable and receivable, net

     2,631        (1,977     30,158   

Accrued expenses and other liabilities

     17,795        (3,308     5,471   

Deferred revenue

     244        (2,073     516   
  

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     226,232        174,021        188,387   

Cash flows (used in) provided by investing activities:

      

Purchase of property and equipment

     (81,852     (61,443     (50,260

Proceeds of insurance settlement related to property and equipment

     2,485        —          —     

Business and asset acquisitions, net of acquired cash

     —          —         53   

Purchase of short-term investments

     (3,335     (23,540     —    

Proceeds from maturities and sales of short-term investments

     22,857        250        —    
  

 

 

   

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (59,845     (84,733     (50,207

 

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INTERACTIVE DATA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(In thousands)

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Cash flows provided by (used in) financing activities:

      

Proceeds from issuance of long-term debt, net of issuance costs

     —          —         1,358   

Payment of long-term debt issuance costs, net of proceeds

     (1,009     —          —     

Principal payments on long-term debt

     (9,786     (32,029     (10,088

Principal payments on capital leases

     (402     (364     —    

Proceeds from issuance of restricted parent company common stock and capital contributions

     —          —         11,850   

Capital contribution resulting from exercise of parent company stock options

     514        787        —    

Payment of interest rate cap

     (1,663     (1,664     (415

Capital contribution from parent company

     7,676        6,628        —    

Return of capital to parent company

     —          (100,000     —    

Dividend to parent company

     (28,715     —          —     

Capital reduction resulting from cash distribution to option holders

     (935     (3,020     —    
  

 

 

   

 

 

   

 

 

 

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

     (34,320     (129,662     2,705   

Effect of change in exchange rates on cash and cash equivalents

     69        2,819        (2,437
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     132,136        (37,555     138,448   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     224,597        262,152        123,704   
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 356,733      $ 224,597      $ 262,152   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash (paid) received for taxes

   $ (7,641   $ (7,822   $ 18,898   

Cash paid for interest, net of capitalized amounts ($2.4 million and $1.6 million for 2013 and 2012, respectively)

   $ (120,644   $ (130,295   $ (139,454

The accompanying notes are an integral part of these consolidated financial statements.

 

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INTERACTIVE DATA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

(In thousands)

 

     Common Stock                  Accumulated        
   Number
of
Shares
     Par
Value
     Additional
Paid-In-
Capital
    Accumulated
Loss
    Other
Comprehensive
Income
    Total
Stockholder’s
Equity
 

Balance, December 31, 2010

     10         —         $ 1,327,115      $ (94,263   $ 19,619      $ 1,252,471   

Equity contribution from parent company

     —          —          2,000        —         —         2,000   

Stock-based compensation (Note 6)

     —          —          4,229        —         —         4,229   

Other comprehensive loss

     —          —          —         —         (9,479     (9,479

Net loss

     —          —          —         (29,316     —         (29,316
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     10         —        $ 1,333,344      $ (123,579   $ 10,140      $ 1,219,905   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity contribution from parent company

     —          —          7,415        —         —         7,415   

Return of capital to parent company

     —          —          (100,000     —         —         (100,000

Capital reduction resulting from cash distribution to option holders

     —          —          (6,530     —         —         (6,530

Stock-based compensation (Note 6)

     —          —          18,429        —         —         18,429   

Tax benefit from cash distribution to option holders

     —          —          1,163        —         —         1,163   

Other comprehensive income

     —          —          —         —         22,468        22,468   

Net income

     —          —          —         1,017        —         1,017   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     10         —        $ 1,253,821      $ (122,562   $ 32,608      $ 1,163,867   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity contribution from parent company

     —          —          8,190        —          —          8,190   

Dividend to parent company

     —          —          (28,715     —          —          (28,715

Capital reduction resulting from cash distribution to option holders

     —          —          (1,241     —          —          (1,241

Stock-based compensation (Note 6)

     —          —          5,602        —          —          5,602   

Tax impact from cash distribution to option holders

     —          —          109        —          —          109   

Other comprehensive loss

     —          —          —          —          (2,412     (2,412

Net income

     —          —          —          33,506        —          33,506   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

     10         —        $ 1,237,766      $ (89,056   $ 30,196      $ 1,178,906   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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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.

 

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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:

 

(In thousands)

   Estimated
Fair Value
 

Cash

   $ 303,190   

Money market funds – cash equivalent

     53,543   
  

 

 

 

Total

   $ 356,733   
  

 

 

 

Cash and cash equivalents by type at December 31, 2012 were as follows:

 

(In thousands)

   Estimated
Fair Value
 

Cash

   $ 142,437   

Money market funds – cash equivalent

     82,160   
  

 

 

 

Total

   $ 224,597   
  

 

 

 

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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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3. Property and Equipment

Property and equipment consisted of the following at December 31:

 

(In thousands)

   Useful
Life
   2013     2012  

Computer, office and communication equipment

   3-5 years    $ 116,628      $ 87,045   

Leasehold improvements

   Life of lease      49,411        48,276   

Furniture and fixtures

   5-10 years      20,327        19,231   

Purchased and capitalized software

   3-5 years      104,812        60,091   
     

 

 

   

 

 

 
        291,178        214,643   

Less accumulated depreciation (a)

        (105,626     (71,723
     

 

 

   

 

 

 
      $ 185,552      $ 142,920   
     

 

 

   

 

 

 

 

(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.

 

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4. Intangible Assets and Goodwill

Intangible assets consisted of the following (in thousands, except weighted average amortization period):

 

     Weighted
Average
Amortization
Period
   December 31, 2013      December 31, 2012  
        Gross
Carrying
Value
     Accumulated
Amortization
    Net Book
Value
     Gross
Carrying
Value
     Accumulated
Amortization
    Net Book
Value
 

Amortizing Intangibles:

                  

Completed technology (1)

   4.4 years    $ 193,515       $ (175,483   $ 18,032       $ 193,146       $ (148,955   $ 44,191   

Customer lists

   23.8 years      1,567,517         (243,328     1,324,189         1,570,493         (174,712     1,395,781   

Definite-lived trademarks

   7.1 years      1,500         (916     584         1,500         (761     739   

Data/databases

   5.0 years      109,886         (75,089     34,797         110,193         (53,260     56,933   

Exchange relationships

   25.0 years      17,168         (2,346     14,822         16,944         (1,638     15,306   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
        1,889,586         (497,162     1,392,424         1,892,276         (379,326     1,512,950   

Non-amortizing intangibles:

                  

Indefinite-lived trademarks

   Indefinite      177,479         —          177,479         177,702         —         177,702   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 2,067,065       $ (497,162   $ 1,569,903       $ 2,069,978       $ (379,326   $ 1,690,652   
     

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(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):

 

For year ending 12/31/14

   $ 103,235   

For year ending 12/31/15

     85,059   

For year ending 12/31/16

     66,980   

For year ending 12/31/17

     66,650   

For year ending 12/31/18

     66,245   

For years thereafter

     1,004,255   
  

 

 

 

Total

   $ 1,392,424   
  

 

 

 

 

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The changes in the carrying amount of goodwill for the year ended December 31, 2013 by reportable segment were as follows (in thousands):

 

     Pricing and
Reference Data
    Trading
Solutions
    Total  

Balance as of December 31, 2011

   $ 1,524,562      $ 112,564      $ 1,637,126   
  

 

 

   

 

 

   

 

 

 

Impact of change in foreign exchange rates (a)

     7,051        1,172        8,223   

Merger related purchase price adjustment (b)

     (4,580     (228     (4,808
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2012

   $ 1,527,033      $ 113,508      $ 1,640,541   
  

 

 

   

 

 

   

 

 

 

Impact of change in foreign exchange rates (a)

     (4,810     1,471        (3,339
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2013

   $ 1,522,223      $ 114,979      $ 1,637,202   
  

 

 

   

 

 

   

 

 

 

 

(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:

 

(In thousands)

   2013      2012  

Bonus

   $ 25,448       $ 14,331   

Employee related costs

     24,098         20,357   

Sales commissions

     3,680         2,346   

Professional services

     6,608         5,938   

Property costs

     5,869         4,253   

Third party commissions

     3,775         5,047   

Sales taxes

     695         542   

Data and communication charges

     25,564         24,367   

Contingent consideration (earn-out) related to 7ticks acquisition

     —           4,671   

Customer deposits

     7,338         2,741   

Other

     2,767         2,754   
  

 

 

    

 

 

 
   $ 105,842       $ 87,347   
  

 

 

    

 

 

 

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.

 

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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):

 

    Year Ended
December 31, 2013 (a)
    Year Ended
December 31, 2012 (a)
    Year Ended
December 31, 2011
 

Cost of services

  $ 1,405      $ 2,102      $ 2,033   

Selling, general and administrative

    5,595        15,511        2,196   
 

 

 

   

 

 

   

 

 

 

Stock-based compensation expense before income taxes

  $ 7,000      $ 17,613      $ 4,229   

Income tax benefit

    2,897        2,685        1,612   
 

 

 

   

 

 

   

 

 

 

Stock-based compensation expense after income taxes

  $ 4,103      $ 14,928      $ 2,617   
 

 

 

   

 

 

   

 

 

 

 

(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.

 

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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.

 

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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:

 

    Year Ended
December 31, 2013
    Year Ended
December 31, 2012
    Year Ended
December 31, 2011
 

Risk free interest rate

    1.4     1.0     2.5

Weighted average expected volatility

    77.5     80.4     79.7

Expected dividend yield

    0.0     0.0     0.0

Expected term (in years)

    5.0        5.9        6.2   

Weighted average fair value of underlying Holdings shares

  $ 1.15      $ 1.17      $ 1.01   

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:

 

    Pre-Dividend     Post Dividend  

Risk free interest rate

    1.0     1.0

Weighted average expected volatility

    83.0     83.0

Expected dividend yield

    0.0     0.0

Expected term (in years)

    4.7        4.8   

Weighted average fair value of underlying Holdings shares

  $ 1.25      $ 1.00   

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.

 

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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:

 

     Number
of
Options (in
thousands)
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Term
(in years)
 

Outstanding at December 31, 2012

     127,837      $ 0.82        7.9   

Granted

     24,610        1.15     

Exercised

     (1,194     (1.00  

Forfeited

     (2,110     (0.83  

Expired

     (492     (1.00  
  

 

 

     

Outstanding at December 31, 2013

     148,651        0.88        7.3   
  

 

 

     

Vested and unvested expected to vest at December 31, 2013

     145,063        0.88        7.3   

Exercisable at December 31, 2013

     21,277        1.00        7.0   

A summary of the status and activity for restricted stock units for the year ended December 31, 2013 is presented below:

 

     Number
of
Units (in
thousands)
     Weighted
Average
Grant Date
Fair Value
(Per Share)
     Weighted
Average
Remaining
Contractual
Term
(in years)
 

Unvested at December 31, 2012

     36,850       $ 0.66         N/A   

Granted

     —          —       

Vested

     —          —       

Forfeited

     —          —       

Cancelled

     —          —       
  

 

 

       

Unvested at December 31, 2013

     36,850       $ 0.66         N/A   
  

 

 

       

 

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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.

 

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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.

 

     Payment Due by Period  

(In thousands)

   Total      Less Than
1 Year
     1-3
Years
     3-5
Years
     More Than
5 Years
 

Contractual Obligations

              

Long Term Debt (Note 16)

   $ 1,995,214       $ 25,356       $ 26,844       $ 1,943,014       $ —     

Operating Lease Obligations

     132,079         22,354         38,869         22,739         48,117   

Purchase Obligations

     41,838         41,838         —          —          —     

Fixed Rate Interest Obligations

     329,450         71,750         143,500         114,200         —     

Interest Rate Cap Premium Installments (Note 15)

     1,247         1,247         —           —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,499,828       $ 162,545       $ 209,213       $ 2,079,953       $ 48,117   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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):

 

     Year Ended
December 31,
2013
     Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Domestic

   $ 6,658       $ (56,006   $ (117,030

Foreign

     21,837         39,155        32,459   
  

 

 

    

 

 

   

 

 

 

Total

   $ 28,495       $ (16,851   $ (84,571
  

 

 

    

 

 

   

 

 

 

Income tax benefit consists of the following (in thousands):

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Current:

      

Federal

   $ 4,762      $ (118   $ 1,549   

State

     480        130        (1,472

Foreign

     7,018        9,526        9,605   
  

 

 

   

 

 

   

 

 

 

Total current:

   $ 12,260      $ 9,538      $ 9,682   

Deferred:

      

Federal

     4,722        (13,139     (42,356

State

     (2,950     (4,083     (8,909

Foreign

     (19,043     (10,184     (13,672
  

 

 

   

 

 

   

 

 

 

Total deferred

     (17,271     (27,406     (64,937
  

 

 

   

 

 

   

 

 

 

Income tax benefit

   $ (5,011   $ (17,868   $ (55,255
  

 

 

   

 

 

   

 

 

 

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.

 

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The components of the Company’s deferred income tax assets (liabilities) in the Consolidated Financial Statements are as follows at December 31 (in thousands):

 

     2013     2012  

Current deferred tax assets:

    

Accrued expenses

   $ 1,282      $ 3,431   

Accounts receivable allowances

     2,068        1,434   

Retirement benefit plans

     0        6,288   

Net operating loss carry forwards

     5,085        10,851   

Other current assets

     2,412        1,552   
  

 

 

   

 

 

 

Total current deferred assets before valuation allowance

     10,847        23,556   

Valuation allowance

     (136     (160
  

 

 

   

 

 

 

Total current deferred tax assets

     10,711        23,396   

Current deferred tax liabilities:

    

Other current liabilities

     —          —    
  

 

 

   

 

 

 

Total current deferred tax liabilities

     —          —    
  

 

 

   

 

 

 

Total current deferred tax assets, net of liabilities

     10,711        23,396   

Long term deferred tax assets:

    

Deferred stock compensation

     4,350        3,109   

Deferred compensation

     824        1,117   

Non-compete agreements

     596        1,615   

Net operating loss carry forward

     5,342        17,268   

Foreign tax credit carry forward

     15,172        14,158   

Retirement benefit plan

     185        —    

Other long term assets

     9,068        6,251   
  

 

 

   

 

 

 

Total long term deferred assets before valuation allowance

     35,537        43,518   

Valuation allowance

     (1,271     (872
  

 

 

   

 

 

 

Total long term deferred tax assets

     34,266        42,646   

Long term deferred tax liabilities:

    

Intangibles assets

     (555,309     (602,895

Property

     (41,502     (27,906

Other long term liabilities

     (11,235     (16,167
  

 

 

   

 

 

 

Total long term deferred tax liabilities

     (608,046     (646,968
  

 

 

   

 

 

 

Total long-term deferred tax liability, net of assets

   $ (573,780   $ (604,322
  

 

 

   

 

 

 

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.

 

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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:

 

     Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Statutory tax rate

     35.0     (35.0 )%      (35.0 )% 

Increases (decreases) in tax resulting from:

      

State taxes, net of federal tax benefit

     4.3        (15.5     (7.1

Foreign income taxes

     (17.3     (35.7     (7.8

Income tax reserve

     3.0        3.3        2.1   

Rate change

     (32.5     (36.0     (8.4

Return to provision adjustments, net

     0.9        (11.4     (7.7

Research and development credit

     (13.3     —          (1.0

Holdings recapitalization

     —         22.3        —    

Other

     2.3        2.0        (0.4
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     (17.6 )%      (106.0 )%      (65.3 )% 
  

 

 

   

 

 

   

 

 

 

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.

 

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The following table summarizes activity for Gross Unrecognized Tax Benefits for the periods presented:

 

(in thousands)    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
    Year Ended
December 31,
2011
 

Balance at beginning of period

   $ 12,679      $ 13,237      $ 12,122   

Additions based on tax positions related to the current year

     3,031        910        1,571   

Additions for tax positions of prior years

     8,849        380        2,047   

Expiration of statutes

     (442     (284     (1,136

Reductions for tax positions for prior years

     (1,113     (988     (1,130

Settlements

     (332     (576     (237
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,672      $ 12,679      $ 13,237   
  

 

 

   

 

 

   

 

 

 

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,

 

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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

 

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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):

 

     Year Ended December 31,  
     2013     %     2012     %     2011     %  

Revenue (a):

            

Pricing and Reference Data

   $ 639,631        71   $ 612,422        70   $ 591,920        68

Trading Solutions

     265,482        29     267,739        30     275,803        32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 905,113        100   $ 880,161        100   $ 867,723        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations (b):

            

Pricing and Reference Data

   $ 382,709        217   $ 348,036        264   $ 329,871        324

Trading Solutions

     34,952        20     47,663        36     47,962        47

Corporate and unallocated (c)

     (241,673     (137 )%      (263,848     (200 )%      (276,115     (271 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 175,988        100   $ 131,851        100   $ 101,718        100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     As of December 31,     As of December 31,  
     2013      %     2012      %  

Identifiable assets:

          

Pricing and Reference Data

   $ 3,453,003         87   $ 3,447,044         87

Trading Solutions

     331,695         8     330,441         8

Corporate and unallocated (d)

     183,660         5     184,823         5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,968,358         100   $ 3,962,308         100

The following table reconciles income from operations to income (loss) before income taxes for the periods below:

 

(In thousands)    Year Ended
December 31,
    Year Ended
December 31,
    Year Ended
December 31,
 
     2013     2012     2011  

Income from operations (b)

   $ 175,988      $ 131,851      $ 101,718   

Interest (expense) (net)

     (137,628     (149,526     (157,120

Other income (expense) (net)

     347        824        (3,719

Loss on extinguishment of debt

     (10,213     —         (25,450
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

   $ 28,494      $ (16,851   $ (84,571
  

 

 

   

 

 

   

 

 

 

 

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(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:

 

(In thousands)    Year Ended
December 31,
    Year Ended
December 31,
    Year Ended
December 31,
 
     2013      %     2012      %     2011      %  

Pricing and Reference Data

   $ 639,631         71   $ 612,422         70   $ 591,920         68

Real-Time Feeds and Trading Infrastructure

   $ 112,843         12   $ 110,305         12   $ 114,300         13

Hosted Web Applications and Workstations

   $ 152,639         17   $ 157,434         18   $ 161,503         19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 905,113         100   $ 880,161         100   $ 867,723         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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:

 

Purchases of Property and Equipment       

(In thousands)

   Year Ended
December 31,
     Year Ended
December 31,
     Year Ended
December 31,
 
     2013      2012      2011  

Pricing and Reference Data

   $ 14,544       $ 10,616       $ 19,581   

Trading Solutions

     21,193         18,179         21,200   

Corporate and unallocated

     46,115         32,648         9,479   
  

 

 

    

 

 

    

 

 

 

Total

   $ 81,852       $ 61,443       $ 50,260   
  

 

 

    

 

 

    

 

 

 

 

Depreciation Expense       

(In thousands)

   Year Ended
December 31,
     Year Ended
December 31,
     Year Ended
December 31,
 
     2013      2012      2011  

Pricing and Reference Data

   $ 12,560       $ 14,096       $ 13,084   

Trading Solutions

     19,728         20,176         19,517   

Corporate and unallocated

     10,249         7,184         6,790   
  

 

 

    

 

 

    

 

 

 

Total

   $ 42,537       $ 41,456       $ 39,391   
  

 

 

    

 

 

    

 

 

 

 

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The Company’s distribution by major geographic region of revenue and long-lived assets is as follows for the periods below:

 

(In thousands)    Year Ended
December 31,
     Year Ended
December 31,
     Year Ended
December 31,
 
     2013      2012      2011  

Revenue (a):

        

North America

   $ 643,780       $ 608,307       $ 596,836   

United Kingdom

     81,617         88,998         88,688   

All other European countries

     126,455         120,740         126,891   

Asia Pacific

     40,587         48,908         42,699   

Rest of World

     12,674         13,208         12,609   
  

 

 

    

 

 

    

 

 

 

Total

   $    905,113       $    880,161       $    867,723