-----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, DAo0OqK0U/yWxfgccIu2jlrChamzBTePJiGQXvTfOV7C9B0y+VMJrBMkbIC3sEL1 hdQFEYxo7SgDFlYPIDO5pA== 0001035704-98-000698.txt : 19981118 0001035704-98-000698.hdr.sgml : 19981118 ACCESSION NUMBER: 0001035704-98-000698 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INFOUSA INC CENTRAL INDEX KEY: 0000879437 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DIRECT MAIL ADVERTISING SERVICES [7331] IRS NUMBER: 470751545 STATE OF INCORPORATION: NE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19598 FILM NUMBER: 98749441 BUSINESS ADDRESS: STREET 1: 5711 S 86TH CIRCLE CITY: OMAHA STATE: NE ZIP: 68127 BUSINESS PHONE: 4025934500 MAIL ADDRESS: STREET 1: 5711 SOUTH 86TH CIRCLE CITY: OMAHA STATE: NE ZIP: 68127 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN BUSINESS INFORMATION INC /DE DATE OF NAME CHANGE: 19930328 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly Report pursuant to Section 13 or 15(d) of the - --------- Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 or Transition report pursuant to Section 13 or 15(d) of the - --------- Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number 0-19598 ---------------- INFOUSA INC. - ------------------------------------------------------------------------------- (exact name of registrant specified in its charter) DELAWARE 47-0751545 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (402) 593-4500 ----------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 24,689,871 shares of Class A Common Stock and 24,854,879 shares of Class B Common Stock at November 2, 1998 2 INFOUSA INC. INDEX
PAGE NO. PART I - FINANCIAL INFORMATION 2 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 - 10 Management's Discussion and Analysis of Results of Operations 11 - 23 PART II - OTHER INFORMATION 24 Item 1. Legal Proceedings 25 Item 5. Other Information 25 Item 6. Exhibits and Reports on Form 8-K 26 Signature 27 Index to Exhibits
3 INFOUSA INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 PART I FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2 4 INFOUSA INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Current assets: Cash and cash equivalents....................................... $ 24,501 $ 10,653 Marketable securities........................................... 19,046 24,045 Trade accounts receivable, net of allowances of $16,440 and $6,013, respectively.......................................... 40,458 49,409 List brokerage trade accounts receivable........................ 15,953 -- Income taxes receivable......................................... 4,550 345 Prepaid expenses................................................ 3,515 3,475 Deferred marketing costs........................................ 4,430 3,417 Deferred income taxes........................................... 576 -- --------- --------- Total current assets.................................... 113,029 91,344 --------- --------- Property and equipment, net....................................... 38,324 25,117 Intangible assets, net of accumulated amortization................ 107,766 73,741 Deferred income taxes............................................. -- 1,410 Other assets...................................................... 4,870 3,299 --------- --------- $ 263,989 $ 194,911 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................... $ 1,492 $ 716 Payable to shareholders......................................... -- 1,871 Accounts payable................................................ 7,139 9,426 List brokerage trade accounts payable........................... 19,041 -- Accrued payroll expenses........................................ 5,278 4,910 Accrued expenses................................................ 15,403 5,406 Deferred revenue................................................ 3,901 4,238 Deferred income taxes........................................... -- 4,770 --------- --------- Total current liabilities............................... 52,254 31,337 --------- --------- Long-term debt, net of current portion............................ 127,098 81,284 Deferred income taxes............................................. 6,420 -- Other liabilities................................................. -- 2,054 Commitments and contingencies Stockholders' equity: Preferred stock, $.0025 par value. Authorized 5,000,000 shares; None issued or outstanding.................................... -- -- Class A common stock, $.0025 par value. Authorized 220,000,000 shares; 24,689,871 shares issued and outstanding at September 30, 1998 and 24,460,332 shares issued and outstanding at December 31, 1997.............................. 62 61 Class B common stock, $.0025 par value. Authorized 75,000,000 shares; 24,854,879 shares issued and 24,689,879 shares outstanding at September 30, 1998 and 24,625,332 shares issued and 24,460,332 shares outstanding at December 31, 1997........ 62 62 Paid-in capital................................................. 72,476 69,055 Retained earnings............................................... 8,911 13,126 Treasury stock, at cost, 165,000 shares of Class B common stock held at September 30, 1998 and December 31, 1997............. (2,281) (2,281) Accumulated other comprehensive income (loss)................... (1,013) 213 --------- --------- Total stockholders' equity.............................. 78,217 80,236 --------- --------- $ 263,989 $ 194,911 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 5 INFOUSA INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net sales............................................ $ 55,072 $ 50,555 $172,528 $139,511 Costs and expenses: Database and production costs...................... 17,978 14,148 49,469 38,674 Selling, general and administrative................ 41,199 21,331 91,696 59,396 Depreciation and amortization...................... 7,698 8,985 20,784 24,397 Provision for litigation settlement................ 4,500 -- 4,500 -- Acquisition-related and restructuring charges...... 1,216 4,300 15,468 56,098 -------- -------- -------- -------- 72,591 48,764 181,917 178,565 -------- -------- -------- -------- Operating income (loss).............................. (17,519) 1,791 (9,389) (39,054) Other income (expense): Investment income.................................. 212 955 16,306 2,513 Interest expense................................... (3,081) (1,212) (6,225) (2,687) -------- -------- -------- -------- Income (loss) before income taxes.................... (20,388) 1,534 692 (39,228) Income taxes......................................... (7,115) 775 4,907 4,299 -------- -------- -------- -------- Net income (loss).................................... $(13,273) $ 759 $ (4,215) $(43,527) ======== ======== ======== ======== BASIC EARNINGS PER SHARE: Net income (loss).................................. $ (0.27) $ 0.02 $ (0.09) $ (0.91) ======== ======== ======== ======== Weighted average shares outstanding................ 49,360 48,774 49,319 47,964 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE: Net income (loss).................................. $ (0.27) $ 0.02 $ (0.09) $ (0.91) ======== ======== ======== ======== Weighted average shares outstanding................ 49,360 50,273 49,319 47,964 ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 4 6 INFOUSA INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ....................................... $ (4,215) $ (43,527) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .............. 20,784 24,397 Deferred income taxes ...................... (5,361) (2,431) Net realized gains on sale of marketable securities and other investments .............................. (17,603) (1,647) Impairment of other assets ................. 2,000 -- Acquisition-related and restructuring charges .................... 14,353 53,500 Changes in assets and liabilities, net of effect of acquisitions: Trade accounts receivable .............. 8,992 (6,869) List brokerage trade accounts receivable ........................... (4,732) -- Prepaid expenses ....................... 49 1,261 Deferred marketing costs ............... (1,013) (1,303) Accounts payable ....................... (2,948) (985) List brokerage trade accounts payable .............................. 3,104 -- Income taxes receivable and payable .............................. (4,205) 698 Accrued expenses ....................... 97 (5,677) --------- --------- Net cash provided by operating activities ......................... 9,302 17,417 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of marketable securities ................................... 36,443 18,589 Purchases of marketable securities ............. (15,691) (12,285) Purchases of other investments ................. (3,000) (2,000) Purchases of property and equipment ............ (16,692) (6,392) Acquisitions of businesses ..................... (30,906) (79,462) Consumer database costs ........................ (868) (2,348) Software development costs ..................... (4,573) (2,235) Other .......................................... -- (1,101) --------- --------- Net cash used in investing activities ........................... (35,287) (87,234) CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt .................... (110,617) (2,026) Proceeds from long-term debt ................... 154,800 81,000 Deferred financing costs ....................... (5,901) (388) Payment of note payable to shareholders ................................. -- (7,925) Proceeds from exercise of stock options ...................................... 1,150 1,242 Tax benefit related to employee stock options ...................................... 401 588 --------- --------- Net cash provided by financing activities ................. 39,833 72,491 Net increase in cash and cash equivalents .................................... 13,848 2,674 Cash and cash equivalents, beginning ............. 10,653 7,497 --------- --------- Cash and cash equivalents, ending ................ $ 24,501 $ 10,171 ========= ========= Supplemental cash flow information: Interest paid .................................. $ 3,403 $ 2,247 ========= ========= Income taxes paid .............................. $ 9,630 $ 7,389 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 5 7 5 INFOUSA INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The accompanying unaudited financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, contain all adjustments, consisting of normal recurring adjustments, necessary to fairly present the financial information included therein. The Company suggests that this financial data be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 1997 included in the Company's 1997 Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission. Results for the interim period presented are not necessarily indicative of results to be expected for the entire year. 2. ACQUISITIONS AND ACQUISITION-RELATED AND RESTRUCTURING CHARGES Effective March 1998, the Company acquired certain assets and assumed certain liabilities of Walter Karl, Inc. ("Walter Karl"), a national direct marketing service firm that provides list management, list brokerage, database marketing and direct marketing services to a wide array of customers. Total consideration for the acquisition was approximately $19.4 million in cash, funded using a revolving credit facility (See Note 4). The acquisition has been accounted for under the purchase method of accounting. As part of the acquisition, the Company performed a valuation analysis and recorded acquisition-related charges of $9.2 million for the write-off of purchased in-process research and development costs which related to projects that had not met technological feasibility. Intangibles and goodwill recorded as part of the purchase included goodwill of $23.5 million (to be amortized over 15 years), core technology of $3.7 million (to be amortized over 3 years), tradenames of $4.2 million (to be amortized over 15 years), customer base of $2.2 million (to be amortized over 3 years), and $0.8 million of other intangibles (to be amortized over 5 years). 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 approximately $12.6 million in cash, subject to adjustment, funded with the proceeds from the disposition of the Company's holdings of Metromail Corporation common stock (See "Management's Discussion and Analysis of Financial Condition - Other Income (Expense), Net"). The acquisition has been accounted for under the purchase method of accounting. As part of the acquisition, the Company performed a preliminary valuation analysis and recorded goodwill of $0.9 million (to be amortized over 15 years), non-compete agreements of $7.1 million (to be amortized over 5 years), tradenames of $0.4 million (to be amortized over 5 years), customer base of $4.2 million (to be amortized over 3 years), and $0.6 million of other intangibles (to be amortized over 5 years). 6 8 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, for approximately $0.4 million in cash. CTM will be operated as a branch of the Company's Canadian operation. The acquisition has been accounted for under the purchase method of accounting. As part of the acquisition, the Company recorded goodwill of $0.5 million. No pro forma information has been presented within the accompanying consolidated financial statements and notes to consolidated financial statements related to the acquisitions of Walter Karl, JAMI and CTM as the results of operations for these acquisitions for the period from January 1, 1998 to the date of acquisition of these acquisitions are not material to the accompanying consolidated statement of operations. The accompanying consolidated statement of operations for the three month period ended September 30, 1998 reflects $1.2 million for restructuring costs related to certain cost reduction measures the Company enacted during the third quarter of 1998. The $1.2 million of restructuring costs is comprised of: $0.6 million for severance pay, $0.4 million for lease termination costs, and $0.2 million for the abandonment of certain assets. The restructuring, including recording the payments and write-downs described, is anticipated to be completed by March 31, 1999. In addition to the write-off of purchased in-process research and development costs of $9.2 million for Walter Karl previously described, included in acquisition-related and restructuring charges in the accompanying consolidated statement of operations for the nine month period ended September 30, 1998 are: $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation, $0.7 million associated with the Company's offering to sell Class A Common Stock which was not completed, $1.4 million for restructuring costs related to the Company's compilation and sales activities for new businesses enacted during the first quarter of 1998, and $1.2 million for restructuring costs related to certain cost reduction measures enacted during the third quarter of 1998 (as detailed above). The $1.4 million of restructuring costs for the new businesses compilation and sales activities enacted during the first quarter of 1998 is comprised of: $0.6 million for severance pay, $0.3 million for lease termination costs, and $0.5 million for the abandonment of certain assets. The restructuring for the new businesses compilation and sales activities, including recording the payments and write-downs described, was completed as of September 30, 1998. 3. SENIOR SUBORDINATED NOTES On June 18, 1998, the Company completed a private placement of 9 1/2% Senior Subordinated Notes due June 15, 2008 (the "Notes") in the aggregate principal amount of $115.0 million. The Notes have not been registered under the Securities Act of 1933, as amended (the "Act") and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Act. A portion of the proceeds were used to pay-off the revolving credit facility described in Note 4 below. The Notes are subject to various covenants, including among other things, limiting additional indebtedness and the ability to pay dividends. 7 9 Interest on the Notes will accrue from the original issuance date and will be payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 1998, at the rate of 9 1/2% per annum. The Notes are redeemable, in whole or in part, at the option of the Company, on or after June 15, 2003, at designated redemption prices outlined in the Indenture governing the Notes, plus any accrued interest to the date of redemption. In addition, at any time on or prior to June 15, 2001, the Company, at its option, may redeem up to 35% of the aggregate principal amount of the Notes originally issued with the net cash proceeds of one or more equity offerings, at the redemption price equal to 109.5% of the principal amount thereof, plus any accrued interest to the date of redemption. In the event of a change in control, each holder of Notes will have the right to require the Company to repurchase such holder's Notes at a price equal to 101% of the principal amount thereof, plus any accrued interest to the repurchase date. During May 1998 in connection with the sale of the Notes, the Company entered into a Treasury yield collar agreement (the "Treasury Collar") with a bank, to hedge against the movement in interest rates on the ten-year Treasury Note. 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. 4. OTHER DEBT OBLIGATIONS The Company previously maintained an uncollateralized $100 million Credit Facility with First Union National Bank of North Carolina ("FUNB"). The Company terminated the FUNB Credit Facility effective July 1, 1998. As of September 30, 1998, the Company had no revolving credit facility in place. During July 1998, the Company executed a mortgage note in the amount of $10.8 million. The note bears interest at a fixed rate of 7.40% through July 2003, and then will be adjusted to an interest rate which is 175 basis points over the five year Treasury Constant Maturities (as defined by the Federal Reserve System), yet in any event, shall not bear an interest rate below 7.25%. The mortgage note is collateralized by the deed of trust covering certain real property located at the Company's new Papillion, Nebraska facility. During June 1998, the Company executed a commitment letter with a bank proposing to extend credit up to $13.5 million related to the financing of the Company's new facility in Montebello, New York. The commitment is subject to the negotiation and execution of a definitive credit and security agreement. The note would be collateralized by certain real property. 8 10 5. EARNINGS PER SHARE INFORMATION The following data shows 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 0.6 million shares of common stock were not included in computing diluted earnings per share for the three month period ended September 30, 1998, because their effects were antidilutive. Options on 1.1 million and 1.2 million shares of common stock were not included in computing diluted earnings per share for the nine month period ended September 30, 1998 and 1997, respectively, because their effects were antidilutive.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------ ------ ------ ------ Weighted average number of shares outstanding used in basic earnings per share ......... 49,360 48,774 49,319 47,964 Net additional common stock equivalent shares outstanding after assumed exercise of stock options ............................ -- 1,499 -- -- ------ ------ ------ ------ Weighted average number of shares outstanding Used in basic earnings per share ......... 49,360 50,273 49,319 47,964 ====== ====== ====== ======
6. ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in the financial statements. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The following is a reconciliation of net income (loss) per the accompanying consolidated statements of operations to comprehensive income (loss) for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net income (loss) ................................. $(13,273) $ 759 $ (4,215) $(43,527) Other comprehensive income (loss): Unrealized gain (loss) from investments: Unrealized holding gains (losses) arising during the period, net of income taxes of $(484), $2,143, $5,536, and $1,419, respectively ..... (789) 3,496 9,032 2,316 Reclassification adjustment for net (gains) losses included in net income, net of income taxes of $0, $(192), $(6,287), and $(442), respectively ..................... -- (313) (10,258) (721) -------- -------- -------- -------- Net unrealized gain (loss) from investments .... (789) 3,183 (1,226) 1,595 -------- -------- -------- -------- Comprehensive income (loss) ....................... $(14,062) $ 3,942 $ (5,441) $ 41,932 ======== ======== ======== ========
9 11 In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement is effective for fiscal years beginning after December 15, 1997, which will expand disclosures made by the Company and will have no impact on consolidated financial position, results of operations or cash flows. In 1998, the Accounting Standards Committee issued Statement of Accounting Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which is effective for fiscal years beginning after December 15, 1998. The SOP provides guidance on when costs incurred for internal-use computer software are and are not capitalized, and on the accounting for such software that is marketed 7. CONTINGENCIES The Company and its subsidiaries are involved in legal proceedings, claims and litigation arising in the ordinary course of business. Management believes that any resulting liability should not materially affect the Company's financial position, results of operations, or cash flows. See also Note 8 below and Part II, Item 1. 8. SUBSEQUENT EVENT During October 1998, the Company announced a decision in its year-long arbitration dispute with Experian Information Solutions, Inc., a division of TRW, Inc. The dispute centered around a license agreement between the Database America Companies ("DBA") and Experian prior to the Company's acquisition of DBA. DBA claimed that Experian breached the license agreement by, among other things, providing data to third parties in violation of that agreement. Experian claimed that DBA improperly terminated the agreement. Both sides sought damages resulting from their claims of breach. On October 16, 1998, the Arbitrator from the American Arbitration Association found DBA to have breached the contract and awarded damages to Experian in the amount of $4,447,000. Although the Arbitrator found that Experian had provided data improperly to a third party, he did not find it to be a material breach. The Company recorded a provision for litigation settlement of $4.5 million during the third quarter of 1998 related to this dispute which is reflected in the accompanying consolidated statements of operations. The Company has reviewed the Arbitrator's decision and believes that the amount of damages is not supported by either the law or the facts. The Company is currently reviewing its options for a petition to the Arbitrator for reconsideration on the issue of damages and a potential appeal on the grounds that the Arbitrator did not apply the appropriate limitations of California law regarding damages claims. 10 12 INFOUSA INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a leading provider of business and consumer marketing information and data processing services. The Company's products and services help its clients generate new customers more effectively at lower cost. The Company's key assets include a proprietary database of over 11 million businesses and a consumer database of over 113 million households and 180 million individuals in the United States and Canada, which the Company believes are among the most comprehensive and accurate available. The Company leverages these key assets by selling a broad range of marketing information products and data processing services through targeted distribution channels primarily to small and medium size businesses and also to consumers and large corporations. This discussion and analysis contains forward-looking statements, including without limitation statements in the discussion of net sales, liquidity and capital resources and Year 2000 compliance, within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, which are subject to the "safe harbor" created by those sections. The Company's actual future results could differ materially from those projected in the forward-looking statements. Some factors which could cause future actual results to differ materially from the company's recent results or those projected in the forward-looking statements are described in "Factors Affecting Operating Results" below. The Company assumes no obligation to update the forward-looking statement or such factors. 11 13 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items from the Company's consolidated statement of operations data expressed as a percentage of net sales, and selected other financial data expressed as designated within the table:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 -------- -------- -------- -------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales ...................................................... 100% 100% 100% 100% Costs and expenses: Database and production costs ................................ 33 28 29 28 Selling, general and administrative .......................... 75 42 53 43 Depreciation and amortization ................................ 14 18 12 17 Provision for litigation settlement .......................... 8 -- 2 -- Acquisition-related and restructuring charges ................ 2 9 9 40 -------- -------- -------- -------- Total costs and expenses .................................. 132 96 105 128 -------- -------- -------- -------- Operating income (loss) ........................................ (32) 4 (5) (28) Other income (expense), net .................................... (5) (1) 5 -- -------- -------- -------- -------- Income (loss) before income taxes .............................. (37) 3 -- (28) Income taxes ................................................... 13 2 3 3 -------- -------- -------- -------- Net income (loss) .............................................. (24)% 2% (2)% (31)% ======== ======== ======== ======== OTHER DATA: SALES BY PRODUCT GROUP(1): (AMOUNTS IN MILLIONS) Sales Lead Generation Products .......................... $ 35.3 $ 29.5 $ 109.9 $ 94.5 Data Processing Services ................................ 16.9 14.6 45.9 30.9 Consumer CD-ROM Products ................................ 2.9 6.5 16.7 14.1 -------- -------- -------- -------- Total ................................................... $ 55.1 $ 50.6 $ 172.5 $ 139.5 ======== ======== ======== ======== SALES BY PRODUCT GROUP AS A PERCENTAGE OF NET SALES(1): Sales Lead Generation Products .......................... 64% 58% 64% 68% Data Processing Services ................................ 31 29 26 22 Consumer CD-ROM Products ................................ 5 13 10 10 -------- -------- -------- -------- Total ................................................... 100% 100% 100% 100% ======== ======== ======== ======== Earnings before, interest, taxes, depreciation and amortization, as adjusted("EBITDA, as adjusted") (2) ....................... $ (4,105) $ 15,076 $ 31,363 $ 41,441 ======== ======== ======== ======== EBITDA, as adjusted, as a percentage of net sales .............. -- 30% 18% 30% ======== ======== ======== ======== Ratio of EBITDA, as adjusted, to interest expense .............. -- 12.4 5.0 15.4 ======== ======== ======== ======== Ratio of earnings to fixed charges (3) ......................... -- 2.3 1.1 -- ======== ======== ======== ========
(1) Amounts and percentages below may not be fully comparable from period to period due to the acquisition of the Database America Companies ("DBA") in February 1997, Pro CD in August 1997, Walter Karl in March 1998 and JAMI in June 1998. (2) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to exclude depreciation, amortization of intangible assets, and acquisition-related and restructuring charges. EBITDA, as adjusted, is presented because it is a widely accepted indicator of a company's ability to incur and service debt. 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. (3) "Earnings to fixed charges ratio" is determined by dividing the sum of income before income taxes and interest expense by interest expense. 12 14 NET SALES Net sales for the quarter ended September 30, 1998 were $55.1 million, a 9% increase from $50.6 million for the same period in 1997. Net sales of sales lead generation products for the third quarter of 1998 were $35.3 million, a 20% increase from $29.5 million in the third quarter of 1997. Net sales of data processing services for the third quarter of 1998 were $16.9 million, a 16% increase from $14.6 million for the same period in 1997. Net sales of consumer CD-ROM products for the third quarter of 1998 were $2.9 million, a 55% decrease from $6.5 million for the same period in 1997. The decrease in consumer CD-ROM product net sales reflects the general market decline the Company has experienced related to this business and an increase in estimates for reserves of $2.7 million related to product returns. For the nine months ended September 30, 1998 net sales were $172.5 million, a 24% increase from $139.5 million for the same period in 1997. Net sales of sales lead generation products for the nine months ended September 30, 1998 were $109.9 million, a 16% increase from $94.5 million for the same period in 1997. Factors contributing to an increase in net sales of sales leads products include the enhancement of existing and development of new sales lead generation products and the increase in the number of mailing pieces mailed from 21.3 million during the first nine months of 1997 to 30.0 million during the same period of 1998. Net sales of data processing services for the nine months ended September 30, 1998 were $45.9 million, a 49% increase from $30.9 million for the same period in 1997. Net sales of consumer CD-ROM products for the nine months ended September 30, 1998 were $16.7 million, an 18% increase from $14.1 million for the same period in 1997. Although the Company experienced an increase in net sales of consumer CD-ROM products for the nine months ended September 30, 1998 versus the same period in 1997, a portion of the increase relates to the acquisition of Pro CD during August 1997, as the Company recorded the results of operations for Pro CD for only two months of the nine months ended September 30, 1997. During the third quarter of 1998, a major customer of data processing services informed the Company that it would cancel certain direct mail activities requiring the Company's services, adversely affecting net sales of data processing services previously described. The Company believes that the cancellation of services provided to this customer may cause a decline in future data processing services net sales. DATABASE AND PRODUCTION COSTS Database and production costs for the third quarter of 1998 were $18.0 million, or 33% of net sales, compared to $14.1 million, or 28% of net sales, for the third quarter of 1997. For the nine month period, these costs were $49.5 million, or 29% of net sales, compared to $38.7 million, or 28% of net sales for the same period in 1997. The increase in database and production costs as a percentage of net sales is principally the result of the write-down of $0.9 million the Company recorded during the third quarter of 1998 on its remaining 1998 consumer CD-ROM product inventory on hand. 13 15 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the third quarter of 1998 were $41.2 million, or 75% of net sales, compared to $21.3 million, or 42% of net sales, for the third quarter of 1997. For the nine month period, these costs were $91.7 million, or 53% of net sales, compared to $59.4 million, or 43% of net sales for the same period in 1997. The increase in selling, general and administrative expenses as a percentage of net sales is principally the result of the Company's increase in estimates for reserves related to price protection and cooperative advertising for consumer CD-ROM products and additions to other general reserves totalling $12.1 million. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expenses for the third quarter of 1998 were $7.7 million, or 14% of net sales, compared to $9.0 million, or 18% of net sales, for the third quarter of 1997. For the nine month period, these costs were $20.8 million, or 12% of net sales, compared to $24.4 million, or 17% of net sales for the same period in 1997. Amortization of acquired database costs and purchased data processing software associated with the acquisition of the Database America Companies (DBA) in February 1997 totaled $1.2 million and $5.8 million for the quarters ended September 30, 1998, and 1997, respectively, and $5.1 million and $15.8 million for the nine months ended September 30, 1998, and 1997, respectively. Excluding amortization on acquired database costs and purchased data processing software associated with the acquisition of DBA in February 1997, depreciation and amortization expenses were $6.5 million and $3.2 million for the third quarter of 1998 and 1997, respectively, and $15.7 million and $8.6 million for the nine month periods ended September 30, 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 Marketing Services in June 1998. PROVISION FOR LITIGATION SETTLEMENT The Company recorded a provision for litigation settlement of $4.5 million during the third quarter of 1998 related to a dispute which is reflected in the accompanying consolidated statements of operations. See Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding the dispute. ACQUISITION-RELATED AND RESTRUCTURING CHARGES The accompanying consolidated statement of operations for the three month period ended September 30, 1998 reflects $1.2 million for restructuring costs related to certain cost reduction measures the Company enacted during the third quarter of 1998. See Note 2 of the Notes to the Consolidated Financial Statements for additional information regarding these charges. 14 16 For the nine month period ended September 30, 1998, in addition to the write-off of purchased in-process research and development costs of $9.2 million for Walter Karl described in Note 2 of the Notes to the Consolidated Financial Statements, included in acquisition-related and restructuring charges in the accompanying consolidated statement of operations are: $3.0 million of costs associated with the Company's bid to acquire Metromail Corporation, $0.7 million associated with the Company's offering to sell Class A Common Stock which was not completed, $1.4 million for restructuring costs related to the Company's compilation and sales activities for new businesses enacted during the first quarter of 1998, and $1.2 million for restructuring costs related to certain cost reduction measures enacted during the third quarter of 1998. These acquisition-related and restructuring charges totaled $15.5 million, and represented 9% of net sales during the nine months ended September 30, 1998. As part of the acquisition of the Database America Companies in February 1997 and Pro CD in August 1997, the Company recorded charges totaling $56.1 million, or 40% of net sales, during the nine months ended September 30, 1997 for the write-off of acquired in-process research and development costs as well as other related integration and organizational restructuring costs. OPERATING INCOME (LOSS) Including the factors previously described, the Company had an operating loss of $(17.5) million, or (32)% of net sales for the third quarter ended September 30, 1998, as compared to operating income of $1.8 million, or 4% of net sales for the same period in 1997. For the nine month period, the Company had an operating loss of $(9.4) million, or (5)% of net sales, as compared to an operating loss of $(39.1) million, or (28)% of net sales for the same period in 1997. 15 17 OTHER INCOME (EXPENSE), NET Other income (expense), net for the third quarter of 1998 was $(2.9) million, as compared to $(0.3) million in the same period for 1997. The increase in other expense is principally the result of additional debt outstanding during the third quarter of 1998 versus the comparable period in 1997. In addition, the Company recorded investment income of $0.2 million in the third quarter of 1998 versus $1.0 million during the same period in 1997. For the nine months ended September 30, 1998 and 1997, other income (expense), net was $10.1 million and $(0.2) million, respectively. During the second quarter of 1998, the Company recorded a realized gain of $16.5 million on the disposition of its holdings in Metromail Corporation common stock. This realized gain was offset during the second quarter of 1998 when the Company recorded a loss of $2.0 million on the write-off of an investment classified in other assets in the accompanying consolidated balance sheets. INCOME TAXES A provision for income taxes of $(7.1) million and $0.8 million was recorded for the third quarter ended September 30, 1998 and 1997, respectively, and $4.9 million and $4.3 million for the nine months ended June 30, 1998, and 1997, respectively. Acquisition-related charges of $9.2 million and $49.2 million were included in income before income taxes during the nine months ended September 30, 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 acquisition-related and restructuring charges previously described, the Company's EBITDA, as adjusted, was $(4.1) million, or (7)% of net sales, during the third quarter of 1998, compared to $15.1 million, or 30% of net sales, during the same period of 1997. 16 18 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company's principal sources of liquidity included cash and cash equivalents of $24.5 million and marketable securities with a fair market value of $19.0 million. As of September 30, 1998, the Company had working capital of $59.6 million. The Company terminated its revolving credit facility with First Union National Bank during July 1998. Net cash provided by operating activities during the nine month period ended September 30, 1998 totaled $9.3 million. The Company spent $16.7 million related to property additions during the same period. The Company completed construction in August 1998 of a new facility for the consumer and business database compilation division located in Papillion, Nebraska, at an estimated cost of approximately $10.0 million. The Company is also building a new sales center and data processing services facility in Montebello, New York, with an estimated cost of $10.0 million, which is presently anticipated to be completed in the summer of 2000. During the nine months ended September 30, 1998, the Company paid $19.4 million, $12.9 million and $0.5 million in connection with the acquisitions of Walter Karl, JAMI and Contacts Target Marketing, respectively. See Note 2 to the Notes to the Consolidated Financial Statements for additional information related to these acquisitions. During May 1998, the Company recorded a realized gain on the disposition of its holdings in the common stock of Metromail Corporation of $16.5 million. The Company recorded gross proceeds on the disposition of the Metromail Corporation common stock of $34.2 million. 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. 17 19 YEAR 2000 COMPLIANCE BY THE COMPANY AND OTHERS In 1996 the Company began preparing its computer-based systems for Year 2000 ("Y2k") computer software compliance. The Company's Y2k project covers both traditional computer based systems and infrastructure ("IT Systems") and computer based facilities and equipment ("Non IT Systems"). The Company's project has six phases: Inventory, Assessment, Renovation, Testing, Implementation and contingency Planning. The Company has completed an inventory and assessment of its IT Systems. These systems are over 90% Y2k compliant. The Company expects to correct non-compliant IT Systems by replacing or correcting them by the end of the second quarter 1999 with testing and implementation completed by the end of the third quarter of 1999. The Company has completed an inventory and assessment of its Non-IT Systems. The Company expects to replace any non-compliant Non-IT Systems by the end of the first quarter 1999, with testing and implementation completed by the end of the second quarter of 1999. The Company's Y2k project also considers the readiness of significant customers and vendors. Such significant vendors have indicated to the Company an expectation to be Y2k compliant. There are no vendors whose non-compliance will impair the ability of the company to obtain necessary goods or to sell or provide products/services to its customers. Disruptions of the computer systems of the Company's vendors are not expected to have a material adverse effect on the Company's financial conditions and results of operations for the period of such disruption. The Company believes that the most reasonable worst case Y2k scenario is that a small number of vendors will be unable to supply goods for a short time after January 1, 2000. As part of its Y2k process, the Company plans to develop contingency plans with respect to such scenarios. No mission-critical systems or facilities necessary for the Company's continued operation are considered to be at risk. Although these plans are yet to be developed, the Company expects that these plans may include a combination of actions including stockpiling of goods and selective resourcing of business to Y2k compliant vendors. The Company has incurred approximately $2.25 million of Y2k cost. These costs fall into three categories: 1) systems replacement, 2) specific Y2k assessment effort, and 3) expense cost of Y2k Project office. Future expenses are estimated to include approximately $3.5 million of additional cost. These future costs are expected to be primarily replacement system costs. Such cost estimates are based upon presently available information and may change as the Company continues with its Y2k project. The Company anticipates to pay for its Y2k compliance plan from operating cash flows. The above discussion regarding costs, risks and estimated completion dates for Y2k compliance is based on the Company's best estimates given information that is currently available, and is subject to change. Actual costs may substantially exceed the Company's assessment due to unanticipated Y2k problems associated with the Company's IT and non-IT systems and products. Further, failure of the Company's vendors and customers to address Y2k problems in a timely manner may have a greater adverse affect on the Company's business than presently expected. 18 20 FACTORS THAT MAY AFFECT OPERATING RESULTS INTEGRATION OF RECENT AND FUTURE ACQUISITIONS Since mid-1996, the Company has completed eight significant acquisitions, including the August 1996 acquisition of Digital Directory Assistance, the November 1996 merger with County Data Corporation and acquisition of Marketing Data Systems, the December 1996 acquisition of BJ Hunter, the February 1997 merger with Database America ("DBA"), the August 1997 acquisition of Pro CD, the March 1998 acquisition of Walter Karl and the May 1998 acquisition of JAMI Marketing. The Company also made a number of other acquisitions in prior periods. In March 1998, the Company attempted to acquire Metromail Corporation ("Metromail") for approximately $850.0 million, including the assumption of debt, and may in the future evaluate other acquisitions of that magnitude. See "Business -- Litigation." The Company's strategy includes continued growth through acquisitions of complementary products, technologies or businesses, which, if implemented, may result in the diversion of management's attention from the day-to-day operations of the Company's business and may include numerous other risks, including difficulties in the integration of operations, databases, products and personnel, difficulty in applying the Company's internal controls to acquired businesses and particular problems, liabilities or contingencies related to the businesses being acquired. To the extent that efforts to integrate recent or future acquisitions fail, there could be a material adverse effect on the Company's business, financial condition and results of operations. While the Company has not made any binding commitments with respect to any particular future acquisitions, the Company frequently evaluates the strategic opportunities available to it and intends to pursue opportunities that it believes fit its business strategy. RECENT CHANGES IN SENIOR MANAGEMENT The Company has recently undergone significant changes in its senior management team, even as it has experienced rapid growth both internally and through acquisitions. Vinod Gupta, the Company's Chairman, was re-appointed Chief Executive Officer in July 1998, having resigned that position in October 1997. Scott Dahnke, Chief Executive Officer from October 1997, Jon Wellman, President and Chief Operating Officer since January 1997 and Chief Financial Officer from January 1995 to January 1997, Steve Purcell, Chief Financial Officer since April 1997, Rick Puckett, Controller of the Company since October 1997 and Chief Financial Officer after Mr. Purcell's departure, Gregory Back, Executive Vice President of Corporate Planning and Business Development since October 1997 and Kevin Hall, Senior Vice President of Special Projects since October 1997 ceased their employment with the Company between July and September 1998. Gautam Gupta, a director of the Company who is unrelated to Vinod Gupta, is now serving as acting Chief Financial Officer while the Company conducts a search for his permanent replacement. Sanford Goodman, Vice President of Corporate Development, joined the Company in June 1998. Messrs. Dahnke, Wellman, Purcell, Puckett, Back and Hall did not resign because of any disagreements with the Company's Board or other senior management, and much of the Company's remaining senior management team has been with the Company for many years. The Company has now been reorganized into three major groups headed by group presidents. Al Ambrosino, who has been with the Company or its subsidiary for 19 years, Monica Messer, who has been with the Company for 15 years, and William Chasse, who has been with the Company for 10 years, have each been named group president. In the past, limitations on senior management resources resulted in a few key individuals taking on multiple roles and responsibilities in the Company, which in turn placed a significant strain on the Company's senior management. Failure of the Company to identify and hire a permanent Chief Financial Officer on a timely basis or failure of Company's senior management to adjust to new responsibilities, manage growth or work together effectively could result in disruptions of operations or the departure of additional key personnel, which in turn could have a material adverse effect on the Company's business, financial condition, results of operations and stock price. 19 21 FLUCTUATIONS IN OPERATING RESULTS The Company believes that future operating results will be subject to quarterly and annual fluctuations, and that long term growth will depend upon the Company's ability to expand its present business and complete strategic acquisitions. The Company's net sales on a quarterly basis can be affected by seasonal characteristics and certain other factors. For example, the Company typically experiences higher revenue from its sales leads products in the fall of each year due to increases in direct marketing by the Company's clients in the fourth quarter of each year. Revenue from sales lead generation products is generally lower in the summer due to decreased direct marketing activity of the Company's customers during that time. The Company typically experiences decreases in net sales of consumer CD ROM products just prior to the introduction of new editions of these products. This effect, coupled with the changes in estimates outlined below, resulted in a decline in consumer CD ROM net sales in the three months ended September 30, 1998 compared to the prior year period and the three months ended June 30, 1998. In addition, cancellation of a major data processing contract in the three months ended September 30, 1998 resulted in lower than expected net sales of data processing services in that period. The Company's operating expenses are determined in part based on the Company's expectations of future revenue growth and are substantially fixed. As a result, unexpected changes in revenue levels, such as those discussed above, have a disproportionate effect on operating performance in any given period. In addition, changes in estimates for increased reserves and allowances, the provision of an arbitration reserve and charges related to cost-cutting in the three months ended September 30, 1998 amounted to a total of $21.4 million in charges in that period. As a result of these charges and the weakness of net sales discussed above, the Company recorded a net loss of $13.3 million for the three months ended September 30, 1998, and may record a net loss for the fiscal year. If the Company is required to record charges in the future, such charges could materially and adversely affect the Company's business, financial condition or results of operations. Long term growth will be materially adversely affected if the Company fails to broaden its existing product and service offerings, increase sales of products and services, or expand into new markets, or complete acquisitions or successfully integrate acquired operations into its existing operations. To the extent there are fluctuations in operating results or the Company fails to achieve long-term internal growth or growth through acquisitions, there could be a material adverse effect on the Company's business, financial condition or results of operations. RISK OF PRODUCT RETURNS The Company has agreements that allow retailers certain rights to return its consumer CD-ROM products. Accordingly, the Company is exposed to the risk of product returns from retailers and distributors, particularly in the case of products sold shortly before introduction of the next year's edition of the same product. Consumers may also seek to return consumer CD-ROM products, although historically returns from consumers have been low. At the time of product sales, the Company establishes reserves based on estimated future returns of products, taking into account promotional activities, the timing of new product introductions, seasonal variations in product returns, distributor and retailer inventories of the Company's products and other factors. Actual product returns could differ from estimates, and product returns that exceed the Company's reserves could materially adversely affect the Company's business, financial condition and results of operations. In addition, changes in estimates of reserves for product returns can have a material and adverse effect on the Company's operating results. For example, as discussed above, changes in estimates for increased reserves and allowances in the consumer CD-ROM business, primarily to account for anticipated returns and price protection adjustments, together with additions to other reserves, amounted to charges of approximately $15.5 million in the three months ended September 30, 1998 (out of the $21.4 million in charges discussed above), contributing to the Company's net loss for that period. EFFECTS OF LEVERAGE As of September 30, 1998, the Company had total indebtedness of approximately $128.6 million. In addition, the Indenture allows the Company to enter into a revolving credit facility under which it would be able to incur up to $100.0 million of additional borrowings, all of which would be senior to the Notes. Moreover, the Indenture under which the Notes will be issued permits the Company to incur substantial additional indebtedness (including, subject to certain conditions, an additional $85.0 million of senior subordinated notes under the Indenture), a material portion of which could be senior to the Notes. The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which performance will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations may also depend upon the future availability of revolving credit borrowings under a revolving credit facility. Such availability will depend on, among other things, the Company's ability to enter into such a credit facility on acceptable terms and its ability to meet certain specified financial ratios and maintenance tests. The Company expects that, based on current and expected levels of operations, its operating cash flow should be sufficient to meet its operating expenses, to make necessary capital expenditures and to service its debt requirements as they become due. If the Company is unable to service its indebtedness, it will be forced to take actions, such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing its indebtedness (including the Notes) or seeking additional equity capital. There is no assurance that any of these remedies could be effected on satisfactory terms, if at all. 20 22 RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS The Indenture governing the terms of the Notes contains certain covenants limiting, subject to certain exceptions, the incurrence of indebtedness, payment of dividends or other restricted payments, issuance of guarantees, entering into certain transactions with affiliates, consummation of certain asset sales, certain mergers and consolidations, sales or other dispositions of all or substantially all of the assets of the Company and imposing restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries. A breach of any of these covenants could result in an event of default under the Indenture. The Company's ability to comply with such covenants may be affected by events beyond its control. In addition, if the Company were to enter into a revolving credit facility, such facility would contain other restrictive covenants which would be more restrictive than those contained in the Indenture. A breach of any of these covenants, unless waived, would result in a default under such a credit facility. Upon the occurrence of an event of default under such a credit facility, the lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. If the lenders under such a credit facility accelerate the payment of such indebtedness, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company, including the Notes. If the Company were unable to repay those amounts, such lenders could proceed against the collateral granted to them to secure that indebtedness. RISKS ASSOCIATED WITH CHANGES IN TECHNOLOGY Advances in information technology may result in changing customer preferences for products and product delivery formats in the business and consumer marketing information industry. The Company believes it is presently the leading provider of marketing information on CD-ROM. However, the Company's sales of CD-ROM's in the quarter ended September 30, 1998 were lower than expected by the Company and projected by financial analysts. In addition, the Company believes that if customers increasingly look to the Internet, digital video disc ("DVD") or other new technology for information resources, the market for business and consumer information on CD-ROM may contract and prices for CD-ROM products may have to decrease or CD-ROM products may become obsolete. The Company plans to offer and sell its products and services increasingly over the Internet and to introduce products on DVD. Failure of the Company to improve sales of CD-ROM products or to successfully sell its products over the Internet or on DVD or to successfully introduce products that take advantage of other technological changes may thus have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION The business and consumer marketing information industry is highly competitive. Many of the Company's principal or potential future competitors are much larger than the Company and have much larger capital bases from which to develop and compete with the Company. The Company faces increasing competition in consumer sales lead generation products and data processing services from Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions of Experian, Direct Marketing Technologies and Metromail. In business sales lead generation products, the Company faces competition from Dun's Marketing Services ("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information compiled from Dun & Bradstreet's credit database, tends to focus on marketing to large companies. In business directory publishing, the Company competes primarily with Regional Bell Operating Companies, Donnelley Marketing and many smaller, regional directory publishers. In consumer sales lead generation products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk, Trans Union, Experian and Equifax, both directly and through reseller networks. In data processing services, the Company competes with Acxiom, May & Speh, Direct Marketing Technologies and Harte-Hanks Data Technologies. In consumer products, the Company competes with certain smaller producers of CD-ROM products. In addition, the rapid expansion of the Internet creates a substantial new channel for distributing business information to the market, and a new avenue for future entrants to the business and consumer marketing information industry. There is no guarantee that the Company will be successful in this new market. LOSS OF DATA CENTERS The Company's business depends on computer systems contained in the Company's data centers located in Omaha, Nebraska, Carter Lake, Iowa and Montvale, New Jersey. A fire or other disaster affecting any of the Company's data centers could disable the Company's computer systems. Any significant damage to any of the data centers could have a material adverse effect on the Company's business, financial condition and results of operations. 21 23 LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS The Company regards its databases and software as proprietary. The Company's databases are copyrighted, and the Company depends on trade secret and non-disclosure safeguards for protection of its software. The Company distributes its products under agreements that grant customers a license to use the Company's products for specified purposes and contain terms and conditions prohibiting the unauthorized reproduction and use of the Company's products. In addition, the Company generally enters into confidentiality agreements with its management and programming staff and limits access to and distribution of its proprietary information. There can be no assurance that the foregoing measures will be adequate to protect the Company's intellectual property. DIRECT MARKETING REGULATION AND DEPENDENCE UPON MAIL CARRIERS The Company and many of its customers engage in direct marketing. Certain data and services provided by the Company are subject to regulation by federal, state and local authorities. In addition, growing concerns about individual privacy and the collection, distribution and use of information about individuals have led to self-regulation of such practices by the direct marketing industry through guidelines suggested by the Direct Marketing Association and to increased federal and state regulation. Compliance with existing federal, state and local laws and regulations and industry self-regulation has not to date had a material adverse effect on the Company's business, financial condition or results of operations. Nonetheless, federal, state and local laws and regulations designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may increasingly affect the operations of the Company, which could result in substantial regulatory compliance or litigation expense or a loss of revenue. Certain proposed federal legislation could also create proprietary rights in certain "white pages" information that is presently in the public domain, which could in turn increase the cost to the Company of acquiring data or disrupt its ability to do so. The direct mail industry depends and will continue to depend upon the services of the United States Postal Service and other private mail carriers. Any modification by the United States Postal Service of its rate structure, any increase in public or private postal rates generally or any disruption in the availability of public or private postal services could have a negative impact on the demand for business information, direct mail activities and the cost of the Company's direct mail activities. FINANCIAL AND ACCOUNTING ISSUES RELATED TO ACQUISITIONS In connection with the acquisitions completed since mid-1996, the Company issued approximately 3.7 million shares of Class A Common Stock and 3.7 million shares of Class B Common Stock, and paid approximately $158.4 million in cash. The issuance of stock in these or future transactions may be dilutive to existing stockholders to the extent that earnings of the acquired companies do not offset the additional number of shares outstanding. In connection with the acquisitions of DBA, Pro CD and Walter Karl, the Company incurred approximately $97.0 million in debt. In connection with future acquisitions, the Company may incur substantial amounts of debt. Servicing such debt may result in decreases in earnings per share, and the inability on the part of the Company to service such debt would result in a material adverse effect on the Company's business, financial condition and results of operations. Finally, the Company expects that future acquisitions will generally be required to be accounted for using the purchase method. As a result of such accounting treatment, the Company may be required to take charges to operations or to amortize goodwill in connection with future acquisitions. As a result of acquisitions completed since mid-1996, the Company was required to take significant acquisition-related charges to operations and will be required to amortize goodwill and other intangibles over periods of 1 to 15 years. The acquisition-related charges and amortization of goodwill and other intangibles have had and will continue to have an adverse effect on net income. To the extent that future acquisitions result in substantial charges to operations, incurrence of debt and amortization of goodwill and other intangibles, such acquisitions could have an adverse effect on the Company's net income, earnings per share and overall financial condition. VOLATILITY AND UNCERTAINTIES WITH RESPECT TO STOCK PRICE As with other companies that have experienced rapid growth, the Company has experienced and is likely to continue to experience substantial volatility in its stock price. Factors such as announcements by either the Company or its competitors of new products or services or of changes in product or service pricing policies, quarterly fluctuations in the Company's operating results, announcements of technical innovations, announcements relating to strategic relationships or acquisitions by the Company or its competitors, changes in earnings estimates, opinions or ratings by analysts, and general market conditions or market conditions within the business and consumer marketing information industry, among other factors, may have significant impact on the Company's stock price. Should the Company fail to introduce, enhance or integrate products or services on the schedules expected, its stock price could be adversely affected. It is likely that in some future quarter the Company will fail to achieve anticipated operating results, and this failure could have a material adverse effect on the Company's stock price. In addition, the Company's Class A Common Stock and Class B Common Stock have been trading for a very short time. While the Company expects the Class A Common Stock and Class B 22 24 Common Stock prices to remain roughly equal in most market conditions, the difference in rights of the two classes, coupled with the general volatility of the Company's stock price described above, could cause the Class A Common Stock and Class B Common Stock to trade at different prices. In the event of a tender offer or other unsolicited attempt to acquire the Company, shares of Class B Common Stock would likely trade at a substantial premium to shares of Class A Common Stock as a result of the disparity of voting rights. Future issuances of both Class A Common Stock and Class B Common Stock could affect the price for either or both classes of Common Stock. For the foregoing reasons, the price for the Company's Class A Common Stock and Class B Common Stock may be subject to substantial fluctuation. PURCHASE OF NOTES UPON A CHANGE OF CONTROL Upon the occurrence of a change of control of the Company in certain circumstances, the Company is required to make an offer to purchase all outstanding Notes at a purchase price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of purchase. There can be no assurance that the Company will have available funds sufficient to purchase the Notes upon such change of control. In addition, any change of control, and any repurchase of the Notes required under the Indenture upon a change of control, may constitute an event of default under any revolving credit facility which the Company may enter into, and in that event the obligations of the Company thereunder could be declared due and payable by the lenders thereunder. Upon the occurrence of an event of default, the lenders under such a credit facility may have the ability to block repurchases of the Notes for a period of time and upon any acceleration of the obligations under such a credit facility, the lenders thereunder would be entitled to receive payment of all outstanding obligations thereunder before the Company may repurchase any of the Notes tendered pursuant to an offer to repurchase the Notes upon such change of control. 23 25 INFOUSA INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 PART II OTHER INFORMATION INFOUSA INC. 24 26 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 PART II ITEM 1. LEGAL PROCEEDINGS On March 17, 1998, the Company filed suit in Delaware court to enjoin a merger agreement whereby Great Universal Stores, PLC ("GUS") would acquire Metromail Corporation ("Metromail") for $31.50 per share. On March 20, 1998, GUS filed a counterclaim against the Company alleging, among other things, that the Company tortiously interfered with the Merger Agreement and GUS's prospective business relations with Metromail. The Counterclaim also alleges that the Company breached a confidentiality agreement entered into by the Company with Metromail's financial advisor and of which GUS is a third party beneficiary. As relief, the GUS claim seeks, among other things, injunctive relief and actual, punitive and other damages in an amount to be determined at trial, estimated by GUS to exceed $500 million, plus fees and expenses. On March 27, 1998, the Delaware Chancery Court denied the Company's motion for a preliminary injunction to block the GUS Merger Agreement. The Company does not believe that the GUS counterclaim has merit and will vigorously defend the suit, however there can be no assurance that this matter will be resolved without a material adverse affect on the Company's financial condition. On March 30, 1998, the Metromail Board of Directors accepted a proposal to be acquired by GUS for $34.50 per share. On November 3, 1998, the Company and GUS filed a stipulation of dismissal with the Delaware Chancery Court, and the Company expects the Court to approve the stipulation and dismiss the claim and counter claims with prejudice shortly. During October 1998, the Company announced a decision in its year-long arbitration dispute with Experian Information Solutions, Inc., a division of TRW, Inc. The dispute centered around a license agreement between the Database America Companies ("DBA") and Experian prior to the Company's acquisition of DBA. DBA claimed that Experian breached the license agreement by, among other things, providing data to third parties in violation of that agreement. Experian claimed that DBA improperly terminated the agreement. Both sides sought damages resulting from their claims of breach. On October 16, 1998, the Arbitrator from the American Arbitration Association found DBA to have breached the contract and awarded damages to Experian in the amount of $4,447,000. Although the Arbitrator found that Experian had provided data improperly to a third party, he did not find it to be a material breach. The Company has reviewed the Arbitrator's decision and believes that the amount of damages is not supported by either the law or the facts. The Company is currently reviewing its options for a petition to the Arbitrator for reconsideration on the issue of damages and a potential appeal on the grounds that the Arbitrator did not apply the appropriate limitations of California law regarding damages claims. ITEM 5. OTHER INFORMATION In October 1998, Rick Puckett resigned as the Company's Chief Financial Officer. The Company appointed Gautam Gupta, a director of the Company, as acting Chief Financial Officer and is searching for a permanent replacement. Gautam Gupta is unrelated to the Company's Chairman and Chief Executive Officer Vinod Gupta. On October 1, 1998, PricewaterhouseCoopers LLP, the Company's independent accountants resigned from their engagement as principal accountants for the Company. On October 12, 1998, the Company engaged the services of KPMG Peat Marwick LLP to serve as the Company's principal accountants for the current fiscal year. Refer to the current reports on Form 8-K filed on October 8, 1998 and October 13, 1998, respectively, for additional information regarding the change in the Company's accountants. 25 27 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Report on Form 8-K Effective July 31, 1998, the Company filed a current report on Form 8-K related to the change in the Company's name from American Business Information, Inc. to infoUSA Inc. 26 28 S I G N A T U R E S ------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INFOUSA INC. Date: November 13, 1998 /S/ VINOD GUPTA ---------------------- ------------------------------------------ Vinod Gupta, Chief Executive Officer and Chairman of the Board /S/ GAUTAM GUPTA ------------------------------------------ Gautam Gupta, Acting Chief Financial Officer (principal financial officer) 27 29 INDEX TO EXHIBITS Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 0000879437 INFOUSA INC. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 24,501 19,046 56,411 0 0 113,029 66,974 28,650 263,989 52,254 127,098 0 0 124 78,093 263,989 172,528 0 0 181,917 0 0 6,225 692 4,907 (4,215) 0 0 0 (4,215) (0.09) (0.09)
-----END PRIVACY-ENHANCED MESSAGE-----