-----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, QnlrBIv/Ag933sU934VJU2dtjaA9iMeoTRir1B4mWjgBYfUqxONIVT/atcHe0hzl K5uw5BaVsplDem8uArQ+MA== 0000950134-00-002079.txt : 20000320 0000950134-00-002079.hdr.sgml : 20000320 ACCESSION NUMBER: 0000950134-00-002079 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 20000317 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-19598 FILM NUMBER: 573050 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-Q/A 1 AMENDMENT NO. 1 TO FORM 10-Q-QUARTER END 6/30/99 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q / A X Quarterly Report pursuant to Section 13 or 15(d) of the - Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 or Transition report pursuant to Section 13 or 15(d) of the - Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 0-19598 infoUSA INC. ------------------------------------------------------- (exact name of registrant specified in its charter) DELAWARE 47-0751545 ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127 ----------------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (402) 593-4500 -------------- (Former name, former address and former fiscal year, if changed since last report) 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 at least the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 24,325,246 shares of Class A Common Stock and 24,004,254 shares of Class B Common Stock at July 27, 1999 2 infoUSA INC. INDEX PART I - FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 Consolidated Statements of Operations for the three months and six months ended June 30, 1999 and 1998 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature Index to Exhibits 2 3 infoUSA INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 PART I FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 3 4 infoUSA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
JUNE 30, 1999 DECEMBER 31, 1998 ---------------- ----------------- ASSETS Current assets: Cash and cash equivalents................................. $ 38,489 $ 29,603 Marketable securities..................................... 15,290 20,620 Trade accounts receivable, net of allowances of $4,013 and $7,289, respectively.................................... 43,364 40,126 List brokerage trade accounts receivable.................. 11,167 17,831 Income taxes receivable................................... 147 3,387 Prepaid expenses.......................................... 3,727 2,371 Deferred marketing costs.................................. 3,784 4,365 -------- -------- Total current assets.............................. 115,968 118,303 -------- -------- Property and equipment, net................................. 42,212 40,264 Intangible assets, net of accumulated amortization.......... 102,484 109,378 Other assets................................................ 3,529 2,828 -------- -------- $264,193 $270,773 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 2,550 $ 1,580 Accounts payable.......................................... 5,745 7,226 List brokerage trade accounts payable..................... 12,225 18,847 Accrued payroll expenses.................................. 5,455 2,830 Accrued expenses.......................................... 4,995 12,465 Deferred revenue.......................................... 5,661 4,534 Deferred income taxes..................................... 5,728 664 -------- -------- Total current liabilities......................... 42,359 48,146 -------- -------- Long-term debt, net of current portion...................... 118,498 126,679 Deferred income taxes....................................... 6,540 7,701 Commitments and contingencies 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; 24,786,246 shares issued and 24,325,246 outstanding at June 30, 1999 and 24,689,761 shares issued and 24,581,261 outstanding at December 31, 1998.................................................... 62 62 Class B common stock, $.0025 par value. Authorized 75,000,000 shares; 24,951,254 shares issued and 24,004,254 shares outstanding at June 30, 1999 and 24,854,989 shares issued and 24,655,489 shares outstanding at December 31, 1998........................ 62 62 Paid-in capital........................................... 73,355 72,476 Retained earnings......................................... 27,282 15,284 Treasury stock, at cost, 446,232 shares of Class A common stock and 947,000 shares of Class B common stock held at June 30, 1999, and 108,500 shares of Class A common stock and 199,500 shares of Class B common stock held at December 31, 1998........................................ (9,442) (2,951) Accumulated other comprehensive income.................... 5,477 3,314 -------- -------- Total stockholders' equity........................ 96,796 88,247 -------- -------- $264,193 $270,773 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 5 infoUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales ............................... $ 57,573 $ 62,076 $ 113,093 $ 117,456 Costs and expenses: Database and production costs ......... 17,114 16,086 33,290 31,491 Selling, general and administrative ... 23,762 27,103 46,098 50,497 Depreciation and amortization ......... 5,694 6,384 11,727 13,254 Acquisition costs ..................... -- 400 -- 3,643 In-process research and development ... -- -- -- 3,834 Restructuring charges ................. -- -- -- 1,400 --------- --------- --------- --------- 46,570 49,973 91,115 104,119 --------- --------- --------- --------- Operating income ........................ 11,003 12,103 21,978 13,337 Other income (expense): Investment income ..................... 1,704 15,098 4,188 16,094 Interest expense ...................... (2,934) (1,865) (6,048) (3,144) --------- --------- --------- --------- Income before income taxes and extraordinary item .................... 9,773 25,336 20,118 26,287 Income taxes ............................ 4,088 9,964 8,248 12,022 --------- --------- --------- --------- Income before extraordinary item ........ 5,685 15,372 11,870 14,265 Extraordinary item, net of tax .......... -- -- 128 -- --------- --------- --------- --------- Net income .............................. $ 5,685 $ 15,372 $ 11,998 $ 14,265 ========= ========= ========= ========= BASIC EARNINGS PER SHARE: Income before extraordinary item ...... $ 0.12 $ 0.31 $ 0.25 $ 0.29 Extraordinary item .................... -- -- -- -- --------- --------- --------- --------- Net income ............................ $ 0.12 $ 0.31 $ 0.25 $ 0.29 ========= ========= ========= ========= Weighted average shares outstanding.... 48,233 49,607 48,417 49,298 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE: Income before extraordinary item ...... $ 0.12 $ 0.30 $ 0.25 $ 0.28 Extraordinary item .................... -- -- -- -- --------- --------- --------- --------- Net income ............................ $ 0.12 $ 0.30 $ 0.25 $ 0.28 ========= ========= ========= ========= Weighted average shares outstanding ... 48,307 51,226 48,465 50,754 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 infoUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
SIX MONTHS ENDED JUNE 30, 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ........................................ $ 11,998 $ 14,265 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................. 11,728 13,254 Deferred income taxes ......................... 2,189 4,985 Net realized gains on sale of marketable securities investments ........... (3,373) (17,604) Impairment of other assets .................... -- 2,000 Acquisition costs ............................. -- 3,643 In-process research and development ........... -- 3,834 Restructuring charges ......................... -- 1,400 Changes in assets and liabilities, net of effect of acquisitions: Trade accounts receivable ................. (2,633) (4,130) List brokerage trade accounts receivable .............................. 6,664 -- Prepaid expenses and other assets ......... (1,298) (1,296) Deferred marketing costs .................. 581 (3,177) Accounts payable .......................... (1,481) (3,903) List brokerage trade accounts payable ..... (6,343) -- Income taxes receivable and payable ....... 3,240 (1,852) Accrued expenses and other liabilities .... (3,718) (13,242) --------- --------- Net cash provided by (used in) operating activities .................. 17,554 (1,823) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of marketable securities ...... 17,338 36,392 Purchases of marketable securities ................ (4,184) (5,727) Purchases of property and equipment ............... (2,342) (10,402) Acquisitions of businesses ........................ (1,536) (31,595) Consumer database costs ........................... -- (1,133) Software development costs ........................ (2,929) (2,717) Other ............................................. 531 -- --------- --------- Net cash provided by (used in) investing activities .................... 6,878 (15,182) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt ....................... (1,213) (110,367) Proceeds from long-term debt ...................... -- 144,000 Acquisitions of treasury stock .................... (6,553) -- Deferred financing costs .......................... (103) (5,253) Repurchase of senior subordinated notes ........... (8,370) -- Proceeds from exercise of stock options ........... 842 770 Tax benefit related to employee stock options ..... -- 401 --------- --------- Net cash provided by (used in) financing activities .................... (15,397) 29,551 Effect of exchange rate fluctuations on cash ...... (149) -- --------- --------- Net increase in cash and cash equivalents ........... 8,886 12,546 Cash and cash equivalents, beginning ................ 29,603 10,653 --------- --------- Cash and cash equivalents, ending ................... $ 38,489 $ 23,199 ========= ========= Supplemental cash flow information: Interest paid ..................................... $ 6,220 $ 3,110 ========= ========= Income taxes paid ................................. $ 2,891 $ 8,518 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 7 infoUSA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The accompanying unaudited financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial information included therein. The Company suggests that this financial data be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1998 included in the Company's 1998 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Results for the interim period presented are not necessarily indicative of results to be expected for the entire year. 2. EARNINGS PER SHARE INFORMATION The following table shows the amounts used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 -------- -------- -------- -------- Weighted average number of shares outstanding .............. 48,233 49,607 48,417 49,298 used in basic EPS Net additional common stock equivalent shares outstanding after assumed exercise of stock options ...... 74 1,619 48 1,456 -------- -------- -------- -------- Weighted average number of shares outstanding used in diluted EPS ...................................... 48,307 51,226 48,465 50,754 ======== ======== ======== ========
3. SEGMENT INFORMATION The Company currently manages existing operations utilizing financial information accumulated and reported for two general 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. As described above, the small business and large business segments are principally engaged in the sell of certain designated products, although each segment may sell any of the Company's products. 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. 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. 7 8 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 table summarizes segment information:
FOR THE THREE MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------ SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------------- --------------- --------------- ------------ (IN THOUSANDS) Net sales..................... $ 32,894 $24,679 $ -- $57,573 Operating income (loss)....... 14,962 11,883 (15,842) 11,003 Investment income............. -- -- 1,704 1,704 Interest expense.............. -- -- 2,934 2,934 Income (loss) before income taxes and extraordinary item.. 14,962 11,883 (17,072) 9,773
FOR THE THREE MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------ SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------------- --------------- --------------- ------------ (IN THOUSANDS) Net sales.................... $ 36,658 $25,418 $ -- $62,076 Acquisition costs............ -- -- 400 400 Operating income (loss)...... 15,867 9,434 (13,198) 12,103 Investment income............ -- -- 15,098 15,098 Interest expense............. -- -- 1,865 1,865 Income before income taxes and extraordinary item...... 15,867 9,434 35 25,336
FOR THE THREE MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------ SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------------- --------------- --------------- ------------ (IN THOUSANDS) Net sales......................... $ 66,022 $47,071 $ -- $ 113,093 Operating income (loss)........... 31,632 22,221 (31,875) 21,978 Investment income................. -- -- 4,188 4,188 Interest expense.................. -- -- 6,048 6,048 Income (loss) before income taxes and extraordinary item.......... 31,632 22,221 (33,735) 20,118
FOR THE THREE MONTHS ENDED JUNE 30, 1998 ------------------------------------------------------------ SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------------- --------------- --------------- ------------ (IN THOUSANDS) Net sales......................... $ 71,403 $46,053 $ -- $ 117,456 Acquisition costs................. -- -- 3,643 3,643 In-process research and development..................... -- -- 3,834 3,834 Restructuring charges............. -- -- 1,400 1,400 Operating income (loss)........... 32,851 16,526 (36,040) 13,337 Investment income................. -- -- 16,094 16,094 Interest expense.................. -- -- 3,144 3,144 Income (loss) before income taxes and extraordinary item.......... 32,851 16,526 (23,090) 26,287
8 9 4. COMPREHENSIVE INCOME Comprehensive income (loss), including the components of other comprehensive income (loss), is as follows:
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED -------------------- -------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1999 1998 1999 1998 -------- -------- -------- -------- (IN THOUSANDS) Net income .............................................. $ 5,685 $ 15,372 $ 11,998 $ 14,265 Other comprehensive income (loss): Unrealized gain (loss) from investments: Unrealized gains (losses) ........................... (595) (16,498) 2,908 15,842 Related tax expense ................................. 226 6,046 (1,105) (6,020) -------- -------- -------- -------- Net ................................................. (369) (10,452) 1,803 9,822 -------- -------- -------- -------- Reclassification adjustment for net gains (losses) realized on sale of marketable securities: Realized gains (losses) ............................. 168 131 1,603 (16,547) Related tax expense ................................. (64) (50) (609) 6,288 -------- -------- -------- -------- Net ................................................. 104 81 994 (10,259) -------- -------- -------- -------- Foreign currency translation adjustments .............. -- -- (634) -- -------- -------- -------- -------- Total other comprehensive income (loss) ................. (265) (10,371) 2,163 (437) -------- -------- -------- -------- Comprehensive income .................................... $ 5,420 $ 5,001 $ 14,161 $ 13,828 ======== ======== ======== ========
The components of accumulated other comprehensive income is as follows:
FOREIGN ACCUMULATED CURRENCY UNREALIZED OTHER TRANSLATION GAINS ON COMPREHENSIVE ADJUSTMENTS SECURITIES INCOME ------------- ------------ ------------- (IN THOUSANDS) Balance at June 30, 1999 $ (634) $ 6,111 $ 5,477 ====== ======= ======= Balance at June 30, 1998 $ -- $ 3,314 $ 3,314 ====== ======= =======
5. CONTINGENCIES The Company and its subsidiaries are involved in 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. 6. SUBSEQUENT EVENTS Effective July 1, 1999, the Company acquired all issued and outstanding common stock of Donnelley Marketing, Inc. ("Donnelley"), a division of First Data Corporation. Donnelley is a national consumer database and database marketing company. Consideration for the acquisition was $200.0 million in cash (excluding any acquisition-related costs), funded using a combination of existing cash and borrowings under new senior secured credit facilities further described below. The acquisition will be accounted for using the purchase method of accounting. As part of the acquisition, the Company anticipates recording goodwill and other intangibles totaling approximately $202.0 million to be amortized over lives ranging from 5 to 20 years. The Company is in the process of performing a valuation analysis to allocate the cost of the acquisition, which is anticipated to be completed prior to December 31, 1999. 9 10 During July 1999, the Company negotiated a $195.0 million Senior Secured Credit Facilities ("Credit Facilities") borrowing arrangement with Deutsche Bank, comprised of: Term Loan A Facility in the amount of $65.0 million which provides for grid-based interest pricing based upon the Company's leverage ratio and ranges from base rate + 1.25% to 2.00% for base rate loans and from LIBOR + 2.25% to 3.00% for LIBOR loans with a maturity of 5 years; a Term Loan B Facility in the amount of $100.0 million which provides interest at base rate + 2.50% for base rate loans and LIBOR + 3.50% for LIBOR loans with a maturity of 7 years; and a Revolving Credit Facility in the amount of $30.0 million which provides the same interest pricing as the Term Loan A Facility with a maturity of 7 years. Substantially all assets of the Company are pledged as security under the terms of the Credit Facilities. In connection with the acquisition of Donnelley during July 1999, the Company borrowed $165.0 million under the Credit Facilties. 10 11 infoUSA INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading provider of business and consumer marketing information and data processing services. The Company's products and services help its clients generate new customers more effectively at lower cost. The Company's key assets include a proprietary database of over 11 million businesses and a consumer database of over 115 million households and 195 million individuals in the United States and Canada, which the Company believes are among the most comprehensive and accurate available. The Company leverages these key assets by selling a broad range of marketing information products and data processing services through targeted distribution channels primarily to small and medium size businesses and also to consumers and large corporations. This discussion and analysis contains forward-looking statements, including without limitations statements in the discussion of database and production costs,year 2000 readiness disclosure, accounting standards and liquidity and capital resources, within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, which are subject to the "safe harbor" created by those sections. The Company's actual future results could differ materially from those projected in the forward-looking statements. Some factors which could cause future actual results to differ materially from the company's recent results or those projected in the forward-looking statements are described in "Factors Affecting Operating Results" below. The Company assumes no obligation to update the forward-looking statement or such factors. RESULTS OF OPERATIONS 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 combined 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. 11 12 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 Walter Karl in March 1998 and JAMI Marketing Services (JAMI) in June 1998:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30, 1999 1998 1999 1998 -------------- -------------- -------------- -------------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales................................................... 100% 100% 100% 100% Costs and expenses: Database and production costs............................. 30 26 30 27 Selling, general and administrative....................... 41 44 41 43 Depreciation and amortization............................. 10 10 10 11 Acquisition-related and restructuring charges............. -- 1 -- 8 ------- ------- ------- ------- Total costs and expenses............................... 81 81 81 89 ------- ------- ------- ------- Operating income............................................ 19 19 19 11 Other income (expense), net................................. (2) 21 (1) 11 ------- ------- ------- ------- Income before income taxes and extraordinary item........... 17 40 18 22 Income taxes................................................ 7 15 7 10 ------- ------- ------- ------- Income before extraordinary item............................ 10 25 11 12 Extraordinary item, net of tax.............................. -- -- -- -- ------- ------- ------- ------- Net income.................................................. 10% 25% 11% 12% ======= ======= ======= ======= OTHER DATA: SALES BY SEGMENT: Small business....................................... $ 32.9 $ 36.7 $ 66.0 $ 71.4 Large business....................................... 24.7 25.4 47.1 46.1 -------- -------- -------- -------- Total................................................ $ 57.6 $ 62.1 $ 113.1 $ 117.5 ======== ======== ======== ======== SALES BY SEGMENT AS A PERCENTAGE OF NET SALES: Small business....................................... 57% 59% 58% 61% Large business....................................... 43 41 42 39 ------- ------- ------- ------- Total................................................ 100% 100% 100% 100% ======= ======= ======= ======= Earnings before, interest, taxes, depreciation and amortization, (EBITDA), as adjusted (1)................... $16,697 $18,487 $33,705 $30,425 ======= ======= ======= ======= EBITDA, as adjusted, as a percentage of net sales........... 29% 30% 30% 26% ======= ======= ======= =======
(1) "EBITDA, as adjusted" is defined as operating income adjusted to exclude depreciation, amortization of intangible assets and non-cash 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. 12 13 1999 COMPARED TO 1998 NET SALES Net sales for the quarter ended June 30, 1999 were $57.6 million, a decrease of 7% from $62.1 million for the same period in 1998. Net sales of the small business segment for the second quarter of 1999 were $32.9 million, a 10% decrease from $36.7 million for the same period in 1998. The decrease in net sales of the small business segment is principally due to the decrease in net sales of consumer CD-ROM products. The demand for the CD-Rom product began to decline during 1998 as customers began to use new distribution channels, primarily the Internet, for obtaining certain information also contained on the Company's CD-Rom's. The demand for 1998 product lines is expected to be affected by new distribution channels in the future and therefore related sales are expected to remain at declined levels. The Company recorded net sales of consumer CD-ROM products of $4.3 million and $6.4 million for the quarters ended June 30, 1999 and 1998, respectively. Effective for fiscal year 1999, the Company modified its retail distribution strategy to better match its sale of consumer CD-ROM products to distributors with the sell-through at the retail level. Net sales of the large business segment for the second quarter of 1999 were $24.7 million, a 3% decrease from $25.4 million in the second quarter of 1998. The Company recorded net sales of data processing services of $13.6 million and $16.2 million for the quarters ended June 30, 1999 and 1998, respectively. During the first quarter of 1999, a significant data processing services customer transferred the same processing in-house. The Company recorded sales of $14.6 million from data processing services provided to this customer. The decrease in net sales of data processing services related to the loss of this customer was offset by increased sales of data processing services by the Company's National Accounts sales force. Net sales for the six months ended June 30, 1999 were $113.1 million, a decrease of 4% from $117.5 million for the same period in 1998. Net sales of the small business segment for the six months ended June 30, 1999 were $66.0 million, an 8% decrease from $71.4 million for the same period in 1998. The decrease in net sales of the small business segment is principally due to the decrease in net sales of consumer CD-ROM products. The Company recorded net sales of consumer CD-ROM products of $8.9 million and $13.5 million for the six months ended June 30, 1999 and 1998, respectively. Effective for fiscal year 1999, the Company modified its retail distribution strategy to better match its sell of consumer CD-ROM products to distributors with the sell-through at the retail level. Net sales of the large business segment for the six months ended June 30, 1999 were $47.1 million, a 2% increase from $46.1 million from the same period in 1998. The Company recorded net sales of data processing services of $28.1 million during the six months ended June 30, 1999, compared to $28.8 million during the same period in 1998. During late 1998, a significant data processing services customer notified the Company that it intended to perform the same processing in-house. The customer represented 6% of total net sales during fiscal year 1998. During the first quarter of 1999, the customer transferred a significant portion of the business in-house. The decrease in net sales of data processing services related to the loss of this customer was offset by two factors: the acquisition of Walter Karl in March 1998, and increased sales of data processing services by the Company's National Accounts sales force. DATABASE AND PRODUCTION COSTS Database and production costs for the quarter ended June 30, 1999 were $17.1 million, or 30% of net sales, compared to $16.1 million, or 26% of net sales, for the same period in 1998. For the six months ended June 30, 1999, these costs were $33.3 million, or 30% of net sales, compared to $31.5 million, or 27% of net sales for the same period in 1998. Since 1996, database and production costs have increased as a percentage of sales as a result of higher costs associated with data processing services, CD-ROM production, and list brokerage services. To the extent that data processing and list brokerage services constitute a greater percentage of net sales, the Company expects database and production costs to increase as a percentage of net sales. Factors contributing to the increase in database and production costs as a percentage of net sales include an overall increase in list brokerage and data processing services sales and the addition of consumer database compilation costs associated with the Company's roll-out of the consumer white pages file during the second quarter of 1998. The overall increase in database and production costs was partially offset by the decrease in consumer CD-ROM retail distribution sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the quarter ended June 30, 1999 were $23.8 million, or 41% of net sales, compared to $27.1 million, or 44% of net sales, for the same period in 1998. For the six months ended June 30, 1999, these costs were $46.1 million, or 41% of net sales, compared to $50.5 million, or 43% of net sales for the same period in 1998. During the six months ended June 30, 1999, the Company focused on the reduction of expenses, successfully completing a cost reduction program implemented during the third quarter of 1998. The principal factor contributing to the overall decrease in selling, general and administrative expenses in both actual amounts and percentages of net sales for the three and six month periods ended June 30, 1999 from the same 13 14 periods in 1998 relates to the decrease in salaries and wages. The number of total employees has reduced from approximately 2,050 employees as of June 30, 1998 to 1,575 employees as of June 30, 1999. As part of Company's cost reduction program implemented during the third quarter of 1998, management determined to not fill certain "open positions" and also mandated that certain specific positions would not be refilled upon vacancy, allowing for a general downward movement in the size of the workforce through attrition. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expenses for the quarter ended June 30, 1999 were $5.7 million, or 10% of net sales, compared to $6.4 million, or 10% of net sales for the same period in 1998. For the six months ended June 30, 1999, these costs were $11.7 million, or 10% of net sales, compared to $13.3 million, or 11% of net sales for the same period in 1998. Amortization of acquired database costs and purchased data processing software associated with the acquisition of DBA in February 1997 totaled $0.4 million and $3.9 million during the six months ended June 30, 1999 and 1998, respectively. ACQUISITION COSTS For 1998, included in acquisition costs in the accompanying consolidated statement of operations are: $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation and $0.6 million associated with the Company's offering to sell Class A Common Stock which was not completed. IN-PROCESS RESEARCH AND DEVELOPMENT During 1998, the Company wrote off purchased in-process research and development costs (purchased IPR&D) of $3.8 million recorded in connection with the acquisition of Walter Karl in March 1998. 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. OPERATING INCOME Including the factors previously described, the Company had operating income of $11.0 million, or 19% of net sales for the quarter ended June 30, 1999, as compared to operating income of $12.1 million, or 19% of net sales for the same period in 1998. For the six months ended June 30, 1999, operating income was $22.0 million, or 19% of net sales, compared to $13.3 million, or 11% of net sales for the same period in 1998. Operating income for the small business segment for the quarter ended June 30, 1999 was $15.0 million, or 45% of net sales, as compared to $15.9 million, or 43% of net sales for the comparable period. For the six months ended June 30, 1999, operating income was $31.7 million, or 48% of net sales, compared to $32.9 million, or 46% of net sales for the comparable period. Factors contributing to the increase in operating income as a percentage of net sales are described in the section "Selling, general and administrative expenses." Operating income for the large business segment for the quarter ended June 30, 1999 was $11.9 million, or 48% of net sales, as compared to $9.4 million, or 37% of net sales for the comparable period. For the six months ended June 30, 1999, operating income was $22.2 million, or 47% of net sales, compared to $16.5 million, or 36% of net sales for the comparable period. Factors contributing to the increase in operating income as a percentage of net sales are described in the section "Selling, general and administrative expenses." OTHER INCOME (EXPENSE), NET Other income (expense), net was $(1.2) million, or (2)% of net sales, and $13.2 million, or 21% of net sales, for the quarter ended June 30, 1999 and 1998, respectively, and $(1.9) million, or (1)% of net sales, and $13.0 million, or 11% of net sales, for the six months ended June 30, 1999 and 1998, respectively. 14 15 Interest expense was $2.9 million and $1.9 million for the quarter ended June 30, 1999 and 1998, respectively, and $6.0 million and $3.1 million for the six months ended June 30, 1999 and 1998, respectively. The increase in interest expense is principally the result of servicing debt under the Company's 9 1/2% Senior Subordinated Notes Due 2008 which were issued in June 1998. Investment income was $1.7 million and $15.1 million for the quarter ended June 30, 1999 and 1998, respectively, and $4.2 million and $16.1 million for the six months ended June 30, 1999 and 1998, respectively. The Company recorded realized gains on the sale of marketable securities totaling $1.3 million and $16.6 million for the quarters ended June 30, 1999 and 1998, respectively, and $3.4 million and $17.6 million for the six months ended June 30, 1999 and 1998, 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 $4.1 million and $10.0 million was recorded for the quarter ended June 30, 1999 and 1998, respectively, and $8.2 million and $12.0 million for the six months ended June 30, 1999 and 1998, respectively. Acquisition-related charges of $3.8 million were included in income before income taxes for the six months ended June 30, 1998, but are not deductible for tax purposes. The provisions for these periods also reflect the inclusion of amortization on certain intangibles in taxable income not deductible for tax purposes. EXTRAORDINARY ITEM, NET OF TAX During the first quarter of 1999, the Company repurchased $9.0 million of its 9 1/2% Senior Subordinated Notes (the "Notes"). In connection with the repurchase of the Notes, the Company recorded a gain of $0.1 million, net of deferred financing costs of $0.4 million written-off in proportion to the face amount of Notes purchased and retired. EBITDA, AS ADJUSTED Excluding the purchased in-process research and development charge previously described, the Company's EBITDA, as adjusted, was $16.7 million, or 29% of net sales, and $18.5 million, or 30% of net sales, for the quarter ended June 30, 1999 and 1998, respectively, and $33.7 million, or 30% of net sales, and $30.4 million, or 26% of net sales, for the six months ended June 30, 1999 and 1998, respectively. 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 seven phases: Inventory, Assessment, Detailed Planning & Solution Design, 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 likely 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. 15 16 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. The Company has incurred approximately $4.5 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 $1.5 million of additional cost. Additionally, the Company is in the process of specifically replacing its accounts receivable accounting system at a total cost of approximately $3.5 million. The replacement of this system, which will be capitalized as a property addition, assists in the remediation of certain Y2K issues. 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. The foregoing information constitutes "Year 2000 Readiness Disclosure" within one meaning for the Year 2000 Informant Readiness Disclosure Act of 1998. 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, 2000. 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 Consolidated Statements of Cash Flows Information: As of June 30, 1999, the Company's principal sources of liquidity included cash and cash equivalents of $38.5 million and marketable securities with a fair market value of $15.3 million. As of June 30, 1999, the Company had working capital of $73.6 million. During July 1999, the Company negotiated a new credit facilities arrangement which provided for a revolving credit facility of $30.0 million. See footnote 6. "Subsequent Events" of the notes to the accompanying consolidated financial statements for additional information. Net cash provided by operating activities during the six month period ended June 30, 1999 totaled $16.9 million, compared to net cash used in operating activities of $1.8 million during the comparable period of 1998. During the six month period ended June 30, 1999, the Company spent $2.3 million for additions of property and equipment and $3.0 million related to internal software development costs. Consolidated Balance Sheets information: List brokerage trade accounts receivable decreased from $17.8 million at December 31, 1998 to $11.2 million at June 30, 1999. List brokerage trade accounts payable decreased from $18.8 million at December 31, 1998 to $12.2 million at June 30, 1999. The balance of list brokerage trade accounts receivable and list brokerage trade accounts payable may fluctuate significantly and is dependent on the specific timing of cash receipts and disbursements. Total accrued expenses decreased from $12.5 million at December 31, 1998 to $5.0 million at June 30, 1999 principally due to the 16 17 payment of $4.6 million to Experian Information Solutions, Inc. during the first quarter of 1999 in connection with arbitration of a contractual dispute and due to a purchase price adjustment related to the acquisition of Walter Karl of $1.3 million recorded during the first quarter of 1999. Long-term debt decreased from $126.7 million at December 31, 1998 to $118.5 million at June 30, 1999 principally due to the Company's repurchase of $9.0 million of its infoUSA 9 1/2% Senior Subordinated Notes during the first quarter of 1999. See "Factors That May Affect Operating Results--Effects of Leverage" for details regarding additionsl debt incurred by the Company in July 1999. Treasury stock increased from $3.0 million at December 31, 1998 to $9.4 million at June 30, 1999 principally due to the purchase in the open market of 1.1 million shares of common stock during the first quarter of 1999 at a total cost of $6.6 million. 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 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 or may be dilutive. FACTORS THAT MAY AFFECT OPERATING RESULTS INTEGRATION OF RECENT AND FUTURE ACQUISITIONS Since mid-1996, the Company has completed nine 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, the June 1998 acquisition of JAMI Marketing and the July 1999 acquisition of Donnelley Marketing, Inc. ("Donnelley"). The acquisition of Donnelley was extremely significant, with consideration paid by the Company totaling $200.0 million, funded using a combination of existing cash and cash borrowed under new senior secured credit facilities. 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 In the past two years, the Company has undergone significant changes in its senior management team, even as it has experienced growth both internally and through acquisitions. The Company hired a number of senior managers in September and October 1997, who ceased their employment with the Company between July and September 1998. These managers 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. During 1999, the Company made two significant senior management team additions. Susan Henricks was appointed to Executive Vice President in August 1999. Ms. Henricks previously served as managing director of client development for First Data Corporation, and as President and Chief Executive Officer of Metromail Corporation. Jack McGovern was appointed Chief Financial Officer in July 1999. The Company is currently organized into three major sales groups headed by group presidents. Al Ambrosino, who has been with the Company or its subsidiary for 19 years, DJ Thayer, who has been with the Company for 8 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 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. 17 18 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 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 June 30, 1999, the Company had total indebtedness of approximately $118.5 million, including $106.0 million of Notes under an indenture under which State Street Bank and Trust Co. of California is trustee (the "Indenture"). The Indenture permits the Company to incur substantial additional indebtedness (including, subject to certain conditions, an additional $85.0 million of senior subordinated notes under the Indenture). In July 1999, in connection with the acquisition of Donnelley, the Company incurred additional indebtedness of $165.0 million under a $195.0 million Senior Secured Credit Agreement under which Bank Boston, N.A. acts as administrative agent for a group of lenders. Substantially all assets of the Company are pledged as security under the terms of the Credit Agreement. The Company's ability to pay principal and interest on the Notes issued under the Indenture and the Credit Agreement and to satisfy its other debt obligations will depend upon its future operating performance, which performance will be affected by prevailing 18 19 economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. The Company's ability to pay principal and interest on the Notes issued under the Indenture and to satisfy its debt obligations other than in connection with the Credit Agreement may also depend upon the future availability of revolving credit borrowings under the Credit Agreement. Such availability will depend on, among other things, the Company's 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 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 (including the Notes issued under the Indenture and the Credit Agreement) 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, including the Notes issued under the Indenture and the Credit Agreement, 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. The Company's ability to comply with such covenants may be affected by events beyond its control. A breach of any of these covenants could result in an event of default under the terms of the Company's existing debt obligations. Upon the occurrence of an event of default, the lenders under these debt obligations could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If the payment of any such indebtedness is accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full any such indebtedness and the other indebtedness of the Company. Moreover, if the Company were unable to repay amounts owed to the lenders under the Credit Agreement, 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 Experian and 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 and many smaller, regional directory publishers. In consumer sales lead generation products, the Company competes with Acxiom, R.L. Polk, Experian and Equifax, both directly and through reseller networks. In data processing services, the 19 20 Company competes with Acxiom / May & Speh, Experian, Direct Tech, Snyder Communications, Inc. and Harte-Hanks Communications, Inc. 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 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 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 20 21 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 the acquisition of Donnelley, the Company incurred approximately $165.0 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 results, and this failure could have a material adverse effect on the Company's stock price. 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. The Company has proposed a recapitalization that would combine the two classes of stock into one class, however, there is no assessment that such a recapitalization will be successfully completed. 21 22 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no changes in market risks since fiscal yearend 1998. 22 23 infoUSA INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 PART II OTHER INFORMATION 23 24 infoUSA INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the 1999 Annual Meeting of Stockholders of the Company held on May 2, 1999, the stockholders voted and approved the following items: 1. Elected the following directors to the Board of Directors for a term of three years. Paul Goldner FOR: 191,643,586 WITHHOLD AUTHORITY: 4,348,079 Ben Nelson FOR: 191,645,864 WITHHOLD AUTHORITY: 4,345,801 George Kubat FOR: 191,600,764 WITHHOLD AUTHORITY: 4,390,901 2. The stockholders voted to amend to the 1997 Class A Common Stock Option Plan reserving an additional 3,000,000 shares of the Company's Common Stock for issuance thereunder. FOR: 139,299,819 AGAINST: 32,305,782 ABSTAIN: 247,193 NON-VOTE 24,138,871 3. The stockholders also ratified the appointment of KPMG Peat Marwick LLP as the Company's independent auditors to examine the financial statements of the Company for the fiscal year 1999. FOR: 195,895,738 AGAINST: 75,937 ABSTAIN: 19,900 NON-VOTES: 0 ITEM 5. OTHER MATTERS On June 23, 1999, the Company announced the appointment of Jack J. McGovern to Chief Financial Officer effective July 1, 1999. On July 8, 1999, the Company announced the appointment of Susan Henricks to Executive Vice President effective August 1, 1999. On July 26, 1999, George Kubart resigned from his postion as a president at the Company's Board of Directors and Charles Fote was appointed to take his place. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT NO. DESCRIPTION 10.1(1) Amended and Restated Database License Agreement between Donnelley Marketing, Inc. and First Data Resources, Inc. dated as of July 23, 1999. 10.2(1) Covenant not to compete by First Data Corporation to infoUSA Inc. dated as of July 23, 1999. 10.3 Option Agreement by and among infoUSA Inc. and First Data Corporation dated as of July 23, 1999. 27 Financial Data Schedule (b) Report on Form 8-K Effective May 28, 1999, the Company filed a Current Report on Form 8-K related to the acquisition of Donnelley Marketing, Inc. 24 25 S I G N A T U R E S Pursuant to the requirements 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. Date: March 17, 2000 /s/ STORMY DEAN ------------------------------------- Stormy Dean, Controller and Acting Chief Financial Officer (principal financial officer) 25 26 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1(1)* Amended and Restated Database License Agreement between Donnelley Marketing, Inc. and First Data Resources, Inc. dated as of July 23, 1999. 10.2(1)* Covenant not to compete by First Data Corporation to infoUSA Inc. dated as of July 23, 1999. 10.3* Option Agreement by and among infoUSA Inc. and First Data Corporation dated as of July 23, 1999. 27* Financial Data Schedule
- ------------ (1) infoUSA Inc. has requested confidential treatment for the redacted portions of these Exhibits. * previously filed 26 -----END PRIVACY-ENHANCED MESSAGE-----