Quarterly Report

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Unaudited)

NOTE A - NATURE OF BUSINESS

Vertro, Inc., together with its wholly-owned subsidiaries, collectively, the “Company”, “we”, “us” or “Vertro”, is a software and technology company.   Effective June 9, 2009, Vertro, Inc., formerly known as MIVA, Inc., merged a newly formed, wholly owned subsidiary with and into the Company, and changed the Company's legal name to "Vertro, Inc." as a result thereof. The name change does not affect the rights of the stockholders of the Company. There were no other changes to the Company's Certificate of Incorporation.

ALOT (formerly known as MIVA Direct)

We offer a range of products and services through our ALOT division. ALOT offers home page, desktop application, and Internet browser toolbar products under the ALOT brand. Our customizable ALOT Home Page, ALOT Desktop and ALOT Toolbar are designed to make the Internet easy for consumers by providing direct access to affinity content and search results. These products generate approximately 2 million Internet searches per day.

MIVA Media

On March 12, 2009, we sold certain assets relating to our MIVA Media division.  Following the sale, we no longer operate the MIVA Media business (see NOTE C – Sale of MIVA Media Division), and as a result these operations are presented as discontinued for all periods presented.

The majority of our revenue at ALOT is generated through Internet search queries at our website. ALOT products generate search queries to our website http://search.alot.com , where we provide algorithmic and sponsored search functionality to consumers through our contractual relationships with third-party providers.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation of results for the interim periods have been reflected in these unaudited condensed consolidated financial statements.  Operating results for the three months and six months ended June 30, 2009, are not necessarily indicative of the results that may be expected for the entire year.

The unaudited condensed consolidated financial statements include the accounts and operations of MIVA, Inc. and all of our subsidiaries.  Intercompany accounts and transactions have been eliminated in consolidation.

Liquidity

Despite the Company’s negative operating performance in 2009 and 2008, we currently anticipate that our working capital of approximately $0.4 million, including unrestricted cash of approximately $8.3 million as of June 30, 2009, along with cash flows from operations, will be sufficient to meet our expected liquidity needs for working capital and capital expenditures over at least the next 12 months.  Our working capital is calculated by subtracting current liabilities from current assets on our balance sheet.  We are in the process of reviewing our current liabilities and expect to settle a portion of our current liabilities related to discontinued operations for less than their carrying value during Q3 2009.  Additionally, our forecast for future liquidity and capital requirements is dependent on a number of factors, including our ability to monetize our products, our ability to distribute our products, our ability to execute on our business plans, and our ability to meet financial forecasts. We also cannot assure you that we will be able to successfully address these factors or that if our expectations are not met that we will have sufficient capital resources to meet our obligations.

 

In the future, we may seek additional capital through the issuance of debt or equity to fund working capital, expansion of our business and/or acquisitions, or to capitalize on market conditions.  As we require additional capital resources, we may seek to sell additional equity or debt securities or look to enter into a new revolving loan agreement.  The sale of additional equity or convertible debt securities could result in additional dilution to existing stockholders.  There can be no assurance that any financing arrangements will be available in amounts or on terms acceptable to us, if at all.  Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties and actual results could vary materially as a result of the factors described above.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.  Significant estimates in these consolidated financial statements include estimates of: income taxes; tax valuation reserves; restructuring reserve; loss contingencies; allowances for doubtful accounts; share-based compensation; and useful lives for depreciation and amortization.  Actual results could differ materially from these estimates.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid investments with original maturities of three months or less.  We did not have any cash equivalents as of June 30, 2009.  References to cash equivalents relate to the Company’s cash equivalents held in 2008 and used for comparative purposes.

Allowance for Doubtful Accounts

The Company records its allowance for doubtful accounts based on its assessment of various factors.  The Company considers historical experience, the age of the accounts receivable balances, the credit quality of its customers, current economic conditions, and other factors that may affect our customers’ ability to pay to determine the level of allowance required.

Comprehensive Loss

Total comprehensive loss is comprised of net loss shown in the condensed consolidated statement of operations and net foreign currency translation adjustments.  Total comprehensive loss for the three and six months ended June 30, 2009 was $(3.1) million and $(3.7) million, respectively.  Total comprehensive loss for the three and six months ended June 30, 2008 was $(6.5) million and $(11.3) million, respectively.  The difference between total comprehensive loss and net loss is the direct result of foreign currency translation adjustments.

Accumulated Other Comprehensive Income

At June 30, 2009, Accumulated Other Comprehensive Income, which is shown in the equity section of the condensed consolidated balance sheet, is an accumulation of prior net foreign currency translation adjustments of approximately $12.9 million.   The sale of MIVA Media on March 12, 2009 did not include the transfer to the buyer of any significant assets or liabilities of our foreign subsidiaries.  The Company plans to release the $12.9 million of related currency translation adjustments from Accumulated Other Comprehensive Income to discontinued operations in the consolidated statement of operations when the retained foreign entity assets are substantially liquidated.

 

Reclassifications

 

Certain prior period amounts in the condensed consolidated financial statements have been reclassified to conform with the current year presentation.

Foreign Currency Gains and Losses

As a result of the sale of MIVA Media the Company has terminated EU centered operations and all operations are now centered in the US.  As a result, the US dollar subsequently became the functional currency for all operations.  Effective April 1, 2009, the Company is recording all current foreign currency translation adjustments in current period income (loss) from continuing operations.  The balance of foreign currency translation adjustments accumulated through the date of sale, which is reflected in the balance sheet as accumulated other comprehensive income, will be reflected in discontinued operations when the retained foreign entity assets are substantially liquidated.

Advertising Costs

Advertising costs are expensed as incurred, and are included in Marketing, Sales and Service expense. For the three months and six months ended June 30, 2009, the Company incurred approximately $5.8 million and $10.1 million in advertising expense. For the same periods in 2008, the company incurred approximately $7.2 million and $14.8 million respectively.  The majority of these costs were incurred to promote the Company’s ALOT consumer software products.

Income Taxes

Income taxes are accounted for in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.”  Under SFAS 109, deferred income taxes are recognized for temporary differences between financial statement and income tax bases of assets and liabilities, loss carry-forwards, and tax credit carry-forwards for which income tax benefits are expected to be realized in future years.  A valuation allowance is established to reduce deferred tax assets if it is more likely than not that all, or some portion, of such deferred tax assets will not be realized.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash, cash equivalents, and acc ounts receivable. As of March 31, 2009, substantially all of our cash and cash equivalents were managed by a number of financial institutions. As of June 30 , 2009 our cash and cash equivalents with certain of these financial institutions exceed FDIC insure d limits. Accounts receivable are typically unsecured and are derived from revenue earned from customers primarily located in the United States. At June 30, 2009, one customer (Google) accounted for approximately 8 1 % of the accounts receivable balance .  Fo r the three and six months ending June 30, Google represented approximately 89 % and 90 % of consolidated   revenues in 2009, and   94 % and 93 % for the same periods 2008.

 

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008, with early adoption prohibited. Previously, any release of valuation allowances for certain deferred tax assets would serve to reduce goodwill whereas under the new standard any release of valuation allowances related to acquisitions currently or in prior periods will serve to reduce our income tax provision in the period in which the reserve is released.  Additionally, under SFAS 141(R) transaction related expenses, which were previously capitalized as "deal cost," will be expensed as incurred.  We had no capitalized deal costs or acquisitions pending at December 31, 2008. Therefore, we did not have any transition adjustments resulting from our adoption of SFAS 141(R) on January 1, 2009.

 

 

In April 2009, the FASB issued Staff Position No. 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” (“FSP No. 141(R)-1”).  FSP No. 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  This FASB Staff Position is effective for fiscal years beginning on or after December 15, 2008.  The adoption of this FASB Staff Position by us on January 1, 2009 did not have a material effect on our financial position or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require (i) non-controlling interests to be reported as a component of equity, (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and (iii) any retained non-controlling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited.   Our adoption of SFAS 160 on January 1, 2009 did not have a material effect on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, we adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year, which we adopted on January 1, 2009.  The adoption of SFAS 157 did not have a material effect on our financial position or results of operations. The book values of cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments.

In May 2008, the FASB issued SFAS No. 162, “ The Hierarchy of Generally Accepted Accounting Principles. ”  SFAS 162 identifies the sources of accounting principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities.  SFAS 162 was effective November 2008.  The adoption of SFAS 162 had no material impact on the Company’s financial statements.  However, its effect has been nullified by the issuance in June 2009 of SFAS No. 168 “The FASB Accounting Standards Codification TM and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”).  SFAS 168 establishes the FASB Standards Accounting Codification (“Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants.  The Codification will supersede all the existing non-SEC accounting and reporting standards upon its effective date and subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  SFAS 168 will become effective for us in the third quarter of 2009 and will not have a material impact on our consolidated financial statements.

In April 2009, the FASB issued Staff Position No.  FAS 107-1   and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.”  It requires the fair value for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"), to be disclosed in the interim periods as well as in annual financial statements.  This standard was effective for the quarter ending June 30, 2009.  The adoption of this standard did not have a material effect on our  financial statements.

In June 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. It also requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. SFAS 165 is effective for all interim and annual periods ending after June 15, 2009. We adopted SFAS 165 upon its issuance and it had no material impact on our consolidated financial statements.   We have evaluated subsequent events for recognition or disclosure through August 12, 2009, which was the date we filed this Form 10-Q with the SEC.

 

 

NOTE C – SALE OF MIVA MEDIA DIVISION AND DISCONTINUED OPERATIONS

Sale of MIVA MEDIA Division

On March 12, 2009, we and certain of our subsidiaries entered into and consummated an Asset Purchase Agreement with Adknowledge, Inc. (“Adknowledge”) and certain of its subsidiaries pursuant to which we sold to Adknowledge certain assets relating to our MIVA Media Division, including the MIVA name, for cash consideration of approximately $11.6 million, plus assumption of certain balance sheet liabilities, and subject to certain retained assets and liabilities, including assets and liabilities of the MIVA Media division in France, and post-closing adjustments estimated at approximately $0.7 million, which resulted in a gain on sale of approximately $6.9 million during the quarter ended March 31, 2009 (the “MIVA Media Sale”).  We incurred approximately $1.2 million of legal and financial advisory fees in connection with the MIVA Media Sale, which are included in the net gain on sale.

In addition, in connection with the MIVA Media Sale, the Company agreed to provide to and receive from Adknowledge certain transition services. At June 23, 2009 and as contemplated in the MIVA Media Sale Purchase Agreement, the Company finalized an agreement for the Net Working Capital purchase price adjustment of $0.7 million as disclosed in the Company’s previous filing.  At June 30, 2009 approximately $0.4 million is due to Adknowledge as a result of net cash collected on their behalf.  Additionally, as contemplated in the Purchase Agreement, during the quarter ended June 30, 2009, the Company executed an agreement with the lessor that assigned the Company’s previous obligation for a software lease from the Company to Adknowledge.  The remaining lease liability of $0.3 million was released and is included in gain on sale of discontinued operations for the period ending June 30, 2009.

The Company and Adknowledge made customary representations, warranties and covenants in the Asset Purchase Agreement and each party has certain indemnification obligations under the Asset Purchase Agreement.  Further, the Asset Purchase Agreement prohibits the Company from competing in the business of owning and operating a pay-per-click network connecting advertisers and third party publishers for five years, and prohibits the Company from diverting or soliciting past, existing or prospective clients, customers, or sources of financing of Adknowledge or from employing or soliciting for employment Adknowledge’s employees (including the Company’s employees that transferred to Adknowledge pursuant to the terms of the Asset Purchase Agreement) for two years.  In addition, the Asset Purchase Agreement prohibits Adknowledge from employing or soliciting for employment the Company’s employees who did not transfer to Adknowledge pursuant to the terms of the Asset Purchase Agreement for two years.

As a result of the MIVA Media Sale, and our decision during the quarter ended March 31, 2009, to cease operations of the MIVA Media division in France, in accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the operations of the MIVA Media division, including those in France, are presented as discontinued operations and, accordingly, these operating results are segregated and reported as discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented. No income tax expense has been allocated to discontinued operations for any period presented.  In the three months ended June 30, 2009, the Company had income from discontinued operations of $0.5 million due to the collection of receivables that had been previously reserved, partially offset by general and administrative expenses related to the unwinding of the EU operation.

NOTE D–AMENDMENT OF PEROT MASTER SERVICES AGREEMENT

On May 11, 2007, the Company entered into a Master Services Agreement with Perot Systems, pursuant to which the Company outsourced certain of its information technology infrastructure services, application development and maintenance, MIVA Media US support services, and transactional accounting functions.

The Master Services Agreement had a term of 84 calendar months commencing June 1, 2007, unless earlier terminated or extended pursuant to its terms.  Aggregate fees payable by the Company to Perot Systems under the Master Services Agreement were expected to be approximately $41.8 million, but as a result of the August 2008 amendment to the Master Services Agreement described below, the total was reduced to approximately $37.9 million.  As of June 30, 2009, the Company incurred approximately $13.3 million of operating expenses for services received under the agreement since the agreement’s inception. Such expenses incurred during the six month periods ended June 30, 2009 and 2008, are presented as discontinued operations as a result of the MIVA Media Sale.   

 

 

On April 10, 2008, we entered into an approximate $2.4 million software development statement of work with Perot Systems, pursuant to which the Company will pay Perot Systems to develop a new global advertiser and distribution partner application called the "Transformation Project". The Transformation Project involves the development and implementation of one enhanced consolidated global system to replace MIVA Media's existing Internet advertising management and distribution partner management systems.  As of March 12, 2009, the date of the MIVA Media Sale, in connection with the Transformation Project, we had incurred approximately $3.2 million of costs, including $2.6 million of cost with Perot Systems, and $0.6 million of internal development costs, all of which had been capitalized and was to be amortized over the five year estimated useful life of the software once it was placed in service.  This Transformation Project was sold in March 2009 as part of the MIVA Media Sale.

On August 26, 2008, we entered into an amendment to the Master Services Agreement that, among other things, allowed us to “in-source” certain functions (MIVA EU Information Technology functionality and administration and finance and accounting support).  These changes took effect immediately and eliminated the related charges for those services without termination fees as called for in the original contract.  In return, we agreed to a reduction in certain service level agreement (“SLA”) requirements, the elimination of benchmarking pricing, a modified termination payment schedule, and a 10 day payment cycle for invoices.

On February 1, 2009, the Company entered into an amendment to the Master Services Agreement.  Under the terms of the amendment, the Master Services Agreement expired on April 30, 2009, and certain other provisions of the Master Services Agreement have either been modified or terminated. In connection with the Amendment, the Company has issued a letter of credit to Perot Systems for approximately $1.0 million for a portion of the remaining application development costs related to the Company's new technology platform, which was included in the assets sold as part of the MIVA Media Sale. As of June 30, 2009, Perot System has drawn approximately $0.7 million on this letter of credit.  It is expected the balance will be drawn in the quarter ending September 30, 2009.  As part of the Purchase agreement, Adknowledge will reimburse the Company for any amounts drawn on the Letter of Credit.

The Company accounted for the services received under the Master Services Agreement using the guidance in AICPA Statement of Position 98-1 “ Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ” and EITF No. 97-13 “ Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation ”.

NOTE E – AMENDMENT OF BANK LOAN AGREEMENT

On March 12, 2009, we entered into a Consent and Amendment to Loan and Security Agreement (the “Amendment”) with Bridge Bank, which amends certain terms and conditions of the Loan Agreement.  Pursuant to the Amendment, ALOT (formerly dba MIVA Direct) became a borrower under the Loan Agreement and granted a general security interest in its assets to Bridge Bank.  The Amendment further provided Bridge Bank’s consent to the MIVA Media Sale, provided that the Company was required to repay immediately, out of the proceeds of the MIVA Media Sale, all outstanding advances plus any accrued interest under the Loan Agreement in the amount of approximately $4.4 million.  In addition, no further advances under the Loan Agreement will be made until the parties have agreed upon new terms and conditions for borrowing. As a result, during the three months ended June 30, 2009 we recognized approximately $0.6 million of unamortized loan costs related to the Loan Agreement as additional financing costs in general and administrative expense. The Amendment also provides that the letter of credit for the benefit of Perot Systems in the remaining amount of $0.35 million issued by Bridge Bank be secured by a cash deposit.  Perot Systems had drawn $0.7 million as of June 30, 2009.  The cash deposit for the remaining $0.35 million to be drawn is included in restricted cash in the accompanying condensed consolidated balance sheet.

 

 

NOTE F – DEPARTURE OF COMPANY EXECUTIVES

There were no significant departures of company executives in the 3 months ending June 30, 2009.

NOTE G – RESTRUCTURING

Restructuring – June 2009

In June 2009, approximately $0.2 million in severance payments were accrued as restructure reserve and are included in gain from discontinued operations during the quarter ended June 30, 2009.

Restructuring – March 2009

In March 2009, approximately $0.4 million in severance payments were accrued as restructure reserve and are included in loss from discontinued operations during the quarter ended March 31, 2009.  This amount is expected to be paid by April 2010.

Restructuring – August 2008 United Kingdom, Germany, France, and Spain Operations

On August 21, 2008, the Company initiated a restructuring plan that further consolidated the MIVA Media EU operations primarily in one office.  The restructuring plan, which evolved to include a workforce reduction of approximately 40 employees and cash payments totaling approximately $2.1 million, is expected to be completed by September 2009.  The restructuring plan resulted in the closure of our offices in Germany, reductions in headcount in our offices in Paris, Madrid and London, and exiting certain contractual relationships with third party contracts.  

Restructuring – June 2008

On June 17, 2008, the Company initiated a restructuring plan in order to maximize efficiencies within the Company, eliminate certain unprofitable operations, and better position the Company for the future, including the closure of our MIVA Media Italian operations. Management developed a formal plan that included the identification of a workforce reduction totaling 30 employees and cash payments totaling approximately $1.0 million that was completed in February 2009.

Restructuring - February 2008

On February 19, 2008, the Company announced a restructuring plan aimed at continued reduction of the overall cost structure of the Company, which was designed to align the cost structures of our U.S. and U.K. operations with the operational needs of these businesses.  Management developed a formal plan that included the identification of a workforce reduction totaling 8 employees, all of which involved cash payments of approximately $0.1 million made in the quarter ended June 30, 2008.

All actions under the February 19, 2008, restructuring plan were completed by March 31, 2008.  All actions under the June 17, 2008, restructuring plan were completed by February 2009.  All actions under the August 21, 2008, restructuring plan are expected to be completed by September 2009. All actions under the March 12, 2009, restructuring plan are expected to be complete by April 2010. All actions under the June, 2009 restructuring plan are expected to be completed in 2010.

NOTE H – IMPAIRMENT OF GOODWILL AND OTHER INTANGIBLES

In accordance with SFAS No. 142, “ Goodwill and Other Intangible Assets ,” goodwill and other intangible assets with indefinite lives are tested for impairment annually and when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment charges are required to be recorded when the carrying amount exceeds fair value.  In performing this assessment, we compare the carrying value of our reporting units to their fair value.  Quoted market prices in active stock markets are often the best evidence of fair value; therefore, a significant decrease in our stock price could indicate that an impairment of goodwill exists. We have experienced significant impairment losses in previous years and as of June 30, 2009, we have no remaining goodwill and or other indefinite life intangible assets.

During the fourth quarter of 2008, in connection with our annual impairment testing, we performed a step 1 impairment test of our two reporting units, Searchfeed and ALOT, with remaining recorded indefinite lived intangible assets and goodwill for potential impairment.  The fair value estimates used in the initial impairment test were based on market approaches and the present value of future cash flows.  As a result of this analysis, we determined that the estimated fair value of the reporting units exceeded their carrying values and could result in potential impairment.  We then performed an assessment of the long-lived assets of our Searchfeed and ALOT divisions and determined these assets were impaired under the provisions of SFAS No. 144.  Accordingly, in the fourth quarter of 2008, we recorded approximately $2.9 million in non-cash impairment charges to reduce the carrying value of the remaining long-lived tangible and intangible assets to their estimated fair values.  We then performed a step 2 impairment test to determine if the remaining carrying values of recorded goodwill and other indefinite lived intangible assets in these divisions was impaired under the provisions of SFAS No. 142. The step 2 impairment test resulted in a non-cash impairment charge of $14.7 million and $1.1 million, respectively, to reduce the carrying value of goodwill and other indefinite lived intangible assets to their implied fair value.  As a result of these impairment charges, the carrying value of all of the Company’s goodwill and other indefinite lived intangible assets was reduced to zero as of December 31, 2008.

We will continue to assess the potential of impairment for other long-lived assets in future periods in accordance with SFAS 144. Should our business prospects change, and our expectations for acquired business be further reduced, or other circumstances that affect our business dictate, we may be required to recognize additional impairment charges

NOTE I – ACCOUNTING FOR SHARE-BASED COMPENSATION

For the three months ended June 30, 2009 and 2008, our share-based employee compensation expense consisted of stock option expense of $0.05 million and $0.17 million, respectively, and restricted stock unit (“RSU”) expense of $0.19 million and $0.47 million, respectively.  For the six months ended June 30, 2009 and 2008, our share-based employee compensation expense consisted of stock option expense of $0.11 million and $0.34 million, respectively, and restricted stock unit (“RSU”) expense of $1.1 million and $1.0 million, respectively.  The stock option expense and the RSU expense totals for the six months ended June 30, 2009 include approximately $0.7 in accelerated stock-based compensation expense resulting from the vesting of certain stock options and RSUs related to two former officer’s resignations in March 2009.  Stock option activity under the plans during the six months ended June 30, 2009, is summarized below (in thousands, except per share amounts):

 

 

The following table summarizes information as of June 30, 2009, concerning outstanding and exercisable stock options under the plans (in thousands, except per share amounts):

 

As of June 30, 2009, unrecognized compensation expense related to stock options totaled approximately $0.1 million, which will be recognized over a weighted average period of 0.5 years.  The fair value of the stock options is estimated at the date of the grant using the Black-Scholes option-pricing model.  No stock options were granted during the three month or six month periods ended June 30, 2009 and 2008.   

In January 2009, we issued restricted stock units with service based vesting provisions (4 year vesting in equal increments), and market condition performance based restricted stock units that vest upon the Company’s common stock reaching, and closing, at a share price at or exceeding $1.00 per share, for ten consecutive trading days. 

In January 2008, we issued restricted stock units with service based vesting provisions (4 year vesting in equal increments), and market condition performance based restricted stock units that vest upon the Company’s common stock reaching, and closing, at a share price at or exceeding $4.00 per share, for ten consecutive trading days. 

In January 2007, we issued restricted stock units with service based vesting provisions (4 year vesting in equal increments), and market condition performance based restricted stock units that vest in equal tranches upon the Company’s common stock reaching, and closing, at share prices at or exceeding $6.00, $8.00, $10.00, and $12.00, respectively, for ten consecutive trading days.  In June 2007, all criteria were satisfied for the $6.00 tranche level of restricted stock units and accordingly 86,412 shares attributable to the achievement of the $6.00 performance criteria were issued.

 

 

The fair value of our service based restricted stock units is the quoted market price of the Company’s common stock on the date of grant.  Further, we utilize a Monte Carlo simulation model to estimate the fair value and compensation expense related to our market condition performance based restricted stock units.  The Company recognizes stock compensation expense for options or restricted stock units that have graded vesting on the graded vesting attribution method.

New stock options granted and new restricted stock units granted with related expenses for the three and six months ended June 30, 2009 and 2008, are summarized below (in thousands):

For the three and six months ended June 30, 2009 and 2008, the following assumptions were used to estimate the fair value and compensation expense of our performance based restricted stock units with market based conditions:

 

The restricted stock unit (“RSU”) activity for the three and six months ended June 30, 2009, is summarized below (in thousands):

 

NOTE J – INTANGIBLE ASSETS

As a result of our fourth quarter 2008 impairment of goodwill and other indefinite lived intangible assets to their implied fair value, all of the Company’s goodwill and other indefinite lived intangible assets were reduced to zero as of December 31, 2008.

 

 

NOTE K – EQUITY AND PER SHARE DATA

We incurred a net loss from continuing operations for the three months ended June 30, 2009.  As a result, potentially dilutive shares are not included in the calculation of Earnings per Share because to do so would have an anti-dilutive effect on the loss per share.  Had we not recorded a loss, certain exercisable stock options would have been excluded from the calculation of Earnings per Share because option prices were greater than average market prices for the periods presented.  The number of stock options that would have been excluded from the calculations was 1.3 million shares with a range of exercise prices between $1.00 and $23.14 as of June 30, 2009.

The following is the number of shares used in the basic and diluted computation of loss per share (in thousands):

 

NOTE L – LEGAL PROCEEDINGS

Shareholder Class Action Lawsuits

Beginning on May 6, 2005, five putative securities fraud class action lawsuits were filed against us and certain of our former officers and directors in the United States District Court for the Middle District of Florida.  The complaints allege that we and the individual defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the "Act") and that the individual defendants also violated Section 20(a) of the Act as "control persons" of Vertro, Inc.  Plaintiffs purport to bring these claims on behalf of a class of our investors who purchased our stock between September 3, 2003 and May 4, 2005. 

Plaintiffs allege generally that, during the putative class period, we made certain misleading statements and omitted material information.  Plaintiffs seek unspecified damages and other relief.

On July 27, 2005, the Court consolidated all of the outstanding lawsuits under the case style In re MIVA, Inc. (now known as Vertro, Inc.) Securities Litigation, selected lead plaintiff and lead counsel for the consolidated cases, and granted Plaintiffs leave to file a consolidated amended complaint, which was filed on August 16, 2005.  We and the other defendants moved to dismiss the complaint on September 8, 2005.

On December 28, 2005, the Court granted Defendants’ motion to dismiss.  The Court granted Plaintiffs leave to submit a further amended complaint, which was filed on January 17, 2006.  On February 9, 2006, Defendants filed a renewed motion to dismiss.  On March 15, 2007, the Court granted in large part Defendants' motion to dismiss.  On March 29, 2007, Defendants filed a motion for amendment to the March 15, 2007, order to include certification for interlocutory appeal or, in the alternative, for reconsideration of the motion to dismiss.  On July 17, 2007, the Court (1) denied the motion for amendment to the March 15, 2007, order to include certification for interlocutory appeal and (2) granted the motion for reconsideration as to the issue of whether Plaintiffs pled a strong inference of scienter in light of intervening precedent.  The Court requested additional briefing on the scienter issue, and on February 15, 2008, entered an Order dismissing one of the individual defendants from the lawsuit and limiting the claims that could be brought against another individual defendant.  In addition, Plaintiffs previously had moved the Court to certify a putative class of investors, and Defendants had filed briefs in opposition thereto.  On March 12, 2008, the Court entered an Order certifying a class of those investors who purchased the Company's common stock from February 23, 2005, to May 4, 2005.  The Court also dismissed two of the proposed class representatives for lack of standing.

Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management's attention and resources, and other factors.

 

 

Derivative Stockholder Litigation

On July 25, 2005, a shareholder, Bruce Verduyn, filed a putative derivative action purportedly on behalf of us in the United States District Court for the Middle District of Florida, against certain of our directors and officers.  This action is based on substantially the same facts alleged in the securities class action litigation described above.  The complaint is seeking to recover damages in an unspecified amount.  By agreement of the parties and by Orders of the Court, the case was stayed pending the resolution of Defendants’ motion to dismiss and renewed motion to dismiss in the securities class action.  On July 10, 2007, the parties filed a stipulation to continue the stay of the litigation.  On July 13, 2007, the Court granted the stipulation to continue the stay and administratively closed the case pending notification by plaintiff’s counsel that the case is due to be reopened.  Regardless of the outcome, this litigation could have a material adverse impact on our results because of defense costs, including costs related to our indemnification obligations, diversion of management's attention and resources, and other factors.

Lane’s Gifts and Collectibles Litigation

As previously disclosed we entered into an agreement with the plaintiffs to settle this case in January 2008 and received court approval in April 2008.  Under the settlement agreement, all claims against us, including our indemnification obligations to a co-defendant, were dismissed without presumption or admission of any liability or wrongdoing.  Pursuant to the agreement, we established a settlement fund of $3,936,812, of which $1,312,270 was accrued as litigation settlement expense as of December 31, 2007 and paid, in June 2008, for plaintiffs’ attorneys’ fees and class representative incentive awards, and the balance is in advertising credits relating to the class members’ advertising spending with us during the class period.   Advertising credits will be recorded as reductions to revenues in the periods they are redeemed.   For the three months ended March 31, 2009, approximately $1,744 in advertising credits were redeemed.  Subject to the terms of the advertising credits, Adknowledge, the purchaser of the MIVA Media Division, will redeem the advertising credits on an ongoing basis and, subject to a threshold, we have agreed to reimburse Adknowledge for expenses associated with the advertising credits.

 

Other Litigation

We are a defendant in various other legal proceedings from time to time, regarded as normal to our business and, in the opinion of management, the ultimate outcome of such proceedings are not expected to have a material adverse effect on our financial position or our results of operations.

No accruals for potential losses for litigation are recorded for the above referenced items as of June 30, 2009, and although losses are possible in connection with the above litigation, we are unable to estimate an amount or range of possible loss, in accordance with SFAS 5, but if circumstances develop that necessitate a loss contingency being disclosed or recorded, we will do so.  We expense all legal fees for litigation as incurred.

NOTE M– COMMITMENTS AND CONTINGENCIES

Operating Leases

Our primary administrative, sales, customer service, and technical facilities are in a leased office facility in New York, New York.  Our New York office is approximately 10,700 square feet and the lease expires in January 2016.  We also lease an office in Fort Myers, Florida, that served primarily as our headquarters and operations center for MIVA Media.  The total space under our Fort Myers lease is approximately 42,000 square feet and expires in November 2012.  We sublease portions of our Fort Myers facility as set forth below. 

On September 10, 2008, we entered into an operating lease agreement with an unrelated third party to lease work space for our London office for the term of 12 months commencing on December 1, 2008.  The agreement includes a right to three month renewals.  Base rent is approximately $0.3 million per year.  As part of the MIVA Media Sale this agreement was licensed to the buyer.

 

 

Sublease Income

In March 2009, in conjunction with the MIVA Media Sale, we licensed one floor in our office located in Fort Myers, Florida (approximately 10,940 square feet) to the buyer with the intent to convert into a sublease agreement upon receipt of landlord consent.  The term of the license agreement commenced on March 13, 2009, and it is expected to end on November 30, 2012.  The sublease payments are expected to be received ratably over this term.

In August 2007, we entered into a real estate sublease agreement with an unrelated party to sublease 20,171 square feet (approximately 50% of our space) in our office located in Fort Myers, Florida.  The term of the sublease agreement commenced on August 17, 2007 and ends on November 30, 2012, unless certain conditions (as defined) are met for earlier   termination.

The above subleases represent a significant portion of our office space in Fort Myers, Florida and our financial position would be harmed if our subtenants breach the terms of our sublease.   The commercial real estate market in Fort Myers, Florida has suffered significant decline in recent years.  If our subtenants breach our sublease it is unlikely that we could locate substitute tenants.  Additionally, we may not be able to collect damages from our subtenants if the subleases are breached.  If the subleases are breached it would have a material adverse impact on our financial condition.

Capital Leases

In September 2008, we entered into non-cancelable leases with unrelated third parties for software and related maintenance, and hardware, for our new Transformation Project.  The total fair market value of this software was approximately $1.0 million with a lease term of nineteen months. The software lease has an imputed interest rate of 9% with quarterly cash outlays of approximately $0.2 million.  The total fair market value of the hardware was approximately $1.1 million with a lease term of three years. The hardware lease has an imputed interest rate of 12.0%. As a result of the MIVA Media sale the hardware lease was assigned to Adknowledge, therefore the related capital lease obligation of approximately $0.7 million has been removed from condensed consolidated balance sheet as of March 31, 2009.  As of June 30, 2009 the software lease was assigned to Adknowledge and the related liability of approximately $0.3 million that had been recognized by Vertro was released and recognized as gain on sale as described in Note C.

Guaranteed Royalty Payments

As a part of our Media Division operations, we have minimum contractual payments on a royalty bearing non-exclusive license to certain Yahoo! patents payable quarterly through August 2010.  Our rights and minimum payment obligations under this agreement were not assigned to or assumed by Adknowledge as part of the MIVA Media Sale. Therefore, since we are no longer operating the MIVA Media business, these remaining minimum payments of approximately $1.0 million due by us under the agreement were accrued as of June 30 , 2009 and included as a loss from discontinued operations in that period.