UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission File Number: 000-50580

INTERSECTIONS INC.

703-488-6100

     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 þ No o

     Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o No þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

17,013,337 shares of common stock, $0.01 par value, outstanding as of October 31, 2004.

Form 10-Q
September 30, 2004

Table of Contents

PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

3

INTERSECTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

4

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

5

INTERSECTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Notes to Condensed Consolidated Financial Statements

6

INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Organization and Business

     Intersections Inc. (the “Company”), incorporated in the State of Delaware, is a financial information services company that provides identity theft protection and credit management services to consumers and primarily sells monthly subscriptions which provide for a consumer credit monitoring service. The Company and its financial institution clients market subscription programs to consumers throughout the United States and Canada using direct marketing techniques, mainly through inbound and outbound telemarketing and direct mail conducted primarily through endorsed co-marketing relationships with credit card issuers, as well as media advertising.

     The Company’s Registration Statement for the sale of its common stock in an initial public offering was declared effective by the Securities and Exchange Commission on April 29, 2004. The Company offered and sold 3,000,000 shares of its common stock at an initial price of $17.00 per share, and certain selling stockholders offered and sold an additional 4,187,500 shares. The offering was completed with all shares of common stock having been sold on May 5, 2004. The net proceeds to the Company from the initial public offering, after deducting underwriting discounts and commissions and expenses payable by the Company, were $45.0 million. Proceeds to the Company will be used for general corporate purposes. The completion of this stock offering resulted in the conversion of the Senior Secured Convertible Note and all outstanding preferred stock into 8,988,894 shares of common stock.

2. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments consisting of only normal recurring adjustments necessary for a fair presentation of the financial position of the Company, the results of its operations and cash flows have been made. All significant intercompany transactions have been eliminated. Certain information and footnote disclosures included in complete financial statements have been either condensed or omitted. For further information, refer to the Company’s Registration Statement on Form S-1 (File No. 333-111194) as filed with, and declared effective by, the Securities and Exchange Commission on April 29, 2004. Financial results for the period may not be reflective of results anticipated for the entire year.

     Effective May 5, 2004 the Company effected a 554.9338-for-one stock split of its common stock. All share and per share amounts included in the accompanying financial statements have been restated to reflect the stock split.

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

     A significant proportion of revenue is generated from monthly subscriptions from the customers of our financial institution clients. Initial and renewal subscription fees are generally billed to the subscriber’s credit card on a monthly or annual basis. A percentage of our revenue is paid to the Company’s financial institution clients as a commission or fee.

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INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     The point in time that the Company records revenue is determined in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements (“SAB 101”). Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For contracts with refund provisions whereby only the prorated subscription fee is returned upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as revenue on a straight-line basis over the subscription period, generally one year. As of September 30, 2004 and December 31, 2003, the accompanying consolidated balance sheets include deferred revenue of $3,558,894 and $4,012,121, respectively, from such programs. Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and receive a full refund at any time during the subscription period. The Company recognizes a pro rata share of revenue earned upon expiration of the full refund period. As of September 30, 2004 and December 31, 2003, deferred revenue includes $172,169 and $233,883, respectively, for such deferred subscription fees. An allowance for refunds is established based on the Company’s historical experience.

     The Company also provides membership services to customers of certain financial institution clients that pay the Company to provide such services directly to their customers. Revenue from these arrangements is recognized when earned which is at the time that the Company provides the services to the financial institution client, generally on a monthly basis.

     The Company also generates revenue from one-time credit reports which is recognized when the credit report is delivered to the customer.

     The amount of revenue recorded by the Company is determined in accordance with the FASB’s Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which addresses whether a company should report revenue based on the gross amount billed to a customer or the net amount retained by the company (amount billed less commissions or fees paid). The Company generally records revenue on a gross basis in the amount that is billed to the subscriber when its arrangements with financial institution clients provide for the Company to serve as the primary obligor in the transaction, the Company has latitude in establishing price, the Company bears the risk of physical loss of inventory, and the Company bears credit risk for the amount billed to the subscriber. The Company generally records revenue in the amount billed to its financial institution clients, and not the amount billed to the customer, when the Company’s financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

Deferred Subscription Solicitation Costs

     The Company expenses advertising costs as incurred except for direct-response marketing costs. Direct-response marketing costs include telemarketing and direct mail costs related directly to subscription solicitation. In accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 93-7, Reporting on Advertising Costs, direct-response advertising costs are deferred and charged to operations on a cost pool basis as the corresponding revenues from subscription fees are recognized. The period in time in which we amortize these costs reflects historical subscriber patterns, but has historically not exceeded 12 months.

     The recoverability of the amounts capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date, in accordance with SOP 93-7, by comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future benefit expected to result directly from such advertising. The probable remaining future benefit is estimated based upon historical customer patterns, and represents net revenues less costs to earn those revenues.

8

INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

     Deferred subscription solicitation costs as of September 30, 2004 and December 31, 2003 were $8,594,432 and $9,767,563, respectively. Amortization of deferred subscription solicitation costs for the three months ended September 30, 2004 and 2003 were $5,398,714 and $5,363,341, respectively. Subscription solicitation costs expensed as incurred in the three months ended September 30, 2004 and 2003 were $207,107 and $421,370, respectively. Amortization of deferred subscription solicitation costs for the nine months ended September 30, 2004 and 2003 were $16,295,606 and $17,582,701, respectively. Subscription solicitation costs expensed as incurred in the nine months ended September 30, 2004 and 2003 were $481,503 and $698,116, respectively.

Stock-Based Compensation

     The Company has elected to continue to follow the recognition and measurement principals of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations for its stock-based employee compensation plan. Accordingly, the Company measured compensation expense using the intrinsic value method which yielded no compensation cost for the three and nine months ended September 30, 2004 and 2003 (unaudited), as all options were granted at or above the estimated fair market value of the underlying common stock on the date of grant.

     Had compensation expense been determined consistent with the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS 148, Accounting for Stock-Based Compensation — Transition and Disclosure — An Amendment of SFAS 123, the Company’s net income would have been as follows:

     For SFAS No. 123 purposes, the fair value of each option granted has been estimated as of the date of grant using the Black-Scholes option pricing model with the following assumptions:

9

INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

3. Earnings Per Share

     Basic and diluted income per share amounts are determined in accordance with the provisions of SFAS No. 128, Earnings Per Share. Basic income per share is computed using the weighted average number of shares of common stock outstanding during the year. Diluted income per share is computed using the weighted average number of shares of common stock, adjusted for the dilutive effect of potential common stock. Potential common stock, computed using the treasury stock method or the if-converted method, includes options, warrants, convertible debt and preferred stock. For the three and nine months ended September 30, 2004, options to purchase 1,425,483 and 368,338 shares of common stock, respectively, have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. For the three and nine months ended September 30, 2003, options to purchase 1,216,276 shares of common stock have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. These shares could dilute earnings per share in the future.

The following table sets forth the computation of basic and diluted earnings per share:

10

INTERSECTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

4. Recent Accounting Pronouncements

     In March 2004, the Financial Accounting Standards Board (“FASB”) approved Emerging Issues Task Force (“EITF”) Issue 03-6, Participating Securities and the Two-Class Method under SFAS 128. EITF Issue 03-6 supersedes the guidance in Topic No. D-95, Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share, and requires the use of the two-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared or accumulated and participation rights in undistributed earnings. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings per share. The adoption of EITF Issue 03-6 did not have an effect on the Company’s consolidated financial position or results of operations.

5. Stock Option Plan

On March 12, 2004 and May 5, 2004, the Board of Directors and stockholders, respectively, approved the 2004 Stock Option Plan (the “Plan”) to be effective immediately prior to the consummation of the initial public offering. The Plan provides for the authorization to issue 2,775,000 shares of common stock. Effective May 5, 2004, 1,031,345 shares of common stock were issued under the Plan at the initial public offering price.

6. Subsequent Events

     On October 14, 2004, the Company entered into a Stock Purchase Agreement with American Background Information Services, Inc., a Virginia corporation (“American Background”), and AMSEC Enterprises, L.C., a Virginia limited liability company (“AMSEC”), pursuant to which the Company has agreed to acquire from AMSEC, and AMSEC has agreed to sell, all of the outstanding stock of American Background for $18.5 million in cash. In addition, Intersections has agreed to pay approximately $1.4 million to retire the outstanding bank debt of American Background. The parties have agreed that $1.9 million of the purchase price will be held in escrow until the 18 month anniversary of the closing of the acquisition as security for any claims of Intersections under the definitive agreement. The acquisition closed on November 12, 2004.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     We provide identity theft protection and credit management services on a subscription basis to our subscribers. Our services are principally marketed to customers of our clients and branded and tailored to meet our clients’ specifications. Our clients are principally credit and charge card issuing financial institutions. Our subscribers purchase our services either directly from us or through arrangements with our clients.

     Our services include daily, monthly or quarterly monitoring of our subscribers’ credit files at one or all three of the major credit reporting agencies, Equifax, Experian and TransUnion. We deliver our services online or by mail to our subscribers in a user-friendly format. We also offer credit score analysis tools, credit education, a consumer fraud resource center and identity theft cost coverage.

     We evaluate the quality of our results using key financial measures. The following table details these metrics and consists principally of selected subscriber and financial data. We believe these metrics illustrate, in tabular format, certain aspects of our management discussion and analysis.

Other Data:

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Critical Accounting Policies

     In preparing our consolidated financial statements, we make estimates and assumptions that can have a significant impact on our financial position and results of operations. The application of our critical accounting policies requires an evaluation of a number of complex criteria and significant accounting judgments by us. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions. We have identified the following policies as critical to our business operations and the understanding of our results of operations.

Revenue Recognition

     We receive revenue from recurring revenue from existing subscriptions, the sale of new subscriptions and transactional sales. Subscription fees recognized as revenue by us are generally billed to the subscriber’s credit card on a monthly basis directly by our client or through our credit card processor. The prices to subscribers of various configurations of our services range from $4.99 to $12.99 per month. A percentage of our revenue is received by our clients as a commission.

     The point in time we recognize revenue from our services is determined in accordance with Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements. Revenue for monthly subscriptions is recognized in the month the subscription fee is earned. For subscriptions with refund provisions whereby only the prorated subscription fee is refunded upon cancellation by the subscriber, deferred subscription fees are recorded when billed and amortized as subscription fee revenue on a straight-line basis over the subscription period, generally one year. Revenue for annual subscription fees must be deferred if the subscriber has the right to cancel the service and receive a full refund at any time during the subscription period. We recognize a pro rata portion of revenue earned upon expiration of the full refund period. An allowance for monthly subscription refunds is established based on our actual cancellation experience. We also provide services for which certain financial institution clients are the primary obligors directly to their customers. Revenue from these arrangements is recognized when earned, which is at the time we provide the service, generally on a monthly basis. In addition, we generate revenue from the sale of one-time credit reports, which is recognized when the credit report is delivered to the customer.

     The amount of revenue recorded by us is determined in accordance with FASB’s Emerging Issues Task Force (“EITF”) 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, which addresses whether a company should report revenue based on the gross amount billed to a customer or the net amount retained by the company (amount billed less commissions or fees paid). We generally record revenue on a gross basis in the amount that we bill the subscriber when our arrangements with financial institution clients provide for us to serve as the primary obligor in the transaction, we have latitude in establishing price and we bear the risk of physical loss of inventory and credit risk for the amount billed to the subscriber. We generally record revenue in the amount that we bill our financial institution clients, and not the amount billed to their customers, when our financial institution client is the primary obligor, establishes price to the customer and bears the credit risk.

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Deferred Subscription Solicitation Costs

     Our deferred subscription solicitation costs consist of subscription acquisition costs, including telemarketing and direct mail expenses such as printing and postage, and commissions paid to clients. Telemarketing and direct mail expenses are direct response advertising costs, which are accounted for in accordance with American Institute of Certified Public Accountants Statement of Position (“SOP”) 93-7, Reporting on Advertising Costs (“SOP 93-7”). The recoverability of amounts capitalized as deferred subscription solicitation costs are evaluated at each balance sheet date, in accordance with SOP 93-7, by comparing the carrying amounts of such assets on a cost pool basis to the probable remaining future benefit expected to result directly from such advertising costs. Probable remaining future benefit is estimated based upon historical subscriber patterns, and represents net revenues less costs to earn those revenues. In estimating probable future benefit (on a per subscriber basis) we deduct our contractual cost to service that subscriber from the known sales price. We then apply the future benefit (on a per subscriber basis) to the number of subscribers expected to be retained in the future to arrive at the total probable future benefit. In estimating the number of subscribers we will retain (i.e., factoring in expected cancellations), we utilize historical subscriber patterns maintained by us that show attrition rates by client and marketing channel. The total probable future benefit is then compared to the costs of a given marketing campaign (i.e., cost pools), and if the probable future benefit exceeds the cost pool, the amount is considered to be recoverable. If direct response advertising costs were to exceed the estimated probable remaining future benefit, an adjustment would be made to the deferred subscription costs to the extent of any shortfall.

     We amortize deferred subscription solicitation costs on a cost pool basis over the period during which the future benefits are expected to be received. The period of time in which we amortize these costs reflects historical subscriber patterns, but has historically not exceeded 12 months.

     In accordance with SAB No. 101, Revenue Recognition in Financial Statements, commissions that relate to annual subscriptions with full refund provisions and monthly subscriptions are expensed in the month incurred, unless we are entitled to a refund of the commissions. If annual subscriptions are cancelled prior to their initial terms, we are generally entitled to a full refund of the previously paid commission for those annual subscriptions with a full refund provision and a pro-rata refund, equal to the unused portion of their subscription, for those annual subscriptions with a pro-rata refund provision. Commissions that relate to annual subscriptions with full commission refund provisions are deferred until the earlier of expiration of the refund privileges or cancellation. Once the refund privileges have expired, the commission costs are recognized ratably in the same pattern that the related revenue is recognized. Commissions that relate to annual subscriptions with pro-rata refund provisions are deferred and charged to operations as the corresponding revenue is recognized. If a subscription is cancelled, upon receipt of the refunded commission from our client, we record a reduction to the deferred commission.

Software Development Costs

     We develop software for internal use and capitalize software development costs incurred during the application developm