-----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, F7ed33U7edDadhGnVu2HCNiS/3E2rM5Hs3OETTTqRhsBNmN7adZ6qu8/X5kiYDp+ ngV84DrOuF/G3bCbPLc1jA== /in/edgar/work/0000950134-00-008317/0000950134-00-008317.txt : 20001003 0000950134-00-008317.hdr.sgml : 20001003 ACCESSION NUMBER: 0000950134-00-008317 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000929 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOUSA INC CENTRAL INDEX KEY: 0000879437 STANDARD INDUSTRIAL CLASSIFICATION: [7331 ] IRS NUMBER: 470751545 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-19598 FILM NUMBER: 732479 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/A 1 d80554a1e10-ka.txt AMENDMENT NO. 1 TO FORM 10-K - FISCAL END 12/31/99 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (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, 1999 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: COMMON STOCK, $0.0025 PAR VALUE SERIES A 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 Common Stock on March 7, 2000 as reported on the NASDAQ National Market System, was approximately $286 million. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding 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 7, 2000 registrant had outstanding 49,838,408 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on April 28, 2000, which will be filed within 120 days of the end of fiscal year 1999, are incorporated into Part III hereof by reference. ================================================================================ 2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW infoUSA is a leading provider of business and consumer marketing information, data processing and database marketing services. infoUSA is also an incubator of Internet database companies in that companies utilize our products and services to find new customers, manage their marketing databases, and deliver innovative Internet solutions to their clients. The Company's key assets include proprietary databases of 12 million businesses and 200 million consumers in the United States and Canada. We believe our proprietary content is the most comprehensive and accurate data available. We leverage these key assets by selling through multiple distribution channels to small and medium-size businesses, Fortune 1000 companies, consumers, and Internet and Wireless value added resellers. Historically, our revenue has been derived predominantly through the sale of customized sales lead generation products. We estimate that no customer represented greater than approximately 3% of net sales in 1999. As our company has expanded product and service offerings, we have successfully capitalized on new markets and applications for our proprietary databases. We began to recognize significant revenue from data processing services in 1997 following the acquisition of Database America. With the expansion of our Consumer Products Division, and the acquisition of Pro CD and Digital Directory Assistance, revenue from consumer CD-Rom products increased substantially between 1993 and 1997. List Brokerage and List Management revenue showed strong growth during 1998 with the acquisition of Walter Karl and JAMI Marketing Services. Finally, the company has recognized strong growth in the past year and believes there is significant opportunity with our various Internet initiatives. During 1999, we formalized our Internet Strategy, which is to leverage our proprietary content online for multiple applications. We intend to use our powerful database assets and branded distribution to create and develop multiple Internet database companies. Our databases are dynamic, changing by over 40% per year, and are rich in content. In addition, we are continuously increasing the depth and breadth of the content to include public information, pictures, videos and many other unique data elements. We are poised to exploit this technology and distribution channel, and have positioned our company as an incubator of various information based Internet companies, such as infoUSA.com, VideoYellowPages.com, businessCreditUSA.com, and listbazaar.com. Several other potential companies are on the drawing board. We intend to leverage our proprietary content into multiple vertical market applications and valuable B2b e-Commerce, e-CRM, and e-Infomediary solutions. During 1999 we named long-time company executive William Chasse as Chairman and CEO of infoUSA.com and headquartered our Internet companies in the heart of Silicon Valley, in Foster City, California. Mr. Chasse has during the past several months recruited and assembled a team of executive managers who bring a wealth of Internet experience to our company. We also made significant progress during 1999 in our core business operations, specifically with the acquisition of Donnelley Marketing from First Data Resources, and the expansion of our executive management team. In July of 1999, we completed the acquisition of Donnelley Marketing, which enhanced our proprietary consumer database and database marketing services. The merger made us the only company in our industry offering proprietary business and consumer data, data processing, and database marketing services. This strategic acquisition gives us the ability to offer complete solutions and fulfill substantially all the database, data processing, and database marketing needs of our Fortune 1000 customers. Susan L. Henricks joined our company during 1999 as Senior Vice President of our large customer group, comprised of Donnelley Marketing, Database America, and Walter Karl. Ms. Henricks previously served as Executive Vice President of Client Development for First Data Corporation, and prior to working with First Data Corporation, served as President and CEO of Metromail Corporation. Ms. Henricks was instrumental in the successful integration of Donnelley Marketing ahead of schedule, and with greater cost synergies than projected. She has a wealth of experience in our industry, and has made significant contributions already. Other notable additions to the management team include J. Peter Bardwick as CFO and COO of infoUSA.com. Mr. Bardwick was previously CFO of CBS Marketwatch. Rakesh Gupta (no relation to infoUSA chairman and chief executive officer, Vinod Gupta) was hired as Senior Vice President, e-Commerce. Mr. Gupta was previously the Chief Information Officer for Atlas Travel Technologies. Overall, 1999 was a record year, with revenue of $266.1 million and EBITDA, as adjusted of $72.4 million. The Company returned to historic levels for cash flow, as measured by EBITDA. 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 2 3 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 "commingled" 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. Since 1997, net sales of the Company's large business segment have increased as a percentage of the Company's total net sales, due to the acquisition of the Database America Companies, Walter Karl, JAMI Marketing and Donnelley Marketing. The Company has experienced an increase in length of time that sales are outstanding before collection compared to historical data, due to the recent acquisition of Donnelly Marketing. A significant portion of Donnelly Marketing sales include payment terms that are generally more extended than the Company's pre-Donnelly Marketing acquisition customer base. The Company has supplemented its internal growth through strategic acquisitions. The Company has completed ten 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 PRINCIPAL TYPE OF VALUE ACQUIRED COMPANY KEY ASSET BUSINESS SEGMENT ACQUISITION DATE ACQUIRED (IN MILLIONS)(1) ------------------- --------- ---------------- ----------- ------------- ---------------- Digital Directory Assistance....... Consumer CD-Rom Products Small business Asset purchase August 1996 $ 17 County Data Corporation...... New Businesses Database Small business Pooling-of-interest November 1996 $ 11 Marketing Data Systems.......... Data Processing Services Large business Asset purchase November 1996 $ 3 BJ Hunter.......... Canadian Business Small business Stock purchase December 1996 $ 3 Database Database America Companies........ Consumer Database and Large business Stock purchase February 1997 $ 105 Data Processing Services Pro CD............. Consumer CD-Rom Products Small business Asset purchase August 1997 $ 18 Walter Karl........ Data Processing and List Large business Stock purchase March 1998 $ 18 Management Services JAMI Marketing..... List Management Services Large business Asset purchase June 1998 $ 13 Contacts Target Marketing........ Canadian Business Small business Asset purchase July 1998 $ 1 Database Donnelley Marketing Consumer Database and Large business Stock purchase July 1999 $ 200 Data Processing Services
(1) Transaction value includes total consideration paid including cash paid, debt issued and stock issued plus long-term debt repaid or 3 4 assumed at the date of acquisition plus, in the case of DBA, a subsequent purchase price adjustment in October 1997. As part of these strategic acquisitions, the Company has incurred various acquisition-related charges to operations, consisting of: 1) $10.0 million in 1996 in connection with the acquisition of Digital Directory Assistance, 2) $56.1 million in 1997 in connection with the acquisitions of DBA and Pro CD, 3) $10.1 million in 1998 in connection with the acquisitions of Walter Karl and JAMI Marketing and for certain internal restructuring charges, and 4) $9.8 million in 1999 in connection with the acquisition of Donnelley Marketing. In addition, the Company expects to amortize goodwill and other intangibles over periods of 1 to 20 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, and the results for 1998 and 1997 do not include the operations of Donnelley 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. Associated with the acquisitions previously described, the Company has recorded amortization expense on goodwill and other intangibles as summarized in the following table (amounts in thousands):
FISCAL YEAR AMOUNT ----------- -------- 1995................. $ 1,248 1996................. 1,312 1997................. 27,661 1998................. 18,147 1999................. 22,237
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 the Database America Companies (DBA) in February 1997, Pro CD in August 1997, Walter Karl in March 1998, JAMI Marketing Services (JAMI) in June 1998, and Donnelley Marketing (Donnelley) in July 1999:
YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales......................................... 100% 100% 100% Costs and expenses: Database and production costs................... 30 29 29 Selling, general and administrative............. 42 51 41 Depreciation and amortization................... 13 12 18 Provision for litigation settlement............. -- 2 -- Impairment of assets............................ 2 -- -- Acquisition costs............................... 2 1 1 In-process research and development............. -- 2 28 Restructuring charges........................... -- 1 -- ------ ------ ------ Total costs and expenses................ 88 98 117 ------ ------ ------ Operating income (loss)........................... 12 2 (17) Other income, net................................. 2 2 -- ------ ------ ------ Income (loss) before income taxes and extraordinary 14 4 (17) item.............................................. Income taxes...................................... 5 3 4 ------ ------ ------ Income (loss) before extraordinary item........... 9 1 (21) Extraordinary item, net of tax.................... -- -- -- ------ ------ ------ Net income (loss)................................. 9% 1% (21)% ====== ====== ====== EBITDA, as adjusted(1)............................ 27% 15% 29% ====== ====== ====== OTHER DATA: SALES BY SEGMENT: Small business.................................. $130.1 $130.0 $116.3 Large business.................................. 136.0 98.7 77.0 ------ ------ ------ Total................................... $266.1 $228.7 $193.3 ====== ====== ====== SALES BY SEGMENT AS A PERCENTAGE OF NET SALES: Small business.................................. 49% 57% 60% Large business.................................. 51 43 40 ------ ------ ------ Total................................... 100% 100% 100% ====== ====== ======
4 5 - ---------- (1) "EBITDA, as adjusted," is defined as operating income (loss) adjusted to exclude depreciation, amortization of intangible assets and non-cash 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. 1999 COMPARED TO 1998 Net sales Net sales for 1999 were $266.1 million, an increase of 16% from $228.7 million for 1998. Net sales of the small business segment for 1999 were $130.1 million, compared to $130.0 million for 1998. Net sales of consumer CD-Rom products were $19.0 million, a 3% decrease from $19.5 million for 1998. Internet content sales were $3.3 million, an 83% increase from $1.8 million for 1998, led by growth in net sales of mailing lists, sales leads and business credit reports. Net sales for the small business segment were flat principally due to the implementation of stricter credit practices during late 1998. The Company adhered to these new credit-extension practices throughout 1999, effectively slowing the growth of sales within the small business segment, but improving the profitability of the segment. The Company has also improved the product mix within its small business segment resulting in improved profit margins. The Company has been aggressively targeting mid-size customers since mid-1999, and believe these customers represent an important growth opportunity for the small business segment in 2000. Net sales of the large business segment for 1999 were $136.0 million, a 38% increase from $98.7 million for 1998. The Company recorded net sales of data processing services of $74.8 million during 1999, compared to $62.3 million during 1998. Net sales of Internet-based database licenses were $12.5 million, a 59% increase from $7.8 million for 1998. Since mid-1999, the Company has been successfully renewing and signing new Internet license agreements using a variable CPM model, no longer entering into license agreements on a flat fee basis. The increase in net sales for the large business segment and in data processing services is principally due to the following factors: 1) an increase in sales of Internet-based database licenses accounted for $4.7 million of the increase, 2) increased sales of data processing services by the Company's National Accounts sale force accounted for $7.1 million of the increase, and 3) the remainder of the increase is attributed to the acquisition of Donnelley effective July 1999, although the amount can not be accurately quantified for the reason that Donnelly products or features were combined with existing products or features. 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 1998. In early 1999, the customer transferred a significant portion of the business in-house. The overall increase in the large business segment net sales was partially offset by the loss of this customer. Database and production costs Database and production costs for 1999 were $78.8 million, or 30% of net sales, compared to $66.3 million, or 29% of net sales for 1998. Since 1996, database and production costs have increased as a percentage of net sales as a result of higher cost margins 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: 1) an overall increase in list brokerage and data processing services sales due to the acquisitions of Walter Karl and JAMI Marketing during 1998, and 2) the acquisition of Donnelley in July 1999 which internally has significant sales of data processing services. The overall increase in database and production costs of 2% was offset by a decrease in the cost of production of consumer CD-Rom titles of $2.6 million, representing a decrease of 1%. Selling, general and administrative expenses Selling, general and administrative expenses for 1999 were $110.7 million, or 42% of net sales, compared to $117.7 million, or 51% of net sales for 1998. The decrease in selling, general and administrative expenses for 1999 from 1998, represented as a percentage of net sales, is partially the result of the following items recorded during 1998: 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. 5 6 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, represented principally by staffing reductions, as described in the section "Restructuring Charges" to counter prior measures taken. During the period from the fourth quarter of 1998 through the second quarter of 1999, the Company focused on the reduction of operating expenses, successfully completing during mid-1999 the cost reduction program implemented during the third quarter of 1998. In addition to the items previously described, the decrease in selling, general and administrative expenses in total and as a percentage of net sales is partially the result of the staffing reductions, excluding the effects of the addition of staff related to the acquisition of Donnelley in July 1999. Depreciation and amortization expenses Depreciation and amortization expenses for 1999 were $35.1 million, or 13% of net sales, compared to $27.5 million, or 12% of net sales for 1998. The increase in depreciation and amortization expenses is due to the acquisition of Donnelley in July 1999. Provision for litigation settlement During 1998, the Company recorded a provision for litigation settlement of $4.5 million, or 2% of net sales, 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. Impairment of assets During 1999, the Company recorded asset impairment charges totaling $5.6 million, or 2% of net sales. The impairment charges included: 1) a write-down of $3.9 million on the net unamortized balance of the Company's existing consumer database white pages file which was impaired due to the addition of the more complete Donnelley consumer file with the acquisition of Donnelley in July 1999, and 2) a write-down of $1.7 million on the net book value of certain leasehold improvements and in-process construction projects which were abandoned due to the move of data processing services operations from Montvale, NJ to Greenwich, CT. Acquisition costs During 1999, the Company recorded various integration-related charges of $4.2 million, or 2% of net sales. The integration-related charges included consulting costs, management bonuses, direct travel and entertainment costs and other direct integration-related charges. These costs were not directly related to the acquisition of Donnelley, and therefore could not be capitalized, but were costs associated with the integration of Donnelley operations into the Company's existing operations. During 1998, the Company recorded charges totaling $3.6 million, or 1% of net sales, consisting of $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 Common Stock which was not completed. In-process research and development During 1998, the Company recorded a charge of $3.8 million, or 2% of net sales, for purchased in-process research and development costs associated with the acquisition of Walter Karl, Inc. See discussion of 1998 compared to 1997 for additional information related to this charge. Restructuring charges During 1998, the Company recorded restructuring charges totaling $2.6 million, or 1% of net sales. A restructuring charge of $1.4 million was recorded related to the closing of the County Data Corp. new business compilation and sales center and moving these operations from Vermont to Nebraska. All 45 of the County Data Corp. employees were terminated, and severance charges 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. 6 7 Also during 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 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 by June 30, 1999. Operating income Including the factors previously described, the Company had operating income of $31.7 million, or 12% of net sales for 1999, as compared to operating income of $2.6 million, or 2% of net sales for 1998. Excluding acquisition-related, integration and restructuring, provision for litigation settlement and asset impairment charges previously described, the Company would have had operating income of $41.5 million, or 16% of net sales for 1999, as compared to operating income of $17.2 million, or 8% of net sales for 1998. Small business segment - Operating income for the small business segment for 1999 was $59.3 million, or 46% of net sales, as compared to $54.7 million, or 42% of net sales for 1998. The increase in operating income as a percentage of net sales of 4% directly relates to certain costs incurred during 1998 which were not incurred during 1999, including: 1) an increase in the estimated reserves for bad debts of $3.5 million, 2) an increase in the estimates for reserves for consumer CD-Rom products of $5.3 million, and 3) a charge of $2.7 million related to the change in estimated lives for deferred advertising costs. These adjustments principally related to the small business segment. The incremental costs incurred during 1998 described above were offset by cost reductions performed by the Company during 1998. During late 1998, the Company enacted certain cost reduction measures described in selling, general and administrative expenses. Specifically, the Company reduced staffing for this segment by approximately 175 staff. The staffing reduction caused no material deterioration in sales, improving profitability of this segment. Large business segment - Operating income for the large business segment for 1999 was $55.9 million, or 41% of net sales, as compared to $39.7 million, or 40% of net sales for 1998. The increase in operating income as a percentage of net sales of 1% directly relates to the cost reduction measures described in selling, general and administrative expenses. Specifically, the Company reduced staffing for this segment by approximately 70 staff. The staffing reduction caused no material deterioration in sales, improving profitability of this segment. Other income (expense), net Other income (expense), net was $4.5 million, or 2% of net sales, and $5.5 million, or 2% of net sales, for 1999 and 1998, respectively. Other income (expense) is comprised of interest expense, investment income and other income or expense items which do not represent components of operating income (expense) of the Company. Interest expense was $18.6 million and $9.2 million for 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 and the addition of the Deutsche Bank Credit Facilities used to finance the acquisition of Donnelley in July 1999. Investment income was $14.2 million and $16.6 million for 1999 and 1998, respectively. The Company recorded realized gains on the sale of marketable securities totaling $12.9 million and $15.5 million for 1999 and 1998, respectively. During 1999, the Company realized a gain of $10.3 million on the disposition of its holdings in InfoSpace.com common stock. During 1998, the Company realized a gain of $16.5 million on the disposition of its holdings in Metromail Corporation common stock. During 1999, infoUSA.com, a subsidiary of the Company, completed its first round of venture capital financing. As a result of the issuance of common stock of this subsidiary, the Company recorded a gain of $8.9 million on the transaction. During 1998, the Company recorded a loss of $2.0 million on the write-off of an investment. During 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. 7 8 Income taxes A provision for income taxes of $13.1 million and $5.9 million was recorded for 1999 and 1998, respectively. Acquisition-related charges of $3.8 million, representing purchased in-process research and development charges for Walter Karl, were included in income before income taxes for 1998, but are not deductible for tax purposes. The provisions for these periods also reflect the inclusion of amortization of certain intangibles in taxable income not deductible for tax purposes. Amortization expense of $7.5 million and $3.3 million were not deductible for tax purposes for 1999 and 1998, respectively. 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 and asset impairment charges previously described, the Company's EBITDA, as adjusted, was $72.4 million, or 27% of net sales for 1999, and $33.9 million, or 15% of net sales for 1998. 1998 COMPARED TO 1997 Net sales Net sales for 1998 were $228.7 million, a 18% increase from $193.3 million in 1997. Net sales of the small business segment were $130.0 million, a 12% increase from $116.3 million in 1997. Included in the small business segment are sales of sales leads generation products and consumer CD-Rom products. 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 DBA, Pro CD, and Contacts Target Marketing during 1997 and 1998. The average net sales per mailing piece declined from $6.55 per piece in 1997 to $5.75 in 1998. The principal reason for the decline in average sales per mailing piece is that during 1998, the Company increased the pieces mailed to test various markets and new product lines. The market tests did not result in significant incremental net sales. 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. Net sales of the large business segment were $98.7 million, a 28% increase from $77.0 million in 1997. Included in the large business segment are sales of data processing services. 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 DBA in February 1997, Walter Karl in March 1998 and JAMI Marketing in June 1998. Additionally, during 1998, the Company entered into Internet licensing agreements totaling approximately $7.8 million compared to $4.8 million in 1997. 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 intended to perform the same processing in-house. The overall increase in net sales of data processing services in 1999 was partially offset by the loss of this customer. 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. The Company produces, markets and sells an annual consumer CD-Rom product line consisting in excess of twenty separate titles. Each product line is customarily released during the third quarter of each fiscal year. The 1999 product line was released during the third quarter of 1998. During 1998, the Company produced units of the 1998 product line that exceeded actual sales. The write-down of $0.9 million was equal to the remaining costs recorded on the books for the 1998 product line which became obsolete as a result of the release of the 1999 product line during the third quarter of 1998. 8 9 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 the third quarter 1998, the Company modified the estimated benefit period related to deferred advertising costs from 12 months to 6 months. The Company updated its study of sales and responses derived from its direct marketing campaigns during the third quarter of 1998. This study was based upon specific evaluations of sales responses from specific direct marketing campaigns. Due to changes in mailing patterns, management was able to determine that the Company's catalogs generated sales for approximately 6 months after the mail date rather than 12 months. 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 "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 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 of 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 costs During 1998, the Company recorded charges totaling $3.6 million, or 1% of net sales, consisting of $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 Common Stock which was not completed. During 1997, the Company recorded $2.6 million of acquisition costs, or 1% of net sales, 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. 9 10 In-process research and development During 1998, the Company recorded a write-off of acquired in-process research and development of $3.8 million, or 2% of net sales, in connection with the acquisition of Walter Karl. A portion of the purchase price for this acquisition 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 total amount allocated to the purchased IPR&D recorded in connection with the acquisition of Walter Karl was $3.8 million after retroactive application of the Securities and Exchange Commission's new guidelines for valuing purchased IPR&D. The Company obtained an independent valuation of the purchased IPR&D. The income valuation approach was used to determine the fair value of the IPR&D projects acquired from Walter Karl. 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 it 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 three risk factors: project risk, product risk, and market risk. Project risk reflects the degree to which the project can be feasibly completed and will perform upon its completion in the manner specified. Project risk is dependent upon the development phase of the project as of the acquisition date. Under this premise, the closer the project is to completion, the more likely that the project will reach a successful conclusion. Product risk refers to the concept that these products will be able to produce commercially viable products and services. This factor can be assessed based upon past management experience in the development of new products or services and success of those past ventures. Whether the development required a significant technological or process change was also considered. For a product or service which is similar to other products or services, the risk factor associated is low. Market risk refers to the concept that these products will be demanded by the market upon their completion. Market risk is based upon information that indicates the degree to which the market will demand a product or service that provides the functionality specified. Without the successful completion of the remaining development efforts, the end result would be to fail to introduce new products. A discount of 30% was applied to reflect these risks associated with the projected cash flow to be generated by the acquired IPR & D projects. The descriptions of the projects related to Walter Karl are as follows: - Internet F/E to M204 is a list fulfillment system which interfaces with the Internet to request orders. - M204 Shipping Interface automates shipping and generates the ability to setup shipping destination information as well as allow for the tracking of shipments throughout out its journey to the final destination. - List Brokerage & Management Order is a new order entry system for list fulfillment. - Global Database Update refers to a project that will create a new updated database for the client, Global. - Arandel System Postal/Inkjet allows for postal information to be formatted for Inkjet specifications. - Paul Fredrick/Garden Botanika Reporting provides new reporting and database retrieval for the client Paul Fredrick/Garden Botanika. - Chilean Database is a project for a Chilean organization which consists of creating a new database with additional information. - Datacard System allows for the integration with the List Brokerage & Management Order System for rental lists. - Inkjet Utilities will generate a different layout for Inkjet specifications and the project will also allow for new audit reporting. - Flowers Response Analysis is a project that will attempt to increase the database response time of the client, Flowers. - Data Entry System will allow for LAN data entry of additional information. Research and Development costs of each Walter Karl project are directly proportional to the amount of labor (i.e. technicians and engineers) required to complete the project. It is estimated that the average annual cost per technical worker at Walter Karl is 10 11 $47,507. As a result, the R&D incurred on each project prior to the acquisition and the total amount of research and development cost estimated to complete each project are listed below.
R&D Costs R&D Costs Prior to the Expected Post IPR&D Project Acquisition Acquisition Total R&D Costs ------------- ------------ ------------- --------------- Internet F/E to M204 $11,877 $23,754 $35,631 M204 Shipping Interface $23,754 $11,877 $35,631 List Brokerage & Mgt. Order $23,754 $47,507 $71,261 Global Database Update $4,751 $23,754 $28,504 ArandalSystem Postal/InkJet $11,877 $23,754 $35,630 Paul Fredrick $35,630 $23,754 $59,384 Chilean Database $4,751 $23,754 $28,504 Datacard System $47,507 $9,501 $57,008 InkJet Utilities $23,754 $9,501 $33,255 Flowers Response Analysis $4751 $4,751 $9,501 Data Entry System $23,754 $4,751 $28,504 Total $228,034 $206,655 $434,689
A description of the stage of completion as well as the methodology employed is listed below for each IPR&D project related to Walter Karl; the stage of completion of each project was determined by examining the ratio of R&D expenses as of the acquisition date to total R&D costs (incurred and projected).
SCHEDULED BETA TEST IPR&D PROJECTS STAGE OF COMPLETION DATE -------------- ------------------- ------------------- Internet F/E to M204....... Middle of the Design June 1998 Phase M204 Shipping Interface.... Design Phase Unknown - Delayed List Brokerage & Mgt. Order Early Design Phase December 1998 Global Database Update..... Early Design Phase August 1998 ArandalSystem Postal/InkJet Design Phase Unknown - Delayed Paul Fredrick.............. Design Phase Unknown - Delayed Chilean Database........... Design Phase October 1998 Datacard System............ Design Phase April 1998 InkJet Utilities........... Late Stages of Design May 1998 Phase Flowers Response analysis.. Late Stages of Design April 1998 Phase Data Entry System.......... Late Stages of Design April 1998 Phase
The stage of completion for each project was determined by using the formula: person years completed on R&D/Total person years of R&D effort. Below is a chart outlining the stage of completion for each project.
R&D PERSON YEARS COMPLETED AS OF PERSON YEARS TOTAL R&D PERCENTAGE OF IPR&D PROJECT VALUATION DATE REMAINING PERSON YEARS COMPLETION ------------- ---------------- ------------ ------------ ------------- Internet F/E to M204...... .25 .50 .75 33% M204 Shipping Interface... .50 .25 .75 67% List Brokerage & Mgt. Order .50 1.0 1.5 33% Global Database Update.... .10 .50 .60 17% ArandalSystem Postal/InkJet .25 .50 .75 33% Paul Fredrick............. .75 .50 1.25 60% Chilean Database.......... .10 .50 .60 17% Datacard System........... 1.0 .20 1.2 83% InkJet Utilities.......... .50 .20 .70 71% Flowers Response Analysis. .10 .10 .20 50% Data Entry System......... .50 .10 .60 83% Total........... 4.80 4.35 9.15 52%
11 12 In regards to Walter Karl, product and market risks for each project are outlined in the following table:
IPR & D PROJECT PROJECT RISK PRODUCT RISK MARKET RISK --------------- ------------ ------------ ----------- Internet F/E to M204.......... Low Low Medium M204 Shipping Interface....... Low to Medium Low to Medium Low List Brokerage & Mgt. Order... Low Low Medium Global Database Update........ Medium Low High ArandalSystem Postal/InkJet... Medium Low High Paul Fredrick................. Low to Medium Low High Chilean Database.............. Medium Low High Datacard System............... Low Low to Medium Low InkJet Utilities.............. Low Low Medium Flowers Response Analysis..... Low Low High Data Entry System............. Low Low Low
During 1997, the Company recorded write-offs of acquired IPR & D totaling $53.5 million, or 28% of net sales, including charges of $49.2 million and $4.3 million in connection with the acquisition of DBA and Pro CD, respectively. 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 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 three risk factors: project risk, product risk, and market risk. Project risk reflects the degree to which the project can be feasibly completed and will perform upon its completion in the manner specified. Project risk is dependent upon the development phase of the project as of the acquisition date. Under this premise, the closer the project is to completion, the more likely that the project will reach a successful conclusion. Product risk refers to the concept that these products will be able to produce commercially viable products and services. This factor can be assessed based upon past management experience in the development of new products or services and success of those past ventures. Whether the development required a significant technological or process change was also considered. For a product or service which is similar to other products or services, the risk factor associated is low. Market risk refers to the concept that these products will be demanded by the market upon their completion. Market risk is based upon information that indicates the degree to which the market will demand a product or service that provides the functionality specified. Without the successful completion of the remaining development efforts, the end result would be to fail to introduce new products. A discount ranging from 24% to 30% was applied to reflect these risks 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. In applying the income approach, management's projections of the revenue and expenses the technologies were expected to generate were modeled. The earnings before interest and taxes (EBIT) was computed and tax-affected to estimate debt free net income. Debt free net income was subsequently decreased by changes in working capital and reduced by an appropriate rate of return on assets (assets utilized to achieve the respective cash flows). The computation yielded debt free cash flow available for distribution to debt and equity holders. The debt free cash flow streams for each technology or product was discounted to the present value based on the rate of return an investor would require for a project with a risk profile similar to DBA. Where appropriate, a terminal value was determined using a multiple or factor applied to the last year's projected revenue or EBITDA. The same discount rate applied to the debt free cash flow stream was also applied to the terminal value to arrive at the present value. This amount was then added to the present value of the debt fee cash flow stream to determine the total value of the technology. The $49.2 million charge for DBA relates to $46.9 million for interactive media products and services and $2.3 million for data processing technologies. Interactive media products included technology that would allow a customer to: access the Company's web site and download profile information on a particular business, company or individual for a per-access charge; "enrich" or "enhance" their list by matching it to the Company's via the internet; and allow the list to reside at the Company, while via the internet the customer will be "flagged" or notified of any updates to the information contained in the list. This project was in the early stages of development and was approximately 5-10% complete at acquisition. The ability to forecast project completion was not reasonable as the technological developments had not achieved a stage of feasibility as of January 31, 1997. Stage of completion was not assessed for this technology. The company had dedicated two engineering software technicians for the development of this technology concentrating on the development of the company's web-site prior to acquisition. These technologies were completed during 1998. During 1998, these functions were completed and have been utilized since that point in time to provide additional capabilities to customers. The new data processing technologies include merge/purge abilities, update and maintenance capabilities of relational databases, improved delivery systems and upgraded billing/accounting systems. 12 13 The $4.3 million charge related to Pro-CD includes the following projects: Graphical user interface technology represented $1.5 million of the charge. This project involved integrating certain features and functions of SelectPhone and Phonedisc graphical user interfaces into a common interface. The estimated costs at acquisition to complete the project were $3.1 million, with completion estimated for 1999. Database re-engineering, including process modification and restructuring records, of the SelectPhone product in order to accommodate consumer and business files accounted for $2.1 million of the charge. Additional elements were also expected to be added to enhance the SelectPhone product's competitive position. The estimated costs to complete were $5.5 million at acquisition through 2002. Applying DVD compact disc technology to the SelectPhone product line represented $0.5 million of the charge. The estimated cost to complete the project at acquisition was $0.2 million with expected completion in 1999. Finally, $0.2 million was charged relating to the extensive evaluation and correction for year 2000 date processing compliance of the SelectPhone product line. This assessment included the user interface as well as the product database. The estimated cost to complete was $0.4 million at acquisition with completion scheduled for 1998. IPR&D was a critical factor for the Company in making these acquisitions and timely completion of these projects was an equally important consideration. The time completion was expected to give the Company a competitive edge in its 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. 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 1998, the Company recorded restructuring charges totaling $2.6 million, or 1% of net sales. 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 personnel from under-performing sales functions 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 exit of certain field sales offices which were completed in early 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. Operating income for the small business segment for 1998 was $54.7 million, or 42% of net sales, as compared to $50.5 million, or 43% of net sales for 1997. Factors contributing to the decrease in operating income as a percentage of net sales are described in the section "Selling, general and administrative expenses." See Note 21 of the notes to the accompanying consolidated financial statements for additional information. Operating income for the large business segment for 1998 was $39.7 million, or 40% of net sales, as compared to $35.7 million, or 46% of net sales for 1997. Factors contributing to the decrease in operating income as a percentage of net sales are described in the section "Selling, general and administrative expenses." Additionally, the Company acquired Walter Karl and JAMI Marketing during 1998. Walter Karl and JAMI Marketing perform list brokerage services, which traditionally have lower profit margins than services associated with the Company's data processing services. See Note 21 of the notes to the accompanying consolidated financial statements for additional information. 13 14 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. The increase in interest expense to $9.2 million from $4.1 million is primarily attributable to the issuance of senior subordinated notes during 1998, of which $115 million was outstanding at December 31, 1998. 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. EBITDA, as adjusted Excluding the purchased in-process research and development charges previously described, the Company's EBITDA, as adjusted, was $33.9 million, or 15% of net sales, during 1998, compared to $55.4 million, or 29% of net sales, during 1997. YEAR 2000 READINESS DISCLOSURE The total estimated costs associated with the Company's Year 2000 remediation plan were $5.0 million. As of the date of this Form 10-K, the Company has not experienced any material business disruptions as a result of Year 2000 issues arising from its information systems, nor is it aware of any material Year 2000 related business interruptions impacting its clients or service providers. However, the Company cannot be certain that it will not suffer business interruptions, either due to its own Year 2000 issues that may develop or those of third parties. Accordingly, there can be no assurance the Company or third parties will not have ongoing Year 2000 issues that may have a material adverse effect on the Company. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivatives be recognized as either assets or liabilities in the balance sheet and measured at their fair value. If certain conditions are met, a derivative may be specifically designated as (i) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (ii) a hedge of the exposure to variable cash flows of a forecasted transaction or (iii) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security or a foreign-currency denominated forecasted transaction. SFAS 133, as amended by Statement of Financial Accounting Standards No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect the effect of SFAS 133 to be significant to its financial reporting. LIQUIDITY AND CAPITAL RESOURCES "Consolidated Statements of Cash Flows Information' As of December 31, 1999, the Company had working capital of $41.1 million. During 1999 in conjunction with the acquisition of Donnelley, the Company negotiated a new credit facilities arrangement which provides for a Revolving Credit Facility of $30.0 million. As of December 31, 1999, the Company had no borrowings under the Revolving Credit Facility, with the exception of one outstanding letter of credit in the amount of $5.0 million reducing the availability under the Revolving Credit Facility to $25.0 million. 14 15 Net cash provided by operating activities during 1999 totaled $29.4 million, compared to net cash provided by operating activities of $16.7 million during 1998. During 1999, the Company spent $9.0 million for additions of property and equipment, $10.4 million related to internal software development costs and $577 thousand related to database development costs. The Company acquired Donnelley effective July 1999. The Company has paid $206.4 million related to the acquisition, including consideration paid for the acquisition of $200.0 million and $6.4 million for capitalized acquisition costs. As part of the acquisition, the Company borrowed $165.0 million under the new credit facilities arrangement. The Company paid financing costs of $4.0 million to secure the financing arrangement. The Company also utilized existing cash and marketable securities of approximately $45.0 million to purchase Donnelley. During 1999, the Company spent $6.6 million to repurchase common stock of the Company and $8.4 million to repurchase outstanding Senior Subordinated Notes of the Company. During 1999, the Company's subsidiary received $10.0 million on the issuance of common stock of a subsidiary and $7.8 million on proceeds from the exercise of stock options. The issuance of subsidiary stock to outside investors has allowed the Company to continue to execute its planned expansion related to infoUSA.com as an online provider of white and yellow page directory assistance and an Internet destination for sales and marketing tools and information. The issuance of stock has allowed the Company to continue the expansion without affecting working capital of existing operations. The Company may continue to issue additional stock to outside investors, although there can be no assurances that the Company will issue additional stock and such issuance is dependent upon the results of operations related to infoUSA.com and its planned expansion. "Consolidated Balance Sheets Information' Cash and cash equivalents decreased from $29.6 million at December 31, 1998 to $10.8 million at December 31, 1999 and marketable securities decreased from $20.6 million at December 31, 1998 to $70 thousand at December 31, 1999. The Company utilized existing cash and cash equivalents and marketable securities of approximately $45.0 million to purchase Donnelley in July 1999. Trade accounts receivable increased from $40.1 million at December 31, 1998 to $65.8 million at December 31, 1999 principally due to the acquisition of Donnelley in July 1999. The Company recorded trade accounts receivable of $14.5 million as part of the acquisition. Property and equipment, net increased from $40.3 million at December 31, 1998 to $53.6 million at December, 1999 principally due to the following: 1) $6.2 million recorded as part of the acquisition of Donnelley in July 1999, and 2) the Company recorded capital leases totaling $6.8 million during 1999, primarily related to the acquisition of new computer equipment. List brokerage trade accounts receivable decreased from $17.8 million at December 31, 1998 to $16.7 million at December 31, 1999. List brokerage trade accounts payable decreased from $18.8 million at December 31, 1998 to $16.4 million at December 31, 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. The Company customarily pays the selling broker shortly after being paid by the buying broker. Intangible assets, net increased from $109.4 million at December 31, 1998 to $315.9 million at December 31, 1999. Goodwill and other intangibles recorded as part of the acquisition of Donnelley based on management's preliminary estimates totaled $228.2 million, and included goodwill of $150.3 million, purchased data processing software of $64.1 million, trade names of $7.7 million, and non-compete agreements of $6.1 million. Total accrued expenses decreased from $12.5 million at December 31, 1998 to $6.4 million at December 31, 1999 principally due to the following: 1) payment of $4.6 million to Experian Information Solutions, Inc. during 1999 in connection with arbitration of a contractual dispute, 2) purchase price adjustment of $1.3 million, recorded as a reduction to goodwill, of an accrual related to the buy-out of a lease recorded in connection with the acquisition of Walter Karl. 15 16 Long-term debt increased from $126.7 million at December 31, 1998 to $267.6 million at December 31, 1999 principally due to the borrowing of $165.0 million under the new credit facilities arrangement to purchase Donnelley. Additionally, the Company recorded capital leases totaling $6.8 million during 1999, primarily related to the acquisition of new computer equipment. This increase was offset by the Company's repurchase of $9.0 million of its infoUSA 9 1/2% Senior Subordinated Notes as previously described and repayments totaling $10.2 million on the Credit Facilities during 1999. Treasury stock increased from $3.0 million at December 31, 1998 to $9.2 million at December 31, 1999 principally due to the purchase in the open market of 1.1 million shares of common stock during 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 Our Internet strategy -- to be an incubator of Internet database companies -- is untested. Our Internet strategy is to be an incubator of Internet database companies. With this strategy, we are seeking to leverage our proprietary content into multiple vertical market applications and provide marketing solutions for electronic commerce applications. We recently introduced this strategy and it is relatively untested. We cannot guarantee that our Internet ventures will attract the number of visitors or advertisers that we project, or that our customers will choose to have our products and services delivered to them over the Internet. If we are successful in these ventures, we may face strong competition from current and potential competitors, including other Internet companies and other providers of business and consumer databases. Implementation of our Internet strategy is dependent on our ability to attract and retain senior management. The demand for senior management for Internet companies currently exceeds the supply of qualified candidates. The management team for our Internet ventures will include senior managers who have been with us for many years as well as newly hired senior managers. If we are unable to retain these managers or to attract other qualified senior management, the implementation of our Internet strategy may be delayed or impaired. Our markets are highly competitive and many of our competitors have greater resources than we do. The business and consumer marketing information industry in which we operate is highly competitive. Intense competition could harm us by causing, among other things, price reductions, reduced gross margins, and loss of market share. Our competition includes: - In consumer sales lead generation products, Acxiom, R.L. Polk, Experian (a subsidiary of Great Universal Stores, P.L.C. ("GUS")), and Equifax, both directly and through reseller networks. - In data processing services, Acxiom, May & Speh, Experian, Direct Marketing Technologies (a subsidiary of GUS), Snyder Communications, Inc. and Harte-Hanks Communications, Inc. - In business sales lead generation products, 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, from Regional Bell Operating Companies and many smaller, regional directory publishers. - In consumer products, certain smaller producers of CD-Rom products. - Technologies which companies may install and implement in-house as part of their internal IS functions, instead of purchasing or outsourcing such functions. 16 17 In addition, we may face competition from new entrants to the business and consumer marketing information industry as a result of the rapid expansion of the Internet, which creates a substantial new channel for distributing business information to the market. Many of our competitors have longer operating histories, better name recognition and greater financial resources than we do, which may enable them to implement their business strategies more readily than we can. We are highly leveraged. If we are unable to service our debt as it becomes due, our business would be harmed. As of December 31, 1999, we had total indebtedness of approximately $277.5 million, including $106.0 million of Notes under an indenture (the "Indenture") and $154.8 million under a $195 million Senior Secured Credit Agreement. Substantially all of our assets are pledged as security under the terms of the Credit Agreement. The indebtedness under the Credit Agreement was incurred in connection with our acquisition of Donnelley Marketing in 1999. Our ability to pay principal and interest on the Notes issued under the Indenture and the indebtedness under the Credit Agreement and to satisfy our other debt obligations will depend upon our future operating performance. Our performance will be affected by prevailing economic conditions and financial, business and other factors. Certain of these factors are beyond the our control. The future availability of revolving credit under the Credit Agreement will depend on, among other things, our ability to meet certain specified financial ratios and maintenance tests. We expect that our operating cash flow should be sufficient to meet our operating expenses, to make necessary capital expenditures and to service our debt requirements as they become due. If we are unable to service our indebtedness, however, we will be forced to take actions such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness (including the Notes issued under the Indenture and the Credit Agreement) or seeking additional equity capital. We may not be able to obtain any such remedies on terms that are favorable or satisfactory to us, if at all. The terms of our current indebtedness restrict our ability to take certain actions that fit our business strategy. Our existing credit facilities contain certain covenants which restrict our ability to: - Incur additional indebtedness; - Pay dividends and make certain other similar payments; - Guarantee indebtedness of others; - Enter into certain transactions with affiliates; - Consummate certain asset sales, certain mergers and consolidations, sales or other dispositions of all or substantially all of our assets; and - Obtain dividends or certain other payments from our subsidiaries. These restrictions may impair our ability to take certain actions that fit our business strategy. A breach of any of these covenants could result in an event of default under the terms of our existing credit facilities. Upon the occurrence of an event of default, the lenders 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, our assets may not be sufficient to repay in full the indebtedness under our credit facilities and our other indebtedness. Moreover, if we were unable to repay amounts owed to the lenders under our credit facilities, the lenders could foreclose on our assets that secure the indebtedness. Under the terms of our current indebtedness, the occurrence of a change of control of infoUSA could have serious adverse financial consequences to us. If a change of control of infoUSA were to occur, we would in certain circumstances be required to make an offer to purchase all outstanding Notes under the Indenture at a purchase price equal to 101% of the principal amount of the Notes, together with accrued and unpaid interest. There can be no guarantee that, if this were to happen, we would have sufficient funds to purchase the Notes. In addition, a change of control and any repurchase of the Notes upon a change of control may constitute an event of default under our other current or future credit facilities. In that event, our obligations under such credit facilities could be declared due and payable by the lenders, and the lenders may also have the right to be paid for all outstanding obligations under such credit facilities before we repurchase any of the Notes. 17 18 Fluctuations in our operating results may result in decreases in the market price of our common stock. Our operating results may fluctuate on a quarterly and annual basis. Our expense levels are relatively fixed and are based, in part, on our expectations as to future revenues. As a result, unexpected changes in revenue levels may have a disproportionate effect on operating performance in any given period. In some period or periods our operating results may be below the expectations of public market analysts and investors. Our failure to meet analyst or investor expectations could result in a decrease in the market price of our common stock. If we do not adapt our products and services to respond to changes in technology, they could become obsolete. We provide marketing information and services to our customers in a variety of formats, including printed formats, electronic formats such as CD-Rom and DVD, and over the Internet. Advances in information technology may result in changing customer preferences for products and product delivery formats. If we do not successfully adapt our products and services to take advantage of changes in technology and customer preferences, our business, financial condition and results of operations would be adversely affected. We have adopted an Internet strategy because we believe that the Internet represents an important and rapidly evolving market for marketing information products and services. Our business, financial condition and results of operations would be adversely affected if we: - Fail to develop products and services that are well suited to the Internet market; - Experience difficulties that delay or prevent the successful development, introduction and marketing of these products and services; or - Fail to achieve sufficient traffic to our Internet sites to generate significant revenues, or to successfully implement electronic commerce operations. Changes in laws and regulations relating to data privacy could adversely affect our business. We engage in direct marketing, as do many of our customers. Certain data and services provided by us 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. There is increasing awareness and concern among the general public regarding marketing and privacy concerns, particularly as it relates to the Internet. This concern is likely to result in new laws and regulations. Compliance with existing federal, state and local laws and regulations and industry self-regulation has not to date seriously affected our 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 our operations. This could result in substantial regulatory compliance or litigation expense or a loss of revenue. Our business would be harmed if we do not successfully integrate future acquisitions. Our business strategy includes continued growth through acquisitions of complementary products, technologies or businesses. We have made ten acquisitions since mid-1996 and completed the integration of these acquisitions into our existing business by the end of 1999. We continue to evaluate strategic opportunities available to us and intend to pursue opportunities that we believe fit our business strategy. Acquisitions of companies, products or technologies may result in the diversion of management's time and attention from day-to-day operations of our business and may entail numerous other risks, including difficulties in assimilating and integrating acquired operations, databases, products, corporate cultures and personnel, potential loss of key employees of acquired businesses, difficulties in applying our internal controls to acquired businesses, and particular problems, liabilities or contingencies related to the businesses being acquired. To the extent our efforts to integrate future acquisitions fail, our business, financial condition and results of operations would be adversely affected. 18 19 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-25 of this Form 10-K:
DESCRIPTION PAGE NO. ----------- -------- Independent Auditors' Reports....................... F-2, F-3 Consolidated Balance Sheets as of December 31, 1999 and 1998............................................ F-4 Consolidated Statements of Operations for the Year Ended December 31, 1999, 1998, and 1997............. F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998, and 1997... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997............. 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, 1999, 1998, and 1997 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. 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 (File No. 000-19598). 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 (File No. 000-19598). 2.4 -- Agreement and Plan of Reorganization between the Company and the Shareholders of Marketing Data Systems, Inc. is incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-3 (File No. 333-36669) filed 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.
19 20 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 exhibits filed with 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. is incorporated herein by reference to exhibits filed with the Company's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1998 (File No. 000-19598). 2.9 -- Agreement and Plan of Reorganization by and among the Company, Hugo Acquisition Corporation, First Data Corporation, First Data Information Management Group, Inc., DM Holdings, Inc., Donnelley Marketing Holdings, Inc., and Donnelley Marketing, Inc. is incorporated herein by reference to exhibits filed with the Company's Current Report on Form 8-K dated May 28, 1999. 3.1 -- Certificate of Incorporation, as amended through October 22, 1999, is Incorporated herein by reference to exhibits filed with Company's Registration Statement on Form 8-A, as amended, filed March 20, 2000. 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 Designation of Participating Preferred Stock, filed in Delaware on October 22,1999, is incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form 8-A, as amended, filed March 20, 2000. 4.1 -- Preferred Share Rights Agreement is incorporated herein by reference to the Company's Registration Statement on Form 8-A, as amended, filed March 20, 2000. 4.2 -- Specimen of Common Stock Certificate is incorporated herein by reference to the exhibits filed with the Company's Registration Statement on Form 8-A, as amended), filed March 20, 2000. 4.3 -- Reference is made to Exhibits 3.1, 3.2, and 3.3 hereof. 4.4 -- Purchase Agreement dated June 12, 1998 between the Company, BT Alex. Brown Incorporated, Goldman, Sachs & Co. and Hambrecht & Quist LLC is incorporated herein by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998 (File No. 000-19598). 4.5 -- Indenture dated as of June 18, 1998 (the "Indenture") by and between the Company and State Street Bank and Trust Company of California, N.A., as Trustee is incorporated herein by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998 (File No. 000-19598).
20 21 4.6 -- Exchange and Registration Rights Agreement dated as of June 18, 1998 by and among the Company and BT Alex. Brown Incorporated, Goldman, Sachs & Co. and Hambrecht & Quist LLC as the Initial Purchasers is incorporated herein by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998 (File No. 000-19598). 4.7 -- Form of New 9 1/2% Senior Subordinated Note due 2008 is incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-4 (File No. 333-61645), filed December 15, 1999. 4.8 -- Credit Agreement by and among infoUSA, Inc., various Lenders (as defined therein) and Bankers Trust Company dated as of July 23, 1999 is incorporated herein by reference to exhibits filed with the Company's Current Report on Form 8-K dated July 23, 1999. 4.9 * -- First Amendment dated October 29, 1999 and Second Amendment dated December 15, 1999 to Credit Agreement by and among the Company, various Lenders (as defined therein) and Bankers Trust Company, filed herewith. 10.1 -- Form of Indemnification Agreement with Officers and Directors is incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-1 (File No. 33-51352), filed August 28, 1992. 10.2 -- 1992 Stock Option Plan as amended is incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-8 (File No. 333-37865), filed October 14, 1997. 10.3 -- 1997 Stock Option Plan as amended is incorporated herein by reference to exhibits filed with the Company's Registration Statement on Form S-8 (File No. 333-82933), filed July 15, 1999. 10.4 * -- Employment Agreement dated July 5, 1999 between the Company and Susan Henricks, filed herewith. 10.5 -- Amended and Restated Database License Agreement between Donnelley Marketing, Inc. and First Data Resources, Inc. dated as of July 23, 1999 is incorporated herein by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999 (File No. 000-19598). 10.6 -- Covenant not to compete by First Data Corporation to infoUSA Inc. dated as of July 23, 1999 is incorporated herein by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999 (File No. 000-19598). 10.7 -- Reference is made to Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 4.5, 4.8 and 4.9 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, filed herewith.
21 22 27.1 * -- Financial Data Schedule, filed herewith.
* Previously filed (b) Reports on Form 8-K: On October 6, 1999, the Company filed a Current Report on Form 8-K/A dated July 23, 1999, pursuant to Item 7 of that form, to report required pro forma and audited financial information related to the acquisition of Donnelley Marketing effective July 1, 1999. 22 23 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, 1999 and 1998............................................ F-4 Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997.............. F-5 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997.... F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997.............. F-7 Notes to Consolidated Financial Statements.......... F-8 to F-22 Schedule II -- Valuation and Qualifying Accounts.... S-1
F-1 24 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors infoUSA Inc.: We have audited the accompanying consolidated balance sheets of infoUSA Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for the years ended December 31, 1999 and 1998. In connection with our audits 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 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 as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1999 and 1998, 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 LLP --------------------- KPMG LLP Omaha, Nebraska January 24, 2000 F-2 25 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors infoUSA Inc.: We have audited the accompanying consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows of infoUSA Inc. and subsidiaries (formerly American Business Information, Inc.) for the year ended December 31, 1997. We have also audited the financial statement schedule listed in Item 14 in this Form 10-K for the year 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 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 consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of infoUSA Inc. and subsidiaries (formerly American Business Information, Inc.) for the year 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 26 infoUSA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Current assets: Cash and cash equivalents .................................. $ 10,846 $ 29,603 Marketable securities ...................................... 70 20,620 Trade accounts receivable, net of allowances of $7,068 and $7,289, respectively .................................... 65,812 40,126 List brokerage trade accounts receivable ................... 16,734 17,831 Income taxes receivable .................................... -- 3,387 Prepaid expenses ........................................... 2,973 2,371 Deferred marketing costs ................................... 2,957 4,365 --------- --------- Total current assets ............................... 99,392 118,303 --------- --------- Property and equipment, net .................................. 53,569 40,264 Intangible assets, net ....................................... 315,889 109,378 Other assets ................................................. 4,494 2,828 --------- --------- $ 473,344 $ 270,773 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .......................... $ 9,885 $ 1,580 Accounts payable ........................................... 8,370 7,226 List brokerage trade accounts payable ...................... 16,375 18,847 Accrued payroll expenses ................................... 5,767 2,830 Accrued expenses ........................................... 6,579 12,465 Income taxes payable ....................................... 3,699 -- Deferred revenue ........................................... 7,556 4,534 Deferred income taxes ...................................... 262 664 --------- --------- Total current liabilities .......................... 58,493 48,146 --------- --------- Long-term debt, net of current portion ....................... 267,637 126,679 Deferred income taxes ........................................ 35,319 7,701 Minority interest ............................................ 1,084 -- Stockholders' equity: Preferred stock, $.0025 par value. Authorized 5,000,000 shares; none issued or outstanding ...................... -- -- Common stock, $.0025 par value. Authorized 295,000,000 shares; 50,719,548 shares issued and 49,390,058 shares outstanding at December 31, 1999 and 49,544,750 shares issued and 49,236,750 outstanding at December 31, 1998 .................................................... 127 124 Paid-in capital ............................................ 82,025 72,476 Retained earnings .......................................... 38,470 15,284 Treasury stock, at cost, 1,329,490 shares held at December 31, 1999 and 308,000 shares held at December 31, 1998 .................................................... (9,170) (2,951) Accumulated other comprehensive income (loss) .............. (641) 3,314 --------- --------- Total stockholders' equity ......................... 110,811 88,247 Commitments and contingencies --------- --------- $ 473,344 $ 270,773 ========= =========
See accompanying notes to consolidated financial statements. F-4 27 infoUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED -------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ Net sales ............................... $ 266,073 $ 228,678 $ 193,327 --------- --------- --------- Costs and expenses: Database and production costs ......... 78,760 66,319 55,090 Selling, general and administrative ... 110,740 117,724 80,203 Depreciation and amortization ......... 35,109 27,472 34,415 Provision for litigation settlement ... -- 4,500 -- Impairment of assets .................. 5,599 -- -- Acquisition costs ..................... 4,166 3,643 2,598 In-process research and development ... -- 3,834 53,500 Restructuring charges ................. -- 2,616 -- --------- --------- --------- 234,374 226,108 225,806 --------- --------- --------- Operating income (loss) ................. 31,699 2,570 (32,479) Other income (expense): Investment income ..................... 14,196 16,628 3,748 Interest expense ...................... (18,579) (9,160) (4,098) Gain on issuance of subsidiary stock .. 8,886 -- -- Other ................................. -- (2,000) -- --------- --------- --------- Income (loss) before income taxes and extraordinary item .................... 36,202 8,038 (32,829) Income taxes ............................ 13,144 5,880 6,987 --------- --------- --------- Income (loss) before extraordinary items 23,058 2,158 (39,816) Extraordinary item, net of tax .......... 128 -- -- --------- --------- --------- Net income (loss) ....................... $ 23,186 $ 2,158 $ (39,816) ========= ========= ========= BASIC EARNINGS PER SHARE: Income (loss) before extraordinary item $ 0.48 $ 0.04 $ (0.82) Extraordinary item .................... -- -- -- --------- --------- --------- Net income (loss) ....................... $ 0.48 $ 0.04 $ (0.82) ========= ========= ========= Weighted average shares outstanding ..... 48,470 49,314 48,432 ========= ========= ========= DILUTED EARNINGS PER SHARE: Income (loss) before extraordinary item $ 0.48 $ 0.04 $ (0.82) Extraordinary item .................... -- -- -- --------- --------- --------- Net income (loss) ....................... $ 0.48 $ 0.04 $ (0.82) ========= ========= ========= Weighted average shares outstanding ..... 48,613 50,215 48,432 ========= ========= =========
See accompanying notes to consolidated financial statements. F-5 28 INFOUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED OTHER TOTAL COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY --------- --------- --------- --------- ------------- ------------- 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 2 for 1 stock dividend ............... 61 (61) -- -- -- -- Tax benefit related to employee stock options ............................ -- 587 -- -- -- 587 --------- --------- --------- --------- --------- --------- Balances, December 31, 1997 ............ 123 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 ............ 124 72,476 15,284 (2,951) 3,314 88,247 Comprehensive income: Net income ......................... -- -- 23,186 -- -- 23,186 Foreign currency translation adjustments ...................... -- -- -- -- (641) (641) Change in unrealized gain, net of tax .............................. -- -- -- -- (3,314) (3,314) --------- --------- --------- --------- --------- --------- Total comprehensive income ..... -- -- -- -- -- 19,231 --------- --------- --------- --------- --------- --------- Issuance of 1,096,288 shares of common stock .............................. 3 7,771 -- -- -- 7,774 Issuance of 78,510 shares of treasury stock for Company's match of 401(k) plan contribution .................. -- 160 -- 334 -- 494 Tax benefit related to employee stock options ............................ -- 1,618 -- -- -- 1,618 Acquisition of treasury stock ........ -- -- -- (6,553) -- (6,553) --------- --------- --------- --------- --------- --------- Balances, December 31, 1999 ............ $ 127 $ 82,025 $ 38,470 $ (9,170) $ (641) $ 110,811 ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 29 infoUSA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED -------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) ............................... $ 23,186 $ 2,158 $ (39,816) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................. 35,109 27,472 34,415 Amortization of deferred financing fees ....... 1,362 -- -- Deferred income taxes ......................... (2,528) (1,019) (2,787) Net realized gains on sale of marketable securities and other investments ............ (12,920) (15,511) (2,560) Gain on issuance of subsidiary stock .......... (8,886) -- -- Provision for litigation settlement ........... -- 4,500 -- Impairment of other assets .................... 5,599 2,000 -- In-process research and development ........... -- 3,834 53,500 Changes in assets and liabilities, net of effect of acquisitions: Trade accounts receivable ................... (13,224) 9,324 (7,445) List brokerage trade accounts receivable .... 1,097 (4,463) -- Prepaid expenses ............................ (3) (1,233) 287 Deferred marketing costs .................... 1,408 (948) (2,154) Accounts payable ............................ (1,850) (2,861) (4,854) List brokerage trade accounts payable ....... (2,193) 752 -- Income taxes receivable and payable ......... 7,086 (3,042) 7,283 Accrued expenses ............................ (3,866) (4,221) (5,613) --------- --------- --------- Net cash provided by operating activities 29,377 16,742 30,256 --------- --------- --------- Cash flows from investing activities: Proceeds from sales of marketable securities .... 32,106 41,114 19,596 Purchases of marketable securities .............. (4,184) (17,177) (17,448) Purchase of other investments ................... (1,000) (2,000) (2,000) Purchases of property and equipment ............. (9,048) (20,582) (8,882) Acquisitions of businesses, net of cash acquired (206,968) (31,654) (84,224) Database development costs ...................... (577) (603) (3,398) Software development costs ...................... (10,400) (5,724) (2,898) Other ........................................... -- -- (678) --------- --------- --------- Net cash used in investing activities .... (200,071) (36,626) (99,932) --------- --------- --------- Cash flows from financing activities: Repayment of long-term debt ..................... (13,540) (110,876) (7,193) Proceeds from long-term debt .................... 165,000 154,800 86,000 Proceeds from sale of subsidiary common stock ... 10,000 -- -- Deferred financing costs ........................ (3,989) (5,969) (388) Repayment of note payable to shareholders ....... -- -- (7,925) Acquisition of treasury stock ................... (6,553) (670) -- Repurchase of Senior Subordinated Notes ......... (8,370) -- -- Deferred offering costs ......................... -- -- (339) Proceeds from exercise of stock options ......... 7,771 1,148 2,090 Tax benefit related to employee stock options ... 1,618 401 587 --------- --------- --------- Net cash provided by financing activities 152,142 38,834 72,832 --------- --------- --------- Net increase (decrease) in cash and cash equivalents ..................................... (18,757) 18,950 3,156 Cash and cash equivalents, beginning .............. 29,603 10,653 7,497 --------- --------- --------- Cash and cash equivalents, ending ................. $ 10,846 $ 29,603 $ 10,653 ========= ========= ========= Supplemental cash flow information: Interest paid ................................... $ 18,299 $ 8,902 $ 3,616 ========= ========= ========= Income taxes paid ............................... $ 7,047 $ 9,637 $ 7,443 ========= ========= =========
See accompanying notes to consolidated financial statements. F-7 30 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 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. 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. 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. List brokerage sales are reflected net of costs on the accompanying consolidated statement of operations. Advertising Costs. Direct marketing costs associated with the mailing and printing of brochures and catalogs are capitalized and amortized over a period of six months which corresponds to the estimated revenue stream of the individual advertising activities. All other advertising costs are expensed as the advertising takes place. Total unamortized marketing costs at December 31, 1999 and 1998, was $3.0 million and $4.4 million, respectively. Total advertising expense for the years ended December 31, 1999, 1998, and 1997 was $21.0 million, $19.7 million, and $15.9 million, respectively. 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.................. 7 years Computer equipment.............................. 5 years Capitalized equipment leases.................... 5 years
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.............................. 7 to 20 years Distribution networks................. 2 years Noncompete agreements................. Term of agreements Purchased data processing software.... 2 to 7 years Acquired database costs............... 1 year Core technology costs................. 3 years Customer base costs................... 3 to 15 years Tradename costs....................... 10 to 20 years Perpetual software license agreement.. 10 years Software development costs............ 1 to 5 years Workforce costs....................... 5 to 8 years
F-8 31 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, 1999 and 1998, were $9.3 million and $4.0 million, respectively. Amortization of capitalized costs during the years ended December 31, 1999, 1998 and 1997, totaled approximately $5.1 million, $3.6 million, and $2.5 million, respectively. Database Development 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 represent direct external costs, are capitalized with amortization beginning upon successful completion of the compilation project. Database development costs are amortized straight-line over the expected lives of the databases generally ranging from one to five years. Unamortized database development costs included in intangible assets at December 31, 1999 and 1998, were $577 thousand and $4.7 million, respectively. Amortization of capitalized costs during the years ended December 31, 1999, and 1998 totaled approximately $796 thousand, $619 thousand, respectively. During 1999, as a direct result of the acquisition of Donnelley Marketing in July 1999 and the addition of the Donnelly consumer database file (see Note 3), the Company recorded a write-down of $3.9 million (see Note 18) on the unamortized balance of the Company's existing consumer database white pages file which was impaired due to the addition of the more complete Donnelley consumer file. 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 1999, the Company transferred its data processing services function from Montvale, NJ to an existing Company location in Greenwich, CT. As a direct result of this move and the abandonment of certain leasehold improvements and in-process construction projects, the Company recorded a write-down of $1.7 million (see Note 18) on the remaining net book value of the impaired assets. During 1998, the Company wrote-off an investment in an other entity of $2.0 million, which was accounted for using the cost method. 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 recognized when the product is delivered or the services are performed. Data licensing revenue is recognized giving consideration to whether the Company retains service commitments to periodically provide updates, the incremental costs associated with providing continuing service, and the fair value of the initial set of data and subsequent updates based upon prices charged to customers who purchase elements on a separate basis. Revenue related to future updates is recorded as deferred revenue. Reserves are established for estimated returns and uncollectible amounts. Royalty revenue is recognized at the time it is earned under the Company's license agreement. Advertising revenue is typically derived from advertising agreements in which the Company receives a fixed fee or a fee based on a per impression or click through basis and is recognized as the Company fulfills the terms of the agreement. Revenue from revenue-sharing agreements is recognized after the transaction has occurred and in the period the obligation to pay is reported by the product or service provider. 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. CHANGE IN OWNERSHIP INTEREST - GAINS OR LOSSES FROM A CHANGE IN OWNERSHIP OF A CONSOLIDATED SUBSIDIARY OR AN UNCONSOLIDATED AFFILIATE ARE RECOGNIZED IN THE CONSOLIDATED STATEMENTS OF OPERATIONS IN THE PERIOD OF CHANGE. 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, F-9 32 including contingently issuable shares, which have been restated to account for the stock combination (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, 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS) Weighted average number of shares outstanding used in basic EPS ....... 48,470 49,314 48,432 Net additional common equivalent shares outstanding after assumed exercise of stock options ....................... 143 901 -- ------ ------ ------ Weighted average number of shares outstanding used in diluted EPS ..... 48,613 50,215 48,432 ====== ====== ======
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. Reclassifications. Certain reclassifications were made to the 1998 and 1997 financial statements to conform to the 1999 presentation. 3. ACQUISITIONS 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 $82.5 million, consisting of $51.5 million in cash, partially funded using a revolving credit facility, and approximately 4.6 million unregistered shares of the Company's Common Stock at a recorded value of $31.0 million. In October 1997, the Company and the former stockholders of DBA agreed to a purchase price adjustment, pursuant to which the Company agreed to issue to the former DBA stockholders an additional 279,658 unregistered shares of its Common Stock. The shares were issued in January 1998. 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 17), 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. At the time of the acquisition of Pro CD, the Company entered into two separate contracts with Acxiom whereby the Company agreed to license its complete business database to Acxiom in exchange for a perpetual license agreement allowing the Company the use of a CD-Rom search engine technology developed by Acxiom for the Pro CD product line. The Company's agreement with Acxiom licensed the Company's complete business database to Acxiom for a two year period for $8.0 million to be recognized on a straight-line basis over the period of the agreement. The Company also entered into an agreement which provided the Company with a perpetual license to use Acxiom's CD-Rom search engine technology for a fee of $8.0 million. The total cost is being amortized over the 10 year estimated economic life of the perpetual license. In addition to purchased in-process research and development costs of $4.3 million (See Note 17), 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 marketing and direct marketing services to a wide array of customers. Total consideration for the acquisition was $19.4 million in cash, as adjusted, funded using a F-10 33 revolving credit facility. 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 17), intangibles and goodwill recorded estimates included goodwill of $16.7 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. In addition, the Company recorded as part of the purchase of Walter Karl an accrual related to closure of a facility and relocating or terminating the employees from this facility totaling $6.8 million, of which a balance of $4.4 million remained at December 31, 1998. 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, as adjusted, 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 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. During the fourth quarter of 1998, a purchase price adjustment of $0.3 million was made due to the final calculation of purchase price based on the acquisition agreement and amounts were reallocated based on the purchase price allocation finalized in the fourth quarter of 1998. 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 included goodwill of $0.5 million. Goodwill is being amortized over 8 years. Effective July 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. Total consideration for the acquisition was $200.0 million in cash, funded using a combination of existing cash and borrowings under new senior secured credit facilities (see Note 8). The acquisition has been accounted for under the purchase method of accounting, and accordingly, the operating results of Donnelley have been included in the Company's financial statements since the date of acquisition. Goodwill and other intangibles recorded included goodwill of $150.3 million, non-compete agreements of $6.1 million, trade names of $7.7 million, and purchased data processing software of $64.1 million, which are being amortized over lives of 20 years, 5 years, 20 years, and 7 years, respectively. The amount of intangibles recorded by the Company exceeded the purchase price due to the Company recording deferred taxes established for certain intangibles not currently deductible for tax purposes and an accrual related to costs associated with the integration of acquired operations into existing operations. For each of the acquisitions above, 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. 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, 1998, 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 (loss) and net income (loss) per share would have been as follows:
FOR THE YEARS ENDED -------------------------- DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales.......................... $ 308,608 $ 331,864 Net income (loss).................. $ 13,850 $ (14,876) Basic earnings (loss) per share.... $ 0.29 $ (0.30) Diluted earnings (loss) per share.. $ 0.28 $ (0.30)
F-11 34 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, 1999: Municipal bonds ... $ -- $ -- $ -- $ -- Corporate bonds ... -- -- -- -- Common stock ...... 70 -- -- 70 Preferred stock ... -- -- -- -- -------- -------- -------- -------- $ 70 $ -- $ -- $ 70 ======== ======== ======== ======== 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 ======== ======== ======== ========
For the year ended December 31, 1999 proceeds from sales of marketable securities were $32.1 million while realized gains totaled $13.1 million and realized losses totaled $0.2 million. For the year ended December 31, 1998, proceeds were $41.1 million while realized gains totaled $17.9 million and realized losses totaled $2.4 million. 5. COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) were as follows:
FOR THE YEARS ENDED ----------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS) Unrealized holding losses arising during the period: Unrealized net losses .................. $ (7,448) $(10,162) $ (1,261) Related tax benefit .................... 2,830 3,861 479 -------- -------- -------- Net ............................ (4,618) (6,301) (782) -------- -------- -------- Less: Reclassification adjustment for net gains realized on sale of marketable securities during the period: Realized net gains ..................... 2,103 15,164 2,216 Related tax expense .................... (799) (5,762) (842) -------- -------- -------- Net ............................ 1,304 9,402 1,374 -------- -------- -------- Foreign currency translation adjustments (641) -- -- -------- -------- -------- Total other comprehensive income (loss) ....................... $ (3,955) $ 3,101 $ 592 ======== ======== ========
6. PROPERTY AND EQUIPMENT
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) Land and improvements..................... $ 3,205 $ 4,274 Buildings and improvements................ 25,398 19,537 Furniture and equipment................... 50,543 41,626 Capitalized equipment leases.............. 11,879 5,050 ------- ------- 91,025 70,487 Less accumulated depreciation and amortization: Owned property.......................... 35,388 29,020 Capitalized equipment leases............ 2,068 1,203 ------- ------- Property and equipment, net..... $53,569 $40,264 ======= =======
F-12 35 7. INTANGIBLE ASSETS
DECEMBER 31, DECEMBER 31, 1999 1998 ------------- ------------ (IN THOUSANDS) Goodwill........................ $ 216,548 $ 70,456 Noncompete agreements........... 13,534 7,420 Core technology................. 4,800 4,800 Customer base................... 8,372 8,372 Trade names..................... 15,802 8,108 Purchased data processing software...................... 73,478 9,400 Acquired database costs......... 19,000 19,000 Work force costs................ 1,338 1,338 Perpetual software license agreement..................... 8,000 8,000 Software development costs...... 9,295 4,038 Database costs.................. 577 5,309 Deferred financing costs........ 9,958 5,970 --------- --------- 380,702 152,211 Less accumulated amortization... 64,813 42,833 --------- --------- $ 315,889 $ 109,378 ========= =========
8. FINANCING ARRANGEMENTS Long-term debt consisted of the following:
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) 9 1/2% Senior Subordinated Notes........................ $ 106,000 $ 115,000 Senior Secured Credit Facilities -- Term A Loan......... 60,977 -- Senior Secured Credit Facilities -- Term B Loan......... 93,810 -- Senior Secured Credit Facilities -- Revolving Credit Facility.............................................. -- -- 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........................... 9,776 10,553 State of Connecticut Department of Economic Development note payable.......................................... -- 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....... 433 478 Capital lease obligations (See Note 16)................. 6,526 1,778 --------- --------- 277,522 128,259 Less current portion.................................... 9,885 1,580 --------- --------- Long-term debt.......................................... $ 267,637 $ 126,679 ========= =========
Future maturities by calendar year of long-term debt as of December 31, 1999 are as follows (in thousands): 1999....... $ 9,885 2000....... $ 17,299 2001....... $ 17,760 2002....... $ 18,258 2003....... $ 33,714 Thereafter. $ 180,606
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 F-13 36 109.5% 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 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 consolidated 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 5 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 Facilities. The Company has subsequently made repayments of $10.2 million of the Credit Facilities utilizing proceeds received from the sales of marketable securities. As of December 31, 1999, the Company had no borrowings under the Revolving Credit Facility, with the exception of one outstanding letter of credit in the amount of $5.0 million reducing the availability under the Revolving Credit Facility to $25.0 million. There were no outstanding short-term borrowings at December 31, 1998. Interest rate swap agreements are used by the Company to reduce the potential impact of increases in interest rates on floating-rate long term debt (See Note 15). The Company is subject to certain financial covenants in the Credit Facilities, including minimum consolidated interest coverage ratio, maximum consolidated leverage ratio and minimum consolidated EBITDA. Additionally, the Company is required to pay a commitment fee of 0.5% on the average unused amount of the Revolving Credit Facility. 9. INCOME TAXES The provision for income taxes before extraordinary items consists of the following:
FOR THE YEARS ENDED ----------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS) Current: Federal $14,401 $ 4,469 $ 9,163 State.. 1,271 556 742 ------- ------- ------- 15,672 5,025 9,905 ------- ------- ------- Deferred: Federal (2,308) 742 (2,688) State.. (220) 113 (230) ------- ------- ------- (2,528) 855 (2,918) ------- ------- ------- $13,144 $ 5,880 $ 6,987 ======= ======= =======
F-14 37 The effective income tax rate varied from the Federal statutory rate as follows:
FOR THE YEARS ENDED ----------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS) Expected Federal income taxes at statutory rate of 35%.............................. $12,671 $ 2,813 $ (11,490) State taxes, net of Federal effects........ 683 435 424 Amortization of nondeductible intangibles.. 2,619 1,260 637 Gain on of subsidiary common stock......... (3,110) -- -- In-process research and development........ -- 1,342 17,220 Other...................................... 281 30 196 ------- ------- --------- $13,144 $ 5,880 $ 6,987 ======= ======= =========
The components of the net deferred tax asset (liabilities) were as follows:
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ (IN THOUSANDS) Deferred tax assets: Accrued vacation............. $ 929 $ 507 Accrued expenses............. 121 1,710 --------- --------- 1,050 2,217 --------- --------- Deferred tax liabilities: Intangible assets............ (31,894) (3,996) Accounts receivable.......... (1,310) (1,667) Marketable securities........ -- (2,031) Depreciation................. (1,173) (1,088) Deferred marketing costs..... (1,124) (1,659) Prepaid expenses and other assets..................... (1,130) (141) --------- --------- (36,631) (10,582) --------- --------- Net deferred tax liabilities........ $ (35,581) $ (8,365) ========= =========
In conjunction with the acquisition of Donnelley, the Company recorded a deferred tax liability of approximately $30 million related to intangibles which were not currently deductible for tax purposes. The Company had no valuation allowance in 1999 and 1998. 10. STOCK INCENTIVES As of December 31, 1999, a total of 10.0 million shares of the Company's 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, 1999, a total of 5.0 million shares of the Company's Common Stock have been reserved for issuance to officers, key employees and non-employee directors under the Company's 1997 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) 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: F-15 38
FOR THE YEARS ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income (loss) -- as reported... $ 23,186 $2,158 $(39,816) Net income (loss) -- pro forma..... $ 20,176 $ (788) $(41,503) Basic earnings (loss) per share -- as reported...................... $ 0.48 $ 0.04 $ (0.82) Diluted earnings (loss) per share -- as reported............. $ 0.48 $ 0.04 $ (0.82) Basic earnings (loss) per share -- pro forma........................ $ 0.42 $ (0.02) $ (0.86) Diluted earnings (loss) per share -- pro forma............... $ 0.42 $ (0.02) $ (0.86)
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 1999, 1998 and 1997: expected volatility of 9.51% (1999), 17.33% (1998) and 19.16% (1997); 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 combination (See Note 19).
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------- -------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE -------------------- --------------------- --------------------- SHARES PRICE SHARES PRICE SHARES PRICE --------- ------- --------- ------- --------- ------- Outstanding beginning of period..................... 7,094,036 $ 9.37 7,478,050 $ 9.22 5,203,800 $ 7.58 Granted...................... 2,697,335 6.57 1,160,000 11.49 2,799,250 11.81 Exercised.................... (1,322,298) 6.84 (179,428) 6.40 (357,250) 5.87 Forfeited/expired............ (547,939) 10.57 (1,364,586) 10.91 (167,750) 8.95 --------- ------- ---------- ------- -------- ------- Outstanding end of period.... 7,921,134 $ 8.74 7,094,036 $ 9.33 7,478,050 $ 9.22 ========= ======= ========= ======= ========= ======= Options exercisable at end of period..................... 3,453,689 $ 9.13 2,809,439 $ 8.20 1,344,550 $ 7.10 ========= ======= ========= ======= ========= ======= Shares available for options that may be granted........ 1,139,938 777,834 1,660,000 ========= ========= ========= Weighted-average grant date fair value of options, granted during the period -- exercise price equals stock market price at grant................... $ 1.66 $ 3.34 $ 3.30 ======= ======= =======
The following table summarizes information about stock options outstanding at December 31, 1999:
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 ------------------------ ----------- ----------- -------- ----------- --------- $4.28 to $5.70.......... 142,000 4.7 years $ 5.08 -- $ -- $5.70 to $7.13.......... 2,822,335 3.8 years 6.62 762,500 6.38 $7.13 to $8.55.......... 2,040,500 1.8 years 8.42 1,155,500 8.48 $8.55 to $9.98.......... 365,572 1.3 years 9.05 306,570 9.01 $9.98 to $11.40......... 1,632,395 2.4 years 10.73 768,402 10.72 $11.40 to $12.83........ 333,332 2.2 years 11.95 206,762 11.89 $12.83 to $14.25........ 585,000 2.9 years 13.38 253,955 13.42 -------- ------- --------- $4.28 to $14.25......... 7,921,134 2.8 years $ 8.74 3,453,689 $ 9.13 ========= ========= ======= ========= =======
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, $1.1 million and $782 thousand in the years ended December 31, 1999, 1998 and 1997, respectively. F-16 39 During 1999, the Company began making matching contributions to its 401(k) Plan in the form of treasury stock. The Company contributed 78,510 shares at a recorded value of $494 thousand. 12. RELATED PARTY TRANSACTIONS The Company paid a total of $4.0 million, $1.4 million, and $364 thousand in 1999, 1998 and 1997, respectively, to Annapurna Corporation and Everest Investment Management for consulting services and related expenses in connection with investment and acquisition activity conducted by the Company. Annapurna Corporation is wholly owned and Everest Investment Management is 40% owned by a significant stockholder and officer of the Company. The Company also paid $200 thousand and $145 thousand in the years ended December 31, 1998 and 1997, 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 $540 thousand, $370 thousand, and $146 thousand in the years ended December 31, 1999, 1998 and 1997, respectively. 13. SUPPLEMENTAL CASH FLOW INFORMATION The Company made certain acquisitions during 1999, 1998 and 1997 (See Note 3) and assumed liabilities as follows:
1999 1998 1997 ---------- --------- --------- (IN THOUSANDS) Fair value of assets $ 247,201 $ 58,552 $ 134,555 Cash paid........... (206,968) (31,654) (84,224) Common stock issued. -- -- (29,178) ---------- --------- --------- Liabilities assumed. $ 40,233 $ 26,898 $ 21,153 ========== ========= =========
During 1999, the Company acquired computer equipment totaling $6.8 million under capital lease obligations (See Note 16). 14. 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, 1999 and 1998. 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, 1999 DECEMBER 31, 1998 ---------------------- --------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- (AMOUNTS IN THOUSANDS) Financial assets: Cash and cash equivalents $ 10,846 $ 10,846 $ 29,603 $ 29,603 Marketable securities.. 70 70 15,275 20,620 Other assets........... 3,000 3,000 2,000 2,000 Financial liabilities: Long-term debt......... 277,522 241,088 128,259 105,935 Derivatives: Interest rate swaps.... -- 540 -- --
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents. 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. F-17 40 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. 15. 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. At December 31, 1999, the Company was a party to one interest rate swap agreement which expires in September 2002. The agreement entitles the Company to receive from counterparties on a semi-annual basis the amounts, if any, by which the Company's interest payments on $60.5 million of outstanding debt under the Credit Facilities exceed 6.385%, and to pay counterparties on a semi-annual basis the amounts, if any, by which the Company's interest payments on $60.5 million of outstanding debt under the Credit Facilities are less than 6.385%. 16. 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, 1999 are as follows (in thousands): 2000..... $ 1,437 2001..... $ 626 2002..... $ 320 2003..... $ 320 2004..... $ 160
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 April 2008. Certain of these leases contain renewal options. Rent expense was $4.6 million, $3.1 million, and $2.6 million in the years ended December 31, 1999, 1998 and 1997, respectively. Following is a schedule of the future minimum lease payments as of December 31, 1999:
CAPITAL OPERATING ------- --------- (IN THOUSANDS) 2000.................................... $ 3,213 $ 4,319 2001.................................... 2,665 3,925 2002.................................... 1,263 3,721 2003.................................... -- 3,104 2004.................................... -- 1,899 ------- -------- Total future minimum lease payments..... 7,141 $ 16,968 ======== Less amounts representing interest...... 615 ------- Present value of net minimum lease payments................................ $ 6,526 =======
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. F-18 41 17. ACQUISITION COSTS, IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D") AND RESTRUCTURING CHARGES As part of the acquisition of DBA in February 1997 (See Note 3), the Company recorded charges totaling $49.2 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. 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 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. During 1997, the Company recorded $2.6 million of acquisition costs 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. As part of the acquisition of Walter Karl in March 1998 (See Note 3), the Company recorded 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 listed below. 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. Descriptions of the projects are as follows: - Internet F/E to M204 is a list fulfillment system which interfaces with the Internet to request orders. - M204 Shipping Interface automates shipping and generates the ability to setup shipping destination information as well as allow for the tracking of shipments throughout out its journey to the final destination. - List Brokerage & Management Order is a new order entry system for list fulfillment. - Global Database Update refers to a project that will create a new updated database for the client, Global. - Arandel System Postal/Inkjet allows for postal information to be formatted for Inkjet specifications. - Paul Fredrick/Garden Botanika Reporting provides new reporting and database retrieval for the client Paul Fredrick/Garden Botanika. - Chilean Database is a project for a Chilean organization which consists of creating a new database with additional information. - Datacard System allows for the integration with the List Brokerage & Management Order System for rental lists. - Inkjet Utilities will generate a different layout for Inkjet specifications and the project will also allow for new audit reporting. - Flowers Response Analysis is a project that will attempt to increase the database response time of the client, Flowers. - Data Entry System will allow for LAN data entry of additional information. The R&D costs of each project listed above are directly proportional to the amount of labor (i.e. technicians and engineers) required to complete the project. It is estimated that the average annual cost per technical worker at Walter Karl is $47,507. As a F-19 42 result, the R&D incurred on each project prior to the acquisition and the total amount of research and development cost estimated to complete each project are listed below.
R&D Costs R&D Costs Prior to the Expected Post IPR&D Project Acquisition Acquisition Total R&D Costs ------------- ------------ ------------- --------------- Internet F/E to M204 $11,877 $23,754 $35,631 M204 Shipping Interface $23,754 $11,877 $35,631 List Brokerage & Mgt. Order $23,754 $47,507 $71,261 Global Database Update $4,751 $23,754 $28,504 ArandalSystem Postal/InkJet $11,877 $23,754 $35,630 Paul Fredrick $35,630 $23,754 $59,384 Chilean Database $4,751 $23,754 $28,504 Datacard System $47,507 $9,501 $57,008 InkJet Utilities $23,754 $9,501 $33,255 Flowers Response Analysis $4751 $4,751 $9,501 Data Entry System $23,754 $4,751 $28,504 Total $228,034 $206,655 $434,689
A description of the stage of completion as well as the methodology employed is listed below for each IPR&D project related to Walter Karl; the stage of completion of each project was determined by examining the ratio of R&D expenses as of the acquisition date to total R&D costs (incurred and projected).
SCHEDULED BETA TEST IPR&D PROJECTS STAGE OF COMPLETION DATE -------------- ------------------- ------------------- Internet F/E to M204...... Middle of the Design June 1998 Phase M204 Shipping Interface... Design Phase Unknown - Delayed List Brokerage & Mgt. Order Early Design Phase December 1998 Global Database Update.... Early Design Phase August 1998 ArandalSystem Postal/InkJet Design Phase Unknown - Delayed Paul Fredrick............. Design Phase Unknown - Delayed Chilean Database.......... Design Phase October 1998 Datacard System........... Design Phase April 1998 InkJet Utilities.......... Late Stages of Design May 1998 Phase Flowers Response analysis. Late Stages of Design April 1998 Phase Data Entry System......... Late Stages of Design April 1998 Phase
The stage of completion for each project was determined by using the formula: person years completed on R&D/Total person years of R&D effort. Below is a chart outlining the stage of completion for each project.
R&D PERSON YEARS COMPLETED AS OF PERSON YEARS TOTAL R&D PERCENTAGE OF IPR&D PROJECT VALUATION DATE REMAINING PERSON YEARS COMPLETION ------------- ---------------- ------------ ------------ ------------- Internet F/E to M204....... .25 .50 .75 33% M204 Shipping Interface.... .50 .25 .75 67% List Brokerage & Mgt. Order .50 1.0 1.5 33% Global Database Update..... .10 .50 .60 17% ArandalSystem Postal/InkJet .25 .50 .75 33% Paul Fredrick.............. .75 .50 1.25 60% Chilean Database........... .10 .50 .60 17% Datacard System............ 1.0 .20 1.2 83% InkJet Utilities........... .50 .20 .70 71% Flowers Response Analysis.. .10 .10 .20 50% Data Entry System.......... .50 .10 .60 83% Total............ 4.80 4.35 9.15 52%
During 1998, the Company recorded acquisition costs of $3.0 million associated with the Company's bid to acquire Metromail Corporation and $0.6 million associated with the Company's offering to sell Common Stock which was not completed. F-20 43 During 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 September 30, 1998. During 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 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 exit of certain field sales offices was completed by June 30, 1999. As part of the acquisition of Donnelley Marketing in July 1999 (See Note 3), the Company recorded acquisition costs which included consulting costs, management bonuses, direct travel and entertainment costs and other direct integration-related charges. 18. IMPAIRMENT OF ASSETS During 1999, as a direct result of the acquisition of Donnelley in July 1999 (See Note 3) and the addition of the Donnelly consumer database file, the Company recorded a write-down of $3.9 million (See Note 2) on the unamortized balance of the Company's existing consumer database white pages file which was impaired due to the addition of the more complete Donnelley consumer file. During 1999, the Company transferred its data processing services function from Montvale, NJ to an existing Company location in Greenwich, CT. As a direct result of this move and the abandonment of certain leasehold improvements and in-process construction projects, the Company recorded a write-down of $1.7 million (See Note 2) on the remaining net book value of the impaired assets. 19. STOCK COMBINATION AND STOCKHOLDERS RIGHTS PLAN On October 21, 1999, the Company received shareholder approval to combine and reclassify its then outstanding Class A common stock and Class B common stock into a single class of common stock. The combination had no effect on the total number of shares outstanding, with each of the Company's Class A and Class B shares converted on a one-for-one basis for the reclassified single class of common stock. Each share of stock is entitled to a single vote. Accordingly, all share information included in the accompanying consolidated financial statements has been restated to reflect the combination of Class A common stock and Class B common stock into one class of common stock. In connection with the combination and reclassification of its Class A common stock and Class B common stock into a single class of common stock, the Company also combined the stockholder rights plans with respect to its Class A common stock and Class B common stock into a single plan. 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. GAIN ON ISSUANCE OF SUBSIDIARY STOCK During December 1999, the Company's wholly-owned subsidiary, infoUSA.com, issued approximately 2.9 million shares of convertible preferred stock for approximately $10 million or $3.42 per share. As a result of the issuance of the convertible preferred stock, the Company's ownership in infoUSA.com went from 100% to approximately 83% and a gain of $8.9 million was recorded. There were no deferred income taxes recorded due to the gain being a non-taxable transaction. infoUSA.com is an online provider of white and yellow page directory assistance and an Internet destination for sales and marketing tools and information. F-21 44 21. 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. The small business and large business segments reflect actual net sales, direct order production, and identifiable direct sales and marketing costs related to their operations. The remaining indirect costs are presented as a reconciling item in Corporate Activities. 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 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, 1999 ------------------------------------------------- SMALL LARGE CORPORATE CONSOLIDATED BUSINESS BUSINESS ACTIVITIES TOTAL -------- -------- ---------- ------------ (IN THOUSANDS) Net sales......................... $130,117 $135,956 $ -- $266,073 Impairment of assets.............. -- -- 5,599 5,599 Acquisition costs................. -- -- 4,166 4,166 Operating income (loss)........... 59,291 55,898 (83,490) 31,699 Investment income................. -- -- 23,082 23,082 Interest expense.................. -- -- 18,579 18,579 Income (loss) before income taxes and discontinued operations..... 59,291 55,898 (78,987) 36,202
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 costs................... -- -- 3,643 3,643 In-process research and development. -- -- 3,834 3,834 Restructuring charges............... -- -- 2,616 2,616 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 costs............................ -- -- 2,598 2,598 In-process research and development.......... -- -- 53,500 53,500 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)
F-22 45 INFOUSA INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS ---------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ----------- ---------- ---------- ---------- Allowance for doubtful accounts receivable:.................. (A) December 31, 1997............ $1,589 $ 1,272 $961* $ 2,387 $ 1,435 December 31, 1998............ $1,435 $ 4,388 $578* $ 3,701 $ 2,700 December 31, 1999............ $2,700 $ 1,839 $1,586* $ 3,543 $ 2,582 Allowance for sales returns: (B) December 31, 1997............ $1,135 $ 7,748 $2,477* $ 6,782 $ 4,578 December 31, 1998............ $4,578 $15,693 $ -- $15,682 $ 4,589 December 31, 1999............ $4,589 $ 6,506 $ -- $ 6,609 $ 4,486
- ---------- * Recorded as a result of acquisitions (A) Charge-offs during the period indicated (B) Returns processed during the period indicated S-1 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to this Report to be signed on its behalf by the undersigned, thereunto duly authorized. infoUSA INC. By: /s/ STORMY L. DEAN -------------------------------------- Stormy L. Dean Chief Financial Officer (principal accounting and financial officer) Dated: September 29, 2000 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 September 29, 2000 - ---------------- Chief Executive Officer Vinod Gupta (principal executive officer) /s/ STORMY L. DEAN Chief Financial Officer September 29, 2000 - ------------------ (principal accounting and Stormy L. Dean financial officer) /s/ E. BENJAMIN NELSON* Director September 29, 2000 - ----------------------- E. Benjamin Nelson /s/ CHARLES T. FOTE* Director September 29, 2000 - -------------------- Charles T. Fote /s/ GEORGE F. HADDIX* Director September 29, 2000 - --------------------- George F. Haddix /s/ ELLIOT S. KAPLAN* Director September 29, 2000 - --------------------- Elliot S. Kaplan /s/ HAROLD ANDERSEN* Director September 29, 2000 - -------------------- Harold Andersen /s/ PAUL A. GOLDNER* Director September 29, 2000 - -------------------- Paul A. Goldner Director - ------------------- Cynthia H. Milligan *By: /s/ STORMY L. DEAN September 29, 2000 - ----------------------- Stormy L. Dean Attorney-in-fact
23 47 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 23.1 Accountants' Consent 23.2 Consent of Independent Accountants
EX-23.1 2 d80554a1ex23-1.txt CONSENT OF KPMG LLP 1 EXHIBIT 23.1 ACCOUNTANTS' CONSENT We consent to incorporation by reference in the registration statements (File No. 333-37865, No. 333-82933, No. 33-91194, No. 333-77417, No. 333-43391, and No. 33-59256) on Form S-8 of infoUSA Inc. of our report dated January 24, 2000, relating to the consolidated balance sheet as of December 31, 1999 of infoUSA Inc. and subsidiaries and the related statements of income, shareholders' equity and comprehensive income, and cash flows for the two years in the period ended December 31, 1999, and related schedule, which report appears in the December 31, 1999, annual report on Form 10-K/A of infoUSA Inc. /s/ KPMG LLP ------------------------- KPMG LLP Omaha, Nebraska September 28, 2000 EX-23.2 3 d80554a1ex23-2.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-37865, No. 333-82933, No. 33-91194, No. 333-77417, No. 333-43391, and No. 33-59256) of infoUSA Inc. (formerly American Business Information, Inc.) of our report dated January 23, 1998, on our audit of the consolidated financial statements and financial statement schedule of infoUSA Inc. for the year ended December 31, 1997, which report is included in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP ----------------------------------- PRICEWATERHOUSECOOPERS LLP Omaha, Nebraska September 29, 2000 -----END PRIVACY-ENHANCED MESSAGE-----