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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
[NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
DELAWARE 47-0751545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
(Address of principal executive offices)
(402) 593-4500
(Registrant's telephone number, including area code)
---------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.0025 PAR VALUE
CLASS B COMMON STOCK, $0.0025 PAR VALUE
SERIES A PREFERRED SHARE PURCHASE RIGHTS
SERIES B PREFERRED SHARE PURCHASE RIGHTS
---------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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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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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(1) ...................... 27,472 34,415 16,355 3,469 3,125
Provision for litigation settlement(2) ................ 4,500 -- -- -- --
Acquisition costs (3) ................................. 3,643 2,598 -- -- --
In-process research and development(4) ................ 3,834 53,500 10,000 -- --
Restructuring charges(5) .............................. 2,616 -- -- -- --
--------- --------- --------- --------- ---------
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(6) ...................... -- -- (355) (2,317) (404)
Loss from abandonment of subsidiary(6) .................. -- -- (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(7) ........................................... $ 33,876 $ 55,436 $ 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>
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(1) Includes the change in estimated useful lives during 1996 based on
management's evaluation of the remaining lives of certain intangibles
related to acquisitions prior to 1995 of $11.5 million.
(2) During 1998, includes $4.6 million in damages awarded to Experian
Information Solutions, Inc. in connection with arbitration of a contractual
dispute.
(3) Includes in 1998 the following acquisition costs: 1) $3.0 million of costs
associated with the Company's bid to acquire Metromail Corporation, and 2)
$0.6 million associated with the Company's offering to sell Common Stock
which was not completed. Includes in 1997 acquisition costs of $2.6 million
associated with the acquisitions of DBA and Pro CD.
(4) Includes the following charges related to purchased 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).
(5) Includes in 1998 the following restructuring charges: 1) $1.4 million for
restructuring costs related to the Company's compilation and sales
activities for new businesses, and 2) $1.2 million for restructuring costs
related to certain cost reduction measures enacted by the Company.
(6) 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.
(7) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to
exclude depreciation, amortization of intangible assets and non-cash
acquisition-related and restructuring charges. EBITDA 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.
(8) The Company has had several acquisitions since 1996 which would affect the
comparability of historical data. See Management's Discussion and Analysis
of Financial Condition and Results of Operations.
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.
During 1998, the Company recorded sales of $14.6 million (approximately 6%
of data processing sales) from data processing services provided to a single
customer. During 1998, the customer notified the Company that it intends to
perform the data processing services in-house. As a result, sales of data
processing services may decline in 1999 compared to 1998 sales levels.
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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 demand for the CD-Rom product began to decline during 1998 as customers
began to use new distribution channels, primarily the Internet, for obtaining
certain information also contained on the Company's CD-Roms. The demand for
1998 product lines is expected to be affected by new distribution channels in
the future and therefore related sales are expected to remain at declined
levels.
The Company 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.
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>
5
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- ----------
(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.
As part of these strategic acquisitions, the Company has incurred various
acquisition-related charges to operations, consisting of: 1) $10.0 million in
1996 in connection with the acquisition of Digital Directory Assistance, 2)
$56.1 million in 1997 in connection with the acquisitions of the DBA and Pro CD,
and 3) $10.1 million in 1998 in connection with the acquisitions of Walter Karl
and JAMI marketing and for certain internal 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.
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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 16
Provision for litigation settlement ............................ 2 -- --
Acquisition costs .............................................. 1 1 --
In-process research and development ............................ 2 28 9
Restructuring charges .......................................... 1 -- --
------ ------ ------
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) ........................................... 15% 29% 31%
====== ====== ======
Other Data:
Sales by Segment:
Small business ................................................. $130.0 $116.3 $ 87.4
Large business ................................................. 98.7 77.0 20.9
------ ------ ------
Total .................................................. $228.7 $193.3 $108.3
====== ====== ======
Sales by Segment as a Percentage of Net Sales:
Small business ................................................. 57% 60% 81%
Large business ................................................. 43 40 19
------ ------ ------
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.
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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 the small business segment were $130.0 million, a 12% increase
from $116.3 million in 1997. Included in the small business segment are sales of
sales leads generation products and consumer CD-ROM products. Factors
contributing to an increase in net sales of sales lead generation products
included: the enhancement of existing and development of new sales lead
generation products, the increase in the number of mailing pieces mailed from
30.0 million during 1997 to 38.7 million during 1998, and the acquisitions of
DBA, Pro CD, and Contacts Target Marketing during 1997 and 1998. Average net
sales per mailing piece declined from $6.55 per piece in 1997 to $5.75 in 1998.
The principal reason for the decline in average sales per mailing piece is that
during 1998, the Company increased the pieces mailed to test various markets and
new product lines. The market tests did not result in significant incremental
net sales. Net sales of consumer CD-ROM products for 1998 were $19.5 million, an
11% decrease from $21.7 million for 1997. The decrease in consumer CD-ROM
product net sales reflects an increase in estimates for reserves of $2.7 million
during 1998 related to product returns. Due to a decline in general market
conditions and demand for the product, the Company experienced significant
product returns during the second and third quarters of 1998. Therefore the
reserve for returns was adjusted accordingly. The change in the reserve for
returns related primarily to sales that occurred during the second and third
quarters of 1998. The decline in market conditions and demand for the product
have continued to remain low therefore sales are expected to remain at a
decreased level.
Net sales of the large business segment were $98.7 million, a 28% increase
from $77.0 million in 1997. Included in the large business segment are sales of
data processing services. Net sales of data processing services for 1998 were
$62.3 million, a 45% increase from $42.7 million for 1997. The increase is
principally the result of the acquisition of DBA in February 1997, Walter Karl
in March 1998 and JAMI Marketing in June 1998. Additionally, during 1998, the
Company entered into Internet licensing agreements totaling approximately $7.8
million compared to $4.8 million in 1997. The Company recorded sales to a
significant data processing services customer totaling $14.6 million during
1998, representing 6% of total net sales. Sales to this customer occurred evenly
during the year. During 1998, the customer notified the Company that it intends
to perform the same processing in-house. As a result, sales of data processing
services in 1999 may decline from 1998 levels.
Database and Production Costs
For 1998, database and production costs were $66.3 million, or 29% of net
sales, compared to $55.1 million, or 29% of net sales for 1997. The Company
produces, markets and sells an annual consumer CD-ROM product line consisting in
excess of twenty separate titles. Each product line is customarily released
during the third quarter of each fiscal year. The 1999 product line was released
during the third quarter of 1998. During 1998, the Company produced units of the
1998 product line that exceeded actual sales. The write-down of $0.9 million was
equal to the recorded costs for the 1998 product line which became obsolete as a
result of the release of the 1999 product line during the third quarter of 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1998 were $117.7 million,
or 51% of net sales, compared to $80.2 million, or 41% of net sales for 1997.
The increase in selling, general and administrative expenses, representing 10%
of net sales, is principally the result of the following items: 1) increase in
estimates for reserves for bad debts of $3.5 million, 2) increase in estimates
for reserves related to price protection and cooperative advertising for
consumer CD-ROM products of $5.3 million, 3) decrease in estimated benefit
period related to deferred advertising costs of $2.7 million, and 4) $0.6
million related to executive severance costs. The charges described above
accounted for approximately one-half of the increase in selling, general and
administrative expenses, expressed as a percentage of net sales.
During the third quarter 1998, the Company modified the estimated benefit
period related to deferred advertising costs from 12 months to 6 months. The
Company updated its study of sales and responses derived from its direct
marketing campaigns during the third quarter of 1998. This study was based upon
specific evaluations of sales responses from specific direct marketing
campaigns. Due to changes in mailing patterns, management was able to determine
that the Company's catalogs generated sales for approximately 6 months after the
mail date rather than 12 months.
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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 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 Costs
During 1998, the Company recorded charges totaling $3.6 million, or 1% of
net sales, consisting of $3.0 million of costs associated with the Company's
bid to acquire Metromail Corporation and $0.6 million associated with the
Company's offering to sell Common Stock which was not completed.
During 1997, the Company recorded $2.6 million of acquisition costs, or 1%
of net sales, related to integrating acquired operations into the Company's
existing operations. These expenses consisted primarily of costs such as travel
between the Company and the new operations, consulting, payroll and other
expenses related to implementing Company policies and information systems at
the new locations. All costs had been incurred by December 31, 1997.
In-Process Research and Development
During 1998, the Company recorded a write-off of acquired in-process
research and development of $3.8 million, or 2% of net sales, in connection with
the acquisition of Walter Karl. A portion of the purchase price for this
acquisition was attributed to the value of the IPR&D projects and was expensed
in accordance with Statement of Financial Accounting Standards (SFAS) No. 2,
"Accounting for Research and Development Costs." The Company believes its
accounting for purchased IPR&D was made in accordance with generally accepted
accounting principles and valuation practices at the time of the related
acquisitions. The total amount allocated to the purchased IPR&D recorded in
connection with the acquisition of Walter Karl was $3.8 million after
retroactive application of the Securities and Exchange Commission's new
guidelines for valuing purchased IPR&D.
The Company obtained an independent valuation of the purchased IPR&D. The
income valuation approach was used to determine the fair value of the IPR&D
projects acquired from Walter Karl. Under the income approach, the fair value
reflects the present value of the projected cash flow that will be generated by
the IPR&D projects if successfully completed. The income approach focuses on the
income producing capability of the acquired IPR&D, which the Company believes it
represents the present value of the future
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<PAGE> 10
economic benefits expected to be potentially derived from these projects. As of
the valuation dates, the acquired IPR&D projects had not demonstrated
technological nor economic feasibility. As a result, the attainability of the
income projections is subject to three risk factors: project risk, product risk,
and market risk. Project risk reflects the degree to which the project can be
feasibly completed and will perform upon its completion in the manner specified.
Project risk is dependent upon the development phase of the project as of the
acquisition date. Under this premise, the closer the project is to completion,
the more likely that the project will reach a successful conclusion. Product
risk refers to the concept that these products will be able to produce
commercially viable products and services. This factor can be assessed based
upon past management experience in the development of new products or services
and success of those past ventures. Whether the development required a
significant technological or process change was also considered. For a product
or service which is similar to other products or services, the risk factor
associated is low. Market risk refers to the concept that these products will be
demanded by the market upon their completion. Market risk is based upon
information that indicates the degree to which the market will demand a product
or service that provides the functionality specified. Without the successful
completion of the remaining development efforts, the end result would be to fail
to introduce new products. A discount of 30% was applied to reflect these risks
associated with the projected cash flow to be generated by the acquired IPR & D
projects.
The descriptions of the projects related to Walter Karl are as follows:
o Internet F/E to M204 is a list fulfillment system which interfaces with the
Internet to request orders.
o M204 Shipping Interface automates shipping and generates the ability to
setup shipping destination information as well as allow for the tracking of
shipments throughout out its journey to the final destination.
o List Brokerage & Management Order is a new order entry system for list
fulfillment.
o Global Database Update refers to a project that will create a new updated
database for the client, Global.
o Arandel System Postal/Inkjet allows for postal information to be formatted
for Inkjet specifications.
o Paul Fredrick/Garden Botanika Reporting provides new reporting and database
retrieval for the client Paul Fredrick/Garden Botanika.
o Chilean Database is a project for a Chilean organization which consists of
creating a new database with additional information.
o Datacard System allows for the integration with the List Brokerage &
Management Order System for rental lists.
o Inkjet Utilities will generate a different layout for Inkjet specifications
and the project will also allow for new audit reporting.
o Flowers Response Analysis is a project that will attempt to increase the
database response time of the client, Flowers.
o Data Entry System will allow for LAN data entry of additional information.
A description of the stage of completion as well as the methodology
employed is listed below for each IPR&D project related to Walter Karl; the
stage of completion of each project was determined by examining the ratio of R&D
expenses as of the acquisition date to total R&D costs (incurred and projected).
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
IPR&D PROJECTS STAGE OF COMPLETION SCHEDULED BETA TEST
DATE
------------------------------------ ------------------------------- ----------------------------
<S> <C> <C>
Internet F/E to M204 MIDDLE OF THE DESIGN PHASE JUNE 1998
------------------------------------ ------------------------------- ----------------------------
M204 Shipping Interface DESIGN PHASE UNKNOWN - DELAYED
------------------------------------ ------------------------------- ----------------------------
List Brokerage & Mgt. Order EARLY DESIGN PHASE DECEMBER 1998
------------------------------------ ------------------------------- ----------------------------
Global Database Update EARLY DESIGN PHASE AUGUST 1998
------------------------------------ ------------------------------- ----------------------------
ArandalSystem Postal/InkJet DESIGN PHASE UNKNOWN - DELAYED
------------------------------------ ------------------------------- ----------------------------
Paul Fredrick DESIGN PHASE UNKNOWN - DELAYED
------------------------------------ ------------------------------- ----------------------------
Chilean Database DESIGN PHASE OCTOBER 1998
------------------------------------ ------------------------------- ----------------------------
Datacard System DESIGN PHASE APRIL 1998
------------------------------------ ------------------------------- ----------------------------
InkJet Utilities LATE STAGES OF DESIGN PHASE MAY 1998
------------------------------------ ------------------------------- ----------------------------
Flowers Response analysis LATE STAGES OF DESIGN PHASE APRIL 1998
------------------------------------ ------------------------------- ----------------------------
Data Entry System LATE STAGES OF DESIGN PHASE APRIL 1998
------------------------------------ ------------------------------- ----------------------------
</TABLE>
10
<PAGE> 11
The stage of completion for each project was determined by using the
formula: person years completed on R&D/Total person years of R&D effort. Below
is a chart outlining the stage of completion for each project.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
IPR&D Project R&D Person Years Person Years Total R&D Percentage of
Completed as of Remaining Person Years Completion
Valuation Date
------------------------------------- ----------------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Internet F/E to M204 .25 .50 .75 33%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
M204 Shipping Interface .50 .25 .75 67%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
List Brokerage & Mgt. Order .50 1.0 1.5 33%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
Global Database Update .10 .50 .60 17%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
ArandalSystem Postal/InkJet .25 .50 .75 33%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
Paul Fredrick .75 .50 1.25 60%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
Chilean Database .10 .50 .60 17%
------------------------------------- ----------------------- ----------------- ----------------- -----------------
Datacard System 1.0 .20 1.2 83%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
InkJet Utilities .50 .20 .70 71%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
Flowers Response Analysis .10 .10 .20 50%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
Data Entry System .50 .10 .60 83%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
------------------------------------- ----------------------- ----------------- ----------------- ------------------
Total 4.80 4.35 9.15 52%
------------------------------------- ----------------------- ----------------- ----------------- ------------------
------------------------------------- ----------------------- ----------------- ----------------- ------------------
</TABLE>
In regards to Walter Karl, product and market notes for each product are
outlined in the following table.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
IPR&D PROJECT PROJECT RISK PRODUCT RISK MARKET RISK
------------------------------------- ----------------------- ----------------- -----------------
<S> <C> <C> <C>
Internet F/E to M204 Low Low Medium
------------------------------------- ----------------------- ----------------- -----------------
M204 Shipping Interface Low to Medium Low to Medium Low
------------------------------------- ----------------------- ----------------- -----------------
List Brokerage & Mgt. Order Low Low Medium
------------------------------------- ----------------------- ----------------- -----------------
Global Database Update Medium Low High
------------------------------------- ----------------------- ----------------- -----------------
ArandalSystem Postal/InkJet Medium Low High
------------------------------------- ----------------------- ----------------- -----------------
Paul Fredrick Low to Medium Low High
------------------------------------- ----------------------- ----------------- -----------------
Chilean Database Medium Low High
------------------------------------- ----------------------- ----------------- -----------------
Datacard System Low Low to Medium Low
------------------------------------- ----------------------- ----------------- -----------------
InkJet Utilities Low Low Medium
------------------------------------- ----------------------- ----------------- -----------------
Flowers Response Analysis Low Low High
------------------------------------- ----------------------- ----------------- -----------------
Data Entry System Low Low Low
-------------------------------------------------------------------------------------------------
</TABLE>
See discussion of 1997 compared to 1996 for information on IPR&D charges
recorded during 1997.
Restructuring Charges
During 1998, the Company recorded restructuring charges totaling 2.6
million, or 1% of net sales. During the first quarter of 1998, the Company
recorded a restructuring charge of $1.4 million related to the closing of the
CDC new business compilation and sales center and moving these operations from
Vermont to Nebraska. All 45 of the CDC employees were terminated, and severance
recorded totaled $0.6 million. The restructuring charges also included lease
termination costs of $0.3 million and a write-off of $0.5 million of leasehold
improvement costs associated with the closed Vermont facility. The
restructuring, including recording the payments and write-downs described, was
completed by September 30, 1998.
During the third quarter of 1998, the Company recorded a restructuring
charge of $1.2 million which included $0.6 million in severance for 244
employees terminated as a result of the implementation of certain cost reduction
measures. These employees were primarily in support and administration positions
but some under-performing sales personnel were also terminated. The
restructuring
11
<PAGE> 12
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.
Operating income for the small business segment for 1998 was $54.7 million,
or 42% of net sales, as compared to $50.5 million, or 43% of net sales for the
comparable period. Factors contributing to the decrease in operating income as a
percentage of net sales are described in the section "Selling, general and
administrative expenses." See Note 20 of the notes to the accompanying
Consolidated Financial Statements for additional information.
Operating income for the large business segment for 1998 was $39.7 million,
or 40% of net sales, as compared to $35.7 million, or 46% of net sales for the
comparable period. Factors contributing to the decrease in operating income as a
percentage of net sales are described in the section "Selling, general and
administrative expenses." Additionally, the Company acquired Walter Karl and
JAMI Marketing during 1998. Walter Karl and JAMI Marketing perform list
brokerage services, which traditionally have lower profit margins than services
associated with the Company's data processing services. See Note 20 of the notes
to the accompanying Consolidated Financial Statements for additional
information.
Other Income (Expense), Net
Other income (expense), net for 1998 and 1997 was $5.5 million and $(0.4)
million, respectively. During the second quarter of 1998, the Company realized a
gain of $16.5 million on the disposition of its holdings in Metromail
Corporation common stock. This realized gain was partially offset during the
second quarter of 1998 when the Company recorded a loss of $2.0 million on the
write-off of an investment. The increase in interest expense to $9.2 million
from $4.1 million is primarily attributable to the issuance of senior
subordinated notes during 1998, of which $115 million was outstanding at
December 31, 1998. During the first quarter of 1997, the Company made an
investment of $2.0 million in preferred stock of an issuer, representing less
than 20% of the issuer's outstanding stock. During 1998 the issuer commenced a
reorganization and sought funding from other outside investors, diluting the
Company's investment in this entity to a nominal value. Additionally, the
Company obtained knowledge that the issuer was incurring significant losses and
the intended line of business of this start-up entity had significantly changed.
Accordingly, the Company wrote-off this investment, which was accounted for on a
cost basis, during the second quarter of 1998.
Income Taxes
A provision for income taxes of $5.9 million and $7.0 million was recorded
for 1998, and 1997, respectively. Acquisition-related charges of $3.8 million
and $49.2 million were included in income before income taxes during 1998 and
1997, respectively, but are not deductible for tax purposes. The provision for
these periods also reflect the inclusion of amortization on certain intangibles
in taxable income not deductible for tax purposes.
EBITDA, As Adjusted
Excluding the purchased in-process research and development charges
previously described, the Company's EBITDA, as adjusted, was $33.9 million, or
15% of net sales, during 1998, compared to $55.4 million, or 29% of net sales,
during 1997.
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 the small business segment were $116.3 million, a 33% increase
from $87.4 million in 1996. Included in the small business segment are sales of
sales leads generation products and consumer CD-ROM products. The increase in
small business
12
<PAGE> 13
segment sales is directly attributable to the acquisitions of Digital Directory
Assistance, County Data Corporation, BJ Hunter, DBA and Pro CD during 1996 and
1997. 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.
Net sales of the large business segment were $77.0 million, a 268% increase
from $20.9 million in 1996. Included in the large business segment are sales of
data processing services. 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.
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 $16.4 million in 1996. These expenses constituted 18% of net sales
in 1997, and 16% 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.
The increase was partially offset by changes in estimated lives. In the
third quarter of 1996, the Company completed its evaluation of the remaining
useful lives of certain intangible assets created through a series of
acquisitions between 1990 and 1994. While each of these acquisitions consisted
of "original" compilers and/or value added resellers, none of the purchased
databases were retained, many of the trade names have been discontinued and, in
most instances, the operations restructured so as to be unrecognizable at this
point in time. For the most part, these acquisitions were "market share"
acquisitions for what now has become short term periods which brought us through
a growth period in the early 1990s. The Company's operations and market focus
have changed over the years such that any intangibles related to markets, trade
name or distribution channel virtually disappeared. This occurred as a natural
evolution of the Company's business. 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.
Acquisition Costs
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.
13
<PAGE> 14
In-process Research and Development
During 1997, the Company recorded write-offs of acquired IPR&D totaling
53.5 million, or 28% of net sales, including charges of $49.2 million and $4.3
million in connection with the acquisitions of DBA and Pro CD, respectively.
During 1996, the Company recorded writeoffs of acquired IPR&D of $10.0 million
in connection with the acquisition of Digital Directory Assistance. 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. Project risk reflects
the degree to which the project can be feasibly completed and will perform upon
its completion in the manner specified. Project risk is dependent upon the
development phase of the project as of the acquisition date. Under this premise,
the closer the project is to completion, the more likely that the project will
reach a successful conclusion. Product risk refers to the concept that these
products will be able to produce commercially viable products and services. This
factor can be assessed based upon past management experience in the development
of new products or services and success of those past ventures. Whether the
development required a significant technological or process change was also
considered. For a product or service which is similar to other products or
services, the risk factor associated is low. Market risk refers to the concept
that these products will be demanded by the market upon their completion. Market
risk is based upon information that indicates the degree to which the market
will demand a product or service that provides the functionality specified. .
Without the successful completion of the remaining development efforts, the end
result would be to fail to introduce new products. A discount ranging from 24%
to 30% was applied to reflect these risks associated with the projected cash
flow to be generated by the acquired IPR&D projects. The stage of completion of
the projects is not used in the determination of the value of IPR&D under a
discounted cash flow approach. However, the remaining costs to complete each
product were subtracted from the corresponding projected profits thereby
intrinsically incorporating the level of completion effort.
The $10 million charge for Digital Directory Assistance (DDA) represents
the fair value of DDA's DVD-ROM (Digital Video Disc - Read Only Memory)
database technology. The creation of a new search engine, the retrieval
component and the display component of the database software technology were
approximately ninety percent complete. The data layout, mapping and interface
components were approximately fifty percent complete and final completion was
pending access to the newly developed DVD player (hardware). Once the player
was competed, an additional two months time was estimated to be necessary to
integrate the software with the hardware and the testing phase could then be
accomplished. This project was expected to be completed and was completed in
1997. The percentages of completion were determined by milestone achievement
towards beta release.
The $49.2 million charge for DBA relates to $46.9 million for interactive
media products and services and $2.3 million for data processing technologies.
Interactive media products included technology that would allow a customer to:
access the Company's web site and download profile information on a particular
business, company or individual for a per-access charge; "enrich" or "enhance"
their list by matching it to the Company's via the internet; and allow the list
to reside at the Company, while via the internet the customer will be "flagged"
or notified of any updates to the information contained in the list. This
project was in the early stages of development and was approximately 5-10%
complete at acquisition. The ability to forecast project completion was not
reasonable as the technological developments had not achieved a stage of
feasibility as of January 31, 1997. Stage of completion was not assessed for
this technology. The company had dedicated two engineering software technicians
for the development of this technology concentrating on the development of the
company's web-site prior to acquisition. These technologies were completed
during 1998. During 1998, these functions were completed and have been utilized
since that point in time to provide additional capabilities to customers . The
new data processing technologies include merge/purge abilities, update and
maintenance capabilities of relational databases, improved delivery systems and
upgraded billing/accounting systems.
14
<PAGE> 15
The $4.3 million charge related to Pro-CD includes the following projects:
Graphical user interface technology represented $1.5 million of the charge. This
project involved integrating certain features and functions of SelectPhone and
Phonedisc graphical user interfaces into a common interface. The estimated costs
at acquisition to complete the project were $3.1 million, with completion
estimated for 1999. Database re-engineering, including process modification and
restructuring records, of the SelectPhone product in order to accommodate
consumer and business files accounted for $2.1 million of the charge. Additional
elements were also expected to be added to enhance the SelectPhone product's
competitive position. The estimated costs to complete were $5.5 million at
acquisition through 2002. Applying DVD compact disc technology to the
SelectPhone product line represented $0.5 million of the charge. The estimated
costs to complete the project at acquisition was $0.2 million with expected
completion in 1999. Finally, $0.2 million was charged relating to the extensive
evaluation and correction for year 2000 date processing compliance of the
SelectPhone product line. This assessment included the user interface as well as
the product database. The estimated costs to complete was $0.4 million at
acquisition with completion scheduled for 1998.
IPR&D was a critical factor for the Company in making these acquisitions and
timely completion of these projects was an equally important consideration. The
time completion was expected to give the Company a competitive edge in its
competition and solidify its position as a leader in the business-to-business
marketing information field. A major risk of not completing these projects
timely, would be the risk of losing customers on a medium to long term basis
and allow a competitor to provide a solution that may include these technically
advanced and value added features.
A major risk of not completing these projects timely, would be the risk of
losing customers on a medium to long term basis and allow a competitor to
provide a solution that may include these technically advanced and value added
features.
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.
Operating income for the small business segment for 1997 was $50.5 million,
or 43% of net sales, as compared to $38.0 million, or 43% of net sales for the
comparable period. See Note 20 of the notes to the accompanying consolidated
financial statements for additional information.
Operating income for the large business segment for 1997 was $35.7 million,
or 46% of net sales, as compared to $9.9 million, or 47% of net sales for the
comparable period. The decrease in operating income as a percentage of net sales
is attributable to the acquisition of DBA during 1997. DBA products and services
have lower profit margins than the traditional products associated with the
Company's large business segment. See Note 20 of the notes to the accompanying
consolidated financial statements for additional information.
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.
15
<PAGE> 16
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
Excluding the purchased in-process research and development charges
previously described, the Company's EBITDA, as adjusted, was $55.4 million or
29% of net sales in 1997, and $33.3 million or 31% of net sales in 1996.
16
<PAGE> 17
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 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 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 costs(2) ....... 3,243 400 -- -- 2,598 -- -- --
In-process research and
development(3) ............ 3,834 -- -- -- 49,200 -- 4,300 --
Restructuring charges(4).... 1,400 -- 1,216 -- -- -- -- --
---------- --------- ------------ ----------- -------- ------- ------------ -----------
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 costs .......... 6 1 -- -- 6 -- -- --
In-process research and
development ............... 7 -- -- -- 117 -- 9 --
Restructuring charges ...... 2 -- 2 -- -- -- -- --
---------- --------- ------------ ----------- -------- ------- ------------ -----------
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>
- ----------
17
<PAGE> 18
(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 in 1998 the following acquisition costs: 1) $3.0 million of costs
associated with the Company's bid to acquire Metromail Corporation, 2) $0.6
million associated with the Company's offering to sell Class A Common Stock
which was not completed. Includes in 1997 restructuring costs of $2.6
million associated with the acquisitions of DBA and Pro CD.
(3) Includes charges related to purchases for 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),
and Pro CD of $4.3 million (1997).
(4) Includes in 1998 the following restructuring charges: 1) $1.4 million for
restructuring costs related to the Company's compilation and sales
activities for new businesses, and 2) $1.2 million for restructuring costs
related to certain costs reduction measures enacted by the Company.
18
<PAGE> 19
infoUSA INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
infoUSA Inc. and Subsidiaries:
Independent Auditors' Reports.............................................................. 20
Consolidated Balance Sheets as of December 31, 1998 and 1997............................... 22
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and
1996...................................................................................... 23
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1998, 1997 and 1996....................................................................... 24
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997
and 1996.................................................................................. 25
Notes to Consolidated Financial Statements................................................. 26
Schedule II-- Valuation and Qualifying Accounts............................................ 40
</TABLE>
19
<PAGE> 20
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
20
<PAGE> 21
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
21
<PAGE> 22
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
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.
22
<PAGE> 23
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 16,355
Provision for litigation settlement................ 4,500 -- --
Acquisition costs.................................. 3,643 2,598 --
In-process research and development................ 3,834 53,500 10,000
Restructuring charges.............................. 2,616 -- --
------------ ------------ ------------
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.
23
<PAGE> 24
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>
CLASS CLASS ACCUMULATED
A B OTHER TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INCOME (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.
24
<PAGE> 25
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 16,355
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 -- --
In-process research and development ....................... 3,834 53,500 10,000
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 ......................................... (4,221) (5,613) (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.
25
<PAGE> 26
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 recognized when the
product is delivered or the services are performed. Data licensing revenue is
recognized giving consideration to whether the Company retains service
commitments to periodically provide updates, the incremental costs associated
with providing continuing service, and the fair value of the initial set of data
and subsequent updates based upon prices charged to customers who purchase
elements on a separate basis. Revenue related to future updates is recorded as
deferred revenue. Reserves are established for estimated returns and
uncollectible amounts.
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 represent direct external 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 dividend (See
Note 19). Diluted earnings per
26
<PAGE> 27
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.
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
27
<PAGE> 28
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. In 1996 the Company revised the estimated useful
lives of certain intangibles related to acquisitions prior to 1995. Management
performed an evaluation of the remaining lives of these intangibles. Based on
this evaluation, it was evident that the business and distribution networks
acquired changed more rapidly than was originally estimated. Therefore, the
estimated lives of the related goodwill and intangibles were revised to 8 and 2
years, from 30 and 15 years, respectively. As a result, amortization related to
such intangibles was approximately $11.5 million higher in 1996 than calculated
using the historical lives. The total impact of $7.1 million, net of tax reduced
both basic earnings per share and diluted earnings per share by $0.17.
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 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.
28
<PAGE> 29
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. In October 1997, the Company and the
former stockholders of DBA agreed to a purchase price adjustment, pursuant to
which the Company agreed to issue to the Former DBA stockholders an additional
139,829 unregistered shares of its Class A Common Stock and 139,829 unregistered
shares of its Class B Common Stock. As of December 31, 1997, these additional
shares of the Company's stock had not been issued to the former DBA
stockholders, and this liability of approximately $1.9 million is included in
payable to shareholders in the accompanying consolidated balance sheets. The
shares were issued in January 1998. The acquisition has been accounted for under
the purchase method of accounting. In addition to purchased in-process research
and development costs of $49.2 million (See Note 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 contracts with
Acxiom whereby the Company agreed to license its complete business database to
Acxiom in exchange for a perpetual license agreement allowing the Company the
use of a CD-Rom search engine technology developed by Acxiom for the Pro CD
product line. The Company's agreement with Acxiom Corporation licensed the
Company's complete business database to Acxiom Corporation for total fees of
$8.0 million for a two year period. The Company also entered into an agreement,
which provided the Company with a perpetual license to use Acxiom's CD-Rom
search engine technology for a fee of $8.0 million. The total cost is being
amortized over the 10 year estimated economic life of the perpetual license. At
the time of these agreements, an $8.0 million intangible asset was recorded for
the perpetual license with an offsetting liability of $8.0 million. 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 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. In addition, the
Company recorded as part of the purchase of Walter Karl an accrual related to
closure of a facility and relocating or terminating the employees from this
facility totaling $6.8 million, of which a balance of $4.4 million remained at
December 31, 1998. Goodwill is being amortized over 15 years. The amount of
intangibles recorded by the Company exceeded the purchase price due to the
Company recording an accrual related to costs associated with the integration of
acquired operations into existing operations, deferred taxes established for
certain intangibles not currently deductible for tax purposes, and the excess of
liabilities over assets assumed.
Effective June 1998, the Company acquired certain assets and assumed certain
liabilities of JAMI Marketing Services, Inc. (JAMI), a list brokerage, list
management, data processing and marketing consulting firm. Total consideration
for the acquisition was $12.8 million in cash, 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.
During the fourth quarter of 1998, a purchase price adjustment of $0.3 million
was made due to the final calculation of purchase price based on the acquisition
agreement and amounts were reallocated based on the purchase price allocation
finalized in the fourth quarter 1998.
29
<PAGE> 30
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.
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>
LESS THAN ONE TO FIVE TO MORE 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>
30
<PAGE> 31
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.
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>
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>
31
<PAGE> 32
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.
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.
32
<PAGE> 33
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>
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.
33
<PAGE> 34
Options are generally granted at the stock's fair market value on the date
of grant, vest generally over a four or five year period and expire five or six
years, respectively, from date of grant. Options issued to shareholders holding
10% or more of the Company's stock are generally issued at 110% of the stock's
fair market value on the date of grant and vest over periods ranging from five
to six years with early vesting if certain financial goals are met. Certain
options issued to directors at the stock's fair market value vested immediately
and expire five years from grant date. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standard (SFAS)
No. 123 "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost for
the Company's stock option plan been determined based on the fair value at the
grant date for awards issued in or subsequent to 1996 consistent with the
provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<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>
34
<PAGE> 35
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> <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.
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).
35
<PAGE> 36
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.
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
36
<PAGE> 37
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 COSTS, IN-PROCESS RESEARCH AND DEVELOPMENT AND RESTRUCTURING
CHARGES
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
37
<PAGE> 38
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 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.
38
<PAGE> 39
The small business and large business segments reflect actual net sales,
direct order production, and identifiable direct sales and marketing costs
related to their operations. The remaining indirect costs are presented as a
reconciling item in Corporate Activities.
Corporate activities principally represent the information systems
technology, database compilation, database verification, and administrative
functions of the Company. Investment income (loss), interest expense, income
taxes, amortization of intangibles, and depreciation expense are only recorded
in corporate activities. The Company does not allocate these costs to the two
business segments. The small business and large business segments reflect actual
net sales, direct order production, and identifiable direct sales and
marketing-related costs related to their operations. The Company records unusual
or non-recurring items including acquisition-related and restructuring charges
and provisions for litigation settlement in corporate activities to allow for
the analysis of the sales business segments excluding such unusual or
non-recurring charges.
The Company accounts for property and equipment on a consolidated basis. The
Company's property and equipment is shared by the Company's business segments.
Depreciation expense is recorded in corporate activities.
The Company has no intercompany sales or intercompany expense transactions.
Accordingly, there are no adjustments necessary to eliminate amounts between the
Company's segments.
The following tables summarize 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 ................................ -- -- 10,000 10,000
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>
39
<PAGE> 40
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
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
infoUSA INC.
By: /s/ STORMY L. DEAN
---------------------------------------------
Stormy L. Dean
Controller and Acting Chief Financial Officer
(principal accounting and financial officer)
Dated: March 17, 2000
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Amendment to the Annual Report on Form 10-K has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ----------------------------- ------------
<S> <C> <C>
/s/ VINOD GUPTA Chairman of the Board and Chief March 17, 2000
- --------------------------- Executive Officer (principal
Vinod Gupta executive officer)
/s/ STORMY L. DEAN Controller and Acting Chief March 17, 2000
- --------------------------- Financial Officer (principal
Stormy L. Dean accounting officer and principal
financial officer)
/s/ Director March 17, 2000
- ---------------------------
Charles Fote
/s/ Director March 17, 2000
- ---------------------------
Ben Nelson
/s/ GEORGE F. HADDIX Director March 17, 2000
- ---------------------------
George F. Haddix
/s/ ELLIOT S. KAPLAN Director March 17, 2000
- ---------------------------
Elliot S. Kaplan
/s/ HAROLD ANDERSEN Director March 17, 2000
- ---------------------------
Harold Andersen
/s/ PAUL A. GOLDNER Director March 17, 2000
- ---------------------------
Paul A. Goldner
By: /s/ STORMY L. DEAN
- ---------------------------
Stormy L. Dean
Attorney-in-fact
</TABLE>
41
<PAGE> 42
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
- ------- -----------
23.1 Accountants' Consent
23.2 Consent of Independent Accountants
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
InfoUSA Inc.:
We consent to the incorporation by reference in the registration statements (No.
333-91194, No. 333-77417, No. 333-43391 and No. 33-59256) on Form S-8 of infoUSA
Inc. 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/A of infoUSA Inc.
Omaha, Nebraska
March 17, 2000
/s/ KPMG LLP
--------------------------
KPMG LLP
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (File No. 333-37865, No. 333-82933, No. 33-91194, No. 333-77417, No.
333-43391, and No. 33-59256) of infoUSA Inc. (formerly American Business
Information, Inc.) of our report dated January 23, 1998, on our audit of the
consolidated financial statements and financial statement schedule of infoUSA
Inc. for the year ended December 31, 1997, which report is included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
------------------------------------
PRICEWATERHOUSECOOPERS LLP
Omaha, Nebraska
March 17, 2000
