SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 0-19598

 

 

 

 

infoUSA INC.

(Exact name of registrant as specified in its charter)

 

 

5711 South 86th Circle, Omaha, Nebraska 68127
(Address of principal executive offices)

 

(402) 593-4500
(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:
None

 

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.0025 par value
Series A Preferred Share Purchase Rights

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

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 þ     No o

 

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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the last reported sales price of the common stock on June 30, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter) was $285.9 million.

 

As of March 6, 2007 the registrant had outstanding 55,515,973 shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s definitive proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed within 120 days of the end of fiscal year 2006, are incorporated into Part III (Items 10, 11, 12, 13 and 14) hereof by reference.

 

 

TABLE OF CONTENTS

 

 

This Annual Report on Form 10-K, the documents incorporated by reference into the Company’s Annual Report to stockholders, and press releases (as well as oral statements and other written statements made or to be made by the Company) contain forward-looking statements that are made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements related to potential future acquisitions and our strategy and plans for our business contained in Item 1 “Business,” Item 2 “Properties,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other parts of this Annual Report. Such forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by our management. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include those set forth in this Annual Report under Item 1A “Risk Factors,” as well as those noted in the documents incorporated by reference into this Annual Report. You are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date on which they were made. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

 

Company Profile

 

infoUSA Inc. (the “Company” or “infoUSA” or “we”) is a leading provider of sales leads, mailing lists, direct marketing, database marketing, e-mail marketing and market research solutions to help our clients grow their sales and increase their profits. We operate three principal business groups.

 

 

infoUSA Data Group

 

In January 2007, we combined our database operations into a single business unit, the infoUSA Data Group. This move completes the integration of Donnelley Marketing (acquired in 1999) and OneSource (acquired in 2004) into our database business. The Data Group is responsible for maintaining our 12 proprietary databases and for developing and marketing products and services stemming from those databases.

 

Our Proprietary Databases

 

Business Databases

 

Our proprietary business databases contain information on nearly 15 million businesses in the United States and Canada, compiled through our proprietary compilation and verification processes. The business database

contains information such as: name, address, telephone number, SIC codes, number of employees, business owner and key executive names, credit score and sales volume. We also provide fax and toll free numbers, website addresses, headline news, and public filings including liens, judgments, bankruptcies, and UCC filings. The primary segments within our business data file are:

 

 

Other databases within our business file include:

 

 

Our data can be further categorized in various segments such as Small Business Owners, Executives at Home, Big Businesses and their Corporate Affiliations, Growing Businesses, Places of Interest, Schools and Female Business Owners.

 

We compile and update business information from over 15,000 sources. Most of these sources fall within the following categories:

 

 

 

In addition, we use information licensed from the United States Postal Service’s National Change of Address (NCOA) system and Delivery Sequence File (DSF) to update and maintain our business database.

 

Consumer Databases

 

Our consumer database contains approximately 200 million individuals and 115 million households and includes hundreds of data elements. Key elements in our database include: name, address, phone number, age, estimate household income, marital status, religion, ethnicity, dwelling type and size, home value, length of residence, and dozens of lifestyle elements. Our databases within our consumer files include:

 

 

Other databases within our consumer files are:

 

 

We compile and update the consumer database by reviewing over 3 billion records annually. Examples of the sources that are used to create the database are:

 

 

Expanding our Databases and Keeping Them Current

 

We employ over 650 full-time staff in both the United States and India to compile and update the databases from thousands of public sources such as yellow pages, white pages, newspapers, incorporation records, real estate

deed transfers, bankruptcy filings, UCC filings and various other sources. The databases change by roughly 65% per year. We spend over $50 million annually to update these databases and related database management systems.

 

In the United States, we have staff updating the U.S. business database by making over 20 million phone calls a year to verify the name of the owner or key executive, address, number of employees, fax numbers, e-mail addresses, hours of operation, credit cards accepted, URL address and other information. In addition, we employ staff to add to our database of 2.6 million photographs of businesses located in the top 100 cities in the United States.

 

In our India office, we employ business editors to provide business descriptions and executive biographies on global companies. In addition our associates update complete company profiles for Asia Pacific companies in our international database.

 

Products and Services Derived from Our Databases

 

We create many products and services from our databases to meet the needs of current and potential customers. We offer access to our databases over the Internet through our various websites, such as infoUSA.com, Salesgenie.com, onesource.com, and others. We create products and services such as prospect lists, mailing labels, 3 × 5 cards, diskettes, printed directories, DVDs, business credit reports, and many other online and offline applications. Our products and data processing services are used by clients for identifying and qualifying prospective customers, initiating direct mail and email campaigns, telemarketing, analyzing and assessing market potential, and surveying competitive markets in order to find new customers and increase sales. Our data also enables extensive data hygiene and enhancement services.

 

Internet Based Subscription Services for Sales Leads and New Customer Development

 

Salesgenie.com.  Designed for the small business user and sales people, Salesgenie provides unlimited access to our databases, and unlimited sales leads and mailing lists, with a built-in contact management software and mapping ability. Currently subscriptions start at $180 per month per user for Salesgenie, with multi-seat packages based on a tiered-pricing structure. The pricing information of our products set forth in this report reflect current prices and may be subject to future fluctuations and negotiations.

 

Salesgenie.com/Lite.  This service offers 6 databases with limited search criteria for currently $90 per month per user. This service also has contact management software.

 

SalesgeniePro — Marketing Edition.  Provides on-demand, online access to infoUSA’s database of 14 million businesses combined with the hygiene and data enhancement of existing customer files. Designed for marketing departments who support distributed or large sales forces (50 or more sales representatives), SalesgeniePro combines point-and-click selection of targeted prospects from any web-browser with suppression of existing customers to improve the effectiveness of and cost efficiency of direct marketing campaigns. Direct marketers can use SalesgeniePro to analyze existing customers, identify target markets and develop more successful targeted marketing programs.

 

MarketZone^® Platinum.  An e-CRM (customer relationship management) solution that integrates the entire suite of infoUSA services to create real-time customer content integration. MarketZone Platinum is an extremely flexible, full function marketing database, campaign management and e-campaign solution which incorporates an engine to support analytic tools for extracting customer insight from today’s expanding data sets. MarketZone Platinum enables infoUSA to quickly build and deploy custom analytic solutions to meet the evolving demands of our largest customers with the most sophisticated marketing requirements. MarketZone Platinum’s multiple platform applications, modules, and campaign management/e-campaign management components can be leveraged to deliver high-performance analytic applications rapidly. These capabilities, along with our ability to provide data-processing, data and consultative services under one roof make MarketZone Platinum a very comprehensive & compelling solution.

 

infoConnect ONE PASS.  Provides online, real-time data enhancement and file cleansing services which allow our clients to access key data and model scores to build customer relationships at the point of contact. Composed of four targeted web services — BusinessConnect, ScoreConnect, ConsumerConnect, and AddressConnect — infoConnect offers immediate response capabilities that can yield impressive direct marketing results.

Our infoConnect services allow our clients to upsell, cross-sell and provide more targeted offers to grow their sales in real-time environments such as call centers and online stores.

 

OneSource Global Corporate and Executive Database.  Provides business and financial information to professionals who need quick access to timely and reliable company, industry, and market intelligence. OneSource’s primary products, the OneSource Business Browser^sm products, are password-protected, subscription-based products that provide sales, marketing, finance, and management professionals and consultants with industry and company profiles, research reports, media accounts, executive listings and biographies, and financial information on over 1,700,000 public and private companies. Our international database spans 241 countries and provides information on approximately 16.6 million companies and 18 million key decision makers at these companies. The companies featured in our international database include not only large public companies but also well-known private companies.

 

Credit.net — Business Credit Reports.  Our business credit directories include a printed directory bundled with a DVD and Internet access to business credit reports on Credit.net. The product is used by customers for making credit decisions, verifying company information, assisting in collection support, and identifying potential new customers. Customers can purchase individual business credit reports for a current price of $9.95 from the Internet or they may select a subscription based plan offering unlimited access to our business credit reports for a current flat fee of $75 per month per user.

 

Polk City Directories and infoUSA City Directories (formerly Hill-Donnelly Directories).  Two of our directory divisions, Polk City Directories (CityDirectory.com) and Hill-Donnelly Directories (hilldonn.com), now offer bundled subscription packages for under $100 per month per user. These bundled packages include a printed directory on a customer’s immediate region, a DVD on the entire state, and Internet access for all of U.S.

 

Directories and DVD Products — Printed Directories, DVD and Internet access.  We offer a variety of titles: US Business Directory, State Business Directories, Big Business Directory, Manufacturers Directory, 575,000 Physicians and Surgeons, Households USA, and Entrepreneurs Directory. Our customers use these directories for lead generation, telemarketing and reference purposes.

 

Non-Subscription Products and Services — Customized Sales Leads and Databases

 

Printed Prospect Lists, Mailing Labels, and Sales Lead Cards.  Our databases can be “sliced and diced” to create customized sales leads and mailing lists for our customers. Our small business consultants work with a business to select the right criteria such as geography, type of business and size of business to generate the most revenue. The custom list can then be delivered in electronic format, printed format, put on mailing labels, provided on 3 × 5 index cards, or customers may place the order themselves using the infoUSA.com website.

 

Licensing

 

We license our data to a variety of value added resellers and original equipment manufacturers in several key vertical industries, including directory assistance, GIS/mapping, navigation, local search, Internet directories, site location analysis, sales leads, marketing, demographic modeling and fraud prevention.

 

Sales Divisions within the Data Group

 

We organize the sales divisions of the Data Group based on customer and product focus. The principal divisions are the Small Business Group, the National Accounts Group (formerly Donnelley Marketing), the Licensing Group, OneSource, and the Library and Government Division.

 

Small Business Group.  Approximately 90% of all businesses are small companies with less than 50 employees. We dedicated this division to meet the unique sales and marketing needs of small- and medium-sized businesses, including small office and home office businesses, sales executives, and aspiring entrepreneurs. This market holds about 20 million potential prospects for infoUSA.

 

National Accounts.  infoUSA National Accounts serves large marketing departments in all industries, including financial institutions, insurance carriers, retailers, telecommunications providers, utilities, gaming and hospitality companies, non-profit organizations, and technology and business services providers.

 

Licensing.  The licensing sales division serves the value-added reseller market, including major Internet search providers such as Google, Yahoo!, and AOL, and providers of mapping systems and in-car navigation products.

 

OneSource — Global Business Database.  OneSource products and services are designed to address the information needs of leading professional and financial services firms, technology companies, and other large organizations. OneSource customers use the OneSource products for such purposes as account prospecting and management (i.e., business development), competitive and peer analysis, company tracking and monitoring, and company and industry research. OneSource’s primary target market consists of Global 5000 business-to-business companies in the technology, professional services, and financial services industries and that employ large direct sales forces.

 

Library and Government Division.  The Library and Government Division serves the needs of public agencies, academics and libraries worldwide. We offer a wide range of database products, available in print, CD-ROM or via the Internet. These products include State Business-to-Business Marketing Directories, The American Big Businesses Directory and CD-ROM, The American Manufacturers Directory and CD-ROM, The American Business Disc, Powerfinder and ReferenceUSA. ReferenceUSA is an Internet-based reference service site which is used as a reference tool in libraries and is continually enhanced based upon suggestions from librarians and library patrons.

 

infoUSA Services Group

 

The infoUSA Services Group consists of subsidiaries whose primary focus is on helping customers enhance the value of their own customer data or providing full-service marketing solutions. The Services Group consists of the following divisions: List Brokerage and List Management, Catalog Vision, Triplex and Yesmail.

 

List Brokerage and List Management

 

This division includes subsidiaries Walter Karl, Edith Roman, Millard Group, Mokrynskidirect and the recently acquired Rubin Response, whose combined operations make it one of the largest list brokerage/list management providers in the industry. We provide list brokerage and list management services and an array of database services to a broad range of direct marketing clients. Walter Karl also specializes in email list management and brokerage services for on-line marketers. Our specialized list brokerage services help our customers recognize revenue from their own customer data, selling specialty lists to a wide range of businesses in many industries.

 

Catalog Vision

 

Catalog Vision is a leading provider of data processing services to the catalog direct marketing industry, with a heritage of over 40 years. Our clients are integrated multi-channel direct marketers who utilize our suite of merge/purge, address hygiene, database management, and data products to reduce promotion expenses and improve response performance. Catalog Vision provides integrated solutions that help our clients gain insight into their customer base and turn that insight into actionable, measurable means of targeting the best audience and increasing profitability.

 

Triplex — Non-Profit Group

 

infoUSA’s Triplex division provides data processing services for high-profile political and non-profit organizations. Using infoUSA’s vast data assets, Triplex is building on its core services by introducing enhanced address hygiene, demographic data and internet contact appends for its clients.

 

Yesmail

 

Yesmail specializes in providing email solutions for a wide range of industries including retail, travel, entertainment, financial, healthcare and consumer packaged goods. The Yesmail product suite, a combination of technology and service solutions, enables marketers to develop highly personalized customer communications programs that drive return on investment through increased sales and/or cost reductions. Email marketing has become a critical component of modern marketing and is utilized on a stand-alone basis or as part of an integrated marketing effort.

 

The Yesmail online marketing suite includes a comprehensive mix of technology and service components including:

 

 

In addition, Yesmail owns patented predictive modeling tools that are embedded into certain of its email campaign management tools and utilized by the Yesmail professional services team. Yesmail also plans on introducing a small-business email campaign management tool in 2007.

 

Marketing Research Group

 

On December 4, 2006, we completed our acquisition of Opinion Research Corporation, a diversified market research company with two principal divisions. These divisions consist of Opinion Research and Macro International.

 

Opinion Research

 

Opinion Research Corporation (ORC) was established in 1938 as a global market research and consulting firm by Claude Robinson, the original partner of George Gallup. A decision to focus on business-related research using the principles of public opinion polling was the catalyst for the company’s founding.

 

Employing a worldwide data collection network, Opinion Research performs surveys for its client companies and organizations, using the results to guide leadership teams in making informed business decisions based on in-depth insights into customer attitudes about an organization’s product and service offerings. Opinion Research advises senior level executives in both public and private sectors on a number of issues in the areas of corporate reputation and branding, customer strategies, market development, employee research and consumer knowledge across a number of industry sectors, including financial services, information technology, telecommunications, life sciences and consumer products and services.

 

Research products include ORC CARAVAN^®, which we believe is the oldest continuously running consumer omnibus survey in the U.S.; ORC Overnight, which delivers rapid answers to business questions within 24 hours; and ORC Portal, a secure online project management tool enabling clients to track the progress of complex projects in real time. ORC International’s UK office recently introduced ORC Accesspoint^tm, a project portal enabling clients to store and manage all of their research material in one central repository while providing project managers and stakeholders with a tool to monitor survey progress.

 

In addition to providing business insights to its global client base, Opinion Research has partnered with CNN on the CNN/Opinion Research Poll.

 

Opinion Research’s geographic reach has encompassed 106 countries across six continents. It operates as Opinion Research in the U.S., (headquartered in Princeton, New Jersey) and as ORC International in Europe (headquartered in London, UK) and Asia (headquartered in Hong Kong).

 

Macro International

 

Macro International Inc. is a leading federal government contractor, offering a range of services that address federal agency program needs from design to implementation and evaluation. Macro has been providing applied research, program evaluation, technical assistance, information technology and social marketing services to U.S. government agencies for more than 40 years. Macro’s core competencies span issues in health, education, international development, housing, energy and the environment.

 

Macro’s survey experts and demographers provide governments, policy makers and health care providers with the most up-to-date, scientifically reliable data on a wide variety of health issues. Macro has a global reputation for providing the most accurate measurements of the incidence and prevalence of deadly diseases such as HIV/AIDS, implementing complex, large-scale population surveys which often include the collection and analysis of thousands of blood samples. Over the past 20 years, the firm has completed more than 200 demographic and health surveys in 75 developing countries. Macro is currently providing technical assistance to the national health care organizations of more than 30 countries, helping them create and sustain programs to promote the health and safety of their citizens.

 

Macro also designs and implements complex, large-scale, web-based data collection and data dissemination projects. Macro was one of the first companies to utilize the Internet for collecting data from individuals and institutions to support a variety of federal programs.

 

Macro is a leading provider of public education and social marketing services to the federal government. Macro’s experts make use of impressive internal technical capabilities, including large-scale printing and publishing facilities, website design, development and hosting, and state-of-the-art video production facilities, to create health promotion campaigns. For example, Macro is currently working on a full-scale smoking cessation campaign for the armed forces.

 

Macro also conducts complex, large-scale telephone, web-based and in-person surveys. Macro conducts several very large telephone surveys for the government, conducting several hundred thousand interviews annually. Macro also maintains a large national field force to conduct in-person interviews, and specializes in collecting health risk behavioral data from school-aged children, teens and young adults in the school setting.

 

* * *

 

Sales & Marketing Strategy

 

infoUSA employs several media options to grow and increase our market share including direct mail, print, outbound telemarketing, online keyword search engines, banner advertising, television, radio and e-mail marketing. Publications such as DM News, Target, Fortune, Forbes, Inc., Entrepreneur and Sales and Marketing Management are a regular part of our marketing strategy, as well as local market newspapers and USA Today. In 2006, we continued these traditional forms of advertising as well as national and local radio and television campaigns to further build our brand name and drive revenue for our flagship online subscription product, Salesgenie.com. With the launch of Salesgenie.ca in 2006, Canadian radio and television advertising was added to our print and direct mail advertising. infoUSA continued to advertise aggressively to promote its valuable brand, including television advertisements aired during the Super Bowl in February 2007.

 

To monitor the success of our various marketing efforts, we have incorporated data gathering and tracking systems. These systems enable us to determine the type of advertising that best appeals to our target market so that we can invest future dollars in these programs and obtain a greater yield from our marketing. Additionally, through the use of our database tools, we are working to more efficiently determine the needs of our various client segments and tailor our services to their individual needs. With this system, we plan to strengthen relationships and support marketing campaigns to attract new clients.

 

Growth Strategy

 

Our growth strategy continues to have multiple components. Our primary growth strategy is to improve our organic growth. Key to this is our effort to replace revenue from declining traditional direct marketing products and services with our on-line internet subscription services. Subscription services offer enhanced annual revenue per customer, assure greater multi-year revenue retention, and, most importantly, provide greater value to our customers by providing Internet access to our content and customer acquisition and retention software tools. Delivery of information via the Internet is the preferred method by our customers. We are investing in Internet technology to develop subscription-based new customer development services for businesses and sales people.

 

We also intend to continue to grow through strategic acquisitions. We have grown through more than 30 strategic acquisitions in the last ten years. These acquisitions have enabled us to acquire the requisite critical mass to compete over the long term in the databases, direct marketing, e-mail marketing and market research industries. During 2006, we acquired Mokrynskidirect and Rubin Response Services Inc., which both provide list brokerage and list management services, Digital Connexxions, which provides e-mail marketing services, and Opinion Research Corporation, which complements our existing services with market research services. We will continue to use synergistic acquisitions to grow in the future.

 

We also are focusing on international growth opportunities. We are now upgrading our international business databases and expanding our own compilation efforts. In late 2005, we opened a database center in India. We have also partnered with hundreds of content providers around the world. Our comprehensive international database includes information on 1.1 million large public and private non-U.S. companies in approximately 170 countries. There are over 2.2 million executives represented in its non-U.S. global database, which is constantly updated using 2,500 daily news sources to track changes like executive changes, mergers and acquisitions, and late breaking company news. We are also putting great emphasis on more comprehensive financial information and regulatory filings. Examples include SEC filings, annual reports, analyst and industry reports, and detailed corporate family structure.

 

As we continue to enhance our international databases, we are aggressively pursuing high growth, emerging markets in Asia-Pacific, Western Europe, Australia, and South America. Using London as our international headquarters, we have sales offices in Hong Kong, New Delhi, Sydney, Singapore, and are in the process of opening sales offices in Mexico and South America. We plan to open more sales locations in France, Germany, Italy, Scandinavia, China, Japan, and South Korea.

 

Competition

 

The business and consumer marketing information industry is highly competitive. We believe that the ability to provide highly accurate proprietary consumer and business databases along with data processing, database marketing, e-mail marketing and market research services under one roof, is a key competitive advantage. We compete with several companies in each segment of our business.

 

Employees

 

As of December 31, 2006, we employed 4,089 people on a full-time equivalent basis. None of our employees is represented by a labor union or is the subject of a collective bargaining agreement. We have never experienced a work stoppage and believe that our employee relations are good.

 

Executive Officers of the Registrant

 

The executive officers of the Company are as follows:

 

 

Vinod Gupta is the founder of the Company and has been Chairman of the Board of the Company since its incorporation in 1972. Mr. Gupta served as Chief Executive Officer of the Company from the time of its incorporation in 1972 until September 1997 and since August 1998. Mr. Gupta holds a B.S. in Engineering from the Indian Institute of Technology, Kharagpur, India, and an M.S. in Engineering and an M.B.A. from the University of Nebraska. Mr. Gupta also was awarded an Honorary Doctorate from the Monterey Institute of International Studies, an Honorary Doctorate from the University of Nebraska, and an Honorary Doctorate from the Indian Institute of Technolgoy. He was appointed by President Clinton to serve as a Trustee on the Kennedy Center for Performing Arts in Washington, D.C. He was nominated and confirmed to be the United States Consul General to Bermuda. Then, President Clinton nominated him to be the United States Ambassador to Fiji. Due to business commitments, he withdrew his name from consideration.

 

Stormy L. Dean has served as Chief Financial Officer since February 2006. He served as the Principal Accounting Officer of the Company since December 2005. Mr. Dean has been employed by the Company since 1995, except during the period from October 2003 to August 2004. He served as Chief Financial Officer of the Company from January 2000 through October 2003, as the Corporate Controller from September 1998 until January 2000 and as the acting Chief Financial Officer from January 1999 to August 1999. From August 1995 to September 1998, Mr. Dean served as the Company’s tax director. Mr. Dean holds a B.S. in Accounting from the University of Nebraska at Omaha, an M.B.A from the University of Nebraska at Omaha, and a Certified Public Accountant certificate.

 

Fred Vakili has served as Executive Vice President of Administration and Chief Administrative Officer since August 1998. Mr. Vakili served as Senior Vice President of Special Projects from October 1997 to August 1998, as Senior Vice President of Value Added-Resellers Group and Canada Operations from May 1987 to October 1997, and as Senior Vice President of various Company divisions from 1985 to 1987. Mr. Vakili joined the Company in 1985 as the Product Manager for the Directory Group. Mr. Vakili holds a B.S. in Industrial Engineering and Management from Iowa State University.

 

Monica Messer has served as President of the Data Group since January 2007 and as Chief Operations Officer since January 2003. Prior to that Ms. Messer served as President of the Database Compilation and Technology Group and Chief Information Officer of the Company from February 1997 to January 2003, and served as a Senior Vice President of the Company from January 1996 to January 1997. Ms. Messer joined the Company in 1983 and has served as a Vice President of the Company since 1985. Ms. Messer holds a B.S. in Business Administration from Bellevue University and is an alum of the Stanford Business School Executive Education program in Strategy and Organization.

 

Edward C. Mallin has served as President of the Services Group since January 2007. Prior to that Mr. Mallin served as President of Donnelley Marketing since August 2005, as President of Walter Karl since June 1998, as Executive Vice President of the National Accounts Division from January 1997 to June 1998 and as President of

Compilers Plus from January 1990 to May 1998. Prior to that, Mr. Mallin was Executive Vice President of Compilers Plus which the Company acquired in January 1990. Mr. Mallin holds a B.A. in Economics and a Masters in Business Administration and Planning from New York University.

 

Gerard Miodus was appointed President of Opinion Research in December 2006. He has been with the company since 1982 serving in a wide variety of management positions. In 2006 he served as Managing Director, Executive Vice President for the US Region. Prior to that, Mr. Miodus held the positions of Managing Director of Research Services and Managing Director of Information Services. Mr. Miodus holds a Bachelor of Science degree in Economics from Michigan State University.

 

Dr. Greg Mahnke has served as President of Macro International since November 2005. Dr. Mahnke has been with Macro International since 1988. Dr. Mahnke has a B.A. in Cultural Anthropology from the University of Montana, completed an M.A. in Cultural Anthropology at McGill University in 1981 and received his doctoral degree in Cultural Anthropology from Indiana University in 1987. Prior to assuming the role of President, Dr. Mahnke served as Executive Vice President and Managing Director of Macro’s Survey Research Division. Dr. Mahnke is a well known survey methodologist and serves as Principal Investigator on a number of Macro’s key survey projects.

 

John H. Longwell has served as General Counsel and Secretary since November 2006. From July 2005 to July 2006, Mr. Longwell was a law clerk to the Honorable Stephen G. Breyer of the United States Supreme Court. He was also an associate with the law firm of Paul Weiss Rifkind Wharton & Garrison LLP in New York from October 2003 to April 2005, and Kellogg Huber Hansen Todd Evans & Figel PLLC in Washington from October 2000 to June 2002, where he practiced complex commercial litigation and regulatory law. He also clerked for the Honorable Douglas H. Ginsburg of the United States Court of Appeals for the District of Columbia Circuit from September 2002 to September 2003 and for the Honorable Vaughn R. Walker of the United States District Court for the Northern District of California from September 1999 to September 2000. He is a graduate of the University of Virginia and the University of Georgia School of Law.

 

Website Information

 

We have a website at www.infousa.com. Contents of the website are not part of, or incorporated by this reference, into this Annual Report. We have made available on our website all annual and quarterly reports, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we have filed such material with, or furnished it to, the SEC.

 

Described below and throughout this report are certain risks that our management believes are applicable to our business and the industry in which we operate. There may be additional risks that are not presently material or known. There are also risks within the economy, the industry and the capital markets that affect business generally, and us as well, which have not been described. If any of the described events occur, our business, results of operations, financial condition, liquidity or access to the capital markets could be materially adversely affected.

 

Our business would be harmed if we do not continue successfully to implement our Internet strategy.

 

We use the Internet as our primary vehicle to provide sales leads and database information to our customers. The Internet is widely accepted by businesses all over the world. It is a very fluid distribution channel for information. We have always used cutting-edge technology to deliver our information to our customers. We believe infoUSA was the first database company to offer its products on magnetic media, CD, DVD and also the Internet. Our Salesgenie, Salesgenie/Lite and other products are now being offered on the Internet on a subscription basis.

 

We have adopted an Internet strategy because we believe that the Internet represents an important and rapidly evolving market for marketing information products and services. Our business, financial condition and results of operations would be adversely affected if we:

 

 

Our markets are highly competitive and many of our competitors have greater resources than we do.

 

The business and consumer marketing information industry in which we operate is highly competitive. Intense competition could harm us by causing, among other things, price reductions, reduced gross margins, and loss of market share. Our competition includes: Acxiom, Experian, Harte-Hanks Communications, Inc., Dun & Bradstreet(C), and other companies in research. In addition, we may face competition from new entrants to the business and consumer marketing information industry as a result of the rapid expansion of the Internet, which creates a substantial new channel for distributing business information to the market. Many of our competitors have longer operating histories, better name recognition and greater financial resources than we do, which may enable them to implement their business strategies more readily than we can. We may not be able to compete successfully against current and future competitors.

 

Changes in the direct marketing industry and in the industries in which our customers operate may adversely affect our business.

 

Many large companies are reducing their use of direct mail advertising and increasing their use of on-line advertising, including e-mail, search words, and banner advertisements. As a result of this change in the direct marketing industry, such customers are purchasing less data for direct mail applications. In addition, several of our customers operate in industries, in particular the financial and telecommunications industries, that are undergoing consolidation. Such consolidation reduces the number of companies in those industries, and therefore may reduce the number of customers we serve. We are addressing these changes by offering products that integrate our data, data processing, database marketing and e-mail resources, and pursuing industries that are experiencing growth rather than consolidation. We cannot assure you that the marketplace will accept these new products, or that we will be successful in entering new markets. If we do not gain acceptance for our new products or successfully enter new markets, our business, financial condition and results of operations would be adversely affected.

 

We are highly dependent on key personnel.

 

We are highly dependent on Vinod Gupta and other principal members of our management team. Loss of our key personnel would likely impede achievement of our research and development, operational, or strategic objectives. To be successful, we must retain key employees and attract additional qualified employees.

 

We are leveraged. If we are unable to service our debt as it becomes due, our business would be harmed.

 

As of December 31, 2006, we had total indebtedness of approximately $260 million. Substantially all of our assets are pledged as security under the terms of our existing credit facility entered into in February of 2006, with Wells Fargo Bank, N.A., as Administrative Agent (the “Credit Facility”).

 

Our ability to pay principal and interest on the indebtedness under the Credit Facility and our ability to satisfy our other debt obligations will depend upon our future operating performance. Our performance will be affected by prevailing economic conditions and financial, business and other factors. Certain of these factors are beyond our control. The future availability of revolving credit under the Credit Facility will depend on, among other things, our ability to meet certain specified financial ratios and maintenance tests. We expect that our operating cash flow should be sufficient to meet our operating expenses, to make necessary capital expenditures and to service our debt requirements as they become due. If we are unable to service our indebtedness, however, we will be forced to take

actions such as reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness (including the Credit Facility) or seeking additional equity capital. We may not be able to implement any such measures or obtain additional financing on terms that are favorable or satisfactory to us, if at all.

 

Fluctuations in our operating results may result in decreases in the market price of our common stock.

 

Our operating results may fluctuate on a quarterly and annual basis. Our expense levels are relatively fixed and are based, in part, on our expectations as to future revenues. As a result, unexpected changes in revenue levels may have a disproportionate effect on operating performance in any given period. In some period or periods our operating results may be below the expectations of public market analysts and investors. Our failure to meet analyst or investor expectations could result in a decrease in the market price of our common stock.

 

If we do not adapt our products and services to respond to changes in technology, they could become obsolete.

 

We provide marketing information and services to our customers in a variety of formats, including printed formats, magnetic media formats such as CD-ROM and DVD, and electronic media via the Internet. Advances in information technology may result in changing customer preferences for products and product delivery formats. If we do not successfully adapt our products and services to take advantage of changes in technology and customer preferences, our business, financial condition and results of operations would be adversely affected.

 

Our ability to increase our revenues will depend to some extent upon introducing new products and services, and if the marketplace does not accept these new products and services, our revenues may decline.

 

To increase our revenues, we must enhance and improve existing products and continue to introduce new products and new versions of existing products that keep pace with technological developments, satisfy increasingly sophisticated customer requirements, and achieve market acceptance. We believe much of our future growth prospects will rest on our ability to continue to expand into newer products and services. Products and services that we plan to market in the future are in various stages of development. We cannot be assured that the marketplace will accept these products. If our current or potential customers are not willing to switch to or adopt our new products and services, our ability to increase revenues will be impaired.

 

Changes in laws and regulations relating to data privacy could adversely affect our business.

 

We engage in direct marketing, as do many of our customers. Certain data and services provided by us are subject to regulation by federal, state and local authorities in the United States as well as those in Canada and the United Kingdom. For instance, some of the data and services that we provide are subject to regulation under the Fair Credit Reporting Act, which regulates the use of consumer credit information, and to a lesser extent, the Gramm-Leach-Bliley Act, which regulates the use of non-public personal information. We are also subject to the United Kingdom’s Data Protection Act of 1998, which became fully effective on October 24, 2001 and regulates the manner in which we can use third-party data, and recent regulatory limitations relating to use of the Electoral Roll, one of our key data sources in the United Kingdom. In addition, growing concerns about individual privacy and the collection, distribution and use of information about individuals have led to self-regulation of such practices by the direct marketing industry through guidelines suggested by the Direct Marketing Association and to increased federal and state regulation. There is increasing awareness and concern among the general public regarding marketing and privacy concerns, particularly as it relates to the Internet. This concern is likely to result in new laws and regulations. For example, in 2003 the Federal Trade Commission amended its rules to establish a national “do not call” registry that permits consumers to protect themselves from unsolicited telemarketing telephone calls. Various states also have established similar “do not call” lists. And although “do not call” list regulations do not currently apply to market research phone calls, such as the type performed by us, new legislation or regulation could eliminate the current market research exemption. Compliance with existing federal, state and local laws and regulations and industry self-regulation has not to date seriously affected our business, financial condition or results of operations. Nonetheless, federal, state and local laws and regulations designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the collection,

management or commercial use of such information may increasingly affect our operations. This could result in substantial regulatory compliance or litigation expense or a loss of revenue.

 

Our business would be harmed if we do not successfully integrate future acquisitions.

 

Our business strategy includes continued growth through acquisitions of complementary products, technologies or businesses. We have made over 30 acquisitions since 1996 and completed the integration of these acquisitions into our existing business. We continue to evaluate strategic opportunities available to us and intend to pursue opportunities that we believe fit our business strategy. Acquisitions of companies, products or technologies may result in the diversion of management’s time and attention from day-to-day operations of our business and may entail numerous other risks, including difficulties in assimilating and integrating acquired operations, databases, products, corporate cultures and personnel, potential loss of key employees of acquired businesses, difficulties in applying our internal controls to acquired businesses, and particular problems, liabilities or contingencies related to the businesses being acquired. To the extent our efforts to integrate future acquisitions fail, our business, financial condition and results of operations would be adversely affected.

 

Future acquisitions may also harm our operating results, dilute our stockholders’ equity and create other financial difficulties for us.

 

We may in the future pursue acquisitions that we believe could provide us with new technologies, products or service offerings, or enable us to obtain other competitive advantages.

 

Acquisitions by us may involve some or all of the following financial risks:

 

 

We may not be successful in overcoming the risks described above or any other problems associated with future acquisitions. Any of these risks and problems could materially harm our business, prospects and financial condition. Additionally, we cannot guarantee that any companies we may acquire will achieve anticipated revenues or operating results.

 

A failure in the integrity of our database could harm our brand and result in a loss of sales and an increase in legal claims.

 

The reliability of our products and services is dependent upon the integrity of the data in our databases. We have in the past been subject to customer and third-party complaints and lawsuits regarding our data, which have occasionally been resolved by the payment of money damages. A failure in the integrity of our database could harm us by exposing us to customer or third-party claims or by causing a loss of customer confidence in our products and services.

 

Also, we license proprietary rights to third parties. While we attempt to ensure that the quality of our brand is maintained by the business partners to whom we grant non-exclusive licenses and by customers, they may take actions that could materially and adversely affect the value of our proprietary rights or our reputation. In addition, it cannot be assured that these licensees and customers will take the same steps we have taken to prevent misappropriation of our data solutions or technologies.

 

We may lose key business assets, including loss of data center capacity or the interruption of telecommunications links, the Internet, or power sources, which could significantly impede our ability to operate our business.

 

Our operations depend on our ability, as well as that of third-party service providers to whom we have outsourced several critical functions, to protect data centers and related technology against damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, breaches in security (such as the actions of computer hackers), natural disasters, or other disasters. The on-line services we provide are dependent on links to telecommunications providers. In addition, we generate a significant amount of our revenue through telesales centers and websites that we utilize in the acquisition of new customers, fulfillment of solutions and services and responding to customer inquiries. We may not have sufficient redundant operations to cover a loss or failure in all of these areas in a timely manner. Any damage to our data centers, failure of our telecommunications links or inability to access these telesales centers or websites could cause interruptions in operations that materially adversely affect our ability to meet customers’ requirements, resulting in decreased revenue, operating income and earnings per share.

 

Our international operations subject us to additional risks and challenges that could harm our business and our profitability.

 

We have begun expanding internationally, and plan to aggressively expand in high growth, emerging international markets. International operations subject us to additional risks and challenges, including:

 

 

We cannot assure you that we will be successful in our efforts in foreign countries. Some of these factors may cause our international costs to exceed our domestic costs of doing business. Failure to adequately address these risks could decrease our profitability and operating results.

 

Our contracts with the U.S. federal government grant the government rights that are typically not found in commercial contracts and that could adversely affect our revenues and income.

 

As a result of our acquisition of ORC in 2006, we have approximately 150 active contracts and task orders with the U.S. federal government. There are inherent risks in contracting with the U.S. federal government which could have an adverse effect on our business. All contracts with the U.S. federal government contain provisions, and/or are subject to laws and regulations, that give the government rights and remedies not typically found in our commercial contracts, including rights that allow the government to:

 

 

The U.S. federal government has the right to terminate its contracts with us at any time and such terminations could adversely affect our revenues and income.

 

The U.S. federal government has the right to terminate its contracts with us at any time. If the U.S. federal government terminates a contract, we may recover only our incurred or committed costs, settlement expenses and profit on work completed before the termination. If the government terminates a contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Additionally, most of our backlog could be reduced by any modification or termination of contracts that we have with the U.S. federal government or, in cases where we are a subcontractor, contracts that our prime contractors have with the U.S. federal government.

 

As a contractor to the U.S. federal government, we are subject to restrictions and compliance requirements that could divert the attention of our management, drain our resources and/or result in additional costs, fines or other penalties.

 

As a contractor to the U.S. federal government, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. We are required to obtain and maintain material governmental authorizations and approvals to conduct our business as it is currently conducted. New or more stringent laws or governmental regulations concerning government contracts could hurt our business by limiting our flexibility and by potentially causing us to incur additional expenses.

 

We also must comply with and are affected by laws and regulations relating to the formation, administration and performance of U.S. federal government contracts. These laws and regulations affect how we do business with our U.S. federal government clients and may result in added costs for our business. For example, we are required to comply with the Federal Acquisition Regulations and all supplements, which comprehensively regulate the formation, administration and performance of U.S. federal government contracts, and the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with contract negotiations. If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:

 

 

Any of the sanctions could adversely affect our business, prospects, financial condition, or operating results.

 

Our government contracts are subject to audits and cost adjustments by the U.S. federal government, which could hurt our operating results.

 

Our government contracts are subject to audits and reviews by the U.S. federal government of our performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations and standards. Responding to governmental audits, inquiries or investigations may involve significant expense and divert the attention of our management. An audit of our work, including an audit of work performed by companies we have acquired or may acquire, could result in a substantial adjustment to our revenues because any costs determined by the government to be improperly allocated to a specific contract will not be reimbursed, and revenues we have already recognized may need to be refunded. If a U.S. federal government audit results in allegations of improper or illegal activities by us or our employees and if we are unable to successfully defend against those allegations, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension, and/or debarment from doing business with U.S. federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us regardless of the merits of any such allegation. In addition, the U.S. federal

government may conduct non-audit reviews on a majority of our government contracts, which in turn could lead to full audit reviews by the government.

 

None.

 

Our headquarters are located in a 156,000 square foot facility in Omaha, Nebraska, where we perform sales and administrative activities. Administration and management personnel are also located in a 24,000 square foot facility in Omaha, Nebraska, which is adjacent to our headquarters. In 2006, we completed a 5,000 square foot training facility within walking distance of our headquarters. We have three locations in Carter Lake, Iowa. Our order fulfillment and printing operations are located within our 27,000 square foot building, shipping is conducted at our 18,500 square foot warehouse, and data center operations are split between our 27,000 square foot facility and our adjacent 32,000 square foot building; all of which are located within 15 miles from our headquarters. Data compilation, telephone verification, data and product development, and information technology services are conducted at our recently expanded 175,000 square foot Papillion, Nebraska facility which is located within 5 miles from our headquarters. Catalog Vision sales operations are performed in a 30,000 square foot location in Marshfield, Wisconsin. We own these facilities, as well as adjacent land at certain locations for possible future expansion.

 

We lease sales office space at approximately 80 different locations in the United States, Canada, the United Kingdom and other countries.

 

In December 2001, we commenced a lawsuit against Naviant, Inc., (now known as BERJ, LLP) in the District Court for Douglas County, Nebraska, for breach of a database license agreement by Naviant. We sought recovery of minimum royalties due under that agreement in excess of $18 million. In its answer, Naviant alleged that we had breached the agreement. The District Court entered an order in January 2004 that Naviant, not the Company, had breached the agreement, and awarded us damages of $625,000. We appealed the damages calculation, and in October 2005 the Court of Appeals remanded the case to the District Court for recalculation of damages. On November 9, 2006, the District Court on remand awarded us $9.75 million in damages. We have filed a motion for reconsideration alleging that the award should include additional royalties and interest. Naviant has moved to set aside the damages award. Those motions are still pending in the District Court.

 

In February 2006, Cardinal Value Equity Partners, L.P., which beneficially owns 6.1% of our stock, filed a lawsuit in the Court of Chancery for the State of Delaware in and for New Castle County, against certain directors of the Company, and the Company. The lawsuit was filed as a derivative action on behalf of the Company and as a class action on behalf of Cardinal Value Equity Partners, L.P. and other stockholders. The lawsuit asserted claims for breach of fiduciary duty and sought an order requiring the Company to reinstate the special committee of directors. The special committee had been formed in June 2005 to consider a then-pending proposal by Vinod Gupta to acquire the shares of the Company not owned by him and was dissolved in August 2005 after Mr. Gupta withdrew that proposal. The lawsuit also sought an order awarding the Company and the class unspecified damages. In May 2006, Cardinal amended its complaint to add several new allegations and named two additional directors of the Company as defendants. The Company and the individual defendants filed a motion to dismiss the lawsuit. On October 17, 2006, the Court granted that motion and dismissed the lawsuit without prejudice. The Court’s order permitted Cardinal to file an amended complaint within 60 days of the order. Cardinal subsequently filed a Third Amended Complaint, alleging derivative claims of breach of fiduciary duty and violations of Delaware law. In January 2007, the Court granted the defendants’ motion to consolidate the action with a similar action filed by Dolphin Limited Partnership I, L.P. et al. (See below.)

 

In October 2006, Dolphin Limited Partnership I, L.P., Dolphin Financial Partners, L.L.C. and Robert Bartow filed a lawsuit in the Court of Chancery for the State of Delaware in and for New Castle County, against the current directors of the Company, and two former directors of the Company, and the Company as a nominal defendant. The lawsuit was filed as a derivative action on behalf of the Company. The lawsuit asserts claims for breach of fiduciary duty and misuse of corporate assets, and seeks an order rescinding or declaring void certain transactions between the Company and Vinod Gupta, requiring the defendants to reimburse the Company for alleged damages and expenses relating to such transactions, and directing the Company to amend its Stockholder Rights Plan to include Mr. Gupta, his family and affiliates. The lawsuit also seeks an order awarding the Company unspecified damages. In January 2007, the Court ordered the case consolidated with a similar lawsuit filed by Cardinal Value Equity Partners, L.P. Pursuant to the consolidation order entered by the court, Dolphin and Cardinal have filed a consolidated complaint that essentially combines the claims that had been set forth in their respective individual complaints, described above. Defendants have moved to dismiss that complaint. The lawsuit is in the early stages and it is not yet possible to determine the ultimate outcome of this matter.

 

We are subject to legal claims and assertions in the ordinary course of business. Although the outcomes of any other lawsuits and claims are uncertain, we do not believe that, individually or in the aggregate, any such lawsuits or claims will have a material effect on our business, financial conditions, results of operations or liquidity.

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this 2006 Annual Report on Form 10-K.

 

Our Common Stock, $0.0025 par value, is traded on the NASDAQ Global Select Market under the symbol “IUSA.”

 

The following table sets forth the high and low closing prices for our Common Stock during each quarter of 2006 and 2005. These prices do not include retail mark-up, mark-down or commissions and may not represent actual transactions.

 

Common Stock

 

 

On March 6, 2007, the last reported sale price in the NASDAQ National Market for our Common Stock was $10.03 per share. As of March 6, 2007, there were 109 stockholders of record of the Common Stock, and an

estimated additional 4,400 stockholders who held beneficial interests in shares of Common Stock registered in nominee names of banks and brokerage houses.

 

On March 1, 2005, we paid a cash dividend of $0.20 per common share to stockholders of record on February 8, 2005. This dividend was the first cash dividend paid by us. On February 21, 2006, we paid a cash dividend of $0.23 per common share to stockholders of record on February 6, 2006. On March 5, 2007, we paid a cash dividend of $0.25 per common share and a special dividend of $0.10 per common share to stockholders of record on February 16, 2007. Any decision to pay future dividends will be made by the Board of Directors. No assurance can be given that dividends will be paid in the future since they are dependent on our earnings, cash flows from operations, the financial condition and other factors. The Credit Facility has certain restrictions on the ability to declare dividends on our common stock.

 

The information required by this section concerning securities authorized for issuance under equity compensation plans is set forth in or incorporated by reference into Part III, Item 12 of this Annual Report and Note 10 in our consolidated financial statements included in this Annual Report.

PERFORMANCE GRAPH

 

The following Performance Graph compares the cumulative total return to stockholders of the Company’s Common Stock from December 31, 2001 to December 31, 2006 to the cumulative total return over such period of (i) The Nasdaq Stock Market (U.S. Companies) Index, and (ii) the S&P Data Processing & Outsourced Services Index. The performance graph is not necessarily indicative of future investment performance.

 

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
AMONG INFOUSA INC., NASDAQ STOCK MARKET INDEX, AND
S&P DATA PROCESSING OUTSOURCED SERVICES INDEX

 

 

 

 

The information contained in this Item 5 of this Annual Report is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.

 

The following selected consolidated financial data as of the end of, and for each of the years in the five-year period ended December 31, 2006 are derived from our 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 included elsewhere in this Form 10-K. We have made several acquisitions since 2001 that would affect the comparability of historical data. See Management’s Discussion and Analysis of Financial Condition and Results of Operations. The audited Consolidated Financial Statements as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, are included elsewhere in this Form 10-K.

 

 

 

 

 

This discussion and analysis contains forward-looking statements, including without limitation statements in the discussion of comparative results of operations, accounting standards and liquidity and capital resources, within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, which are subject to the “safe harbor” created by those sections. Our actual future results could differ materially from those projected in the forward-looking statements. Some factors which could cause future actual results to differ materially from our recent results or those projected in the forward-looking statements are described in Item 1A “Risk Factors” above. We assume no obligation to update the forward-looking statements or such factors.

 

General

 

Overview

 

In 2007, we are reorganizing our segments both for operational and reporting purposes. In 2007, we will report results in three segments: the Data Group, the Services Group, and the Research Group. We believe that by organizing all of our businesses that sell proprietary content into a single segment, we can more effectively deploy sales and marketing resources. The reorganization is also expected to create better opportunities for cross selling proprietary databases under one brand name. The financial information contained in this report is according to the segment organization in place during fiscal year 2006 which was the infoUSA Group, the Donnelley Group, and as of December 2006, the Research Group.

 

Initiatives in 2006 included:

 

 

 

Financial Performance

 

Operating income for 2006 was $64.6 million, or 15% of net sales, up from $58.3 million, or 15% of net sales, for 2005. The primary reasons for the increase in operating income were (1) our diligent approach to being more efficient in our operations, and (2) the successful integration of @Once and Millard Group, which were acquired in 2005 and reported a full twelve months of operations in 2006. The continued successful integration of Mokrynskidirect, Digital Connexxions, Rubin Response and Opinion Research Corporation, which were acquired in 2006, into our structure also contributed to the increase in operating income. These increases were offset by $2.3 million expensed during 2006 relating to the proxy contest and other stockholder matters.

 

Mergers and Acquisitions

 

Internal revenue growth is our primary objective. However, we still pursue opportunities for strategic acquisitions. As described in the notes to the accompanying consolidated financial statements, we acquired the following entities in 2005: (1) @Once, a provider of email marketing services, and (2) Millard Group, a provider of list brokerage and list management services. During 2006, we acquired the following entities: (1) Mokrynskidirect, a provider of list brokerage and list management services, (2) Digital Connexxions, a provider of email marketing services, (3) Rubin Response, a provider of list brokerage and list management services, and (4) Opinion Research Corporation, a provider of social and market research services.

 

We have systematically integrated the operations of the acquired companies into existing operations. Due to recent and potential future acquisitions, future results of operations may not be directly comparable to historical data.

 

Summary of Acquisitions

 

Through acquisitions, we have increased our presence in the consumer marketing information industry, greatly increased our ability to provide data processing and e-mail marketing solutions, increased our presence in list management and list brokerage services and broadened our offerings of business and consumer marketing information. In addition, with the most recent acquisition of Opinion Research Corporation we have added a research division to complement our existing services. The following table summarizes the more significant acquisitions:

 

 

 

 

We frequently evaluate the strategic opportunities available and intend to pursue strategic acquisitions of complementary products, technologies or businesses that we believe fit our business strategy. In connection with future acquisitions, we expect that we will be required to incur additional acquisition-related charges to operations.

 

Associated with the acquisitions previously described, we recorded amortization expense on other purchased intangibles as summarized in the following table (amounts in thousands):

 

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are described in Note 2 to the audited Consolidated Financial Statements. Of those policies, we have identified the following to be the most critical because they are the most important to our portrayal of our results of operations and financial condition and they require subjective or complex management judgments:

 

 

 

Revenue recognition.  Revenue from the sale of prospect lists (paper form or electronic), mailing labels, published directories, other sales lead products and DVD and CD information products are recognized upon shipment. These product sales are typically evidenced by a written purchase order or by credit card authorization.

 

List management revenue is recognized net of costs upon shipment of list to third party. List brokerage revenue is recognized net of costs upon verification from third party of the actual list used and shipped.

 

Data processing and e-mail customer retention solution revenues are billed on a time and materials basis, with the recognition of revenue occurring as the services are rendered to the customer.

 

Revenue from the licensing of our data to third parties and the sale of our subscription-based products are recognized on a straight-line basis over the life of the agreement, when we commit to provide the customer either continuous data access (i.e., “24/7” access via the Internet) or updates of data files over a period of time. Licenses and subscriptions are evidenced by written contracts. We also license data to customers with no such commitments. In those cases, we recognize revenue when the data is shipped to the customer, provided all revenue recognition criteria have been met.

 

Services performed in the Research Group vary from contract to contract and are not uniformly performed over the term of the arrangement. Revenues under fixed-price contracts are recognized on a proportional performance basis. Performance is based on the ratio of costs incurred to total estimated costs where the costs incurred represent a reasonable surrogate for output measures of contract performance, including survey design, data collection, survey analysis and presentation of deliverables to the client. Progress on a contract is matched against project costs and costs to complete on a periodic basis. Provision for estimated contract losses, if any, is made in the period such losses are determined. Customers are obligated to pay as services are performed, and in the event that a client cancels the contract, the client is responsible for payment for services performed through the date of cancellation.

 

Revenues under cost-reimbursement contracts are recognized as costs are incurred. Applicable estimated profits are included in earnings in the proportion that incurred costs bear to total estimated costs. Incentives, award fees or penalties related to performance are also considered in estimating revenues and profit rates based on actual and anticipated awards.

 

Revenues under time-and-materials contracts are recognized as costs are incurred. Invoices to clients are generated in accordance with the terms of the applicable contract, which may not be directly related to the performance of services. Unbilled receivables are invoiced based upon the achievement of specific events as defined by each contract including deliverables, timetables and incurrence of certain costs. Unbilled receivables are classified as a current asset. Reimbursements of out of pocket expenses are included in revenues with corresponding costs incurred by us included in cost of revenues.

 

We assess collectibility of revenues and our allowance for doubtful accounts based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. An allowance for doubtful accounts is established to record our trade accounts receivable at estimated net realizable value. If we determine that collection of revenues are not reasonably assured at or prior to the delivery of our products, we recognize revenue upon the receipt of cash. Cash-basis revenue recognition periodically occurs in those cases where we sell or license our information products to a poorly capitalized company, such as an Internet startup company. However, sales recognized on this basis are not a significant portion of our total revenues.

 

Database Costs.  Our database and production costs are generally charged to expense as incurred and relate principally to maintaining, verifying and updating our databases, fulfilling customer orders and the production of DVD/CD titles. Costs to develop new databases are capitalized by us and amortized upon the successful completion of the databases, over a period ranging from one to five years. Our cost of maintaining consumer and business databases does not necessarily vary directly with revenues since a significant portion of the cost is the maintenance and verification of our existing data. Consequently, operating income may vary significantly with changes in revenue from period-to-period, as our ability to adjust certain elements of our cost structure is limited in the short-run.

 

Because we expense the costs of maintaining and verifying our existing database, our balance sheet does not include an asset for the value of our database. We believe that our databases of consumer and business information are valuable intellectual property assets. Our success in marketing our products and services depends, in large part, on our ability to maintain an accurate and reliable database of business and consumer information.

 

Valuation of long-lived and intangible assets and goodwill.  We assess the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we considered important which could trigger an impairment review included the following:

 

 

When we determine that the carrying value of intangibles, long-lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure impairment based on estimated fair value of the assets. Net property and equipment, net intangible assets, long-lived assets, and goodwill amounted to $551.0 million as of December 31, 2006.

 

We completed an impairment test as of October 31, 2006 and 2005, respectively, and determined that no impairment existed. The goodwill impairment test is a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired, and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss. The second step is essentially a purchase price allocation exercise, which allocates the newly determined fair value of the reporting unit to the assets. For purposes of the allocation, the fair values of all assets, including both recognized and unrecognized intangible assets, are determined. The residual goodwill value is then compared to the carrying value of goodwill to determine the impairment charge.

 

At December 31, 2006, we had six reporting units that had goodwill and therefore required testing pursuant to SFAS No. 142. The six reporting units represent a subset of the operating segments reported upon in the accompanying financial statements. These reporting units represent financial information one level lower than the reported operating segments, and these individual reporting units have discrete financial information available and have different economic characteristics.

 

We used the Gordon growth model to calculate residual values. The Gordon growth model refers to the concept of taking the residual year cash flow and determining the value of a growing, perpetual annuity. The long-term growth rate used for each reporting unit was 3.5%. We used weighted average cost of capital ranging from 10.1% to 11.7% in its discounted cash flow analysis.

 

Income Taxes.  Accounting for income taxes requires significant judgments in the development of estimates used in income tax calculations. Such judgments include, but would not be limited to, the likelihood we would realize the benefits of net operating loss carryforwards, the adequacy of valuation allowances, and the rates used to measure transactions with foreign subsidiaries. As part of the process of preparing the our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The judgments and estimates used are subject to challenge by domestic and foreign taxing authorities. It is possible that either domestic or foreign taxing authorities could challenge those judgments and estimates and draw conclusions that would cause us to incur tax liabilities in excess of those currently recorded. Changes in the geographical mix or estimated amount of annual pretax income could impact our overall effective tax rate.

 

To the extent recovery of deferred tax assets is not likely based on estimation of future taxable income in each jurisdiction, we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than

not to be realized. Although we have considered future taxable income along with prudent and feasible tax planning strategies in assessing the need for the valuation allowance, should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to deferred tax assets would be charged to income in the period any such determination was made. Likewise, in the event we were able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to deferred tax assets would increase income in the period any such determination was made.

 

Results of Operations

 

The following table sets forth, for the periods indicated, certain items from the our statement of operations data expressed as a percentage of net sales. The amounts and related percentages may not be fully comparable due to our acquisition of Triplex in February 2004, Edith Roman in June 2004, OneSource in June 2004, @Once in January 2005, Millard Group in November 2005, Mokrynskidirect in June 2006, Digital Connexxions in October 2006, Rubin Response in November 2006 and Opinion Research Corporation in December 2006.

 

 

2006 Compared to 2005

 

Net sales

 

Net sales for 2006 were $434.9 million, an increase of 13% from $383.2 million for 2005.

 

Net sales of the infoUSA Group segment for 2006 were $151.9 million, a 6% increase from $142.8 million for 2005. The increase in net sales is principally due to the growth of the segment’s subscription revenues which includes Salesgenie.com, Salesgenie.com/Lite, SalesLeadsUSA.info and Credit.net. The infoUSA Group segment principally engages in the selling of sales lead generation and consumer DVD products to small to medium sized companies, small office and home office businesses and individual consumers. Customers purchase our information as custom lists or on a subscription basis primarily from the Internet. Sales of subscription-based products require us to recognize revenues over the subscription period instead of at the time of sale.

 

Net sales of the Donnelley Group segment for 2006 were $268.4 million, a 12% increase from $240.4 million for 2005. The majority of the increase in the Donnelley Group is related to the acquisition of Millard Group in November 2005, Mokrynskidirect in June 2006, Digital Connexxions in October 2006 and Rubin Response in November 2006, as well as growth in the Yesmail division as e-mail marketing is becoming a bigger part of corporate advertising. The Donnelley Group segment provides our proprietary databases, database marketing solutions, e-mail marketing solutions, list brokerage and list management services and online interactive marketing services to large companies in the United States, Canada and globally. This segment includes the licensing of databases to value added resellers.

 

Net sales of the newly acquired Research Group segment for 2006 were $14.6 million, which reflects the sales of Opinion Research Corporation since the acquisition date of December 4, 2006. The Research Group segment provides diversified market research which consists of Opinion Research and Macro International.

 

Cost of goods and services

 

Cost of goods and services for 2006 were $116.5 million, or 27% of net sales, compared to $108.1 million, or 29% of net sales for 2005. The majority of the increase in cost of goods and services in 2006 related to the acquisition of Opinion Research Corporation in December 2006. Opinion Research recorded $10.7 million in database and production costs for December 2006. This increase was offset by the decrease in costs due to our November 2005 payment of $1.5 million to terminate a contract with our mainframe processor to bring the processing in-house.

 

The reduction of the cost as a percentage of revenue is due primarily to database compilation costs remaining relatively constant despite the increase in our data sales. List brokerage and list management revenue increased from the Millard Group, Mokrynskidirect and Rubin Response acquisitions which have very low production costs due to sales being recorded on a net basis.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for 2006 were $224.9 million, or 52% of net sales, compared to $185.9 million, or 48% of net sales for 2005. The increase in selling, general and administrative expenses principally relates to the increase in advertising and marketing costs for the subscription products, as well as costs incurred for the proxy contest in connection with our 2006 annual meeting of stockholders. In addition, increased expenses resulted from the businesses acquired in 2005 and 2006, some of which had selling, general and administrative expenses that were higher as a percentage of revenue than those of the Company as a whole.

 

Effective in 2006, selling, general and administrative expenses include items previously reported as separate income statement line items. These items were consolidated since we determined these items no longer had a material impact on our consolidated statements of operations. These include non-cash stock compensation expenses, restructuring costs, litigation settlement charges and acquisition costs. Prior year results have been reclassified to reflect this change.

 

We adopted SFAS No. 123(R) in January 2006, which requires measurement of compensation cost for all share-based payment awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The adoption of SFAS No. 123(R) resulted in a charge of $1.2 million for 2006, compared to a benefit of $0.3 million for 2005. The benefit in 2005 was related to non-employee consulting agreements executed in previous years. See Note 10 of the Notes to Consolidated Financial Statements for further detail regarding the adoption of this new accounting standard.

 

Depreciation and amortization of operating assets

 

Depreciation expense for 2006 was $14.0 million, or 3% of net sales, compared to $12.8 million, or 3% of net sales for 2005. The majority of the increase in depreciation expense is the result of one month of depreciation expense for Opinion Research Corporation acquired in December 2006.

 

Amortization of intangible assets

 

Amortization expense for 2006 was $14.9 million, or 3% of net sales, compared to $18.1 million, or 5% of net sales for 2005. The decrease in amortization expense is due to a certain identifiable intangible asset from the Donnelley Marketing acquisition becoming fully amortized in June 2006.

 

Operating income

 

Including the factors previously described, we had operating income of $64.6 million, or 15% of net sales during 2006, compared to operating income of $58.3 million, or 15% of net sales for 2005. The increase in operating income is a result of the following items: 1) organic growth of approximately 4% for the Company as a whole, 2) solid expense management, and 3) the successful integration of acquisitions made in 2005 and 2006 into our structure which allowed us to eliminate redundant costs.

 

Operating income for the infoUSA Group segment for 2006 was $50.4 million, or 33% of net sales for the infoUSA Group, as compared to $47.4 million, or 33% of net sales for the infoUSA Group for 2005. The increase in operating income for the infoUSA Group is principally due to the growth of the segment’s subscription divisions.

 

Operating income for the Donnelley Group segment for 2006 was $109.3 million, or 41% of net sales for the Donnelley Group, as compared to $101.9 million, or 42% of net sales for the Donnelley Group for 2005. The increase in operating income is principally due to the strong performances of the email technology companies and the list brokerage and list management businesses including the performance of the acquisitions made in 2006 including Mokrynskidirect, Digital Connexxions and Rubin Response.

 

Operating income for the Research Group segment for 2006 was $1.2 million, or 8% of net sales for the Research Group. This includes activity since the date of acquisition of December 4, 2006.

 

Other (expense), net

 

Other expense, net was $(11.3) million, or 2% of net sales, and $(9.1) million, or 2% of net sales, for 2006 and 2005, respectively. Other expense, net is comprised of interest expense, investment income (loss) and other income or expense items, which do not represent components of our operating income and operating expense.

 

Interest expense was $11.8 million for both 2006 and 2005. Investment income was $0.5 million and $2.9 million, for 2006 and 2005, respectively. The decrease is due to fewer gains recorded in 2006 as compared to 2005 for marketable securities on the open market.

 

Income taxes

 

A provision for income taxes of $19.9 million and $17.7 million was recorded during 2006 and 2005, respectively. The effective income tax rate used for both periods was 36%.

 

2005 Compared to 2004

 

Net sales

 

Net sales for 2005 were $383.2 million, an increase of 11% from $344.9 million for 2004.

 

Net sales of the infoUSA Group segment for 2005 were $142.8 million, a 4% decrease from $148.3 million for 2004. The decrease in net sales is principally due to the change in the pricing structure for one of our divisions, which was offset by an increase in net sales due to the growth of the segment’s subscription revenues.

 

Net sales of the Donnelley Group segment for 2005 were $240.4 million, a 22% increase from $196.6 million for 2004. The increase was principally due to the acquisitions of Edith Roman and OneSource in June 2004, @Once in January 2005, and Millard Group in November 2005, which was offset by a slight decrease in our Donnelley Marketing and Walter Karl Divisions.

 

Cost of goods and services

 

Cost of goods and services for 2005 were $108.1 million, or 29% of net sales, compared to $102.8 million, or 30% of net sales for 2004. The increase in cost of goods and services principally relates to the acquisitions of OneSource in June 2004 and @Once in January 2005, as well as our payment of $1.5 million in November 2005 to terminate a contract with our mainframe processor in order to bring the processing in-house. These items were both offset by a decrease in costs as a result of cost cutting initiatives including the insourcing of directory printing and binding operations as well as renegotiating the remaining printing and binding service contracts.

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses for 2005 were $185.9 million, or 48% of net sales, compared to $170.8 million, or 49% of net sales for 2004. The increase in selling, general and administrative expenses principally relates to the acquisition of companies during 2004 including Edith Roman and OneSource, and during 2005 including @Once and Millard Group. In addition, we increased the spending for our subscription product advertisements, and incurred nonrecurring expenses associated with the “going-private” transaction proposal by our CEO.

 

Depreciation and amortization of operating assets

 

Depreciation expense for 2005 was $12.8 million, or 3% of net sales, compared to $14.1 million, or 4% of net sales for 2004. The decrease in depreciation expense is the result of certain computer equipment being fully depreciated during the first half of 2005.

 

Amortization of intangible assets

 

Amortization expense for 2005 was $18.1 million, or 5% of net sales, compared to $15.9 million, or 5% of net sales for 2004. Amortization expense increased as identifiable intangible assets recorded as part of the acquisition of OneSource, totaling $31.3 million, were recorded, and subject to a full twelve months of amortization during 2005, compared to seven months recorded during 2004. SFAS No. 142 requires us to complete an annual impairment test on goodwill and other intangible assets with an indefinite life rather than record amortization expense on those assets. We determined that during our impairment tests completed as of October 31, 2005, no impairment existed.

 

Operating income

 

Including the factors previously described, we had operating income of $58.3 million, or 15% of net sales during 2005, compared to operating income of $41.3 million, or 12% of net sales for 2004. The increase in operating income as a percentage of net sales is a result of the following items: 1) our diligent approach to being more efficient in our operations including items such as consolidating printing facilities and other cost cutting initiatives, and 2) the successful integration of Edith Roman, OneSource, @Once and Millard Group into our structure, which allowed us to eliminate redundant computer costs, printing facilities and back office operations.

 

Operating income for the infoUSA Group segment for 2005 was $47.4 million, or 33% of net sales for the infoUSA Group, as compared to $46.0 million, or 31% of net sales for the infoUSA Group for 2004. The increase in operating income as a percentage of net sales is principally due to increased efficiencies in the segment’s operations including consolidation of printing facilities.

 

Operating income for the Donnelley Group segment for 2005 was $101.9 million, or 42% of net sales for the Donnelley Group, as compared to $84.2 million, or 43% of net sales for the Donnelley Group for 2004. The increase in operating income is principally due to the successful integration of Edith Roman, OneSource, @Once and Millard Group, which allowed us to eliminate redundant costs.

 

Other (expense), net

 

Other expense, net was $(9.1) million, or 2% of net sales, and $(12.6) million, or 4% of net sales, for 2005 and 2004, respectively. Other expense, net is comprised of interest expense, investment income (loss) and other income or expense items, which do not represent components of our operating income and operating expense.

 

Interest expense was $11.8 million and $9.2 million for 2005 and 2004, respectively. The increase is principally due to an increase in interest rates (which are tied to fluctuating LIBOR rates) on our debt facilities, as well as the increase in debt in June 2004 as a result of financing the OneSource acquisition. Investment income (loss) was $2.9 million and $(0.2) million, for 2005 and 2004, respectively. The increase is due to gains recorded as a result of the selling of marketable securities on the open market during 2005.

 

During 2005, we recorded a loss of $0.1 million for an other-than-temporary decline in the value of a nonmarketable equity investment, and a loss of $0.1 million for a loss on an investment with a limited partnership.

 

During 2004, we wrote-off deferred financing costs of $0.1 million related to the existing credit facility as a result of the financing of the 2004 Credit Facility (as defined below).

 

During 2004, we redeemed the remainder of our outstanding 91/2% Senior Subordinated Notes of $30.0 million at a premium of 4.75% to face amount. The premium paid on the redemption was $1.5 million, representing amounts paid in excess of the carrying value of the debt. As part of the redemption, we recorded charges of $0.6 million for net unamortized debt issue costs related to the Senior Subordinated Notes.

 

During 2004, we recorded a loss of $1.0 million for an other-than-temporary decline in the value of a nonmarketable equity investment.

 

Income taxes

 

A provision for income taxes of $17.7 million and $10.9 million was recorded during 2005 and 2004, respectively. The effective income tax rate decreased from 38% in 2004 to 36% in 2005 due to the following factors: state income tax planning, Section 199 of the Internal Revenue Code related to manufacturing deduction and dividends paid to the ESOP plans.

 

Liquidity and Capital Resources

 

Overview

 

Our principal sources of liquidity are cash flow provided by our operating activities, our 2006 Credit Facility (as defined below), and cash and cash equivalents on hand. Our ability to generate cash from our operations is one of our fundamental financial strengths. We use cash flows from operations, along with borrowings, to fund capital expenditures, pursue growth initiatives, make acquisitions and retire outstanding indebtedness.

 

We are not subject to significant variability in cash flows from operations. Our sales (including those subject to deferred revenue recognition practices), cash receipts and cash disbursements occur fairly evenly through the course of a fiscal year.

 

Cash flows from operations on an annual basis have historically been well in excess of contractual obligations, including required debt payments, capital lease obligations, operating leases and other long-term obligations, and we believe that this financial condition will remain comparable for the foreseeable future. We do not anticipate utilizing cash flows from operations to fund significant capital expenditures in the foreseeable future. Additionally, we had $37.0 million of available borrowing capacity under our 2006 Credit Facility (as defined below) at December 31, 2006, and have been historically successful in negotiating and obtaining additional debt financing as necessary.

 

General Information — Debt Instruments, Financial Covenants and Sources and Uses of Cash

 

On February 14, 2006, we entered into an amended and restated $275 million Senior Secured Credit Facility (the “2006 Credit Facility”) administered by Wells Fargo Bank, N.A., replacing the Senior Secured Credit Facility originally entered into on March 25, 2004 (the “2004 Credit Facility”). The 2006 Credit Facility provides for a

$175 million revolving line of credit with a maturity date in February 2011 and a $100 million term loan with a maturity date in February 2012. At February 14, 2006, we borrowed $100 million under the term loan and $21 million under the revolving line of credit to repay the 2004 Credit Facility. At December 31, 2006, the term loan had a balance of $99.0 million, bearing an interest rate of 7.12%, the revolving line of credit had a balance of $139.0 million, bearing an interest rate of 6.82%, and $36.0 million was available under the revolving line of credit. Substantially all of our assets are pledged as security under the terms of the 2006 Credit Facility.

 

The 2006 Credit Facility provides for grid-based interest pricing based upon our consolidated total leverage ratio. Interest rates for use of the revolving line of credit range from base rate plus 0.25% to 1.00% for base rate loans and LIBOR plus 1.25% to 2.00% for Eurodollar rate loans. Interest rates for the term loan range from base rate plus 0.75% to 1.00% for base rate loans and LIBOR plus 1.75% to 2.00% for Eurodollar rate loans. Subject to certain limitations set forth in the credit agreement, we may designate borrowings under the 2006 Credit Facility as base rate loans or Eurodollar loans.

 

We are subject to certain financial covenants in the 2006 Credit Facility, including minimum consolidated fixed charge coverage ratio, maximum consolidated total leverage ratio and minimum consolidated net worth. The fixed charge coverage ratio and leverage ratio financial covenants are based on EBITDA (“earnings before interest expense, income taxes, depreciation and amortization”), as adjusted, providing for adjustments to EBITDA for certain agreed upon items including non-operating gains (losses), other charges (gains), asset impairments, non-cash stock compensation expense and other items specified in the 2006 Credit Facility. We were in compliance with all restrictive covenants of the 2006 Credit Facility as of December 31, 2006.

 

The 2006 Credit Facility provides that we may pay cash dividends on our common stock or repurchase shares of our common stock provided that (a) before and after giving effect to such dividend or repurchase, no event of default exists or would exist under the credit agreement, (b) before and after giving effect to such dividend or repurchase, our consolidated total leverage ratio is not more than 2.75 to 1.0, and (c) the aggregate amount of all cash dividends and stock repurchases during any loan year does not exceed $20 million, except that there is no cap on the amount of cash dividends or stock repurchases so long as, after giving effect to the dividend or repurchase our consolidated total leverage ratio is not more than 2.00 to 1.0.

 

As of December 31, 2006, we had a working capital deficit of $34.9 million. We believe that our existing sources of liquidity and cash generated from operations will satisfy our projected working capital, debt repayments and other cash requirements for at least the next 12 months. Acquisitions of other technologies, products or companies, or internal product development efforts may require us to obtain additional equity or debt financing, which may not be available or may be dilutive.

 

Selected Consolidated Statements of Cash Flows Information

 

Net cash provided by operating activities during 2006 totaled $61.6 million compared to $86.3 million for 2005. The lower cash inflow for the current period was mainly attributed to the change in deferred revenue. In December 2005, $24.0 million was received due to the early termination of a database license contract between us and First Data Solutions. The license agreement, which had an original term of 9 years ending in 2008, was terminated as of December 31, 2005. The $24.0 million was recorded as deferred revenue for this contract which is being recognized over the revised two year contract.

 

Net cash used in investing activities during 2006 totaled $169.0 million, compared to $28.7 million for 2005. The current year outflow was mainly attributed to the following: 1) payments for the acquisitions of Opinion Research Corporation for $131.5 million excluding cash acquired of $0.8 million, Mokrynskidirect for $6.6 million, excluding the cash acquired of $2.0 million, Digital Connexxions for $4.3 million, Rubin Response for $1.5 million, and the Millard Group acquisition working capital adjustment of $1.4 million, and 2) our spending $21.1 million for additions of property and equipment, which include facility expansions and remodeling, and $7.5 million for software and database development costs.

 

Net cash provided by financing activities during 2006 totaled $112.8 million, compared to $67.2 million used in 2005. During 2006, we borrowed a total of $285.8 million in debt, which was mainly attributed to borrowings associated with the restatement of the 2004 Credit Facility, and the funds borrowed to finance the Opinion Research

Corporation acquisition. During 2006, we paid a total of $174.4 million in debt, which was mainly associated with the repayment of the 2004 Credit Facility and principal payments for both the 2004 and 2006 Credit Facilities, as well as payments on the revolver during the year.

 

We received proceeds from employee stock option exercises, including the related tax benefit of $14.3 million during 2006.

 

We paid a cash dividend of $0.23 per common share. The dividend payments, totaling $12.4 million, were paid on February 21, 2006, to stockholders of record as of the close of business on February 6, 2006.

 

Selected Consolidated Balance Sheet Information

 

Trade accounts receivable increased to $77.1 million at December 31, 2006 from $52.7 million at December 31, 2005. The increase was the result of the acquisition of Opinion Research Corporation in December 2006, which was offset by a decline in the days sales outstanding (“DSO”) ratio, which was 52 days in 2006 compared to 55 days for the same period in 2005.

 

List brokerage trade accounts receivable increased to $68.3 million at December 31, 2006 from $50.4 million at December 31, 2005. The increase was primarily the result of the acquisitions of Mokrynskidirect in June 2006 and Rubin Response in November 2006.

 

Unbilled services increased to $20.8 million at December 31, 2006 from $1.7 million at December 31, 2005. The increase was the result of the acquisition of Opinion Research Corporation in December 2006.

 

Property and equipment, net increased to $61.2 million at December 31, 2006 from $48.5 million at December 31, 2005. The increase was primarily the result of the acquisition of Opinion Research Corporation in December 2006.

 

Goodwill increased to $381.7 million at December 31, 2006 from $313.4 million at December 31, 2005. The majority of the increase was the result of the acquisition of Opinion Research Corporation in December 2006, which increased goodwill by $57.7 million. In addition, goodwill was recorded for $4.7 million for Mokrynskidirect, $1.7 million for Digital Connexxions and $1.9 for Rubin Response, as well as certain finalization of purchase price allocations recorded during the current year. Additionally, acquisition costs associated with the above acquisitions of $4.5 million were recorded.

 

Intangible assets, net, increased to $108.0 million at December 31, 2006 from $51.3 million at December 31, 2005. The increase was primarily the result of the intangibles identified and recorded for the acquisition of Opinion Research Corporation in December 2006 of $46.1 million for customer relationships and $10.9 million for tradenames. In addition, intangibles identified and recorded for the acquisition of Mokrynskidirect in June 2006 totaled $1.2 million for customer relationships and $0.9 million for trade names, and intangibles were identified and recorded during the year for the Millard Group acquisition of $5.6 million for customer relationships, $0.3 million for developed technology and $0.2 million for trade names. These additions were offset by amortization recorded during 2006 for intangible assets.

 

Accounts payable increased to $27.5 million at December 31, 2006 from $13.0 million at December 31, 2005. The increase was primarily the result of a overdraft position which has been reclassed to accounts payable, accordingly.

 

List brokerage trade accounts payable increased to $62.0 million at December 31, 2006 from $44.0 million at December 31, 2005. The increase was the result of the acquisitions of Mokrynskidirect in June 2006 and Rubin Response in November 2006.

 

Accrued payroll expenses increased to $33.6 million at December 31, 2006 from $19.0 million at December 31, 2005. The increase was primarily the result of the acquisition of Opinion Research Corporation in December 2006.

 

Deferred revenue decreased to $77.9 million at December 31, 2006 from $86.1 million at December 31, 2005. This decrease was the result of twelve months of revenue being recognized from the early termination of the license agreement with First Data Solutions in December 2005.

 

Our long-term debt increased to $255.3 million at December 31, 2006 from $142.4 million at December 31, 2005. The increase was mainly attributable to credit facility debt proceeds received to fund the acquisition of Opinion Research Corporation in December 2006.

 

Deferred income taxes increased to $35.4 million at December 31, 2006 from $19.8 million at December 31, 2005. The increase was mainly due to the acquisition adjustment recorded for the book amortizable intangibles of Opinion Research Corporation.

 

Selected other balance sheet accounts, including prepaid expenses, other assets, accrued expenses and income taxes payable, increased (decreased) moderately from their respective account balances at December 31, 2005 to their respective account balances at December 31, 2006. The increase (decrease) in these account balances is due to the acquisition of certain companies during 2006 and payment timing differences related to various general operating expenses.

 

The following table summarizes our contractual obligations as of December 31, 2006:

 

 

Unconditional purchase obligations include service contracts for Internet, phone and data communication services, software and hardware maintenance services, consulting agreements, data processing services and data center hosting agreements.

 

Other than for long-term debt arrangements, we have historically not entered into significant long-term contractual commitments, and do not anticipate doing so in the foreseeable future. We principally negotiate longer-term contracts that bear terms of one year or less, although some contracts may bear terms of up to three years.

 

Off-Balance Sheet Arrangements

 

Other than rents associated with facility leasing arrangements, we do not engage in off-balance sheet financing activities.

 

Accounting Standards

 

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments” using the modified prospective approach. See Note 10 to Consolidated Financial Statements for further detail regarding the adoption of this accounting standard.

 

In February 2006, the Financial Accounting Standards Board (“the FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140.” SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation to be accounted for as a whole on a fair value basis, at the holders’ election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect that the adoption of SFAS No. 155 will have a material impact on our consolidated financial condition or results of operations.

 

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140.” SFAS No. 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. We do not expect that

the adoption of SFAS No. 156 will have a material impact on our consolidated financial condition or results of operations.

 

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 applies to all income tax positions taken on previously filed tax returns or expected to be taken on a future tax return. FIN 48 prescribes a benefit recognition model with a two-step approach, a more-likely-than-not recognition criterion and a measurement attribute that measures the position as the largest amount of tax benefit that is greater than 50% likely of being ultimately realized upon ultimate settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold for purposes of applying FIN 48. Therefore, if it can be established that the only uncertainty is when an item is taken on a tax return, such positions have satisfied the recognition step for purposes of FIN 48 and uncertainty related to timing should be assessed as part of measurement. FIN 48 also requires that the amount of interest expense and income to be recognized related to uncertain tax positions be computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in a tax return. FIN 48 is effective for us as of January 1, 2007. The change in net assets as a result of applying this pronouncement will be a change in accounting principle with the cumulative effect of the change required to be treated as an adjustment to the opening balance of retained earnings. Adjustments to goodwill or regulatory accounts associated with the implementation of FIN 48 will be based on other applicable accounting standards. We have not fully completed the process of evaluating the impact of adopting FIN 48, including the apportionment of the tax and interest impacts to the registrants in infoUSA’s affiliated group. Nevertheless, we have performed procedures to identify a range of the anticipated impacts of the adoption of FIN 48. The adoption of FIN 48 is not anticipated to have a material impact on our January 1, 2007 balance of retained earnings.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding financial instruments in one of the categories (level 3), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS No. 157 will not have a material impact on our consolidated financial statements.

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88,106 and 132(R).” SFAS No. 158 requires: the recognition of the funded status of a defined benefit plan in the balance sheet; the recognition in other comprehensive income of gains or losses and prior service costs or credits arising during the period but which are not included as components of periodic benefit cost; the measurement of defined benefit plan assets and obligations as of the balance sheet date; and disclosure of additional information about the effects on periodic benefit cost for the following fiscal year arising from delayed recognition in the current period. In addition, SFAS No. 158 amends SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” to include guidance regarding selection of assumed discount rates for use in measuring the benefit obligation. SFAS No. 158 is effective for our year ending December 31, 2006. SFAS 158 did not have a material impact on our consolidated financial statements.

 

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006. Upon adoption of SAB 108, we recorded a one-time cumulative effect adjustment to beginning-of-year retained earnings of

$3.2 million. See Note 21 for the Consolidated Financial Statements for additional information on the adoption of SAB 108.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 on our consolidated financial statements.

 

Inflation

 

We do not believe that the rate of inflation has had a material effect on our operating results. However, inflation could adversely affect our future operating results if it were to result in a substantial weakening of the economic condition.

 

We have identified interest rate risk as our primary market risk exposure. We are exposed to significant future earnings and cash flow exposures from significant changes in interest rates as nearly all of our debt is at variable rates. If necessary, we could refinance our debt to fixed rates or utilize interest rate protection agreements to manage interest rate risk. For example, each 100 basis point increase (decrease) in the interest rate would cause an annual increase (decrease) in interest expense of approximately $2.5 million. At December 31, 2006, the fair value of our long-term debt is based on quoted market prices at the reporting date or is estimated by discounting the future cash flows of each instrument at rates currently offered to us for similar debt instruments of comparable maturities. At December 31, 2006, we had long-term debt with a carrying value of $259.9 million and estimated fair value of $254.9 million. We have no significant operations subject to risks of foreign currency fluctuations.

 

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 included elsewhere in 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, 2006. This unaudited information have been prepared by us 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 our audited consolidated financial statements and the notes thereto. Our quarterly net sales and operating results may vary in the future. The operating results for any quarter are not necessarily indicative of the operating results for any future period or for a full year. You should not rely on period-to-period comparisons of our operating results as an indication of our future performance. Factors that may cause our net sales and operating results to vary or fluctuate include those discussed in Item I, Part 1A “Risk Factors” section of this Annual Report.

 

 

 

 

 

No reports under this item have been required to be filed involving a change of accountants or disagreements on accounting and financial disclosure.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining “adequate internal control over financial reporting” as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements.

 

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2006, based on the criteria for effective internal control described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2006.

 

We acquired Opinion Research Corporation on December 4, 2006. Management excluded from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 Opinion Research Corporation’s internal control over financial reporting which represents 24% of our consolidated total assets and 3% of our consolidated total sales included in the consolidated financial statements and our subsidiaries as of and for the year ended December 31, 2006.

 

Management engaged KPMG LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, to attest to and report on management’s evaluation of our internal control over financial reporting. KPMG LLP’s report is included herein.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act

Rules 13a-15(e) and 15d-15(e). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2006, our disclosure controls and procedures were effective, as of the end of the period covered by this report, to enable us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended December 31, 2006, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitation in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

The Stockholders and Board of Directors

infoUSA Inc.:

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that infoUSA Inc. (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). infoUSA Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that infoUSA Inc. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on COSO. Also, in our opinion, infoUSA Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on COSO.

 

The Company acquired control of Opinion Research Corporation on December 4, 2006. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 Opinion Research Corporation’s internal control over financial reporting which represents 24% of the Company’s consolidated total assets and 3% of the Company’s consolidated total sales included in the consolidated financial statements of the Company and its subsidiaries as of and for the year ended December 31, 2006. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Opinion Research Corporation.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of infoUSA Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, cash flows, and financial statement schedule for each of the years in the three-year period ended December 31, 2006, and our report dated March 12, 2007 expressed an unqualified opinion on those consolidated financial statements.

 

KPMG LLP

 

Omaha, Nebraska

March 12, 2007

 

None.

 

The required information regarding our Directors is incorporated by reference to the information under the caption “Nominees for Election at the Annual Meeting” and “Incumbent Directors whose Terms of Office Continue After the Annual Meeting” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders.

 

The required information regarding our executive officers is contained in Part I of this Form 10-K.

 

The required information regarding corporate governance is incorporated by reference to the information under the caption “Board Meetings and Committees” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders.

 

The required information regarding compliance with Section 16(a) of the Exchange Act is incorporated by reference to the information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders.

 

Code of Ethics

 

We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. The Code of Business Conduct and Ethics is posted on our website at www.infousa.com under the caption Investor Relations.

 

We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above and, to the extent required by the listing standards of the Nasdaq Global Select Market, by filing a Current Report on Form 8-K with the SEC, disclosing such information.

 

Incorporated by reference to the information under the captions “Board Compensation,” “Executive Compensation,” and “Certain Transactions” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders.

 

Incorporated by reference to the information under the caption “Security Ownership” and “Equity Compensation Plan Table” in our definitive proxy statement for the 2007 Annual Meeting of Stockholders.