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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
[NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19598
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INFOUSA INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 47-0751545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
(Address of principal executive offices)
(402) 593-4500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.0025 PAR VALUE
CLASS B COMMON STOCK, $0.0025 PAR VALUE
SERIES A PREFERRED SHARE PURCHASE RIGHTS
SERIES B PREFERRED SHARE PURCHASE RIGHTS
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Class A Common Stock and
Class B Common Stock on March 9, 1999 as reported on the NASDAQ National Market
System, was approximately $114 million. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Class A Common Stock or Class B Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 9, 1999 registrant had outstanding 24,228,875 shares of Class A
Common Stock and 23,907,875 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 2, 1999, which will be filed within 120 days of
the end of fiscal year 1998, is incorporated into Part III hereof by reference.
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995 including,
without limitations, statements related to potential future acquisitions and the
Company's strategy and plans for its business contained in Item 1 "Business,"
Item 2 "Properties" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Such forward-looking statements
are based on current expectations, estimates and projections about the Company's
industry, management's beliefs, and certain assumptions made by the Company's
management. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Factors That May Affect Operating
Results," as well as those noted in the documents incorporated herein by
reference. Unless required by law, the Company undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. However, readers should carefully
review the risk factors set forth in other reports or documents the Company
files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.
ITEM 1. BUSINESS
THE COMPANY
infoUSA Inc. (the "Company") is a leading provider of information on 11
million U.S. and Canadian businesses and 195 million U.S. residents which the
Company believes are among the most comprehensive and accurate available. The
Company leverages these key assets by selling a broad range of products and
services through multiple distribution channels to businesses and consumers.
Businesses use the products and services for a host of things, including:
finding sales leads, conducting direct mail and direct marketing campaigns,
qualifying prospects using business credit reports, creating custom databases,
performing marketing research, and database marketing and direct marketing
applications. The products and services also have a wide range of uses for
consumers including: locating family and friends; updating holiday lists,
finding places to stay when traveling, assisting with a job search; and a
variety of other reference purposes.
The Company was originally incorporated in Nebraska in 1972, and was
reincorporated in Delaware in 1992.
INDUSTRY BACKGROUND
Every business no matter how large or small has three main components to
their business:
1. The products and services they are manufacturing or creating.
2. The actual selling process.
3. The accounting and financial functions.
As the businesses grow, these components become larger and more complex,
but the basic structure does not change. The selling process in every business
requires information -- such as analysis of present customers, finding new
customers, knowing more about prospective customers, and determining
creditworthiness. The information provided by the Company's databases is an
integral part of the decision making process.
STRATEGY
The Company's objective is to be the leading provider of business and
consumer information in the United States and Canada and produce innovative
products and services to meet the needs of businesses and consumers. The Company
believes that its success is dependent upon the success of three critical
aspects of the business:
1. Increasing and enhancing the proprietary content of our databases,
2. Continuing to create new products and services to meet the needs of
our diverse customer base, and
3. Expanding our broad distribution channels to serve our customers
effectively and efficiently, and exploit the future potential of
the Internet.
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The company focuses on selling its lead generation products to small and
medium size businesses while marketing reference products to consumers and more
complete solutions to larger corporations. The Company believes that it
effectively competes in the business and consumer marketing information industry
by exploiting its competitive strengths. These strengths include the Company's
accurate and comprehensive databases and its ability to leverage these databases
by providing customers with the specific data they need in a variety of formats
through targeted distribution channels. Key elements of the Company's growth
strategy include:
Expand and Enhance the Proprietary Business Database. The Company continues
to invest substantial time and resources to maintain the quality and increase
the depth of its proprietary business database, which it believes contains the
most comprehensive and accurate business marketing information in the United
States and Canada. The Company is continually looking to expand the information
contained on its databases with useful, high quality data. In addition, the
Company makes over 20 million telephone calls every year to verify the accuracy
of the records in the business database.
Leverage the Databases. The Company continues to leverage its business
database by introducing new products and delivery formats to strengthen its
competitive advantage in the business marketing information industry. The
Company sells a wide range of pre-packaged and customized information products
tailored to specific customer requirements on a variety of delivery formats
through targeted distribution channels. The Company distributes its products and
data processing services through direct mail, telemarketing, field sales
offices, national accounts sales teams, retail outlets and information
resellers. In the past year, the Company has dedicated resources to respond to
changes in information technology by introducing new product delivery formats,
including delivery over the Internet and by incorporating DVD formats into some
of the CD-ROM products. There can be no assurance that the Company will be
successful in responding to such technological changes. The Company prices its
products and services based on the type, amount and format of the information
provided to create an attractive solution for its customers.
Increase Recurring Revenue. The databases change continuously throughout
each year, so the Company believes that frequent updates are important to our
customers. The Company seeks to increase recurring revenue in a number of ways.
The Company encourages repeat purchases of its information products by offering
annual editions of its directories and monthly subscription updates. The Company
generates recurring revenue from royalties by licensing its databases to other
information providers and large corporations for internal use. In addition, the
Company sells its data processing services to large corporations with ongoing
information service requirements, and subsequently seeks to sell its information
products to these clients.
Broaden Distribution Channels through the Internet. The Company continues
to exploit the Internet distribution channel to expand its potential market of
approximately 40 million households, entrepreneurs, and small business owners.
For example, www.infoUSA.com, the Company's corporate web site transitioned from
the testing stage to becoming a viable and profitable distribution channel
during 1998. The Internet offers a variety of revenue sources for the Company,
including licensing royalties, e-commerce, other information (non-proprietary)
content sales, and advertising revenue opportunities. The site generates nearly
1 million hits per day, and strategic partnerships with other Internet service
providers continues to grow the traffic visiting our site. The Company is still
in early stages of developing its Internet strategy and there is no assurance
that the Company will be successful in this new market.
Enhance Product and Service Offerings Through Strategic Acquisitions. Since
mid-1996, the Company has completed nine acquisitions that increased its
presence in the consumer marketing information industry, greatly increased its
ability to provide data processing solutions, added two consumer CD-ROM product
lines and broadened its offerings of business marketing information. The Company
believes that there are further opportunities to add to its product and service
offerings and to expand its distribution channels through strategic
acquisitions. However, there can be no assurance that the Company will be able
to successfully complete future acquisitions or integrate acquired businesses
into its operations.
Business Credit Products. The Company now offers Business Credit
Directories for all 50 states, and Business Credit Profiles at $5 each. These
are available for purchase on our corporate web site, as well as through a
dedicated sales division. Customers have been very receptive to these products,
and they represent an attractive, useful, and cost effective alternative to
other credit reference products currently available.
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Monthly Updates. Because the databases continuously change throughout each
year, our customers have a need for frequent updates on the records they
purchase from the Company. The Company continues to enhance the subscription
program which provides customers with a prospect database and monthly updates.
Enhancements include new delivery alternatives including fax and Internet upon
request.
DATABASES
The Company believes its Business and Consumer databases are among the most
comprehensive and accurate in the United States, and the maintenance and
development of these databases will be critical elements of the Company's
continued success. The Company continually updates its Business database to
reflect the formation of new businesses, entities going out of business, and
changes relating to existing businesses, new officers and new lines of business.
The Company continually updates its Consumer database to reflect changes in
household composition, age, income, homeownership, and lifestyle information on
over 115 million households and 195 million individuals in the United States.
During 1998, the Company incurred direct costs totaling approximately $48
million to create, maintain and enhance its databases, maintain data center
operations, and perform data processing services. This total excludes costs
associated with administrative overhead costs, building and equipment costs,
interest expense, and depreciation and amortization expense.
Business Database. The Company's proprietary business database contains
information on over 11 million businesses in the United States and Canada. The
Company maintains its data in a data warehouse, which can be segmented into data
segments. Some of the data segments are Small Business Owners, Small Business
Owners at Home, Big Businesses and their Corporate Affiliations, Growing
Businesses, and Female Business Owners. Additionally, vertical industry data
segments are created such as Physicians and Surgeons, Schools, Restaurants,
Places of Interest, Importers/Exporters, and Government Offices.
The Company compiles the business information from over 15,000 sources.
Some sources, such as the yellow pages, telephone directory white pages, and
chamber directories, are used to identify businesses for inclusion in the
database. Other sources such as primary telephone research surveys are used to
enhance the database with key data elements like number of employees, estimated
sales/output volume and year established. Additional sources, such as, annual
reports, SEC filings and public filings, are used to update the database with
lawsuits, liens, judgements, bankruptcies, headline news, commercial debtor
data, changes in leadership, changes of address, changes of corporate
affiliations, and the like. In addition, the Company updates and maintains its
business database using information licensed from the United States Postal
Service's National Change of Address (NCOA) and Delivery Sequence File (DSF).
The Company compiles the information in the business database using five
key processes: 1) Routine compilation from core sources to validate the ongoing
existence of businesses and identification of new businesses, 2) Event driven
compilation from sources identifying new business formations, business moves,
mergers and acquisitions, or other business events, which could have substantial
impact on the profile of the business, 3) Primary telephone research to verify
and enhance business information, 4) Public data and models updated with each
file refresh, and 5) Data Validation performed nightly and monthly to assure the
highest quality product creation.
Each business entry contains, where available: name of business, contact
person, street address, city, state, area code and telephone number, fax number,
SIC code, NAICS code, product brands sold by businesses, franchises,
professional specialties, yellow page classification, size of yellow page
advertisement, year of first appearance in the yellow pages, zip code, carrier
route, county code, population code and metropolitan statistical area, and the
latitude/longitude coordinates. The Company's proprietary automated and
predictive dialing system allows custom scripts for both the size of the company
and its industry.
The Company's business database requires extensive ongoing attention to
detail and data quality. The Company maintains a dedicated staff of both data
analysts and systems analysts, who continually enhance the business rules used
in the software to create and maintain the database. The business rules embedded
in the compilation software are also used in product creation to assure the
Company's customers derive full value from the business data. The Company's
computer systems allow a work force of approximately 400 employees to compile,
telephone verify, analyze, model, and perform continuous data validation.
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Over the next year, the Company plans to enhance the proprietary software
programs operating the data center will be enhanced to incorporate near
real-time data feeds and to deploy data updates to subscribing customers in a
near real-time fashion via the Internet or e-mail. However, if these
modifications cause disruptions in the Company's software or do not perform as
anticipated, there could be a material adverse effect on the Company's business,
financial condition and results of operations.
New Business Database. The Company monitors and compiles information on
newly formed businesses throughout the United States by checking state filings,
business licenses and county courthouse documents. The Company verifies and
sells the data to allow clients to contact potential new customers as soon as
possible then incorporates the information into its core business database.
Medical Databases. The Company maintains and markets a specialized database
on physicians and surgeons. The physicians and surgeons database contains
information on over 575,000 physicians and surgeons nationwide. The database is
compiled from third party sources and contains information on age, gender,
professional school, practice information, specialties, and personal interests.
Consumer Database. The Company's consumer database has emerged over the
last year to be among the most comprehensive and accurate in the United States.
The Company begins with its own compilation of all households from telephone
directories. This core data source is compiled with greater accuracy and
timeliness than most others using this base source. The white page file is then
enhanced with over 1 billion records licensed from third parties to add
individuals not listed in the telephone directories and to add the demographic
and psychographic data required to segment consumer prospects. The end result is
a database of 115 million households, 195 million individuals, 57 million
homeowners, 1 million monthly new movers, and 50 million mail order purchasers.
The consumer database also includes information in over 70 categories of
demographic information including age, income, marital status, gender, presence
of children in households, credit card information, mortgage data, vehicle
information, recent changes of address and lifestyle selections.
PRODUCTS AND SERVICES
From its databases of 11 million businesses in the U.S. and Canada and 115
million households in the U.S. the Company produces products such as prospect
lists, mailing labels, 3 x 5 cards, diskettes, printed directories, CD-ROMs,
Business Credit Reports, and many other products and services. The Company's
products and data processing services are used by customers for activities such
as identifying and qualifying prospective customers, initiating direct mail
programs, telemarketing, analyzing and assessing market potential, monitoring
the effectiveness of marketing efforts and surveying competitive markets. The
Company distributes its products and data processing services through
distribution channels outlined in the Sales and Marketing section of this
report. The Company is organized around two customer segment groups: Small
Business and Consumer Markets Group and the Large Business Customers Group. The
Company's products and services are designed for the unique needs of each group.
SMALL BUSINESS AND CONSUMER MARKETS GROUP. This group concentrates on the
needs of small to medium size businesses, small office and home office
businesses, aspiring entrepreneurs, and individual consumers. The group is
managed from the Company's Omaha headquarters, and the product fulfillment is
handled by a dedicated facility in Carter Lake, Iowa. The Company's products and
services help small businesses and consumers analyze their existing customers,
identify new markets, and grow their businesses. The products are also used to
locate suppliers, look up business credit profiles, and for other marketing and
reference purposes. The products allow businesses to "slice and dice" their
existing customer base, gain insight about who their best customers are, and
identify potential new markets. For example, a customer can identify all used
car dealers and body shops with sales in excess of $1 million and who have been
in business more than 5 years in selected ZIP codes, or generate a list of all
businesses with less than 10 employees and who have been in business for more
than 10 years in a county. From this starting point, the products can be further
tailored and output in a format that best suites the customer's needs (i.e. for
use in direct mail, telemarketing, lead generation for direct sales, etc.). The
accompanying notes to the consolidated financial statements include segment
financial information for the small business and consumer markets group.
Prospect Lists, Mailing Labels, and Sales Lead Products. The Company's
customized sales lead generation products, which include hard copy prospect
lists, sales leads cards, mailing labels, diskettes and mapping products,
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are used by customers who ask the Company to generate specific information for
them. The Company produces its sales lead generation products using a
combination of customized sorting criteria to meet the customer's specific
marketing objectives. The Company's sales and marketing consultants work with a
variety of prospective customers to help them specify sorting criteria that will
produce marketing information materials. The resulting products are customized
for each customer's needs, and the Company's representatives guide the customers
in understanding how this information can be used. Generally, sales lead
generation products are priced on a per name basis, which varies according to
the number of names supplied, the type of information required, and the delivery
format selected.
Monthly Updates: The Company offers a subscription program that provides
customers with a prospect database and monthly updates including new leads for
the market area, changes to the original database, and a list of companies that
have gone out of business. The Company sells Monthly Updates to small, medium
and large businesses who use the monthly new prospect updates to acquire new
customers, expand into new markets and replace lost customers. Customers pay an
up-front fee for the initial database of requested information and additional
monthly subscription fees for the updates.
Business Directories and CD-ROM Products: The Company's printed business
directories are bundled with CD-ROMs and include such titles as Business USA,
Business Canada, State Business Directories, American Manufacturers Directory,
Big Business Directory, Entrepreneurs Directory, and Physicians & Surgeons
Directory. In addition, the Company also sells a number of business directories
on CD-ROM only, including titles such as Households USA, Professionals, Female
Executives, and Small Business Owners. The Company sells these directories to
businesses who use them for lead generation, telemarketing, and reference
purposes, and are attracted to the directories for their affordability,
convenience and reference value. The printed directories are useful for
reference, while the CD-ROM products allow users to sort, search, and print
marketing information. Purchasers of business directories subscribe to them on
an annual basis. For CD-ROM products, an annual license fee enables a customer
to access and use a specified number of names. Proprietary metering technologies
for CD-ROM products require purchasers to pay an additional fee to download
additional names and prevent purchasers from using the product beyond one year
after the installation date.
Business Credit Directories: The Company's business credit directories
include a printed directory bundled with a CD-ROM. The product is used by
customers for decision making, verifying company information, assisting in
collection support, and identifying potential new customers. The directories are
available by individual states, multi-state regions, the entire U.S., and
Canada. Pricing for this product is similar to the other business directory
products outlined above. Customers can also buy Business Credit Reports for $5
each on the Internet, and over the phone and fax.
Directory Assistance+Plus/Business Credit Reports: For busy executives and
people on the road, the Company sells its information, Directory
Assistance+Plus, over the phone. The Company prices its telephone information
services on a subscription basis. Business Credit Reports can be purchased
individually, or on a subscription basis.
Consumer CD-ROM Products: The Company's consumer CD-ROM products include
titles such as 104 million businesses and Households, Streets USA, American
Yellow Pages, 88 million Households, 2 million Fax Number Directory,
Powerfinder, Powerfinder Pro, and Select Phone. These products can be used on
personal computers as an affordable way to find addresses and phone numbers of
businesses and consumers anywhere in the country. CD-ROM products are sold
through over 5,000 retail outlets in North America, including OfficeMax, Office
Depot, Staples, CompUSA, and Best Buy. The Company also has over 1.5 million
registered users that it targets using direct mail and telemarketing.
Database Marketing and Data Processing Services: Although analytical and
data processing services have historically been utilized by larger companies,
the Company offers these services to smaller business customers. An example is
the customer profile analysis which is available for free, and allows small
business customers to gain valuable insights about their existing customer base.
The Company continues to develop and introduce a variety of analytical and data
processing services to meet the needs of the smaller business customer.
Internet Content Users consist of small office and home-based businesses,
entrepreneurs, and individuals who access our products and services primarily
through our Company web site www.infoUSA.com. Our site allows businesses and
consumers to define a target market, retrieve a count of the number of
businesses in a particular
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market, or obtain a credit profile on a particular company. The Company sells
customers lists and business profiles over the Internet on a per name or per
profile basis.
The Internet represents a new and rapidly evolving potential market for the
Company's information products and data processing services. If the Company is
unsuccessful in selling its products and services over the Internet, or fails to
respond to changes in the Internet market in a timely manner, the Company's
business, financial condition and results of operations could be materially and
adversely effected.
LARGE BUSINESS CUSTOMERS GROUP. The large business customer group is
focused on developing and maintaining relationships with large corporations by
providing databases, data processing services, and database marketing solutions.
This group is headquartered in Montvale, New Jersey. The Company's database
marketing services, direct marketing and analytical services, database licensing
agreements, and information content sales to corporate clients are managed
primarily by dedicated national account sales teams, who work with the same
clients on an ongoing basis. The Company prices these various services on an
annual license basis, depending upon the nature of the services provided. The
accompanying notes to the consolidated financial statements include segment
financial information for the large business customers group.
Licensing of Database to Value Added Resellers: The Company licenses its
databases to value added resellers who pay the Company royalties for the use of
its information. The customers who license the databases use the information for
a wide range of purposes, including national directory assistance services, the
creation of mapping products and services, and for global positioning satellite
(GPS) in-car navigation systems.
Database Marketing Services: Database marketing involves the use of
sophisticated statistical methodologies to segment customers, glean insight
about customer characteristics, and identify the best prospective markets. The
Company offers a variety of market research services, including customer and
market profile analyses, market segmentation reports, statistical marketing
reports, list enhancements to update a customer's in-house database,
computerized name search service, and other analytical tools and reports.
Direct Marketing Services: The Company offers a full range of direct
marketing services to help customers turn their in-house databases into a more
powerful marketing tool. This includes cleaning and standardizing their in-
house databases and enhancing the value of their customer files by appending
additional data. Examples of the types of services offered include "merge-purge"
services, which involves merging data from multiple sources and purging out
duplicative and erroneous data. List enhancement is the process of appending
additional data to a customer file to provide a better description of the
customer. National Change of Address (NCOA) processing helps companies maintain
an accurate, up-to-date file of customer addresses which minimizes the number of
mail pieces which cannot be delivered. The Company sells its direct marketing
services primarily to large corporations, many of which use these services on an
ongoing basis, providing a steady stream of revenue.
Licensing the Database for Internet Directory Assistance service: Most
Internet providers offering national white page and yellow page services license
the database from the Company. Licensees (including Microsoft, InfoSpace, Yahoo!
Netscape, GTE, and others) pay the Company royalties to use the Company's
databases on their web sites. Internet users access these sites for directory
assistance, finding individuals in the white pages or businesses in the yellow
pages. In addition, most of these Internet sites provide a link to the Company's
web site, allowing potential customers to purchase additional products or
services directly from the Company. The Company's directory assistance
information over the Internet is free.
SALES AND MARKETING
The Company markets and sells its information products and data processing
services directly through direct mail, telemarketing, field sales offices and
national accounts sales teams, the Internet, and indirectly through distribution
channels such as value-added resellers and retail outlets. The sales and
marketing channels used by the Company vary by product. Sales lead generation
products are sold through direct mail, telesales, field sales offices and
national accounts sales teams, and the Internet. Data processing services are
sold primarily through national accounts sales teams. Consumer CD-ROM products
are sold through direct mail, telemarketing and retail outlets, and the Company
licenses its databases to information resellers and large corporations.
Direct Mail: The Company has traditionally marketed to businesses through
direct mail, in which the Company mails catalogs to prospective customers and
processes orders by mail or by telephone. In 1998, the Company mailed more than
39 million catalogs, letters and other pieces of mail primarily to small and
medium size
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businesses. The Company sells its full line of sales lead generation products,
including customer lists, mailing labels, directories, CD-ROM products, maps and
credit reference guides, through direct mail. Direct mail marketing allows the
Company to reach a large number of customers at relatively little cost, and
generates a high volume of sales.
Telemarketing: The Company sells its sales lead generation products and
services through "outbound" telephone calls to small and medium size businesses.
In 1998, the Company initiated more than 750,000 telephone contacts with past
and prospective customers. Telemarketing allows the Company to contact dormant
accounts, occasional purchasers and repeat customers to create a more
consultative relationship between the client and the Company, and in turn to
generate more frequent sales.
Sales Force and Field Sales Offices: The Company's field sales offices sell
the Company's full line of sales lead generation products and services though
direct or telephone contact with small and medium size businesses, establishing
consultative relationships at the local level. The Company believes that through
field sales offices it can establish and maintain direct relationships with
businesses that are otherwise unresponsive to direct mail and telesales
contacts. As of December 31, 1998, the Company had field sales offices in 16
cities.
The Company's national accounts sales teams establish ongoing relationships
with larger corporations to sell data processing services, database marketing
services, and information content sales. Data processing and database marketing
services for these clients include generating mailing lists through merging and
purging of databases, producing customer profiles and market analyses, managing
and warehousing client data. After selling data processing services to large
corporations, the Company seeks to sell its information products to these
clients as well.
Internet: The Company has established an Internet site, www.infoUSA.com,
which allows businesses and consumers to perform a variety of tasks. Users can
define a target market, retrieve a count of the number of businesses or
consumers in a particular market, obtain a credit profile for a particular
business, or purchase any of the company's business directory and CD-ROM
reference products.
Retail Sales: The Company sells it consumer CD-ROM products "off-the-shelf"
to customers through over 5,000 retail outlets including computer software
stores, office supply stores, convenience stores, pharmacies and supermarkets.
The Company sells its consumer CD-ROM products principally through wholesale
distributors and also directly to retail outlets.
Database Licensing: The Company licenses its databases for distribution to
on-line information providers such as InfoSpace, Microsoft, Yahoo!, Netscape,
and GTE, and to large corporations for internal use. Licensees pay the Company
royalties for the use of its information products. In addition, most of these
on-line information services provide a link to the Company's World Wide Web
site, allowing potential customers to purchase products or services directly
from the company.
COMPUTER OPERATIONS AND DATABASE PROTECTION
The Company operates five data centers located in Omaha, Nebraska;
Papillion, Nebraska; Carter Lake, Iowa; Montvale, New Jersey; and Greenwich,
Connecticut. Business continuity is assured through the Company's use of these
five separate data center locations. The Company can reestablish sales,
marketing, production and administrative functions at a combination of the data
center sites.
The Omaha Data Center supports the Company's Sales Order Entry systems,
Internet website systems, company enterprise systems (e.g. email, file servers)
and company accounting systems. Sales Order Entry and accounting systems run on
a midrange IBM AS/400 and four Sun UNIX platforms. The Internet website resides
on a mixture of approximately twenty Sun UNIX platforms. Enterprise systems are
driven by large-scale PCs running Microsoft NT. This center is also the home for
network connectivity for desktop computers in the Omaha facility, four T1
Internet connections, and connectivity to the other data centers and remote
offices. This center also contains a Nortel Option 81 PBX for telephone services
within the facility. MCI and US West provide telephone service over redundant
access points into the facility. The Omaha data center is protected by a fire
suppression system and an uninterrupted power supply battery backup system.
Business and financial data is backed up daily and stored off-site.
The Company's Papillion Data Center contains the data compilation systems,
enterprise support systems, and software development platforms. The compilation
systems run on a IBM AS/400. Software development is done on
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a mixture of three IBM AS/400s. Enterprise systems and scanning services are run
on large-scale PCs running Microsoft NT. Network services to desktop computers
and terminals and other data centers are supported in this center. Like the
Omaha center, this center also contains a Nortel Option 81 PBX with redundant
MCI and US West telephone service access points into the facility. A fire
suppression system, an uninterrupted power supply battery backup system, and a
diesel generator protect the Papillion center. Data is backed up daily and
stored off-site. This facility is staffed with a team of over 150 Information
Technology professionals.
The Carter Lake Data Center is home to the business and consumer order
fulfillment systems. Fulfillment computer services are provided by IBM AS/400s.
Various high-end printers, CDROM, magnetic tape, and diskette devices are used
here to produce the customer's product. A Nortel Option 11 PBX provides facility
telephone services with connection to MCI and US West circuits. The Carter Lake
center is protected by a fire suppression system and an uninterrupted power
supply battery backup system. Data is backed up daily and stored off-site. This
facility is staffed by 50 production, operations, and shipping professionals.
The Company maintains its consumer database and analytical data processing
capabilities at its Montvale Data Center. The data is regularly backed up and
stored off-site. The Company has contracted with a third party to load and
access its consumer database in the event of loss at the Montvale facility, and
the Company believes that it could regenerate its analytical capabilities
through the lease of computer equipment in less than two weeks.
The Montvale Data Center houses three Mainframe class CPU's (two OS systems
and one DOS), eight large midrange UNIX systems, a number of high-end PC network
class machines, a large LAN PC network, a multitude of telecommunication
equipment, and transport abilities supporting various protocols. The facility
also maintains direct T1 connectivity to the Internet and a WAN connection to
all other Company computer facilities.
All midrange and mainframe class computers are used to service direct
marketing needs to large and mid-sized clients, many in the fortune 500
marketplace. The mainframe class machines are used in every aspect of direct
marketing computer services while the mid-range systems are used in a client
server or three tiered architecture to house relational database marketing
files. These systems service over 200 clients and are available to the Montvale
staff of over 250 on a seven day a week, twenty-four hours a day basis.
The Montvale facility services it's client with time tested proprietary
direct marketing software as well as state of the art three tiered and client
server open systems. Through these systems and services, along with Company
owned databases, the Company provides a product that is not offered by many.
Montvale houses a large data tape library with over 160,000 volumes of
tape. While it is impossible to secure a secondary backup of a library of this
size, all critical databases and system backups are sent offsite to a secure
location with a third party contracted data and document security company. These
'backups' are secured on a daily basis.
The Montvale facility maintains contracts with Comdisco for disaster
recovery. In the event of a disaster, all on-line computer operations can be
resumed within 48 hours, while other normal operations would resume within two
weeks. The shear volume of data to be recovered is one of the largest concerns
and time-consuming factors in the event of a disaster.
The Greenwich Data Center is home to the Company's list brokerage and list
management operations. The data center is fully sprinklered and protected by an
uninterrupted power supply battery back up system.
The Company is in the process of relocating certain operations located on
the east coast. The Company is relocating certain personnel between the Montvale
and Greenwich facilities, and is also going to relocate certain personnel from
the Montvale and Greenwich sites to a new location in Park Ridge, New Jersey.
The Company anticipates completing these relocations by August 1999. The Company
is in the process of constructing a new facility located in Montebello, New
York. Upon completion of the Montebello facility, the Company anticipates
relocating a significant portion of its east coast operations, including
personnel located at the Montvale, Greenwich and Park Ridge locations, to this
new facility.
The Company's computer operations include a mix of mainframe, midrange,
server, and desktop systems.
8
<PAGE> 10
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company regards its databases and software as proprietary. The
Company's databases are copyrighted, and the Company depends on trade secret and
non-disclosure safeguards for protection of its software. The Company
distributes its products under agreements that grant customers a license to use
the Company's products in the ordinary course of their businesses and contain
terms and conditions prohibiting the unauthorized reproduction of the Company's
products. In addition, the Company generally enters into confidentiality
agreements with its management and programming staff and limits access to and
distribution of its proprietary information. While there can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary rights or independent third party development of
substantially similar products and technology, the Company believes that legal
protection of its database and software is less significant than the knowledge
and experience of the Company's management and personnel, and their ability to
develop, enhance and market existing and new products and services.
COMPETITION
The business and consumer marketing information industry is highly
competitive. Many of the Company's principal or potential future competitors are
much larger than the Company and have much larger capital bases from which to
develop and compete with the Company. The Company faces increasing competition
in consumer sales lead generation products and data processing services from
Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions
of Experian, Direct Marketing Technologies and Metromail. In business sales lead
generation products, the Company faces competition from Dun's Marketing Services
("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information
compiled from Dun & Bradstreet's credit database, tends to focus on marketing to
large companies. In business directory publishing, the Company competes
primarily with Regional Bell Operating Companies, Donnelley Marketing and many
smaller, regional directory publishers. In consumer sales lead generation
products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk,
Trans Union, Experian and Equifax, both directly and through reseller networks.
In data processing services, the Company competes with Acxiom, May & Speh,
Direct Marketing Technologies and Harte-Hanks Data Technologies. In consumer
products, the Company competes with certain smaller producers of CD-ROM
products. In addition, the rapid expansion of the Internet creates a substantial
new channel for distributing business information to the market, and a new
avenue for future entrants to the business and consumer marketing information
industry. There is no guarantee that the Company will be successful in this new
market.
EMPLOYEES
As of December 31, 1998, the Company employed a total of approximately
1,500 people on a full-time basis. None of the Company's employees is
represented by a labor union or is the subject of a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company's headquarters are located in a 148,000 square foot facility in
Omaha, Nebraska, where the Company performs sales and administrative activities.
Order fulfillment and shipping are conducted at the Company's 30,000 square foot
Carter Lake, Iowa facility, which is located 15 miles from its headquarters.
Data compilation, telephone verification, data and product development, and
information technology services are conducted at the Company's 130,000 square
foot Papillion, Nebraska facility which is located about 5 miles from its
headquarters. The Company owns these facilities, as well as adjacent land for
possible future expansion. In addition, the Company leases a 101,000 square foot
facility in Montvale, New Jersey, which lease expires in September 1999. The
Company also leases sales office space at various locations, the aggregate
rental obligations of which are not significant.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
Not applicable.
9
<PAGE> 11
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Vinod Gupta.......................... 52 Chairman of the Board and Chief Executive Officer
Stormy L. Dean....................... 41 Controller and Acting Chief Financial Officer
Allen Ambrosino...................... 55 President, Large Business Group
Monica Messer........................ 36 President, Database and Technology Group
William Chasse....................... 40 President, Small Business Group
William Kerrey....................... 50 Senior Vice President, Licenses
</TABLE>
Vinod Gupta is the founder of the Company and has been Chairman of the
Board of the Company since its incorporation in 1972. Mr. Gupta served as Chief
Executive Officer of the Company from the time of its incorporation in 1972
until September 1997 and since August 1998. Mr. Gupta holds a B.S. in
Engineering from the Indian Institute of Technology, Kharagpur, India, and an
M.S. in Engineering and an M.B.A. from the University of Nebraska.
Stormy L. Dean has served as the Corporate Controller since September of
1998 and as the acting Chief Financial Officer since January of 1999. From
August 1995 to September 1998, Mr. Dean served as the Company's tax director.
Prior to that, Mr. Dean worked in the Tax Department of Peter Kiewit Sons' Inc.,
a construction and telecommunications company, from January of 1990 until
joining the Company in August of 1995. Mr. Dean holds a B.S. in Accounting from
the University of Nebraska at Omaha, an M.B.A from the University of Nebraska at
Omaha, and a Certified Public Accountant certificate.
Allen Ambrosino has served as Executive Vice President of the Company since
August 1997, and as President of DBA, which the Company acquired in February
1997, since November 1991. Mr. Ambrosino holds a B.S. in Business Administration
from Fairleigh Dickinson University.
Monica Messer has served as Executive Vice President and Chief Information
Officer of the Company since February 1997, and served as a Senior Vice
President of the Company from January 1996 to January 1997. Ms. Messer joined
the Company in 1983 and has served as a Vice President of the Company since
1985. Ms. Messer holds a B.S. in Business Administration from Bellevue
University.
William Chasse has served as Executive Vice President, Sales and Marketing
of the Company since October 1996, as a Senior Vice President from January 1995
to October 1996, and as a Vice President from 1990 to January 1995. Mr. Chasse
joined the Company in 1988. Mr. Chasse holds a B.S. in Business Administration
and an M.B.A. from the University of Nebraska.
William Kerrey has served as Senior Vice President, Licenses since August
1994, and served as a Vice President from 1989 to August 1994. Mr. Kerrey holds
a B.S. in Economics, a B.S. in Spanish and an M.S. in Agronomy from the
University of Nebraska.
10
<PAGE> 12
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock and Class B Common Stock $0.0025 par
value, is traded on the NASDAQ National Market System under the symbols IUSAA
and IUSAB, respectively.
The Company's Class A Common Stock began trading on the Nasdaq National
Market on October 10, 1997. Between October 10, 1997 and December 31, 1997, the
high and low closing prices for the Company's Class A Common Stock were $12.75
and $9.13, respectively.
The following table sets forth the high and low closing prices for the
Company's Class A Common Stock and Class B Common Stock during each quarter of
1998 and 1997 (class B Common Stock only), as adjusted to give effect to stock
splits completed to date.
CLASS A COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
Fourth Quarter............................................ $ 6.63 $ 2.63
Third Quarter............................................. $15.00 $ 5.00
Second Quarter............................................ $15.25 $12.00
First Quarter............................................. $16.00 $10.25
</TABLE>
CLASS B COMMON STOCK
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
Fourth Quarter............................................ $ 7.50 $ 2.69
Third Quarter............................................. $15.81 $ 6.00
Second Quarter............................................ $16.00 $12.38
First Quarter............................................. $17.63 $10.50
1997
Fourth Quarter............................................ $13.63 $ 9.25
Third Quarter............................................. $15.75 $11.07
Second Quarter............................................ $11.69 $ 8.50
First Quarter............................................. $11.69 $ 9.38
</TABLE>
As of March 9, 1999, there were 81 and 86 stockholders of record of the
Class A Common Stock and Class B Common Stock, respectively.
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not anticipate
paying cash dividends within the foreseeable future. Any future payment of
dividends will be determined by the Company's Board of Directors and will depend
on the Company's financial condition, results of operations and other factors
deemed relevant by its Board of Directors.
11
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the years in
the five years ended December 31, 1998 has been derived from the Company's
audited Consolidated Financial Statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes set
forth on pages F-1 through F-24 of this Form 10-K. The Consolidated Financial
Statements as of December 31, 1998 and 1997, and for each of the years in the
three years ended December 31, 1998, are set forth on pages F-1 through F-24 of
this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales..................................... $228,678 $193,327 $108,298 $ 86,766 $69,603
Costs and expenses:
Database and production costs............... 66,319 55,090 29,272 23,999 18,153
Selling, general and administrative......... 117,724 80,203 45,766 37,724 28,249
Depreciation and amortization............... 27,472 34,415 4,855 3,469 3,125
Provision for litigation settlement(1)...... 4,500 -- -- -- --
Acquisition-related and restructuring
charges(2)(3)............................ 10,093 56,098 21,500 -- --
-------- -------- -------- -------- -------
Total costs and expenses............ 226,108 225,806 101,393 65,192 49,527
-------- -------- -------- -------- -------
Operating income (loss)....................... 2,570 (32,479) 6,905 21,574 20,076
Other income (expense):
Investment income........................... 16,628 3,748 3,194 1,322 1,109
Interest expense............................ (9,160) (4,098) (209) (157) (247)
Other....................................... (2,000) -- (943) -- --
-------- -------- -------- -------- -------
Income (loss) before income taxes and
discontinued operations..................... 8,038 (32,829) 8,947 22,739 20,938
Income taxes.................................. 5,880 6,987 3,400 8,421 7,710
-------- -------- -------- -------- -------
Income (loss) from continuing operations...... 2,158 (39,816) 5,547 14,318 13,228
Loss on discontinued operations(4)............ -- -- (355) (2,317) (404)
Loss from abandonment of subsidiary(4)........ -- -- (1,373) -- --
-------- -------- -------- -------- -------
Net income (loss)............................. $ 2,158 $(39,816) $ 3,819 $ 12,001 $12,824
======== ======== ======== ======== =======
Basic earnings (loss) per share............... $ 0.04 $ (0.82) $ 0.09 $ 0.29 $ 0.31
======== ======== ======== ======== =======
Weighted average shares outstanding........... 49,314 48,432 42,065 41,475 41,356
======== ======== ======== ======== =======
Diluted earnings (loss) per share............. $ 0.04 $ (0.82) $ 0.09 $ 0.28 $ 0.31
======== ======== ======== ======== =======
Weighted average shares outstanding........... 50,215 48,432 42,390 42,136 41,545
======== ======== ======== ======== =======
OTHER DATA:
Earnings before interest, taxes, depreciation
and amortization ("EBITDA"), as
adjusted(5)................................. $ 44,635 $ 58,034 $ 33,260 $ 25,043 $23,201
======== ======== ======== ======== =======
CASH FLOW DATA:
Net cash from operating activities............ $ 16,742 $ 30,256 $ 12,321 $ 15,819 $18,086
======== ======== ======== ======== =======
Net cash used in investing activities......... (36,626) (99,932) (13,824) (14,905) (12,394)
======== ======== ======== ======== =======
Net cash from (used in) financing
activities.................................. 38,834 72,832 (2,999) (2,406) (712)
======== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 70,157 $ 60,007 $ 45,727 $ 45,363 $35,411
Total assets.................................. 270,773 194,911 107,877 91,241 77,783
Long-term debt, including current portion..... 128,259 82,000 1,135 2,039 3,821
Stockholders' equity.......................... 88,247 80,236 87,605 76,084 63,326
</TABLE>
12
<PAGE> 14
- ---------------
(1) During 1998, includes $4.6 million in damages awarded to Experian
Information Solutions, Inc. in connection with arbitration of a contractual
dispute.
(2) Includes the following acquisition related charges: 1) charges related to
purchases in-process research and development costs associated with the
acquisitions of Walter Karl, Inc. of $3.8 million (1998), DBA Holdings, Inc.
("DBA") of $49.2 million (1997), Pro CD of $4.3 million (1997), and Digital
Directory Assistance, Inc. of $10.0 million (1996), and 2) the change in
1996 in estimated useful lives based on management's evaluation of the
remaining lives of certain intangibles related to acquisitions prior to 1995
of $11.5 million.
(3) Includes in 1998 the following restructuring charges: 1) $3.0 million of
costs associated with the Company's bid to acquire Metromail Corporation, 2)
$0.7 million associated with the Company's offering to sell Class A Common
Stock which was not completed, 3) $1.4 million for restructuring costs
related to the Company's compilation and sales activities for new
businesses, and 4) $1.2 million for restructuring costs related to certain
costs reduction measures enacted by the Company. Includes in 1997
restructuring costs of $2.6 million associated with the acquisitions of DBA
and Pro CD.
(4) During 1995, the Company sold American Business Communications for $3.0
million in the form of a non-recourse promissory note. In 1996 the Company
recorded a loss of $1.4 million attributable to the default by the purchaser
on the non-recourse promissory note delivered to the Company in this
transaction.
(5) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to
exclude depreciation, amortization of intangible assets, provision for
litigation settlement and acquisition-related and restructuring charges.
EBITDA is presented because it is a widely accepted indicator of a company's
ability to incur and service debt and of the Company's cash flows from
operations excluding any non-recurring items. However, EBITDA, as adjusted,
does not purport to represent cash provided by operating activities as
reflected in the Company's consolidated statements of cash flows, is not a
measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP.
Also, the measure of EBITDA, as adjusted, may not be comparable to similar
measures reported by other companies.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading provider of business and consumer marketing
information products and data processing services that assist its clients in
finding new customers and generating new business. The Company's key assets
include a proprietary database of over 11 million businesses and a consumer
database of over 115 million households and over 195 million individuals in the
United States and Canada, which the Company believes are the most comprehensive
and accurate available. The Company leverages these key assets by selling a wide
range of information products and data processing services through multiple
distribution channels primarily to small and medium-size businesses and also to
consumers and large corporations.
Sales lead generation products, data processing services and consumer
CD-ROM products accounted for 64%, 27% and 9%, respectively, of the Company's
net sales for 1998. Historically, the Company's revenue has been derived
predominantly through the sale of its sales lead generation products. The
Company began to recognize significant revenue from its data processing services
in 1997, revenue from its consumer CD-ROM products increased substantially
between 1993 and 1997, and the Company began to recognize significant list
brokerage revenue during 1998 with the acquisition of Walter Karl and JAMI
Marketing Services. The Company estimates that no customer represented greater
than approximately 6% of net sales in 1998.
The Company's net sales are generated from the sale of its products and
services and the licensing of its data to third parties. Revenue from the sale
of products and services is generally recognized when the product is delivered
or the services are performed. Generally, a majority of revenue from data
licensing is recognized at the time the initial set of data is delivered, with
the remaining portion being deferred and recognized over the license term as the
Company provides updated information. The Company's operating expenses are
determined in part based on the Company's expectations of future revenue growth
and are substantially fixed in the short term. As a result, unexpected changes
in revenue will have a disproportionate effect on financial performance in any
given period. The Company's database and production costs are generally expensed
as incurred and relate principally to maintaining, verifying and updating its
databases, fulfilling customer orders and the direct costs associated with the
production of CD-ROM titles. Costs to develop new databases are capitalized by
the Company and amortized upon the successful completion of the databases over a
period ranging from one to five years. Selling, general and administrative
expenses consist principally of salaries and benefits associated with the
Company's sales force as well as costs associated with its catalogs and other
promotional materials.
The Company had previously made certain disclosures relative to the
continuing results of operations of acquired companies where appropriate and
possible, although the Company has in the case of all acquisitions since 1996,
immediately integrated the operations of the acquired companies into existing
operations of the Company. Generally, the results of operations for these
acquired activities are no longer separately accounted for from existing
activities. The Company cannot report on the results of operations of acquired
companies upon completion of the integration as the results are "blended-in"
with existing results. Additionally, upon integration of acquired operations,
the Company frequently combines acquired products or features with existing
products, and experiences significant cross-selling of products between business
units, including sales of acquired products by existing business units and sales
by acquired business units of existing products. Due to recent and potential
future acquisitions, future results of operations will not be comparable to
historical data. While the results cannot be accurately quantified, acquisitions
have had a significant impact on net sales.
Since 1996, database and production costs have increased as a percentage of
net sales as a result of higher costs associated with data processing services
and CD-ROM production. To the extent that data processing and CD-ROM sales
constitute a greater percentage of net sales, the Company expects database and
production costs to increase as a percentage of net sales in the future.
During the last two quarters of 1997 and the first three quarters of 1998,
the Company built infrastructure for continued growth and increased sales and
heightened its investment in general sales operations, field sales operations,
development of new products and services, and direct marketing activities. As a
result, selling, general and administrative expenses increased substantially
between 1997 and 1998, and constituted a greater percentage of net sales. See
the discussion of selling, general and administrative expenses in "Results of
Operations" for additional information related to these costs.
14
<PAGE> 16
The Company has supplemented its internal growth through strategic
acquisitions. The Company has completed nine acquisitions since mid-1996.
Through these acquisitions, the Company has increased its presence in the
consumer marketing information industry, greatly increased its ability to
provide data processing solutions, added two consumer CD-ROM product lines,
increased its presence in list management and list brokerage services and
broadened its offerings of business marketing information. The following table
summarizes these acquisitions:
<TABLE>
<CAPTION>
TRANSACTION
VALUE
ACQUIRED COMPANY KEY ASSET DATE ACQUIRED (IN MILLIONS)(1)
- ---------------- --------- ------------- ----------------
<S> <C> <C> <C>
Digital Directory Assistance Consumer CD-ROM Products August 1996 $ 17
County Data Corporation New Businesses Database November 1996 $ 11
Marketing Data Systems Data Processing Services November 1996 $ 3
BJ Hunter Canadian Business Database December 1996 $ 3
DBA Consumer Database and Data February 1997 $105
Processing Services
Pro CD Consumer CD-ROM Products August 1997 $ 18
Walter Karl Data Processing and List March 1998 $ 18
Management Services
JAMI Marketing List Management Services June 1998 $ 13
Contacts Target Marketing Canadian Business Database July 1998 $ 1
</TABLE>
- ---------------
(1) Transaction value includes total consideration paid including cash paid,
debt issued and stock issued plus long-term debt repaid or assumed at the
date of acquisition plus, in the case of DBA, a subsequent purchase price
adjustment in October 1997.
The Company incurred acquisition-related charges to operations, consisting
of the write-off of acquired in-process research and development and other
restructuring charges of an aggregate of approximately $21.5 million in 1996 in
connection with the acquisition of Digital Directory Assistance and the change
in estimated useful lives of certain intangibles related to acquisitions prior
to 1995, $56.1 million in 1997 in connection with the acquisitions of the DBA
and Pro CD and $10.1 million in 1998 in connection with the acquisitions of
Walter Karl and for certain other acquisition-related and restructuring charges.
In addition, the Company expects to amortize goodwill and other intangibles over
periods of 1 to 15 years in connection with acquisitions completed since
mid-1996. The Company's results for 1997 do not include the operations of Walter
Karl or JAMI Marketing. In connection with future acquisitions, the Company
expects that it will be required to incur additional acquisition-related charges
to operations and to amortize additional amounts of goodwill and other
intangibles over future periods. While there are currently no binding
commitments with respect to any particular future acquisitions, the Company
frequently evaluates the strategic opportunities available to it and intends to
pursue strategic acquisitions of complementary products, technologies or
businesses that it believes fit its business strategy.
15
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statement of operations data expressed as a percentage of net
sales. The amounts and related percentages may not be fully comparable due to
the acquisition of Digital Directory Assistance (DDA) in August 1996, County
Data Corporation (CDC) and Marketing Data Systems in November 1996, BJ Hunter in
December 1996, the Database America Companies (DBA) in February 1997, Pro CD in
August 1997, Walter Karl in March 1998 and JAMI Marketing Services (JAMI) in
June 1998:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... 100% 100% 100%
Costs and expenses:
Database and production costs............................. 29 29 27
Selling, general and administrative....................... 51 41 42
Depreciation and amortization............................. 12 18 5
Provision for litigation settlement....................... 2 -- --
Acquisition-related charges............................... 4 29 20
------ ------ ------
Total costs and expenses.......................... 98 117 94
------ ------ ------
Operating income (loss)..................................... 2 (17) 6
Other income, net........................................... 2 -- 2
------ ------ ------
Income (loss) before income taxes and discontinued
operations................................................ 4 (17) 8
Income taxes................................................ 3 4 3
------ ------ ------
Income (loss) from continuing operations.................... 1 (21) 5
Loss on discontinued operations and abandonment of
subsidiary................................................ -- -- 1
------ ------ ------
Net income (loss)........................................... 1% (21)% 4%
====== ====== ======
EBITDA, as adjusted(1)...................................... 20% 30% 31%
====== ====== ======
OTHER DATA:
SALES BY PRODUCT GROUP:
Sales Lead Generation Products............................ $146.9 $128.9 $ 89.8
Data Processing Services.................................. 62.3 42.7 4.6
Consumer CD-ROM Products.................................. 19.5 21.7 13.9
------ ------ ------
Total............................................. $228.7 $193.3 $108.3
====== ====== ======
SALES BY PRODUCT GROUP AS A PERCENTAGE OF NET SALES:
Sales Lead Generation Products............................ 64% 67% 83%
Data Processing Services.................................. 27 22 4
Consumer CD-ROM Products.................................. 9 11 13
------ ------ ------
Total............................................. 100% 100% 100%
====== ====== ======
</TABLE>
- ---------------
(1) "EBITDA, as adjusted," is defined as operating income (loss) adjusted to
exclude depreciation, amortization of intangible assets, provision for
litigation settlement and acquisition-related and restructuring charges.
EBITDA, as adjusted, is presented because it is a widely accepted indicator
of a company's ability to incur and service debt and of the Company's cash
flows from operations excluding any non-recurring items. However, EBITDA, as
adjusted, does not purport to represent cash provided by operating
activities as reflected in the Company's consolidated statements of cash
flows, is not a measure of financial performance under generally accepted
accounting principles ("GAAP") and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
GAAP. Also, the measure of EBITDA, as adjusted, may not be comparable to
similar measures reported by other companies.
16
<PAGE> 18
1998 COMPARED TO 1997
Net Sales
For 1998 net sales were $228.7 million, a 18% increase from $193.3 million
in 1997. Net sales of sales lead generation products for 1998 were $146.9
million, a 14% increase from $128.9 million in 1997. Factors contributing to an
increase in net sales of sales lead generation products included: the
enhancement of existing and development of new sales lead generation products,
the increase in the number of mailing pieces mailed from 30.0 million during
1997 to 38.7 million during 1998 and the acquisitions of Walter Karl in March
1998 and JAMI in June 1998. During 1998, the Company entered into Internet
licensing agreements totaling approximately $7.8 million compared to $4.8
million in 1997.
Net sales of data processing services for 1998 were $62.3 million, a 45%
increase from $42.7 million for 1997. The increase is principally the result of
the acquisition of the DBA in February 1997 and Walter Karl in March 1998. The
Company recorded sales to a significant data processing services customer
totaling $14.6 million during 1998, representing 6% of total net sales. Sales to
this customer occurred evenly during the year. During 1998, the customer
notified the Company that it intends to perform the same processing in-house. As
a result, sales of data processing services in 1999 may decline from 1998
levels.
Net sales of consumer CD-ROM products for 1998 were $19.5 million, an 11%
decrease from $21.7 million for 1997. The decrease in consumer CD-ROM product
net sales reflects an increase in estimates for reserves of $2.7 million during
1998 related to product returns. Due to a decline in general market conditions
and demand for the product, the Company experienced significant product returns
during the second and third quarters of 1998. Therefore the reserve for returns
was adjusted accordingly. The change in the reserve for returns related
primarily to sales that occurred during the second and third quarters of 1998.
The decline in market conditions and demand for the product have continued to
remain low therefore sales are expected to remain at a decreased level.
Database and Production Costs
For 1998, database and production costs were $66.3 million, or 29% of net
sales, compared to $55.1 million, or 29% of net sales for 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 were $117.7 million,
or 51% of net sales, compared to $80.2 million, or 41% of net sales for 1997.
The increase in selling, general and administrative expenses, representing 10%
of net sales, is principally the result of the following items: 1) increase in
estimates for reserves for bad debts of $3.5 million, 2) increase in estimates
for reserves related to price protection and cooperative advertising for
consumer CD-ROM products of $5.3 million, 3) decrease in estimated benefit
period related to deferred advertising costs of $2.7 million, and 4) $0.6
million related to executive severance costs. The charges described above
accounted for approximately one-half of the increase in selling, general and
administrative expenses, expressed as a percentage of net sales.
During late 1997 and early 1998, the Company ramped-up its sales force
anticipating a targeted incremental increase in net sales. The Company
subsequently did not achieve the targeted incremental increase in net sales.
During the third quarter of 1998, the Company enacted certain cost reduction
measures as described in the section "Acquisition-related and Restructuring
Charges" to counter prior measures taken. Salaries and wages principally related
to the sales force accounted for approximately one-half of the increase in
selling, general and administrative expenses, expressed as a percentage of net
sales.
Due to a decline in general market conditions and demand for the consumer
CD-ROM product, the Company experienced significant product returns during the
second and third quarters of 1998. In addition, the Company issued additional
price protection due to the decline in demand. The change in reserve related
primarily to sales of consumer CD-ROM products that occurred during the second
and third quarters of 1998.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for 1998 were $27.5 million, or 12%
of net sales, compared to $34.4 million, or 18% of net sales for 1997.
Amortization of acquired database costs and purchased data processing
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software associated with the acquisition of the DBA in February 1997 totaled
$6.3 million and $21.7 million for 1998, and 1997, respectively.
Excluding amortization on acquired database costs and purchased data
processing software associated with the acquisition of DBA in February 1997,
depreciation and amortization expenses were $21.1 million and $12.7 million for
1998 and 1997, respectively. The increase relates primarily to amortization of
intangibles for acquisitions recorded since June 1997, including Pro CD in
August 1997, Walter Karl in March 1998, and JAMI in June 1998.
Provision for Litigation Settlement
The Company recorded a provision for litigation settlement of $4.5 million,
or 2% of net sales, during the third quarter of 1998 related to a dispute
centered around a license agreement between DBA and Experian Information
Solutions, Inc. prior to the Company's acquisition of DBA in February 1997.
Acquisition-Related and Restructuring Charges
For 1998, in addition to the write-off of purchased in-process research and
development costs (purchased IPR&D) of $3.8 million for Walter Karl, included in
acquisition-related charges in the accompanying consolidated statement of
operations are: $3.0 million of costs associated with the Company's bid to
acquire Metromail Corporation, $0.7 million associated with the Company's
offering to sell Class A Common Stock which was not completed, $1.4 million for
restructuring costs related to the Company's compilation and sales activities
for new businesses enacted during the first quarter of 1998, and $1.2 million
for restructuring costs related to certain cost reduction measures enacted
during the third quarter of 1998.
These acquisition-related charges totaled $10.1 million, and represented 4%
of net sales during 1998. As part of the acquisition of the Database America
Companies in February 1997 and Pro CD in August 1997, the Company recorded
charges totaling $56.1 million, or 29% of net sales, during 1997 for the
write-off of purchased IPR&D as well as other related integration and
organizational restructuring costs.
Acquisition-Related Charges
The purchased IPR&D recorded in connection with the acquisition of Walter
Karl consisted of various projects, of which none were individually significant,
related to areas including: Internet capabilities, automated job cards and
shipping information, database and merge/purge processing enhancements, list
brokerage and management order and data entry systems. There were a total of 12
separately identified projects.
The total amount allocated to the above IPR&D projects was $3.8 million
after retroactive application of the Securities and Exchange Commission's new
guidelines for valuing purchased IPR&D.
The stage of completion was determined based on the analysis of the
completion plan for each of the projects. For each of the projects, the
completion plan was laid out in terms of beta release date, new lines of code,
total anticipated person-years and total invested person years to date. To
compute the stage of completion the ratio of person years already spent to total
person years to finish the product was calculated. In the aggregate the stage of
completion was computed to be 52%.
The revised valuation of the IPR&D addresses the matters cited by Lynn
Turner, Chief Accountant of the Securities and Exchange Commission in his letter
to the American Institute of Certified Public Accountants dated October 9, 1998.
The revised valuation excludes the projected cash flows from uncompleted
portions of the in-process research and development, and eliminates a "relief
from royalty approach" which had previously included value attributed to future
versions of the IPR&D.
At the date of acquisition, a total of 4.8 man years had been invested on
in-process projects while the estimated total investment was 9.15 man years, and
estimated 4.35 man years remained to complete the projects. The valuation used
the target company workforce, salary and benefits data to convert this into
dollars. Accordingly, the estimated cost to complete the projects was
approximately $0.2 million. The total cost of the projects prior to the
acquisition was $0.2 million.
The IPR&D related to various projects of which certain projects have been
completed and the Company is receiving benefits associated with these projects
and certain projects are still in process of development.
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None of the 12 projects were determined to be individually significant.
Without the successful completion of the remaining development efforts, the end
result would be to fail to introduce new products.
IPR&D was a critical factor for the Company in making this acquisition and
timely completion of these projects was an equally important consideration. On
time completion was expected to give the Company a competitive edge in its
field. All IPR&D projects had planned features that could preempt the
competition and solidify its position as a leader in the business-to-business
marketing information field. A major risk of not completing these projects
timely, would be the risk of losing customers on a medium to long term basis and
allow a competitor to provide a solution that may include these technically
advanced and value added features.
Restructuring Charges
During the first quarter of 1998 the Company recorded a restructuring
charge of $1.4 million related to the closing of the CDC new business
compilation and sales center and moving these operations from Vermont to
Nebraska. All 45 of the CDC employees were terminated, and severance recorded
totaled $0.6 million. The restructuring charges also included lease termination
costs of $0.3 million and a write-off of $0.5 million of leasehold improvement
costs associated with the closed Vermont facility. The restructuring, including
recording the payments and write-downs described, was completed by September 30,
1998.
During the third quarter of 1998 the Company recorded a restructuring
charge of $1.2 million which included $0.6 million in severance for 244
employees terminated as a result of the implementation of certain cost reduction
measures. These employees were primarily in support and administration positions
but some under-performing sales personnel were also terminated. The
restructuring charges also included $0.4 million related to the planned closing
of four field sales offices. Additionally, the Company recorded a write-down of
$0.2 million related to leasehold improvement costs at facilities leased by the
Company which were being closed. The restructuring, including recording the
payments and write-downs described, was completed as of December 31, 1998, with
the exception of the costs totaling $0.4 million related to the planned exit of
certain field sales offices which are anticipated to be completed by March 31,
1999.
Operating Income (Loss)
Including the factors previously described, the Company had operating
income of $2.6 million, or 2% of net sales for 1998, as compared to an operating
loss of $(32.5) million, or (17)% of net sales for 1997.
Other Income (Expense), Net
Other income (expense), net for 1998 and 1997 was $5.5 million and $(0.4)
million, respectively. During the second quarter of 1998, the Company realized a
gain of $16.5 million on the disposition of its holdings in Metromail
Corporation common stock. This realized gain was partially offset during the
second quarter of 1998 when the Company recorded a loss of $2.0 million on the
write-off of an investment. During the first quarter of 1997, the Company made
an investment of $2.0 million in preferred stock of an issuer, representing less
than 20% of the issuer's outstanding stock. During 1998 the issuer commenced a
reorganization and sought funding from other outside investors, diluting the
Company's investment in this entity to a nominal value. Additionally, the
Company obtained knowledge that the issuer was incurring significant losses and
the intended line of business of this start-up entity had significantly changed.
Accordingly, the Company wrote-off this investment, which was accounted for on a
cost basis, during the second quarter of 1998.
Income Taxes
A provision for income taxes of $5.9 million and $7.0 million was recorded
for 1998, and 1997, respectively. Acquisition-related charges of $3.8 million
and $49.2 million were included in income before income taxes during 1998 and
1997, respectively, but are not deductible for tax purposes. The provision for
these periods also reflect the inclusion of amortization on certain intangibles
in taxable income not deductible for tax purposes.
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EBITDA, as adjusted
Excluding the provision for litigation settlement and acquisition-related
and restructuring charges previously described, the Company's EBITDA, as
adjusted, was $44.6 million, or 20% of net sales, during 1998, compared to $58.0
million, or 30% of net sales, during 1997.
1997 COMPARED TO 1996
Net Sales
Net sales for 1997 were $193.3 million, a 79% increase from $108.3 million
in 1996. Of this increase, approximately $54.4 million were attributable to the
net sales of DBA for the period from February 1, 1997, the date of acquisition,
through December 31, 1997. In addition, net sales in 1996 and 1997 also
increased as a result of acquisitions completed in the third and fourth quarters
of 1996.
Net sales of sales lead generation products for 1997 were $128.9 million, a
44% increase from $89.7 million in 1996. Excluding the effect of acquisitions
completed after July 1996, net sales of sales lead generation products for 1997
were $106.8 million, a 19% increase from 1996. Net sales of sales lead
generation products attributable to acquired companies and included in 1997 were
approximately $22.0 million, or 17% of net sales.
Net sales of data processing services for 1997 were $42.7 million, as
compared to $4.6 million in 1996. This increase is directly attributable to the
acquisitions of DBA and Marketing Data Systems.
Net sales of consumer CD-ROM products for 1997 were $21.7 million, a 56%
increase from $13.9 million in 1996. This increase was primarily attributable to
the acquisitions of Digital Directory Assistance in August 1996 and Pro CD in
August 1997.
Database and Production Cost
Database and production costs for 1997 were $55.1 million, an 88% increase
from $29.3 million in 1996. These costs constituted 29% of net sales in 1997 and
27% of net sales in 1996. The increase as a percentage of net sales was the
result of higher database and production costs associated with sales of data
processing services and CD-ROM products. As previously noted, net sales of data
processing services for 1997 were $42.7 million, as compared to $4.6 million in
1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1997 were $80.2 million, a
75% increase from $45.8 million in 1996. These expenses constituted 41% of net
sales in 1997 and 42% as a percentage of net sales in 1996. This decrease as a
percentage of net sales was the result of the increase in net sales of data
processing services from 4% of total net sales in 1996 to 22% of total net sales
in 1997. Since 1996, the overall increase in selling, general and administrative
expenses as a percentage of net sales has been offset by the overall increase in
the sales of data processing services and CD-ROM products, which bear a slightly
lower selling, general and administrative cost margin than the same margin
associated with the net sales of sales lead generation products.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for 1997 were $34.4 million, as
compared to $4.9 million in 1996. These expenses constituted 18% of net sales in
1997, and 5% of net sales in 1996. Of such increases, $21.7 million represented
amortization of acquired database costs and purchased data processing costs
related to the acquisition of DBA, which are being amortized over lives of one
or two years. The remaining increase reflects additional depreciation on
property and equipment additions and amortization of intangibles for certain
other acquisitions recorded since July 1996.
Acquisition-Related and Restructuring Charges
As part of the acquisition of Digital Directory Assistance in August 1996,
the Company recorded charges of $10.0 million in 1996 for purchased in-process
research and development costs. Additionally, in September 1996, the Company
recorded a charge of $11.5 million due to the change in estimated useful lives
based on management's
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evaluation of the remaining lives of certain intangibles related to acquisitions
made prior to 1995. These acquisition-related charges constituted $21.5 million,
or 20%, of net sales in 1996.
As part of the acquisition of DBA in February 1997 and Pro CD in August
1997, the Company recorded charges totaling $56.1 million, or 29% of net sales,
in 1997 for purchased in-process research and development costs as well as other
related integration and organizational restructuring costs.
Acquisition-Related Charges
The Company incurred significant acquisition-related charges in 1996 and
1997 related to purchased IPR&D costs associated with the DDA acquisition in
1996 and the DBA and Pro CD acquisitions in 1997. A portion of the purchase
price for these acquisitions was attributed to the value of the IPR&D projects
and was expensed in accordance with Statement of Financial Accounting Standards
(SFAS) No. 2 "Accounting for Research and Development Costs." The Company
believes its accounting for purchased IPR&D was made in accordance with
generally accepted accounting principles and valuation practices at the time of
the related acquisitions.
The Company obtained independent valuations of the purchased IPR&D. The
income valuation approach was used to determine the fair value of the IPR&D
projects acquired from DDA, DBA and Pro CD. Under the income approach, the fair
value reflects the present value of the projected cash flow that will be
generated by the IPR&D projects if successfully completed. The income approach
focuses on the income producing capability of the acquired IPR&D, which the
Company believes represents the present value of the future economic benefits
expected to be potentially derived from these projects. As of the valuation
dates, the acquired IPR&D projects had not demonstrated technological nor
economic feasibility. As a result, the attainability of the income projections
is subject to project risk, product risk and market risk. These risks reflect
the technical difficulty in completing scheduled tasks, any issues with the
ability to provide a high quality product with consistent and reproducible
results, and the risk that the ultimate delivery of projects in process will be
supplanted by competition or new end-user requirements. Accordingly, a discount
of from 24% to 30% was applied to reflect the risk associated with the projected
cash flow to be generated by the acquired IPR&D projects. The stage of
completion of the projects is not used in the determination of the value of
IPR&D under a discounted cash flow approach. However, the remaining costs to
complete each product were subtracted from the corresponding projected profits,
thereby intrinsically incorporating the level of completion effort.
The purchased IPR&D projects associated with the DDA, DBA and Pro CD
acquisitions are as follows:
DDA (1996) -- The projects under development by DDA involve Digital
Video Disk-Read Only Memory (DVD-ROM) based information database
technology. The value of the technology as applied to DDA's PhoneDisc
product was $3.8 million and as applied to the Company's products was $6.2
million.
DBA (1997) -- The projects under development by DBA involve data
processing technologies including merge/purge and update and maintenance
capabilities of the relational databases and interactive media technology
to allow DBA to provide existing services via the Internet. The value of
the data processing technologies was $2.3 million and the value of the
interactive media technology was $46.9 million.
Pro CD (1997) -- The projects under development by Pro CD involve
graphical user interface technology, data enhancements, DVD capability and
Year 2000 compliance for the Select Phone product line. The value of these
projects was $4.3 million.
A major risk of not completing these projects timely, would be the risk of
losing customers on a medium to long term basis and allow a competitor to
provide a solution that may include these technically advanced and value added
features.
Restructuring Charges
Included in acquisition-related charges for 1997 are $2.6 million of
expenses related to integrating acquired operations into the Company's existing
operations. These expenses consisted primarily of costs such as travel between
the Company and the new operations, consulting, payroll and other expenses
related to implementing Company policies and information systems at the new
locations. All costs had been incurred by December 31, 1997.
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Change in Estimated Lives
As a consequence of changes in the Company's acquisition strategy in 1996,
management performed an evaluation of the remaining lives of certain intangibles
related to acquisitions prior to 1995. Based on this evaluation, it was evident
that the business and distribution networks acquired changed more rapidly than
was originally estimated. Therefore, the estimated useful lives of the related
goodwill and distribution networks were revised to 8 and 2 years, from 30 and 15
years, respectively. This change in estimated lives resulted in a charge of
$11.5 million in 1996. Net income and earnings per share for 1996 were reduced
due to the charge by $7.1 million and $0.17, respectively. Additionally, future
annual amortization is expected to increase over the prior annual amortization
amounts by approximately $672,000 through 1998.
Operating Income (Loss)
As a result of the factors previously described, the Company had an
operating loss of $(32.5) million, or (17)% of net sales in 1997, as compared to
operating income of $6.9 million, or 6% of net sales in 1996. Excluding the
effect of the amortization and acquisition-related charges previously described,
the Company would have had operating income of $45.3 million, or 24% of net
sales, in 1997, and operating income of $28.4 million, or 26% of net sales, in
1996.
Other Income (Expense), Net
Other income (expense), net for 1997 was $(0.4) million, as compared to
$2.0 million in 1996. This decrease was primarily attributable to interest
expense incurred on a revolving credit facility, of which $78.0 million was
outstanding at December 31, 1997. The Company did not have a credit facility at
December 31, 1996.
Income Taxes
A provision for income taxes of $7.0 million and $3.4 million was recorded
for 1997 and 1996, respectively. A provision was recorded on a pretax loss in
1997 due to non-deductible acquisition related charges and amortization of
certain intangibles.
EBITDA, As Adjusted
The Company's EBITDA, as adjusted, was $58.0 million or 30% of net sales in
1997, and $33.3 million or 31% of net sales in 1996. Including
acquisition-related charges previously described, the Company had EBITDA, as
adjusted, of $1.9 million, or 1% of net sales in 1997, as compared to EBITDA, as
adjusted, of $11.8 million, or 11% of net sales in 1996.
YEAR 2000 READINESS DISCLOSURE
In 1996 the Company began preparing its computer-based systems for Year
2000 ("Y2k") computer software compliance. The Company's Y2k project covers both
traditional computer based systems and infrastructure ("IT Systems") and
computer based facilities and equipment ("Non IT Systems"). The Company's
project has six phases: Inventory, Assessment, Renovation, Testing,
Implementation and contingency Planning.
The Company has completed an inventory and assessment of its IT Systems.
Some of these systems are fully compliant, while others require fixes to be
applied. The Company expects to correct the remaining non-compliant IT Systems
by replacing or correcting them as a part of a larger infrastructure improvement
effort. Infrastructure improvements are ongoing and will continue throughout
1999. The Company has completed an inventory and assessment of its NON-IT
Systems, some of which will be affected by the millennium rollover. Not all
affected systems require fixes; some are inconsequential or have nuisance
affects and will not be addressed. The Company expects to replace critical
non-compliant NON-IT Systems by the end of the year.
The Company's Y2k project also considers the readiness of critical vendors.
The Company believes that the most reasonable worst case Y2k scenario is that a
small number of vendors will be unable to supply goods for a short time after
January 1, 2000. Contingency plans are being developed in the event that
critical vendors suffer from Y2k problems from their internal systems or their
suppliers systems. Although these plans are yet to be completed, the Company
expects that these plans may include a combination of actions including
stockpiling of goods and selective resourcing of business to Y2k compliant
vendors.
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The Company has incurred approximately $2.75 million of Y2k cost. These
costs fall into three categories: 1) systems replacement, 2) specific Y2k
assessment effort, and 3) expense cost of Y2k Project office. Future expenses
are estimated to include approximately $3.0 million of additional cost. These
future costs are expected to be primarily replacement system costs. Such cost
estimates are based upon presently available information and may change as the
Company continues with its Y2k project. The Company anticipates paying for its
Y2k compliance plan from operating cash flows.
The above discussion regarding costs, risks and estimated completion dates
for Y2k compliance is based on the Company's best estimates given information
that is currently available, and is subject to change. Actual costs may
substantially exceed the Company's assessment due to unanticipated Y2k problems
associated with the Company's IT and non-IT systems and products. Further,
failure of the Company's vendors and customers to address Y2k problems in a
timely manner may have a greater adverse affect on the Company's business than
presently expected.
ACCOUNTING STANDARDS
Statement of Financial Accounting Standard (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities" was issued in June of 1998. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives either assets or liabilities in the statement of financial position
and measure those instruments at fair value. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
anticipates adopting this accounting pronouncement in 2000; however, management
believes it will not have a significant impact on the Company's consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company's principal sources of liquidity
included cash and cash equivalents of $29.6 million and marketable securities
with a fair market value of $20.6 million. As of December 31, 1998, the Company
had working capital of $70.2 million.
The Company terminated its revolving credit facility with First Union
National Bank during July 1998.
Net cash provided by operating activities during 1998 totaled $16.7
million. The Company spent $20.6 million related to property additions during
the same period. The Company completed construction in August 1998 of a new
facility for the consumer and business database compilation division located in
Papillion, Nebraska, at a cost of approximately $10.0 million.
During 1998, the Company paid a total of $31.7 million, net of cash
received, in connection with the acquisitions of Walter Karl, JAMI and Contacts
Target Marketing, respectively. See the Notes to the Consolidated Financial
Statements for additional information related to these acquisitions.
During May 1998, the Company recorded a realized gain on the disposition of
its holdings in the common stock of Metromail Corporation of $16.5 million. The
Company recorded gross proceeds on the disposition of the Metromail Corporation
common stock of $34.2 million.
Total accrued expenses increased from $5.4 million at December 31, 1997 to
$12.5 million at December 31, 1998 due to: 1) during the third quarter of 1998,
the Company recorded a provision for litigation settlement of $4.5 million, 2)
during the first quarter of 1998, the Company recorded as part of the purchase
of Walter Karl an accrual related to the integration of acquired operations into
existing operations of $6.8 million, of which a balance of $4.4 million remained
at December 31, 1998, and 3) during the third quarter of 1998, the Company
recorded restructuring costs totaling $1.2 million related to certain cost
reduction measures enacted by the Company, of which a balance of $0.5 million
remained at December 31, 1998.
Total long-term debt increased from $82.0 million at December 31, 1997 to
$128.3 million at December 31, 1998 due to: 1) The Company purchased Walter Karl
in March 1998 for total consideration of approximately $19 million, which was
funded using an existing revolving credit facility, and 2) the Company's sale of
its senior subordinated notes resulted in gross proceeds of $115 million, of
which the Company utilized approximately $87 million to pay-off other
outstanding debt obligations.
The Company believes that its existing sources of liquidity and cash
generated from operations, assuming no major acquisitions, will satisfy the
Company's projected working capital and other cash requirements for at least the
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next 12 months. To the extent the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash.
Any such future growth and any acquisitions of other technologies, products or
companies may require the Company to obtain additional equity or debt financing,
which may not be available, may be dilutive or may be restricted by the
Company's existing debt obligations.
FACTORS THAT MAY AFFECT OPERATING RESULTS
Integration of Recent and Future Acquisitions
Since mid-1996, the Company has completed eight significant acquisitions,
including the August 1996 acquisition of Digital Directory Assistance, the
November 1996 merger with County Data Corporation and acquisition of Marketing
Data Systems, the December 1996 acquisition of BJ Hunter, the February 1997
merger with Database America ("DBA"), the August 1997 acquisition of Pro CD, the
March 1998 acquisition of Walter Karl and the June 1998 acquisition of JAMI
Marketing. The Company also made a number of other acquisitions in prior
periods. In March 1998, the Company attempted to acquire Metromail Corporation
("Metromail") for approximately $850.0 million, including the assumption of
debt, and may in the future evaluate other acquisitions of that magnitude. The
Company's strategy includes continued growth through acquisitions of
complementary products, technologies or businesses, which, if implemented, may
result in the diversion of management's attention from the day-to-day operations
of the Company's business and may include numerous other risks, including
difficulties in the integration of operations, databases, products and
personnel, difficulty in applying the Company's internal controls to acquired
businesses and particular problems, liabilities or contingencies related to the
businesses being acquired. To the extent that efforts to integrate recent or
future acquisitions fail, there could be a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company has not made any binding commitments with respect to any particular
future acquisitions, the Company frequently evaluates the strategic
opportunities available to it and intends to pursue opportunities that it
believes fit its business strategy.
Recent Changes in Senior Management
The Company has recently undergone significant changes in its senior
management team, even as it has experienced rapid growth both internally and
through acquisitions. Vinod Gupta, the Company's Chairman, was re-appointed
Chief Executive Officer in July 1998, having resigned that position in October
1997. Scott Dahnke, Chief Executive Officer from October 1997, Jon Wellman,
President and Chief Operating Officer since January 1997 and Chief Financial
Officer from January 1995 to January 1997, Steve Purcell, Chief Financial
Officer since April 1997, Rick Puckett, Controller of the Company since October
1997 and Chief Financial Officer after Mr. Purcell's departure, Gregory Back,
Executive Vice President of Corporate Planning and Business Development since
October 1997 and Kevin Hall, Senior Vice President of Special Projects since
October 1997 ceased their employment with the Company between July and September
1998. Gautam Gupta, a director of the Company who is unrelated to Vinod Gupta,
served as acting Chief Financial Officer from October 1998 to January 1999.
Stormy Dean, the Company's controller, has served as acting Chief Financial
Officer since January 1999 while the Company conducts a search for his permanent
replacement. Messrs. Dahnke, Wellman, Purcell, Puckett, Back and Hall did not
resign because of any disagreements with the Company's Board or other senior
management, and much of the Company's remaining senior management team has been
with the Company for many years. The Company has now ogetbeen reorganized into
three major groups headed by group presidents. Al Ambrosino, who has been with
the Company or its subsidiary for 19 years, Monica Messer, who has been with the
Company for 16 years, and William Chasse, who has been with the Company for 11
years, have each been named group president. In the past, limitations on senior
management resources resulted in a few key individuals taking on multiple roles
and responsibilities in the Company, which in turn placed a significant strain
on the Company's senior management. Failure of the Company to identify and hire
a permanent Chief Financial Officer on a timely basis or failure of Company's
senior management to adjust to new responsibilities, manage growth or work
together effectively could result in disruptions of operations or the departure
of additional key personnel, which in turn could have a material adverse effect
on the Company's business, financial condition, results of operations and stock
price.
Fluctuations in Operating Results
The Company believes that future operating results will be subject to
quarterly and annual fluctuations, and that long term growth will depend upon
the Company's ability to expand its present business and complete strategic
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acquisitions. The Company's net sales on a quarterly basis can be affected by
seasonal characteristics and certain other factors. For example, the Company
typically experiences higher revenue from its sales leads products in the fall
of each year due to increases in direct marketing by the Company's clients in
the fourth quarter of each year. Revenue from sales lead generation products is
generally lower in the summer due to decreased direct marketing activity of the
Company's customers during that time. The Company typically experiences
decreases in net sales of consumer CD ROM products just prior to the
introduction of new editions of these products. This effect, coupled with the
changes in estimates outlined below, resulted in a decline in consumer CD ROM
net sales in the three months ended September 30, 1998 compared to the prior
year period and the three months ended June 30, 1998. In addition, cancellation
of a major data processing contract in the three months ended September 30, 1998
resulted in lower than expected net sales of data processing services in that
period. The Company's operating expenses are determined in part based on the
Company's expectations of future revenue growth and are substantially fixed. As
a result, unexpected changes in revenue levels, such as those discussed above,
have a disproportionate effect on operating performance in any given period. In
addition, changes in estimates for increased reserves and allowances, the
provision of an arbitration reserve and charges related to cost-cutting in the
three months ended September 30, 1998 amounted to a total of $21.4 million in
charges in that period. These charges and the weakness of net sales discussed
above caused the Company to record a net loss of $13.4 million for the three
months ended September 30, 1998, and lower than expected net income for the
fiscal year. If the Company is required to record charges in the future, such
charges could materially and adversely affect the Company's business, financial
condition or results of operations. Long term growth will be materially
adversely affected if the Company fails to successfully exploit the Internet as
a market for its products and services, broaden its existing product and service
offerings, increase sales of products and services, expand into new markets, or
complete acquisitions or successfully integrate acquired operations into its
existing operations. To the extent there are fluctuations in operating results
or the Company fails to achieve long-term internal growth or growth through
acquisitions, there could be a material adverse effect on the Company's
business, financial condition or results of operations.
Risk of Product Returns
The Company has agreements that allow retailers certain rights to return
its consumer CD-ROM products. Accordingly, the Company is exposed to the risk of
product returns from retailers and distributors, particularly in the case of
products sold shortly before introduction of the next year's edition of the same
product. Consumers may also seek to return consumer CD-ROM products, although
historically returns from consumers have been low. At the time of product sales,
the Company establishes reserves based on estimated future returns of products,
taking into account promotional activities, the timing of new product
introductions, seasonal variations in product returns, distributor and retailer
inventories of the Company's products and other factors. Actual product returns
could differ from estimates, and product returns that exceed the Company's
reserves could materially adversely affect the Company's business, financial
condition and results of operations. In addition, changes in estimates of
reserves for product returns can have a material and adverse effect on the
Company's operating results. For example, as discussed above, changes in
estimates for increased reserves and allowances in the consumer CD-ROM business,
primarily to account for anticipated returns and price protection adjustments,
together with additions to other reserves, amounted to charges of approximately
$15.5 million in the three months ended September 30, 1998 (out of the $21.4
million in charges discussed above), contributing to the Company's net loss for
that period.
Effects of Leverage
As of December 31, 1998, the Company had total indebtedness of
approximately $128.3 million. In addition, the Company's existing debt
obligations allow the Company to enter into a revolving credit facility under
which it would be able to incur up to $100.0 million of additional borrowings
and to incur substantial additional indebtedness (including, subject to certain
conditions, an additional $85.0 million of senior subordinated notes).
The Company's ability to satisfy its debt obligations will depend upon its
future operating performance, which performance will be affected by prevailing
economic conditions and financial, business and other factors, certain of which
are beyond the control of the Company. The Company's ability to satisfy its debt
obligations may also depend upon the future availability of revolving credit
borrowings under a revolving credit facility. Such availability will depend on,
among other things, the Company's ability to enter into such a credit facility
on acceptable terms and its ability to meet certain specified financial ratios
and maintenance tests. The Company expects that, based on current and expected
levels of operations, its operating cash flow should be sufficient to meet its
operating expenses, to make
25
<PAGE> 27
necessary capital expenditures and to service its debt requirements as they
become due. If the Company is unable to service its indebtedness, it will be
forced to take actions, such as reducing or delaying acquisitions and/or capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There is no assurance that any of these
remedies could be effected on satisfactory terms, if at all.
Restrictions Imposed By Terms of Indebtedness
The Company's existing debt obligations contain certain covenants limiting,
subject to certain exceptions, the incurrence of indebtedness, payment of
dividends or other restricted payments, issuance of guarantees, entering into
certain transactions with affiliates, consummation of certain asset sales,
certain mergers and consolidations, sales or other dispositions of all or
substantially all of the assets of the Company and imposing restrictions on the
ability of a subsidiary to pay dividends or make certain payments to the Company
and its subsidiaries. A breach of any of these covenants could result in an
event of default under the terms of the Company's existing debt obligations. The
Company's ability to comply with such covenants may be affected by events beyond
its control.
In addition, if the Company were to enter into a revolving credit facility,
such facility would contain other restrictive covenants which would be more
restrictive than those contained in the Company's existing debt obligations. A
breach of any of these covenants, unless waived, would result in a default under
such a credit facility. Upon the occurrence of an event of default under such a
credit facility, the lenders could elect to declare all amounts outstanding,
together with accrued interest, to be immediately due and payable. If the
lenders under such a credit facility accelerate the payment of such
indebtedness, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other indebtedness of the
Company. If the Company were unable to repay those amounts, such lenders could
proceed against the collateral granted to them to secure that indebtedness.
Risks Associated with Changes in Technology
Advances in information technology may result in changing customer
preferences for products and product delivery formats in the business and
consumer marketing information industry. The Company believes it is presently
the leading provider of marketing information on CD-ROM. However, the Company's
sales of CD-ROM's in the quarter ended September 30, 1998 were lower than
expected by the Company and projected by financial analysts. In addition, the
Company believes that if customers increasingly look to digital video disc
("DVD") or other new technology for information resources, the market for
business and consumer information on CD-ROM may contract and prices for CD-ROM
products may have to decrease or CD-ROM products may become obsolete. The
Company plans to introduce products on DVD. Failure of the Company to improve
sales of CD-ROM products or to successfully sell its products on DVD or to
successfully introduce products that take advantage of other technological
changes may thus have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company believes that the Internet represents an important and rapidly
evolving market for marketing information products and services. As such, the
Company has recently begun to focus more heavily on the Internet, and to develop
plans to exploit its new market more fully in the future. The Company may fail
to develop product and services that are well adapted to the Internet market, to
achieve market acceptance of its products and services, to achieve sufficient
traffic to its Internet sites to generate significant net sales, or to
successfully implement electronic commerce operations. Any such failure could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Competition
The business and consumer marketing information industry is highly
competitive. Many of the Company's principal or potential future competitors are
much larger than the Company and have much larger capital bases from which to
develop and compete with the Company. The Company faces increasing competition
in consumer sales lead generation products and data processing services from
Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions
of Experian, Direct Marketing Technologies and Metromail. In business sales lead
generation products, the Company faces competition from Dun's Marketing Services
("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information
compiled from Dun & Bradstreet's credit database, tends to focus on marketing to
large companies. In business directory publishing, the Company competes
primarily with
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<PAGE> 28
Regional Bell Operating Companies, Donnelley Marketing and many smaller,
regional directory publishers. In consumer sales lead generation products, the
Company competes with Metromail, Donnelley Marketing, R.L. Polk, Trans Union,
Experian and Equifax, both directly and through reseller networks. In data
processing services, the Company competes with Acxiom, May & Speh, Direct
Marketing Technologies and Harte-Hanks Data Technologies. In consumer products,
the Company competes with certain smaller producers of CD-ROM products. In
addition, the rapid expansion of the Internet creates a substantial new channel
for distributing business information to the market, and a new avenue for future
entrants to the business and consumer marketing information industry. There is
no guarantee that the Company will be successful in this new market.
Loss of Data Centers
The Company's business depends on computer systems contained in the
Company's data centers located in Omaha, Nebraska, Carter Lake, Iowa and
Montvale, New Jersey. A fire or other disaster affecting any of the Company's
data centers could disable the Company's computer systems. Any significant
damage to any of the data centers could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is in the process of relocating certain operations located on
the east coast. The Company is relocating certain personnel between the Montvale
and Greenwich facilities, and is also going to relocate certain personnel from
the Montvale and Greenwich sites to a new location in Park Ridge, New Jersey.
Any disruptions to operations or loss of data or equipment in connection with
these moves could materially and adversely affect the Company's business,
financial condition or results of operations.
Limited Protection of Intellectual Property Rights
The Company regards its databases and software as proprietary. The
Company's databases are copyrighted, and the Company depends on trade secret and
non-disclosure safeguards for protection of its software. The Company
distributes its products under agreements that grant customers a license to use
the Company's products for specified purposes and contain terms and conditions
prohibiting the unauthorized reproduction and use of the Company's products. In
addition, the Company generally enters into confidentiality agreements with its
management and programming staff and limits access to and distribution of its
proprietary information. There can be no assurance that the foregoing measures
will be adequate to protect the Company's intellectual property.
Restatement of Financial Results
The 1995 financial statements were restated in 1997 to reflect a settlement
of an employee's stock options as compensation expense due to additional
information obtained regarding the nature and timing of the agreement to settle
the options. The 1995 financial statements were also restated to reflect an
increase to receivable reserves of $0.6 million as selling, general and
administrative expenses. The restatements decreased net income by $2.3 million
and earnings per share by $0.06 in 1995 and had no impact on net sales. The
Company has implemented new control procedures that assign responsibility for
accounting for all option activity and ensure that copies of the related
underlying agreements are reviewed for appropriate accounting. The 1995 and 1996
financial statements were restated to properly present the discontinued
operations of American Business Communications (ABC). Since ABC was sold in
exchange for a non-recourse promissory note, the Company had not relinquished
all risks of ownership and was required to reflect the continued losses of the
business in its financial statements. These restatements did not impact net
sales, net income or earnings per share for either 1995 or 1996. Due to the
unique circumstances involved, the Company had misinterpreted the accounting
rules related to the "sale" and re-addressed the accounting when the purchaser
defaulted on the note.
The Form 10-Q for the quarter ended March 31, 1997 was restated to
accurately account for the acquisition of DBA and the related IPR&D charge as a
result of receiving a final valuation report. The restatement increased net
income and earnings per share by $18.2 million and $.79, respectively for the
quarter ended March 31, 1997 and had no impact on net sales. The Company uses
its best estimates based on information available related to acquisitions when
filing its interim financial statements. However, estimates change as additional
information is obtained during the valuation process.
The Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and
September 30, 1998 were restated to accurately account for the acquisition of
Walter Karl and the related IPR&D charge as a result of receiving a
27
<PAGE> 29
valuation report reflecting the retroactive application of the Securities and
Exchange Commission's new guidelines for valuing purchased IPR&D. During the
first quarter of 1998, the Company had originally recorded an IPR&D charge of
$9.2 million. During the fourth quarter of 1998, the Company performed a new
valuation following the new guidance and the IPR&D charge was adjusted to $3.8
million.
Direct Marketing Regulation and Dependence Upon Mail Carriers
The Company and many of its customers engage in direct marketing. Certain
data and services provided by the Company are subject to regulation by federal,
state and local authorities. In addition, growing concerns about individual
privacy and the collection, distribution and use of information about
individuals have led to self-regulation of such practices by the direct
marketing industry through guidelines suggested by the Direct Marketing
Association and to increased federal and state regulation. Compliance with
existing federal, state and local laws and regulations and industry
self-regulation has not to date had a material adverse effect on the Company's
business, financial condition or results of operations. Nonetheless, federal,
state and local laws and regulations designed to protect the public from the
misuse of personal information in the marketplace and adverse publicity or
potential litigation concerning the commercial use of such information may
increasingly affect the operations of the Company, which could result in
substantial regulatory compliance or litigation expense or a loss of revenue.
Certain proposed federal legislation could also create proprietary rights in
certain "white pages" information that is presently in the public domain, which
could in turn increase the cost to the Company of acquiring data or disrupt its
ability to do so. The direct mail industry depends and will continue to depend
upon the services of the United States Postal Service and other private mail
carriers. Any modification by the United States Postal Service of its rate
structure, any increase in public or private postal rates generally or any
disruption in the availability of public or private postal services could have a
negative impact on the demand for business information, direct mail activities
and the cost of the Company's direct mail activities.
Financial and Accounting Issues Related to Acquisitions
In connection with the acquisitions completed since mid-1996, the Company
issued approximately 3.7 million shares of Class A Common Stock and 3.7 million
shares of Class B Common Stock, and paid approximately $158.4 million in cash.
The issuance of stock in these or future transactions may be dilutive to
existing stockholders to the extent that earnings of the acquired companies do
not offset the additional number of shares outstanding. In connection with the
acquisitions of DBA, Pro CD and Walter Karl, the Company incurred approximately
$97.0 million in debt. In connection with future acquisitions, the Company may
incur substantial amounts of debt. Servicing such debt may result in decreases
in earnings per share, and the inability on the part of the Company to service
such debt would result in a material adverse effect on the Company's business,
financial condition and results of operations. Finally, the Company expects that
future acquisitions will generally be required to be accounted for using the
purchase method. As a result of such accounting treatment, the Company may be
required to take charges to operations or to amortize goodwill in connection
with future acquisitions. As a result of acquisitions completed since mid-1996,
the Company was required to take significant acquisition-related charges to
operations and will be required to amortize goodwill and other intangibles over
periods of 1 to 15 years. The acquisition-related charges and amortization of
goodwill and other intangibles have had and will continue to have an adverse
effect on net income. To the extent that future acquisitions result in
substantial charges to operations, incurrence of debt and amortization of
goodwill and other intangibles, such acquisitions could have an adverse effect
on the Company's net income, earnings per share and overall financial condition.
Volatility and Uncertainties with Respect to Stock Price
As with other companies that have experienced rapid growth, the Company has
experienced and is likely to continue to experience substantial volatility in
its stock price. Factors such as announcements by either the Company or its
competitors of new products or services or of changes in product or service
pricing policies, quarterly fluctuations in the Company's operating results,
announcements of technical innovations, announcements relating to strategic
relationships or acquisitions by the Company or its competitors, changes in
earnings estimates, opinions or ratings by analysts, and general market
conditions or market conditions within the business and consumer marketing
information industry, among other factors, may have significant impact on the
Company's stock price. Should the Company fail to introduce, enhance or
integrate products or services on the schedules expected, its stock price could
be adversely affected. It is likely that in some future quarter the Company will
fail to achieve anticipated operating
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<PAGE> 30
results, and this failure could have a material adverse effect on the Company's
stock price. In addition, the Company's Class A Common Stock and Class B Common
Stock have been trading for a very short time. While the Company expects the
Class A Common Stock and Class B Common Stock prices to remain roughly equal in
most market conditions, the difference in rights of the two classes, coupled
with the general volatility of the Company's stock price described above, could
cause the Class A Common Stock and Class B Common Stock to trade at different
prices. In the event of a tender offer or other unsolicited attempt to acquire
the Company, shares of Class B Common Stock would likely trade at a substantial
premium to shares of Class A Common Stock as a result of the disparity of voting
rights. Future issuances of both Class A Common Stock and Class B Common Stock
could affect the price for either or both classes of Common Stock. For the
foregoing reasons, the price for the Company's Class A Common Stock and Class B
Common Stock may be subject to substantial fluctuation.
Purchase of Notes Upon a Change of Control
Upon the occurrence of a change of control of the Company in certain
circumstances, the Company is required to make an offer to purchase all
outstanding 9 1/2% Senior Subordinated Notes at a purchase price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of purchase. There can be no assurance that the Company will
have available funds sufficient to purchase the notes upon such change of
control. In addition, any change of control, and any repurchase of the notes
upon a change of control, may constitute an event of default under any revolving
credit facility which the Company may enter into, and in that event the
obligations of the Company thereunder could be declared due and payable by the
lenders thereunder. Upon the occurrence of an event of default, the lenders
under such a credit facility may have the ability to block repurchases of the
Notes for a period of time and upon any acceleration of the obligations under
such a credit facility, the lenders thereunder would be entitled to receive
payment of all outstanding obligations thereunder before the Company may
repurchase any of the notes tendered pursuant to an offer to repurchase the
notes upon such change of control.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt as the majority of
the Company's debt is at fixed rates. At December 31, 1998, the fair value of
the Company's long-term debt is based on quoted market prices at the reporting
date or is estimated by discounting the future cash flows of each instrument at
rates currently offered to the Company for similar debt instruments of
comparable maturities. At December 31, 1998, the Company had long-term debt with
a carrying value of $128.3 million and estimated fair value of approximately
$106.0 million. The market risk is estimated as the potential decrease in fair
value of the Company's long-term debt resulting from a hypothetical increase of
10% in the rates currently offered to the Company. An increase in interest rates
would result in approximately a $7.5 million decrease in fair value of the
Company's long-term debt.
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<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item (other than selected quarterly
financial data which is set forth below) is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-24 of this
Form 10-K. The following table sets forth selected financial information for
each of the eight quarters in the two-year period ended December 31, 1998. This
information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal recurring adjustments
necessary to present fairly this information when read in conjunction with the
Company's audited consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
1998 1997
QUARTER ENDED QUARTER ENDED
----------------------------------------------- -----------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31 31 30 30 31
-------- ------- ------------ ----------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $55,380 $62,076 $ 55,072 $56,150 $ 41,948 $47,008 $50,555 $53,816
Costs and expenses:
Database and production
costs..................... 15,405 16,086 17,978 16,850 11,415 13,111 14,148 16,416
Selling, general and
administrative............ 23,394 27,103 41,199 26,028 17,986 20,079 21,331 20,807
Depreciation and
amortization.............. 6,870 6,384 7,824 6,394 6,356 9,056 8,985 10,018
Provision for litigation
settlement(1)............. -- -- 4,500 -- -- -- -- --
Acquisition-related and
restructuring
charges(2)(3)............. 8,477 400 1,216 -- 51,798 -- 4,300 --
------- ------- -------- ------- -------- ------- ------- -------
Operating income (loss)....... 1,234 12,103 (17,645) 6,878 (45,607) 4,762 1,791 6,575
Other income (expense), net... (283) 13,233 (2,869) (4,613) 42 41 (257) (176)
------- ------- -------- ------- -------- ------- ------- -------
Income (loss) before income
taxes....................... 951 25,336 (20,514) 2,265 (45,565) 4,803 1,534 6,399
Income taxes.................. 2,058 9,964 (7,115) 973 1,631 1,893 775 2,688
------- ------- -------- ------- -------- ------- ------- -------
Net income (loss)............. $(1,107) $15,372 $(13,399) $ 1,292 $(47,196) $ 2,910 $ 759 $ 3,711
======= ======= ======== ======= ======== ======= ======= =======
Basic earnings (loss) per
share....................... $ (0.02) $ 0.31 $ (0.27) $ 0.03 $ (1.02) $ 0.06 $ 0.02 $ 0.08
======= ======= ======== ======= ======== ======= ======= =======
Weighted average shares
outstanding................. 49,395 49,607 49,360 49,301 46,412 48,678 48,774 48,848
======= ======= ======== ======= ======== ======= ======= =======
Diluted earnings (loss) per
share....................... $ (0.02) $ 0.30 $ (0.27) $ 0.03 $ (1.00) $ 0.06 $ 0.02 $ 0.07
======= ======= ======== ======= ======== ======= ======= =======
Weighted average shares
outstanding................. 49,395 51,226 49,360 49,334 47,298 49,461 50,273 49,945
======= ======= ======== ======= ======== ======= ======= =======
AS A PERCENTAGE OF NET SALES:
Net sales..................... 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Database and production
costs..................... 28 26 33 30 27 28 28 31
Selling, general and
administrative............ 42 44 75 46 43 43 42 39
Depreciation and
amortization.............. 12 10 14 11 15 19 18 18
Provision for litigation
settlement................ -- -- 8 -- -- -- -- --
Acquisition-related and
restructuring charges..... 15 1 2 -- 123 -- 9 --
------- ------- -------- ------- -------- ------- ------- -------
Operating income (loss)..... 2 19 (32) 12 (109) 10 4 12
Other income (expense), net... (1) 21 (5) (8) -- -- (1) --
------- ------- -------- ------- -------- ------- ------- -------
Income (loss) before income
taxes....................... 2 41 (37) 4 (109) 10 3 12
Income taxes.................. 4 16 (13) 2 4 4 2 5
------- ------- -------- ------- -------- ------- ------- -------
Net income (loss)............. (2)% 25% (24)% 2% (113)% 6% 2% 7%
======= ======= ======== ======= ======== ======= ======= =======
</TABLE>
- ---------------
(1) During 1998, includes $4.6 million in damages awarded to Experian
Information Solutions, Inc. in connection with arbitration of a contractual
dispute.
(2) Includes the following acquisition-related charges: 1) charges related to
purchases in-process research and development costs associated with the
acquisitions of Walter Karl, Inc. of $3.8 million (1998), DBA Holdings, Inc.
("DBA") of $49.2 million (1997), Pro CD of $4.3 million (1997), and Digital
Directory Assistance, Inc.
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<PAGE> 32
of $10.0 million (1996), and 2) the change in 1996 in estimated useful lives
based on management's evaluation of the remaining lives of certain
intangibles related to acquisitions prior to 1995 of $11.5 million.
(3) Includes in 1998 the following restructuring charges: 1) $3.0 million of
costs associated with the Company's bid to acquire Metromail Corporation, 2)
$0.7 million associated with the Company's offering to sell Class A Common
Stock which was not completed, 3) $1.4 million for restructuring costs
related to the Company's compilation and sales activities for new
businesses, and 4) $1.2 million for restructuring costs related to certain
costs reduction measures enacted by the Company. Includes in 1997
restructuring costs of $2.6 million associated with the acquisitions of DBA
and Pro CD.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On October 1, 1998, PricewaterhouseCoopers LLP, the Company's independent
accountants (the "Former Accountants") resigned from their engagement as
principal accountants for the Company. The reports of the Former Accountants for
the last two fiscal years contained no adverse opinion, disclaimer of opinion or
opinion that was qualified or modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was not recommended or
approved by Company's board of directors, nor by its audit committee. In the
last two fiscal years and through October 1, 1998, there have been no
disagreements with the Former Accountants on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of the Former Accountants, would have
caused them to make reference thereto in their report on the financial
statements of such years. In the last two fiscal years and through October 1,
1998, none of the events listed in paragraphs (A) through (D) of Item
304(a)(l)(v) of Regulation S-K occurred except: (i) the Form 10-Q, filed by the
Company for the period ended June 30, 1998, disclosed that the Company was in
the process of performing a valuation analysis of its acquisition of JAMI
Marketing and any changes to its preliminary estimates of the assets acquired,
liabilities assumed and goodwill and other intangibles recorded as part of the
purchase, including an assessment of purchased in-process research and
development costs, would be recorded in the third quarter of 1998; the Former
Accountants indicated that if such in-process research and development charge
was material, the financial statements for the period ended June 30, 1998 would
require restatement; the Company has since determined that there will be no
material in-process research and development costs in connection with the JAMI
Marketing acquisition; and (ii) as a result of recent financial management
resignations, the Former Accountants advised the Company that it intended to
expand the scope of its audit testing for the fiscal year 1998 audit and
management is in agreement with this advice.
On October 12, 1998, the Company engaged the services of KPMG Peat Marwick
LLP (the "New Accountants") to serve as the Company's principal accountants for
the current fiscal year. In September, 1998, the Company engaged the New
Accountants for purposes of allocating the cost of the acquisition to certain
assets and liabilities acquired by the Company from JAMI Marketing in May 1998.
PricewaterhouseCoopers LLP, the Company's former accountants, were not consulted
by the Company regarding the allocation of the acquisition costs. During its
last two fiscal years and through October 1, 1998, the Company has not consulted
with the New Accountants on either the application of accounting principles to a
specified transaction, or any matter that was the subject of a reportable event
discussed above.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding Directors of the registrant is
incorporated by reference to the information under the caption "Nominees for
Election at the Annual Meeting" and "Incumbent Directors whose Terms of Office
Continue After the Annual Meeting" in the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 2, 1999.
The required information regarding Executive Officers of the registrant is
contained in Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference to the information under
the caption "Section 16(a) Beneficial Ownership Reporting
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<PAGE> 33
Compliance" in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 2, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the captions "Executive
Compensation," "Performance Graph," "Report of the Compensation Committee," and
"Certain Transactions" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held on May 2, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the caption "Security
Ownership" in the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 2, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the captions "Certain
Transactions" in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 2, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the Report:
1. Financial Statements. The following Consolidated Financial
Statements of infoUSA Inc. and Subsidiaries and Report of Independent
Accountants are included at pages F-1 through F-24 of this Form 10-K:
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
- ----------- --------
<S> <C>
Independent Auditors' Reports............................... F-2, F-3
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated Statements of Operations for the Year Ended
December 31, 1998, 1997, and 1996......................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996............. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
2. Financial Statement Schedule. The following consolidated financial
statement schedule of infoUSA Inc. and Subsidiaries for the years ended
December 31, 1998, 1997, and 1996 is filed as part of this Report and
should be read in conjunction with the Consolidated Financial Statements.
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
- ----------- --------
<S> <C>
Schedule II Valuation and Qualifying Accounts S-1
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes
thereto.
32
<PAGE> 34
3. Exhibits. The following Exhibits are filed as part of, or
incorporated by reference into, this report:
<TABLE>
<C> <S>
2.1 -- Asset Purchase Agreement between the Company and Digital
Directory Assistance, Inc. is incorporated herein by
reference to exhibits filed with the Company's current
report on Form 8-K dated September 10, 1996.
2.2 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of County Data Corporation is
incorporated herein by reference to exhibits filed with
Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996.
2.3 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of 3319971 Canada Inc. is
incorporated herein by reference to exhibits filed with
Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996.
2.4 -- Agreement and Plan of Reorganization between the Company
and the shareholders of Marketing Data Systems, Inc. is
incorporated herein by reference to the exhibits filed
with the Company's Registration Statement on Form S-3
(File No. 333-36669) filed on October 23, 1997.
2.5 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of DBA Holdings, Inc. is
incorporated herein by reference to exhibits filed with
the Company's Current Report on Form 8-K dated February
28, 1997.
2.6 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of Pro CD, Inc. is incorporated
herein by reference to exhibits filed with the Company's
Current Report on Form 8-K dated September 8, 1997.
2.7 -- Stock Purchase Agreement between the Company and the
Shareholders Of Walter Karl, Inc. is incorporated herein
by reference to the Company's Current Report on Form 8-K
dated February 24, 1998.
2.8 -- Asset Purchase Agreement between the Company and JAMI
Marketing Services, Inc., filed herewith
3.1 -- Certificate of Incorporation, as amended through July 31,
1998 is Incorporated herein by reference to exhibits
filed with Company's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1998 (File No. 000-19598),
filed on August 14, 1998.
3.2 -- Bylaws are incorporated herein by reference to the
Company's Registration Statement on Form S-1 (File No.
33-42887), which became effective February 18, 1992.
3.3 -- Amended and Restated Certificate of Designations of
Participating Preferred Stock, filed in Delaware on
October 3, 1997, is incorporated herein by reference to
the Company's Registration Statement on From 8-A, (File
No. 97-690893), filed on October 6, 1997.
4.1 -- Rights Plan for Class A Common is incorporated herein by
reference to the Company's Registration Statement on Form
8-A, (File No. 97-690893), filed on October 6, 1997.
4.2 -- Rights Plan for Class B Common is incorporated herein by
reference to the Company's Registration Statement on Form
8-A, (File No. 97-690896), filed on August 6, 1997 and
amended on October 6, 1997.
4.3 -- Specimen of Class A Common Stock Certificate is
incorporated herein by reference to the exhibits filed
with the company's Registration Statement on Form S-3
(File No. 333-36669) filed on October 23, 1997.
4.4 -- Specimen Class B Common Stock Certificate is incorporated
herein by reference to exhibits filed with Company's
Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1997.
4.5 -- Reference is made to Exhibits 3.1, 3.2, and 3.3 hereof.
</TABLE>
33
<PAGE> 35
<TABLE>
<C> <S>
4.6 -- Purchase Agreement dated June 12, 1998 between the
Registrant, BT Alex. Brown Incorporated, Goldman, Sachs &
Co. and Hambrecht & Quist LLC is incorporated herein by
reference to the Company's quarterly report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 000-19598),
filed on August 14, 1998.
4.7 -- Indenture dated as of June 18, 1998 (the "Indenture") by
and between the Registrant and State Street Bank and
Trust Company of California, N.A., as Trustee is
incorporated herein by reference to the Company's
quarterly report on Form 10-Q for the quarter ended June
30, 1998 (File No. 000-19598), filed on August 14, 1998.
4.8 -- Exchange and Registration Rights Agreement dated as of
June 18, 1998 by and among the Registrant and BT Alex.
Brown Incorporated, Goldman, Sachs & Co. and Hambrecht &
Quist LLC as the Initial Purchasers is incorporated
herein by reference to the Company's quarterly report on
Form 10-Q for the quarter ended June 30, 1998 (File No.
000-19598), filed on August 14, 1998.
4.9 -- Form of New 9 1/2% Senior Subordinated Note due 2008 is
incorporated herein by reference to the exhibits filed
with the Company's Registration Statement on Form S-4
(File No. 333-61645), filed on December 15, 1999.
10.1 -- Form of Indemnification Agreement with Officers and
Directors is incorporated herein by reference to the
exhibits filed with the Company's Registration Statement
on Form S-1 (File No. 33-51352), filed August 28, 1992.
10.5 -- Reference is made to Exhibits 2.1, 2.2, 2.3, 2.4, 2.5,
2.6, 2.7, 2.8 and 4.5 hereof.
21.1 -- Subsidiaries and State of Incorporation, filed herewith.
23.1 -- Consent of Independent Accountants, filed herewith.
23.2 -- Consent of Independent Accountants, filed herewith.
24.1 -- Power of Attorney (included on signature page)
27.1 -- Financial Data Schedule, filed herewith.
</TABLE>
(b) Reports on Form 8-K:
On October 8, 1998, the Company filed a Current Report on Form 8-K
dated October 1, 1998, pursuant to Item 4 of that form, to report the
change in the Company's independent accountants. The report was amended on
Form 8-K/A on October 14, 1998, for technical reasons.
On October 13, 1998, the Company filed a Current Report on Form 8-K
dated October 12, 1998, pursuant to Item 4 of that form, to report the
change in the Company's independent accountants.
34
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
infoUSA INC.
By: /s/ STORMY L. DEAN
--------------------------------------
Stormy L. Dean
Controller and Acting Chief Financial
Officer
(principal accounting and financial
officer)
Dated: March 31, 1999
POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Amendment to the Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ VINOD GUPTA Chairman of the Board and Chief March 31, 1999
- ----------------------------------------------------- Executive Officer (principal
Vinod Gupta executive officer)
/s/ STORMY L. DEAN Controller and Acting Chief March 31, 1999
- ----------------------------------------------------- Financial Officer (principal
Stormy L. Dean accounting officer and principal
financial officer)
/s/ JON D. HOFFMASTER Director March 31, 1999
- -----------------------------------------------------
Jon D. Hoffmaster
/s/ GAUTAM GUPTA Director March 31, 1999
- -----------------------------------------------------
Gautam Gupta
/s/ GEORGE F. HADDIX Director March 31, 1999
- -----------------------------------------------------
George F. Haddix
/s/ ELLIOT S. KAPLAN Director March 31, 1999
- -----------------------------------------------------
Elliot S. Kaplan
/s/ HAROLD ANDERSEN Director March 31, 1999
- -----------------------------------------------------
Harold Andersen
/s/ PAUL A. GOLDNER Director March 31, 1999
- -----------------------------------------------------
Paul A. Goldner
/s/ GEORGE J. KUBAT Director March 31, 1999
- -----------------------------------------------------
George J. Kubat
By: /s/ STORMY L. DEAN
-------------------------------------------------
Stormy L. Dean
Attorney-in-fact
</TABLE>
35
<PAGE> 37
[This page intentionally left blank]
<PAGE> 38
INFOUSA INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
infoUSA Inc. and Subsidiaries:
Independent Auditors' Reports............................... F-2, F-3
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996.............. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997
and 1996.................................................. F-7
Notes to Consolidated Financial Statements.................. F-8 to F-24
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
infoUSA Inc.:
We have audited the accompanying consolidated balance sheet of infoUSA Inc.
and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for the year then ended. In connection with our audit of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
infoUSA Inc. and subsidiaries as of December 31, 1998 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
---------------------------------------
KPMG PEAT MARWICK LLP
Omaha, Nebraska
January 22, 1999
F-2
<PAGE> 40
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
infoUSA Inc.:
We have audited the accompanying consolidated balance sheet of infoUSA Inc.
and subsidiaries (formerly American Business Information, Inc.) as of December
31, 1997, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the two years in the
period ended December 31, 1997. We have also audited the financial statement
schedule listed in Item 14 in this Form 10-K for each of the two years in the
period ended December 31, 1997. These consolidated financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of infoUSA Inc.
and subsidiaries (formerly American Business Information, Inc.) as of December
31, 1997 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
/s/ PricewaterhouseCoopers LLP
-----------------------------------------
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
January 23, 1998
F-3
<PAGE> 41
INFOUSA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 29,603 $ 10,653
Marketable securities..................................... 20,620 24,045
Trade accounts receivable, net of allowances of $7,289 and
$6,013, respectively................................... 40,126 49,409
List brokerage trade accounts receivable.................. 17,831 --
Income taxes receivable................................... 3,387 345
Prepaid expenses.......................................... 2,371 3,475
Deferred marketing costs.................................. 4,365 3,417
-------- --------
Total current assets.............................. 118,303 91,344
-------- --------
Property and equipment, net............................... 40,264 25,117
Intangible assets, net of accumulated amortization........ 109,378 73,741
Deferred income taxes..................................... -- 1,410
Other assets.............................................. 2,828 3,299
-------- --------
$270,773 $194,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 1,580 $ 716
Payable to shareholders................................... -- 1,871
Accounts payable.......................................... 7,226 9,426
List brokerage trade accounts payable..................... 18,847 --
Accrued payroll expenses.................................. 2,830 4,910
Accrued expenses.......................................... 12,465 5,406
Deferred revenue.......................................... 4,534 4,238
Deferred income taxes..................................... 664 4,770
-------- --------
Total current liabilities......................... 48,146 31,337
-------- --------
Long-term debt, net of current portion...................... 126,679 81,284
Deferred income taxes....................................... 7,701 --
Other liabilities........................................... -- 2,054
Stockholders' equity:
Preferred stock, $.0025 par value. Authorized 5,000,000
shares; none issued or outstanding..................... -- --
Class A common stock, $.0025 par value. Authorized
220,000,000 shares; 24,689,761 shares issued and
24,581,261 shares outstanding at December 31, 1998 and
24,460,332 shares issued and outstanding at December
31, 1997............................................... 62 61
Class B common stock, $.0025 par value. Authorized
75,000,000 shares; 24,854,989 shares issued and
24,655,489 shares outstanding at December 31, 1998 and
24,625,332 shares issued and 24,460,332 shares
outstanding at December 31, 1997....................... 62 62
Paid-in capital........................................... 72,476 69,055
Retained earnings......................................... 15,284 13,126
Treasury stock, at cost, 108,500 shares of Class A common
stock and 199,500 shares of Class B common stock held
at December 31, 1998 and 165,000 shares of Class B
common stock held at December 31, 1997................. (2,951) (2,281)
Accumulated other comprehensive income.................... 3,314 213
-------- --------
Total stockholders' equity........................ 88,247 80,236
-------- --------
Commitments and contingencies............................. $270,773 $194,911
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
INFOUSA INC. SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................................... $228,678 $193,327 $108,298
-------- -------- --------
Costs and expenses:
Database and production costs............................. 66,319 55,090 29,272
Selling, general and administrative....................... 117,724 80,203 45,766
Depreciation and amortization............................. 27,472 34,415 4,855
Provision for litigation settlement....................... 4,500 -- --
Acquisition-related and restructuring charges............. 10,093 56,098 21,500
-------- -------- --------
226,108 225,806 101,393
-------- -------- --------
Operating income (loss)..................................... 2,570 (32,479) 6,905
Other income (expense):
Investment income......................................... 16,628 3,748 3,194
Interest expense.......................................... (9,160) (4,098) (209)
Other..................................................... (2,000) -- (943)
-------- -------- --------
Income (loss) before income taxes and discontinued
operations................................................ 8,038 (32,829) 8,947
Income taxes................................................ 5,880 6,987 3,400
-------- -------- --------
Income (loss) from continuing operations.................... 2,158 (39,816) 5,547
Loss on discontinued operations............................. -- -- (355)
Loss from abandonment of subsidiary......................... -- -- (1,373)
-------- -------- --------
Net income (loss)........................................... $ 2,158 $(39,816) $ 3,819
======== ======== ========
Basic earnings per share:
Income (loss) from continuing operations.................. $ 0.04 $ (0.82) $ 0.13
Loss on discontinued operations and abandonment of
subsidiary............................................. -- -- (0.04)
-------- -------- --------
Net income (loss)........................................... $ 0.04 $ (0.82) $ 0.09
======== ======== ========
Weighted average shares outstanding......................... 49,314 48,432 42,065
======== ======== ========
Diluted earnings per share:
Income (loss) from continuing operations.................. $ 0.04 $ (0.82) $ 0.13
Loss on discontinued operations and abandonment of
subsidiary............................................. -- -- (0.04)
-------- -------- --------
Net income (loss)........................................... $ 0.04 $ (0.82) $ 0.09
======== ======== ========
Weighted average shares outstanding......................... 50,215 48,432 42,390
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 43
INFOUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
CLASS A CLASS B COMPREHENSIVE TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY INCOME STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK (LOSS) EQUITY
------- ------- ------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995............ $-- $51 $27,342 $48,937 $ -- $ (246) $76,084
Comprehensive income:
Net income............................. -- -- -- 3,819 -- -- 3,819
Change in unrealized loss, net of
tax.................................. -- -- -- -- -- (133) (133)
--- --- ------- -------- ------- ------ -------
Total comprehensive income..... -- -- -- -- -- -- ...... 3,686
--- --- ------- -------- ------- ------ -------
Issuance of 2,441,950 shares of common
stock................................ -- 3 9,628 -- -- -- 9,631
Issuance of 1,120,000 shares of common
stock in pooling-of-interests
transaction.......................... -- 1 86 186 -- -- 273
Tax benefit related to employee stock
options.............................. -- -- 212 -- -- -- 212
Acquisition of treasury stock.......... -- -- -- -- (2,281) -- (2,281)
--- --- ------- -------- ------- ------ -------
Balances, December 31, 1996............ -- 55 37,268 52,942 (2,281) (379) 87,605
Comprehensive loss:
Net loss............................... -- -- -- (39,816) -- -- (39,816)
Change in unrealized gain, net of
tax.................................. -- -- -- -- -- 592 592
--- --- ------- -------- ------- ------ -------
Total comprehensive loss............... -- -- -- -- -- -- (39,224)
--- --- ------- -------- ------- ------ -------
Issuance of 4,718,744 shares of common
stock................................ -- 7 31,261 -- -- -- 31,268
Tax benefit related to employee stock
options.............................. -- -- 587 -- -- -- 587
2 for 1 stock dividend................. 61 -- (61) -- -- -- --
--- --- ------- -------- ------- ------ -------
Balances, December 31, 1997............ 61 62 69,055 13,126 (2,281) 213 80,236
Comprehensive income:
Net income............................. -- -- -- 2,158 -- -- 2,158
Change in unrealized gain, net of
tax.................................. -- -- -- -- -- 3,101 3,101
--- --- ------- -------- ------- ------ -------
Total comprehensive income..... -- -- -- -- -- -- 5,259
--- --- ------- -------- ------- ------ -------
Issuance of 459,086 shares of common
stock................................ 1 -- 3,020 -- -- -- 3,021
Tax benefit related to employee stock
options.............................. -- -- 401 -- -- -- 401
Acquisition of treasury stock.......... -- -- -- -- (670) -- (670)
--- --- ------- -------- ------- ------ -------
Balances, December 31, 1998............ $62 $62 $72,476 $15,284 $(2,951) $3,314 $88,247
=== === ======= ======== ======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 44
INFOUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 2,158 $(39,816) $ 3,819
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 27,472 34,415 4,855
Deferred income taxes.................................. (1,019) (2,787) (6,307)
Loss on discontinued operations and abandonment of
subsidiary........................................... -- -- 2,788
Net realized (gains) losses on sale of marketable
securities and other investments..................... (15,511) (2,560) (1,267)
Impairment of other assets............................. 2,000 -- 740
Provision for litigation settlement.................... 4,500 -- --
Acquisition-related and restructuring charges.......... 10,093 56,098 21,500
Changes in assets and liabilities, net of effect of
acquisitions:
Trade accounts receivable............................ 9,324 (7,445) (7,762)
List brokerage trade accounts receivable............. (4,463) -- --
Prepaid expenses..................................... (1,233) 287 (1,117)
Deferred marketing costs............................. (948) (2,154) (267)
Accounts payable..................................... (2,861) (4,854) (1,422)
List brokerage trade accounts payable................ 752 -- --
Income taxes receivable and payable.................. (3,042) 7,283 (128)
Accrued expenses..................................... (10,480) (8,211) (3,111)
--------- -------- --------
Net cash provided by operating activities......... 16,742 30,256 12,321
--------- -------- --------
Cash flows from investing activities:
Proceeds from sales of marketable securities.............. 41,114 19,596 18,865
Purchases of marketable securities........................ (17,177) (17,448) (17,348)
Purchase of other investments............................. (2,000) (2,000) --
Purchases of property and equipment....................... (20,582) (8,882) (6,755)
Acquisitions of businesses, including minority interest... (31,654) (84,224) (6,484)
Consumer database costs................................... (603) (3,398) (494)
Software development costs................................ (5,724) (2,898) (1,955)
Other..................................................... -- (678) 347
--------- -------- --------
Net cash used in investing activities............. (36,626) (99,932) (13,824)
--------- -------- --------
Cash flows from financing activities:
Repayment of long-term debt............................... (110,876) (7,193) (1,450)
Proceeds from long-term debt.............................. 154,800 86,000 --
Deferred financing costs.................................. (5,969) (388) --
Repayment of note payable to shareholders................. -- (7,925) --
Acquisition of treasury stock............................. (670) -- (2,281)
Deferred offering costs................................... -- (339) --
Proceeds from exercise of stock options................... 1,148 2,090 520
Tax benefit related to employee stock options............. 401 587 212
--------- -------- --------
Net cash provided by (used in) financing
activities...................................... 38,834 72,832 (2,999)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 18,950 3,156 (4,502)
Cash and cash equivalents, beginning........................ 10,653 7,497 11,999
--------- -------- --------
Cash and cash equivalents, ending........................... $ 29,603 $ 10,653 $ 7,497
========= ======== ========
Supplemental cash flow information:
Interest paid..................................... $ 8,902 $ 3,616 $ 78
========= ======== ========
Income taxes paid................................. $ 9,637 $ 7,443 $ 8,280
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 45
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
infoUSA Inc. and its subsidiaries (the Company), provides business and
consumer marketing information products and data processing services throughout
the United States and Canada. These products include customized business lists,
business directories and other information services. During 1998, the Company
changed names from American Business Information, Inc. to infoUSA Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition. The Company's revenue is primarily generated from the
sale of its products and services and the licensing of its data to third
parties. Revenue from the sale of products and services is generally recognized
when the product is delivered or the services are performed. Data licensing
revenue is recognized based on percentages which are derived from the pricing of
the product and corresponds to delivery of the initial set of data and any
obligations to provide future updates of data. Revenue related to future updates
is recorded as deferred revenue. Reserves are established for estimated returns
and uncollectible amounts.
Database Costs. Costs to maintain and enhance the Company's existing
business and consumer databases are expensed as incurred. Costs to develop new
databases, which primarily include labor costs, are capitalized with
amortization beginning upon successful completion of the compilation project.
Database costs are amortized straight-line over the expected lives of the
databases generally ranging from one to five years.
Advertising Costs. Direct marketing costs associated with the mailing and
printing of brochures and catalogs are capitalized and amortized over periods
that correspond to the estimated revenue stream of the individual advertising
activities, generally for periods ranging from six to twelve months. All other
advertising costs are expensed as the advertising takes place. Total unamortized
marketing costs at December 31, 1998 and 1997, was $4.4 million and $3.4
million, respectively. Total advertising expense for the years ended December
31, 1998, 1997, and 1996 was $19.7 million, $15.9 million, and $11.0 million,
respectively.
Software Capitalization. Until technological feasibility is established,
software development costs are expensed as incurred. After that time, direct
costs are capitalized and amortized equal to the greater of the ratio of current
revenues to the estimated total revenues for each product or the straight-line
method, generally over one year for software developed for external use and over
two to five years for software developed for internal use. Unamortized software
costs included in intangible assets at December 31, 1998 and 1997, were $4.0
million and $1.9 million, respectively. Amortization of capitalized costs during
the years ended December 31, 1998, 1997 and 1996, totaled approximately $4.1
million, $2.5 million, and $1.0 million, respectively.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances, if any, are established when necessary to
reduce deferred tax assets to the amount that is more likely than not to be
realized.
Earnings (Loss) Per Share. Basic earnings per share are based on the
weighted average number of common shares outstanding, including contingently
issuable shares, which have been restated to account for the stock
F-8
<PAGE> 46
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividend (See Note 19). Diluted earnings per share are based on the weighted
number of common shares outstanding, including contingently issuable shares,
plus dilutive potential common shares outstanding (representing outstanding
stock options).
The following data show the amounts used in computing earnings per share
and the effect on the weighted average number of shares of dilutive potential
common stock. Options on 1.1 million shares of common stock were not included in
computing diluted earnings per share for 1997 because their effects were
antidilutive.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average number of shares outstanding used in basic
EPS....................................................... 49,314 48,432 42,065
Net additional common equivalent shares outstanding after
assumed exercise of stock options......................... 901 -- 325
------ ------ ------
Weighted average number of shares outstanding used in
diluted EPS............................................... 50,215 48,432 42,390
====== ====== ======
</TABLE>
Cash Equivalents. Cash equivalents, consisting of highly liquid debt
instruments that are readily convertible to known amounts of cash and when
purchased have an original maturity of three months or less, are carried at cost
which approximates fair value.
Marketable Securities. Marketable securities have been classified as
available-for-sale and are therefore carried at fair value, which are estimated
based on quoted market prices. Unrealized gains and losses, net of related tax
effects, are reported as a separate component of stockholders' equity until
realized. Unrealized and realized gains and losses are determined by specific
identification.
Property and Equipment. Property and equipment (including equipment
acquired under capital leases) are stated at cost and are depreciated or
amortized primarily using straight-line methods over the estimated useful lives
of the assets, as follows:
<TABLE>
<S> <C>
Building and improvements................................... 30 years
Office furniture and equipment.............................. 5 to 7 years
Computer equipment.......................................... 5 years
Capitalized equipment leases................................ 5 years
</TABLE>
List brokerage trade accounts receivable and trade accounts payable. The
Company acquired Walter Karl, Inc. in March 1998 and JAMI Marketing Services,
Inc. in June 1998. A significant business line of these two entities is list
brokerage services, whereby the entities serve as a broker between unrelated
parties who wish to purchase a certain list and unrelated parties who have the
desired list for sale. Accordingly, Walter Karl and Jami Marketing each
recognize trade accounts receivable and trade accounts payable, reflecting a
"gross-up" of the two concurrent transactions. The transactions are not
structured providing for the right of offset. The Company did not previously
engage in this type of business.
F-9
<PAGE> 47
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles. Intangible assets are stated at cost and are amortized using
the straight-line method over the estimated useful lives of the assets, as
follows:
<TABLE>
<S> <C>
Goodwill.................................................... 8 to 15 years
Distribution networks....................................... 2 years
Noncompete agreements....................................... Term of agreements
Purchased data processing software.......................... 2 years
Acquired database costs..................................... 1 year
Core technology costs....................................... 3 years
Customer base costs......................................... 3 to 15 years
Tradename costs............................................. 10 to 15 years
Perpetual software license agreement........................ 10 years
Software development costs.................................. 1 to 4 years
Workforce costs............................................. 5 to 8 years
</TABLE>
Stock-based compensation. The Company recognizes stock-based compensation
expense using the intrinsic value method. Under that method, no compensation
expense is recorded if the exercise price of the employee stock options equals
or exceeds the market price of the underlying stock on the date of grant. For
disclosure purposes, pro forma net income (loss) and income (loss) per share are
provided as if the fair value method had been applied.
Long-lived assets. All of the Company's long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized in operating results. The impairment loss is measured using
discounted cash flows or quoted market prices, when available. The Company also
periodically reevaluates the remaining useful lives of its long-lived assets
based on the original intended and expected future use or benefit to be derived
from the assets. Changes in estimated useful lives are reflected prospectively
by amortizing the remaining book value at the date of the change over the
adjusted remaining estimated useful life. During 1998 and 1996, the Company
wrote-off investments in other entities of $2.0 million and $740 thousand,
respectively, which were accounted for using the cost method.
Accounting pronouncements. In 1997, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting Comprehensive Income." The Company adopted the provisions of this
SFAS in 1998 (includes restatement for comparative disclosures for 1997 and
1996). The components of comprehensive income have been presented in Note 5 of
the consolidated financial statements.
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company adopted the provisions of this
SFAS effective December 31, 1998 (includes restatement for comparative
disclosures for 1997 and 1996). The information required is presented in Note 20
of the consolidated financial statements.
In 1998, the Accounting Standards Committee issued Statement of Accounting
Position (SOP) No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The Company adopted the provisions of
this SOP effective January 1, 1998. The adoption of this SOP resulted in an
amount capitalized of $1.5 million, net of accumulated amortization expense, as
of December 31, 1998.
Reclassifications. Certain reclassifications were made to the 1997 and 1996
financial statements to conform to the 1998 presentation.
3. ACQUISITIONS
Effective August 1996, the Company acquired certain assets and assumed
certain liabilities of Digital Directory Assistance, Inc. (DDA), a publisher of
PhoneDisc CD-ROM products. The total purchase price was approximately $16.9
million of which $4.0 million was paid in September 1996, $7.9 million in the
form of a promissory note issued to the sellers paid in January 1997, and the
remaining amount through the issuance of 600,000 unregistered shares
F-10
<PAGE> 48
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Company's Class A Common Stock and 600,000 unregistered shares of the
Company's Class B Common Stock at a recorded value of $5.2 million. The
acquisition was accounted for under the purchase method of accounting. In
addition to purchased in-process research and development costs of $10.0 million
(See Note 18), goodwill recorded as part of the purchase was $10.0 million,
which is being amortized over 8 years.
Effective November 1996, the Company acquired all issued and outstanding
common stock of County Data Corporation (CDC), a national new business database
compiler. Total consideration for the acquisition was 560,000 unregistered
shares of the Company's Class A Common Stock and 560,000 unregistered shares of
the Company's Class B Common Stock. The acquisition was accounted for under the
pooling-of-interests method of accounting. The accompanying consolidated
financial statements have not been restated to reflect this acquisition, as the
financial position, results of operations and cash flows of County Data
Corporation for the periods prior to acquisition were not significant.
Effective November 1996, the Company acquired certain assets and assumed
certain liabilities of Marketing Data Systems, Inc. (MDS), a provider of data
warehousing, research and analysis services for target marketing applications to
Fortune 1000 companies. Total consideration for the acquisition was $2.4
million, consisting of $1.0 million in cash and 118,000 unregistered shares of
the Company's Class A Common Stock and 118,000 shares of the Company's Class B
Common Stock at a recorded value of $1.3 million. The acquisition has been
accounted for under the purchase method of accounting. Substantially all of the
purchase price was allocated to goodwill which is being amortized over 8 years.
Effective December 1996, the Company acquired all issued and outstanding
common stock of Kadobec Investments, Inc., (operating as B.J. Hunter), which
provides lead generation products in Canada. Total consideration for the
acquisition was $3.1 million, consisting of $876 thousand in cash and 150,000
unregistered shares of the Company's Class A Common Stock and 150,000 shares of
the Company's Class B Common Stock at a recorded value of $2.6 million. The
acquisition has been accounted for under the purchase method of accounting. The
Company allocated substantially all of the purchase price to goodwill which is
being amortized over 8 years.
Effective February 1997, the Company acquired all issued and outstanding
common stock of DBA Holdings, Inc. and Subsidiaries (operating as Database
America Companies, or DBA), a provider of data processing and analytical
services for marketing applications, and compiler of information on consumers
and businesses in the United States. Total consideration, as adjusted, for the
acquisition was approximately $103.5 million, consisting of $51.5 million in
cash, partially funded using a revolving credit facility (See Note 8), and
approximately 2.3 million unregistered shares of the Company's Class A Common
Stock and 2.3 million unregistered shares of the Company's Class B Common Stock
at a recorded value of $31.0 million. The acquisition has been accounted for
under the purchase method of accounting. In addition to purchased in-process
research and development costs of $49.2 million (See Note 18), intangibles and
goodwill recorded as part of the purchase included acquired database costs of
$19.0 million, purchased data processing software of $9.4 million, noncompete
agreements of $1.7 million and goodwill of $20.8 million. Goodwill is being
amortized over 15 years.
Effective August 1997, the Company acquired certain assets and assumed
certain liabilities of Pro CD, Inc. (Pro CD) from Acxiom Corporation (Acxiom), a
provider of telephone directory and other business software products on CD-ROM
to consumers. The acquisition has been accounted for under the purchase method
of accounting. Total consideration for the acquisition was $18 million in cash,
funded using a revolving credit facility (See Note 8). At the time of the
acquisition of Pro CD, the Company entered into two separate and unrelated
contracts with Acxiom whereby the Company agreed to license its complete
business database to Acxiom. Additionally, the Company entered into a perpetual
license agreement with Acxiom for the right to use search engine technology
developed by Axciom for the Pro CD product line. In addition to purchased
in-process research and development costs of $4.3 million (See Note 18),
intangibles and goodwill recorded as part of the purchase included core
technology, customer base, and tradename costs totaling $5.9 million, noncompete
agreements of $5.2 million and goodwill of $6.2 million. Goodwill is being
amortized over 10 years.
Effective March 1998, the Company acquired all issued and outstanding
common stock of Walter Karl, Inc. (Walter Karl), a national direct marketing
service firm that provides list management, list brokerage, and database
F-11
<PAGE> 49
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
marketing and direct marketing services to a wide array of customers. Total
consideration for the acquisition was $19.4 million in cash, subject to
adjustment, funded using a revolving credit facility (See Note 8). The
acquisition has been accounted for under the purchase method of accounting, and
accordingly, the operating results of Walter Karl have been included in the
Company's financial statements since the date of acquisition. In addition to
purchased in-process research and development costs of $3.8 million (See Note
18), intangibles and goodwill recorded based on management's preliminary
estimates included goodwill of $16.0 million, core technology of $3.7 million,
trade names of $4.2 million, customer base of $2.2 million, and workforce costs
of $0.8 million. Goodwill is being amortized over 15 years. The amount of
intangibles recorded by the Company exceeded the purchase price due to the
Company recording an accrual related to costs associated with the integration of
acquired operations into existing operations, deferred taxes established for
certain intangibles not currently deductible for tax purposes, and the excess of
liabilities over assets assumed.
Effective June 1998, the Company acquired certain assets and assumed
certain liabilities of JAMI Marketing Services, Inc. (JAMI), a list brokerage,
list management, data processing and marketing consulting firm. Total
consideration for the acquisition was $12.8 million in cash, subject to
adjustment, funded with the proceeds from the disposition of the Company's
holdings of Metromail Corporation common stock. The acquisition has been
accounted for under the purchase method of accounting, and accordingly, the
operating results of JAMI have been included in the Company's financial
statements since the date of acquisition. Intangibles and goodwill recorded
based on management's preliminary estimates included goodwill of $7.3 million,
trade names of $0.2 million, customer base of $5.1 million, noncompete
agreements of $0.2 million, and workforce costs of $0.5 million. Goodwill is
being amortized over 15 years.
Effective July 1998, the Company acquired certain assets and assumed
certain liabilities of Contacts Target Marketing (CTM), a regional business
marketing database company, based in Vancouver, Canada. Total consideration for
the acquisition was $0.4 million in cash. The acquisition has been accounted for
under the purchase method of accounting, and accordingly, the operating results
of CTM have been included in the Company's financial statements since the date
of acquisition. Intangibles and goodwill recorded based on management's
preliminary estimates included goodwill of $0.5 million. Goodwill is being
amortized over 8 years.
All stock issued in acquisitions, with the exception of the final
distribution related to DBA in late 1997, included the Company's common stock,
prior to the October 1997 reclassification of the Company's Common Stock as
Class B Common Stock and the dividend of one share of Class A Common Stock for
each share of Class B Common Stock then outstanding. See Note 19 for discussion
related to the Reclassification and Stock Dividend. The final distribution
related to the DBA acquisition in October 1997 was an equal number of shares of
Class A and Class B Common Stock.
For each of the acquisitions above, with the exception of the acquisition
of CDC in 1996 which was accounted for as a pooling of interests transaction,
the Company recorded each purchase reflecting the issuance of restricted stock
at a calculated discount, based on stock valuations performed by investment
bankers.
All purchase price adjustments recorded by the Company subsequent to the
acquisition date were in accordance with the provisions of the related purchase
agreements.
F-12
<PAGE> 50
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Operating results for each of these acquisitions are included in the
accompanying consolidated statements of operations from the respective
acquisition dates. Assuming the above described companies had been acquired on
January 1, 1997, and excluding the write-offs of in-process research and
development costs included in acquisition-related and restructuring charges in
the accompanying consolidated statements of operations, unaudited pro forma
consolidated net sales, net income and net income per share would have been as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net sales................................................... $245,139 $230,019
Net income.................................................. $ 3,787 $ 23,883
Basic earnings per share.................................... $ 0.08 $ 0.49
Diluted earnings per share.................................. $ 0.08 $ 0.49
</TABLE>
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
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GROSS GAIN GROSS LOSS VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Municipal bonds.......................................... $ 1,304 $ 3 $ (1) $ 1,306
Corporate bonds.......................................... 4,718 3 (28) 4,693
Common stock............................................. 9,056 5,357 -- 14,413
Preferred stock.......................................... 197 11 -- 208
------- ------ ------- -------
$15,275 $5,374 $ (29) $20,620
======= ====== ======= =======
At December 31, 1997:
Municipal bonds.......................................... $ 824 $ 1 $ (2) $ 823
Corporate bonds.......................................... 2,459 4 (66) 2,397
Common stock............................................. 20,372 1,429 (1,030) 20,771
Preferred stock.......................................... 47 7 -- 54
------- ------ ------- -------
$23,702 $1,441 $(1,098) $24,045
======= ====== ======= =======
</TABLE>
Scheduled maturities of marketable debt securities at December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
MORE
LESS THAN ONE TO FIVE TO THAN
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
--------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Municipal bonds.......................................... $ 217 $ 458 $105 $526
Corporate bonds.......................................... 3,660 1,033 -- --
------ ------ ---- ----
$3,877 $1,491 $105 $526
====== ====== ==== ====
</TABLE>
For the year ended December 31, 1998 proceeds from sales of marketable
securities approximated $41.1 million while realized gains totaled $17.9 million
and realized losses totaled $2.4 million. For the year ended December 31, 1997,
proceeds approximated $19.6 million while realized gains totaled $2.6 million
and realized losses totaled $86 thousand.
F-13
<PAGE> 51
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period:
Unrealized net losses..................................... $(10,162) $(1,261) $(1,701)
Related tax benefit....................................... 3,861 479 647
-------- ------- -------
Net....................................................... (6,301) (782) (1,054)
-------- ------- -------
Less: Reclassification adjustment for net gains (losses)
realized on sale of marketable securities during the
period
Realized net gains........................................ 15,164 2,216 1,486
Related tax expense....................................... (5,762) (842) (565)
-------- ------- -------
Net....................................................... 9,402 1,374 921
-------- ------- -------
Total other comprehensive income (loss)................... $ 3,101 $ 592 $ (133)
======== ======= =======
</TABLE>
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements....................................... $ 4,274 $ 1,733
Buildings and improvements.................................. 19,537 13,040
Furniture and equipment..................................... 41,626 26,608
Capitalized equipment leases................................ 5,050 2,014
------- -------
70,487 43,395
Less accumulated depreciation and amortization:
Owned property............................................ 29,020 17,502
Capitalized equipment leases.............................. 1,203 776
------- -------
Property and equipment, net....................... $40,264 $25,117
======= =======
</TABLE>
F-14
<PAGE> 52
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $ 70,456 $44,598
Noncompete agreements....................................... 7,420 6,925
Core technology............................................. 4,800 1,100
Customer base............................................... 8,372 1,100
Tradename................................................... 8,108 3,700
Purchased data processing software.......................... 9,400 9,400
Acquired database costs..................................... 19,000 19,000
Work force costs............................................ 1,338 --
Perpetual software license agreement........................ 8,000 8,000
Software development costs.................................. 4,038 1,865
Consumer database costs..................................... 5,309 3,892
Deferred financing costs.................................... 5,970 --
Other deferred costs........................................ -- 1,662
-------- -------
152,211 101,242
Less accumulated amortization............................... 42,833 27,501
-------- -------
$109,378 $73,741
======== =======
</TABLE>
8. FINANCING ARRANGEMENTS
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
9 1/2% Senior Subordinated Notes*........................... $115,000 $ --
Uncollateralized bank revolving line of credit**............ -- 78,000
Mortgage note, collateralized by deed of trust. Note bears a
fixed interest rate of 7.4% through July 2003, and then
will be adjusted to a designated Federal Reserve rate plus
1.75%. Principal is due August 2008. Interest is payable
monthly................................................... 10,553 --
State of Connecticut Department of Economic Development note
payable. Note bears a fixed interest rate of 5.0%. Note is
collateralized by certain real property. Principal is due
November 2003. Interest is payable monthly................ 450 --
Uncollateralized note payable for leasehold improvements.
Note bears a fixed interest rate of 5.0%. Principal is due
September 2003. Interest is payable monthly............... 478 --
Uncollateralized bank revolving line of credit, provides for
maximum borrowings of $5 million.......................... -- 3,000
Capital lease obligations (Note 17)......................... 1,778 1,000
-------- -------
128,259 82,000
Less current portion........................................ 1,580 716
-------- -------
Long-term debt.............................................. $126,679 $81,284
======== =======
</TABLE>
The weighted average interest rate on short-term borrowings outstanding as
of December 31, 1997 was 6.66%. There were no short-term borrowings outstanding
at December 31, 1998.
F-15
<PAGE> 53
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities by calendar year of long-term debt as of December 31,
1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 1,580
2000........................................................ $ 1,534
2001........................................................ $ 1,433
2002........................................................ $ 1,371
2003........................................................ $ 1,220
Thereafter.................................................. $121,121
</TABLE>
*On June 18, 1998, the Company completed a private placement of 9 1/2%
Senior Subordinated Notes due June 15, 2008 in the aggregate principal amount of
$115.0 million. The Notes are subject to various covenants, including among
other things, limiting additional indebtedness and the ability to pay dividends.
In January 1999, the Company exchanged registered 9 1/2% Senior Subordinated
Notes (the "Notes") for the unregistered notes pursuant to a Registration
Statement on Form S-4 declared effective by the Securities & Exchange
Commission. Interest on the Notes will accrue from the original issuance date of
the unregistered notes and will be payable semi-annually in arrears on June 15
and December 15 of each year, commencing on December 15, 1998, at the rate of
9 1/2% per annum. The Notes are redeemable, in whole or in part, at the option
of the Company, on or after June 15, 2003, at designated redemption prices
outlined in the Indenture governing the Notes, plus any accrued interest to the
date of redemption. In addition, at any time on or prior to June 15, 2001, the
Company, at its option, may redeem up to 35% of the aggregate principal amount
of the Notes originally issued with the net cash proceeds of one or more equity
offerings, at the redemption price equal to 109.5% of the principal amount
thereof, plus any accrued interest to the date of redemption. In the event of a
change in control, each holder of Notes will have the right to require the
Company to repurchase such holder's Notes at a price equal to 101% of the
principal amount thereof, plus any accrued interest to the repurchase date.
During May 1998 in connection with the sale of the Notes, the Company
entered into a Treasury yield collar agreement (the "treasury collar") with a
bank, to hedge against the movement in interest rates on the Notes. The treasury
collar was in the notional amount of $100.0 million. During June 1998, the
Company terminated the treasury collar and, in connection therewith, made a
payment of approximately $1.6 million to the bank which was recorded as deferred
financing costs included in intangible assets in the accompanying consolidated
balance sheets. The termination fee will be amortized over the 10 year life of
the Notes.
**During 1998, subsequent to completion of the private placement of notes
previously described, the Company terminated its revolving line of credit with a
bank.
9. INCOME TAXES
The provision for income taxes on continuing operations consists of the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $4,469 $ 9,163 $ 8,782
State............................................. 556 742 925
------ ------- -------
5,025 9,905 9,707
------ ------- -------
Deferred:
Federal........................................... 742 (2,688) (6,159)
State............................................. 113 (230) (148)
------ ------- -------
855 (2,918) (6,307)
------ ------- -------
$5,880 $ 6,987 $ 3,400
====== ======= =======
</TABLE>
F-16
<PAGE> 54
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Loss on discontinued operations and abandonment of subsidiary is presented
net of income tax benefits of $1.1 million in 1996.
The effective income tax rate varied from the Federal statutory rate as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected Federal income taxes at statutory rate of
35%............................................... $2,813 $(11,490) $3,131
State taxes, net of Federal effects................. 435 424 530
Amortization of nondeductible intangibles........... 1,260 637 29
In-process research and development................. 1,342 17,220 --
Nondeductible expense, nontaxable income and
other............................................. 30 196 (290)
------ -------- ------
$5,880 $ 6,987 $3,400
====== ======== ======
</TABLE>
The components of the net deferred tax asset (liability) were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Intangible assets......................................... $ -- $ 2,242
Accrued vacation.......................................... 507 399
Accrued expenses.......................................... 1,710 --
Other assets.............................................. -- 521
-------- -------
2,217 3,162
-------- -------
Deferred tax liabilities:
Intangible assets......................................... (3,996) --
Accounts receivable....................................... (1,667) (2,876)
Marketable securities..................................... (2,031) (130)
Depreciation.............................................. (1,088) (1,126)
Deferred marketing costs.................................. (1,659) (1,298)
Prepaid expenses and other assets......................... (141) (1,092)
-------- -------
(10,582) (6,522)
-------- -------
Net deferred tax liability........................ $ (8,365) $(3,360)
======== =======
</TABLE>
The Company had no valuation allowance in 1998 and 1997.
10. STOCK INCENTIVES
As of December 31, 1998, a total of 5 million shares of the Company's Class
A Common Stock and 5 million shares of the Company's Class B Common Stock have
been reserved for issuance to officers, key employees and non-employee directors
under the Company's 1992 Stock Option Plan. In addition, as of December 31,
1998, a total of 2 million shares of the Company's Class A Common Stock have
been reserved for issuance to officers, key employees and non-employee directors
under the Company's 1997 Class A Common Stock Option Plan.
Options are generally granted at the stock's fair market value on the date
of grant, vest generally over a four or five year period and expire five or six
years, respectively, from date of grant. Options issued to shareholders holding
10% or more of the Company's stock are generally issued at 110% of the stock's
fair market value on the date of grant and vest over periods ranging from five
to six years with early vesting if certain financial goals are met. Certain
options issued to directors at the stock's fair market value vested immediately
and expire five years from grant date. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standard (SFAS)
F-17
<PAGE> 55
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant date for awards issued in or subsequent to 1996 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) -- as reported.................... $2,158 $(39,816) $3,819
Net income (loss) -- pro forma...................... $ (788) $(41,503) $3,072
Basic earnings (loss) per share -- as reported...... $ 0.04 $ (0.82) $ 0.09
Diluted earnings (loss) per share -- as reported.... $ 0.04 $ (0.82) $ 0.09
Basic earnings (loss) per share -- pro forma........ $(0.02) $ (0.86) $ 0.07
Diluted earnings (loss) per share -- pro forma...... $(0.02) $ (0.86) $ 0.07
</TABLE>
The above pro forma results are not likely to be representative of the
effects on reported net income for future years since options vest over several
years and additional awards generally are made each year.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 1998, 1997 and 1996: expected
volatility of 17.33% (1998), 19.16% (1997) and 15.52% (1996); risk free interest
rate based on the U.S. Treasury strip yield at the date of grant; and expected
lives of 4 to 6 years.
The following information has been restated to reflect the stock dividend
(See Note 19). Each option to purchase shares of common stock outstanding prior
to the Stock Dividend was converted into an option to purchase both, but not
either, shares of Class A Common Stock and Class B Common Stock.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
-------------------- ------------------- ------------------
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ------ ---------- ------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of period..... 7,478,050 $ 9.22 5,203,800 $ 7.58 2,913,750 $5.49
Granted............................. 1,160,000 11.49 2,799,250 11.81 3,964,000 8.19
Exercised........................... (179,428) 6.40 (357,250) 5.87 (705,950) 4.32
Forfeited/expired................... (1,364,586) 10.91 (167,750) 8.95 (968,000) 6.00
----------- ------ ---------- ------ ---------- -----
Outstanding end of period........... 7,094,036 $ 9.33 7,478,050 $ 9.22 5,203,800 $7.58
=========== ====== ========== ====== ========== =====
Options exercisable at end of
period............................ 2,809,439 $ 8.20 1,344,550 $ 7.10 585,050 $5.53
=========== ====== ========== ====== ========== =====
Shares available for options that
may be granted.................... 777,834 1,660,000 2,796,200
=========== ========== ==========
Weighted-average grant date fair
value of options, granted during
the period -- exercise price
equals stock market price at
grant............................. $ 3.34 $ 3.30 $2.00
====== ====== =====
Weighted-average grant date fair
value of options granted during
the period -- exercise price
exceeds stock market price at
grant............................. $2.10
=====
</TABLE>
F-18
<PAGE> 56
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
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
- ------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4.09 to $5.45...................... 339,800 0.5 years $4.51 339,800 $ 4.51
$5.45 to $6.82...................... 691,500 1.9 years 6.21 422,998 6.12
$6.82 to $8.18...................... 549,000 1.6 years 7.42 304,000 7.49
$8.18 to $9.54...................... 2,595,570 2.3 years 8.64 1,229,814 8.67
$9.54 to $10.90..................... 774,500 3.6 years 10.38 78,496 10.38
$10.90 to $12.27.................... 1,213,666 3.2 years 11.23 284,333 11.17
$12.27 to $13.63.................... 930,000 2.8 years 13.14 149,998 13.19
--------- --------- ----- --------- ------
$4.09 to $13.63..................... 7,094,036 2.5 years $9.33 2,809,439 $ 8.20
========= ========= ===== ========= ======
</TABLE>
11. SAVINGS PLAN
Employees who meet certain eligibility requirements can participate in the
Companys' 401(k) Savings and Investment Plans. Under the plans, the Company may,
at its discretion, match a percentage of the employee contributions. The Company
recorded expenses related to its matching contributions of $1.1 million, $782
thousand and $115 thousand in the years ended December 31, 1998, 1997 and 1996,
respectively.
12. RELATED PARTY TRANSACTIONS
The Company paid $1.4 million, $364 thousand, and $48 thousand in 1998,
1997 and 1996, respectively, to Annapurna Corporation for consulting services
and related expenses in connection with acquisition activity conducted by the
Company. Annapurna Corporation is 100% owned by a significant stockholder. The
Company also paid $200 thousand, $145 thousand, and $156 thousand in the years
ended December 31, 1998, 1997 and 1996, respectively, to a Director of the
Company for consulting services in connection with acquisition activity
conducted by the Company.
The Company utilizes a law firm of which one member of the Board of
Directors is a partner to the firm. Legal fees paid to the law firm totaled $370
thousand, $146 thousand, and $91 thousand in the years ended December 31, 1998,
1997 and 1996, respectively.
13. DISCONTINUED OPERATIONS
On June 1, 1995, the Company transferred substantially all of the assets
and liabilities of its wholly-owned subsidiary, American Business
Communications, Inc. ("ABC") to a wholly-owned subsidiary of Baker University.
The Company received $3.0 million in the form of a 7.52% non-recourse promissory
note, due in equal monthly installments through 2005.
During 1996, Baker University defaulted on the note and the Company
abandoned any remaining net assets of the business. As a result, the Company
recorded a loss from abandonment of subsidiary of $1.4 million, net of tax.
F-19
<PAGE> 57
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
The Company made certain acquisitions in 1998 and 1997 (See Note 3) and
assumed liabilities as follows:
<TABLE>
<CAPTION>
1998 1997
------- --------
(IN THOUSANDS)
<S> <C> <C>
Fair value of assets........................................ $58,552 $134,555
Cash paid................................................... (31,654) (84,224)
Common stock issued......................................... -- (29,178)
------- --------
Liabilities assumed......................................... $26,898 $ 21,153
======= ========
</TABLE>
During 1997, the Company acquired computer equipment totaling $577 thousand
under a capital lease obligation (See Note 17).
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1998 and 1997. The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties.
The carrying amounts shown in the following table are included in the
consolidated balance sheets under the indicated captions.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............................ $ 29,603 $ 29,603 $ 10,653 $ 10,653
Marketable securities................................ 15,275 20,620 23,833 24,045
Other assets......................................... 2,000 2,000 2,071 2,000
Financial liabilities:
Payable to shareholders.............................. -- -- (1,871) (1,871)
Long-term debt....................................... 128,259 105,935 (81,284) (81,284)
Derivatives:
Interest rate swaps.................................. -- -- -- 133
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents and payable to shareholders. The carrying
amounts approximate fair value because of the short maturity of those
instruments.
Marketable securities. The fair values of debt securities and equity
investments are based on quoted market prices at the reporting date for
those or similar investments.
Other assets, including investments in other companies. Investments in
companies not traded on organized exchanges are valued on the basis of
comparisons with similar companies whose shares are publicly traded.
Long-term debt. The 9 1/2% Senior Subordinated Notes due June 2008 are
valued based on quoted market prices at the reporting date. All other debt
obligations are valued at the discounted amount of future cash flows.
Interest rate swap. The fair value of the interest rate swap was
calculated based on discounted cash flows of the difference between the
swap rate and the estimated market rate for similar terms.
F-20
<PAGE> 58
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. DERIVATIVES
The Company may use interest rate swap agreements to reduce the potential
impact of increases in interest rates on floating-rate long-term debt. The
original cost of the swap is amortized to interest expense over its term. The
amounts paid or received under the agreement are recorded as an adjustment to
interest expense. Neither the Company nor the counterparties are required to
collateralize their obligations under these agreements. Therefore, the swap
agreements expose the Company to credit losses to the extent of counterparty
nonperformance, but does not anticipate any losses from its agreements, which
are with major financial institutions.
17. COMMITMENTS AND CONTINGENCIES
The Company is committed to pay various individuals under consulting and
non-compete agreements in future periods.
Future payments by calendar year under consulting and non-compete
agreements as of December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,844
2000........................................................ $1,117
2001........................................................ $ 306
</TABLE>
Under the terms of its capital lease agreements, the Company is required to
pay ownership costs, including taxes, licenses and maintenance. The Company also
leases office space under operating leases expiring at various dates through
October 2007. Certain of these leases contain renewal options. Rent expense was
$3.1 million, $2.6 million, and $952 thousand in the years ended December 31,
1998, 1997 and 1996, respectively.
Following is a schedule of the future minimum lease payments as of December
31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1999................................................... $ 814 $ 3,806
2000................................................... 549 2,337
2001................................................... 353 1,978
2002................................................... 195 1,746
2003................................................... -- 1,386
------ -------
Total future minimum lease payments.................... 1,911 $11,253
=======
Less amounts representing interest..................... 133
------
Present value of net minimum lease payments............ $1,778
======
</TABLE>
During October, 1998, the Company announced a decision in its year-long
arbitration dispute with Experian Information Solutions, Inc. (Experian). The
dispute centered around a license agreement between the Database America
Companies (DBA) and Experian prior to the Company's acquisition of DBA. In
October 1998 an arbitrator from the American Arbitration Association found DBA
to have breached the contract and awarded damages to Experian for approximately
$4.6 million.
The Company and its subsidiaries are involved in other legal proceedings,
claims and litigation arising in the ordinary course of business. Management
believes that any resulting liability should not materially affect the Company's
financial position, results of operations, or cash flows.
18. ACQUISITION-RELATED AND RESTRUCTURING CHARGES
As a consequence of changes in the Company's acquisition strategy in 1996,
management performed an evaluation of the remaining lives of certain intangibles
related to acquisitions prior to 1995. Based on this evaluation, it was evident
that the business and distribution networks acquired changed more rapidly than
was originally
F-21
<PAGE> 59
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated. Therefore, the estimated useful lives of the related goodwill and
distribution networks were revised to 8 and 2 years, from 30 and 15 years,
respectively. This change in estimated lives resulted in a charge of $11.5
million in 1996.
As part of the acquisition of DDA in August 1996 (See Note 3), the Company
recorded acquisition-related charges for purchased in-process research and
development costs (purchased IPR&D) totaling $10.0 million for write-offs in
conjunction with the merger of DDA, which related to projects that had not met
technological feasibility. The projects under development involve Digital Video
Disk-Read Only Memory based information database technology. The value of the
technology as applied to DDA's PhoneDisc product was $3.8 million and as applied
to the Company's products was $6.2 million.
As part of the acquisition of DBA in February 1997 (See Note 3), the
Company recorded acquisition-related charges totaling $51.8 million for
write-offs in conjunction with the merger of DBA for purchased IPR&D which
related to projects that had not met technological feasibility ($49.2 million),
as well as other related integration and organizational restructuring costs
($2.6 million). The projects under development involve data processing
technologies including merge/purge and update and maintenance capabilities of
the relational databases and interactive media technology to allow DBA to
provide existing services via the Internet. The value of the data processing
technologies was $2.3 million and the value of the interactive media technology
was $46.9 million.
As part of the acquisition of Pro CD in August 1997 (See Note 3), the
Company recorded acquisition-related charges totaling $4.3 million for
write-offs in conjunction with the merger of Pro CD for purchased IPR&D which
related to projects that had not met technological feasibility. The projects
under development involve graphical user interface technology, data
enhancements, DVD capability and Year 2000 compliance for the Select Phone
product line. The value of these projects was $4.3 million.
As part of the acquisition of Walter Karl in March 1998 (See Note 3), the
Company recorded acquisition-related charges totaling $3.8 million for
write-offs in conjunction with the merger of Walter Karl for purchased IPR&D
which related to projects that had not met technological feasibility. The
purchased IPR&D recorded in connection with the acquisition of Walter Karl
consisted of various projects, of which none were individually significant,
related to areas including: Internet capabilities, automated job cards and
shipping information, database and merge/purge processing enhancements, list
brokerage and management order and data entry systems. There were a total of 12
separately identified projects. The total amount allocated to the above IPR&D
projects was $3.8 million after retroactive application of the Securities and
Exchange Commission's new guidelines for valuing purchased IPR&D.
In addition to the write-off of purchased IPR&D of $3.8 million for Walter
Karl previously described, included in acquisition-related and restructuring
charges in the accompanying consolidated statement of operations for 1998 are:
$3.0 million of costs associated with the Company's bid to acquire Metromail
Corporation, $0.7 million associated with the Company's offering to sell Class A
Common Stock which was not completed, $1.4 million for restructuring costs
related to the Company's compilation and sales activities for new businesses
enacted during the first quarter of 1998, and $1.2 million for restructuring
costs related to certain cost reduction measures enacted during the third
quarter of 1998.
During the first quarter of 1998 the Company recorded a restructuring
charge of $1.4 million related to the closing of the County Data Corporation
(CDC) new business compilation and sales center and moving these operations from
Vermont to Nebraska. All 45 of the CDC employees were terminated, and severance
recorded totaled $0.6 million. The restructuring charges also included lease
termination costs of $0.3 million and a write-off of $0.5 million of leasehold
improvement costs associated with the closed Vermont facility. The
restructuring, including recording the payments and write-downs described, was
completed by December 31, 1998.
During the third quarter of 1998 the Company recorded a restructuring
charge of $1.2 million which included $0.6 million in severance for 244
employees terminated as a result of the implementation of certain cost reduction
measures. These employees were primarily in support and administration positions
but some under-performing sales personnel were also terminated. The
restructuring charges also included a charge of $0.4 million related to the
planned closing of four field sales offices. Additionally, the Company recorded
a write-down of $0.2 million related
F-22
<PAGE> 60
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to leasehold improvement costs at facilities leased by the Company which were
being closed. The restructuring, including recording the payments and
write-downs described, was completed as of December 31, 1998, with the exception
of the costs totaling $0.5 million related to the planned exit of certain field
sales offices which are anticipated to be completed by March 31, 1999.
Included in acquisition-related charges for 1997 are $2.6 million of
expenses related to integrating acquired operations into the Company's existing
operations. These expenses consisted primarily of costs such as travel between
the Company and the new operations, consulting, payroll and other expenses
related to implementing Company policies and information systems at the new
locations. All costs had been incurred by December 31, 1997.
19. STOCK RECLASSIFICATION AND STOCK DIVIDEND AND STOCKHOLDERS RIGHTS PLANS
On October 3, 1997, the Company's Board of Directors and shareholders
approved the reclassification of the existing common stock as Class B Common
Stock and authorized 220,000,000 shares of a new Class A Common Stock. The Board
also declared a two-for-one stock split, effected in the form of a stock
dividend of one share of Class A Common Stock for each share of Class B Common
Stock then outstanding. Accordingly all share and per share information has been
restated to reflect the stock split. Each share of Class A Common Stock entitles
the holder to one vote and a non-cumulative dividend of $0.02 per year, when and
as declared by the Board of Directors in preference to any dividend on Class B
Common Stock. Each share of Class B Common Stock entitles the holder to ten
votes.
On October 3, 1997, the Company adopted a stockholder rights plan with
respect to its Class A Common Stock and adopted certain changes to the plan it
had adopted on July 21, 1997 with respect to its Class B Common Stock, under
which the Board declared a dividend distribution of one Preferred Stock purchase
right to holders of each share of Class A Common Stock and Class B Common Stock.
The rights are not exercisable until ten days after a person or group announces
the acquisition of 15% or more of the Company's voting stock or announces a
tender offer for 15% or more of the Company's outstanding common stock. Each
right entitles the holder to purchase common stock at one half the stock's
market value. The rights are redeemable at the Company's option for $0.001 per
Right at any time on or prior to public announcement that a person has acquired
15% or more of the Company's voting stock. The rights are automatically attached
to and trade with each share of Common Stock.
20. SEGMENT INFORMATION
The Company currently manages existing operations utilizing financial
information accumulated and reported for two business segments.
The small business segment principally engages in the selling of sales lead
generation and consumer CD-ROM products to small to medium sized companies,
small office and home office businesses and individual consumers. This segment
includes the sale of content via the Internet.
The large business segment principally engages in the selling of data
processing services, licensed databases, database marketing solutions and list
brokerage and list management services to large companies. This segment includes
the licensing of databases for Internet directory assistance services.
Corporate activities principally represent the information systems
technology, database compilation, database verification, and administrative
functions of the Company. Investment income (loss), interest expense, income
taxes, amortization of intangibles, and depreciation expense are only recorded
in corporate activities. The Company does not allocate these costs to the two
business segments. The small business and large business segments reflect actual
net sales, direct order production, and identifiable direct sales and
marketing-related costs related to their operations. The Company records unusual
or non-recurring items including acquisition-related and restructuring charges
and provisions for litigation settlement in corporate activities to allow for
the analysis of the sales business segments excluding such unusual or
non-recurring charges.
F-23
<PAGE> 61
INFOUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for property and equipment on a consolidated basis.
The majority of the Company's property and equipment is shared by the Company's
business segments. Depreciation expense is recorded in corporate activities.
The Company has no intercompany sales or intercompany expense transactions.
Accordingly, there are no adjustments necessary to eliminate amounts between the
Company's segments.
The following tables summarizes certain segment information:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales...................................... $129,973 $98,705 $ -- $228,678
Provision for litigation settlement............ -- -- 4,500 4,500
Acquisition-related and restructuring
charges...................................... -- -- 10,093 10,093
Operating income (loss)........................ 54,660 39,671 (91,761) 2,570
Investment income.............................. -- -- 16,628 16,628
Interest expense............................... -- -- 9,160 9,160
Income (loss) before income taxes and
discontinued operations...................... 54,660 39,671 (86,293) 8,038
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales...................................... $116,333 $76,994 $ -- $193,327
Acquisition-related and restructuring
charges...................................... -- -- 56,098 56,098
Operating income (loss)........................ 50,462 35,688 (118,629) (32,479)
Investment income.............................. -- -- 3,748 3,748
Interest expense............................... -- -- 4,098 4,098
Income (loss) before income taxes and
discontinued operations...................... 50,462 35,688 (118,979) (32,829)
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales...................................... $ 87,431 $20,867 $ -- $108,298
Acquisition-related and restructuring
charges...................................... -- -- 21,500 21,500
Operating income (loss)........................ 37,972 9,865 (40,932) 6,905
Investment income.............................. -- -- 3,194 3,194
Interest expense............................... -- -- 209 209
Income (loss) before income taxes and
discontinued operations...................... 37,972 9,865 (38,890) 8,947
</TABLE>
F-24
<PAGE> 62
INFOUSA INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:............................. (A)
December 31, 1996....................... $1,024 $ 1,485 $ 364* $ 1,284 $1,589
December 31, 1997....................... $1,589 $ 1,272 $ 961* $ 2,387 $1,435
December 31, 1998....................... $1,435 $ 4,388 $ 578* $ 3,701 $2,700
Allowance for sales returns:.............. (B)
December 31, 1996....................... $ 800 $ 3,401 $ 929* $ 3,995 $1,135
December 31, 1997....................... $1,135 $ 7,748 $2,477* $ 6,782 $4,578
December 31, 1998....................... $4,578 $15,693 $ -- $15,682 $4,589
</TABLE>
- ---------------
* Recorded as a result of acquisitions
(A) Charge-offs during the period indicated
(B) Returns processed during the period indicated
S-1
<PAGE> 1
===============================================================================
ASSET PURCHASE AGREEMENT
By and Between
ARMONK LIST COMPANIES CORP.,
a New York corporation,
and
JAMI MARKETING SERVICES, INC.,
a Delaware corporation
Dated as of May 27, 1998
===============================================================================
<PAGE> 2
ARTICLE I
SALE AND PURCHASE OF ACQUIRED ASSETS
<TABLE>
<S> <C> <C>
Section 1.01. Agreement To Purchase and Sell............................1
Section 1.02. Assumption of Liabilities.................................3
Section 1.03. Purchase Price............................................4
Section 1.04. Allocation of Consideration...............................6
Section 1.05. Closing...................................................6
ARTICLE II
SELLER'S REPRESENTATIONS AND WARRANTIES
Section 2.01. Acquired Assets and Title.................................9
Section 2.02. Corporate Status.........................................10
Section 2.03. Power and Authority......................................10
Section 2.04. Noncontravention.........................................10
Section 2.05. Enforceability...........................................11
Section 2.06. Consents and Approvals...................................11
Section 2.07. Claims and Proceedings...................................12
Section 2.08. Financial Statements.....................................12
Section 2.09. [Reserved]...............................................12
Section 2.10. No Material Adverse Changes..............................12
Section 2.11. Tax Matters..............................................13
Section 2.12. Employee Benefit Plans and Related Matters...............13
Section 2.13. Bankruptcy or Insolvency Proceedings.....................15
Section 2.14. [Reserved]...............................................15
Section 2.15. No Other Agreements......................................15
Section 2.16. No Broker................................................15
Section 2.17. Licenses, Permits, Etc. .................................15
Section 2.18. Compliance With Laws.....................................15
Section 2.19. [Reserved]...............................................15
Section 2.20. Environmental Matters....................................16
Section 2.21. [Reserved]...............................................17
Section 2.22. Full Disclosure..........................................17
ARTICLE III
REPRESENTATIONS AND WARRANTIES BY BUYER
Section 3.01. Organization.............................................17
Section 3.02. Power and Authority......................................17
Section 3.03. Noncontravention.........................................17
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 3.04. No Broker................................................17
Section 3.05. Bankruptcy or Insolvency Proceedings.....................17
Section 3.06. Enforceability...........................................18
Section 3.07. Use of Premises..........................................18
ARTICLE IV
MISCELLANEOUS
Section 4.01. Costs....................................................18
Section 4.02. Headings.................................................18
Section 4.03. Counterparts.............................................18
Section 4.04. Assignment or Delegation.................................18
Section 4.05. Severability.............................................18
Section 4.06. Entire Agreement.........................................18
Section 4.07. Notices..................................................18
Section 4.08. Nonwaiver................................................19
Section 4.09. Exhibits and Schedules...................................19
Section 4.10. Indemnification..........................................19
Section 4.11. Governing Law............................................22
Section 4.12. Amendments...............................................22
Section 4.13. Further Assurances.......................................22
Section 4.14. Confidentiality..........................................22
EXHIBIT A FORM OF ESCROW AGREEMENT
EXHIBIT B ALLOCATION SCHEDULE
EXHIBIT C FORM OF EMPLOYMENT AGREEMENTS
EXHIBIT D FORM OF NONCOMPETITION AGREEMENTS
EXHIBIT E FORM OF ASSUMPTION AGREEMENT
EXHIBIT F FORM OF OPINION OF BUYER'S COUNSEL
EXHIBIT G FORM OF BILL OF SALE
EXHIBIT H FORM OF OPINION OF SELLER'S COUNSEL
SCHEDULES
Schedule 1.01 Financial Statements
Schedule 2.01(a) Liens and Encumbrances on the Purchased Assets
Schedule 2.01(c) Material Contracts
Schedule 2.01(d) Intangible Assets
Schedule 2.02 Good Standing
Schedule 2.04 Noncontravention
Schedule 2.06 Consents
</TABLE>
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Schedule 2.07 Claims and Proceedings
Schedule 2.08 Potential Additional Liabilities
Schedule 2.10 Potential Adverse Changes
Schedule 2.12(a) Current JAMI Employees Earning in Excess of $50,000 per Year
Schedule 2.12(b) Employee Benefit Plan
Schedule 2.18 Compliance With Laws
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of
May 27, 1998 (the "Effective Date") by and between JAMI MARKETING SERVICES,
INC., a Delaware corporation ("Seller"), and ARMONK LIST COMPANIES CORP., a New
York corporation ("Buyer").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to Buyer and Buyer desires to
purchase from Seller certain of the assets of the Seller, subject to the terms,
covenants and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements set forth herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF ACQUIRED ASSETS
SECTION 1.01. AGREEMENT TO PURCHASE AND SELL.
(a) On and subject to the terms and conditions of this
Agreement, the Seller agrees to sell, convey, transfer, assign and
deliver to the Buyer and the Buyer agrees to purchase, receive, assume
and accept from the Seller the Acquired Assets and the Acquired
Liabilities for the consideration specified in Section 1.03.
(b) It is expressly understood and agreed that the Acquired
Assets shall not include any of the assets of either JAMI Charity
Brands or JAMI Charity Brands Services, Inc.
(c) As used in this Agreement, the following capitalized
terms have the meanings set forth below unless the context otherwise
requires. Certain additional defined terms are found elsewhere in this
Agreement.
"Acquired Assets" means all of Seller's right, title and
interest in or to the Assets as and to the extent existing on the
Effective Date, including all property, plant, machinery, equipment,
computer hardware and software, goodwill and other assets, employed or
held in connection with Seller's Business (other than the Excluded
Assets), and including, without limitation, all cash, cash
equivalents, accounts receivable and all
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proceeds thereof; all work in process, supplies, furniture, fixtures
and equipment, and the name "JAMI Marketing."
"Acquired Liabilities" means (i) all of Seller's liabilities
as shown on the Unaudited Financial Statements (including the notes
thereto) as at the Balance Sheet Date (other than those liabilities
that have been paid or otherwise satisfied or discharged prior to the
Effective Date) and those liabilities of Seller arising in the
ordinary course of business of Seller since the Balance Sheet Date,
which are of the same nature as the liabilities set forth on such
Unaudited Balance Sheet, (ii) all obligations (A) under real property
and equipment leases that are included in the Acquired Assets and (b)
with respect to any current or former employees or independent
contractors, including without limitation obligations for accrued
vacation pay, sick leave and statutory and non-statutory severance
benefits, (iii) all obligations of Seller under the contracts and
other agreements identified on Schedule 2.01(c), but excluding the
Excluded Liabilities.
"Assets" means all of Seller's assets shown on its unaudited
balance sheet as at the Balance Sheet Date, other than the Excluded
Assets.
"Audited Balance Sheet" means the Balance Sheet of the Seller
as at March 31, 1998 included in the Audited Financial Statements.
"Audited Financial Statements" means the balance sheet and
statement of income and retained earnings of the Seller as at and for
the year ended March 31, 1998 audited by the Present Accountants and
delivered by the Seller pursuant to Section 1.03(c) of this Agreement.
"Balance Sheet Date" means March 31, 1998.
"Brokerage Component" means the Net Revenues of the Seller
from its brokerage operations reflected in the Audited Financial
Statements.
"Buyer's Accountants" means Coopers & Lybrand.
"Computer Operations Component" means the net Revenues of the
Seller from its computer processing and consulting operations
reflected in the Audited Financial Statements.
"Excluded Assets" means the JAMI Charity Brands Assets; and
the other assets identified on Schedule 1.01-(B)
"Excluded Liabilities" means Accounts Payable relating to
certain business practices of Seller referred to in Schedule 2.19,
relating to billing procedures which result in unclaimed, unpaid
and/or uncollected obligations owing by Seller to list owners and
others, the amount of which is estimated to be $250,000; and the other
liabilities identified on Schedule 1.01-(B)
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"JAMI Charity Brands Assets" means all of the shares of JCBS
Inc. and its interest in the partnership known as "JAMI Charity Brands
Services", and all of the assets, tangible and intangible, and
liabilities relating to the business of such corporation and such
partnership, and amounts due to JCBS Inc. or JAMI from such
corporation and such partnership.
"JCBS Inc." means JAMI Charity Brands Services, Inc., a
Delaware corporation.
"Management Component" means the Net Revenues of Seller from
its list management operations reflected in the Audited Financial
Statements.
"Net Revenues" means gross billings less list rental payments
to third parties.
"Present Accountants" means Linder & Linder and Feldman,
Gutterman Meinberg & Company.
"Revenue Components" means, collectively, the Brokerage
Component, Management Component and the Computer Operations Component.
"Seller's Business" means Seller's business and operations
reflected in the Unaudited Financial Statements as at and for the
period ending on the Balance Sheet Date and as conducted through the
Effective Date, other than the Excluded Assets and the Excluded
Liabilities.
"Tangible Net Worth" means the difference between the amount
of (A) the Current Assets and Operating Equipment (and in no event
including any of the Excluded Assets) and (B) the Current Liabilities.
"Unaudited Balance Sheet" means the Balance Sheet prepared by
the Seller for the fiscal year ended March 31, 1998, included as part
of Schedule 1.01.
SECTION 1.02. ASSUMPTION OF LIABILITIES. The Buyer hereby assumes the
Acquired Liabilities. The Buyer will not in any event assume or be responsible
for any liabilities, liens, claims, obligations, or encumbrances of the Seller,
contingent or otherwise, except for the Acquired Liabilities, and the Acquired
Assets shall be sold and conveyed to Buyer free and clear of all liabilities,
liens, claims, charges, restrictions on transfer, security interests, pledges
or encumbrances of any kind, except for the Acquired Liabilities and as
otherwise set forth on Schedule 2.01(a) or Schedule 2.08. Without limiting the
generality of the foregoing, in no event will Buyer assume (except as set forth
on the Unaudited Balance Sheet):
(a) any income, sales, property, franchise, use, or other tax of
the Seller arising out of or resulting from the sale of the Acquired
Assets pursuant hereto;
(b) any liability, obligation, or cost resulting from any claim
or lawsuit or other proceeding relating to the Acquired Assets or
naming the Seller, or any successor thereof,
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as a party arising out of events, transactions, or circumstances
occurring or existing prior to Closing;
(c) any claim against the Buyer, or the Seller, which claim is
based, in whole or in part, upon the failure of the Seller or the
Buyer to comply with laws applicable to bulk transfers.
Acquired Liabilities include an Accrued Rent Liability of $254,746.00
arising as a result of initial rent concessions granted to Seller by the
landlord under Seller's lease of its current premises at One Blue Hill Plaza,
Pearl River, New York. In the event that Buyer terminates such lease and
settles any liabilities under the lease for less than $254,746, Buyer will pay
Seller an additional adjustment of the Purchase Price in an amount equal to the
amount of the final settled liability under the lease which is less than
$254,746.
SECTION 1.03. PURCHASE PRICE.
(a) The purchase price (the "Purchase Price") for the Acquired
Assets of $5,439,500 subject to adjustment pursuant to this Section
1.03, will be payable by the Buyer to the Seller as follows:
(i) $4,839,500 in cash, subject to adjustment pursuant
to this Section 1.03, will be payable to the Seller by wire
transfer of immediately available funds on the Effective
Date; and
(ii) an amount equal to $600,000 (the "Escrow Amount")
will be deposited on or prior to the Closing in an escrow
account to be maintained with the escrow agent designated in
the Escrow Agreement in the form of Exhibit A to this
Agreement (the "Escrow Agent"), which Escrow Amount will be
held for one year following the Effective Date in connection
with the potential indemnification claims hereunder and for
payment of uncollected accounts receivables pursuant to the
terms and conditions of the Escrow Agreement.
(b) To the extent that the Net Revenues of the Seller from its
Brokerage Component at and for the twelve months ended March 31, 1998,
as reflected in its audited financial statements prepared in
accordance with generally accepted accounting principles consistently
applied (the "March 31 Financial Statements"), exceed $2,770,000, the
Purchase Price will be increased by an amount equal to 1.5 times the
amount of such excess and to the extent that such Net Revenues are
less than $2,770,000, the Purchase Price will be reduced by an amount
equal to 1.5 times the amount of such difference. To the extent that
the Net Revenues of the Seller from its Management Component for the
twelve months ended March 31, 1998, as reflected in its March 31
Financial Statements, exceed $2,320,000, the Purchase Price will be
increased by an amount equal to 1.5 times the amount of such excess
and to the extent that such Net Revenues are less than $2,320,000, the
Purchase Price will be reduced by an amount equal to 1.5 times the
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amount of such difference. To the extent that the Net Revenues of the
Seller from its Computer Operating Component for the twelve months
ended March 31, 1998, as reflected in its March 31 Financial
Statements, exceed $2,000,000, the Purchase Price will be increased by
an amount equal to 2.5 times the amount of such excess and to the
extent that such Net Revenues are less than $2,000,000, the Purchase
Price will be reduced by an amount equal to 2.5 times the amount of
such difference.
(c) CALCULATION OF POST CLOSING ADJUSTMENTS TO PURCHASE PRICE. As
promptly as practicable after the Closing Seller shall cause the
Present Accountants to prepare and deliver to Buyer (i) the Audited
Financial Statements, (ii) an unaudited balance sheet for Seller as at
May 29, 1998 (the "Closing Balance Sheet") prepared in accordance with
generally accepted accounting principles, consistently applied in the
manner used to prepare Seller's Audited Balance Sheet (it being agreed
that all unbilled receivables of Seller as of May 29, 1998 shall be
included in Seller's accounts receivable in preparing the Closing
Balance Sheet), and (iii) a statement (the "Statement") setting forth
(1) each of the Revenue Components itemized by Brokerage Component,
Management Component, and Computer Operations Component reflected in
the Audited Financial Statements, and (2) the Tangible Net Worth of
the Seller as at May 29, 1998, reflected in the Closing Balance Sheet
(the "Closing Tangible Net Worth"). Not later than 15 business days
after the Statement is delivered to Buyer, Buyer shall notify Seller
in writing (the "Notice of Disagreement") whether Buyer disagrees with
the computation of the Closing Tangible Net Worth or the Revenue
Components. If no Notice of Disagreement is received by Seller within
such 15-business day period, then the calculation of the Closing
Tangible Net Worth and the Revenue Components shall be deemed to be
accepted and agreed to by Buyer. Buyer shall have the right to review
the ledgers, books, records and work papers of Seller and the Present
Accountants utilized in preparing the Closing Balance Sheet and the
Net Revenue Statement. The Notice of Disagreement shall provide
specific reasons for the disagreement. If such Notice of Disagreement
is given, then Buyer and Seller shall use reasonable efforts to
resolve the disagreement regarding the calculation of the Closing
Tangible Net Worth and the Revenue Components. If no agreement is
reached between them within thirty (30) days after the date on which
Buyer gives its Notice of Disagreement, then a determining accountant
(the "Determining Accountant") shall be appointed by the Buyer's
Accountants and the Present Accountants within ten (10) days
thereafter with instructions to resolve the disagreement and provide a
report of its determination of the amounts in dispute within thirty
(30) days of its appointment. The Determining Accountant may examine
all ledgers, books, records and work papers utilized in connection
with the accounting and preparation of the Closing Balance Sheet and
the Audited Financial Statements by the scope of its engagement will
be limited to resolving those items which Buyer identified in its
Notice of Disagreement as to which Buyer disagreed and determining
whether such items were properly reflected on the Net Revenue
Statement in accordance with the requirements of this Section;
provided that the Determining Accountant shall also make such other
changes to the Closing Balance Sheet
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and the Audited Financial Statements as are necessary and appropriate
for the consistent presentation thereof in light of its determination
of the specific issues in dispute. The decision of the Determining
Accountant shall be delivered in a written report addressed to Buyer
and Seller and shall be binding and conclusive upon the parties
hereto. The costs and fees of the Determining Accountant shall be
borne one-half by Seller and one-half by Buyer. The Tangible Net Worth
set forth in the Closing Balance Sheet and the Revenue Components set
forth in the Statement, either as agreed to by Seller and Buyer if the
calculation of the Closing Tangible net Worth and the Revenue
Components are not referred to the Determining Accountant or as
finally determined by the Determining Accountant, are referred to
respectively herein as the "Final Closing Tangible Net Worth" and the
"Final Revenue Components."
(i) Upon the fifth Business Day after completion of the
calculation of the Final Closing Tangible Net Worth and Final
Revenue Components, the Purchase Price shall be adjusted in
the manner set forth below.
(ii) The Purchase Price shall be reduced by the sum of
(i) the amount, if any, by which the Final Closing Tangible
Net Worth is less than zero, and (ii) the sum of the amounts,
if any, by which each result obtained by multiplying each
Revenue Component by its corresponding multiple referred to
in Section 1.03(b) is less than the amount for such Revenue
Component required by such Section 1.03(b), and Seller shall
deliver to Buyer, cash in an amount equal to such reduction
in the Purchase Price within five (5) business days
thereafter.
(iii) The Purchase Price shall be increased by the sum
of (i) the amount, if any, by which the Final Closing
Tangible Net Worth is greater than zero, and (ii) the sum of
the amounts, if any, by which each result obtained by
multiplying each Revenue Component by its corresponding
multiple referred to in Section 1.03(b) is greater than the
amount for such Revenue Component required by such Section
1.03(b), and Seller shall deliver to Buyer, cash in an amount
equal to such increase in the Purchase Price within five (5)
business days thereafter.
SECTION 1.04. ALLOCATION OF CONSIDERATION. The Buyer and the Seller
agree to allocate the Purchase Price among the Acquired Assets for all
purposes, including financial accounting and tax purposes, in accordance with
the allocation schedule set forth in Exhibit B to this Agreement. The Buyer and
the Seller agree to cooperate in preparing and filing the applicable and
necessary Internal Revenue Service forms reflecting such allocation,
acknowledge and agree that such allocations have been determined by arm's
length negotiations and that neither of them will take a position on any income
tax return, before any governmental agency charged with the collection of any
income tax or in any judicial proceeding that is inconsistent with such
allocation.
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SECTION 1.05. CLOSING.
(a) Subject to the terms and conditions of this Agreement, the
closing under this Agreement (the "Closing") shall take place
simultaneously as of the date this Agreement is executed. The Closing
shall occur at the offices of Feder, Kaszovitz, Isaacson, Weber, Skala
& Bass LLP, New York City, New York, or at such other place as the
Buyer and the Seller may agree.
(b) At Closing, the Buyer shall execute, acknowledge and/or
deliver or cause to be delivered the following:
(i) The Purchase Price, other than the Escrow Amount, in
cash by wire transfer of immediately available funds pursuant
to wiring instructions provided by the Seller prior to the
Closing;
(ii) The Employment Agreements, in the form of Exhibit
C, for each of Scott Miller, Arlene Rosenbaum, John Greany,
David Malamed and Jeff Feldman (collectively, the
"Employees"), duly executed by the Buyer;
(iii) The Noncompetition Agreements, in the form of
Exhibit D, for each of the Employees, Jeffrey Schwartz and
Michael Miller, duly executed by the Buyer;
(iv) A certificate of good standing for the Buyer issued
by the Secretary of State of the State of New York;
(v) An assumption agreement (the "Assumption Agreement")
relating to the assumption of certain liabilities of the
Seller, in the form of Exhibit E duly executed by the Buyer;
(vi) The opinion of counsel to the Buyer in
substantially the form set forth in Exhibit F;
(vii) The Escrow Agreement in the form of Exhibit A,
duly executed by the Buyer;
(viii) Buyer Secretary's Certificate certifying as to
the following:
(A) resolutions duly adopted by the Board of
Directors of the Buyer, certified by its corporate
secretary, authorizing the execution, delivery and
performance of this Agreement, the Employment
Agreements, the Noncompetition Agreements, the
Assumption Agreement and the Escrow Agreement and
the consummation of the transactions contemplated
thereby; and
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(B) the incumbency and signature of the officers of
the Buyer executing this Agreement, the Employment
Agreements, the Noncompetition Agreements, the
Assumption Agreement and the Escrow Agreement.
(ix) The Escrow Amount, which will be delivered to the
Escrow Agent; and
(x) Any and all other instruments reasonably required or
requested by the Seller or its counsel in connection with the
Closing.
(c) At Closing, the Seller shall execute, acknowledge and/or
deliver or cause to be delivered the following:
(i) A bill of sale, relating to the Acquired Assets to
be transferred to the Buyer, in the form attached hereto as
Exhibit G, duly executed by the Seller (the "Bill of Sale");
(ii) Such other instruments of conveyance, assignment and
transfer, in form and substance satisfactory to the Buyer's
counsel, as shall be effective to vest in the Buyer good and
marketable title to the Acquired Assets;
(iii) The Employment Agreements, in the form of Exhibit C,
duly executed by the respective Employees;
(iv) The Noncompetition Agreements, in the form of
Exhibit D, duly executed by the respective Employees, Jeffrey
Schwartz and Michael Miller;
(v) A certificate of good standing for the Seller issued
by the Secretary of State of the State of Delaware;
(vi) Seller Secretary's Certificate certifying to the
following:
(A) resolutions duly adopted by the Board of
Directors of the Seller certified by its corporate
secretary, authorizing the execution, delivery and
performance of this Agreement, the Assumption
Agreement and the Escrow Agreement and the
consummation of the transactions contemplated
thereby;
(B) the incumbency and signature of the officers of
the Seller executing this Agreement, the Assumption
Agreement and the Escrow Agreement; and
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(C) resolution duly adopted by all of the Seller's
shareholders authorizing the consummation of the
transaction contemplated hereby.
(vii) The opinion of counsel to the Seller in
substantially the form set forth in Exhibit H;
(viii) The Escrow Agreement, in the form of Exhibit A,
duly executed by the Seller;
(ix) Draft, unaudited financial statements of the Seller
at and for the twelve months ended March 31, 1998, prepared
in accordance with generally accepted accounting principles
consistently applied, except as otherwise noted in the
financial statements (the "Unaudited March 31 Financial
Statements");
(x) All consents, approvals, authorizations or orders of
and all registrations, declarations or filings with third
parties, including creditors, contract parties or public or
governmental authorities, necessary for the authorization,
execution and delivery of this Agreement by the Seller or the
consummation by the Seller of the transactions contemplated
by this Agreement, except for those which the Seller has not
obtained or made as set forth in Schedule 2.06; and
(xi) Any and all other instruments reasonably required
or requested by the Buyer or its counsel in connection with
the Closing.
ARTICLE II
SELLER'S REPRESENTATIONS AND WARRANTIES
The Seller represents and warrants to the Buyer that the statements
contained in this Article II, including the disclosure schedules thereto, are
correct and complete in all material respects as of the date of this Agreement,
except that any representation or warranty that is given as of a particular
date and relates solely to a particular date or period is given as of such date
or period. If and to the extent any information required to be furnished in any
Section of any Schedule or Exhibit hereto is contained in another Section of
such Schedule or Exhibit or in any other Schedule or Exhibit hereto, such
information will be deemed to be included in all Sections or Exhibits of each
Schedule or Exhibit in which such information is required to be included.
Seller represents, warrants and covenants to Buyer, its successors and assigns
as follows:
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SECTION 2.01. ACQUIRED ASSETS AND TITLE.
(a) Except for the Acquired Liabilities and as otherwise set
forth in Schedule 2.01(a) or Schedule 2.08 hereto, the Seller will
convey the Acquired Assets to Buyer free and clear of all liabilities,
liens, claims, charges, restrictions on transfer, security interests,
pledges or encumbrances of any kind. The Seller has the full right,
power, authority and capacity to sell and transfer the Acquired Assets
to the Seller. There are no agreements, covenants, conditions,
limitations or other exceptions affecting the Acquired Assets which
would prevent, prohibit, delay or interfere with Buyer's intended use
of the Acquired Assets.
(b) Schedule 1.01 hereto contains a description of all material
fixed and other tangible assets owned, leased or used by the Seller,
including without limitation, improvements to leased property and real
property, equipment, vehicles and all personal property relating to
the Seller and its business and properties. All such improvements,
equipment, vehicles and personal property are in good working
condition and repair, normal wear and tear excepted. All such
improvements, equipment, vehicles and personal property comply in all
material respects to applicable health, sanitation, fire,
environmental (including air and water pollution laws and
regulations), safety, labor, zoning and building laws and ordinances;
and the Seller has not received any written notification within the
last five years of any violation of any applicable ordinance or
regulation of building, zoning or other law, in respect of its
properties or operations. To the Seller's knowledge, none of such real
property is currently the subject of any eminent domain, condemnation
or similar proceeding and, to the Seller's knowledge, no such
proceeding is threatened. To the Seller's knowledge, there are no
pending or threatened proceedings which might interfere with the
Buyer's quiet enjoyment of such real property.
(c) Schedule 2.01(c) contains a list of all contracts and
agreements for the performance of services or the purchase or leasing
of property by the Seller of an amount or value in excess of $10,000
("Material Contracts"). Each of the Material Contracts is in full
force and effect and (assuming each such contract is a valid and
binding obligation of the other parties thereto) is valid and
enforceable in accordance with its terms. The Seller is not, and to
the knowledge of the Seller each other person that has or had any
obligation under a Material Contract is not, in material violation,
breach or default of any such Material Contract or with or without
notice or lapse of time or both would be in material violation, breach
or default of any such Material Contract, except as set forth in
Schedule 2.01(c). The Seller has not renegotiated, and there are no
outstanding rights to renegotiate, any amounts paid or payable under
any Material Contract with any person.
(d) Schedule 2.01(d) hereto also contains a description of all
material intangible assets owned or used by the Seller, including,
without limitation, tradenames, trademarks, servicemarks, copyrights,
uncopyrighted marks, software, licenses, sublicenses, permits and
patents (collectively, the "Intangible Assets"). Except as set forth
in Schedule 2.01(d),
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the Seller has full and clear title to the Intangible Assets for the
goods and services for which such Intangible Assets are used and
believes that any registrations thereof are valid and subsisting and
are in full force and effect. Except as set forth in Schedule 2.01(d),
the Seller has the sole, full and clear title to each copyright in the
Intangible Assets and believes that the registrations thereof are
valid and subsisting and are in full force and effect.
SECTION 2.02. CORPORATE STATUS. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to carry on its business and
to own or lease and to operate its properties as and in the places where such
business is conducted and such properties are owned, leased or operated. The
Seller is qualified to do business as a foreign corporation in the
jurisdictions identified in Schedule 2.02 and is in good standing under the
laws of any state of the United States in which the character of the properties
owned or leased by it therein or in which the transaction of business makes
such qualification necessary, except where the failure to be so qualified would
not have a Material Adverse Effect. For purposes of this Agreement, the term
"Material Adverse Effect" shall mean any change or changes in the assets,
business, operations, property or results of operations that is materially
adverse to the financial condition of the Seller. The Seller has delivered to
the Buyer complete and correct copies of its certificate of incorporation and
bylaws or other organizational documents, in each case, as amended and in
effect on the date of this Agreement. The Seller is not in violation of any of
the provisions of such organizational documents.
SECTION 2.03. POWER AND AUTHORITY. The Seller has full corporate power
and authority to enter into, execute and deliver this Agreement and all other
agreements and documents contemplated by this Agreement, to perform its
obligations thereunder and to consummate the transactions contemplated thereby
except as set forth in Schedule 2.02 hereto. The Seller has taken all corporate
action required, including requisite actions by the Board of Directors and the
shareholders of the Seller, to authorize the execution and delivery of this
Agreement and the consummation of the transactions contemplated on its part
herein.
SECTION 2.04. NONCONTRAVENTION. Except as set forth in Schedule 2.04
hereto, neither the execution and delivery of this Agreement by the Seller nor
the consummation by the Seller of the transaction as contemplated on its part
hereby will (i) violate in any material respects or result in a material change
in any rights or obligations under any governmental permit or license, any
existing law or regulation applicable to the Seller or any judgment, writ,
injunction, order, award or decree of any court, arbitrator or governmental
authority by which it is bound, (ii) conflict with in any material respect,
result in a breach of any material provision of or the modification or
termination of, constitute a material default (with the giving of notice or the
lapse of time or both) under or result in the creation or imposition of any
lien, security interest, charge or encumbrance upon any of the assets of the
Seller which in the aggregate are material under any mortgage, indenture,
security agreement, contract, agreement or other undertaking to which it is a
party or by which it is bound (other than contracts, leases or other agreements
which require a consent to the transfer thereof) and which, in the aggregate,
would have a Material Adverse Effect upon
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the operation of the business conveyed as part of the transfer of the Acquired
Assets or (iii) conflict with or result in a breach of any provisions of its
certificate of incorporation or bylaws.
SECTION 2.05. ENFORCEABILITY. This Agreement, the Bill of Sale, the
Escrow Agreement and the Assumption Agreement constitutes the valid and legally
binding obligations of the Seller, enforceable upon and against Seller in
accordance with their respective terms.
SECTION 2.06. CONSENTS AND APPROVALS. (a) Except as set forth on
Schedule 2.06 hereto, the Seller has obtained all approvals, authorizations or
orders of and has made all registrations, declarations or filings with third
parties, including governmental authorities, necessary for the authorization,
execution and delivery of this Agreement by the Seller or the consummation by
the Seller of the transactions contemplated by this Agreement, which consents,
approvals, authorizations, orders, registrations, declarations and filings are
set forth in Schedule 2.06.
(b) Seller and Buyer will cooperate and use their respective
commercially reasonable efforts to obtain as promptly as practicable all
consents, approvals and waivers which have not been obtained as of the Closing
required by third persons to transfer the contracts in a manner that will avoid
any default, conflict or termination of rights under the contracts.
Notwithstanding anything to the contrary in this Agreement, nothing in this
Section 2.06 shall require Seller or Buyer to expend any material sum, make a
material financial commitment or grant or agree to any material concession to
any third person to obtain any such consent, approval or waiver.
(c) In the event that any and all consents, approvals or waivers
necessary for the assignment, transfer or novation of any contract, or any
claim, right or benefit arising thereunder or resulting therefrom, or consents
relating to sale of the Acquired Assets, shall not have been obtained prior to
the Closing, then as of the Closing, this Agreement, to the extent permitted by
law, shall constitute full and equitable assignment by Seller to Buyer of all
of Seller's right, title and interest in and to, and all of Seller's
obligations and liabilities under, such contract, and Buyer shall be deemed
Seller's agent for purposes of completing, fulfilling and discharging all of
Seller's liabilities under any such contract. The parties shall take all
necessary steps and actions to provide Buyer with the benefits of such
contracts, and to relieve Seller of the performance and other obligations
thereunder arising after the Closing. Buyer agrees to pay, perform and
discharge, and Buyer agrees to indemnify Seller against and hold Seller
harmless from, all obligations and liabilities of Seller relating to such
performance or failure to perform under such Contracts arising after the
Closing. To the extent required in order to obtain a consent, approval or
waiver to the transfer of any contract described in this Section, Buyer and
Buyer's parent corporation, American Business Information, Inc., by their
signatures at the end of this Agreement hereby guarantee such obligations of
Buyer and agree to pay, perform and discharge all obligations and liabilities
of Seller relating to such performance or failure to perform under any such
contract arising after the Closing.
(d) In the event Seller shall be unable to make the equitable
assignment described in the preceding paragraph, or if such attempted
assignment would give rise to any right of
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termination, or would otherwise adversely affect the rights of Seller or Buyer
under such contract, or would not assign all Seller's rights thereunder at the
Closing, Seller and Buyer shall continue to cooperate and use all reasonable
efforts to provide Buyer with all such rights. To the extent that any such
consents and waivers are not obtained, or until the impediments to such
assignments are resolved, Seller shall use all reasonable efforts to (i)
provide to Buyer, at the request of Buyer, the benefits of any such contract,
(ii) cooperate in any lawful arrangement designed to provide such benefits to
Buyer, and (iii) enforce, at the request of and for the account of Buyer, any
rights of Seller arising from any such contract against any third person,
including the right to elect to terminate in accordance with the terms thereof
upon the advice of Buyer. To the extent that Buyer is provided the benefits of
any contract referred to herein (whether from Seller or otherwise), Buyer shall
perform the obligations of Seller thereunder, and Buyer agrees to pay, perform
and discharge, and Buyer agrees to indemnify Seller against and hold Seller
harmless from, all obligations and liabilities of relating to such performance
or failure to perform (but only to the extent such obligations or liabilities
arise solely from acts of Buyer after the Closing).
SECTION 2.07. CLAIMS AND PROCEEDINGS. Except as set forth in Schedule
2.07, there is no suit, action, claim, complaint, proceeding, demand,
arbitration, grievance, citation, summons, subpoena, inquiry or investigation
of any nature, civil, criminal, regulatory or otherwise, pending or, to the
knowledge of the Seller, threatened against the Seller or the Acquired Assets
before any court or by any governmental, administrative or regulatory agency or
authority, or otherwise which, if decided adversely, would have Material
Adverse Effect upon the operation of the business conveyed as part of the
transfer of the Acquired Assets. The Seller is not subject to any currently
existing order, writ, injunction or decree relating to its operations. There is
no litigation pending or written notice of threatened litigation in which any
injunction or material damages are sought against or from Seller in connection
with the transactions contemplated hereby
SECTION 2.08. FINANCIAL STATEMENTS. The Seller has delivered the
Unaudited March 31 Financial Statements to the Buyer. The Seller shall
cooperate and use commercially reasonable efforts to prepare and deliver to the
Buyer the Closing Balance Sheet and to cause its independent accounting firm to
prepare and complete the Audited Financial Statements, at the Seller's expense,
for completion and delivery to the Buyer on or prior to July 15, 1998. The
Unaudited Balance Sheet, including the notes thereto, has been prepared, and
the Audited March 31 Financial Statements and the Closing Balance Sheet shall
be prepared, in accordance with generally accepted accounting principles
consistently applied throughout the periods covered thereby, except as
otherwise noted in the financial statements, present fairly the financial
condition of the Seller as of such dates and the results of operations for such
periods, are correct and complete in all material respects and are consistent
with the books and records of the Seller, which books are correct and complete
in all material respects. Schedule 2.08 sets forth certain potential additional
liabilities.
SECTION 2.09. [RESERVED.]
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SECTION 2.10. NO MATERIAL ADVERSE CHANGES. Except as set forth in
Schedule 2.10, since March 31, 1998, there has not been (i) any change in the
financial condition, results of operations, business, assets or liabilities
(contingent or otherwise, whether due or to become due, known or unknown) of
the Seller which would have a Material Adverse Effect on the foregoing, (ii)
any incurrence by the Seller of any long term debt, (iii) any increases in
salary, bonus or other compensation to any officers, employees or agents of the
Seller, (iv) any pending or threatened labor disputes or other labor problems
against or potentially affecting the Seller or (v) any other transaction
entered into by the Seller, except in the ordinary course of business and
consistent with past practice.
SECTION 2.11. TAX MATTERS.
(a) For purposes of this Agreement, "Tax" means any federal,
state, local or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental (including taxes under Section 59A of the
Internal Revenue Code of 1986, as amended (the "Code")), customs,
duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property,
personal property, sales, use, transfer, registration, value added,
alternative or add on minimum, estimated or other tax of any kind
whatsoever, including any penalty, interest or addition thereto,
whether disputed or not.
(b) Since March 31, 1998, the Seller has not incurred any Tax
liabilities other than in the ordinary course of business. There are
no Tax liens upon any of the Acquired Assets.
SECTION 2.12. EMPLOYEE BENEFIT PLANS AND RELATED MATTERS.
(a) Schedule 2.12(a) sets forth the names, ages and titles of all
members of the Board of Directors and officers of the Seller and all
employees of the Seller earning in excess of $50,000 per year and the
annual rate of compensation (including bonuses) being paid to each
such officer and employee as of the most recent practicable date.
(b) Schedule 2.12(b) lists each employment, bonus, deferred
compensation, pension, stock option, stock appreciation right,
profit-sharing or retirement plan, arrangement or practice, each
medical, vacation, retiree medical severance pay plan, and each other
agreement or fringe benefit plan, arrangement or practice, of the
Seller, whether legally binding or not, that affects one or more of
the Seller's employees, including all "employee benefit plans" as
defined by Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") (collectively, the "Plans"). The Seller
neither has nor sponsors, nor participates in, any Plan that is
subject to Title IV of ERISA or the minimum funding standards of
Section 412 of the Code.
(c) For each Plan that is an "employee benefit plan" under
Section 3(3) of ERISA, the Seller has delivered to the Buyer correct
and complete copies of the plan
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documents and summary plan descriptions, the most recent determination
letter received from the Internal Revenue Service, the most recent
Form 5500 Annual Report, and all related trust agreements, insurance
contracts and funding agreements that implement each such Plan.
(d) The Seller has no commitment, whether formal or informal and
whether legally binding or not, (i) to create any additional Plan,
(ii) to modify or change any Plan or (iii) to maintain for any period
of time any Plan. Schedule 2.12(b) contains an accurate and complete
description of the funding policies (and commitments, if any) with
respect to each existing Plan.
(e) The Seller has no unfunded past service liability in respect
of any of its Plans; neither the Seller nor any Plan, nor any trustee,
administrator, fiduciary or sponsor of any Plan, has engaged in any
prohibited transaction as defined in Section 406 of ERISA or Section
4975 of the Code for which there is no statutory exemption in Section
408 of ERISA or Section 4975 of the Code; all filings, reports and
descriptions as to such Plans (including Form 5500 Annual Reports,
summary plan descriptions and summary annual reports) required to have
been made or distributed to participants, the Internal Revenue
Service, the United States Department of Labor and other governmental
agencies have been made in a timely manner; there is no material
litigation, disputed claim, governmental proceeding or investigation
pending or threatened with respect to any of the Plans, the related
trusts or any fiduciary, trustee, administrator or sponsor of the
Plans; the Plans have been established, maintained and administered in
all material respects in accordance with their governing documents and
applicable provisions of ERISA and the Code and Treasury Regulations
promulgated thereunder; and each Plan that is intended to be a
qualified plan under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service with
respect to the current terms of the Plan.
(f) Except where failure to do so would not have a Material
Adverse Effect, the Seller has complied in all respects with all
applicable federal, state and local laws, rules and regulations
relating to employee's employment and employment relationships,
including, without limitation, wage-related laws, antidiscrimination
laws, employee safety laws and COBRA (defined herein to mean the
requirements of Code Section 4980B, Proposed Treasury Regulation
Section 1.162-26 and Part 6 of Subtitle B of Title I of ERISA).
(g) The consummation of the transactions contemplated by this
Agreement will not (i) result in the payment or series of payments by
the Seller to any employee or other person of an "excess parachute
payment" within the meaning of Section 280G of the Code; (ii) entitle
any employee or former employee of the Seller to severance pay,
unemployment compensation or any other payment; or (iii) accelerate
the time of payment or vesting of any stock option, stock appreciation
right, deferred compensation or other employee benefits under any Plan
(including vacation and sick pay).
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(h) None of the Plans that are "welfare benefit plans," within
the meaning of Section 3(1) of ERISA, provide for continuing benefits
or coverage after termination or retirement from employment, except
for COBRA rights under a "group health plan" as defined in Code
Section 4980B(g) and ERISA Section 607.
(i) Neither the Seller nor any member in a "controlled group"
with the Seller (as defined in ERISA) has ever contributed to,
participated in or withdrawn from a multiemployer plan as defined in
Section 4001(a)(3) of Title IV of ERISA, and the Seller has not
incurred and does not owe any liability as a result of any partial or
complete withdrawal by an employer from such a multiemployer plan as
described under Section 4201, 4203 or 4205 of ERISA.
(j) Seller and Buyer agree that Buyer is not assuming any Plans
of the Seller or any of its subsidiaries or affiliates or any
liability under any such Plan.
SECTION 2.13. BANKRUPTCY OR INSOLVENCY PROCEEDINGS. There are no
attachments, executions, assignments for the benefit of creditors or voluntary
or involuntary proceedings in bankruptcy pending or to Seller's knowledge
threatened against Seller or the Acquired Assets.
SECTION 2.14. [RESERVED.]
SECTION 2.15. NO OTHER AGREEMENTS. Seller has no existing contract or
agreement, written or oral, and is not engaged in any negotiations, with any
party other than Buyer for the sale, transfer or other conveyance of the
Acquired Assets (including the grant of any license to any intellectual
property of the Seller other than licenses in the ordinary course of business
related to the sale of the Seller's products or services) or portion thereof or
of any interest in or right to acquire the Acquired Assets or a portion
thereof, or for the acquisition of any material portion of the capital stock of
the Seller.
SECTION 2.16. NO BROKER. The Seller has not entered into any contract,
arrangement or understanding with any person or firm that may result in the
obligation of the Seller or the Buyer to pay any finder's fee, brokerage or
agent's commission or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby, except for Ronald Shapss Corporate Services, Inc., to whom the Buyer
shall have no liability or obligation to pay any fees, commissions, expenses or
other like payments.
SECTION 2.17. LICENSES, PERMITS, ETC. Seller has delivered to Buyer
all documents, instruments, approvals, certificates, plans and specifications,
records and reports with respect to the Acquired Assets in the possession of
Seller. There are no governmental licenses or permits required to own and
operate the Acquired Assets.
SECTION 2.18. COMPLIANCE WITH LAWS. Except as set forth in Schedule
2.18, the Seller has been and currently is conducting its business and each of
the premises leased or owned by it have been and now are being used and
operated in compliance, in all material respects, with all
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applicable statutes (including 15 U.S.C. Section 1681 et seq.), regulations,
rules, ordinances, judgments, orders, covenants, restrictions and plans of
federal, state, regional, county or municipal court, authorities, agencies or
boards, except where the failure to do so would not have a Material Adverse
Effect. All governmental licenses, permits and approvals necessary to own and
operate the Acquired Assets are in full force and effect and there are no
violations thereof, except where the failure to do so would not have a Material
Adverse Effect.
SECTION 2.19. [RESERVED.]
SECTION 2.20. ENVIRONMENTAL MATTERS.
(a) To the Seller's knowledge, the Seller is in compliance in all
material respects with all applicable environmental laws, and no
facility owned or leased by the Seller (including, to the knowledge of
the Seller, all owners or operators thereof insofar as such property
is concerned) is in violation of any applicable environmental laws in
any material respect. The Seller has not received any written
communication that alleges that any facility owned or leased by the
Seller (including, with respect to any such facility, to the knowledge
of the Seller, any owner or operator thereof insofar as such property
is concerned) is not in such material compliance, and to the knowledge
of the Seller there are no circumstances that may prevent or interfere
with such compliance by the Seller in the future. There are no
licenses held by the Seller pursuant to environmental laws.
(b) There is no Environmental Claim (as defined below) pending
against the Seller or any facility owned or leased by the Seller or,
to the knowledge of the Seller, threatened against the Seller or any
such facility, or threatened or pending against any person whose
liability for any environmental claims the Seller has or may have
retained or assumed either contractually or by operation of law. The
term "Environmental Claim" means any written notice by a person
alleging actual or potential liability (including, potential liability
for any investigatory cost, cleanup cost, governmental response cost,
natural resource damage, property damage, personal injury or penalty)
arising out of, based on or resulting from (i) the presence,
transport, disposal, discharge or release of any chemicals,
pollutants, contaminants, wastes, toxic or hazardous substances,
petroleum or petroleum products or (ii) circumstances forming the
basis of any violation, or alleged violation of any environmental law.
(c) To the Seller's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge,
disposal or presence of any materials of environmental concern, that
will form the basis of any valid Environmental Claim against the
Seller, any facility owned or leased by the Seller or any person whose
liability for any Environmental Claim the Seller has or may have
retained or assumed either contractually or by operation of law.
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(d) Without in any way limiting the generality of the foregoing,
to the knowledge of the Seller there:
(i) are no underground storage tanks currently or
formerly being located on property currently owned or leased
by the Seller;
(ii) is no asbestos contained in or forming part of
any building or structure owned or leased by the Seller; and
(iii) are no polychlorinated biphenyls which are
used or stored at any property currently owned or leased by
the Seller.
SECTION 2.21. [RESERVED.]
SECTION 2.22. FULL DISCLOSURE. All of the information provided by the
Seller and its representatives herein or in the disclosure schedules and
exhibits hereto is true, correct and complete in all material respects, and no
representation, warranty or statement made by the Seller in or pursuant to this
Agreement, the disclosure schedules or the exhibits contains any untrue
statement of a material fact or omits or will omit to state any material fact
necessary to make such representation, warranty or statement not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES BY BUYER
The Buyer represents and warrants to the Seller that the statements
contained in this Article III, including the disclosure schedules thereto, are
correct and complete as of the date of this Agreement, except that any
representation or warranty that is given as of a particular date and relates
solely to a particular date or period is given as of such date or period. Buyer
represents, warrants and covenants to Seller, its successors and assigns as
follows:
SECTION 3.01. ORGANIZATION. Buyer is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of New York.
SECTION 3.02. POWER AND AUTHORITY. The Buyer has full corporate power
and authority to enter into, execute and deliver this Agreement and all other
agreements and documents contemplated by this Agreement, to perform its
obligations thereunder and to consummate the transactions contemplated thereby.
The Buyer has taken all corporate action required to authorize the execution
and delivery of this Agreement and the consummation of the transactions
contemplated on its part herein.
SECTION 3.03. NONCONTRAVENTION. The execution and delivery of this
Agreement by Buyer and the consummation by Buyer of the transactions as
contemplated on its part hereby do not or will not violate or result, with the
giving of notice or the lapse of time or both, in a material violation of any
provision of (i) any existing law or regulation or any order, award or decree
of
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any court, arbitrator or governmental authority by which Buyer is bound, (ii)
any mortgage, indenture, security agreement, contract, agreement or other
undertaking to which Buyer is a party or by which it is bound or (iii) Buyer's
Certificate of Incorporation or Bylaws.
SECTION 3.04. NO BROKER. The Buyer has not entered into any contract,
arrangement or understanding with any person or firm that may result in the
obligation of the Seller or the Buyer to pay any finder's fee, brokerage or
agent's commission or other like payments in connection with the negotiations
leading to this Agreement or the consummation of the transactions contemplated
hereby.
SECTION 3.05. BANKRUPTCY OR INSOLVENCY PROCEEDINGS. There are no
attachments, executions, assignments for the benefit of creditors or voluntary
or involuntary proceedings pending or threatened against Buyer.
SECTION 3.06. ENFORCEABILITY. This Agreement constitutes, and all
other agreements and documents contemplated by this Agreement to which the
Buyer is a party will constitute on the Effective Date, the valid and legally
binding obligations of the Buyer, enforceable upon and against Buyer in
accordance with their respective terms.
SECTION 3.07. USE OF PREMISES. Buyer agrees that JCBS Inc. and JAMI
Charity Brands Services, for one year after the date of this Agreement, shall
have the right to use the portion of the premises it uses as of the date of
this Agreement leased by Seller.
ARTICLE IV
MISCELLANEOUS
SECTION 4.01. COSTS. Each of the parties to this Agreement shall pay
all costs incurred by it incident to the preparation, execution and delivery of
this Agreement and the performance of its obligations under this Agreement,
whether or not the transactions contemplated by this Agreement shall be
consummated, including fees and disbursements of legal counsel, accountants,
financial advisors and consultants employed by the respective parties to this
Agreement in connection with the transactions contemplated by this Agreement.
SECTION 4.02. HEADINGS. All headings of sections of this Agreement are
inserted for convenience only and do not form part of this Agreement or limit,
expand or otherwise alter the meaning of any provisions hereof.
SECTION 4.03. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, and
all of which shall constitute one in the same agreement.
SECTION 4.04. ASSIGNMENT OR DELEGATION. No rights, obligations or
duties of the Seller or the Buyer hereunder may be assigned or delegated.
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SECTION 4.05. SEVERABILITY. Should any provision of this Agreement be
deemed unenforceable by a court of competent jurisdiction, the unenforceable
provision shall be considered severed from this Agreement and the remainder
shall remain in force.
SECTION 4.06. ENTIRE AGREEMENT. This instrument contains and
constitutes the entire agreement of the parties regarding the subject matter
hereof, and there are no other agreements, written or oral, between the parties
affecting the subject matter hereof.
SECTION 4.07. NOTICES. All notices or other communications to be given
hereunder shall be given in writing and delivered by (i) certified mail, return
receipt requested, (ii) personal delivery, (iii) facsimile or (iv) overnight
express carrier addressed as follows:
If to Seller: Mr. Michael Miller
c/o Quintel Enterprises, Inc.
One Blue Hill Plaza
Pearl River, NY 10965
with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
LLP
750 Lexington Avenue
New York, NY 10022
Attention: Geoffrey Bass, Esq.
If to Buyer: Armonk List Companies Corp.
5711 South 86 Circle
Omaha, NE 68127
Attention: Mr. Steven Purcell, Chief Financial
Officer
with a copy to: Michael C. Pallesen, Esq.
Corporate Counsel
Armonk List Companies Corp.
5711 South 86 Circle
Omaha, NE 68127
or to such other address furnished by any party to the other in writing at any
time and from time to time for such notice purposes. Any notice served by
either party on the other shall be deemed effective the fifth business day
following deposit in the mail if sent by certified mail, return receipt
requested, when received, if delivered personally, upon machine confirmation if
sent by facsimile, or the next business day following deposit with an overnight
express carrier.
SECTION 4.08. NONWAIVER. No delay, forbearance or neglect by Buyer or
Seller in the enforcement of any of the conditions of this Agreement or any of
Seller's or Buyer's rights or remedies hereunder shall constitute or be
construed as a waiver thereof. No waiver of any of the
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conditions of this Agreement by Seller or Buyer shall be effective unless
expressly and affirmatively made and given by Seller or Buyer, as the case may
be, in writing.
SECTION 4.09. EXHIBITS AND SCHEDULES. All exhibits and schedules
attached hereto shall be deemed a part hereof to the same extent as if fully
set forth herein.
SECTION 4.10. INDEMNIFICATION.
(a) Seller agrees to indemnify and hold Buyer and its directors,
officers, shareholders, employees, agents and affiliates harmless from
and against any and all claims, demands, losses, costs, expenses
(including, without limitation, reasonable attorneys' fees and
expenses, accountants' fees and expenses and expenses and fees of
other associated professionals), damages, causes of action or
liabilities (collectively, all of the foregoing are referred to as
"Claims") that may be paid, incurred or suffered by, or asserted
against, Buyer or the Acquired Assets, resulting from any liability or
obligation of Seller with respect to events or conditions affecting
the Acquired Assets arising or accruing prior to the date of the
Closing which is not part of the Acquired Liabilities or resulting
from a breach by Seller of any of its representations, warranties and
covenants set forth in this Agreement. The foregoing indemnity shall
survive the Closing for a period of one year after the Closing, except
that the indemnity shall survive the Closing for a period of three
years with respect to Tax liabilities of Seller.
No claim may be made against Seller for indemnification
pursuant to this Section 4.10(a) with respect to any individual Claim,
unless the aggregate of all Claims of the Buyer for which the Buyer is
entitled to be indemnified shall exceed $100,000 and Seller shall not
be required to pay or be liable for the first $100,000 in aggregate
amount of any such Claims, and in no event shall Seller's aggregate
liability for all Claims exceed the Purchase Price, nor shall Seller
be liable for consequential, indirect, punitive, exemplary or special
damages, including loss of profits.
For the purposes of this Section 4.10(a), in computing such
individual or aggregate amounts of Claims, the amount of each Claim
shall be deemed to be an amount (i) net of any Tax benefit to the
Buyer or any affiliate thereof, (ii) net of any insurance proceeds and
any indemnity, contribution or other similar payment received by any
third party with respect thereto, and (iii) net of any reserves
provided for the situation in question which are included in the
Acquired Assets and reflected in the Closing Balance Sheet. Tax
benefits will be considered to be realized by Buyer for the purposes
of this Section 4.10(a) in the year in which a payment occurs, and the
amount of the tax benefits shall be determined by assuming (i) Buyer
or its affiliate, as the case may be, is in the maximum Federal income
tax bracket after any deduction reportable with respect to a payment
hereunder and (ii) Buyer or its affiliate's effective state and local
income tax rate is its effective rate for the most recent prior
taxable year for which such information is available.
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(b) Buyer agrees to indemnify and hold Seller and its directors,
officers, shareholders, employees, agents and affiliates harmless from
and against any and all Claims that may be paid, incurred or suffered
by, or asserted against, Seller resulting from a breach by Buyer of
any of its representations, warranties and covenants set forth in this
Agreement.
(c) If the Buyer or the Seller suffers or is threatened with any
Claim for which it would be entitled to be indemnified from the other
party, it shall notify the indemnifying party to such effect with
reasonable promptness after it first becomes aware of such Claim, and
shall furnish the indemnifying party with details regarding the Claim.
If the Claim is asserted by a third party by the filing by such third
party of any action at law or in equity, the indemnified party shall
give such notice of the Claim not later than 10 days prior to the date
by which a responsive pleading must be filed, and shall also furnish
the original or a copy of such Claim (if made in writing) and of all
documents received from the third party in support of its Claim, and
shall otherwise make available all relevant information material to
the defense of such Claim in the possession or control of the
Indemnified Party. If the indemnifying party requests in writing that
such third-party Claim not be paid, the indemnified party shall not
pay such Claim and the indemnifying party shall, at its expense,
settle, compromise or litigate such Claim in good faith, and shall
keep the indemnified party adequately informed of any action taken and
the progress thereof; provided that the indemnified party shall not be
required to refrain from paying any such Claim which has matured by a
court judgment or decree unless a timely appeal is taken therefrom and
a proper appeal bond posted by or on behalf of the indemnifying party,
nor shall the indemnified party be required to refrain from paying any
Claim where such action would result in the foreclosure of a lien upon
any of its property or an order enjoining or restraining it
temporarily or permanently, from the operation of business in the
normal course. If the Indemnifying party elects to compromise or
defend such Claim, it shall within thirty (30) days (or sooner, if the
nature of the Claim so requires) notify the indemnified party of its
intent to do so, and the indemnified party shall cooperate with the
indemnifying party and shall provide the indemnifying party access to
its records and personnel relating to any such Claim, in each case, at
the expense of the indemnifying party, in the compromise of, or
defense against, such Claim. Subject to the limitations contained
below on the obligations of the indemnifying party in respect of
proposed settlements, the indemnified party shall have the right to
employ its own counsel with respect to any Claim, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (a) the employment of such counsel at the expense of the
indemnifying party shall have been authorized in writing by the
Indemnifying party in connection with the defense of such action, or
(b) such indemnifying party shall not have, as provided above,
promptly employed counsel reasonably satisfactory to the Indemnified
party to take charge of the defense of such action. The indemnified
party, at its own cost, may employ separate counsel to assert, based
on an opinion of counsel, one or more legal defenses available to it
which are different from or additional to those available to such
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indemnifying party; the indemnifying party shall not have the right to
direct the defense of such action on behalf of the indemnified party
in respect of such different or additional defenses.
Notwithstanding the foregoing provisions of this Section
4.10(c) neither the indemnifying party nor the indemnified party may
settle or compromise any Claim for which indemnification has been
sought and is available hereunder, over the reasonable objection of
the other; provided, however, that consent to settlement or compromise
shall not be unreasonably withheld or delayed. If, however, the
indemnified party refuses to consent to a bona fide offer of
settlement which the indemnifying party wishes to accept, the
indemnified party may continue to pursue such matter, free of any
participation by the indemnifying party, at the sole expense of the
indemnified party. In such event, the obligation of the indemnifying
party to the indemnified party shall be equal to the lesser of (i) the
amount of the offer of settlement which the indemnified party refused
to accept plus the costs and expenses of the indemnified party prior
to the date the indemnifying party notified the Indemnified party of
the offer of settlement, and (ii) the actual out-of-pocket amount the
indemnified party is obligated to pay as a result of the indemnified
party's continuing to pursue such matter.
If, by the expiration of 15 days after notice of such a claim
is given, the indemnifying party has not notified the indemnified
party that the indemnifying party will undertake to settle, compromise
or litigate such claim, such action shall be deemed an authorization
to the indemnified party to pay such claim, and upon receipt of proof
of payment, indemnity shall immediately be due and payable.
SECTION 4.11. GOVERNING LAW. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Delaware without giving
effect to its conflict of laws principles.
SECTION 4.12. AMENDMENTS. This Agreement may not be modified or
amended, except by an agreement in writing signed by the parties hereto. The
parties may waive any of the conditions contained herein or any of the
obligations of the other parties hereunder, but any such waiver shall be
effective only if it is in writing and signed by the party waiving such
condition or obligation.
SECTION 4.13. FURTHER ASSURANCES. Each of the parties hereto agrees to
take such further action and to execute such further instruments as may be
reasonably required by any of the other parties in order to consummate the
transaction contemplated by this Agreement and to carry out the intentions
expressed in this Agreement.
SECTION 4.14. CONFIDENTIALITY. As a material inducement to Seller and
Buyer entering into this Agreement, Seller and Buyer shall keep the
Confidential Information (as defined below) in strict confidence and shall not
disclose such Confidential Information other than to such of their
23
<PAGE> 28
respective officers, directors, employees, attorneys, advisors, accountants and
agents with a need to know such Confidential Information.
"Confidential Information" shall mean the financial terms of this
Agreement and the Transaction Documents. Notwithstanding anything in this
Agreement to the contrary, Confidential Information shall not include any
information which (i) at the time of disclosure is generally available to and
known by the public (other than as a result of a disclosure made directly or
indirectly in violation of this Agreement), or (ii) becomes publicly available
in the future (other than as a result of a disclosure made directly or
indirectly in violation of this Agreement).
In the event that a party to this Agreement, or any of such party's
officers, directors, shareholders, employees or agents become legally compelled
(by deposition, interrogatory, request of documents, subpoena, civil
investigative demand or similar process) to disclose any of the Confidential
Information of the other party, the person referred to above from whom such
information is being sought shall provide the party to whom such Confidential
Information belongs with promptly prior written notice of such requirement, and
such other party may seek a protective order or other appropriate remedy and/or
waive compliance with the terms of this Agreement. In the event that such
protective order or other remedy is not obtained, or the other party waives
compliance with the provisions hereof, the party required to provide such
information agrees to furnish only such portion of the Confidential Information
which is legally required to be furnished.
34
<PAGE> 29
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date and year first above written.
ARMONK LIST COMPANIES CORP.,
a New York corporation
By:
---------------------------------
Title:
---------------------------------
JAMI MARKETING SERVICES, INC.,
a Delaware corporation
By:
---------------------------------
Title:
---------------------------------
AMERICAN BUSINESS INFORMATION, INC.
hereby guarantees Buyers's obligations under
Section 2.06(c)
By:
---------------------------------
Title:
---------------------------------
25
<PAGE> 30
EXHIBIT A
FORM OF ESCROW AGREEMENT
26
<PAGE> 31
EXHIBIT B
ALLOCATION SCHEDULE
27
<PAGE> 32
EXHIBIT C
FORM OF EMPLOYMENT AGREEMENTS
28
<PAGE> 33
EXHIBIT D
FORM OF NONCOMPETITION AGREEMENTS
29
<PAGE> 34
EXHIBIT E
FORM OF ASSUMPTION AGREEMENT
30
<PAGE> 35
EXHIBIT F
FORM OF OPINION OF BUYER'S COUNSEL
31
<PAGE> 36
EXHIBIT G
FORM OF BILL OF SALE
32
<PAGE> 37
EXHIBIT H
FORM OF OPINION OF SELLER'S COUNSEL
33
<PAGE> 1
EXHIBIT 21.1
INFOUSA INC. AND SUBSIDIARIES
SUBSIDIARIES AND STATE OF INCORPORATION
<TABLE>
<S> <C>
American Business Communication, Inc. ...................... Delaware
BMI Medical Information, Inc. .............................. Delaware
County Data Corp............................................ Vermont
American Business Information Marketing, Inc. .............. Delaware
CD-ROM Technologies......................................... Delaware
Contacts Influential, Inc. ................................. Delaware
InfoUSA Inc. ............................................... Delaware
Database America Companies, Inc. ........................... New Jersey
Database Holdings, Inc. .................................... Delaware
Walter Karl, Inc. .......................................... New York
List Maintenance Corp....................................... New York
</TABLE>
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
We consent to incorporation by reference in the registration statement (No.
33-59256) on Form S-8 of infoUSA Inc. of our report dated January 22, 1999,
relating to the consolidated balance sheet of infoUSA Inc. and subsidiaries as
of December 31, 1998, and the related statements of income, shareholders' equity
and comprehensive income, and cash flows for the year ended December 31, 1998,
and related schedule, which report appears in the December 31, 1998, annual
report on Form 10-K of infoUSA Inc.
/s/ KPMG Peat Marwick LLP
---------------------------------------
KPMG PEAT MARWICK LLP
Omaha, Nebraska
March 31, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (File No. 33-59256) of infoUSA Inc. (formerly American Business
Information, Inc.) of our report dated January 23, 1998, on our audits of the
consolidated financial statements and financial statement schedule of infoUSA
Inc. as of December 31, 1997 and for each of the two years in the period ended
December 31, 1997, which report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
---------------------------------------
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
March 31, 1999
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Vinod Gupta and Stormy Dean, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ VINOD GUPTA Chairman of the Board and Chief March 31, 1999
- ----------------------------------------------------- Executive Officer (principal
Vinod Gupta executive officer)
/s/ STORMY L. DEAN Controller and Acting Chief March 31, 1999
- ----------------------------------------------------- Financial Officer (principal
Stormy L. Dean accounting officer and principal
financial officer)
/s/ JON D. HOFFMASTER Director March 31, 1999
- -----------------------------------------------------
Jon D. Hoffmaster
/s/ GAUTAM GUPTA Director March 31, 1999
- -----------------------------------------------------
Gautam Gupta
/s/ GEORGE F. HADDIX Director March 31, 1999
- -----------------------------------------------------
George F. Haddix
/s/ ELLIOT S. KAPLAN Director March 31, 1999
- -----------------------------------------------------
Elliot S. Kaplan
/s/ HAROLD ANDERSEN Director March 31, 1999
- -----------------------------------------------------
Harold Andersen
/s/ PAUL A. GOLDNER Director March 31, 1999
- -----------------------------------------------------
Paul A. Goldner
/s/ GEORGE J. KUBAT Director March 31, 1999
- -----------------------------------------------------
George J. Kubat
By: /s/ STORMY L. DEAN
-------------------------------------------------
Stormy L. Dean
Attorney-in-fact
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 29,603
<SECURITIES> 20,620
<RECEIVABLES> 57,957
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 118,303
<PP&E> 70,487
<DEPRECIATION> 30,223
<TOTAL-ASSETS> 270,773
<CURRENT-LIABILITIES> 48,146
<BONDS> 126,679
0
0
<COMMON> 124
<OTHER-SE> 88,123
<TOTAL-LIABILITY-AND-EQUITY> 270,773
<SALES> 228,678
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 226,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,160
<INCOME-PRETAX> 8,038
<INCOME-TAX> 5,880
<INCOME-CONTINUING> 2,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,158
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
