-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OCRKgU1WVR4VMWoD6zWIkYRqAWlKn55vrv8CKUJ3GdoCg0TK2mj/WuO3tjDFXwpG bXWj7Sbl4Vdx4eTgCp9Y9A== 0000950134-99-002361.txt : 19990402 0000950134-99-002361.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950134-99-002361 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOUSA INC CENTRAL INDEX KEY: 0000879437 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DIRECT MAIL ADVERTISING SERVICES [7331] IRS NUMBER: 470751545 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19598 FILM NUMBER: 99581165 BUSINESS ADDRESS: STREET 1: 5711 S 86TH CIRCLE CITY: OMAHA STATE: NE ZIP: 68127 BUSINESS PHONE: 4025934500 MAIL ADDRESS: STREET 1: 5711 SOUTH 86TH CIRCLE CITY: OMAHA STATE: NE ZIP: 68127 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN BUSINESS INFORMATION INC /DE DATE OF NAME CHANGE: 19930328 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-19598 --------------------- INFOUSA INC. (Exact name of registrant as specified in its charter) DELAWARE 47-0751545 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127 (Address of principal executive offices) (402) 593-4500 (Registrant's telephone number, including area code) --------------------- Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $0.0025 PAR VALUE CLASS B COMMON STOCK, $0.0025 PAR VALUE SERIES A PREFERRED SHARE PURCHASE RIGHTS SERIES B PREFERRED SHARE PURCHASE RIGHTS --------------------- 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. [ ] 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 [X] No [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Class A Common Stock and Class B Common Stock on March 9, 1999 as reported on the NASDAQ National Market System, was approximately $114 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Class A Common Stock or Class B Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 9, 1999 registrant had outstanding 24,228,875 shares of Class A Common Stock and 23,907,875 shares of Class B Common Stock. DOCUMENTS INCORPORATED BY REFERENCE The Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 2, 1999, which will be filed within 120 days of the end of fiscal year 1998, is incorporated into Part III hereof by reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 including, without limitations, statements related to potential future acquisitions and the Company's strategy and plans for its business contained in Item 1 "Business," Item 2 "Properties" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs, and certain assumptions made by the Company's management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth herein under "Factors That May Affect Operating Results," as well as those noted in the documents incorporated herein by reference. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents the Company files from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. ITEM 1. BUSINESS THE COMPANY infoUSA Inc. (the "Company") is a leading provider of information on 11 million U.S. and Canadian businesses and 195 million U.S. residents which the Company believes are among the most comprehensive and accurate available. The Company leverages these key assets by selling a broad range of products and services through multiple distribution channels to businesses and consumers. Businesses use the products and services for a host of things, including: finding sales leads, conducting direct mail and direct marketing campaigns, qualifying prospects using business credit reports, creating custom databases, performing marketing research, and database marketing and direct marketing applications. The products and services also have a wide range of uses for consumers including: locating family and friends; updating holiday lists, finding places to stay when traveling, assisting with a job search; and a variety of other reference purposes. The Company was originally incorporated in Nebraska in 1972, and was reincorporated in Delaware in 1992. INDUSTRY BACKGROUND Every business no matter how large or small has three main components to their business: 1. The products and services they are manufacturing or creating. 2. The actual selling process. 3. The accounting and financial functions. As the businesses grow, these components become larger and more complex, but the basic structure does not change. The selling process in every business requires information -- such as analysis of present customers, finding new customers, knowing more about prospective customers, and determining creditworthiness. The information provided by the Company's databases is an integral part of the decision making process. STRATEGY The Company's objective is to be the leading provider of business and consumer information in the United States and Canada and produce innovative products and services to meet the needs of businesses and consumers. The Company believes that its success is dependent upon the success of three critical aspects of the business: 1. Increasing and enhancing the proprietary content of our databases, 2. Continuing to create new products and services to meet the needs of our diverse customer base, and 3. Expanding our broad distribution channels to serve our customers effectively and efficiently, and exploit the future potential of the Internet. 1 3 The company focuses on selling its lead generation products to small and medium size businesses while marketing reference products to consumers and more complete solutions to larger corporations. The Company believes that it effectively competes in the business and consumer marketing information industry by exploiting its competitive strengths. These strengths include the Company's accurate and comprehensive databases and its ability to leverage these databases by providing customers with the specific data they need in a variety of formats through targeted distribution channels. Key elements of the Company's growth strategy include: Expand and Enhance the Proprietary Business Database. The Company continues to invest substantial time and resources to maintain the quality and increase the depth of its proprietary business database, which it believes contains the most comprehensive and accurate business marketing information in the United States and Canada. The Company is continually looking to expand the information contained on its databases with useful, high quality data. In addition, the Company makes over 20 million telephone calls every year to verify the accuracy of the records in the business database. Leverage the Databases. The Company continues to leverage its business database by introducing new products and delivery formats to strengthen its competitive advantage in the business marketing information industry. The Company sells a wide range of pre-packaged and customized information products tailored to specific customer requirements on a variety of delivery formats through targeted distribution channels. The Company distributes its products and data processing services through direct mail, telemarketing, field sales offices, national accounts sales teams, retail outlets and information resellers. In the past year, the Company has dedicated resources to respond to changes in information technology by introducing new product delivery formats, including delivery over the Internet and by incorporating DVD formats into some of the CD-ROM products. There can be no assurance that the Company will be successful in responding to such technological changes. The Company prices its products and services based on the type, amount and format of the information provided to create an attractive solution for its customers. Increase Recurring Revenue. The databases change continuously throughout each year, so the Company believes that frequent updates are important to our customers. The Company seeks to increase recurring revenue in a number of ways. The Company encourages repeat purchases of its information products by offering annual editions of its directories and monthly subscription updates. The Company generates recurring revenue from royalties by licensing its databases to other information providers and large corporations for internal use. In addition, the Company sells its data processing services to large corporations with ongoing information service requirements, and subsequently seeks to sell its information products to these clients. Broaden Distribution Channels through the Internet. The Company continues to exploit the Internet distribution channel to expand its potential market of approximately 40 million households, entrepreneurs, and small business owners. For example, www.infoUSA.com, the Company's corporate web site transitioned from the testing stage to becoming a viable and profitable distribution channel during 1998. The Internet offers a variety of revenue sources for the Company, including licensing royalties, e-commerce, other information (non-proprietary) content sales, and advertising revenue opportunities. The site generates nearly 1 million hits per day, and strategic partnerships with other Internet service providers continues to grow the traffic visiting our site. The Company is still in early stages of developing its Internet strategy and there is no assurance that the Company will be successful in this new market. Enhance Product and Service Offerings Through Strategic Acquisitions. Since mid-1996, the Company has completed nine acquisitions that increased its presence in the consumer marketing information industry, greatly increased its ability to provide data processing solutions, added two consumer CD-ROM product lines and broadened its offerings of business marketing information. The Company believes that there are further opportunities to add to its product and service offerings and to expand its distribution channels through strategic acquisitions. However, there can be no assurance that the Company will be able to successfully complete future acquisitions or integrate acquired businesses into its operations. Business Credit Products. The Company now offers Business Credit Directories for all 50 states, and Business Credit Profiles at $5 each. These are available for purchase on our corporate web site, as well as through a dedicated sales division. Customers have been very receptive to these products, and they represent an attractive, useful, and cost effective alternative to other credit reference products currently available. 2 4 Monthly Updates. Because the databases continuously change throughout each year, our customers have a need for frequent updates on the records they purchase from the Company. The Company continues to enhance the subscription program which provides customers with a prospect database and monthly updates. Enhancements include new delivery alternatives including fax and Internet upon request. DATABASES The Company believes its Business and Consumer databases are among the most comprehensive and accurate in the United States, and the maintenance and development of these databases will be critical elements of the Company's continued success. The Company continually updates its Business database to reflect the formation of new businesses, entities going out of business, and changes relating to existing businesses, new officers and new lines of business. The Company continually updates its Consumer database to reflect changes in household composition, age, income, homeownership, and lifestyle information on over 115 million households and 195 million individuals in the United States. During 1998, the Company incurred direct costs totaling approximately $48 million to create, maintain and enhance its databases, maintain data center operations, and perform data processing services. This total excludes costs associated with administrative overhead costs, building and equipment costs, interest expense, and depreciation and amortization expense. Business Database. The Company's proprietary business database contains information on over 11 million businesses in the United States and Canada. The Company maintains its data in a data warehouse, which can be segmented into data segments. Some of the data segments are Small Business Owners, Small Business Owners at Home, Big Businesses and their Corporate Affiliations, Growing Businesses, and Female Business Owners. Additionally, vertical industry data segments are created such as Physicians and Surgeons, Schools, Restaurants, Places of Interest, Importers/Exporters, and Government Offices. The Company compiles the business information from over 15,000 sources. Some sources, such as the yellow pages, telephone directory white pages, and chamber directories, are used to identify businesses for inclusion in the database. Other sources such as primary telephone research surveys are used to enhance the database with key data elements like number of employees, estimated sales/output volume and year established. Additional sources, such as, annual reports, SEC filings and public filings, are used to update the database with lawsuits, liens, judgements, bankruptcies, headline news, commercial debtor data, changes in leadership, changes of address, changes of corporate affiliations, and the like. In addition, the Company updates and maintains its business database using information licensed from the United States Postal Service's National Change of Address (NCOA) and Delivery Sequence File (DSF). The Company compiles the information in the business database using five key processes: 1) Routine compilation from core sources to validate the ongoing existence of businesses and identification of new businesses, 2) Event driven compilation from sources identifying new business formations, business moves, mergers and acquisitions, or other business events, which could have substantial impact on the profile of the business, 3) Primary telephone research to verify and enhance business information, 4) Public data and models updated with each file refresh, and 5) Data Validation performed nightly and monthly to assure the highest quality product creation. Each business entry contains, where available: name of business, contact person, street address, city, state, area code and telephone number, fax number, SIC code, NAICS code, product brands sold by businesses, franchises, professional specialties, yellow page classification, size of yellow page advertisement, year of first appearance in the yellow pages, zip code, carrier route, county code, population code and metropolitan statistical area, and the latitude/longitude coordinates. The Company's proprietary automated and predictive dialing system allows custom scripts for both the size of the company and its industry. The Company's business database requires extensive ongoing attention to detail and data quality. The Company maintains a dedicated staff of both data analysts and systems analysts, who continually enhance the business rules used in the software to create and maintain the database. The business rules embedded in the compilation software are also used in product creation to assure the Company's customers derive full value from the business data. The Company's computer systems allow a work force of approximately 400 employees to compile, telephone verify, analyze, model, and perform continuous data validation. 3 5 Over the next year, the Company plans to enhance the proprietary software programs operating the data center will be enhanced to incorporate near real-time data feeds and to deploy data updates to subscribing customers in a near real-time fashion via the Internet or e-mail. However, if these modifications cause disruptions in the Company's software or do not perform as anticipated, there could be a material adverse effect on the Company's business, financial condition and results of operations. New Business Database. The Company monitors and compiles information on newly formed businesses throughout the United States by checking state filings, business licenses and county courthouse documents. The Company verifies and sells the data to allow clients to contact potential new customers as soon as possible then incorporates the information into its core business database. Medical Databases. The Company maintains and markets a specialized database on physicians and surgeons. The physicians and surgeons database contains information on over 575,000 physicians and surgeons nationwide. The database is compiled from third party sources and contains information on age, gender, professional school, practice information, specialties, and personal interests. Consumer Database. The Company's consumer database has emerged over the last year to be among the most comprehensive and accurate in the United States. The Company begins with its own compilation of all households from telephone directories. This core data source is compiled with greater accuracy and timeliness than most others using this base source. The white page file is then enhanced with over 1 billion records licensed from third parties to add individuals not listed in the telephone directories and to add the demographic and psychographic data required to segment consumer prospects. The end result is a database of 115 million households, 195 million individuals, 57 million homeowners, 1 million monthly new movers, and 50 million mail order purchasers. The consumer database also includes information in over 70 categories of demographic information including age, income, marital status, gender, presence of children in households, credit card information, mortgage data, vehicle information, recent changes of address and lifestyle selections. PRODUCTS AND SERVICES From its databases of 11 million businesses in the U.S. and Canada and 115 million households in the U.S. the Company produces products such as prospect lists, mailing labels, 3 x 5 cards, diskettes, printed directories, CD-ROMs, Business Credit Reports, and many other products and services. The Company's products and data processing services are used by customers for activities such as identifying and qualifying prospective customers, initiating direct mail programs, telemarketing, analyzing and assessing market potential, monitoring the effectiveness of marketing efforts and surveying competitive markets. The Company distributes its products and data processing services through distribution channels outlined in the Sales and Marketing section of this report. The Company is organized around two customer segment groups: Small Business and Consumer Markets Group and the Large Business Customers Group. The Company's products and services are designed for the unique needs of each group. SMALL BUSINESS AND CONSUMER MARKETS GROUP. This group concentrates on the needs of small to medium size businesses, small office and home office businesses, aspiring entrepreneurs, and individual consumers. The group is managed from the Company's Omaha headquarters, and the product fulfillment is handled by a dedicated facility in Carter Lake, Iowa. The Company's products and services help small businesses and consumers analyze their existing customers, identify new markets, and grow their businesses. The products are also used to locate suppliers, look up business credit profiles, and for other marketing and reference purposes. The products allow businesses to "slice and dice" their existing customer base, gain insight about who their best customers are, and identify potential new markets. For example, a customer can identify all used car dealers and body shops with sales in excess of $1 million and who have been in business more than 5 years in selected ZIP codes, or generate a list of all businesses with less than 10 employees and who have been in business for more than 10 years in a county. From this starting point, the products can be further tailored and output in a format that best suites the customer's needs (i.e. for use in direct mail, telemarketing, lead generation for direct sales, etc.). The accompanying notes to the consolidated financial statements include segment financial information for the small business and consumer markets group. Prospect Lists, Mailing Labels, and Sales Lead Products. The Company's customized sales lead generation products, which include hard copy prospect lists, sales leads cards, mailing labels, diskettes and mapping products, 4 6 are used by customers who ask the Company to generate specific information for them. The Company produces its sales lead generation products using a combination of customized sorting criteria to meet the customer's specific marketing objectives. The Company's sales and marketing consultants work with a variety of prospective customers to help them specify sorting criteria that will produce marketing information materials. The resulting products are customized for each customer's needs, and the Company's representatives guide the customers in understanding how this information can be used. Generally, sales lead generation products are priced on a per name basis, which varies according to the number of names supplied, the type of information required, and the delivery format selected. Monthly Updates: The Company offers a subscription program that provides customers with a prospect database and monthly updates including new leads for the market area, changes to the original database, and a list of companies that have gone out of business. The Company sells Monthly Updates to small, medium and large businesses who use the monthly new prospect updates to acquire new customers, expand into new markets and replace lost customers. Customers pay an up-front fee for the initial database of requested information and additional monthly subscription fees for the updates. Business Directories and CD-ROM Products: The Company's printed business directories are bundled with CD-ROMs and include such titles as Business USA, Business Canada, State Business Directories, American Manufacturers Directory, Big Business Directory, Entrepreneurs Directory, and Physicians & Surgeons Directory. In addition, the Company also sells a number of business directories on CD-ROM only, including titles such as Households USA, Professionals, Female Executives, and Small Business Owners. The Company sells these directories to businesses who use them for lead generation, telemarketing, and reference purposes, and are attracted to the directories for their affordability, convenience and reference value. The printed directories are useful for reference, while the CD-ROM products allow users to sort, search, and print marketing information. Purchasers of business directories subscribe to them on an annual basis. For CD-ROM products, an annual license fee enables a customer to access and use a specified number of names. Proprietary metering technologies for CD-ROM products require purchasers to pay an additional fee to download additional names and prevent purchasers from using the product beyond one year after the installation date. Business Credit Directories: The Company's business credit directories include a printed directory bundled with a CD-ROM. The product is used by customers for decision making, verifying company information, assisting in collection support, and identifying potential new customers. The directories are available by individual states, multi-state regions, the entire U.S., and Canada. Pricing for this product is similar to the other business directory products outlined above. Customers can also buy Business Credit Reports for $5 each on the Internet, and over the phone and fax. Directory Assistance+Plus/Business Credit Reports: For busy executives and people on the road, the Company sells its information, Directory Assistance+Plus, over the phone. The Company prices its telephone information services on a subscription basis. Business Credit Reports can be purchased individually, or on a subscription basis. Consumer CD-ROM Products: The Company's consumer CD-ROM products include titles such as 104 million businesses and Households, Streets USA, American Yellow Pages, 88 million Households, 2 million Fax Number Directory, Powerfinder, Powerfinder Pro, and Select Phone. These products can be used on personal computers as an affordable way to find addresses and phone numbers of businesses and consumers anywhere in the country. CD-ROM products are sold through over 5,000 retail outlets in North America, including OfficeMax, Office Depot, Staples, CompUSA, and Best Buy. The Company also has over 1.5 million registered users that it targets using direct mail and telemarketing. Database Marketing and Data Processing Services: Although analytical and data processing services have historically been utilized by larger companies, the Company offers these services to smaller business customers. An example is the customer profile analysis which is available for free, and allows small business customers to gain valuable insights about their existing customer base. The Company continues to develop and introduce a variety of analytical and data processing services to meet the needs of the smaller business customer. Internet Content Users consist of small office and home-based businesses, entrepreneurs, and individuals who access our products and services primarily through our Company web site www.infoUSA.com. Our site allows businesses and consumers to define a target market, retrieve a count of the number of businesses in a particular 5 7 market, or obtain a credit profile on a particular company. The Company sells customers lists and business profiles over the Internet on a per name or per profile basis. The Internet represents a new and rapidly evolving potential market for the Company's information products and data processing services. If the Company is unsuccessful in selling its products and services over the Internet, or fails to respond to changes in the Internet market in a timely manner, the Company's business, financial condition and results of operations could be materially and adversely effected. LARGE BUSINESS CUSTOMERS GROUP. The large business customer group is focused on developing and maintaining relationships with large corporations by providing databases, data processing services, and database marketing solutions. This group is headquartered in Montvale, New Jersey. The Company's database marketing services, direct marketing and analytical services, database licensing agreements, and information content sales to corporate clients are managed primarily by dedicated national account sales teams, who work with the same clients on an ongoing basis. The Company prices these various services on an annual license basis, depending upon the nature of the services provided. The accompanying notes to the consolidated financial statements include segment financial information for the large business customers group. Licensing of Database to Value Added Resellers: The Company licenses its databases to value added resellers who pay the Company royalties for the use of its information. The customers who license the databases use the information for a wide range of purposes, including national directory assistance services, the creation of mapping products and services, and for global positioning satellite (GPS) in-car navigation systems. Database Marketing Services: Database marketing involves the use of sophisticated statistical methodologies to segment customers, glean insight about customer characteristics, and identify the best prospective markets. The Company offers a variety of market research services, including customer and market profile analyses, market segmentation reports, statistical marketing reports, list enhancements to update a customer's in-house database, computerized name search service, and other analytical tools and reports. Direct Marketing Services: The Company offers a full range of direct marketing services to help customers turn their in-house databases into a more powerful marketing tool. This includes cleaning and standardizing their in- house databases and enhancing the value of their customer files by appending additional data. Examples of the types of services offered include "merge-purge" services, which involves merging data from multiple sources and purging out duplicative and erroneous data. List enhancement is the process of appending additional data to a customer file to provide a better description of the customer. National Change of Address (NCOA) processing helps companies maintain an accurate, up-to-date file of customer addresses which minimizes the number of mail pieces which cannot be delivered. The Company sells its direct marketing services primarily to large corporations, many of which use these services on an ongoing basis, providing a steady stream of revenue. Licensing the Database for Internet Directory Assistance service: Most Internet providers offering national white page and yellow page services license the database from the Company. Licensees (including Microsoft, InfoSpace, Yahoo! Netscape, GTE, and others) pay the Company royalties to use the Company's databases on their web sites. Internet users access these sites for directory assistance, finding individuals in the white pages or businesses in the yellow pages. In addition, most of these Internet sites provide a link to the Company's web site, allowing potential customers to purchase additional products or services directly from the Company. The Company's directory assistance information over the Internet is free. SALES AND MARKETING The Company markets and sells its information products and data processing services directly through direct mail, telemarketing, field sales offices and national accounts sales teams, the Internet, and indirectly through distribution channels such as value-added resellers and retail outlets. The sales and marketing channels used by the Company vary by product. Sales lead generation products are sold through direct mail, telesales, field sales offices and national accounts sales teams, and the Internet. Data processing services are sold primarily through national accounts sales teams. Consumer CD-ROM products are sold through direct mail, telemarketing and retail outlets, and the Company licenses its databases to information resellers and large corporations. Direct Mail: The Company has traditionally marketed to businesses through direct mail, in which the Company mails catalogs to prospective customers and processes orders by mail or by telephone. In 1998, the Company mailed more than 39 million catalogs, letters and other pieces of mail primarily to small and medium size 6 8 businesses. The Company sells its full line of sales lead generation products, including customer lists, mailing labels, directories, CD-ROM products, maps and credit reference guides, through direct mail. Direct mail marketing allows the Company to reach a large number of customers at relatively little cost, and generates a high volume of sales. Telemarketing: The Company sells its sales lead generation products and services through "outbound" telephone calls to small and medium size businesses. In 1998, the Company initiated more than 750,000 telephone contacts with past and prospective customers. Telemarketing allows the Company to contact dormant accounts, occasional purchasers and repeat customers to create a more consultative relationship between the client and the Company, and in turn to generate more frequent sales. Sales Force and Field Sales Offices: The Company's field sales offices sell the Company's full line of sales lead generation products and services though direct or telephone contact with small and medium size businesses, establishing consultative relationships at the local level. The Company believes that through field sales offices it can establish and maintain direct relationships with businesses that are otherwise unresponsive to direct mail and telesales contacts. As of December 31, 1998, the Company had field sales offices in 16 cities. The Company's national accounts sales teams establish ongoing relationships with larger corporations to sell data processing services, database marketing services, and information content sales. Data processing and database marketing services for these clients include generating mailing lists through merging and purging of databases, producing customer profiles and market analyses, managing and warehousing client data. After selling data processing services to large corporations, the Company seeks to sell its information products to these clients as well. Internet: The Company has established an Internet site, www.infoUSA.com, which allows businesses and consumers to perform a variety of tasks. Users can define a target market, retrieve a count of the number of businesses or consumers in a particular market, obtain a credit profile for a particular business, or purchase any of the company's business directory and CD-ROM reference products. Retail Sales: The Company sells it consumer CD-ROM products "off-the-shelf" to customers through over 5,000 retail outlets including computer software stores, office supply stores, convenience stores, pharmacies and supermarkets. The Company sells its consumer CD-ROM products principally through wholesale distributors and also directly to retail outlets. Database Licensing: The Company licenses its databases for distribution to on-line information providers such as InfoSpace, Microsoft, Yahoo!, Netscape, and GTE, and to large corporations for internal use. Licensees pay the Company royalties for the use of its information products. In addition, most of these on-line information services provide a link to the Company's World Wide Web site, allowing potential customers to purchase products or services directly from the company. COMPUTER OPERATIONS AND DATABASE PROTECTION The Company operates five data centers located in Omaha, Nebraska; Papillion, Nebraska; Carter Lake, Iowa; Montvale, New Jersey; and Greenwich, Connecticut. Business continuity is assured through the Company's use of these five separate data center locations. The Company can reestablish sales, marketing, production and administrative functions at a combination of the data center sites. The Omaha Data Center supports the Company's Sales Order Entry systems, Internet website systems, company enterprise systems (e.g. email, file servers) and company accounting systems. Sales Order Entry and accounting systems run on a midrange IBM AS/400 and four Sun UNIX platforms. The Internet website resides on a mixture of approximately twenty Sun UNIX platforms. Enterprise systems are driven by large-scale PCs running Microsoft NT. This center is also the home for network connectivity for desktop computers in the Omaha facility, four T1 Internet connections, and connectivity to the other data centers and remote offices. This center also contains a Nortel Option 81 PBX for telephone services within the facility. MCI and US West provide telephone service over redundant access points into the facility. The Omaha data center is protected by a fire suppression system and an uninterrupted power supply battery backup system. Business and financial data is backed up daily and stored off-site. The Company's Papillion Data Center contains the data compilation systems, enterprise support systems, and software development platforms. The compilation systems run on a IBM AS/400. Software development is done on 7 9 a mixture of three IBM AS/400s. Enterprise systems and scanning services are run on large-scale PCs running Microsoft NT. Network services to desktop computers and terminals and other data centers are supported in this center. Like the Omaha center, this center also contains a Nortel Option 81 PBX with redundant MCI and US West telephone service access points into the facility. A fire suppression system, an uninterrupted power supply battery backup system, and a diesel generator protect the Papillion center. Data is backed up daily and stored off-site. This facility is staffed with a team of over 150 Information Technology professionals. The Carter Lake Data Center is home to the business and consumer order fulfillment systems. Fulfillment computer services are provided by IBM AS/400s. Various high-end printers, CDROM, magnetic tape, and diskette devices are used here to produce the customer's product. A Nortel Option 11 PBX provides facility telephone services with connection to MCI and US West circuits. The Carter Lake center is protected by a fire suppression system and an uninterrupted power supply battery backup system. Data is backed up daily and stored off-site. This facility is staffed by 50 production, operations, and shipping professionals. The Company maintains its consumer database and analytical data processing capabilities at its Montvale Data Center. The data is regularly backed up and stored off-site. The Company has contracted with a third party to load and access its consumer database in the event of loss at the Montvale facility, and the Company believes that it could regenerate its analytical capabilities through the lease of computer equipment in less than two weeks. The Montvale Data Center houses three Mainframe class CPU's (two OS systems and one DOS), eight large midrange UNIX systems, a number of high-end PC network class machines, a large LAN PC network, a multitude of telecommunication equipment, and transport abilities supporting various protocols. The facility also maintains direct T1 connectivity to the Internet and a WAN connection to all other Company computer facilities. All midrange and mainframe class computers are used to service direct marketing needs to large and mid-sized clients, many in the fortune 500 marketplace. The mainframe class machines are used in every aspect of direct marketing computer services while the mid-range systems are used in a client server or three tiered architecture to house relational database marketing files. These systems service over 200 clients and are available to the Montvale staff of over 250 on a seven day a week, twenty-four hours a day basis. The Montvale facility services it's client with time tested proprietary direct marketing software as well as state of the art three tiered and client server open systems. Through these systems and services, along with Company owned databases, the Company provides a product that is not offered by many. Montvale houses a large data tape library with over 160,000 volumes of tape. While it is impossible to secure a secondary backup of a library of this size, all critical databases and system backups are sent offsite to a secure location with a third party contracted data and document security company. These 'backups' are secured on a daily basis. The Montvale facility maintains contracts with Comdisco for disaster recovery. In the event of a disaster, all on-line computer operations can be resumed within 48 hours, while other normal operations would resume within two weeks. The shear volume of data to be recovered is one of the largest concerns and time-consuming factors in the event of a disaster. The Greenwich Data Center is home to the Company's list brokerage and list management operations. The data center is fully sprinklered and protected by an uninterrupted power supply battery back up system. The Company is in the process of relocating certain operations located on the east coast. The Company is relocating certain personnel between the Montvale and Greenwich facilities, and is also going to relocate certain personnel from the Montvale and Greenwich sites to a new location in Park Ridge, New Jersey. The Company anticipates completing these relocations by August 1999. The Company is in the process of constructing a new facility located in Montebello, New York. Upon completion of the Montebello facility, the Company anticipates relocating a significant portion of its east coast operations, including personnel located at the Montvale, Greenwich and Park Ridge locations, to this new facility. The Company's computer operations include a mix of mainframe, midrange, server, and desktop systems. 8 10 INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS The Company regards its databases and software as proprietary. The Company's databases are copyrighted, and the Company depends on trade secret and non-disclosure safeguards for protection of its software. The Company distributes its products under agreements that grant customers a license to use the Company's products in the ordinary course of their businesses and contain terms and conditions prohibiting the unauthorized reproduction of the Company's products. In addition, the Company generally enters into confidentiality agreements with its management and programming staff and limits access to and distribution of its proprietary information. While there can be no assurance that the steps taken by the Company will be adequate to deter misappropriation of its proprietary rights or independent third party development of substantially similar products and technology, the Company believes that legal protection of its database and software is less significant than the knowledge and experience of the Company's management and personnel, and their ability to develop, enhance and market existing and new products and services. COMPETITION The business and consumer marketing information industry is highly competitive. Many of the Company's principal or potential future competitors are much larger than the Company and have much larger capital bases from which to develop and compete with the Company. The Company faces increasing competition in consumer sales lead generation products and data processing services from Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions of Experian, Direct Marketing Technologies and Metromail. In business sales lead generation products, the Company faces competition from Dun's Marketing Services ("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information compiled from Dun & Bradstreet's credit database, tends to focus on marketing to large companies. In business directory publishing, the Company competes primarily with Regional Bell Operating Companies, Donnelley Marketing and many smaller, regional directory publishers. In consumer sales lead generation products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk, Trans Union, Experian and Equifax, both directly and through reseller networks. In data processing services, the Company competes with Acxiom, May & Speh, Direct Marketing Technologies and Harte-Hanks Data Technologies. In consumer products, the Company competes with certain smaller producers of CD-ROM products. In addition, the rapid expansion of the Internet creates a substantial new channel for distributing business information to the market, and a new avenue for future entrants to the business and consumer marketing information industry. There is no guarantee that the Company will be successful in this new market. EMPLOYEES As of December 31, 1998, the Company employed a total of approximately 1,500 people on a full-time basis. None of the Company's employees is represented by a labor union or is the subject of a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good. ITEM 2. PROPERTIES The Company's headquarters are located in a 148,000 square foot facility in Omaha, Nebraska, where the Company performs sales and administrative activities. Order fulfillment and shipping are conducted at the Company's 30,000 square foot Carter Lake, Iowa facility, which is located 15 miles from its headquarters. Data compilation, telephone verification, data and product development, and information technology services are conducted at the Company's 130,000 square foot Papillion, Nebraska facility which is located about 5 miles from its headquarters. The Company owns these facilities, as well as adjacent land for possible future expansion. In addition, the Company leases a 101,000 square foot facility in Montvale, New Jersey, which lease expires in September 1999. The Company also leases sales office space at various locations, the aggregate rental obligations of which are not significant. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. Not applicable. 9 11 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
NAME AGE POSITION - ---- --- -------- Vinod Gupta.......................... 52 Chairman of the Board and Chief Executive Officer Stormy L. Dean....................... 41 Controller and Acting Chief Financial Officer Allen Ambrosino...................... 55 President, Large Business Group Monica Messer........................ 36 President, Database and Technology Group William Chasse....................... 40 President, Small Business Group William Kerrey....................... 50 Senior Vice President, Licenses
Vinod Gupta is the founder of the Company and has been Chairman of the Board of the Company since its incorporation in 1972. Mr. Gupta served as Chief Executive Officer of the Company from the time of its incorporation in 1972 until September 1997 and since August 1998. Mr. Gupta holds a B.S. in Engineering from the Indian Institute of Technology, Kharagpur, India, and an M.S. in Engineering and an M.B.A. from the University of Nebraska. Stormy L. Dean has served as the Corporate Controller since September of 1998 and as the acting Chief Financial Officer since January of 1999. From August 1995 to September 1998, Mr. Dean served as the Company's tax director. Prior to that, Mr. Dean worked in the Tax Department of Peter Kiewit Sons' Inc., a construction and telecommunications company, from January of 1990 until joining the Company in August of 1995. Mr. Dean holds a B.S. in Accounting from the University of Nebraska at Omaha, an M.B.A from the University of Nebraska at Omaha, and a Certified Public Accountant certificate. Allen Ambrosino has served as Executive Vice President of the Company since August 1997, and as President of DBA, which the Company acquired in February 1997, since November 1991. Mr. Ambrosino holds a B.S. in Business Administration from Fairleigh Dickinson University. Monica Messer has served as Executive Vice President and Chief Information Officer of the Company since February 1997, and served as a Senior Vice President of the Company from January 1996 to January 1997. Ms. Messer joined the Company in 1983 and has served as a Vice President of the Company since 1985. Ms. Messer holds a B.S. in Business Administration from Bellevue University. William Chasse has served as Executive Vice President, Sales and Marketing of the Company since October 1996, as a Senior Vice President from January 1995 to October 1996, and as a Vice President from 1990 to January 1995. Mr. Chasse joined the Company in 1988. Mr. Chasse holds a B.S. in Business Administration and an M.B.A. from the University of Nebraska. William Kerrey has served as Senior Vice President, Licenses since August 1994, and served as a Vice President from 1989 to August 1994. Mr. Kerrey holds a B.S. in Economics, a B.S. in Spanish and an M.S. in Agronomy from the University of Nebraska. 10 12 PART II ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock and Class B Common Stock $0.0025 par value, is traded on the NASDAQ National Market System under the symbols IUSAA and IUSAB, respectively. The Company's Class A Common Stock began trading on the Nasdaq National Market on October 10, 1997. Between October 10, 1997 and December 31, 1997, the high and low closing prices for the Company's Class A Common Stock were $12.75 and $9.13, respectively. The following table sets forth the high and low closing prices for the Company's Class A Common Stock and Class B Common Stock during each quarter of 1998 and 1997 (class B Common Stock only), as adjusted to give effect to stock splits completed to date. CLASS A COMMON STOCK
HIGH LOW ------ ------ 1998 Fourth Quarter............................................ $ 6.63 $ 2.63 Third Quarter............................................. $15.00 $ 5.00 Second Quarter............................................ $15.25 $12.00 First Quarter............................................. $16.00 $10.25
CLASS B COMMON STOCK
HIGH LOW ------ ------ 1998 Fourth Quarter............................................ $ 7.50 $ 2.69 Third Quarter............................................. $15.81 $ 6.00 Second Quarter............................................ $16.00 $12.38 First Quarter............................................. $17.63 $10.50 1997 Fourth Quarter............................................ $13.63 $ 9.25 Third Quarter............................................. $15.75 $11.07 Second Quarter............................................ $11.69 $ 8.50 First Quarter............................................. $11.69 $ 9.38
As of March 9, 1999, there were 81 and 86 stockholders of record of the Class A Common Stock and Class B Common Stock, respectively. The Company has not declared or paid any cash dividends on its capital stock. The Company currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying cash dividends within the foreseeable future. Any future payment of dividends will be determined by the Company's Board of Directors and will depend on the Company's financial condition, results of operations and other factors deemed relevant by its Board of Directors. 11 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for each of the years in the five years ended December 31, 1998 has been derived from the Company's audited Consolidated Financial Statements and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes set forth on pages F-1 through F-24 of this Form 10-K. The Consolidated Financial Statements as of December 31, 1998 and 1997, and for each of the years in the three years ended December 31, 1998, are set forth on pages F-1 through F-24 of this Form 10-K.
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales..................................... $228,678 $193,327 $108,298 $ 86,766 $69,603 Costs and expenses: Database and production costs............... 66,319 55,090 29,272 23,999 18,153 Selling, general and administrative......... 117,724 80,203 45,766 37,724 28,249 Depreciation and amortization............... 27,472 34,415 4,855 3,469 3,125 Provision for litigation settlement(1)...... 4,500 -- -- -- -- Acquisition-related and restructuring charges(2)(3)............................ 10,093 56,098 21,500 -- -- -------- -------- -------- -------- ------- Total costs and expenses............ 226,108 225,806 101,393 65,192 49,527 -------- -------- -------- -------- ------- Operating income (loss)....................... 2,570 (32,479) 6,905 21,574 20,076 Other income (expense): Investment income........................... 16,628 3,748 3,194 1,322 1,109 Interest expense............................ (9,160) (4,098) (209) (157) (247) Other....................................... (2,000) -- (943) -- -- -------- -------- -------- -------- ------- Income (loss) before income taxes and discontinued operations..................... 8,038 (32,829) 8,947 22,739 20,938 Income taxes.................................. 5,880 6,987 3,400 8,421 7,710 -------- -------- -------- -------- ------- Income (loss) from continuing operations...... 2,158 (39,816) 5,547 14,318 13,228 Loss on discontinued operations(4)............ -- -- (355) (2,317) (404) Loss from abandonment of subsidiary(4)........ -- -- (1,373) -- -- -------- -------- -------- -------- ------- Net income (loss)............................. $ 2,158 $(39,816) $ 3,819 $ 12,001 $12,824 ======== ======== ======== ======== ======= Basic earnings (loss) per share............... $ 0.04 $ (0.82) $ 0.09 $ 0.29 $ 0.31 ======== ======== ======== ======== ======= Weighted average shares outstanding........... 49,314 48,432 42,065 41,475 41,356 ======== ======== ======== ======== ======= Diluted earnings (loss) per share............. $ 0.04 $ (0.82) $ 0.09 $ 0.28 $ 0.31 ======== ======== ======== ======== ======= Weighted average shares outstanding........... 50,215 48,432 42,390 42,136 41,545 ======== ======== ======== ======== ======= OTHER DATA: Earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted(5)................................. $ 44,635 $ 58,034 $ 33,260 $ 25,043 $23,201 ======== ======== ======== ======== ======= CASH FLOW DATA: Net cash from operating activities............ $ 16,742 $ 30,256 $ 12,321 $ 15,819 $18,086 ======== ======== ======== ======== ======= Net cash used in investing activities......... (36,626) (99,932) (13,824) (14,905) (12,394) ======== ======== ======== ======== ======= Net cash from (used in) financing activities.................................. 38,834 72,832 (2,999) (2,406) (712) ======== ======== ======== ======== =======
DECEMBER 31, --------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- ------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................... $ 70,157 $ 60,007 $ 45,727 $ 45,363 $35,411 Total assets.................................. 270,773 194,911 107,877 91,241 77,783 Long-term debt, including current portion..... 128,259 82,000 1,135 2,039 3,821 Stockholders' equity.......................... 88,247 80,236 87,605 76,084 63,326
12 14 - --------------- (1) During 1998, includes $4.6 million in damages awarded to Experian Information Solutions, Inc. in connection with arbitration of a contractual dispute. (2) Includes the following acquisition related charges: 1) charges related to purchases in-process research and development costs associated with the acquisitions of Walter Karl, Inc. of $3.8 million (1998), DBA Holdings, Inc. ("DBA") of $49.2 million (1997), Pro CD of $4.3 million (1997), and Digital Directory Assistance, Inc. of $10.0 million (1996), and 2) the change in 1996 in estimated useful lives based on management's evaluation of the remaining lives of certain intangibles related to acquisitions prior to 1995 of $11.5 million. (3) Includes in 1998 the following restructuring charges: 1) $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation, 2) $0.7 million associated with the Company's offering to sell Class A Common Stock which was not completed, 3) $1.4 million for restructuring costs related to the Company's compilation and sales activities for new businesses, and 4) $1.2 million for restructuring costs related to certain costs reduction measures enacted by the Company. Includes in 1997 restructuring costs of $2.6 million associated with the acquisitions of DBA and Pro CD. (4) During 1995, the Company sold American Business Communications for $3.0 million in the form of a non-recourse promissory note. In 1996 the Company recorded a loss of $1.4 million attributable to the default by the purchaser on the non-recourse promissory note delivered to the Company in this transaction. (5) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to exclude depreciation, amortization of intangible assets, provision for litigation settlement and acquisition-related and restructuring charges. EBITDA is presented because it is a widely accepted indicator of a company's ability to incur and service debt and of the Company's cash flows from operations excluding any non-recurring items. However, EBITDA, as adjusted, does not purport to represent cash provided by operating activities as reflected in the Company's consolidated statements of cash flows, is not a measure of financial performance under generally accepted accounting principles ("GAAP") and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Also, the measure of EBITDA, as adjusted, may not be comparable to similar measures reported by other companies. 13 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading provider of business and consumer marketing information products and data processing services that assist its clients in finding new customers and generating new business. The Company's key assets include a proprietary database of over 11 million businesses and a consumer database of over 115 million households and over 195 million individuals in the United States and Canada, which the Company believes are the most comprehensive and accurate available. The Company leverages these key assets by selling a wide range of information products and data processing services through multiple distribution channels primarily to small and medium-size businesses and also to consumers and large corporations. Sales lead generation products, data processing services and consumer CD-ROM products accounted for 64%, 27% and 9%, respectively, of the Company's net sales for 1998. Historically, the Company's revenue has been derived predominantly through the sale of its sales lead generation products. The Company began to recognize significant revenue from its data processing services in 1997, revenue from its consumer CD-ROM products increased substantially between 1993 and 1997, and the Company began to recognize significant list brokerage revenue during 1998 with the acquisition of Walter Karl and JAMI Marketing Services. The Company estimates that no customer represented greater than approximately 6% of net sales in 1998. The Company's net sales are generated from the sale of its products and services and the licensing of its data to third parties. Revenue from the sale of products and services is generally recognized when the product is delivered or the services are performed. Generally, a majority of revenue from data licensing is recognized at the time the initial set of data is delivered, with the remaining portion being deferred and recognized over the license term as the Company provides updated information. The Company's operating expenses are determined in part based on the Company's expectations of future revenue growth and are substantially fixed in the short term. As a result, unexpected changes in revenue will have a disproportionate effect on financial performance in any given period. The Company's database and production costs are generally expensed as incurred and relate principally to maintaining, verifying and updating its databases, fulfilling customer orders and the direct costs associated with the production of CD-ROM titles. Costs to develop new databases are capitalized by the Company and amortized upon the successful completion of the databases over a period ranging from one to five years. Selling, general and administrative expenses consist principally of salaries and benefits associated with the Company's sales force as well as costs associated with its catalogs and other promotional materials. The Company had previously made certain disclosures relative to the continuing results of operations of acquired companies where appropriate and possible, although the Company has in the case of all acquisitions since 1996, immediately integrated the operations of the acquired companies into existing operations of the Company. Generally, the results of operations for these acquired activities are no longer separately accounted for from existing activities. The Company cannot report on the results of operations of acquired companies upon completion of the integration as the results are "blended-in" with existing results. Additionally, upon integration of acquired operations, the Company frequently combines acquired products or features with existing products, and experiences significant cross-selling of products between business units, including sales of acquired products by existing business units and sales by acquired business units of existing products. Due to recent and potential future acquisitions, future results of operations will not be comparable to historical data. While the results cannot be accurately quantified, acquisitions have had a significant impact on net sales. Since 1996, database and production costs have increased as a percentage of net sales as a result of higher costs associated with data processing services and CD-ROM production. To the extent that data processing and CD-ROM sales constitute a greater percentage of net sales, the Company expects database and production costs to increase as a percentage of net sales in the future. During the last two quarters of 1997 and the first three quarters of 1998, the Company built infrastructure for continued growth and increased sales and heightened its investment in general sales operations, field sales operations, development of new products and services, and direct marketing activities. As a result, selling, general and administrative expenses increased substantially between 1997 and 1998, and constituted a greater percentage of net sales. See the discussion of selling, general and administrative expenses in "Results of Operations" for additional information related to these costs. 14 16 The Company has supplemented its internal growth through strategic acquisitions. The Company has completed nine acquisitions since mid-1996. Through these acquisitions, the Company has increased its presence in the consumer marketing information industry, greatly increased its ability to provide data processing solutions, added two consumer CD-ROM product lines, increased its presence in list management and list brokerage services and broadened its offerings of business marketing information. The following table summarizes these acquisitions:
TRANSACTION VALUE ACQUIRED COMPANY KEY ASSET DATE ACQUIRED (IN MILLIONS)(1) - ---------------- --------- ------------- ---------------- Digital Directory Assistance Consumer CD-ROM Products August 1996 $ 17 County Data Corporation New Businesses Database November 1996 $ 11 Marketing Data Systems Data Processing Services November 1996 $ 3 BJ Hunter Canadian Business Database December 1996 $ 3 DBA Consumer Database and Data February 1997 $105 Processing Services Pro CD Consumer CD-ROM Products August 1997 $ 18 Walter Karl Data Processing and List March 1998 $ 18 Management Services JAMI Marketing List Management Services June 1998 $ 13 Contacts Target Marketing Canadian Business Database July 1998 $ 1
- --------------- (1) Transaction value includes total consideration paid including cash paid, debt issued and stock issued plus long-term debt repaid or assumed at the date of acquisition plus, in the case of DBA, a subsequent purchase price adjustment in October 1997. The Company incurred acquisition-related charges to operations, consisting of the write-off of acquired in-process research and development and other restructuring charges of an aggregate of approximately $21.5 million in 1996 in connection with the acquisition of Digital Directory Assistance and the change in estimated useful lives of certain intangibles related to acquisitions prior to 1995, $56.1 million in 1997 in connection with the acquisitions of the DBA and Pro CD and $10.1 million in 1998 in connection with the acquisitions of Walter Karl and for certain other acquisition-related and restructuring charges. In addition, the Company expects to amortize goodwill and other intangibles over periods of 1 to 15 years in connection with acquisitions completed since mid-1996. The Company's results for 1997 do not include the operations of Walter Karl or JAMI Marketing. In connection with future acquisitions, the Company expects that it will be required to incur additional acquisition-related charges to operations and to amortize additional amounts of goodwill and other intangibles over future periods. While there are currently no binding commitments with respect to any particular future acquisitions, the Company frequently evaluates the strategic opportunities available to it and intends to pursue strategic acquisitions of complementary products, technologies or businesses that it believes fit its business strategy. 15 17 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's statement of operations data expressed as a percentage of net sales. The amounts and related percentages may not be fully comparable due to the acquisition of Digital Directory Assistance (DDA) in August 1996, County Data Corporation (CDC) and Marketing Data Systems in November 1996, BJ Hunter in December 1996, the Database America Companies (DBA) in February 1997, Pro CD in August 1997, Walter Karl in March 1998 and JAMI Marketing Services (JAMI) in June 1998:
YEAR ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------ ------ ------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................... 100% 100% 100% Costs and expenses: Database and production costs............................. 29 29 27 Selling, general and administrative....................... 51 41 42 Depreciation and amortization............................. 12 18 5 Provision for litigation settlement....................... 2 -- -- Acquisition-related charges............................... 4 29 20 ------ ------ ------ Total costs and expenses.......................... 98 117 94 ------ ------ ------ Operating income (loss)..................................... 2 (17) 6 Other income, net........................................... 2 -- 2 ------ ------ ------ Income (loss) before income taxes and discontinued operations................................................ 4 (17) 8 Income taxes................................................ 3 4 3 ------ ------ ------ Income (loss) from continuing operations.................... 1 (21) 5 Loss on discontinued operations and abandonment of subsidiary................................................ -- -- 1 ------ ------ ------ Net income (loss)........................................... 1% (21)% 4% ====== ====== ====== EBITDA, as adjusted(1)...................................... 20% 30% 31% ====== ====== ====== OTHER DATA: SALES BY PRODUCT GROUP: Sales Lead Generation Products............................ $146.9 $128.9 $ 89.8 Data Processing Services.................................. 62.3 42.7 4.6 Consumer CD-ROM Products.................................. 19.5 21.7 13.9 ------ ------ ------ Total............................................. $228.7 $193.3 $108.3 ====== ====== ====== SALES BY PRODUCT GROUP AS A PERCENTAGE OF NET SALES: Sales Lead Generation Products............................ 64% 67% 83% Data Processing Services.................................. 27 22 4 Consumer CD-ROM Products.................................. 9 11 13 ------ ------ ------ Total............................................. 100% 100% 100% ====== ====== ======
- --------------- (1) "EBITDA, as adjusted," is defined as operating income (loss) adjusted to exclude depreciation, amortization of intangible assets, provision for litigation settlement and acquisition-related and restructuring charges. EBITDA, as adjusted, is presented because it is a widely accepted indicator of a company's ability to incur and service debt and of the Company's cash flows from operations excluding any non-recurring items. However, EBITDA, as adjusted, does not purport to represent cash provided by operating activities as reflected in the Company's consolidated statements of cash flows, is not a measure of financial performance under generally accepted accounting principles ("GAAP") and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Also, the measure of EBITDA, as adjusted, may not be comparable to similar measures reported by other companies. 16 18 1998 COMPARED TO 1997 Net Sales For 1998 net sales were $228.7 million, a 18% increase from $193.3 million in 1997. Net sales of sales lead generation products for 1998 were $146.9 million, a 14% increase from $128.9 million in 1997. Factors contributing to an increase in net sales of sales lead generation products included: the enhancement of existing and development of new sales lead generation products, the increase in the number of mailing pieces mailed from 30.0 million during 1997 to 38.7 million during 1998 and the acquisitions of Walter Karl in March 1998 and JAMI in June 1998. During 1998, the Company entered into Internet licensing agreements totaling approximately $7.8 million compared to $4.8 million in 1997. Net sales of data processing services for 1998 were $62.3 million, a 45% increase from $42.7 million for 1997. The increase is principally the result of the acquisition of the DBA in February 1997 and Walter Karl in March 1998. The Company recorded sales to a significant data processing services customer totaling $14.6 million during 1998, representing 6% of total net sales. Sales to this customer occurred evenly during the year. During 1998, the customer notified the Company that it intends to perform the same processing in-house. As a result, sales of data processing services in 1999 may decline from 1998 levels. Net sales of consumer CD-ROM products for 1998 were $19.5 million, an 11% decrease from $21.7 million for 1997. The decrease in consumer CD-ROM product net sales reflects an increase in estimates for reserves of $2.7 million during 1998 related to product returns. Due to a decline in general market conditions and demand for the product, the Company experienced significant product returns during the second and third quarters of 1998. Therefore the reserve for returns was adjusted accordingly. The change in the reserve for returns related primarily to sales that occurred during the second and third quarters of 1998. The decline in market conditions and demand for the product have continued to remain low therefore sales are expected to remain at a decreased level. Database and Production Costs For 1998, database and production costs were $66.3 million, or 29% of net sales, compared to $55.1 million, or 29% of net sales for 1997. Selling, General and Administrative Expenses Selling, general and administrative expenses for 1998 were $117.7 million, or 51% of net sales, compared to $80.2 million, or 41% of net sales for 1997. The increase in selling, general and administrative expenses, representing 10% of net sales, is principally the result of the following items: 1) increase in estimates for reserves for bad debts of $3.5 million, 2) increase in estimates for reserves related to price protection and cooperative advertising for consumer CD-ROM products of $5.3 million, 3) decrease in estimated benefit period related to deferred advertising costs of $2.7 million, and 4) $0.6 million related to executive severance costs. The charges described above accounted for approximately one-half of the increase in selling, general and administrative expenses, expressed as a percentage of net sales. During late 1997 and early 1998, the Company ramped-up its sales force anticipating a targeted incremental increase in net sales. The Company subsequently did not achieve the targeted incremental increase in net sales. During the third quarter of 1998, the Company enacted certain cost reduction measures as described in the section "Acquisition-related and Restructuring Charges" to counter prior measures taken. Salaries and wages principally related to the sales force accounted for approximately one-half of the increase in selling, general and administrative expenses, expressed as a percentage of net sales. Due to a decline in general market conditions and demand for the consumer CD-ROM product, the Company experienced significant product returns during the second and third quarters of 1998. In addition, the Company issued additional price protection due to the decline in demand. The change in reserve related primarily to sales of consumer CD-ROM products that occurred during the second and third quarters of 1998. Depreciation and Amortization Expenses Depreciation and amortization expenses for 1998 were $27.5 million, or 12% of net sales, compared to $34.4 million, or 18% of net sales for 1997. Amortization of acquired database costs and purchased data processing 17 19 software associated with the acquisition of the DBA in February 1997 totaled $6.3 million and $21.7 million for 1998, and 1997, respectively. Excluding amortization on acquired database costs and purchased data processing software associated with the acquisition of DBA in February 1997, depreciation and amortization expenses were $21.1 million and $12.7 million for 1998 and 1997, respectively. The increase relates primarily to amortization of intangibles for acquisitions recorded since June 1997, including Pro CD in August 1997, Walter Karl in March 1998, and JAMI in June 1998. Provision for Litigation Settlement The Company recorded a provision for litigation settlement of $4.5 million, or 2% of net sales, during the third quarter of 1998 related to a dispute centered around a license agreement between DBA and Experian Information Solutions, Inc. prior to the Company's acquisition of DBA in February 1997. Acquisition-Related and Restructuring Charges For 1998, in addition to the write-off of purchased in-process research and development costs (purchased IPR&D) of $3.8 million for Walter Karl, included in acquisition-related charges in the accompanying consolidated statement of operations are: $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation, $0.7 million associated with the Company's offering to sell Class A Common Stock which was not completed, $1.4 million for restructuring costs related to the Company's compilation and sales activities for new businesses enacted during the first quarter of 1998, and $1.2 million for restructuring costs related to certain cost reduction measures enacted during the third quarter of 1998. These acquisition-related charges totaled $10.1 million, and represented 4% of net sales during 1998. As part of the acquisition of the Database America Companies in February 1997 and Pro CD in August 1997, the Company recorded charges totaling $56.1 million, or 29% of net sales, during 1997 for the write-off of purchased IPR&D as well as other related integration and organizational restructuring costs. Acquisition-Related Charges The purchased IPR&D recorded in connection with the acquisition of Walter Karl consisted of various projects, of which none were individually significant, related to areas including: Internet capabilities, automated job cards and shipping information, database and merge/purge processing enhancements, list brokerage and management order and data entry systems. There were a total of 12 separately identified projects. The total amount allocated to the above IPR&D projects was $3.8 million after retroactive application of the Securities and Exchange Commission's new guidelines for valuing purchased IPR&D. The stage of completion was determined based on the analysis of the completion plan for each of the projects. For each of the projects, the completion plan was laid out in terms of beta release date, new lines of code, total anticipated person-years and total invested person years to date. To compute the stage of completion the ratio of person years already spent to total person years to finish the product was calculated. In the aggregate the stage of completion was computed to be 52%. The revised valuation of the IPR&D addresses the matters cited by Lynn Turner, Chief Accountant of the Securities and Exchange Commission in his letter to the American Institute of Certified Public Accountants dated October 9, 1998. The revised valuation excludes the projected cash flows from uncompleted portions of the in-process research and development, and eliminates a "relief from royalty approach" which had previously included value attributed to future versions of the IPR&D. At the date of acquisition, a total of 4.8 man years had been invested on in-process projects while the estimated total investment was 9.15 man years, and estimated 4.35 man years remained to complete the projects. The valuation used the target company workforce, salary and benefits data to convert this into dollars. Accordingly, the estimated cost to complete the projects was approximately $0.2 million. The total cost of the projects prior to the acquisition was $0.2 million. The IPR&D related to various projects of which certain projects have been completed and the Company is receiving benefits associated with these projects and certain projects are still in process of development. 18 20 None of the 12 projects were determined to be individually significant. Without the successful completion of the remaining development efforts, the end result would be to fail to introduce new products. IPR&D was a critical factor for the Company in making this acquisition and timely completion of these projects was an equally important consideration. On time completion was expected to give the Company a competitive edge in its field. All IPR&D projects had planned features that could preempt the competition and solidify its position as a leader in the business-to-business marketing information field. A major risk of not completing these projects timely, would be the risk of losing customers on a medium to long term basis and allow a competitor to provide a solution that may include these technically advanced and value added features. Restructuring Charges During the first quarter of 1998 the Company recorded a restructuring charge of $1.4 million related to the closing of the CDC new business compilation and sales center and moving these operations from Vermont to Nebraska. All 45 of the CDC employees were terminated, and severance recorded totaled $0.6 million. The restructuring charges also included lease termination costs of $0.3 million and a write-off of $0.5 million of leasehold improvement costs associated with the closed Vermont facility. The restructuring, including recording the payments and write-downs described, was completed by September 30, 1998. During the third quarter of 1998 the Company recorded a restructuring charge of $1.2 million which included $0.6 million in severance for 244 employees terminated as a result of the implementation of certain cost reduction measures. These employees were primarily in support and administration positions but some under-performing sales personnel were also terminated. The restructuring charges also included $0.4 million related to the planned closing of four field sales offices. Additionally, the Company recorded a write-down of $0.2 million related to leasehold improvement costs at facilities leased by the Company which were being closed. The restructuring, including recording the payments and write-downs described, was completed as of December 31, 1998, with the exception of the costs totaling $0.4 million related to the planned exit of certain field sales offices which are anticipated to be completed by March 31, 1999. Operating Income (Loss) Including the factors previously described, the Company had operating income of $2.6 million, or 2% of net sales for 1998, as compared to an operating loss of $(32.5) million, or (17)% of net sales for 1997. Other Income (Expense), Net Other income (expense), net for 1998 and 1997 was $5.5 million and $(0.4) million, respectively. During the second quarter of 1998, the Company realized a gain of $16.5 million on the disposition of its holdings in Metromail Corporation common stock. This realized gain was partially offset during the second quarter of 1998 when the Company recorded a loss of $2.0 million on the write-off of an investment. During the first quarter of 1997, the Company made an investment of $2.0 million in preferred stock of an issuer, representing less than 20% of the issuer's outstanding stock. During 1998 the issuer commenced a reorganization and sought funding from other outside investors, diluting the Company's investment in this entity to a nominal value. Additionally, the Company obtained knowledge that the issuer was incurring significant losses and the intended line of business of this start-up entity had significantly changed. Accordingly, the Company wrote-off this investment, which was accounted for on a cost basis, during the second quarter of 1998. Income Taxes A provision for income taxes of $5.9 million and $7.0 million was recorded for 1998, and 1997, respectively. Acquisition-related charges of $3.8 million and $49.2 million were included in income before income taxes during 1998 and 1997, respectively, but are not deductible for tax purposes. The provision for these periods also reflect the inclusion of amortization on certain intangibles in taxable income not deductible for tax purposes. 19 21 EBITDA, as adjusted Excluding the provision for litigation settlement and acquisition-related and restructuring charges previously described, the Company's EBITDA, as adjusted, was $44.6 million, or 20% of net sales, during 1998, compared to $58.0 million, or 30% of net sales, during 1997. 1997 COMPARED TO 1996 Net Sales Net sales for 1997 were $193.3 million, a 79% increase from $108.3 million in 1996. Of this increase, approximately $54.4 million were attributable to the net sales of DBA for the period from February 1, 1997, the date of acquisition, through December 31, 1997. In addition, net sales in 1996 and 1997 also increased as a result of acquisitions completed in the third and fourth quarters of 1996. Net sales of sales lead generation products for 1997 were $128.9 million, a 44% increase from $89.7 million in 1996. Excluding the effect of acquisitions completed after July 1996, net sales of sales lead generation products for 1997 were $106.8 million, a 19% increase from 1996. Net sales of sales lead generation products attributable to acquired companies and included in 1997 were approximately $22.0 million, or 17% of net sales. Net sales of data processing services for 1997 were $42.7 million, as compared to $4.6 million in 1996. This increase is directly attributable to the acquisitions of DBA and Marketing Data Systems. Net sales of consumer CD-ROM products for 1997 were $21.7 million, a 56% increase from $13.9 million in 1996. This increase was primarily attributable to the acquisitions of Digital Directory Assistance in August 1996 and Pro CD in August 1997. Database and Production Cost Database and production costs for 1997 were $55.1 million, an 88% increase from $29.3 million in 1996. These costs constituted 29% of net sales in 1997 and 27% of net sales in 1996. The increase as a percentage of net sales was the result of higher database and production costs associated with sales of data processing services and CD-ROM products. As previously noted, net sales of data processing services for 1997 were $42.7 million, as compared to $4.6 million in 1996. Selling, General and Administrative Expenses Selling, general and administrative expenses for 1997 were $80.2 million, a 75% increase from $45.8 million in 1996. These expenses constituted 41% of net sales in 1997 and 42% as a percentage of net sales in 1996. This decrease as a percentage of net sales was the result of the increase in net sales of data processing services from 4% of total net sales in 1996 to 22% of total net sales in 1997. Since 1996, the overall increase in selling, general and administrative expenses as a percentage of net sales has been offset by the overall increase in the sales of data processing services and CD-ROM products, which bear a slightly lower selling, general and administrative cost margin than the same margin associated with the net sales of sales lead generation products. Depreciation and Amortization Expenses Depreciation and amortization expenses for 1997 were $34.4 million, as compared to $4.9 million in 1996. These expenses constituted 18% of net sales in 1997, and 5% of net sales in 1996. Of such increases, $21.7 million represented amortization of acquired database costs and purchased data processing costs related to the acquisition of DBA, which are being amortized over lives of one or two years. The remaining increase reflects additional depreciation on property and equipment additions and amortization of intangibles for certain other acquisitions recorded since July 1996. Acquisition-Related and Restructuring Charges As part of the acquisition of Digital Directory Assistance in August 1996, the Company recorded charges of $10.0 million in 1996 for purchased in-process research and development costs. Additionally, in September 1996, the Company recorded a charge of $11.5 million due to the change in estimated useful lives based on management's 20 22 evaluation of the remaining lives of certain intangibles related to acquisitions made prior to 1995. These acquisition-related charges constituted $21.5 million, or 20%, of net sales in 1996. As part of the acquisition of DBA in February 1997 and Pro CD in August 1997, the Company recorded charges totaling $56.1 million, or 29% of net sales, in 1997 for purchased in-process research and development costs as well as other related integration and organizational restructuring costs. Acquisition-Related Charges The Company incurred significant acquisition-related charges in 1996 and 1997 related to purchased IPR&D costs associated with the DDA acquisition in 1996 and the DBA and Pro CD acquisitions in 1997. A portion of the purchase price for these acquisitions was attributed to the value of the IPR&D projects and was expensed in accordance with Statement of Financial Accounting Standards (SFAS) No. 2 "Accounting for Research and Development Costs." The Company believes its accounting for purchased IPR&D was made in accordance with generally accepted accounting principles and valuation practices at the time of the related acquisitions. The Company obtained independent valuations of the purchased IPR&D. The income valuation approach was used to determine the fair value of the IPR&D projects acquired from DDA, DBA and Pro CD. Under the income approach, the fair value reflects the present value of the projected cash flow that will be generated by the IPR&D projects if successfully completed. The income approach focuses on the income producing capability of the acquired IPR&D, which the Company believes represents the present value of the future economic benefits expected to be potentially derived from these projects. As of the valuation dates, the acquired IPR&D projects had not demonstrated technological nor economic feasibility. As a result, the attainability of the income projections is subject to project risk, product risk and market risk. These risks reflect the technical difficulty in completing scheduled tasks, any issues with the ability to provide a high quality product with consistent and reproducible results, and the risk that the ultimate delivery of projects in process will be supplanted by competition or new end-user requirements. Accordingly, a discount of from 24% to 30% was applied to reflect the risk associated with the projected cash flow to be generated by the acquired IPR&D projects. The stage of completion of the projects is not used in the determination of the value of IPR&D under a discounted cash flow approach. However, the remaining costs to complete each product were subtracted from the corresponding projected profits, thereby intrinsically incorporating the level of completion effort. The purchased IPR&D projects associated with the DDA, DBA and Pro CD acquisitions are as follows: DDA (1996) -- The projects under development by DDA involve Digital Video Disk-Read Only Memory (DVD-ROM) based information database technology. The value of the technology as applied to DDA's PhoneDisc product was $3.8 million and as applied to the Company's products was $6.2 million. DBA (1997) -- The projects under development by DBA involve data processing technologies including merge/purge and update and maintenance capabilities of the relational databases and interactive media technology to allow DBA to provide existing services via the Internet. The value of the data processing technologies was $2.3 million and the value of the interactive media technology was $46.9 million. Pro CD (1997) -- The projects under development by Pro CD involve graphical user interface technology, data enhancements, DVD capability and Year 2000 compliance for the Select Phone product line. The value of these projects was $4.3 million. A major risk of not completing these projects timely, would be the risk of losing customers on a medium to long term basis and allow a competitor to provide a solution that may include these technically advanced and value added features. Restructuring Charges Included in acquisition-related charges for 1997 are $2.6 million of expenses related to integrating acquired operations into the Company's existing operations. These expenses consisted primarily of costs such as travel between the Company and the new operations, consulting, payroll and other expenses related to implementing Company policies and information systems at the new locations. All costs had been incurred by December 31, 1997. 21 23 Change in Estimated Lives As a consequence of changes in the Company's acquisition strategy in 1996, management performed an evaluation of the remaining lives of certain intangibles related to acquisitions prior to 1995. Based on this evaluation, it was evident that the business and distribution networks acquired changed more rapidly than was originally estimated. Therefore, the estimated useful lives of the related goodwill and distribution networks were revised to 8 and 2 years, from 30 and 15 years, respectively. This change in estimated lives resulted in a charge of $11.5 million in 1996. Net income and earnings per share for 1996 were reduced due to the charge by $7.1 million and $0.17, respectively. Additionally, future annual amortization is expected to increase over the prior annual amortization amounts by approximately $672,000 through 1998. Operating Income (Loss) As a result of the factors previously described, the Company had an operating loss of $(32.5) million, or (17)% of net sales in 1997, as compared to operating income of $6.9 million, or 6% of net sales in 1996. Excluding the effect of the amortization and acquisition-related charges previously described, the Company would have had operating income of $45.3 million, or 24% of net sales, in 1997, and operating income of $28.4 million, or 26% of net sales, in 1996. Other Income (Expense), Net Other income (expense), net for 1997 was $(0.4) million, as compared to $2.0 million in 1996. This decrease was primarily attributable to interest expense incurred on a revolving credit facility, of which $78.0 million was outstanding at December 31, 1997. The Company did not have a credit facility at December 31, 1996. Income Taxes A provision for income taxes of $7.0 million and $3.4 million was recorded for 1997 and 1996, respectively. A provision was recorded on a pretax loss in 1997 due to non-deductible acquisition related charges and amortization of certain intangibles. EBITDA, As Adjusted The Company's EBITDA, as adjusted, was $58.0 million or 30% of net sales in 1997, and $33.3 million or 31% of net sales in 1996. Including acquisition-related charges previously described, the Company had EBITDA, as adjusted, of $1.9 million, or 1% of net sales in 1997, as compared to EBITDA, as adjusted, of $11.8 million, or 11% of net sales in 1996. YEAR 2000 READINESS DISCLOSURE In 1996 the Company began preparing its computer-based systems for Year 2000 ("Y2k") computer software compliance. The Company's Y2k project covers both traditional computer based systems and infrastructure ("IT Systems") and computer based facilities and equipment ("Non IT Systems"). The Company's project has six phases: Inventory, Assessment, Renovation, Testing, Implementation and contingency Planning. The Company has completed an inventory and assessment of its IT Systems. Some of these systems are fully compliant, while others require fixes to be applied. The Company expects to correct the remaining non-compliant IT Systems by replacing or correcting them as a part of a larger infrastructure improvement effort. Infrastructure improvements are ongoing and will continue throughout 1999. The Company has completed an inventory and assessment of its NON-IT Systems, some of which will be affected by the millennium rollover. Not all affected systems require fixes; some are inconsequential or have nuisance affects and will not be addressed. The Company expects to replace critical non-compliant NON-IT Systems by the end of the year. The Company's Y2k project also considers the readiness of critical vendors. The Company believes that the most reasonable worst case Y2k scenario is that a small number of vendors will be unable to supply goods for a short time after January 1, 2000. Contingency plans are being developed in the event that critical vendors suffer from Y2k problems from their internal systems or their suppliers systems. Although these plans are yet to be completed, the Company expects that these plans may include a combination of actions including stockpiling of goods and selective resourcing of business to Y2k compliant vendors. 22 24 The Company has incurred approximately $2.75 million of Y2k cost. These costs fall into three categories: 1) systems replacement, 2) specific Y2k assessment effort, and 3) expense cost of Y2k Project office. Future expenses are estimated to include approximately $3.0 million of additional cost. These future costs are expected to be primarily replacement system costs. Such cost estimates are based upon presently available information and may change as the Company continues with its Y2k project. The Company anticipates paying for its Y2k compliance plan from operating cash flows. The above discussion regarding costs, risks and estimated completion dates for Y2k compliance is based on the Company's best estimates given information that is currently available, and is subject to change. Actual costs may substantially exceed the Company's assessment due to unanticipated Y2k problems associated with the Company's IT and non-IT systems and products. Further, failure of the Company's vendors and customers to address Y2k problems in a timely manner may have a greater adverse affect on the Company's business than presently expected. ACCOUNTING STANDARDS Statement of Financial Accounting Standard (SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities" was issued in June of 1998. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company anticipates adopting this accounting pronouncement in 2000; however, management believes it will not have a significant impact on the Company's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company's principal sources of liquidity included cash and cash equivalents of $29.6 million and marketable securities with a fair market value of $20.6 million. As of December 31, 1998, the Company had working capital of $70.2 million. The Company terminated its revolving credit facility with First Union National Bank during July 1998. Net cash provided by operating activities during 1998 totaled $16.7 million. The Company spent $20.6 million related to property additions during the same period. The Company completed construction in August 1998 of a new facility for the consumer and business database compilation division located in Papillion, Nebraska, at a cost of approximately $10.0 million. During 1998, the Company paid a total of $31.7 million, net of cash received, in connection with the acquisitions of Walter Karl, JAMI and Contacts Target Marketing, respectively. See the Notes to the Consolidated Financial Statements for additional information related to these acquisitions. During May 1998, the Company recorded a realized gain on the disposition of its holdings in the common stock of Metromail Corporation of $16.5 million. The Company recorded gross proceeds on the disposition of the Metromail Corporation common stock of $34.2 million. Total accrued expenses increased from $5.4 million at December 31, 1997 to $12.5 million at December 31, 1998 due to: 1) during the third quarter of 1998, the Company recorded a provision for litigation settlement of $4.5 million, 2) during the first quarter of 1998, the Company recorded as part of the purchase of Walter Karl an accrual related to the integration of acquired operations into existing operations of $6.8 million, of which a balance of $4.4 million remained at December 31, 1998, and 3) during the third quarter of 1998, the Company recorded restructuring costs totaling $1.2 million related to certain cost reduction measures enacted by the Company, of which a balance of $0.5 million remained at December 31, 1998. Total long-term debt increased from $82.0 million at December 31, 1997 to $128.3 million at December 31, 1998 due to: 1) The Company purchased Walter Karl in March 1998 for total consideration of approximately $19 million, which was funded using an existing revolving credit facility, and 2) the Company's sale of its senior subordinated notes resulted in gross proceeds of $115 million, of which the Company utilized approximately $87 million to pay-off other outstanding debt obligations. The Company believes that its existing sources of liquidity and cash generated from operations, assuming no major acquisitions, will satisfy the Company's projected working capital and other cash requirements for at least the 23 25 next 12 months. To the extent the Company experiences growth in the future, the Company anticipates that its operating and investing activities may use cash. Any such future growth and any acquisitions of other technologies, products or companies may require the Company to obtain additional equity or debt financing, which may not be available, may be dilutive or may be restricted by the Company's existing debt obligations. FACTORS THAT MAY AFFECT OPERATING RESULTS Integration of Recent and Future Acquisitions Since mid-1996, the Company has completed eight significant acquisitions, including the August 1996 acquisition of Digital Directory Assistance, the November 1996 merger with County Data Corporation and acquisition of Marketing Data Systems, the December 1996 acquisition of BJ Hunter, the February 1997 merger with Database America ("DBA"), the August 1997 acquisition of Pro CD, the March 1998 acquisition of Walter Karl and the June 1998 acquisition of JAMI Marketing. The Company also made a number of other acquisitions in prior periods. In March 1998, the Company attempted to acquire Metromail Corporation ("Metromail") for approximately $850.0 million, including the assumption of debt, and may in the future evaluate other acquisitions of that magnitude. The Company's strategy includes continued growth through acquisitions of complementary products, technologies or businesses, which, if implemented, may result in the diversion of management's attention from the day-to-day operations of the Company's business and may include numerous other risks, including difficulties in the integration of operations, databases, products and personnel, difficulty in applying the Company's internal controls to acquired businesses and particular problems, liabilities or contingencies related to the businesses being acquired. To the extent that efforts to integrate recent or future acquisitions fail, there could be a material adverse effect on the Company's business, financial condition and results of operations. While the Company has not made any binding commitments with respect to any particular future acquisitions, the Company frequently evaluates the strategic opportunities available to it and intends to pursue opportunities that it believes fit its business strategy. Recent Changes in Senior Management The Company has recently undergone significant changes in its senior management team, even as it has experienced rapid growth both internally and through acquisitions. Vinod Gupta, the Company's Chairman, was re-appointed Chief Executive Officer in July 1998, having resigned that position in October 1997. Scott Dahnke, Chief Executive Officer from October 1997, Jon Wellman, President and Chief Operating Officer since January 1997 and Chief Financial Officer from January 1995 to January 1997, Steve Purcell, Chief Financial Officer since April 1997, Rick Puckett, Controller of the Company since October 1997 and Chief Financial Officer after Mr. Purcell's departure, Gregory Back, Executive Vice President of Corporate Planning and Business Development since October 1997 and Kevin Hall, Senior Vice President of Special Projects since October 1997 ceased their employment with the Company between July and September 1998. Gautam Gupta, a director of the Company who is unrelated to Vinod Gupta, served as acting Chief Financial Officer from October 1998 to January 1999. Stormy Dean, the Company's controller, has served as acting Chief Financial Officer since January 1999 while the Company conducts a search for his permanent replacement. Messrs. Dahnke, Wellman, Purcell, Puckett, Back and Hall did not resign because of any disagreements with the Company's Board or other senior management, and much of the Company's remaining senior management team has been with the Company for many years. The Company has now ogetbeen reorganized into three major groups headed by group presidents. Al Ambrosino, who has been with the Company or its subsidiary for 19 years, Monica Messer, who has been with the Company for 16 years, and William Chasse, who has been with the Company for 11 years, have each been named group president. In the past, limitations on senior management resources resulted in a few key individuals taking on multiple roles and responsibilities in the Company, which in turn placed a significant strain on the Company's senior management. Failure of the Company to identify and hire a permanent Chief Financial Officer on a timely basis or failure of Company's senior management to adjust to new responsibilities, manage growth or work together effectively could result in disruptions of operations or the departure of additional key personnel, which in turn could have a material adverse effect on the Company's business, financial condition, results of operations and stock price. Fluctuations in Operating Results The Company believes that future operating results will be subject to quarterly and annual fluctuations, and that long term growth will depend upon the Company's ability to expand its present business and complete strategic 24 26 acquisitions. The Company's net sales on a quarterly basis can be affected by seasonal characteristics and certain other factors. For example, the Company typically experiences higher revenue from its sales leads products in the fall of each year due to increases in direct marketing by the Company's clients in the fourth quarter of each year. Revenue from sales lead generation products is generally lower in the summer due to decreased direct marketing activity of the Company's customers during that time. The Company typically experiences decreases in net sales of consumer CD ROM products just prior to the introduction of new editions of these products. This effect, coupled with the changes in estimates outlined below, resulted in a decline in consumer CD ROM net sales in the three months ended September 30, 1998 compared to the prior year period and the three months ended June 30, 1998. In addition, cancellation of a major data processing contract in the three months ended September 30, 1998 resulted in lower than expected net sales of data processing services in that period. The Company's operating expenses are determined in part based on the Company's expectations of future revenue growth and are substantially fixed. As a result, unexpected changes in revenue levels, such as those discussed above, have a disproportionate effect on operating performance in any given period. In addition, changes in estimates for increased reserves and allowances, the provision of an arbitration reserve and charges related to cost-cutting in the three months ended September 30, 1998 amounted to a total of $21.4 million in charges in that period. These charges and the weakness of net sales discussed above caused the Company to record a net loss of $13.4 million for the three months ended September 30, 1998, and lower than expected net income for the fiscal year. If the Company is required to record charges in the future, such charges could materially and adversely affect the Company's business, financial condition or results of operations. Long term growth will be materially adversely affected if the Company fails to successfully exploit the Internet as a market for its products and services, broaden its existing product and service offerings, increase sales of products and services, expand into new markets, or complete acquisitions or successfully integrate acquired operations into its existing operations. To the extent there are fluctuations in operating results or the Company fails to achieve long-term internal growth or growth through acquisitions, there could be a material adverse effect on the Company's business, financial condition or results of operations. Risk of Product Returns The Company has agreements that allow retailers certain rights to return its consumer CD-ROM products. Accordingly, the Company is exposed to the risk of product returns from retailers and distributors, particularly in the case of products sold shortly before introduction of the next year's edition of the same product. Consumers may also seek to return consumer CD-ROM products, although historically returns from consumers have been low. At the time of product sales, the Company establishes reserves based on estimated future returns of products, taking into account promotional activities, the timing of new product introductions, seasonal variations in product returns, distributor and retailer inventories of the Company's products and other factors. Actual product returns could differ from estimates, and product returns that exceed the Company's reserves could materially adversely affect the Company's business, financial condition and results of operations. In addition, changes in estimates of reserves for product returns can have a material and adverse effect on the Company's operating results. For example, as discussed above, changes in estimates for increased reserves and allowances in the consumer CD-ROM business, primarily to account for anticipated returns and price protection adjustments, together with additions to other reserves, amounted to charges of approximately $15.5 million in the three months ended September 30, 1998 (out of the $21.4 million in charges discussed above), contributing to the Company's net loss for that period. Effects of Leverage As of December 31, 1998, the Company had total indebtedness of approximately $128.3 million. In addition, the Company's existing debt obligations allow the Company to enter into a revolving credit facility under which it would be able to incur up to $100.0 million of additional borrowings and to incur substantial additional indebtedness (including, subject to certain conditions, an additional $85.0 million of senior subordinated notes). The Company's ability to satisfy its debt obligations will depend upon its future operating performance, which performance will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. The Company's ability to satisfy its debt obligations may also depend upon the future availability of revolving credit borrowings under a revolving credit facility. Such availability will depend on, among other things, the Company's ability to enter into such a credit facility on acceptable terms and its ability to meet certain specified financial ratios and maintenance tests. The Company expects that, based on current and expected levels of operations, its operating cash flow should be sufficient to meet its operating expenses, to make 25 27 necessary capital expenditures and to service its debt requirements as they become due. If the Company is unable to service its indebtedness, it will be forced to take actions, such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There is no assurance that any of these remedies could be effected on satisfactory terms, if at all. Restrictions Imposed By Terms of Indebtedness The Company's existing debt obligations contain certain covenants limiting, subject to certain exceptions, the incurrence of indebtedness, payment of dividends or other restricted payments, issuance of guarantees, entering into certain transactions with affiliates, consummation of certain asset sales, certain mergers and consolidations, sales or other dispositions of all or substantially all of the assets of the Company and imposing restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries. A breach of any of these covenants could result in an event of default under the terms of the Company's existing debt obligations. The Company's ability to comply with such covenants may be affected by events beyond its control. In addition, if the Company were to enter into a revolving credit facility, such facility would contain other restrictive covenants which would be more restrictive than those contained in the Company's existing debt obligations. A breach of any of these covenants, unless waived, would result in a default under such a credit facility. Upon the occurrence of an event of default under such a credit facility, the lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If the lenders under such a credit facility accelerate the payment of such indebtedness, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company. If the Company were unable to repay those amounts, such lenders could proceed against the collateral granted to them to secure that indebtedness. Risks Associated with Changes in Technology Advances in information technology may result in changing customer preferences for products and product delivery formats in the business and consumer marketing information industry. The Company believes it is presently the leading provider of marketing information on CD-ROM. However, the Company's sales of CD-ROM's in the quarter ended September 30, 1998 were lower than expected by the Company and projected by financial analysts. In addition, the Company believes that if customers increasingly look to digital video disc ("DVD") or other new technology for information resources, the market for business and consumer information on CD-ROM may contract and prices for CD-ROM products may have to decrease or CD-ROM products may become obsolete. The Company plans to introduce products on DVD. Failure of the Company to improve sales of CD-ROM products or to successfully sell its products on DVD or to successfully introduce products that take advantage of other technological changes may thus have a material adverse effect on the Company's business, results of operations and financial condition. The Company believes that the Internet represents an important and rapidly evolving market for marketing information products and services. As such, the Company has recently begun to focus more heavily on the Internet, and to develop plans to exploit its new market more fully in the future. The Company may fail to develop product and services that are well adapted to the Internet market, to achieve market acceptance of its products and services, to achieve sufficient traffic to its Internet sites to generate significant net sales, or to successfully implement electronic commerce operations. Any such failure could have a material adverse effect on the Company's business, financial condition and results of operations. Competition The business and consumer marketing information industry is highly competitive. Many of the Company's principal or potential future competitors are much larger than the Company and have much larger capital bases from which to develop and compete with the Company. The Company faces increasing competition in consumer sales lead generation products and data processing services from Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions of Experian, Direct Marketing Technologies and Metromail. In business sales lead generation products, the Company faces competition from Dun's Marketing Services ("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information compiled from Dun & Bradstreet's credit database, tends to focus on marketing to large companies. In business directory publishing, the Company competes primarily with 26 28 Regional Bell Operating Companies, Donnelley Marketing and many smaller, regional directory publishers. In consumer sales lead generation products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk, Trans Union, Experian and Equifax, both directly and through reseller networks. In data processing services, the Company competes with Acxiom, May & Speh, Direct Marketing Technologies and Harte-Hanks Data Technologies. In consumer products, the Company competes with certain smaller producers of CD-ROM products. In addition, the rapid expansion of the Internet creates a substantial new channel for distributing business information to the market, and a new avenue for future entrants to the business and consumer marketing information industry. There is no guarantee that the Company will be successful in this new market. Loss of Data Centers The Company's business depends on computer systems contained in the Company's data centers located in Omaha, Nebraska, Carter Lake, Iowa and Montvale, New Jersey. A fire or other disaster affecting any of the Company's data centers could disable the Company's computer systems. Any significant damage to any of the data centers could have a material adverse effect on the Company's business, financial condition and results of operations. The Company is in the process of relocating certain operations located on the east coast. The Company is relocating certain personnel between the Montvale and Greenwich facilities, and is also going to relocate certain personnel from the Montvale and Greenwich sites to a new location in Park Ridge, New Jersey. Any disruptions to operations or loss of data or equipment in connection with these moves could materially and adversely affect the Company's business, financial condition or results of operations. Limited Protection of Intellectual Property Rights The Company regards its databases and software as proprietary. The Company's databases are copyrighted, and the Company depends on trade secret and non-disclosure safeguards for protection of its software. The Company distributes its products under agreements that grant customers a license to use the Company's products for specified purposes and contain terms and conditions prohibiting the unauthorized reproduction and use of the Company's products. In addition, the Company generally enters into confidentiality agreements with its management and programming staff and limits access to and distribution of its proprietary information. There can be no assurance that the foregoing measures will be adequate to protect the Company's intellectual property. Restatement of Financial Results The 1995 financial statements were restated in 1997 to reflect a settlement of an employee's stock options as compensation expense due to additional information obtained regarding the nature and timing of the agreement to settle the options. The 1995 financial statements were also restated to reflect an increase to receivable reserves of $0.6 million as selling, general and administrative expenses. The restatements decreased net income by $2.3 million and earnings per share by $0.06 in 1995 and had no impact on net sales. The Company has implemented new control procedures that assign responsibility for accounting for all option activity and ensure that copies of the related underlying agreements are reviewed for appropriate accounting. The 1995 and 1996 financial statements were restated to properly present the discontinued operations of American Business Communications (ABC). Since ABC was sold in exchange for a non-recourse promissory note, the Company had not relinquished all risks of ownership and was required to reflect the continued losses of the business in its financial statements. These restatements did not impact net sales, net income or earnings per share for either 1995 or 1996. Due to the unique circumstances involved, the Company had misinterpreted the accounting rules related to the "sale" and re-addressed the accounting when the purchaser defaulted on the note. The Form 10-Q for the quarter ended March 31, 1997 was restated to accurately account for the acquisition of DBA and the related IPR&D charge as a result of receiving a final valuation report. The restatement increased net income and earnings per share by $18.2 million and $.79, respectively for the quarter ended March 31, 1997 and had no impact on net sales. The Company uses its best estimates based on information available related to acquisitions when filing its interim financial statements. However, estimates change as additional information is obtained during the valuation process. The Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998 were restated to accurately account for the acquisition of Walter Karl and the related IPR&D charge as a result of receiving a 27 29 valuation report reflecting the retroactive application of the Securities and Exchange Commission's new guidelines for valuing purchased IPR&D. During the first quarter of 1998, the Company had originally recorded an IPR&D charge of $9.2 million. During the fourth quarter of 1998, the Company performed a new valuation following the new guidance and the IPR&D charge was adjusted to $3.8 million. Direct Marketing Regulation and Dependence Upon Mail Carriers The Company and many of its customers engage in direct marketing. Certain data and services provided by the Company are subject to regulation by federal, state and local authorities. In addition, growing concerns about individual privacy and the collection, distribution and use of information about individuals have led to self-regulation of such practices by the direct marketing industry through guidelines suggested by the Direct Marketing Association and to increased federal and state regulation. Compliance with existing federal, state and local laws and regulations and industry self-regulation has not to date had a material adverse effect on the Company's business, financial condition or results of operations. Nonetheless, federal, state and local laws and regulations designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may increasingly affect the operations of the Company, which could result in substantial regulatory compliance or litigation expense or a loss of revenue. Certain proposed federal legislation could also create proprietary rights in certain "white pages" information that is presently in the public domain, which could in turn increase the cost to the Company of acquiring data or disrupt its ability to do so. The direct mail industry depends and will continue to depend upon the services of the United States Postal Service and other private mail carriers. Any modification by the United States Postal Service of its rate structure, any increase in public or private postal rates generally or any disruption in the availability of public or private postal services could have a negative impact on the demand for business information, direct mail activities and the cost of the Company's direct mail activities. Financial and Accounting Issues Related to Acquisitions In connection with the acquisitions completed since mid-1996, the Company issued approximately 3.7 million shares of Class A Common Stock and 3.7 million shares of Class B Common Stock, and paid approximately $158.4 million in cash. The issuance of stock in these or future transactions may be dilutive to existing stockholders to the extent that earnings of the acquired companies do not offset the additional number of shares outstanding. In connection with the acquisitions of DBA, Pro CD and Walter Karl, the Company incurred approximately $97.0 million in debt. In connection with future acquisitions, the Company may incur substantial amounts of debt. Servicing such debt may result in decreases in earnings per share, and the inability on the part of the Company to service such debt would result in a material adverse effect on the Company's business, financial condition and results of operations. Finally, the Company expects that future acquisitions will generally be required to be accounted for using the purchase method. As a result of such accounting treatment, the Company may be required to take charges to operations or to amortize goodwill in connection with future acquisitions. As a result of acquisitions completed since mid-1996, the Company was required to take significant acquisition-related charges to operations and will be required to amortize goodwill and other intangibles over periods of 1 to 15 years. The acquisition-related charges and amortization of goodwill and other intangibles have had and will continue to have an adverse effect on net income. To the extent that future acquisitions result in substantial charges to operations, incurrence of debt and amortization of goodwill and other intangibles, such acquisitions could have an adverse effect on the Company's net income, earnings per share and overall financial condition. Volatility and Uncertainties with Respect to Stock Price As with other companies that have experienced rapid growth, the Company has experienced and is likely to continue to experience substantial volatility in its stock price. Factors such as announcements by either the Company or its competitors of new products or services or of changes in product or service pricing policies, quarterly fluctuations in the Company's operating results, announcements of technical innovations, announcements relating to strategic relationships or acquisitions by the Company or its competitors, changes in earnings estimates, opinions or ratings by analysts, and general market conditions or market conditions within the business and consumer marketing information industry, among other factors, may have significant impact on the Company's stock price. Should the Company fail to introduce, enhance or integrate products or services on the schedules expected, its stock price could be adversely affected. It is likely that in some future quarter the Company will fail to achieve anticipated operating 28 30 results, and this failure could have a material adverse effect on the Company's stock price. In addition, the Company's Class A Common Stock and Class B Common Stock have been trading for a very short time. While the Company expects the Class A Common Stock and Class B Common Stock prices to remain roughly equal in most market conditions, the difference in rights of the two classes, coupled with the general volatility of the Company's stock price described above, could cause the Class A Common Stock and Class B Common Stock to trade at different prices. In the event of a tender offer or other unsolicited attempt to acquire the Company, shares of Class B Common Stock would likely trade at a substantial premium to shares of Class A Common Stock as a result of the disparity of voting rights. Future issuances of both Class A Common Stock and Class B Common Stock could affect the price for either or both classes of Common Stock. For the foregoing reasons, the price for the Company's Class A Common Stock and Class B Common Stock may be subject to substantial fluctuation. Purchase of Notes Upon a Change of Control Upon the occurrence of a change of control of the Company in certain circumstances, the Company is required to make an offer to purchase all outstanding 9 1/2% Senior Subordinated Notes at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. There can be no assurance that the Company will have available funds sufficient to purchase the notes upon such change of control. In addition, any change of control, and any repurchase of the notes upon a change of control, may constitute an event of default under any revolving credit facility which the Company may enter into, and in that event the obligations of the Company thereunder could be declared due and payable by the lenders thereunder. Upon the occurrence of an event of default, the lenders under such a credit facility may have the ability to block repurchases of the Notes for a period of time and upon any acceleration of the obligations under such a credit facility, the lenders thereunder would be entitled to receive payment of all outstanding obligations thereunder before the Company may repurchase any of the notes tendered pursuant to an offer to repurchase the notes upon such change of control. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not exposed to material future earnings or cash flow exposures from changes in interest rates on long-term debt as the majority of the Company's debt is at fixed rates. At December 31, 1998, the fair value of the Company's long-term debt is based on quoted market prices at the reporting date or is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities. At December 31, 1998, the Company had long-term debt with a carrying value of $128.3 million and estimated fair value of approximately $106.0 million. The market risk is estimated as the potential decrease in fair value of the Company's long-term debt resulting from a hypothetical increase of 10% in the rates currently offered to the Company. An increase in interest rates would result in approximately a $7.5 million decrease in fair value of the Company's long-term debt. 29 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item (other than selected quarterly financial data which is set forth below) is incorporated by reference to the Consolidated Financial Statements set forth on pages F-1 through F-24 of this Form 10-K. The following table sets forth selected financial information for each of the eight quarters in the two-year period ended December 31, 1998. This information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal recurring adjustments necessary to present fairly this information when read in conjunction with the Company's audited consolidated financial statements and the notes thereto.
1998 1997 QUARTER ENDED QUARTER ENDED ----------------------------------------------- ----------------------------------------------- MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER 31 30 30 31 31 30 30 31 -------- ------- ------------ ----------- -------- ------- ------------ ----------- STATEMENT OF OPERATIONS DATA: Net sales..................... $55,380 $62,076 $ 55,072 $56,150 $ 41,948 $47,008 $50,555 $53,816 Costs and expenses: Database and production costs..................... 15,405 16,086 17,978 16,850 11,415 13,111 14,148 16,416 Selling, general and administrative............ 23,394 27,103 41,199 26,028 17,986 20,079 21,331 20,807 Depreciation and amortization.............. 6,870 6,384 7,824 6,394 6,356 9,056 8,985 10,018 Provision for litigation settlement(1)............. -- -- 4,500 -- -- -- -- -- Acquisition-related and restructuring charges(2)(3)............. 8,477 400 1,216 -- 51,798 -- 4,300 -- ------- ------- -------- ------- -------- ------- ------- ------- Operating income (loss)....... 1,234 12,103 (17,645) 6,878 (45,607) 4,762 1,791 6,575 Other income (expense), net... (283) 13,233 (2,869) (4,613) 42 41 (257) (176) ------- ------- -------- ------- -------- ------- ------- ------- Income (loss) before income taxes....................... 951 25,336 (20,514) 2,265 (45,565) 4,803 1,534 6,399 Income taxes.................. 2,058 9,964 (7,115) 973 1,631 1,893 775 2,688 ------- ------- -------- ------- -------- ------- ------- ------- Net income (loss)............. $(1,107) $15,372 $(13,399) $ 1,292 $(47,196) $ 2,910 $ 759 $ 3,711 ======= ======= ======== ======= ======== ======= ======= ======= Basic earnings (loss) per share....................... $ (0.02) $ 0.31 $ (0.27) $ 0.03 $ (1.02) $ 0.06 $ 0.02 $ 0.08 ======= ======= ======== ======= ======== ======= ======= ======= Weighted average shares outstanding................. 49,395 49,607 49,360 49,301 46,412 48,678 48,774 48,848 ======= ======= ======== ======= ======== ======= ======= ======= Diluted earnings (loss) per share....................... $ (0.02) $ 0.30 $ (0.27) $ 0.03 $ (1.00) $ 0.06 $ 0.02 $ 0.07 ======= ======= ======== ======= ======== ======= ======= ======= Weighted average shares outstanding................. 49,395 51,226 49,360 49,334 47,298 49,461 50,273 49,945 ======= ======= ======== ======= ======== ======= ======= ======= AS A PERCENTAGE OF NET SALES: Net sales..................... 100% 100% 100% 100% 100% 100% 100% 100% Costs and expenses: Database and production costs..................... 28 26 33 30 27 28 28 31 Selling, general and administrative............ 42 44 75 46 43 43 42 39 Depreciation and amortization.............. 12 10 14 11 15 19 18 18 Provision for litigation settlement................ -- -- 8 -- -- -- -- -- Acquisition-related and restructuring charges..... 15 1 2 -- 123 -- 9 -- ------- ------- -------- ------- -------- ------- ------- ------- Operating income (loss)..... 2 19 (32) 12 (109) 10 4 12 Other income (expense), net... (1) 21 (5) (8) -- -- (1) -- ------- ------- -------- ------- -------- ------- ------- ------- Income (loss) before income taxes....................... 2 41 (37) 4 (109) 10 3 12 Income taxes.................. 4 16 (13) 2 4 4 2 5 ------- ------- -------- ------- -------- ------- ------- ------- Net income (loss)............. (2)% 25% (24)% 2% (113)% 6% 2% 7% ======= ======= ======== ======= ======== ======= ======= =======
- --------------- (1) During 1998, includes $4.6 million in damages awarded to Experian Information Solutions, Inc. in connection with arbitration of a contractual dispute. (2) Includes the following acquisition-related charges: 1) charges related to purchases in-process research and development costs associated with the acquisitions of Walter Karl, Inc. of $3.8 million (1998), DBA Holdings, Inc. ("DBA") of $49.2 million (1997), Pro CD of $4.3 million (1997), and Digital Directory Assistance, Inc. 30 32 of $10.0 million (1996), and 2) the change in 1996 in estimated useful lives based on management's evaluation of the remaining lives of certain intangibles related to acquisitions prior to 1995 of $11.5 million. (3) Includes in 1998 the following restructuring charges: 1) $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation, 2) $0.7 million associated with the Company's offering to sell Class A Common Stock which was not completed, 3) $1.4 million for restructuring costs related to the Company's compilation and sales activities for new businesses, and 4) $1.2 million for restructuring costs related to certain costs reduction measures enacted by the Company. Includes in 1997 restructuring costs of $2.6 million associated with the acquisitions of DBA and Pro CD. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On October 1, 1998, PricewaterhouseCoopers LLP, the Company's independent accountants (the "Former Accountants") resigned from their engagement as principal accountants for the Company. The reports of the Former Accountants for the last two fiscal years contained no adverse opinion, disclaimer of opinion or opinion that was qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was not recommended or approved by Company's board of directors, nor by its audit committee. In the last two fiscal years and through October 1, 1998, there have been no disagreements with the Former Accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of the Former Accountants, would have caused them to make reference thereto in their report on the financial statements of such years. In the last two fiscal years and through October 1, 1998, none of the events listed in paragraphs (A) through (D) of Item 304(a)(l)(v) of Regulation S-K occurred except: (i) the Form 10-Q, filed by the Company for the period ended June 30, 1998, disclosed that the Company was in the process of performing a valuation analysis of its acquisition of JAMI Marketing and any changes to its preliminary estimates of the assets acquired, liabilities assumed and goodwill and other intangibles recorded as part of the purchase, including an assessment of purchased in-process research and development costs, would be recorded in the third quarter of 1998; the Former Accountants indicated that if such in-process research and development charge was material, the financial statements for the period ended June 30, 1998 would require restatement; the Company has since determined that there will be no material in-process research and development costs in connection with the JAMI Marketing acquisition; and (ii) as a result of recent financial management resignations, the Former Accountants advised the Company that it intended to expand the scope of its audit testing for the fiscal year 1998 audit and management is in agreement with this advice. On October 12, 1998, the Company engaged the services of KPMG Peat Marwick LLP (the "New Accountants") to serve as the Company's principal accountants for the current fiscal year. In September, 1998, the Company engaged the New Accountants for purposes of allocating the cost of the acquisition to certain assets and liabilities acquired by the Company from JAMI Marketing in May 1998. PricewaterhouseCoopers LLP, the Company's former accountants, were not consulted by the Company regarding the allocation of the acquisition costs. During its last two fiscal years and through October 1, 1998, the Company has not consulted with the New Accountants on either the application of accounting principles to a specified transaction, or any matter that was the subject of a reportable event discussed above. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The required information regarding Directors of the registrant is incorporated by reference to the information under the caption "Nominees for Election at the Annual Meeting" and "Incumbent Directors whose Terms of Office Continue After the Annual Meeting" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 2, 1999. The required information regarding Executive Officers of the registrant is contained in Part I of this Form 10-K. The required information regarding compliance with Section 16(a) of the Securities Exchange Act is incorporated by reference to the information under the caption "Section 16(a) Beneficial Ownership Reporting 31 33 Compliance" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 2, 1999. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the information under the captions "Executive Compensation," "Performance Graph," "Report of the Compensation Committee," and "Certain Transactions" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 2, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the information under the caption "Security Ownership" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 2, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the information under the captions "Certain Transactions" in the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 2, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of the Report: 1. Financial Statements. The following Consolidated Financial Statements of infoUSA Inc. and Subsidiaries and Report of Independent Accountants are included at pages F-1 through F-24 of this Form 10-K:
DESCRIPTION PAGE NO. - ----------- -------- Independent Auditors' Reports............................... F-2, F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-4 Consolidated Statements of Operations for the Year Ended December 31, 1998, 1997, and 1996......................... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996............. F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996......................... F-7 Notes to Consolidated Financial Statements.................. F-8
2. Financial Statement Schedule. The following consolidated financial statement schedule of infoUSA Inc. and Subsidiaries for the years ended December 31, 1998, 1997, and 1996 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements.
DESCRIPTION PAGE NO. - ----------- -------- Schedule II Valuation and Qualifying Accounts S-1
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. 32 34 3. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this report: 2.1 -- Asset Purchase Agreement between the Company and Digital Directory Assistance, Inc. is incorporated herein by reference to exhibits filed with the Company's current report on Form 8-K dated September 10, 1996. 2.2 -- Agreement and Plan of Reorganization between the Company and the Shareholders of County Data Corporation is incorporated herein by reference to exhibits filed with Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996. 2.3 -- Agreement and Plan of Reorganization between the Company and the Shareholders of 3319971 Canada Inc. is incorporated herein by reference to exhibits filed with Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1996. 2.4 -- Agreement and Plan of Reorganization between the Company and the shareholders of Marketing Data Systems, Inc. is incorporated herein by reference to the exhibits filed with the Company's Registration Statement on Form S-3 (File No. 333-36669) filed on October 23, 1997. 2.5 -- Agreement and Plan of Reorganization between the Company and the Shareholders of DBA Holdings, Inc. is incorporated herein by reference to exhibits filed with the Company's Current Report on Form 8-K dated February 28, 1997. 2.6 -- Agreement and Plan of Reorganization between the Company and the Shareholders of Pro CD, Inc. is incorporated herein by reference to exhibits filed with the Company's Current Report on Form 8-K dated September 8, 1997. 2.7 -- Stock Purchase Agreement between the Company and the Shareholders Of Walter Karl, Inc. is incorporated herein by reference to the Company's Current Report on Form 8-K dated February 24, 1998. 2.8 -- Asset Purchase Agreement between the Company and JAMI Marketing Services, Inc., filed herewith 3.1 -- Certificate of Incorporation, as amended through July 31, 1998 is Incorporated herein by reference to exhibits filed with Company's Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998 (File No. 000-19598), filed on August 14, 1998. 3.2 -- Bylaws are incorporated herein by reference to the Company's Registration Statement on Form S-1 (File No. 33-42887), which became effective February 18, 1992. 3.3 -- Amended and Restated Certificate of Designations of Participating Preferred Stock, filed in Delaware on October 3, 1997, is incorporated herein by reference to the Company's Registration Statement on From 8-A, (File No. 97-690893), filed on October 6, 1997. 4.1 -- Rights Plan for Class A Common is incorporated herein by reference to the Company's Registration Statement on Form 8-A, (File No. 97-690893), filed on October 6, 1997. 4.2 -- Rights Plan for Class B Common is incorporated herein by reference to the Company's Registration Statement on Form 8-A, (File No. 97-690896), filed on August 6, 1997 and amended on October 6, 1997. 4.3 -- Specimen of Class A Common Stock Certificate is incorporated herein by reference to the exhibits filed with the company's Registration Statement on Form S-3 (File No. 333-36669) filed on October 23, 1997. 4.4 -- Specimen Class B Common Stock Certificate is incorporated herein by reference to exhibits filed with Company's Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997. 4.5 -- Reference is made to Exhibits 3.1, 3.2, and 3.3 hereof.
33 35 4.6 -- Purchase Agreement dated June 12, 1998 between the Registrant, BT Alex. Brown Incorporated, Goldman, Sachs & Co. and Hambrecht & Quist LLC is incorporated herein by reference to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998 (File No. 000-19598), filed on August 14, 1998. 4.7 -- Indenture dated as of June 18, 1998 (the "Indenture") by and between the Registrant and State Street Bank and Trust Company of California, N.A., as Trustee is incorporated herein by reference to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998 (File No. 000-19598), filed on August 14, 1998. 4.8 -- Exchange and Registration Rights Agreement dated as of June 18, 1998 by and among the Registrant and BT Alex. Brown Incorporated, Goldman, Sachs & Co. and Hambrecht & Quist LLC as the Initial Purchasers is incorporated herein by reference to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998 (File No. 000-19598), filed on August 14, 1998. 4.9 -- Form of New 9 1/2% Senior Subordinated Note due 2008 is incorporated herein by reference to the exhibits filed with the Company's Registration Statement on Form S-4 (File No. 333-61645), filed on December 15, 1999. 10.1 -- Form of Indemnification Agreement with Officers and Directors is incorporated herein by reference to the exhibits filed with the Company's Registration Statement on Form S-1 (File No. 33-51352), filed August 28, 1992. 10.5 -- Reference is made to Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8 and 4.5 hereof. 21.1 -- Subsidiaries and State of Incorporation, filed herewith. 23.1 -- Consent of Independent Accountants, filed herewith. 23.2 -- Consent of Independent Accountants, filed herewith. 24.1 -- Power of Attorney (included on signature page) 27.1 -- Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K: On October 8, 1998, the Company filed a Current Report on Form 8-K dated October 1, 1998, pursuant to Item 4 of that form, to report the change in the Company's independent accountants. The report was amended on Form 8-K/A on October 14, 1998, for technical reasons. On October 13, 1998, the Company filed a Current Report on Form 8-K dated October 12, 1998, pursuant to Item 4 of that form, to report the change in the Company's independent accountants. 34 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. infoUSA INC. By: /s/ STORMY L. DEAN -------------------------------------- Stormy L. Dean Controller and Acting Chief Financial Officer (principal accounting and financial officer) Dated: March 31, 1999 POWER OF ATTORNEY Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Amendment to the Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ VINOD GUPTA Chairman of the Board and Chief March 31, 1999 - ----------------------------------------------------- Executive Officer (principal Vinod Gupta executive officer) /s/ STORMY L. DEAN Controller and Acting Chief March 31, 1999 - ----------------------------------------------------- Financial Officer (principal Stormy L. Dean accounting officer and principal financial officer) /s/ JON D. HOFFMASTER Director March 31, 1999 - ----------------------------------------------------- Jon D. Hoffmaster /s/ GAUTAM GUPTA Director March 31, 1999 - ----------------------------------------------------- Gautam Gupta /s/ GEORGE F. HADDIX Director March 31, 1999 - ----------------------------------------------------- George F. Haddix /s/ ELLIOT S. KAPLAN Director March 31, 1999 - ----------------------------------------------------- Elliot S. Kaplan /s/ HAROLD ANDERSEN Director March 31, 1999 - ----------------------------------------------------- Harold Andersen /s/ PAUL A. GOLDNER Director March 31, 1999 - ----------------------------------------------------- Paul A. Goldner /s/ GEORGE J. KUBAT Director March 31, 1999 - ----------------------------------------------------- George J. Kubat By: /s/ STORMY L. DEAN ------------------------------------------------- Stormy L. Dean Attorney-in-fact
35 37 [This page intentionally left blank] 38 INFOUSA INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- infoUSA Inc. and Subsidiaries: Independent Auditors' Reports............................... F-2, F-3 Consolidated Balance Sheets as of December 31, 1998 and 1997...................................................... F-4 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996.......................... F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996.............. F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.................................................. F-7 Notes to Consolidated Financial Statements.................. F-8 to F-24 Schedule II -- Valuation and Qualifying Accounts............ S-1
F-1 39 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors infoUSA Inc.: We have audited the accompanying consolidated balance sheet of infoUSA Inc. and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1998 consolidated financial statements referred to above present fairly, in all material respects, the financial position of infoUSA Inc. and subsidiaries as of December 31, 1998 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG Peat Marwick LLP --------------------------------------- KPMG PEAT MARWICK LLP Omaha, Nebraska January 22, 1999 F-2 40 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors infoUSA Inc.: We have audited the accompanying consolidated balance sheet of infoUSA Inc. and subsidiaries (formerly American Business Information, Inc.) as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 1997. We have also audited the financial statement schedule listed in Item 14 in this Form 10-K for each of the two years in the period ended December 31, 1997. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of infoUSA Inc. and subsidiaries (formerly American Business Information, Inc.) as of December 31, 1997 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP ----------------------------------------- COOPERS & LYBRAND L.L.P. Omaha, Nebraska January 23, 1998 F-3 41 INFOUSA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents................................. $ 29,603 $ 10,653 Marketable securities..................................... 20,620 24,045 Trade accounts receivable, net of allowances of $7,289 and $6,013, respectively................................... 40,126 49,409 List brokerage trade accounts receivable.................. 17,831 -- Income taxes receivable................................... 3,387 345 Prepaid expenses.......................................... 2,371 3,475 Deferred marketing costs.................................. 4,365 3,417 -------- -------- Total current assets.............................. 118,303 91,344 -------- -------- Property and equipment, net............................... 40,264 25,117 Intangible assets, net of accumulated amortization........ 109,378 73,741 Deferred income taxes..................................... -- 1,410 Other assets.............................................. 2,828 3,299 -------- -------- $270,773 $194,911 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 1,580 $ 716 Payable to shareholders................................... -- 1,871 Accounts payable.......................................... 7,226 9,426 List brokerage trade accounts payable..................... 18,847 -- Accrued payroll expenses.................................. 2,830 4,910 Accrued expenses.......................................... 12,465 5,406 Deferred revenue.......................................... 4,534 4,238 Deferred income taxes..................................... 664 4,770 -------- -------- Total current liabilities......................... 48,146 31,337 -------- -------- Long-term debt, net of current portion...................... 126,679 81,284 Deferred income taxes....................................... 7,701 -- Other liabilities........................................... -- 2,054 Stockholders' equity: Preferred stock, $.0025 par value. Authorized 5,000,000 shares; none issued or outstanding..................... -- -- Class A common stock, $.0025 par value. Authorized 220,000,000 shares; 24,689,761 shares issued and 24,581,261 shares outstanding at December 31, 1998 and 24,460,332 shares issued and outstanding at December 31, 1997............................................... 62 61 Class B common stock, $.0025 par value. Authorized 75,000,000 shares; 24,854,989 shares issued and 24,655,489 shares outstanding at December 31, 1998 and 24,625,332 shares issued and 24,460,332 shares outstanding at December 31, 1997....................... 62 62 Paid-in capital........................................... 72,476 69,055 Retained earnings......................................... 15,284 13,126 Treasury stock, at cost, 108,500 shares of Class A common stock and 199,500 shares of Class B common stock held at December 31, 1998 and 165,000 shares of Class B common stock held at December 31, 1997................. (2,951) (2,281) Accumulated other comprehensive income.................... 3,314 213 -------- -------- Total stockholders' equity........................ 88,247 80,236 -------- -------- Commitments and contingencies............................. $270,773 $194,911 ======== ========
See accompanying notes to consolidated financial statements. F-4 42 INFOUSA INC. SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Net sales................................................... $228,678 $193,327 $108,298 -------- -------- -------- Costs and expenses: Database and production costs............................. 66,319 55,090 29,272 Selling, general and administrative....................... 117,724 80,203 45,766 Depreciation and amortization............................. 27,472 34,415 4,855 Provision for litigation settlement....................... 4,500 -- -- Acquisition-related and restructuring charges............. 10,093 56,098 21,500 -------- -------- -------- 226,108 225,806 101,393 -------- -------- -------- Operating income (loss)..................................... 2,570 (32,479) 6,905 Other income (expense): Investment income......................................... 16,628 3,748 3,194 Interest expense.......................................... (9,160) (4,098) (209) Other..................................................... (2,000) -- (943) -------- -------- -------- Income (loss) before income taxes and discontinued operations................................................ 8,038 (32,829) 8,947 Income taxes................................................ 5,880 6,987 3,400 -------- -------- -------- Income (loss) from continuing operations.................... 2,158 (39,816) 5,547 Loss on discontinued operations............................. -- -- (355) Loss from abandonment of subsidiary......................... -- -- (1,373) -------- -------- -------- Net income (loss)........................................... $ 2,158 $(39,816) $ 3,819 ======== ======== ======== Basic earnings per share: Income (loss) from continuing operations.................. $ 0.04 $ (0.82) $ 0.13 Loss on discontinued operations and abandonment of subsidiary............................................. -- -- (0.04) -------- -------- -------- Net income (loss)........................................... $ 0.04 $ (0.82) $ 0.09 ======== ======== ======== Weighted average shares outstanding......................... 49,314 48,432 42,065 ======== ======== ======== Diluted earnings per share: Income (loss) from continuing operations.................. $ 0.04 $ (0.82) $ 0.13 Loss on discontinued operations and abandonment of subsidiary............................................. -- -- (0.04) -------- -------- -------- Net income (loss)........................................... $ 0.04 $ (0.82) $ 0.09 ======== ======== ======== Weighted average shares outstanding......................... 50,215 48,432 42,390 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 43 INFOUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED OTHER CLASS A CLASS B COMPREHENSIVE TOTAL COMMON COMMON PAID-IN RETAINED TREASURY INCOME STOCKHOLDERS' STOCK STOCK CAPITAL EARNINGS STOCK (LOSS) EQUITY ------- ------- ------- -------- -------- ------------- ------------- Balances, December 31, 1995............ $-- $51 $27,342 $48,937 $ -- $ (246) $76,084 Comprehensive income: Net income............................. -- -- -- 3,819 -- -- 3,819 Change in unrealized loss, net of tax.................................. -- -- -- -- -- (133) (133) --- --- ------- -------- ------- ------ ------- Total comprehensive income..... -- -- -- -- -- -- ...... 3,686 --- --- ------- -------- ------- ------ ------- Issuance of 2,441,950 shares of common stock................................ -- 3 9,628 -- -- -- 9,631 Issuance of 1,120,000 shares of common stock in pooling-of-interests transaction.......................... -- 1 86 186 -- -- 273 Tax benefit related to employee stock options.............................. -- -- 212 -- -- -- 212 Acquisition of treasury stock.......... -- -- -- -- (2,281) -- (2,281) --- --- ------- -------- ------- ------ ------- Balances, December 31, 1996............ -- 55 37,268 52,942 (2,281) (379) 87,605 Comprehensive loss: Net loss............................... -- -- -- (39,816) -- -- (39,816) Change in unrealized gain, net of tax.................................. -- -- -- -- -- 592 592 --- --- ------- -------- ------- ------ ------- Total comprehensive loss............... -- -- -- -- -- -- (39,224) --- --- ------- -------- ------- ------ ------- Issuance of 4,718,744 shares of common stock................................ -- 7 31,261 -- -- -- 31,268 Tax benefit related to employee stock options.............................. -- -- 587 -- -- -- 587 2 for 1 stock dividend................. 61 -- (61) -- -- -- -- --- --- ------- -------- ------- ------ ------- Balances, December 31, 1997............ 61 62 69,055 13,126 (2,281) 213 80,236 Comprehensive income: Net income............................. -- -- -- 2,158 -- -- 2,158 Change in unrealized gain, net of tax.................................. -- -- -- -- -- 3,101 3,101 --- --- ------- -------- ------- ------ ------- Total comprehensive income..... -- -- -- -- -- -- 5,259 --- --- ------- -------- ------- ------ ------- Issuance of 459,086 shares of common stock................................ 1 -- 3,020 -- -- -- 3,021 Tax benefit related to employee stock options.............................. -- -- 401 -- -- -- 401 Acquisition of treasury stock.......... -- -- -- -- (670) -- (670) --- --- ------- -------- ------- ------ ------- Balances, December 31, 1998............ $62 $62 $72,476 $15,284 $(2,951) $3,314 $88,247 === === ======= ======== ======= ====== =======
See accompanying notes to consolidated financial statements. F-6 44 INFOUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss)......................................... $ 2,158 $(39,816) $ 3,819 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 27,472 34,415 4,855 Deferred income taxes.................................. (1,019) (2,787) (6,307) Loss on discontinued operations and abandonment of subsidiary........................................... -- -- 2,788 Net realized (gains) losses on sale of marketable securities and other investments..................... (15,511) (2,560) (1,267) Impairment of other assets............................. 2,000 -- 740 Provision for litigation settlement.................... 4,500 -- -- Acquisition-related and restructuring charges.......... 10,093 56,098 21,500 Changes in assets and liabilities, net of effect of acquisitions: Trade accounts receivable............................ 9,324 (7,445) (7,762) List brokerage trade accounts receivable............. (4,463) -- -- Prepaid expenses..................................... (1,233) 287 (1,117) Deferred marketing costs............................. (948) (2,154) (267) Accounts payable..................................... (2,861) (4,854) (1,422) List brokerage trade accounts payable................ 752 -- -- Income taxes receivable and payable.................. (3,042) 7,283 (128) Accrued expenses..................................... (10,480) (8,211) (3,111) --------- -------- -------- Net cash provided by operating activities......... 16,742 30,256 12,321 --------- -------- -------- Cash flows from investing activities: Proceeds from sales of marketable securities.............. 41,114 19,596 18,865 Purchases of marketable securities........................ (17,177) (17,448) (17,348) Purchase of other investments............................. (2,000) (2,000) -- Purchases of property and equipment....................... (20,582) (8,882) (6,755) Acquisitions of businesses, including minority interest... (31,654) (84,224) (6,484) Consumer database costs................................... (603) (3,398) (494) Software development costs................................ (5,724) (2,898) (1,955) Other..................................................... -- (678) 347 --------- -------- -------- Net cash used in investing activities............. (36,626) (99,932) (13,824) --------- -------- -------- Cash flows from financing activities: Repayment of long-term debt............................... (110,876) (7,193) (1,450) Proceeds from long-term debt.............................. 154,800 86,000 -- Deferred financing costs.................................. (5,969) (388) -- Repayment of note payable to shareholders................. -- (7,925) -- Acquisition of treasury stock............................. (670) -- (2,281) Deferred offering costs................................... -- (339) -- Proceeds from exercise of stock options................... 1,148 2,090 520 Tax benefit related to employee stock options............. 401 587 212 --------- -------- -------- Net cash provided by (used in) financing activities...................................... 38,834 72,832 (2,999) --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 18,950 3,156 (4,502) Cash and cash equivalents, beginning........................ 10,653 7,497 11,999 --------- -------- -------- Cash and cash equivalents, ending........................... $ 29,603 $ 10,653 $ 7,497 ========= ======== ======== Supplemental cash flow information: Interest paid..................................... $ 8,902 $ 3,616 $ 78 ========= ======== ======== Income taxes paid................................. $ 9,637 $ 7,443 $ 8,280 ========= ======== ========
See accompanying notes to consolidated financial statements. F-7 45 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL infoUSA Inc. and its subsidiaries (the Company), provides business and consumer marketing information products and data processing services throughout the United States and Canada. These products include customized business lists, business directories and other information services. During 1998, the Company changed names from American Business Information, Inc. to infoUSA Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition. The Company's revenue is primarily generated from the sale of its products and services and the licensing of its data to third parties. Revenue from the sale of products and services is generally recognized when the product is delivered or the services are performed. Data licensing revenue is recognized based on percentages which are derived from the pricing of the product and corresponds to delivery of the initial set of data and any obligations to provide future updates of data. Revenue related to future updates is recorded as deferred revenue. Reserves are established for estimated returns and uncollectible amounts. Database Costs. Costs to maintain and enhance the Company's existing business and consumer databases are expensed as incurred. Costs to develop new databases, which primarily include labor costs, are capitalized with amortization beginning upon successful completion of the compilation project. Database costs are amortized straight-line over the expected lives of the databases generally ranging from one to five years. Advertising Costs. Direct marketing costs associated with the mailing and printing of brochures and catalogs are capitalized and amortized over periods that correspond to the estimated revenue stream of the individual advertising activities, generally for periods ranging from six to twelve months. All other advertising costs are expensed as the advertising takes place. Total unamortized marketing costs at December 31, 1998 and 1997, was $4.4 million and $3.4 million, respectively. Total advertising expense for the years ended December 31, 1998, 1997, and 1996 was $19.7 million, $15.9 million, and $11.0 million, respectively. Software Capitalization. Until technological feasibility is established, software development costs are expensed as incurred. After that time, direct costs are capitalized and amortized equal to the greater of the ratio of current revenues to the estimated total revenues for each product or the straight-line method, generally over one year for software developed for external use and over two to five years for software developed for internal use. Unamortized software costs included in intangible assets at December 31, 1998 and 1997, were $4.0 million and $1.9 million, respectively. Amortization of capitalized costs during the years ended December 31, 1998, 1997 and 1996, totaled approximately $4.1 million, $2.5 million, and $1.0 million, respectively. Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. Earnings (Loss) Per Share. Basic earnings per share are based on the weighted average number of common shares outstanding, including contingently issuable shares, which have been restated to account for the stock F-8 46 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) dividend (See Note 19). Diluted earnings per share are based on the weighted number of common shares outstanding, including contingently issuable shares, plus dilutive potential common shares outstanding (representing outstanding stock options). The following data show the amounts used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Options on 1.1 million shares of common stock were not included in computing diluted earnings per share for 1997 because their effects were antidilutive.
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Weighted average number of shares outstanding used in basic EPS....................................................... 49,314 48,432 42,065 Net additional common equivalent shares outstanding after assumed exercise of stock options......................... 901 -- 325 ------ ------ ------ Weighted average number of shares outstanding used in diluted EPS............................................... 50,215 48,432 42,390 ====== ====== ======
Cash Equivalents. Cash equivalents, consisting of highly liquid debt instruments that are readily convertible to known amounts of cash and when purchased have an original maturity of three months or less, are carried at cost which approximates fair value. Marketable Securities. Marketable securities have been classified as available-for-sale and are therefore carried at fair value, which are estimated based on quoted market prices. Unrealized gains and losses, net of related tax effects, are reported as a separate component of stockholders' equity until realized. Unrealized and realized gains and losses are determined by specific identification. Property and Equipment. Property and equipment (including equipment acquired under capital leases) are stated at cost and are depreciated or amortized primarily using straight-line methods over the estimated useful lives of the assets, as follows: Building and improvements................................... 30 years Office furniture and equipment.............................. 5 to 7 years Computer equipment.......................................... 5 years Capitalized equipment leases................................ 5 years
List brokerage trade accounts receivable and trade accounts payable. The Company acquired Walter Karl, Inc. in March 1998 and JAMI Marketing Services, Inc. in June 1998. A significant business line of these two entities is list brokerage services, whereby the entities serve as a broker between unrelated parties who wish to purchase a certain list and unrelated parties who have the desired list for sale. Accordingly, Walter Karl and Jami Marketing each recognize trade accounts receivable and trade accounts payable, reflecting a "gross-up" of the two concurrent transactions. The transactions are not structured providing for the right of offset. The Company did not previously engage in this type of business. F-9 47 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intangibles. Intangible assets are stated at cost and are amortized using the straight-line method over the estimated useful lives of the assets, as follows: Goodwill.................................................... 8 to 15 years Distribution networks....................................... 2 years Noncompete agreements....................................... Term of agreements Purchased data processing software.......................... 2 years Acquired database costs..................................... 1 year Core technology costs....................................... 3 years Customer base costs......................................... 3 to 15 years Tradename costs............................................. 10 to 15 years Perpetual software license agreement........................ 10 years Software development costs.................................. 1 to 4 years Workforce costs............................................. 5 to 8 years
Stock-based compensation. The Company recognizes stock-based compensation expense using the intrinsic value method. Under that method, no compensation expense is recorded if the exercise price of the employee stock options equals or exceeds the market price of the underlying stock on the date of grant. For disclosure purposes, pro forma net income (loss) and income (loss) per share are provided as if the fair value method had been applied. Long-lived assets. All of the Company's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized in operating results. The impairment loss is measured using discounted cash flows or quoted market prices, when available. The Company also periodically reevaluates the remaining useful lives of its long-lived assets based on the original intended and expected future use or benefit to be derived from the assets. Changes in estimated useful lives are reflected prospectively by amortizing the remaining book value at the date of the change over the adjusted remaining estimated useful life. During 1998 and 1996, the Company wrote-off investments in other entities of $2.0 million and $740 thousand, respectively, which were accounted for using the cost method. Accounting pronouncements. In 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." The Company adopted the provisions of this SFAS in 1998 (includes restatement for comparative disclosures for 1997 and 1996). The components of comprehensive income have been presented in Note 5 of the consolidated financial statements. In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company adopted the provisions of this SFAS effective December 31, 1998 (includes restatement for comparative disclosures for 1997 and 1996). The information required is presented in Note 20 of the consolidated financial statements. In 1998, the Accounting Standards Committee issued Statement of Accounting Position (SOP) No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The Company adopted the provisions of this SOP effective January 1, 1998. The adoption of this SOP resulted in an amount capitalized of $1.5 million, net of accumulated amortization expense, as of December 31, 1998. Reclassifications. Certain reclassifications were made to the 1997 and 1996 financial statements to conform to the 1998 presentation. 3. ACQUISITIONS Effective August 1996, the Company acquired certain assets and assumed certain liabilities of Digital Directory Assistance, Inc. (DDA), a publisher of PhoneDisc CD-ROM products. The total purchase price was approximately $16.9 million of which $4.0 million was paid in September 1996, $7.9 million in the form of a promissory note issued to the sellers paid in January 1997, and the remaining amount through the issuance of 600,000 unregistered shares F-10 48 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of the Company's Class A Common Stock and 600,000 unregistered shares of the Company's Class B Common Stock at a recorded value of $5.2 million. The acquisition was accounted for under the purchase method of accounting. In addition to purchased in-process research and development costs of $10.0 million (See Note 18), goodwill recorded as part of the purchase was $10.0 million, which is being amortized over 8 years. Effective November 1996, the Company acquired all issued and outstanding common stock of County Data Corporation (CDC), a national new business database compiler. Total consideration for the acquisition was 560,000 unregistered shares of the Company's Class A Common Stock and 560,000 unregistered shares of the Company's Class B Common Stock. The acquisition was accounted for under the pooling-of-interests method of accounting. The accompanying consolidated financial statements have not been restated to reflect this acquisition, as the financial position, results of operations and cash flows of County Data Corporation for the periods prior to acquisition were not significant. Effective November 1996, the Company acquired certain assets and assumed certain liabilities of Marketing Data Systems, Inc. (MDS), a provider of data warehousing, research and analysis services for target marketing applications to Fortune 1000 companies. Total consideration for the acquisition was $2.4 million, consisting of $1.0 million in cash and 118,000 unregistered shares of the Company's Class A Common Stock and 118,000 shares of the Company's Class B Common Stock at a recorded value of $1.3 million. The acquisition has been accounted for under the purchase method of accounting. Substantially all of the purchase price was allocated to goodwill which is being amortized over 8 years. Effective December 1996, the Company acquired all issued and outstanding common stock of Kadobec Investments, Inc., (operating as B.J. Hunter), which provides lead generation products in Canada. Total consideration for the acquisition was $3.1 million, consisting of $876 thousand in cash and 150,000 unregistered shares of the Company's Class A Common Stock and 150,000 shares of the Company's Class B Common Stock at a recorded value of $2.6 million. The acquisition has been accounted for under the purchase method of accounting. The Company allocated substantially all of the purchase price to goodwill which is being amortized over 8 years. Effective February 1997, the Company acquired all issued and outstanding common stock of DBA Holdings, Inc. and Subsidiaries (operating as Database America Companies, or DBA), a provider of data processing and analytical services for marketing applications, and compiler of information on consumers and businesses in the United States. Total consideration, as adjusted, for the acquisition was approximately $103.5 million, consisting of $51.5 million in cash, partially funded using a revolving credit facility (See Note 8), and approximately 2.3 million unregistered shares of the Company's Class A Common Stock and 2.3 million unregistered shares of the Company's Class B Common Stock at a recorded value of $31.0 million. The acquisition has been accounted for under the purchase method of accounting. In addition to purchased in-process research and development costs of $49.2 million (See Note 18), intangibles and goodwill recorded as part of the purchase included acquired database costs of $19.0 million, purchased data processing software of $9.4 million, noncompete agreements of $1.7 million and goodwill of $20.8 million. Goodwill is being amortized over 15 years. Effective August 1997, the Company acquired certain assets and assumed certain liabilities of Pro CD, Inc. (Pro CD) from Acxiom Corporation (Acxiom), a provider of telephone directory and other business software products on CD-ROM to consumers. The acquisition has been accounted for under the purchase method of accounting. Total consideration for the acquisition was $18 million in cash, funded using a revolving credit facility (See Note 8). At the time of the acquisition of Pro CD, the Company entered into two separate and unrelated contracts with Acxiom whereby the Company agreed to license its complete business database to Acxiom. Additionally, the Company entered into a perpetual license agreement with Acxiom for the right to use search engine technology developed by Axciom for the Pro CD product line. In addition to purchased in-process research and development costs of $4.3 million (See Note 18), intangibles and goodwill recorded as part of the purchase included core technology, customer base, and tradename costs totaling $5.9 million, noncompete agreements of $5.2 million and goodwill of $6.2 million. Goodwill is being amortized over 10 years. Effective March 1998, the Company acquired all issued and outstanding common stock of Walter Karl, Inc. (Walter Karl), a national direct marketing service firm that provides list management, list brokerage, and database F-11 49 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) marketing and direct marketing services to a wide array of customers. Total consideration for the acquisition was $19.4 million in cash, subject to adjustment, funded using a revolving credit facility (See Note 8). The acquisition has been accounted for under the purchase method of accounting, and accordingly, the operating results of Walter Karl have been included in the Company's financial statements since the date of acquisition. In addition to purchased in-process research and development costs of $3.8 million (See Note 18), intangibles and goodwill recorded based on management's preliminary estimates included goodwill of $16.0 million, core technology of $3.7 million, trade names of $4.2 million, customer base of $2.2 million, and workforce costs of $0.8 million. Goodwill is being amortized over 15 years. The amount of intangibles recorded by the Company exceeded the purchase price due to the Company recording an accrual related to costs associated with the integration of acquired operations into existing operations, deferred taxes established for certain intangibles not currently deductible for tax purposes, and the excess of liabilities over assets assumed. Effective June 1998, the Company acquired certain assets and assumed certain liabilities of JAMI Marketing Services, Inc. (JAMI), a list brokerage, list management, data processing and marketing consulting firm. Total consideration for the acquisition was $12.8 million in cash, subject to adjustment, funded with the proceeds from the disposition of the Company's holdings of Metromail Corporation common stock. The acquisition has been accounted for under the purchase method of accounting, and accordingly, the operating results of JAMI have been included in the Company's financial statements since the date of acquisition. Intangibles and goodwill recorded based on management's preliminary estimates included goodwill of $7.3 million, trade names of $0.2 million, customer base of $5.1 million, noncompete agreements of $0.2 million, and workforce costs of $0.5 million. Goodwill is being amortized over 15 years. Effective July 1998, the Company acquired certain assets and assumed certain liabilities of Contacts Target Marketing (CTM), a regional business marketing database company, based in Vancouver, Canada. Total consideration for the acquisition was $0.4 million in cash. The acquisition has been accounted for under the purchase method of accounting, and accordingly, the operating results of CTM have been included in the Company's financial statements since the date of acquisition. Intangibles and goodwill recorded based on management's preliminary estimates included goodwill of $0.5 million. Goodwill is being amortized over 8 years. All stock issued in acquisitions, with the exception of the final distribution related to DBA in late 1997, included the Company's common stock, prior to the October 1997 reclassification of the Company's Common Stock as Class B Common Stock and the dividend of one share of Class A Common Stock for each share of Class B Common Stock then outstanding. See Note 19 for discussion related to the Reclassification and Stock Dividend. The final distribution related to the DBA acquisition in October 1997 was an equal number of shares of Class A and Class B Common Stock. For each of the acquisitions above, with the exception of the acquisition of CDC in 1996 which was accounted for as a pooling of interests transaction, the Company recorded each purchase reflecting the issuance of restricted stock at a calculated discount, based on stock valuations performed by investment bankers. All purchase price adjustments recorded by the Company subsequent to the acquisition date were in accordance with the provisions of the related purchase agreements. F-12 50 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Operating results for each of these acquisitions are included in the accompanying consolidated statements of operations from the respective acquisition dates. Assuming the above described companies had been acquired on January 1, 1997, and excluding the write-offs of in-process research and development costs included in acquisition-related and restructuring charges in the accompanying consolidated statements of operations, unaudited pro forma consolidated net sales, net income and net income per share would have been as follows:
FOR THE YEARS ENDED -------------------------------- DECEMBER 31, DECEMBER 31, 1998 1997 -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales................................................... $245,139 $230,019 Net income.................................................. $ 3,787 $ 23,883 Basic earnings per share.................................... $ 0.08 $ 0.49 Diluted earnings per share.................................. $ 0.08 $ 0.49
The pro forma information provided above does not purport to be indicative of the results of operations that would actually have resulted if the acquisitions were made as of those dates or of results which may occur in the future. 4. MARKETABLE SECURITIES
AMORTIZED UNREALIZED UNREALIZED FAIR COST GROSS GAIN GROSS LOSS VALUE --------- ---------- ---------- ------- (IN THOUSANDS) At December 31, 1998: Municipal bonds.......................................... $ 1,304 $ 3 $ (1) $ 1,306 Corporate bonds.......................................... 4,718 3 (28) 4,693 Common stock............................................. 9,056 5,357 -- 14,413 Preferred stock.......................................... 197 11 -- 208 ------- ------ ------- ------- $15,275 $5,374 $ (29) $20,620 ======= ====== ======= ======= At December 31, 1997: Municipal bonds.......................................... $ 824 $ 1 $ (2) $ 823 Corporate bonds.......................................... 2,459 4 (66) 2,397 Common stock............................................. 20,372 1,429 (1,030) 20,771 Preferred stock.......................................... 47 7 -- 54 ------- ------ ------- ------- $23,702 $1,441 $(1,098) $24,045 ======= ====== ======= =======
Scheduled maturities of marketable debt securities at December 31, 1998, are as follows:
MORE LESS THAN ONE TO FIVE TO THAN ONE YEAR FIVE YEARS TEN YEARS TEN YEARS --------- ---------- --------- --------- (IN THOUSANDS) Municipal bonds.......................................... $ 217 $ 458 $105 $526 Corporate bonds.......................................... 3,660 1,033 -- -- ------ ------ ---- ---- $3,877 $1,491 $105 $526 ====== ====== ==== ====
For the year ended December 31, 1998 proceeds from sales of marketable securities approximated $41.1 million while realized gains totaled $17.9 million and realized losses totaled $2.4 million. For the year ended December 31, 1997, proceeds approximated $19.6 million while realized gains totaled $2.6 million and realized losses totaled $86 thousand. F-13 51 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) were as follows:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Unrealized holding gains (losses) arising during the period: Unrealized net losses..................................... $(10,162) $(1,261) $(1,701) Related tax benefit....................................... 3,861 479 647 -------- ------- ------- Net....................................................... (6,301) (782) (1,054) -------- ------- ------- Less: Reclassification adjustment for net gains (losses) realized on sale of marketable securities during the period Realized net gains........................................ 15,164 2,216 1,486 Related tax expense....................................... (5,762) (842) (565) -------- ------- ------- Net....................................................... 9,402 1,374 921 -------- ------- ------- Total other comprehensive income (loss)................... $ 3,101 $ 592 $ (133) ======== ======= =======
6. PROPERTY AND EQUIPMENT
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) Land and improvements....................................... $ 4,274 $ 1,733 Buildings and improvements.................................. 19,537 13,040 Furniture and equipment..................................... 41,626 26,608 Capitalized equipment leases................................ 5,050 2,014 ------- ------- 70,487 43,395 Less accumulated depreciation and amortization: Owned property............................................ 29,020 17,502 Capitalized equipment leases.............................. 1,203 776 ------- ------- Property and equipment, net....................... $40,264 $25,117 ======= =======
F-14 52 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. INTANGIBLE ASSETS
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) Goodwill.................................................... $ 70,456 $44,598 Noncompete agreements....................................... 7,420 6,925 Core technology............................................. 4,800 1,100 Customer base............................................... 8,372 1,100 Tradename................................................... 8,108 3,700 Purchased data processing software.......................... 9,400 9,400 Acquired database costs..................................... 19,000 19,000 Work force costs............................................ 1,338 -- Perpetual software license agreement........................ 8,000 8,000 Software development costs.................................. 4,038 1,865 Consumer database costs..................................... 5,309 3,892 Deferred financing costs.................................... 5,970 -- Other deferred costs........................................ -- 1,662 -------- ------- 152,211 101,242 Less accumulated amortization............................... 42,833 27,501 -------- ------- $109,378 $73,741 ======== =======
8. FINANCING ARRANGEMENTS Long-term debt consisted of the following:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) 9 1/2% Senior Subordinated Notes*........................... $115,000 $ -- Uncollateralized bank revolving line of credit**............ -- 78,000 Mortgage note, collateralized by deed of trust. Note bears a fixed interest rate of 7.4% through July 2003, and then will be adjusted to a designated Federal Reserve rate plus 1.75%. Principal is due August 2008. Interest is payable monthly................................................... 10,553 -- State of Connecticut Department of Economic Development note payable. Note bears a fixed interest rate of 5.0%. Note is collateralized by certain real property. Principal is due November 2003. Interest is payable monthly................ 450 -- Uncollateralized note payable for leasehold improvements. Note bears a fixed interest rate of 5.0%. Principal is due September 2003. Interest is payable monthly............... 478 -- Uncollateralized bank revolving line of credit, provides for maximum borrowings of $5 million.......................... -- 3,000 Capital lease obligations (Note 17)......................... 1,778 1,000 -------- ------- 128,259 82,000 Less current portion........................................ 1,580 716 -------- ------- Long-term debt.............................................. $126,679 $81,284 ======== =======
The weighted average interest rate on short-term borrowings outstanding as of December 31, 1997 was 6.66%. There were no short-term borrowings outstanding at December 31, 1998. F-15 53 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future maturities by calendar year of long-term debt as of December 31, 1998 are as follows (in thousands): 1999........................................................ $ 1,580 2000........................................................ $ 1,534 2001........................................................ $ 1,433 2002........................................................ $ 1,371 2003........................................................ $ 1,220 Thereafter.................................................. $121,121
*On June 18, 1998, the Company completed a private placement of 9 1/2% Senior Subordinated Notes due June 15, 2008 in the aggregate principal amount of $115.0 million. The Notes are subject to various covenants, including among other things, limiting additional indebtedness and the ability to pay dividends. In January 1999, the Company exchanged registered 9 1/2% Senior Subordinated Notes (the "Notes") for the unregistered notes pursuant to a Registration Statement on Form S-4 declared effective by the Securities & Exchange Commission. Interest on the Notes will accrue from the original issuance date of the unregistered notes and will be payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 1998, at the rate of 9 1/2% per annum. The Notes are redeemable, in whole or in part, at the option of the Company, on or after June 15, 2003, at designated redemption prices outlined in the Indenture governing the Notes, plus any accrued interest to the date of redemption. In addition, at any time on or prior to June 15, 2001, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more equity offerings, at the redemption price equal to 109.5% of the principal amount thereof, plus any accrued interest to the date of redemption. In the event of a change in control, each holder of Notes will have the right to require the Company to repurchase such holder's Notes at a price equal to 101% of the principal amount thereof, plus any accrued interest to the repurchase date. During May 1998 in connection with the sale of the Notes, the Company entered into a Treasury yield collar agreement (the "treasury collar") with a bank, to hedge against the movement in interest rates on the Notes. The treasury collar was in the notional amount of $100.0 million. During June 1998, the Company terminated the treasury collar and, in connection therewith, made a payment of approximately $1.6 million to the bank which was recorded as deferred financing costs included in intangible assets in the accompanying consolidated balance sheets. The termination fee will be amortized over the 10 year life of the Notes. **During 1998, subsequent to completion of the private placement of notes previously described, the Company terminated its revolving line of credit with a bank. 9. INCOME TAXES The provision for income taxes on continuing operations consists of the following:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Current: Federal........................................... $4,469 $ 9,163 $ 8,782 State............................................. 556 742 925 ------ ------- ------- 5,025 9,905 9,707 ------ ------- ------- Deferred: Federal........................................... 742 (2,688) (6,159) State............................................. 113 (230) (148) ------ ------- ------- 855 (2,918) (6,307) ------ ------- ------- $5,880 $ 6,987 $ 3,400 ====== ======= =======
F-16 54 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Loss on discontinued operations and abandonment of subsidiary is presented net of income tax benefits of $1.1 million in 1996. The effective income tax rate varied from the Federal statutory rate as follows:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS) Expected Federal income taxes at statutory rate of 35%............................................... $2,813 $(11,490) $3,131 State taxes, net of Federal effects................. 435 424 530 Amortization of nondeductible intangibles........... 1,260 637 29 In-process research and development................. 1,342 17,220 -- Nondeductible expense, nontaxable income and other............................................. 30 196 (290) ------ -------- ------ $5,880 $ 6,987 $3,400 ====== ======== ======
The components of the net deferred tax asset (liability) were as follows:
DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ (IN THOUSANDS) Deferred tax assets: Intangible assets......................................... $ -- $ 2,242 Accrued vacation.......................................... 507 399 Accrued expenses.......................................... 1,710 -- Other assets.............................................. -- 521 -------- ------- 2,217 3,162 -------- ------- Deferred tax liabilities: Intangible assets......................................... (3,996) -- Accounts receivable....................................... (1,667) (2,876) Marketable securities..................................... (2,031) (130) Depreciation.............................................. (1,088) (1,126) Deferred marketing costs.................................. (1,659) (1,298) Prepaid expenses and other assets......................... (141) (1,092) -------- ------- (10,582) (6,522) -------- ------- Net deferred tax liability........................ $ (8,365) $(3,360) ======== =======
The Company had no valuation allowance in 1998 and 1997. 10. STOCK INCENTIVES As of December 31, 1998, a total of 5 million shares of the Company's Class A Common Stock and 5 million shares of the Company's Class B Common Stock have been reserved for issuance to officers, key employees and non-employee directors under the Company's 1992 Stock Option Plan. In addition, as of December 31, 1998, a total of 2 million shares of the Company's Class A Common Stock have been reserved for issuance to officers, key employees and non-employee directors under the Company's 1997 Class A Common Stock Option Plan. Options are generally granted at the stock's fair market value on the date of grant, vest generally over a four or five year period and expire five or six years, respectively, from date of grant. Options issued to shareholders holding 10% or more of the Company's stock are generally issued at 110% of the stock's fair market value on the date of grant and vest over periods ranging from five to six years with early vesting if certain financial goals are met. Certain options issued to directors at the stock's fair market value vested immediately and expire five years from grant date. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standard (SFAS) F-17 55 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plan. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant date for awards issued in or subsequent to 1996 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss) -- as reported.................... $2,158 $(39,816) $3,819 Net income (loss) -- pro forma...................... $ (788) $(41,503) $3,072 Basic earnings (loss) per share -- as reported...... $ 0.04 $ (0.82) $ 0.09 Diluted earnings (loss) per share -- as reported.... $ 0.04 $ (0.82) $ 0.09 Basic earnings (loss) per share -- pro forma........ $(0.02) $ (0.86) $ 0.07 Diluted earnings (loss) per share -- pro forma...... $(0.02) $ (0.86) $ 0.07
The above pro forma results are not likely to be representative of the effects on reported net income for future years since options vest over several years and additional awards generally are made each year. The fair value of the weighted average of each year's option grants is estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1998, 1997 and 1996: expected volatility of 17.33% (1998), 19.16% (1997) and 15.52% (1996); risk free interest rate based on the U.S. Treasury strip yield at the date of grant; and expected lives of 4 to 6 years. The following information has been restated to reflect the stock dividend (See Note 19). Each option to purchase shares of common stock outstanding prior to the Stock Dividend was converted into an option to purchase both, but not either, shares of Class A Common Stock and Class B Common Stock.
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- ------------------- ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE -------------------- ------------------- ------------------ SHARES PRICE SHARES PRICE SHARES PRICE ----------- ------ ---------- ------ ---------- ----- Outstanding beginning of period..... 7,478,050 $ 9.22 5,203,800 $ 7.58 2,913,750 $5.49 Granted............................. 1,160,000 11.49 2,799,250 11.81 3,964,000 8.19 Exercised........................... (179,428) 6.40 (357,250) 5.87 (705,950) 4.32 Forfeited/expired................... (1,364,586) 10.91 (167,750) 8.95 (968,000) 6.00 ----------- ------ ---------- ------ ---------- ----- Outstanding end of period........... 7,094,036 $ 9.33 7,478,050 $ 9.22 5,203,800 $7.58 =========== ====== ========== ====== ========== ===== Options exercisable at end of period............................ 2,809,439 $ 8.20 1,344,550 $ 7.10 585,050 $5.53 =========== ====== ========== ====== ========== ===== Shares available for options that may be granted.................... 777,834 1,660,000 2,796,200 =========== ========== ========== Weighted-average grant date fair value of options, granted during the period -- exercise price equals stock market price at grant............................. $ 3.34 $ 3.30 $2.00 ====== ====== ===== Weighted-average grant date fair value of options granted during the period -- exercise price exceeds stock market price at grant............................. $2.10 =====
F-18 56 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ----------------------- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------------------ ----------- ----------- --------- ----------- --------- $4.09 to $5.45...................... 339,800 0.5 years $4.51 339,800 $ 4.51 $5.45 to $6.82...................... 691,500 1.9 years 6.21 422,998 6.12 $6.82 to $8.18...................... 549,000 1.6 years 7.42 304,000 7.49 $8.18 to $9.54...................... 2,595,570 2.3 years 8.64 1,229,814 8.67 $9.54 to $10.90..................... 774,500 3.6 years 10.38 78,496 10.38 $10.90 to $12.27.................... 1,213,666 3.2 years 11.23 284,333 11.17 $12.27 to $13.63.................... 930,000 2.8 years 13.14 149,998 13.19 --------- --------- ----- --------- ------ $4.09 to $13.63..................... 7,094,036 2.5 years $9.33 2,809,439 $ 8.20 ========= ========= ===== ========= ======
11. SAVINGS PLAN Employees who meet certain eligibility requirements can participate in the Companys' 401(k) Savings and Investment Plans. Under the plans, the Company may, at its discretion, match a percentage of the employee contributions. The Company recorded expenses related to its matching contributions of $1.1 million, $782 thousand and $115 thousand in the years ended December 31, 1998, 1997 and 1996, respectively. 12. RELATED PARTY TRANSACTIONS The Company paid $1.4 million, $364 thousand, and $48 thousand in 1998, 1997 and 1996, respectively, to Annapurna Corporation for consulting services and related expenses in connection with acquisition activity conducted by the Company. Annapurna Corporation is 100% owned by a significant stockholder. The Company also paid $200 thousand, $145 thousand, and $156 thousand in the years ended December 31, 1998, 1997 and 1996, respectively, to a Director of the Company for consulting services in connection with acquisition activity conducted by the Company. The Company utilizes a law firm of which one member of the Board of Directors is a partner to the firm. Legal fees paid to the law firm totaled $370 thousand, $146 thousand, and $91 thousand in the years ended December 31, 1998, 1997 and 1996, respectively. 13. DISCONTINUED OPERATIONS On June 1, 1995, the Company transferred substantially all of the assets and liabilities of its wholly-owned subsidiary, American Business Communications, Inc. ("ABC") to a wholly-owned subsidiary of Baker University. The Company received $3.0 million in the form of a 7.52% non-recourse promissory note, due in equal monthly installments through 2005. During 1996, Baker University defaulted on the note and the Company abandoned any remaining net assets of the business. As a result, the Company recorded a loss from abandonment of subsidiary of $1.4 million, net of tax. F-19 57 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUPPLEMENTAL CASH FLOW INFORMATION The Company made certain acquisitions in 1998 and 1997 (See Note 3) and assumed liabilities as follows:
1998 1997 ------- -------- (IN THOUSANDS) Fair value of assets........................................ $58,552 $134,555 Cash paid................................................... (31,654) (84,224) Common stock issued......................................... -- (29,178) ------- -------- Liabilities assumed......................................... $26,898 $ 21,153 ======= ========
During 1997, the Company acquired computer equipment totaling $577 thousand under a capital lease obligation (See Note 17). 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts shown in the following table are included in the consolidated balance sheets under the indicated captions.
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- (AMOUNTS IN THOUSANDS) Financial assets: Cash and cash equivalents............................ $ 29,603 $ 29,603 $ 10,653 $ 10,653 Marketable securities................................ 15,275 20,620 23,833 24,045 Other assets......................................... 2,000 2,000 2,071 2,000 Financial liabilities: Payable to shareholders.............................. -- -- (1,871) (1,871) Long-term debt....................................... 128,259 105,935 (81,284) (81,284) Derivatives: Interest rate swaps.................................. -- -- -- 133
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents and payable to shareholders. The carrying amounts approximate fair value because of the short maturity of those instruments. Marketable securities. The fair values of debt securities and equity investments are based on quoted market prices at the reporting date for those or similar investments. Other assets, including investments in other companies. Investments in companies not traded on organized exchanges are valued on the basis of comparisons with similar companies whose shares are publicly traded. Long-term debt. The 9 1/2% Senior Subordinated Notes due June 2008 are valued based on quoted market prices at the reporting date. All other debt obligations are valued at the discounted amount of future cash flows. Interest rate swap. The fair value of the interest rate swap was calculated based on discounted cash flows of the difference between the swap rate and the estimated market rate for similar terms. F-20 58 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. DERIVATIVES The Company may use interest rate swap agreements to reduce the potential impact of increases in interest rates on floating-rate long-term debt. The original cost of the swap is amortized to interest expense over its term. The amounts paid or received under the agreement are recorded as an adjustment to interest expense. Neither the Company nor the counterparties are required to collateralize their obligations under these agreements. Therefore, the swap agreements expose the Company to credit losses to the extent of counterparty nonperformance, but does not anticipate any losses from its agreements, which are with major financial institutions. 17. COMMITMENTS AND CONTINGENCIES The Company is committed to pay various individuals under consulting and non-compete agreements in future periods. Future payments by calendar year under consulting and non-compete agreements as of December 31, 1998 are as follows (in thousands): 1999........................................................ $1,844 2000........................................................ $1,117 2001........................................................ $ 306
Under the terms of its capital lease agreements, the Company is required to pay ownership costs, including taxes, licenses and maintenance. The Company also leases office space under operating leases expiring at various dates through October 2007. Certain of these leases contain renewal options. Rent expense was $3.1 million, $2.6 million, and $952 thousand in the years ended December 31, 1998, 1997 and 1996, respectively. Following is a schedule of the future minimum lease payments as of December 31, 1998:
CAPITAL OPERATING ------- --------- (IN THOUSANDS) 1999................................................... $ 814 $ 3,806 2000................................................... 549 2,337 2001................................................... 353 1,978 2002................................................... 195 1,746 2003................................................... -- 1,386 ------ ------- Total future minimum lease payments.................... 1,911 $11,253 ======= Less amounts representing interest..................... 133 ------ Present value of net minimum lease payments............ $1,778 ======
During October, 1998, the Company announced a decision in its year-long arbitration dispute with Experian Information Solutions, Inc. (Experian). The dispute centered around a license agreement between the Database America Companies (DBA) and Experian prior to the Company's acquisition of DBA. In October 1998 an arbitrator from the American Arbitration Association found DBA to have breached the contract and awarded damages to Experian for approximately $4.6 million. The Company and its subsidiaries are involved in other legal proceedings, claims and litigation arising in the ordinary course of business. Management believes that any resulting liability should not materially affect the Company's financial position, results of operations, or cash flows. 18. ACQUISITION-RELATED AND RESTRUCTURING CHARGES As a consequence of changes in the Company's acquisition strategy in 1996, management performed an evaluation of the remaining lives of certain intangibles related to acquisitions prior to 1995. Based on this evaluation, it was evident that the business and distribution networks acquired changed more rapidly than was originally F-21 59 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) estimated. Therefore, the estimated useful lives of the related goodwill and distribution networks were revised to 8 and 2 years, from 30 and 15 years, respectively. This change in estimated lives resulted in a charge of $11.5 million in 1996. As part of the acquisition of DDA in August 1996 (See Note 3), the Company recorded acquisition-related charges for purchased in-process research and development costs (purchased IPR&D) totaling $10.0 million for write-offs in conjunction with the merger of DDA, which related to projects that had not met technological feasibility. The projects under development involve Digital Video Disk-Read Only Memory based information database technology. The value of the technology as applied to DDA's PhoneDisc product was $3.8 million and as applied to the Company's products was $6.2 million. As part of the acquisition of DBA in February 1997 (See Note 3), the Company recorded acquisition-related charges totaling $51.8 million for write-offs in conjunction with the merger of DBA for purchased IPR&D which related to projects that had not met technological feasibility ($49.2 million), as well as other related integration and organizational restructuring costs ($2.6 million). The projects under development involve data processing technologies including merge/purge and update and maintenance capabilities of the relational databases and interactive media technology to allow DBA to provide existing services via the Internet. The value of the data processing technologies was $2.3 million and the value of the interactive media technology was $46.9 million. As part of the acquisition of Pro CD in August 1997 (See Note 3), the Company recorded acquisition-related charges totaling $4.3 million for write-offs in conjunction with the merger of Pro CD for purchased IPR&D which related to projects that had not met technological feasibility. The projects under development involve graphical user interface technology, data enhancements, DVD capability and Year 2000 compliance for the Select Phone product line. The value of these projects was $4.3 million. As part of the acquisition of Walter Karl in March 1998 (See Note 3), the Company recorded acquisition-related charges totaling $3.8 million for write-offs in conjunction with the merger of Walter Karl for purchased IPR&D which related to projects that had not met technological feasibility. The purchased IPR&D recorded in connection with the acquisition of Walter Karl consisted of various projects, of which none were individually significant, related to areas including: Internet capabilities, automated job cards and shipping information, database and merge/purge processing enhancements, list brokerage and management order and data entry systems. There were a total of 12 separately identified projects. The total amount allocated to the above IPR&D projects was $3.8 million after retroactive application of the Securities and Exchange Commission's new guidelines for valuing purchased IPR&D. In addition to the write-off of purchased IPR&D of $3.8 million for Walter Karl previously described, included in acquisition-related and restructuring charges in the accompanying consolidated statement of operations for 1998 are: $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation, $0.7 million associated with the Company's offering to sell Class A Common Stock which was not completed, $1.4 million for restructuring costs related to the Company's compilation and sales activities for new businesses enacted during the first quarter of 1998, and $1.2 million for restructuring costs related to certain cost reduction measures enacted during the third quarter of 1998. During the first quarter of 1998 the Company recorded a restructuring charge of $1.4 million related to the closing of the County Data Corporation (CDC) new business compilation and sales center and moving these operations from Vermont to Nebraska. All 45 of the CDC employees were terminated, and severance recorded totaled $0.6 million. The restructuring charges also included lease termination costs of $0.3 million and a write-off of $0.5 million of leasehold improvement costs associated with the closed Vermont facility. The restructuring, including recording the payments and write-downs described, was completed by December 31, 1998. During the third quarter of 1998 the Company recorded a restructuring charge of $1.2 million which included $0.6 million in severance for 244 employees terminated as a result of the implementation of certain cost reduction measures. These employees were primarily in support and administration positions but some under-performing sales personnel were also terminated. The restructuring charges also included a charge of $0.4 million related to the planned closing of four field sales offices. Additionally, the Company recorded a write-down of $0.2 million related F-22 60 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to leasehold improvement costs at facilities leased by the Company which were being closed. The restructuring, including recording the payments and write-downs described, was completed as of December 31, 1998, with the exception of the costs totaling $0.5 million related to the planned exit of certain field sales offices which are anticipated to be completed by March 31, 1999. Included in acquisition-related charges for 1997 are $2.6 million of expenses related to integrating acquired operations into the Company's existing operations. These expenses consisted primarily of costs such as travel between the Company and the new operations, consulting, payroll and other expenses related to implementing Company policies and information systems at the new locations. All costs had been incurred by December 31, 1997. 19. STOCK RECLASSIFICATION AND STOCK DIVIDEND AND STOCKHOLDERS RIGHTS PLANS On October 3, 1997, the Company's Board of Directors and shareholders approved the reclassification of the existing common stock as Class B Common Stock and authorized 220,000,000 shares of a new Class A Common Stock. The Board also declared a two-for-one stock split, effected in the form of a stock dividend of one share of Class A Common Stock for each share of Class B Common Stock then outstanding. Accordingly all share and per share information has been restated to reflect the stock split. Each share of Class A Common Stock entitles the holder to one vote and a non-cumulative dividend of $0.02 per year, when and as declared by the Board of Directors in preference to any dividend on Class B Common Stock. Each share of Class B Common Stock entitles the holder to ten votes. On October 3, 1997, the Company adopted a stockholder rights plan with respect to its Class A Common Stock and adopted certain changes to the plan it had adopted on July 21, 1997 with respect to its Class B Common Stock, under which the Board declared a dividend distribution of one Preferred Stock purchase right to holders of each share of Class A Common Stock and Class B Common Stock. The rights are not exercisable until ten days after a person or group announces the acquisition of 15% or more of the Company's voting stock or announces a tender offer for 15% or more of the Company's outstanding common stock. Each right entitles the holder to purchase common stock at one half the stock's market value. The rights are redeemable at the Company's option for $0.001 per Right at any time on or prior to public announcement that a person has acquired 15% or more of the Company's voting stock. The rights are automatically attached to and trade with each share of Common Stock. 20. SEGMENT INFORMATION The Company currently manages existing operations utilizing financial information accumulated and reported for two business segments. The small business segment principally engages in the selling of sales lead generation and consumer CD-ROM products to small to medium sized companies, small office and home office businesses and individual consumers. This segment includes the sale of content via the Internet. The large business segment principally engages in the selling of data processing services, licensed databases, database marketing solutions and list brokerage and list management services to large companies. This segment includes the licensing of databases for Internet directory assistance services. Corporate activities principally represent the information systems technology, database compilation, database verification, and administrative functions of the Company. Investment income (loss), interest expense, income taxes, amortization of intangibles, and depreciation expense are only recorded in corporate activities. The Company does not allocate these costs to the two business segments. The small business and large business segments reflect actual net sales, direct order production, and identifiable direct sales and marketing-related costs related to their operations. The Company records unusual or non-recurring items including acquisition-related and restructuring charges and provisions for litigation settlement in corporate activities to allow for the analysis of the sales business segments excluding such unusual or non-recurring charges. F-23 61 INFOUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company accounts for property and equipment on a consolidated basis. The majority of the Company's property and equipment is shared by the Company's business segments. Depreciation expense is recorded in corporate activities. The Company has no intercompany sales or intercompany expense transactions. Accordingly, there are no adjustments necessary to eliminate amounts between the Company's segments. The following tables summarizes certain segment information:
FOR THE YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------- SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------- -------- ---------- ------------ (IN THOUSANDS) Net sales...................................... $129,973 $98,705 $ -- $228,678 Provision for litigation settlement............ -- -- 4,500 4,500 Acquisition-related and restructuring charges...................................... -- -- 10,093 10,093 Operating income (loss)........................ 54,660 39,671 (91,761) 2,570 Investment income.............................. -- -- 16,628 16,628 Interest expense............................... -- -- 9,160 9,160 Income (loss) before income taxes and discontinued operations...................... 54,660 39,671 (86,293) 8,038
FOR THE YEAR ENDED DECEMBER 31, 1997 ----------------------------------------------- SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------- -------- ---------- ------------ (IN THOUSANDS) Net sales...................................... $116,333 $76,994 $ -- $193,327 Acquisition-related and restructuring charges...................................... -- -- 56,098 56,098 Operating income (loss)........................ 50,462 35,688 (118,629) (32,479) Investment income.............................. -- -- 3,748 3,748 Interest expense............................... -- -- 4,098 4,098 Income (loss) before income taxes and discontinued operations...................... 50,462 35,688 (118,979) (32,829)
FOR THE YEAR ENDED DECEMBER 31, 1996 ----------------------------------------------- SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------- -------- ---------- ------------ (IN THOUSANDS) Net sales...................................... $ 87,431 $20,867 $ -- $108,298 Acquisition-related and restructuring charges...................................... -- -- 21,500 21,500 Operating income (loss)........................ 37,972 9,865 (40,932) 6,905 Investment income.............................. -- -- 3,194 3,194 Interest expense............................... -- -- 209 209 Income (loss) before income taxes and discontinued operations...................... 37,972 9,865 (38,890) 8,947
F-24 62 INFOUSA INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS --------------------------- BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND CHARGED TO END OF DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- -------------- ---------- ---------- Allowance for doubtful accounts receivable:............................. (A) December 31, 1996....................... $1,024 $ 1,485 $ 364* $ 1,284 $1,589 December 31, 1997....................... $1,589 $ 1,272 $ 961* $ 2,387 $1,435 December 31, 1998....................... $1,435 $ 4,388 $ 578* $ 3,701 $2,700 Allowance for sales returns:.............. (B) December 31, 1996....................... $ 800 $ 3,401 $ 929* $ 3,995 $1,135 December 31, 1997....................... $1,135 $ 7,748 $2,477* $ 6,782 $4,578 December 31, 1998....................... $4,578 $15,693 $ -- $15,682 $4,589
- --------------- * Recorded as a result of acquisitions (A) Charge-offs during the period indicated (B) Returns processed during the period indicated S-1 EX-2.8 2 ASSET PURCHASE AGREEMENT 1 =============================================================================== ASSET PURCHASE AGREEMENT By and Between ARMONK LIST COMPANIES CORP., a New York corporation, and JAMI MARKETING SERVICES, INC., a Delaware corporation Dated as of May 27, 1998 =============================================================================== 2 ARTICLE I SALE AND PURCHASE OF ACQUIRED ASSETS Section 1.01. Agreement To Purchase and Sell............................1 Section 1.02. Assumption of Liabilities.................................3 Section 1.03. Purchase Price............................................4 Section 1.04. Allocation of Consideration...............................6 Section 1.05. Closing...................................................6 ARTICLE II SELLER'S REPRESENTATIONS AND WARRANTIES Section 2.01. Acquired Assets and Title.................................9 Section 2.02. Corporate Status.........................................10 Section 2.03. Power and Authority......................................10 Section 2.04. Noncontravention.........................................10 Section 2.05. Enforceability...........................................11 Section 2.06. Consents and Approvals...................................11 Section 2.07. Claims and Proceedings...................................12 Section 2.08. Financial Statements.....................................12 Section 2.09. [Reserved]...............................................12 Section 2.10. No Material Adverse Changes..............................12 Section 2.11. Tax Matters..............................................13 Section 2.12. Employee Benefit Plans and Related Matters...............13 Section 2.13. Bankruptcy or Insolvency Proceedings.....................15 Section 2.14. [Reserved]...............................................15 Section 2.15. No Other Agreements......................................15 Section 2.16. No Broker................................................15 Section 2.17. Licenses, Permits, Etc. .................................15 Section 2.18. Compliance With Laws.....................................15 Section 2.19. [Reserved]...............................................15 Section 2.20. Environmental Matters....................................16 Section 2.21. [Reserved]...............................................17 Section 2.22. Full Disclosure..........................................17 ARTICLE III REPRESENTATIONS AND WARRANTIES BY BUYER Section 3.01. Organization.............................................17 Section 3.02. Power and Authority......................................17 Section 3.03. Noncontravention.........................................17
1 3 Section 3.04. No Broker................................................17 Section 3.05. Bankruptcy or Insolvency Proceedings.....................17 Section 3.06. Enforceability...........................................18 Section 3.07. Use of Premises..........................................18 ARTICLE IV MISCELLANEOUS Section 4.01. Costs....................................................18 Section 4.02. Headings.................................................18 Section 4.03. Counterparts.............................................18 Section 4.04. Assignment or Delegation.................................18 Section 4.05. Severability.............................................18 Section 4.06. Entire Agreement.........................................18 Section 4.07. Notices..................................................18 Section 4.08. Nonwaiver................................................19 Section 4.09. Exhibits and Schedules...................................19 Section 4.10. Indemnification..........................................19 Section 4.11. Governing Law............................................22 Section 4.12. Amendments...............................................22 Section 4.13. Further Assurances.......................................22 Section 4.14. Confidentiality..........................................22 EXHIBIT A FORM OF ESCROW AGREEMENT EXHIBIT B ALLOCATION SCHEDULE EXHIBIT C FORM OF EMPLOYMENT AGREEMENTS EXHIBIT D FORM OF NONCOMPETITION AGREEMENTS EXHIBIT E FORM OF ASSUMPTION AGREEMENT EXHIBIT F FORM OF OPINION OF BUYER'S COUNSEL EXHIBIT G FORM OF BILL OF SALE EXHIBIT H FORM OF OPINION OF SELLER'S COUNSEL SCHEDULES Schedule 1.01 Financial Statements Schedule 2.01(a) Liens and Encumbrances on the Purchased Assets Schedule 2.01(c) Material Contracts Schedule 2.01(d) Intangible Assets Schedule 2.02 Good Standing Schedule 2.04 Noncontravention Schedule 2.06 Consents
2 4 Schedule 2.07 Claims and Proceedings Schedule 2.08 Potential Additional Liabilities Schedule 2.10 Potential Adverse Changes Schedule 2.12(a) Current JAMI Employees Earning in Excess of $50,000 per Year Schedule 2.12(b) Employee Benefit Plan Schedule 2.18 Compliance With Laws 3 5 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of May 27, 1998 (the "Effective Date") by and between JAMI MARKETING SERVICES, INC., a Delaware corporation ("Seller"), and ARMONK LIST COMPANIES CORP., a New York corporation ("Buyer"). W I T N E S S E T H: WHEREAS, the Seller desires to sell to Buyer and Buyer desires to purchase from Seller certain of the assets of the Seller, subject to the terms, covenants and conditions contained in this Agreement; NOW, THEREFORE, in consideration of the premises, the representations, warranties, covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE AND PURCHASE OF ACQUIRED ASSETS SECTION 1.01. AGREEMENT TO PURCHASE AND SELL. (a) On and subject to the terms and conditions of this Agreement, the Seller agrees to sell, convey, transfer, assign and deliver to the Buyer and the Buyer agrees to purchase, receive, assume and accept from the Seller the Acquired Assets and the Acquired Liabilities for the consideration specified in Section 1.03. (b) It is expressly understood and agreed that the Acquired Assets shall not include any of the assets of either JAMI Charity Brands or JAMI Charity Brands Services, Inc. (c) As used in this Agreement, the following capitalized terms have the meanings set forth below unless the context otherwise requires. Certain additional defined terms are found elsewhere in this Agreement. "Acquired Assets" means all of Seller's right, title and interest in or to the Assets as and to the extent existing on the Effective Date, including all property, plant, machinery, equipment, computer hardware and software, goodwill and other assets, employed or held in connection with Seller's Business (other than the Excluded Assets), and including, without limitation, all cash, cash equivalents, accounts receivable and all 1 6 proceeds thereof; all work in process, supplies, furniture, fixtures and equipment, and the name "JAMI Marketing." "Acquired Liabilities" means (i) all of Seller's liabilities as shown on the Unaudited Financial Statements (including the notes thereto) as at the Balance Sheet Date (other than those liabilities that have been paid or otherwise satisfied or discharged prior to the Effective Date) and those liabilities of Seller arising in the ordinary course of business of Seller since the Balance Sheet Date, which are of the same nature as the liabilities set forth on such Unaudited Balance Sheet, (ii) all obligations (A) under real property and equipment leases that are included in the Acquired Assets and (b) with respect to any current or former employees or independent contractors, including without limitation obligations for accrued vacation pay, sick leave and statutory and non-statutory severance benefits, (iii) all obligations of Seller under the contracts and other agreements identified on Schedule 2.01(c), but excluding the Excluded Liabilities. "Assets" means all of Seller's assets shown on its unaudited balance sheet as at the Balance Sheet Date, other than the Excluded Assets. "Audited Balance Sheet" means the Balance Sheet of the Seller as at March 31, 1998 included in the Audited Financial Statements. "Audited Financial Statements" means the balance sheet and statement of income and retained earnings of the Seller as at and for the year ended March 31, 1998 audited by the Present Accountants and delivered by the Seller pursuant to Section 1.03(c) of this Agreement. "Balance Sheet Date" means March 31, 1998. "Brokerage Component" means the Net Revenues of the Seller from its brokerage operations reflected in the Audited Financial Statements. "Buyer's Accountants" means Coopers & Lybrand. "Computer Operations Component" means the net Revenues of the Seller from its computer processing and consulting operations reflected in the Audited Financial Statements. "Excluded Assets" means the JAMI Charity Brands Assets; and the other assets identified on Schedule 1.01-(B) "Excluded Liabilities" means Accounts Payable relating to certain business practices of Seller referred to in Schedule 2.19, relating to billing procedures which result in unclaimed, unpaid and/or uncollected obligations owing by Seller to list owners and others, the amount of which is estimated to be $250,000; and the other liabilities identified on Schedule 1.01-(B) 2 7 "JAMI Charity Brands Assets" means all of the shares of JCBS Inc. and its interest in the partnership known as "JAMI Charity Brands Services", and all of the assets, tangible and intangible, and liabilities relating to the business of such corporation and such partnership, and amounts due to JCBS Inc. or JAMI from such corporation and such partnership. "JCBS Inc." means JAMI Charity Brands Services, Inc., a Delaware corporation. "Management Component" means the Net Revenues of Seller from its list management operations reflected in the Audited Financial Statements. "Net Revenues" means gross billings less list rental payments to third parties. "Present Accountants" means Linder & Linder and Feldman, Gutterman Meinberg & Company. "Revenue Components" means, collectively, the Brokerage Component, Management Component and the Computer Operations Component. "Seller's Business" means Seller's business and operations reflected in the Unaudited Financial Statements as at and for the period ending on the Balance Sheet Date and as conducted through the Effective Date, other than the Excluded Assets and the Excluded Liabilities. "Tangible Net Worth" means the difference between the amount of (A) the Current Assets and Operating Equipment (and in no event including any of the Excluded Assets) and (B) the Current Liabilities. "Unaudited Balance Sheet" means the Balance Sheet prepared by the Seller for the fiscal year ended March 31, 1998, included as part of Schedule 1.01. SECTION 1.02. ASSUMPTION OF LIABILITIES. The Buyer hereby assumes the Acquired Liabilities. The Buyer will not in any event assume or be responsible for any liabilities, liens, claims, obligations, or encumbrances of the Seller, contingent or otherwise, except for the Acquired Liabilities, and the Acquired Assets shall be sold and conveyed to Buyer free and clear of all liabilities, liens, claims, charges, restrictions on transfer, security interests, pledges or encumbrances of any kind, except for the Acquired Liabilities and as otherwise set forth on Schedule 2.01(a) or Schedule 2.08. Without limiting the generality of the foregoing, in no event will Buyer assume (except as set forth on the Unaudited Balance Sheet): (a) any income, sales, property, franchise, use, or other tax of the Seller arising out of or resulting from the sale of the Acquired Assets pursuant hereto; (b) any liability, obligation, or cost resulting from any claim or lawsuit or other proceeding relating to the Acquired Assets or naming the Seller, or any successor thereof, 3 8 as a party arising out of events, transactions, or circumstances occurring or existing prior to Closing; (c) any claim against the Buyer, or the Seller, which claim is based, in whole or in part, upon the failure of the Seller or the Buyer to comply with laws applicable to bulk transfers. Acquired Liabilities include an Accrued Rent Liability of $254,746.00 arising as a result of initial rent concessions granted to Seller by the landlord under Seller's lease of its current premises at One Blue Hill Plaza, Pearl River, New York. In the event that Buyer terminates such lease and settles any liabilities under the lease for less than $254,746, Buyer will pay Seller an additional adjustment of the Purchase Price in an amount equal to the amount of the final settled liability under the lease which is less than $254,746. SECTION 1.03. PURCHASE PRICE. (a) The purchase price (the "Purchase Price") for the Acquired Assets of $5,439,500 subject to adjustment pursuant to this Section 1.03, will be payable by the Buyer to the Seller as follows: (i) $4,839,500 in cash, subject to adjustment pursuant to this Section 1.03, will be payable to the Seller by wire transfer of immediately available funds on the Effective Date; and (ii) an amount equal to $600,000 (the "Escrow Amount") will be deposited on or prior to the Closing in an escrow account to be maintained with the escrow agent designated in the Escrow Agreement in the form of Exhibit A to this Agreement (the "Escrow Agent"), which Escrow Amount will be held for one year following the Effective Date in connection with the potential indemnification claims hereunder and for payment of uncollected accounts receivables pursuant to the terms and conditions of the Escrow Agreement. (b) To the extent that the Net Revenues of the Seller from its Brokerage Component at and for the twelve months ended March 31, 1998, as reflected in its audited financial statements prepared in accordance with generally accepted accounting principles consistently applied (the "March 31 Financial Statements"), exceed $2,770,000, the Purchase Price will be increased by an amount equal to 1.5 times the amount of such excess and to the extent that such Net Revenues are less than $2,770,000, the Purchase Price will be reduced by an amount equal to 1.5 times the amount of such difference. To the extent that the Net Revenues of the Seller from its Management Component for the twelve months ended March 31, 1998, as reflected in its March 31 Financial Statements, exceed $2,320,000, the Purchase Price will be increased by an amount equal to 1.5 times the amount of such excess and to the extent that such Net Revenues are less than $2,320,000, the Purchase Price will be reduced by an amount equal to 1.5 times the 4 9 amount of such difference. To the extent that the Net Revenues of the Seller from its Computer Operating Component for the twelve months ended March 31, 1998, as reflected in its March 31 Financial Statements, exceed $2,000,000, the Purchase Price will be increased by an amount equal to 2.5 times the amount of such excess and to the extent that such Net Revenues are less than $2,000,000, the Purchase Price will be reduced by an amount equal to 2.5 times the amount of such difference. (c) CALCULATION OF POST CLOSING ADJUSTMENTS TO PURCHASE PRICE. As promptly as practicable after the Closing Seller shall cause the Present Accountants to prepare and deliver to Buyer (i) the Audited Financial Statements, (ii) an unaudited balance sheet for Seller as at May 29, 1998 (the "Closing Balance Sheet") prepared in accordance with generally accepted accounting principles, consistently applied in the manner used to prepare Seller's Audited Balance Sheet (it being agreed that all unbilled receivables of Seller as of May 29, 1998 shall be included in Seller's accounts receivable in preparing the Closing Balance Sheet), and (iii) a statement (the "Statement") setting forth (1) each of the Revenue Components itemized by Brokerage Component, Management Component, and Computer Operations Component reflected in the Audited Financial Statements, and (2) the Tangible Net Worth of the Seller as at May 29, 1998, reflected in the Closing Balance Sheet (the "Closing Tangible Net Worth"). Not later than 15 business days after the Statement is delivered to Buyer, Buyer shall notify Seller in writing (the "Notice of Disagreement") whether Buyer disagrees with the computation of the Closing Tangible Net Worth or the Revenue Components. If no Notice of Disagreement is received by Seller within such 15-business day period, then the calculation of the Closing Tangible Net Worth and the Revenue Components shall be deemed to be accepted and agreed to by Buyer. Buyer shall have the right to review the ledgers, books, records and work papers of Seller and the Present Accountants utilized in preparing the Closing Balance Sheet and the Net Revenue Statement. The Notice of Disagreement shall provide specific reasons for the disagreement. If such Notice of Disagreement is given, then Buyer and Seller shall use reasonable efforts to resolve the disagreement regarding the calculation of the Closing Tangible Net Worth and the Revenue Components. If no agreement is reached between them within thirty (30) days after the date on which Buyer gives its Notice of Disagreement, then a determining accountant (the "Determining Accountant") shall be appointed by the Buyer's Accountants and the Present Accountants within ten (10) days thereafter with instructions to resolve the disagreement and provide a report of its determination of the amounts in dispute within thirty (30) days of its appointment. The Determining Accountant may examine all ledgers, books, records and work papers utilized in connection with the accounting and preparation of the Closing Balance Sheet and the Audited Financial Statements by the scope of its engagement will be limited to resolving those items which Buyer identified in its Notice of Disagreement as to which Buyer disagreed and determining whether such items were properly reflected on the Net Revenue Statement in accordance with the requirements of this Section; provided that the Determining Accountant shall also make such other changes to the Closing Balance Sheet 5 10 and the Audited Financial Statements as are necessary and appropriate for the consistent presentation thereof in light of its determination of the specific issues in dispute. The decision of the Determining Accountant shall be delivered in a written report addressed to Buyer and Seller and shall be binding and conclusive upon the parties hereto. The costs and fees of the Determining Accountant shall be borne one-half by Seller and one-half by Buyer. The Tangible Net Worth set forth in the Closing Balance Sheet and the Revenue Components set forth in the Statement, either as agreed to by Seller and Buyer if the calculation of the Closing Tangible net Worth and the Revenue Components are not referred to the Determining Accountant or as finally determined by the Determining Accountant, are referred to respectively herein as the "Final Closing Tangible Net Worth" and the "Final Revenue Components." (i) Upon the fifth Business Day after completion of the calculation of the Final Closing Tangible Net Worth and Final Revenue Components, the Purchase Price shall be adjusted in the manner set forth below. (ii) The Purchase Price shall be reduced by the sum of (i) the amount, if any, by which the Final Closing Tangible Net Worth is less than zero, and (ii) the sum of the amounts, if any, by which each result obtained by multiplying each Revenue Component by its corresponding multiple referred to in Section 1.03(b) is less than the amount for such Revenue Component required by such Section 1.03(b), and Seller shall deliver to Buyer, cash in an amount equal to such reduction in the Purchase Price within five (5) business days thereafter. (iii) The Purchase Price shall be increased by the sum of (i) the amount, if any, by which the Final Closing Tangible Net Worth is greater than zero, and (ii) the sum of the amounts, if any, by which each result obtained by multiplying each Revenue Component by its corresponding multiple referred to in Section 1.03(b) is greater than the amount for such Revenue Component required by such Section 1.03(b), and Seller shall deliver to Buyer, cash in an amount equal to such increase in the Purchase Price within five (5) business days thereafter. SECTION 1.04. ALLOCATION OF CONSIDERATION. The Buyer and the Seller agree to allocate the Purchase Price among the Acquired Assets for all purposes, including financial accounting and tax purposes, in accordance with the allocation schedule set forth in Exhibit B to this Agreement. The Buyer and the Seller agree to cooperate in preparing and filing the applicable and necessary Internal Revenue Service forms reflecting such allocation, acknowledge and agree that such allocations have been determined by arm's length negotiations and that neither of them will take a position on any income tax return, before any governmental agency charged with the collection of any income tax or in any judicial proceeding that is inconsistent with such allocation. 6 11 SECTION 1.05. CLOSING. (a) Subject to the terms and conditions of this Agreement, the closing under this Agreement (the "Closing") shall take place simultaneously as of the date this Agreement is executed. The Closing shall occur at the offices of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, New York City, New York, or at such other place as the Buyer and the Seller may agree. (b) At Closing, the Buyer shall execute, acknowledge and/or deliver or cause to be delivered the following: (i) The Purchase Price, other than the Escrow Amount, in cash by wire transfer of immediately available funds pursuant to wiring instructions provided by the Seller prior to the Closing; (ii) The Employment Agreements, in the form of Exhibit C, for each of Scott Miller, Arlene Rosenbaum, John Greany, David Malamed and Jeff Feldman (collectively, the "Employees"), duly executed by the Buyer; (iii) The Noncompetition Agreements, in the form of Exhibit D, for each of the Employees, Jeffrey Schwartz and Michael Miller, duly executed by the Buyer; (iv) A certificate of good standing for the Buyer issued by the Secretary of State of the State of New York; (v) An assumption agreement (the "Assumption Agreement") relating to the assumption of certain liabilities of the Seller, in the form of Exhibit E duly executed by the Buyer; (vi) The opinion of counsel to the Buyer in substantially the form set forth in Exhibit F; (vii) The Escrow Agreement in the form of Exhibit A, duly executed by the Buyer; (viii) Buyer Secretary's Certificate certifying as to the following: (A) resolutions duly adopted by the Board of Directors of the Buyer, certified by its corporate secretary, authorizing the execution, delivery and performance of this Agreement, the Employment Agreements, the Noncompetition Agreements, the Assumption Agreement and the Escrow Agreement and the consummation of the transactions contemplated thereby; and 7 12 (B) the incumbency and signature of the officers of the Buyer executing this Agreement, the Employment Agreements, the Noncompetition Agreements, the Assumption Agreement and the Escrow Agreement. (ix) The Escrow Amount, which will be delivered to the Escrow Agent; and (x) Any and all other instruments reasonably required or requested by the Seller or its counsel in connection with the Closing. (c) At Closing, the Seller shall execute, acknowledge and/or deliver or cause to be delivered the following: (i) A bill of sale, relating to the Acquired Assets to be transferred to the Buyer, in the form attached hereto as Exhibit G, duly executed by the Seller (the "Bill of Sale"); (ii) Such other instruments of conveyance, assignment and transfer, in form and substance satisfactory to the Buyer's counsel, as shall be effective to vest in the Buyer good and marketable title to the Acquired Assets; (iii) The Employment Agreements, in the form of Exhibit C, duly executed by the respective Employees; (iv) The Noncompetition Agreements, in the form of Exhibit D, duly executed by the respective Employees, Jeffrey Schwartz and Michael Miller; (v) A certificate of good standing for the Seller issued by the Secretary of State of the State of Delaware; (vi) Seller Secretary's Certificate certifying to the following: (A) resolutions duly adopted by the Board of Directors of the Seller certified by its corporate secretary, authorizing the execution, delivery and performance of this Agreement, the Assumption Agreement and the Escrow Agreement and the consummation of the transactions contemplated thereby; (B) the incumbency and signature of the officers of the Seller executing this Agreement, the Assumption Agreement and the Escrow Agreement; and 8 13 (C) resolution duly adopted by all of the Seller's shareholders authorizing the consummation of the transaction contemplated hereby. (vii) The opinion of counsel to the Seller in substantially the form set forth in Exhibit H; (viii) The Escrow Agreement, in the form of Exhibit A, duly executed by the Seller; (ix) Draft, unaudited financial statements of the Seller at and for the twelve months ended March 31, 1998, prepared in accordance with generally accepted accounting principles consistently applied, except as otherwise noted in the financial statements (the "Unaudited March 31 Financial Statements"); (x) All consents, approvals, authorizations or orders of and all registrations, declarations or filings with third parties, including creditors, contract parties or public or governmental authorities, necessary for the authorization, execution and delivery of this Agreement by the Seller or the consummation by the Seller of the transactions contemplated by this Agreement, except for those which the Seller has not obtained or made as set forth in Schedule 2.06; and (xi) Any and all other instruments reasonably required or requested by the Buyer or its counsel in connection with the Closing. ARTICLE II SELLER'S REPRESENTATIONS AND WARRANTIES The Seller represents and warrants to the Buyer that the statements contained in this Article II, including the disclosure schedules thereto, are correct and complete in all material respects as of the date of this Agreement, except that any representation or warranty that is given as of a particular date and relates solely to a particular date or period is given as of such date or period. If and to the extent any information required to be furnished in any Section of any Schedule or Exhibit hereto is contained in another Section of such Schedule or Exhibit or in any other Schedule or Exhibit hereto, such information will be deemed to be included in all Sections or Exhibits of each Schedule or Exhibit in which such information is required to be included. Seller represents, warrants and covenants to Buyer, its successors and assigns as follows: 9 14 SECTION 2.01. ACQUIRED ASSETS AND TITLE. (a) Except for the Acquired Liabilities and as otherwise set forth in Schedule 2.01(a) or Schedule 2.08 hereto, the Seller will convey the Acquired Assets to Buyer free and clear of all liabilities, liens, claims, charges, restrictions on transfer, security interests, pledges or encumbrances of any kind. The Seller has the full right, power, authority and capacity to sell and transfer the Acquired Assets to the Seller. There are no agreements, covenants, conditions, limitations or other exceptions affecting the Acquired Assets which would prevent, prohibit, delay or interfere with Buyer's intended use of the Acquired Assets. (b) Schedule 1.01 hereto contains a description of all material fixed and other tangible assets owned, leased or used by the Seller, including without limitation, improvements to leased property and real property, equipment, vehicles and all personal property relating to the Seller and its business and properties. All such improvements, equipment, vehicles and personal property are in good working condition and repair, normal wear and tear excepted. All such improvements, equipment, vehicles and personal property comply in all material respects to applicable health, sanitation, fire, environmental (including air and water pollution laws and regulations), safety, labor, zoning and building laws and ordinances; and the Seller has not received any written notification within the last five years of any violation of any applicable ordinance or regulation of building, zoning or other law, in respect of its properties or operations. To the Seller's knowledge, none of such real property is currently the subject of any eminent domain, condemnation or similar proceeding and, to the Seller's knowledge, no such proceeding is threatened. To the Seller's knowledge, there are no pending or threatened proceedings which might interfere with the Buyer's quiet enjoyment of such real property. (c) Schedule 2.01(c) contains a list of all contracts and agreements for the performance of services or the purchase or leasing of property by the Seller of an amount or value in excess of $10,000 ("Material Contracts"). Each of the Material Contracts is in full force and effect and (assuming each such contract is a valid and binding obligation of the other parties thereto) is valid and enforceable in accordance with its terms. The Seller is not, and to the knowledge of the Seller each other person that has or had any obligation under a Material Contract is not, in material violation, breach or default of any such Material Contract or with or without notice or lapse of time or both would be in material violation, breach or default of any such Material Contract, except as set forth in Schedule 2.01(c). The Seller has not renegotiated, and there are no outstanding rights to renegotiate, any amounts paid or payable under any Material Contract with any person. (d) Schedule 2.01(d) hereto also contains a description of all material intangible assets owned or used by the Seller, including, without limitation, tradenames, trademarks, servicemarks, copyrights, uncopyrighted marks, software, licenses, sublicenses, permits and patents (collectively, the "Intangible Assets"). Except as set forth in Schedule 2.01(d), 10 15 the Seller has full and clear title to the Intangible Assets for the goods and services for which such Intangible Assets are used and believes that any registrations thereof are valid and subsisting and are in full force and effect. Except as set forth in Schedule 2.01(d), the Seller has the sole, full and clear title to each copyright in the Intangible Assets and believes that the registrations thereof are valid and subsisting and are in full force and effect. SECTION 2.02. CORPORATE STATUS. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full corporate power and authority to carry on its business and to own or lease and to operate its properties as and in the places where such business is conducted and such properties are owned, leased or operated. The Seller is qualified to do business as a foreign corporation in the jurisdictions identified in Schedule 2.02 and is in good standing under the laws of any state of the United States in which the character of the properties owned or leased by it therein or in which the transaction of business makes such qualification necessary, except where the failure to be so qualified would not have a Material Adverse Effect. For purposes of this Agreement, the term "Material Adverse Effect" shall mean any change or changes in the assets, business, operations, property or results of operations that is materially adverse to the financial condition of the Seller. The Seller has delivered to the Buyer complete and correct copies of its certificate of incorporation and bylaws or other organizational documents, in each case, as amended and in effect on the date of this Agreement. The Seller is not in violation of any of the provisions of such organizational documents. SECTION 2.03. POWER AND AUTHORITY. The Seller has full corporate power and authority to enter into, execute and deliver this Agreement and all other agreements and documents contemplated by this Agreement, to perform its obligations thereunder and to consummate the transactions contemplated thereby except as set forth in Schedule 2.02 hereto. The Seller has taken all corporate action required, including requisite actions by the Board of Directors and the shareholders of the Seller, to authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated on its part herein. SECTION 2.04. NONCONTRAVENTION. Except as set forth in Schedule 2.04 hereto, neither the execution and delivery of this Agreement by the Seller nor the consummation by the Seller of the transaction as contemplated on its part hereby will (i) violate in any material respects or result in a material change in any rights or obligations under any governmental permit or license, any existing law or regulation applicable to the Seller or any judgment, writ, injunction, order, award or decree of any court, arbitrator or governmental authority by which it is bound, (ii) conflict with in any material respect, result in a breach of any material provision of or the modification or termination of, constitute a material default (with the giving of notice or the lapse of time or both) under or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the assets of the Seller which in the aggregate are material under any mortgage, indenture, security agreement, contract, agreement or other undertaking to which it is a party or by which it is bound (other than contracts, leases or other agreements which require a consent to the transfer thereof) and which, in the aggregate, would have a Material Adverse Effect upon 11 16 the operation of the business conveyed as part of the transfer of the Acquired Assets or (iii) conflict with or result in a breach of any provisions of its certificate of incorporation or bylaws. SECTION 2.05. ENFORCEABILITY. This Agreement, the Bill of Sale, the Escrow Agreement and the Assumption Agreement constitutes the valid and legally binding obligations of the Seller, enforceable upon and against Seller in accordance with their respective terms. SECTION 2.06. CONSENTS AND APPROVALS. (a) Except as set forth on Schedule 2.06 hereto, the Seller has obtained all approvals, authorizations or orders of and has made all registrations, declarations or filings with third parties, including governmental authorities, necessary for the authorization, execution and delivery of this Agreement by the Seller or the consummation by the Seller of the transactions contemplated by this Agreement, which consents, approvals, authorizations, orders, registrations, declarations and filings are set forth in Schedule 2.06. (b) Seller and Buyer will cooperate and use their respective commercially reasonable efforts to obtain as promptly as practicable all consents, approvals and waivers which have not been obtained as of the Closing required by third persons to transfer the contracts in a manner that will avoid any default, conflict or termination of rights under the contracts. Notwithstanding anything to the contrary in this Agreement, nothing in this Section 2.06 shall require Seller or Buyer to expend any material sum, make a material financial commitment or grant or agree to any material concession to any third person to obtain any such consent, approval or waiver. (c) In the event that any and all consents, approvals or waivers necessary for the assignment, transfer or novation of any contract, or any claim, right or benefit arising thereunder or resulting therefrom, or consents relating to sale of the Acquired Assets, shall not have been obtained prior to the Closing, then as of the Closing, this Agreement, to the extent permitted by law, shall constitute full and equitable assignment by Seller to Buyer of all of Seller's right, title and interest in and to, and all of Seller's obligations and liabilities under, such contract, and Buyer shall be deemed Seller's agent for purposes of completing, fulfilling and discharging all of Seller's liabilities under any such contract. The parties shall take all necessary steps and actions to provide Buyer with the benefits of such contracts, and to relieve Seller of the performance and other obligations thereunder arising after the Closing. Buyer agrees to pay, perform and discharge, and Buyer agrees to indemnify Seller against and hold Seller harmless from, all obligations and liabilities of Seller relating to such performance or failure to perform under such Contracts arising after the Closing. To the extent required in order to obtain a consent, approval or waiver to the transfer of any contract described in this Section, Buyer and Buyer's parent corporation, American Business Information, Inc., by their signatures at the end of this Agreement hereby guarantee such obligations of Buyer and agree to pay, perform and discharge all obligations and liabilities of Seller relating to such performance or failure to perform under any such contract arising after the Closing. (d) In the event Seller shall be unable to make the equitable assignment described in the preceding paragraph, or if such attempted assignment would give rise to any right of 12 17 termination, or would otherwise adversely affect the rights of Seller or Buyer under such contract, or would not assign all Seller's rights thereunder at the Closing, Seller and Buyer shall continue to cooperate and use all reasonable efforts to provide Buyer with all such rights. To the extent that any such consents and waivers are not obtained, or until the impediments to such assignments are resolved, Seller shall use all reasonable efforts to (i) provide to Buyer, at the request of Buyer, the benefits of any such contract, (ii) cooperate in any lawful arrangement designed to provide such benefits to Buyer, and (iii) enforce, at the request of and for the account of Buyer, any rights of Seller arising from any such contract against any third person, including the right to elect to terminate in accordance with the terms thereof upon the advice of Buyer. To the extent that Buyer is provided the benefits of any contract referred to herein (whether from Seller or otherwise), Buyer shall perform the obligations of Seller thereunder, and Buyer agrees to pay, perform and discharge, and Buyer agrees to indemnify Seller against and hold Seller harmless from, all obligations and liabilities of relating to such performance or failure to perform (but only to the extent such obligations or liabilities arise solely from acts of Buyer after the Closing). SECTION 2.07. CLAIMS AND PROCEEDINGS. Except as set forth in Schedule 2.07, there is no suit, action, claim, complaint, proceeding, demand, arbitration, grievance, citation, summons, subpoena, inquiry or investigation of any nature, civil, criminal, regulatory or otherwise, pending or, to the knowledge of the Seller, threatened against the Seller or the Acquired Assets before any court or by any governmental, administrative or regulatory agency or authority, or otherwise which, if decided adversely, would have Material Adverse Effect upon the operation of the business conveyed as part of the transfer of the Acquired Assets. The Seller is not subject to any currently existing order, writ, injunction or decree relating to its operations. There is no litigation pending or written notice of threatened litigation in which any injunction or material damages are sought against or from Seller in connection with the transactions contemplated hereby SECTION 2.08. FINANCIAL STATEMENTS. The Seller has delivered the Unaudited March 31 Financial Statements to the Buyer. The Seller shall cooperate and use commercially reasonable efforts to prepare and deliver to the Buyer the Closing Balance Sheet and to cause its independent accounting firm to prepare and complete the Audited Financial Statements, at the Seller's expense, for completion and delivery to the Buyer on or prior to July 15, 1998. The Unaudited Balance Sheet, including the notes thereto, has been prepared, and the Audited March 31 Financial Statements and the Closing Balance Sheet shall be prepared, in accordance with generally accepted accounting principles consistently applied throughout the periods covered thereby, except as otherwise noted in the financial statements, present fairly the financial condition of the Seller as of such dates and the results of operations for such periods, are correct and complete in all material respects and are consistent with the books and records of the Seller, which books are correct and complete in all material respects. Schedule 2.08 sets forth certain potential additional liabilities. SECTION 2.09. [RESERVED.] 13 18 SECTION 2.10. NO MATERIAL ADVERSE CHANGES. Except as set forth in Schedule 2.10, since March 31, 1998, there has not been (i) any change in the financial condition, results of operations, business, assets or liabilities (contingent or otherwise, whether due or to become due, known or unknown) of the Seller which would have a Material Adverse Effect on the foregoing, (ii) any incurrence by the Seller of any long term debt, (iii) any increases in salary, bonus or other compensation to any officers, employees or agents of the Seller, (iv) any pending or threatened labor disputes or other labor problems against or potentially affecting the Seller or (v) any other transaction entered into by the Seller, except in the ordinary course of business and consistent with past practice. SECTION 2.11. TAX MATTERS. (a) For purposes of this Agreement, "Tax" means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Internal Revenue Code of 1986, as amended (the "Code")), customs, duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add on minimum, estimated or other tax of any kind whatsoever, including any penalty, interest or addition thereto, whether disputed or not. (b) Since March 31, 1998, the Seller has not incurred any Tax liabilities other than in the ordinary course of business. There are no Tax liens upon any of the Acquired Assets. SECTION 2.12. EMPLOYEE BENEFIT PLANS AND RELATED MATTERS. (a) Schedule 2.12(a) sets forth the names, ages and titles of all members of the Board of Directors and officers of the Seller and all employees of the Seller earning in excess of $50,000 per year and the annual rate of compensation (including bonuses) being paid to each such officer and employee as of the most recent practicable date. (b) Schedule 2.12(b) lists each employment, bonus, deferred compensation, pension, stock option, stock appreciation right, profit-sharing or retirement plan, arrangement or practice, each medical, vacation, retiree medical severance pay plan, and each other agreement or fringe benefit plan, arrangement or practice, of the Seller, whether legally binding or not, that affects one or more of the Seller's employees, including all "employee benefit plans" as defined by Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (collectively, the "Plans"). The Seller neither has nor sponsors, nor participates in, any Plan that is subject to Title IV of ERISA or the minimum funding standards of Section 412 of the Code. (c) For each Plan that is an "employee benefit plan" under Section 3(3) of ERISA, the Seller has delivered to the Buyer correct and complete copies of the plan 14 19 documents and summary plan descriptions, the most recent determination letter received from the Internal Revenue Service, the most recent Form 5500 Annual Report, and all related trust agreements, insurance contracts and funding agreements that implement each such Plan. (d) The Seller has no commitment, whether formal or informal and whether legally binding or not, (i) to create any additional Plan, (ii) to modify or change any Plan or (iii) to maintain for any period of time any Plan. Schedule 2.12(b) contains an accurate and complete description of the funding policies (and commitments, if any) with respect to each existing Plan. (e) The Seller has no unfunded past service liability in respect of any of its Plans; neither the Seller nor any Plan, nor any trustee, administrator, fiduciary or sponsor of any Plan, has engaged in any prohibited transaction as defined in Section 406 of ERISA or Section 4975 of the Code for which there is no statutory exemption in Section 408 of ERISA or Section 4975 of the Code; all filings, reports and descriptions as to such Plans (including Form 5500 Annual Reports, summary plan descriptions and summary annual reports) required to have been made or distributed to participants, the Internal Revenue Service, the United States Department of Labor and other governmental agencies have been made in a timely manner; there is no material litigation, disputed claim, governmental proceeding or investigation pending or threatened with respect to any of the Plans, the related trusts or any fiduciary, trustee, administrator or sponsor of the Plans; the Plans have been established, maintained and administered in all material respects in accordance with their governing documents and applicable provisions of ERISA and the Code and Treasury Regulations promulgated thereunder; and each Plan that is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service with respect to the current terms of the Plan. (f) Except where failure to do so would not have a Material Adverse Effect, the Seller has complied in all respects with all applicable federal, state and local laws, rules and regulations relating to employee's employment and employment relationships, including, without limitation, wage-related laws, antidiscrimination laws, employee safety laws and COBRA (defined herein to mean the requirements of Code Section 4980B, Proposed Treasury Regulation Section 1.162-26 and Part 6 of Subtitle B of Title I of ERISA). (g) The consummation of the transactions contemplated by this Agreement will not (i) result in the payment or series of payments by the Seller to any employee or other person of an "excess parachute payment" within the meaning of Section 280G of the Code; (ii) entitle any employee or former employee of the Seller to severance pay, unemployment compensation or any other payment; or (iii) accelerate the time of payment or vesting of any stock option, stock appreciation right, deferred compensation or other employee benefits under any Plan (including vacation and sick pay). 15 20 (h) None of the Plans that are "welfare benefit plans," within the meaning of Section 3(1) of ERISA, provide for continuing benefits or coverage after termination or retirement from employment, except for COBRA rights under a "group health plan" as defined in Code Section 4980B(g) and ERISA Section 607. (i) Neither the Seller nor any member in a "controlled group" with the Seller (as defined in ERISA) has ever contributed to, participated in or withdrawn from a multiemployer plan as defined in Section 4001(a)(3) of Title IV of ERISA, and the Seller has not incurred and does not owe any liability as a result of any partial or complete withdrawal by an employer from such a multiemployer plan as described under Section 4201, 4203 or 4205 of ERISA. (j) Seller and Buyer agree that Buyer is not assuming any Plans of the Seller or any of its subsidiaries or affiliates or any liability under any such Plan. SECTION 2.13. BANKRUPTCY OR INSOLVENCY PROCEEDINGS. There are no attachments, executions, assignments for the benefit of creditors or voluntary or involuntary proceedings in bankruptcy pending or to Seller's knowledge threatened against Seller or the Acquired Assets. SECTION 2.14. [RESERVED.] SECTION 2.15. NO OTHER AGREEMENTS. Seller has no existing contract or agreement, written or oral, and is not engaged in any negotiations, with any party other than Buyer for the sale, transfer or other conveyance of the Acquired Assets (including the grant of any license to any intellectual property of the Seller other than licenses in the ordinary course of business related to the sale of the Seller's products or services) or portion thereof or of any interest in or right to acquire the Acquired Assets or a portion thereof, or for the acquisition of any material portion of the capital stock of the Seller. SECTION 2.16. NO BROKER. The Seller has not entered into any contract, arrangement or understanding with any person or firm that may result in the obligation of the Seller or the Buyer to pay any finder's fee, brokerage or agent's commission or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby, except for Ronald Shapss Corporate Services, Inc., to whom the Buyer shall have no liability or obligation to pay any fees, commissions, expenses or other like payments. SECTION 2.17. LICENSES, PERMITS, ETC. Seller has delivered to Buyer all documents, instruments, approvals, certificates, plans and specifications, records and reports with respect to the Acquired Assets in the possession of Seller. There are no governmental licenses or permits required to own and operate the Acquired Assets. SECTION 2.18. COMPLIANCE WITH LAWS. Except as set forth in Schedule 2.18, the Seller has been and currently is conducting its business and each of the premises leased or owned by it have been and now are being used and operated in compliance, in all material respects, with all 16 21 applicable statutes (including 15 U.S.C. Section 1681 et seq.), regulations, rules, ordinances, judgments, orders, covenants, restrictions and plans of federal, state, regional, county or municipal court, authorities, agencies or boards, except where the failure to do so would not have a Material Adverse Effect. All governmental licenses, permits and approvals necessary to own and operate the Acquired Assets are in full force and effect and there are no violations thereof, except where the failure to do so would not have a Material Adverse Effect. SECTION 2.19. [RESERVED.] SECTION 2.20. ENVIRONMENTAL MATTERS. (a) To the Seller's knowledge, the Seller is in compliance in all material respects with all applicable environmental laws, and no facility owned or leased by the Seller (including, to the knowledge of the Seller, all owners or operators thereof insofar as such property is concerned) is in violation of any applicable environmental laws in any material respect. The Seller has not received any written communication that alleges that any facility owned or leased by the Seller (including, with respect to any such facility, to the knowledge of the Seller, any owner or operator thereof insofar as such property is concerned) is not in such material compliance, and to the knowledge of the Seller there are no circumstances that may prevent or interfere with such compliance by the Seller in the future. There are no licenses held by the Seller pursuant to environmental laws. (b) There is no Environmental Claim (as defined below) pending against the Seller or any facility owned or leased by the Seller or, to the knowledge of the Seller, threatened against the Seller or any such facility, or threatened or pending against any person whose liability for any environmental claims the Seller has or may have retained or assumed either contractually or by operation of law. The term "Environmental Claim" means any written notice by a person alleging actual or potential liability (including, potential liability for any investigatory cost, cleanup cost, governmental response cost, natural resource damage, property damage, personal injury or penalty) arising out of, based on or resulting from (i) the presence, transport, disposal, discharge or release of any chemicals, pollutants, contaminants, wastes, toxic or hazardous substances, petroleum or petroleum products or (ii) circumstances forming the basis of any violation, or alleged violation of any environmental law. (c) To the Seller's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, disposal or presence of any materials of environmental concern, that will form the basis of any valid Environmental Claim against the Seller, any facility owned or leased by the Seller or any person whose liability for any Environmental Claim the Seller has or may have retained or assumed either contractually or by operation of law. 17 22 (d) Without in any way limiting the generality of the foregoing, to the knowledge of the Seller there: (i) are no underground storage tanks currently or formerly being located on property currently owned or leased by the Seller; (ii) is no asbestos contained in or forming part of any building or structure owned or leased by the Seller; and (iii) are no polychlorinated biphenyls which are used or stored at any property currently owned or leased by the Seller. SECTION 2.21. [RESERVED.] SECTION 2.22. FULL DISCLOSURE. All of the information provided by the Seller and its representatives herein or in the disclosure schedules and exhibits hereto is true, correct and complete in all material respects, and no representation, warranty or statement made by the Seller in or pursuant to this Agreement, the disclosure schedules or the exhibits contains any untrue statement of a material fact or omits or will omit to state any material fact necessary to make such representation, warranty or statement not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES BY BUYER The Buyer represents and warrants to the Seller that the statements contained in this Article III, including the disclosure schedules thereto, are correct and complete as of the date of this Agreement, except that any representation or warranty that is given as of a particular date and relates solely to a particular date or period is given as of such date or period. Buyer represents, warrants and covenants to Seller, its successors and assigns as follows: SECTION 3.01. ORGANIZATION. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of New York. SECTION 3.02. POWER AND AUTHORITY. The Buyer has full corporate power and authority to enter into, execute and deliver this Agreement and all other agreements and documents contemplated by this Agreement, to perform its obligations thereunder and to consummate the transactions contemplated thereby. The Buyer has taken all corporate action required to authorize the execution and delivery of this Agreement and the consummation of the transactions contemplated on its part herein. SECTION 3.03. NONCONTRAVENTION. The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions as contemplated on its part hereby do not or will not violate or result, with the giving of notice or the lapse of time or both, in a material violation of any provision of (i) any existing law or regulation or any order, award or decree of 18 23 any court, arbitrator or governmental authority by which Buyer is bound, (ii) any mortgage, indenture, security agreement, contract, agreement or other undertaking to which Buyer is a party or by which it is bound or (iii) Buyer's Certificate of Incorporation or Bylaws. SECTION 3.04. NO BROKER. The Buyer has not entered into any contract, arrangement or understanding with any person or firm that may result in the obligation of the Seller or the Buyer to pay any finder's fee, brokerage or agent's commission or other like payments in connection with the negotiations leading to this Agreement or the consummation of the transactions contemplated hereby. SECTION 3.05. BANKRUPTCY OR INSOLVENCY PROCEEDINGS. There are no attachments, executions, assignments for the benefit of creditors or voluntary or involuntary proceedings pending or threatened against Buyer. SECTION 3.06. ENFORCEABILITY. This Agreement constitutes, and all other agreements and documents contemplated by this Agreement to which the Buyer is a party will constitute on the Effective Date, the valid and legally binding obligations of the Buyer, enforceable upon and against Buyer in accordance with their respective terms. SECTION 3.07. USE OF PREMISES. Buyer agrees that JCBS Inc. and JAMI Charity Brands Services, for one year after the date of this Agreement, shall have the right to use the portion of the premises it uses as of the date of this Agreement leased by Seller. ARTICLE IV MISCELLANEOUS SECTION 4.01. COSTS. Each of the parties to this Agreement shall pay all costs incurred by it incident to the preparation, execution and delivery of this Agreement and the performance of its obligations under this Agreement, whether or not the transactions contemplated by this Agreement shall be consummated, including fees and disbursements of legal counsel, accountants, financial advisors and consultants employed by the respective parties to this Agreement in connection with the transactions contemplated by this Agreement. SECTION 4.02. HEADINGS. All headings of sections of this Agreement are inserted for convenience only and do not form part of this Agreement or limit, expand or otherwise alter the meaning of any provisions hereof. SECTION 4.03. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which shall constitute one in the same agreement. SECTION 4.04. ASSIGNMENT OR DELEGATION. No rights, obligations or duties of the Seller or the Buyer hereunder may be assigned or delegated. 19 24 SECTION 4.05. SEVERABILITY. Should any provision of this Agreement be deemed unenforceable by a court of competent jurisdiction, the unenforceable provision shall be considered severed from this Agreement and the remainder shall remain in force. SECTION 4.06. ENTIRE AGREEMENT. This instrument contains and constitutes the entire agreement of the parties regarding the subject matter hereof, and there are no other agreements, written or oral, between the parties affecting the subject matter hereof. SECTION 4.07. NOTICES. All notices or other communications to be given hereunder shall be given in writing and delivered by (i) certified mail, return receipt requested, (ii) personal delivery, (iii) facsimile or (iv) overnight express carrier addressed as follows: If to Seller: Mr. Michael Miller c/o Quintel Enterprises, Inc. One Blue Hill Plaza Pearl River, NY 10965 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, NY 10022 Attention: Geoffrey Bass, Esq. If to Buyer: Armonk List Companies Corp. 5711 South 86 Circle Omaha, NE 68127 Attention: Mr. Steven Purcell, Chief Financial Officer with a copy to: Michael C. Pallesen, Esq. Corporate Counsel Armonk List Companies Corp. 5711 South 86 Circle Omaha, NE 68127 or to such other address furnished by any party to the other in writing at any time and from time to time for such notice purposes. Any notice served by either party on the other shall be deemed effective the fifth business day following deposit in the mail if sent by certified mail, return receipt requested, when received, if delivered personally, upon machine confirmation if sent by facsimile, or the next business day following deposit with an overnight express carrier. SECTION 4.08. NONWAIVER. No delay, forbearance or neglect by Buyer or Seller in the enforcement of any of the conditions of this Agreement or any of Seller's or Buyer's rights or remedies hereunder shall constitute or be construed as a waiver thereof. No waiver of any of the 20 25 conditions of this Agreement by Seller or Buyer shall be effective unless expressly and affirmatively made and given by Seller or Buyer, as the case may be, in writing. SECTION 4.09. EXHIBITS AND SCHEDULES. All exhibits and schedules attached hereto shall be deemed a part hereof to the same extent as if fully set forth herein. SECTION 4.10. INDEMNIFICATION. (a) Seller agrees to indemnify and hold Buyer and its directors, officers, shareholders, employees, agents and affiliates harmless from and against any and all claims, demands, losses, costs, expenses (including, without limitation, reasonable attorneys' fees and expenses, accountants' fees and expenses and expenses and fees of other associated professionals), damages, causes of action or liabilities (collectively, all of the foregoing are referred to as "Claims") that may be paid, incurred or suffered by, or asserted against, Buyer or the Acquired Assets, resulting from any liability or obligation of Seller with respect to events or conditions affecting the Acquired Assets arising or accruing prior to the date of the Closing which is not part of the Acquired Liabilities or resulting from a breach by Seller of any of its representations, warranties and covenants set forth in this Agreement. The foregoing indemnity shall survive the Closing for a period of one year after the Closing, except that the indemnity shall survive the Closing for a period of three years with respect to Tax liabilities of Seller. No claim may be made against Seller for indemnification pursuant to this Section 4.10(a) with respect to any individual Claim, unless the aggregate of all Claims of the Buyer for which the Buyer is entitled to be indemnified shall exceed $100,000 and Seller shall not be required to pay or be liable for the first $100,000 in aggregate amount of any such Claims, and in no event shall Seller's aggregate liability for all Claims exceed the Purchase Price, nor shall Seller be liable for consequential, indirect, punitive, exemplary or special damages, including loss of profits. For the purposes of this Section 4.10(a), in computing such individual or aggregate amounts of Claims, the amount of each Claim shall be deemed to be an amount (i) net of any Tax benefit to the Buyer or any affiliate thereof, (ii) net of any insurance proceeds and any indemnity, contribution or other similar payment received by any third party with respect thereto, and (iii) net of any reserves provided for the situation in question which are included in the Acquired Assets and reflected in the Closing Balance Sheet. Tax benefits will be considered to be realized by Buyer for the purposes of this Section 4.10(a) in the year in which a payment occurs, and the amount of the tax benefits shall be determined by assuming (i) Buyer or its affiliate, as the case may be, is in the maximum Federal income tax bracket after any deduction reportable with respect to a payment hereunder and (ii) Buyer or its affiliate's effective state and local income tax rate is its effective rate for the most recent prior taxable year for which such information is available. 21 26 (b) Buyer agrees to indemnify and hold Seller and its directors, officers, shareholders, employees, agents and affiliates harmless from and against any and all Claims that may be paid, incurred or suffered by, or asserted against, Seller resulting from a breach by Buyer of any of its representations, warranties and covenants set forth in this Agreement. (c) If the Buyer or the Seller suffers or is threatened with any Claim for which it would be entitled to be indemnified from the other party, it shall notify the indemnifying party to such effect with reasonable promptness after it first becomes aware of such Claim, and shall furnish the indemnifying party with details regarding the Claim. If the Claim is asserted by a third party by the filing by such third party of any action at law or in equity, the indemnified party shall give such notice of the Claim not later than 10 days prior to the date by which a responsive pleading must be filed, and shall also furnish the original or a copy of such Claim (if made in writing) and of all documents received from the third party in support of its Claim, and shall otherwise make available all relevant information material to the defense of such Claim in the possession or control of the Indemnified Party. If the indemnifying party requests in writing that such third-party Claim not be paid, the indemnified party shall not pay such Claim and the indemnifying party shall, at its expense, settle, compromise or litigate such Claim in good faith, and shall keep the indemnified party adequately informed of any action taken and the progress thereof; provided that the indemnified party shall not be required to refrain from paying any such Claim which has matured by a court judgment or decree unless a timely appeal is taken therefrom and a proper appeal bond posted by or on behalf of the indemnifying party, nor shall the indemnified party be required to refrain from paying any Claim where such action would result in the foreclosure of a lien upon any of its property or an order enjoining or restraining it temporarily or permanently, from the operation of business in the normal course. If the Indemnifying party elects to compromise or defend such Claim, it shall within thirty (30) days (or sooner, if the nature of the Claim so requires) notify the indemnified party of its intent to do so, and the indemnified party shall cooperate with the indemnifying party and shall provide the indemnifying party access to its records and personnel relating to any such Claim, in each case, at the expense of the indemnifying party, in the compromise of, or defense against, such Claim. Subject to the limitations contained below on the obligations of the indemnifying party in respect of proposed settlements, the indemnified party shall have the right to employ its own counsel with respect to any Claim, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (a) the employment of such counsel at the expense of the indemnifying party shall have been authorized in writing by the Indemnifying party in connection with the defense of such action, or (b) such indemnifying party shall not have, as provided above, promptly employed counsel reasonably satisfactory to the Indemnified party to take charge of the defense of such action. The indemnified party, at its own cost, may employ separate counsel to assert, based on an opinion of counsel, one or more legal defenses available to it which are different from or additional to those available to such 22 27 indemnifying party; the indemnifying party shall not have the right to direct the defense of such action on behalf of the indemnified party in respect of such different or additional defenses. Notwithstanding the foregoing provisions of this Section 4.10(c) neither the indemnifying party nor the indemnified party may settle or compromise any Claim for which indemnification has been sought and is available hereunder, over the reasonable objection of the other; provided, however, that consent to settlement or compromise shall not be unreasonably withheld or delayed. If, however, the indemnified party refuses to consent to a bona fide offer of settlement which the indemnifying party wishes to accept, the indemnified party may continue to pursue such matter, free of any participation by the indemnifying party, at the sole expense of the indemnified party. In such event, the obligation of the indemnifying party to the indemnified party shall be equal to the lesser of (i) the amount of the offer of settlement which the indemnified party refused to accept plus the costs and expenses of the indemnified party prior to the date the indemnifying party notified the Indemnified party of the offer of settlement, and (ii) the actual out-of-pocket amount the indemnified party is obligated to pay as a result of the indemnified party's continuing to pursue such matter. If, by the expiration of 15 days after notice of such a claim is given, the indemnifying party has not notified the indemnified party that the indemnifying party will undertake to settle, compromise or litigate such claim, such action shall be deemed an authorization to the indemnified party to pay such claim, and upon receipt of proof of payment, indemnity shall immediately be due and payable. SECTION 4.11. GOVERNING LAW. This Agreement shall be construed and interpreted in accordance with the laws of the State of Delaware without giving effect to its conflict of laws principles. SECTION 4.12. AMENDMENTS. This Agreement may not be modified or amended, except by an agreement in writing signed by the parties hereto. The parties may waive any of the conditions contained herein or any of the obligations of the other parties hereunder, but any such waiver shall be effective only if it is in writing and signed by the party waiving such condition or obligation. SECTION 4.13. FURTHER ASSURANCES. Each of the parties hereto agrees to take such further action and to execute such further instruments as may be reasonably required by any of the other parties in order to consummate the transaction contemplated by this Agreement and to carry out the intentions expressed in this Agreement. SECTION 4.14. CONFIDENTIALITY. As a material inducement to Seller and Buyer entering into this Agreement, Seller and Buyer shall keep the Confidential Information (as defined below) in strict confidence and shall not disclose such Confidential Information other than to such of their 23 28 respective officers, directors, employees, attorneys, advisors, accountants and agents with a need to know such Confidential Information. "Confidential Information" shall mean the financial terms of this Agreement and the Transaction Documents. Notwithstanding anything in this Agreement to the contrary, Confidential Information shall not include any information which (i) at the time of disclosure is generally available to and known by the public (other than as a result of a disclosure made directly or indirectly in violation of this Agreement), or (ii) becomes publicly available in the future (other than as a result of a disclosure made directly or indirectly in violation of this Agreement). In the event that a party to this Agreement, or any of such party's officers, directors, shareholders, employees or agents become legally compelled (by deposition, interrogatory, request of documents, subpoena, civil investigative demand or similar process) to disclose any of the Confidential Information of the other party, the person referred to above from whom such information is being sought shall provide the party to whom such Confidential Information belongs with promptly prior written notice of such requirement, and such other party may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Agreement. In the event that such protective order or other remedy is not obtained, or the other party waives compliance with the provisions hereof, the party required to provide such information agrees to furnish only such portion of the Confidential Information which is legally required to be furnished. 34 29 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date and year first above written. ARMONK LIST COMPANIES CORP., a New York corporation By: --------------------------------- Title: --------------------------------- JAMI MARKETING SERVICES, INC., a Delaware corporation By: --------------------------------- Title: --------------------------------- AMERICAN BUSINESS INFORMATION, INC. hereby guarantees Buyers's obligations under Section 2.06(c) By: --------------------------------- Title: --------------------------------- 25 30 EXHIBIT A FORM OF ESCROW AGREEMENT 26 31 EXHIBIT B ALLOCATION SCHEDULE 27 32 EXHIBIT C FORM OF EMPLOYMENT AGREEMENTS 28 33 EXHIBIT D FORM OF NONCOMPETITION AGREEMENTS 29 34 EXHIBIT E FORM OF ASSUMPTION AGREEMENT 30 35 EXHIBIT F FORM OF OPINION OF BUYER'S COUNSEL 31 36 EXHIBIT G FORM OF BILL OF SALE 32 37 EXHIBIT H FORM OF OPINION OF SELLER'S COUNSEL 33 EX-21.1 3 INFOR USA INC & SUBSIDIARIES 1 EXHIBIT 21.1 INFOUSA INC. AND SUBSIDIARIES SUBSIDIARIES AND STATE OF INCORPORATION American Business Communication, Inc. ...................... Delaware BMI Medical Information, Inc. .............................. Delaware County Data Corp............................................ Vermont American Business Information Marketing, Inc. .............. Delaware CD-ROM Technologies......................................... Delaware Contacts Influential, Inc. ................................. Delaware InfoUSA Inc. ............................................... Delaware Database America Companies, Inc. ........................... New Jersey Database Holdings, Inc. .................................... Delaware Walter Karl, Inc. .......................................... New York List Maintenance Corp....................................... New York
EX-23.1 4 CONSENT OF KPMG PEAT MARWICK 1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statement (No. 33-59256) on Form S-8 of infoUSA Inc. of our report dated January 22, 1999, relating to the consolidated balance sheet of infoUSA Inc. and subsidiaries as of December 31, 1998, and the related statements of income, shareholders' equity and comprehensive income, and cash flows for the year ended December 31, 1998, and related schedule, which report appears in the December 31, 1998, annual report on Form 10-K of infoUSA Inc. /s/ KPMG Peat Marwick LLP --------------------------------------- KPMG PEAT MARWICK LLP Omaha, Nebraska March 31, 1999 EX-23.2 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 33-59256) of infoUSA Inc. (formerly American Business Information, Inc.) of our report dated January 23, 1998, on our audits of the consolidated financial statements and financial statement schedule of infoUSA Inc. as of December 31, 1997 and for each of the two years in the period ended December 31, 1997, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP --------------------------------------- PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska March 31, 1999 EX-24.1 6 POWER OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vinod Gupta and Stormy Dean, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ VINOD GUPTA Chairman of the Board and Chief March 31, 1999 - ----------------------------------------------------- Executive Officer (principal Vinod Gupta executive officer) /s/ STORMY L. DEAN Controller and Acting Chief March 31, 1999 - ----------------------------------------------------- Financial Officer (principal Stormy L. Dean accounting officer and principal financial officer) /s/ JON D. HOFFMASTER Director March 31, 1999 - ----------------------------------------------------- Jon D. Hoffmaster /s/ GAUTAM GUPTA Director March 31, 1999 - ----------------------------------------------------- Gautam Gupta /s/ GEORGE F. HADDIX Director March 31, 1999 - ----------------------------------------------------- George F. Haddix /s/ ELLIOT S. KAPLAN Director March 31, 1999 - ----------------------------------------------------- Elliot S. Kaplan /s/ HAROLD ANDERSEN Director March 31, 1999 - ----------------------------------------------------- Harold Andersen /s/ PAUL A. GOLDNER Director March 31, 1999 - ----------------------------------------------------- Paul A. Goldner /s/ GEORGE J. KUBAT Director March 31, 1999 - ----------------------------------------------------- George J. Kubat By: /s/ STORMY L. DEAN ------------------------------------------------- Stormy L. Dean Attorney-in-fact
EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 29,603 20,620 57,957 0 0 118,303 70,487 30,223 270,773 48,146 126,679 0 0 124 88,123 270,773 228,678 0 0 226,108 0 0 9,160 8,038 5,880 2,158 0 0 0 2,158 .04 .04
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