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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-19598
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infoUSA INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0751545
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
(Address of principal executive offices)
(402) 593-4500
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.0025 PAR VALUE
SERIES A PREFERRED SHARE PURCHASE RIGHTS
9 1/2% SENIOR SUBORDINATED NOTES DUE 2008
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
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. | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
11, 2002 as reported on the NASDAQ National Market System, was approximately
$142 million. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 11, 2002 registrant had outstanding 50,902,216 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 3, 2002, which will be filed within
120 days of the end of fiscal year 2001, are incorporated into Part III hereof
by reference.
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PART I
This Annual Report on Form 10-K, the documents incorporated by reference
into the Company's Annual Report to shareholders, 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 "Factors That May Affect Operating Results," as well as those noted
in the documents incorporated by reference into this Annual Report. 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.
ITEM 1. BUSINESS
COMPANY PROFILE
infoUSA Inc. (the "Company" or "infoUSA") compiles and updates the finest
proprietary databases of nearly 14 million businesses and 250 million consumers
in the United States and Canada under one roof in Omaha, Nebraska. These
databases are compiled from thousands of public sources. We believe our database
is the richest in content in the industry. In order to improve the quality of
our databases, we make over 17 million phone calls per year to gather additional
content and verify existing information. We maintain a staff of approximately
500 full-time employees in Omaha to manage the database. The content changes by
more than 65 percent every year, which includes change of address, phone number,
SIC code and other content within a record. Our customers need to continually
refresh their databases and that is why customers keep coming to us to purchase
updated products and services. Recurring revenue is a major component of our
revenue, and approximately two-thirds of our revenue is recurring in nature.
More than 4 million customers have used our information in the form of
sales leads, prospect lists, mailing labels, printed directories, 3 x 5 cards,
computer diskettes, business credit reports, consumer products and on the
Internet. Our information is used by businesses for sales leads, mailing lists,
credit decisions, market research, competitive analysis and vendor
relationships. Consumers use our information for travel planning, job searches,
due diligence and multiple other uses. During 2001 and 2002, the Company
launched two new proprietary technologies, infoConnect(DM) ONE PASS and Customer
Analyzer and Prospect Builder(TM). infoConnect(DM) ONE PASS is an Internet
driven data hygiene and enhancement software which was developed to clean our
customers house files or other files by matching their databases against our
databases online. Customer Analyzer and Prospect Builder(TM) analyzes the
customer base of our clients and delivers prospects that have similar
characteristics. Due to the fact that infoUSA is the only company with a
combined database of 250 million consumers and 14 million businesses, we are the
only company that can offer this type of application to our customers.
BUSINESS STRATEGY
There are approximately 14 million businesses in the United States and
Canada. All of these businesses are looking for cost effective solutions to find
new customers and increase their sales, especially during the slow economy.
Our strategy is to be the leader in proprietary databases of businesses
and consumers in the United States and Canada, and produce innovative products
and services to meet the needs of these 14 million businesses for finding new
prospects and increasing their sales. The information provided by our databases
is integral to the decision-making process for businesses. Our organization is
divided into five distinct groups; our Database Compilation and Update Group;
our Small Business Group; our Consumer Products Group; our Large Customer Group;
and our Database Licensing Group, where we license our data to Internet
companies and value-added resellers. Finally, we utilize the Internet for
distribution of our proprietary content and business credit reports. We believe
the Internet complements our core business and in the future will be a dominant
distribution channel, which expands our marketplace by allowing small businesses
and consumers worldwide to access our databases and purchase information with
more frequency.
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The Company's introduction of infoConnect and Customer Analyzer and
Prospect Builder is targeted toward the small business and sales people. These
Internet based technologies will help them find new prospects and grow their
sales at a fraction of the cost of their existing prospecting methods, such as
trade show, print advertising, billboard, television and radio advertising.
DATABASE COMPILATION AND UPDATE GROUP
It is our strategy to add valuable depth to our proprietary databases.
Content is king, and we believe we have the finest content available. We believe
that we are the only company that offers proprietary databases of both
businesses and consumers, compiled and updated under one roof. We use thousands
of sources and hundreds of proprietary processes developed over the last thirty
years to compile and enhance our databases. We employ nearly 500 people, and
spend over $50 million annually to create, maintain, enhance and deliver our
databases.
BUSINESS DATABASE. Our proprietary business database contains information
on nearly 14 million businesses in the United States and Canada. The database
contains a wealth of information about businesses such as: NAME, ADDRESS, PHONE
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, E-MAIL ADDRESSES, HEADLINE NEWS, and PUBLIC FILINGS including
liens, judgments and bankruptcies. Our data can be broken down into various
product segments such as Small Business Owners, Small Business Owners at Home,
Big Businesses and their Corporate Affiliations, Growing Businesses, and Female
Business Owners. Additionally, vertical industry data segments are created such
as Physicians and Surgeons, Schools, Restaurants, Places of Interest, Churches,
and Government Offices.
We compile the business information from over 15,000 sources. Sources such
as the yellow pages and telephone directory white pages, are used to identify
businesses for inclusion in the database. Other sources, such as primary
telephone research surveys, are used to enhance the database with key data
elements like names of executives, primary SIC code, number of employees, fax
numbers and Internet addresses. Additional sources, such as annual reports, SEC
filings and public filings, are used to update the database with liens,
judgments, bankruptcies, headline news, commercial debtor data, changes in
leadership, address changes, corporate affiliation changes and the like. In
addition, we use information licensed from the United States Postal Service's
National Change of Address (NCOA) and Delivery Sequence File (DSF) to update and
maintain our business database. Accuracy is the most important characteristic of
any database, and our database is approximately 95% accurate at any given time,
which we believe is the highest degree of accuracy in the industry.
We continuously enhance our databases. In the last year we have increased
the number of executive e-mail addresses, toll free numbers, new businesses, web
addresses and fax numbers. We continue to add new data content from expanded
compilation, verification and acquisition initiatives. The Company has continued
to invest in core processes and technologies that enable our customers to access
in real-time the most current data possible.
CONSUMER DATABASE. With the acquisition of Donnelley Marketing in 1999, we
acquired over 85 years of database compilation technology and proprietary
models. We have further built upon this foundation to create what we believe is
the most comprehensive and accurate consumer database in the industry. Key
elements in our database include names, addresses, phone numbers, age, income,
marital status, presence of children, active bank cards, religion, ethnicity,
purchasing power, affluence models, length of residence, dwelling type and size,
home value/mortgage amount, vehicle data, and dozens of self-reported behavioral
and lifestyle elements.
The foundation of the consumer database begins with the compilation of all
households listed in telephone directories and other public sources such as real
estate records. This core data source is compiled with the highest accuracy
standards in the industry. The white page file is then enhanced with over 1.8
billion records from public sources and proprietary third parties to add
individuals not listed in the telephone directories and to further enhance the
records with demographic and psychographic data required to segment consumer
prospects. The end result is a database of approximately 250 million consumers,
115 million households, and 55 million homeowners. In addition, we offer other
specialty consumer files including New Homeowners, New Movers, Occupant
Addresses, Bankruptcies, Tax Liens and Judgments.
Our e-Shareforce database is comprised of self-reported psychographic and
demographic information collected via electronic surveys over the Internet.
Information obtained through the Internet is timely, less expensive and the
respondents have all provided the information voluntarily. Respondents to the
e-survey provide information regarding purchase intention and habits, lifestyle
characteristics and product usage. The combination of our traditional Shareforce
database and our new e-Shareforce database consists of a total of over 38
million households. Our marketing material
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has expanded our e-Shareforce brand to include many of our other business and
consumer niche databases.
The Mastermatch file is the largest, most comprehensive multi-sourced
consumer enhancement tool for appending consumer data to our client's customer
databases at both a household and individual level. This database allows
customers to achieve the highest match rates possible for database-enhancement
purposes.
Privacy Issues and Consumer Data. infoUSA utilizes public record
information and self-reported information provided by the consumer in order to
create marketing solutions for our clients. We do not use any credit history,
confidential purchasing or health related data on consumers as a part of our
database.
Effect of Internet on Data Compilation. In 2001 we continued to use
Internet opt-in consumer surveys, which allow consumers to volunteer lifestyle
and buyer behavior information that can be used to assist web marketers in
targeting advertising to best meet their needs. This self-reported survey
information can be obtained on the Internet with more speed, greater accuracy
and at lower cost than mail-based surveys.
PRODUCTS AND SERVICES DERIVED FROM THE DATABASE
We create many products and services from our database to meet the needs
of millions of potential customers. From our databases of 14 million businesses
in the United States and Canada and 250 million consumers in the United States
we produce products such as prospect lists, mailing labels, 3 x 5 cards,
diskettes, printed directories, consumer products, business credit reports, and
many other products and services. We also offer our information on the Internet
through our various websites, such as infoUSA.com, ListBazaar.com,
BusinessCreditUSA.com, MrPoll.com and DBLink.com. Our products and data
processing services are used by customers identifying and qualifying prospective
customers, initiating direct mail campaigns, telemarketing, analyzing and
assessing market potential, monitoring the effectiveness of marketing efforts
and surveying competitive markets in order to find new customers and increase
their sales at low costs. We are organized around four customer groups: Small &
Medium Business Group, Consumer Products Group, Large Business Customers Group
and the Data Licensing Group. Our products and services are designed for the
unique needs of each group.
OUR CUSTOMERS AND POTENTIAL MARKETS
SMALL & MEDIUM BUSINESS GROUP
We estimate our primary potential market to be approximately 6 million
small businesses. This group concentrates on the needs of small to medium size
businesses, small office and home office businesses and aspiring entrepreneurs.
Our products and services help small businesses analyze their existing
customers, identify new markets and grow their businesses. The products may also
be used to locate suppliers, look up business credit reports and for other
marketing and reference purposes. The products and services for the Small
Business Group are as follows:
Prospect Lists, Mailing Labels, and Sales Lead Products. These products
are used by customers who request specific information and formats, such as
mailing labels or diskettes. We produce sales lead generation products using a
combination of customized sorting criteria to meet the customer's specific
marketing objectives for their geographic area.
Electronic Delivery of Products. We deliver sales lead generation products
using a variety of electronic formats, including diskettes formatted for most
common software applications, magnetic tape media, DVD's, CD's, and Internet
delivery of files through infoUSA.com.
Sales Leads on the Internet. infoUSA.com: Our customers can buy all of our
databases on the Internet, 24 hours a day, 7 days a week. The customer has the
ability to search the database by any geographical area they have targeted and
no minimum order size is required.
Monthly Updates. Our databases change by over 65% annually. As a result,
our customers have a need to periodically refresh their customer and marketing
databases. That is why we offer a subscription program that provides customers
with a prospect database and monthly updates including new leads for the market
area, changes to the original database, and a list of companies that have gone
out of business. We also offer monthly updates using Internet delivery.
Business Directories and DVD/CD Products. Many of our customers are small
businesses that sell to other businesses within a specific geography. They use
our printed business directories bundled with the data on DVD/CDs. Our customers
use them for lead generation, telemarketing and reference purposes. Our plan is
to offer an interface with our web site along with Internet access with these
DVD/CDs to offer our customers complete flexibility for one price.
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Business Credit Directories and Reports. Our business credit directories
include a printed directory bundled with a DVD/CD. The product is used by
customers for making credit decisions, verifying company information, assisting
in collection support, and identifying potential new customers. Business Credit
Reports and other products can also be purchased individually on the Internet,
currently three dollars for each report or on a subscription basis.
Customer Analyzer and Prospect Builder. Our research and development
efforts over the last two years to offer a complete Internet based sales and
marketing tool for small business owners and sales people are bearing fruit. The
Internet is an ideal environment for small businesses since it does not require
any software installation or updates. This product is still in the development
stage but it aims to combine CRM with analysis of existing customers database
and generate prospects that look like their preferred customers. The service
will also provide customized lead generation, business credit reports and direct
mail services through a subcription-based service that is purely web based.
Polk Directories. Since 1870, The Polk City Directory(R) has been the
trusted brand for providing residential, demographic, and business data
information to small and medium businesses across the U.S. Annually, over 900
versions of the directory are produced and delivered in hard cover book and
CD-ROM format. Sales of these products are generated from the 200 plus field
sales representatives, 20 plus telemarketing sales representatives, and on-going
direct mail programs. Polk Directories' 110,000 customers cover a wide range of
industries including: service, financial, and retail businesses.
- The Polk City Directory(R) consists of seven directories in one,
designed to help businesses save time by planning sales calls
efficiently, saving money by reducing undeliverable mail, and
increasing sales by identifying prospects.
- InfoTYME(R), our CD-ROM version of The Polk City Directory(R),
allows the customer to quickly search and select prospects, download
prospect records into other applications for lead generation
programs, and produce labels for telemarketing or direct mail
campaigns.
infoUSA acquired Polk Directories in the fourth quarter of 2001. Polk
Directories provides us with another major channel for the sales and
distribution of related infoUSA directory and list services products. We plan to
offer Internet access and more directories in more cities to our subscribers.
CONSUMER & SMALL OFFICE - HOME OFFICE (SOHO) MARKETS GROUP
Consumers need our information for various applications such as directory
assistance, job search, travel planning, sales leads and general reference
purposes. These products come in the form of DVD/CD and are currently priced
between $9.95 and $119.00. The popular labels are Select Phone, PowerFinder,
Directory Assistance USA, Caller ID, Yellow Pages USA, Streets USA and Business
Credit Ratings USA. Consumer products are sold through over 5,000 retail outlets
in North America, including Office Depot, Staples, CompUSA, Best Buy, Costco,
Fry's Electronics, Electronics Boutique, Micro Center and Future Shop. A good
percentage of the consumers who buy these products register them with us and
sign up for a subscription to receive annual renewals.
LARGE BUSINESS GROUP
Our Large Customer group is comprised of Donnelley Marketing and Walter
Karl. Donnelley Marketing is one of the nation's leading direct marketing
solution providers, targeting medium and large size firms where quality data and
customer service count. Our mission is to help businesses find new customers,
grow their sales, reduce selling costs and become more profitable. Donnelley's
reputation has been built by delivering consistent results to clients for 85
years.
Donnelley Marketing serves a variety of industries including traditional
direct marketers, packaged goods, retailers, financial institutions,
telecommunications, utilities, technology, fund raising, automotive and catalog
companies. Donnelley Marketing maintains over 300 marketing databases, processes
over 50 billion records annually, creates 200 custom models each year and
delivers personalized customer care to more than 2,000 customers.
Our goal in 2001 was to increase client access to our databases and data
processing services while reducing turnaround time and lowering costs. We were
pleased to announce the introduction of infoConnect(TM) ONE PASS.
infoConnect(TM) ONE PASS is an Internet driven software which performs data
cleansing and enhancement services online. In the past, customers used to send
the tapes to us and we would match those tapes against our databases and send
them back to the customers in days or weeks. Now, they can do it online, 24
hours a day, seven days a week. Not only does it save our customers money, but
our fulfillment costs are lower. We are in the process of transitioning our
clients to a recurring revenue model through this automated system. This
offering is attractive to large, medium and
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small organizations.
infoConnect(DM) ONE PASS provides online, real-time data enhancement and
file cleansing access to the following databases:
- 250 Million National Consumer Database - the industry's largest and
most comprehensive consumer database.
- 14 Million National Business Database - the world's finest business
content.
- 15 Million National Privacy Database - provides marketers with the
ability to eliminate people who will not respond to their offer.
- All Major USPS Data Hygiene Databases - Donnelley Marketing licenses
all five of the major United State Postal Service data hygiene
databases.
2001 also proved to be a highly successful year for our client marketing
database unit. MarketZone DS, a closed loop, Internet enabled, fully relational
database tool for decision support, campaign management and execution system,
provided our new clients the ability to identify new prospects and reduce costs
while managing their customer relationship. MarketZone DS is an e-CRM (customer
relationship management) solution that integrates the entire suite of Donnelley
Marketing products to create real-time customer content integration.
CatalogVision(TM), a division of Donnelley Marketing, has been
specializing in the catalog marketing industry for over 25 years.
Walter Karl, a division of Donnelley Marketing, provides list management
services to a variety of list owners. Our special integrated, targeted marketing
programs develop list rental usage in the broadest range of potential markets.
With the list brokerage business, Walter Karl sources and sells specialty lists
to a wide range of businesses in many industries.
DATABASE LICENSING GROUP
Countless applications exist for infoUSA's business and consumer data. The
quality and integrity of our databases are what make infoUSA properties the most
reliable and useful for value-added resellers. infoUSA data is behind the scenes
of numerous products and services of leading companies in a variety of
industries. infoUSA has long been the core data provider for over 90% of
Internet directory services including AOL and Yahoo!. The infoUSA database also
powers in-car navigation/telematics systems found in select GM, Acura, Lexis
and Mercedes vehicles. Leading GIS (geographic information system) and mapping
companies incorporate infoUSA data into their products. Most of the country's
leading third-party transaction processors and providers of intelligence for
businesses and government use infoUSA data to serve the informational needs of
their financial clients. Established marketing and analytical companies, like
VNU and Claritas, continue to use infoUSA data in their applications.
DISTRIBUTION CHANNELS
We sell our products and services through direct mail, telemarketing and a
large team of Account Executives. We also sell through value added resellers and
various websites, such as infoUSA.com, DBLink.com, MrPolk.com, ListBazaar.com
and BusinessCreditUSA.com. The sales channels used by us vary by product. We
currently employ over 200 sales executives who work with our customers.
INTERNET STRATEGY
The Company views the Internet as a dominant and important distribution
channel for its information in the future. As the owner of the content, infoUSA
is uniquely able to use its content for exploitation of this wonderful channel.
We use many website addresses to sell our products and services, such as
infoUSA.com, DBLink.com, MrPolk.com, ListBazaar.com and BusinessCreditUSA.com.
During 2002, the Company launched a revolutionary software called Customer
Analyzer and Prospect Builder(TM). This Internet based tool will help small
business owners and salespeople to find prospects just like their customers.
Most business owners don't know what their current customers are like, and how
to find prospects just like their customers. This proprietary software developed
by the Company takes the guesswork out of finding new prospects. The customer
sends the phone numbers of its existing customers to the Customer Analyzer and
Prospect Builder(TM) software. The phone numbers can be of businesses or
consumers or both. The software matches the phone numbers of the customers to
infoUSA's business database of 14 million businesses and 250 million consumers.
The business customers are analyzed
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by modeling software that takes into account number of employees, sales volume,
credit rating code, years in business etc. The consumer customers are analyzed
by such factors as age, income, home value and other characteristics. At the
completion of the analysis the customer can see their prospects on the web and
choose prospective customers by any zip code, city, state or county. They can
preview the names and cherry pick only the prospects they want and save the rest
for later. The software also suppresses their existing customers.
infoConnect(DM) ONE PASS is a state-of-the-art, scalable, on-line,
real-time system enabling clients to integrate data from multiple touch points
across their enterprise. infoConnect presents an elemental evolution in customer
integration and sets a new standard in delivering speed, accuracy, and customer
information management.
We have websites for all our divisions which are selling their products
and the products of other divisions on the web. We are sending approximately 10
million e-mails per month to advertise our web sites.
We have advanced our development as e-infomediary by using the Internet as
a valuable tool for data compilation as well as distribution. We have introduced
Internet opt-in consumer surveys, where consumers can volunteer lifestyle and
buyer behavior that can be used to assist web marketers in targeting advertising
to best meet their needs. The opt-in feature also allows us to match online and
offline data to form a complete profile of consumer purchase intentions and
decisions. This self-reported survey information can be obtained on the Internet
with more speed, greater accuracy and at lower cost than mail-based surveys. In
this way, we intend to use the Internet to increase productivity, cut data
compilation costs and obtain more relevant real-time information in the
database. As with the consumer surveys, we are adding self-reported options to
the infoUSA.com site in order to enhance our database with more unique and
valuable information. For example, businesses will be able to update their own
database information online, adding content such as names, titles and e-mail
addresses of executives, as well as other demographics.
COMPUTER OPERATIONS AND DATABASE PROTECTION
The Company operates four data centers located in Omaha, Nebraska;
Papillion, Nebraska; Carter Lake, Iowa; and Greenwich, Connecticut. The Company
also contracts mainframe data processing functions for Donnelley Marketing from
an outside vendor. Business continuity is assured through our use of these four
separate data center locations. We can reestablish sales, marketing, production
and administrative functions at a combination of the data center sites.
The Omaha Data Center supports our Sales Order Entry systems, contact
management system, several Internet website systems, electronic data delivery
systems, company enterprise systems (e.g. email, file/print servers) and
accounting systems. Sales Order Entry and accounting systems run on a midrange
IBM AS/400 and two SUN UNIX machines. Contact Management is loaded on a SUN
system. The Internet websites reside on approximately 18 SUN and 13 DELL
servers. Electronic data delivery systems run on 6 SUN servers. Enterprise
systems are driven by DELL servers running Microsoft NT. This center is also the
home for the Local and Wide Area Network connectivity for desktop computers in
the Omaha facility. Data communications are provided by ATM on an OC3 SHNS ring
between the Ralston - Papillion - Carter Lake facilities, a 12 Meg Internet pipe
transported on ATM riding a new OC12 SHNS network, and connectivity to the other
data centers and remote offices. This center also contains a Nortel Option 81
PBX for telephone and ACD services within the facility. MCIWorldcom and Qwest
provide telephone service over diverse access points into the facility. The
Omaha data center is protected by a fire suppression system and a battery backup
system. Business and financial data is backed up daily and stored off-site.
Our Papillion Data Center contains the data compilation systems,
enterprise support systems, and software development platforms. The business
database compilation process runs on an IBM AS/400 and utilizes 6 SUN systems to
support the Davox predictive dialing program. Software development and testing
is done on a mixture of three other IBM AS/400s. The consumer database
compilation process utilizes several DELL servers running Microsoft Windows
2000. Enterprise systems are run on large-scale servers running Microsoft NT.
Network services to desktop computers and terminals and other data centers are
supported in this center. Like the Omaha center, this center also contains a
Nortel Option 81 PBX with diverse MCIWorldcom and Qwest telephone service access
points into the facility, the ATM OC3 and the OC12 SHNS ring. A fire suppression
system, battery backup system, and a diesel generator protect the Papillion
center. Data is backed up daily and stored off-site. This facility is staffed
with a team of over 80 Information Technology professionals.
The Carter Lake Data Center is home to the business and consumer order
fulfillment systems. An IBM AS/400, a DELL server running Microsoft Windows NT
and a SUN system, provides fulfillment computer services. Various high-end
printers, CDROM, magnetic tape, and diskette devices are used here to produce
the customer's product. A Nortel Option 11 PBX provides facility telephone
services with connection to Qwest facilities. Data communications have been
enhanced by the installation of an ATM ring overlaid on the SHNS service. The
Carter Lake center is protected by a fire suppression system and an
uninterrupted power supply battery backup system. Data is backed up daily and
stored off-
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site. This facility is staffed by 20 production, operations, and shipping
professionals.
The Greenwich Data Center supports Donnelley Marketing for the receipt of
customer files and the creation of all customer outputs. Donnelley Marketing has
entered into a computer services agreement with (i)Structure, a subsidiary of
Level3, to outsource all of its mainframe processing. (i)Structure provides
Donnelley a secure processing environment and state-of-the-art facilities
infrastructure with a dedicated mainframe, disk storage, and a combination of
virtual, silo, and manual tape. (i)Structure is considered one of the premier
mainframe outsourcers in the industry. They focus heavily on providing superior
customer service and maintaining high security levels. Mainframe hardware at the
Distribution Center, used for customer file processing, is connected to
(i)Structure via multiple high speed DS3 data circuits utilizing CNT channel
extender technology. Heavy emphasis is placed on quick turnaround, while
maintaining a high level of quality control, to ensure that customer needs are
being met.
The Greenwich Data Center, in addition to providing mainframe distribution
services, houses eight midrange UNIX Servers, five midrange OpenVMS Servers,
multiple high-end NT Servers, and a large PC/LAN Network. A Nortel Option 61 PBX
provides telephone services for the facility. The facility also maintains direct
connectivity to the Internet and a WAN connection to all other Company computer
facilities. All midrange and mainframe class computers are used to service
direct marketing needs to large and mid-sized clients, many in the fortune 500
marketplace. The mainframe is used in every aspect of direct marketing computer
services while the mid-range systems are used in a client server or three tiered
architecture to house relational database marketing files. All systems are
available on a seven day, twenty-four hours a day basis.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
For more than 85 years, Donnelley Marketing, and over the last 30 years,
infoUSA have developed a lot of processes, software, techniques and models that
are unique, sophisticated and proprietary. Our databases are copyrighted, and we
depend on trade secret and non-disclosure safeguards for protection of our
intellectual property. We distribute our products under agreements that grant
customers a license to use our products in the ordinary course of their
businesses and contain terms and conditions prohibiting the unauthorized
reproduction of our products. In addition, we generally enter into
confidentiality agreements with our management and programming staff and limit
access to and distribution of our proprietary information. There can be no
assurance that the steps taken by us will be adequate to deter misappropriation
of our proprietary rights or independent third party development of
substantially similar products and technology. We believe, however, that legal
protection of our database and software is less significant than the knowledge
and experience of our management and personnel, and their ability to develop and
market existing and new products and services to millions of customers.
COMPETITION
The business and consumer marketing information industry is highly
competitive. We believe that competition in our industry is based on the quality
and comprehensiveness of the information provided, the ability to deliver the
information in products and formats that the customer needs, the distribution
channel and to a lesser extent, on the pricing of information products and
services. We also believe that the ability to provide proprietary consumer and
business databases along with data processing and database marketing services is
a key competitive advantage. A number of competitors are active in specific
aspects of our business. In business sales lead products and credit report
market, we face competition primarily from Dun & Bradstreet. Dun & Bradstreet,
relies upon information compiled from its credit database. In consumer sales
lead products, we compete primarily with Acxiom, Experian and Equifax, both
directly and through reseller networks. In data processing services, we compete
primarily with Acxiom, Experian and Harte-Hanks Data Technologies.
EMPLOYEES
As of December 31, 2001, we employed a total of 1,896 people on a
full-time 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.
8
EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Vinod Gupta............... 55 Chairman of the Board and Chief Executive Officer
Stormy L. Dean............ 44 Chief Financial Officer
Scott C. Roberts.......... 36 Corporate Controller
Fred Vakili .............. 48 Chief Administration Officer
Allen F. Ambrosino........ 58 President, Donnelley Marketing
D. Joseph Thayer.......... 35 President, Small Business Group
Monica Messer............. 39 President and Chief Information Officer, Database and Technology Group
William L. Kerrey......... 53 Senior Vice President, Licenses
Ed C. Mallin ............. 52 President, Walter Karl
Michael J. Morreale ...... 37 Vice President, Donnelley Marketing
Hans A. Vermandel ........ 49 Vice President, Donnelley Marketing
Vinod Gupta is the founder of the Company and has been Chairman of the
Board of the Company since its incorporation in 1972. Mr. Gupta served as Chief
Executive Officer of the Company from the time of its incorporation in 1972
until September 1997 and since August 1998. Mr. Gupta holds a B.S. in
Engineering from the Indian Institute of Technology, Kharagpur, India, and an
M.S. in Engineering and an M.B.A. from the University of Nebraska.
Stormy L.Dean has served as Chief Financial Officer since January 2000. He
has also served as the Corporate Controller from September of 1998 until January
2000 and as the acting Chief Financial Officer from January 1998 to August 1998.
From August 1995 to September 1998, Mr. Dean served as the Company's tax
director. Prior to that, Mr. Dean worked in the Tax Department of Peter Kiewit
Sons Inc., a construction and telecommunications company, from January of 1990
until joining the Company in August of 1995. Mr. Dean holds a B.S. in Accounting
from the University of Nebraska at Omaha, an M.B.A from the University of
Nebraska at Omaha, and a Certified Public Accountant certificate.
Scott C. Roberts has served as Corporate Controller since joining the
company in February 2000. From August 1995 until February 2000, Mr. Roberts was
the controller for the Life Cycle Services division of Inacom Corp, a technology
management services company headquartered in Omaha, Nebraska. From May 1991
until August 1995 Mr. Roberts was the Director of Internal Audit for First
National of Nebraska, Inc., a multi-billion dollar bank holding company. Mr.
Roberts holds a B.S. in Accounting from the University of Nebraska at Omaha and
is a Certified Public Accountant (inactive registrant) in the state of Nebraska.
Fred Vakili has served as Executive Vice President of Administration and
Chief Administrative Officer since August of 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.
Allen F. Ambrosino has served as President of Donnelley Marketing since
September 2000, as Executive Vice President of Donnelley Marketing from July
1999 to September 2000, and as President of Database America (DBA) from November
1991 to July 1999. The Company acquired DBA in February 1997. Mr. Ambrosino
holds a B.S. in Business Administration from Fairleigh Dickinson University.
DJ Thayer has served as President of the Small Business Group since May
1999, as Senior Vice President from October 1997 to May 1999, and as a Vice
President and General Manager since joining the Company in 1993. Prior to that,
Mr. Thayer worked for US West, Inc., and as a legislative aide in the U.S. House
of Representatives. Mr. Thayer holds a B.A. in Political Science from the
University of Nebraska, and an M.B.A. from Auburn University.
Monica Messer has served as President of the Database and Technology Group
and Chief Information Officer of the Company since February 1997, and served as
a Senior Vice President of the Company from January 1996 to January 1997. Ms.
Messer joined the Company in 1983 and has served as a Vice President of the
Company since 1985. Ms. Messer holds a B.S. in Business Administration from
Bellevue University.
William L. Kerrey has served as Senior Vice President, Licenses since
August 1994, and as a Vice President from 1989 to August 1994. Mr. Kerrey holds
a B.S. in Economics, a B.S. in Spanish and an M.S. in Agronomy from the
University of Nebraska.
9
Edward C. Mallin has served 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 History from
the University of Bridgeport and an M.A. in Business Administration from New
York University.
Michael J. Morreale has served as Executive Vice President and Chief
Operating Officer of Donnelley Marketing since July 1999. Prior to the Company's
acquisition of Donnelley Marketing in July 1999, Mr. Morreale held the position
of Senior Vice President, General Manager from April 1997. Mr. Morreale was
responsible for leading Donnelley Marketing's sales, marketing, and operations
functions. Since 1987, Mr. Morreale has held various corporate, financial and
operating positions in the information industry. Mr. Morreale is a summa cum
laude graduate of Long Island University and is a graduate of Columbia
University's Graduate School of Business Senior Executive Program.
Hans A. Vermandel has served as Vice President and General Manager of
Donnelley Marketing since January 2001, and as Senior Vice President and
National Sales Manager of Donnelley Marketing from July 1999 to January 2001.
Mr. Vermandel served as Vice President and National Sales Manager for the
Company's National Accounts division from September 1998 to July 1999, and as a
Regional Vice President and Regional Sales Manager from March 1994 to September
1998. Before joining the Company in March 1994, Mr. Vermandel spent 18 years at
the Dun & Bradstreet Corporation in a variety of sales and sales management
capacities. Mr. Vermandel holds B.S. degrees in both Marketing and Management
from The University of Pennsylvania, Wharton School of Economics and Finance.
ITEM 2. PROPERTIES
Our headquarters are located in a 148,000 square foot facility in Omaha,
Nebraska, where we perform sales and administrative activities. Order
fulfillment and shipping is conducted at our 30,000 square foot Carter Lake,
Iowa facility, which is located 15 miles from our headquarters. Administration
and management are also located in a 24,000 square foot facility in Omaha,
Nebraska, which is adjacent to our sales and administration facility. Data
compilation, telephone verification, data and product development, and
information technology services are conducted at our 130,000 square foot
Papillion, Nebraska facility which is located about 5 miles from our
headquarters. Donnelley Marketing catalog sales operations are performed in a
40,000 square foot location in Marshfield, Wisconsin. We own these facilities,
as well as adjacent land at certain locations for possible future expansion.
In addition, we lease a 69,000 square foot facility in Greenwich,
Connecticut which lease expires in September 2003. The Greenwich, Connecticut
facility houses various Donnelley Marketing sales and operations functions, and
serves as one of our data centers. Donnelley Marketing also leases a 60,000
square foot facility in Ames, Iowa, which houses consumer database and client
services operations. Donnelley Marketing is currently headquartered in Omaha,
Nebraska. We also lease sales office space at approximately 45 different
locations in the United States, Canada and the United Kingdom, the aggregate
rental obligations of which are not significant.
ITEM 3. LEGAL PROCEEDINGS
During 2001, the Company settled legal issues totaling $1.1 million in
connection with arbitration of two contractual disputes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not applicable.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock, $0.0025 par value, is traded on the NASDAQ National
Market System under the symbol IUSA.
The following table sets forth the high and low closing prices for our
Common Stock during each quarter of 2001 and 2000.
COMMON STOCK
HIGH LOW
-------- --------
2001
Fourth Quarter.... $ 6.94 $ 4.00
Third Quarter..... $ 6.75 $ 3.84
Second Quarter.... $ 6.00 $ 3.95
First Quarter..... $ 5.13 $ 2.25
2000
Fourth Quarter... $ 4.69 $ 2.06
Third Quarter.... $ 8.38 $ 4.81
Second Quarter... $ 9.31 $ 4.75
First Quarter.... $ 17.19 $ 9.13
As of March 11, 2002, there were 133 stockholders of record of the Common
Stock, and an estimated additional 4,500 stockholders who held beneficial
interests in shares of common stock registered in nominee names of banks and
brokerage houses.
We have not declared or paid any cash dividends on our capital stock. We
intend to retain future earnings to fund the development and growth of our
business and, therefore, do not anticipate paying cash dividends within the
foreseeable future. Any future payment of dividends will be determined by our
Board of Directors and will depend on our financial condition, results of
operations and other factors deemed relevant by our Board of Directors. Existing
credit agreements generally prohibit the payment of dividends or other
distributions with respect to our common stock.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for, and as of the end
of, each of the years in the five-year period ended December 31, 2001 are
derived from the Company's audited Consolidated Financial Statements and should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and related notes included elsewhere in this Form 10-K. The Company has made
several acquisitions since 1997 that would affect the comparability of
historical data. See Management's Discussion and Analysis of Financial Condition
and Results of Operations. The Consolidated Financial Statements as of December
31, 2001 and 2000, and for each of the years in the three-year period ended
December 31, 2001, are included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ........................................... $ 288,738 $ 305,668 $ 265,853 $ 228,678 $ 193,327
Costs and expenses:
Database and production costs ..................... 80,880 101,831 78,644 66,319 55,090
Selling, general and administrative ............... 112,402 149,721 108,435 117,724 80,203
Depreciation of operating assets .................. 17,873 20,005 12,872 9,325 6,754
Amortization of intangible assets (1) ............. 30,254 32,190 22,061 18,147 27,661
Impairment of assets(2) ........................... -- 2,135 5,599 -- --
Acquisition costs(3) .............................. 493 2,287 4,166 3,643 2,598
Non-cash stock compensation ....................... 448 3,113 -- -- --
Restructuring charges(4) .......................... 4,899 5,800 -- 2,616 --
Provision for litigation settlement(5) ............ 1,104 -- -- 4,500 --
In-process research and development(6) ............ -- -- -- 3,834 53,500
--------- --------- --------- --------- ---------
Total costs and expenses .................... 248,353 317,082 231,777 226,108 225,806
--------- --------- --------- --------- ---------
Operating income (loss) ............................. 40,385 (11,414) 34,076 2,570 (32,479)
Other income (expense):
Investment income ................................. 953 1,250 14,196 16,628 3,748
Interest expense .................................. (25,285) (26,651) (18,579) (9,160) (4,098)
Minority interest income .......................... 282 6,294 -- -- --
Gain on issuance of subsidiary stock(7) ........... -- 14,634 8,886 -- --
Other ............................................. -- -- -- (2,000) --
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes, extraordinary item and cumulative
effect of change in accounting principle .......... 16,335 (15,887) 38,579 8,038 (32,829)
Income tax expense .................................. 11,371 1,320 14,047 5,880 6,987
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of a
change in accounting principle .................... 4,964 (17,207) 24,532 2,158 (39,816)
Loss from discontinued operations (8) ............... -- (4,160) (1,474) -- --
Extraordinary item, net of tax (9) .................. -- -- 128 -- --
Cumulative effect of a change in accounting
principle, net of tax (10) ........................ -- (10,266) -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................................... $ 4,964 $ (31,633) $ 23,186 $ 2,158 $ (39,816)
========= ========= ========= ========= =========
Basic earnings (loss) per share from continuing
operations ....................................... $ 0.10 $ (0.34) $ 0.51 $ 0.04 $ (0.82)
========= ========= ========= ========= =========
Diluted earnings (loss) per share from continuing
operations ....................................... $ 0.10 $ (0.34) $ 0.51 $ 0.04 $ (0.82)
========= ========= ========= ========= =========
Basic earnings (loss) per share ..................... $ 0.10 $ (0.63) $ 0.48 $ 0.04 $ (0.82)
========= ========= ========= ========= =========
Diluted earnings (loss) per share ................... $ 0.10 $ (0.63) $ 0.48 $ 0.04 $ (0.82)
========= ========= ========= ========= =========
Weighted average shares outstanding - basic ......... 50,651 50,304 48,470 49,314 48,432
========= ========= ========= ========= =========
Weighted average shares outstanding - diluted ....... 50,651 50,304 48,613 50,215 48,432
========= ========= ========= ========= =========
OTHER DATA:
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as adjusted(11) .......... $ 88,960 $ 46,029 $ 74,608 $ 33,876 $ 55,436
========= ========= ========= ========= =========
CASH FLOW DATA:
Net cash provided by operating activities ........... $ 54,549 $ 36,151 $ 30,995 $ 16,742 $ 30,256
========= ========= ========= ========= =========
Net cash used in investing activities ............... (32,028) (29,491) (200,071) (36,626) (99,932)
========= ========= ========= ========= =========
Net cash from (used in) financing activities ........ (39,832) 4,187 150,319 38,834 72,832
========= ========= ========= ========= =========
DECEMBER 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working capital ................................. $ (3,670) $ 19,943 $ 40,899 $ 70,157 $ 60,007
Total assets .................................... 419,088 463,545 473,344 270,773 194,911
Long-term debt, including current portion ....... 225,670 258,652 277,522 128,259 82,000
Stockholders' equity ............................ 95,797 90,970 110,811 88,247 80,236
----------
(1) Effective July 1, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standard (SFAS) No. 141, "Business
Combinations," and certain provisions of SFAS No. 141, "Goodwill and
Other
12
Intangible Assets." As required by SFAS 141 and SFAS 142, goodwill
of $23.6 million resulting from the acquisitions of the Polk City
Directories business and the minority interests of infoUSA.com are
not subject to amortization.
(2) During 2000, the Company recorded a write-down of $2.1 million for
certain capitalized software development costs, fixed assets related
to the abandoned infoPIX business photograph project, as well as
proposed public offering and leasehold improvement costs of
infoUSA.com, a subsidiary of the Company.
During 1999, the Company recorded a write-down of $3.9 million on
the Company's existing consumer database due to the acquisition of
Donnelley Marketing and a write-down of $1.7 million on leasehold
improvements and in-process construction projects due to the move of
the Company's data processing operations from Montvale, NY to
Greenwich, CT.
(3) Includes the following acquisition costs: 1) $0.5 million for the
acquisition of Polk City Directories from Equifax, Inc (2001) 2)
$1.8 million for the attempted acquisition of the consumer database
division of R.L. Polk and $0.5 million related to the acquisitions
of idEXEC, American Church Lists and Getko Direct Response (2000) 3)
$4.2 million associated with the acquisition and integration of
Donnelley Marketing (1999), 4) $3.0 million of costs associated with
the Company's bid to acquire Metromail Corporation and $0.6 million
associated with the Company's offering to sell Common Stock which
was not completed (1998), and 5) $2.6 million associated with the
acquisition and integration of DBA Holdings, Inc. ("DBA") and Pro CD
(1997). These costs are not direct costs of acquisition. Rather,
these are general and administrative costs incurred in connection
with the integration of these businesses.
(4) During 2001, the Company recorded the following restructuring
charges: 1) $2.1 million severance costs for approximately 265
employees terminated during 2001, and 2) estimated lease termination
costs of $2.8 million associated with the infoUSA.com Foster City,
California location.
During 2000, the Company recorded the following restructuring
charges: 1) $2.1 million severance costs for approximately 350
employees terminated during December 2000, and 2) estimated lease
termination costs of $3.7 million associated with the infoUSA.com
Foster City, California location.
During 1998, the Company recorded the following restructuring
charges: 1) $1.4 million related to the Company's compilation and
sales activities for new businesses, and 2) $1.2 million related to
certain cost reduction measures enacted by the Company.
(5) During 2001, the Company settled legal issues totaling $1.1 million
in connection with arbitration of two contractual disputes.
During 1998, the Company incurred $4.5 million in damages awarded to
Experian Information Solutions, Inc. in connection with arbitration
of a contractual dispute.
(6) Includes the following charges for purchased in-process research and
development costs associated with the acquisitions of Walter Karl,
Inc. of $3.8 million (1998), DBA of $49.2 million (1997), and Pro CD
of $4.3 million (1997).
(7) During 2000 and 1999, infoUSA.com, completed its first and second
rounds of venture capital financing. As a result of the issuance of
common stock of this subsidiary, the Company recorded gains of $14.6
million and $8.9 million, respectively, on the transactions.
(8) During December 2000, the Company discontinued the operations of its
VideoYellowPages.com Internet unit and recorded a loss of $4.2
million, net of tax. The loss is comprised of two components: 1) the
loss of its results of operations of $3.4 million, net of tax for
the full fiscal year, and 2) charges totaling $0.8 million, net of
tax, for asset impairments. The loss from this discontinued
operation for 1999 was $1.5 million, net of tax.
(9) During 1999, the Company repurchased $9.0 million of its Senior
Subordinated Notes. As part of the repurchase, the Company recorded
a net gain of $0.1 million.
(10) During 2000, the Company changed its revenue recognition method for
data licensing revenue. Effective January 1, 2000, the Company began
to recognize revenue on data license arrangements on a straight-line
basis. This change in method was made because a growing proportion
of such license revenue is from long-term and continuous access
agreements. The Company believes the newly adopted method of
accounting
13
better reflects the service commitment inherent in its various
license agreements. The cumulative effect of the change in method of
$10.3 million is net of income tax benefit of $3.5 million. Assuming
the above described revenue recognition policy had been implemented
on January 1, 1998, pro forma consolidated net sales, net income
from continuing operations and net income from continuing operations
per share would have been as follows:
FOR THE YEARS ENDED
--------------------------------------
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales........................ $ 261,466 $ 226,754
Net income from continuing
operations...................... $ 21,812 $ 965
Basic earnings per share......... $ 0.45 $ 0.02
Diluted earnings per share....... $ 0.45 $ 0.02
(11) "EBITDA, as adjusted" is defined as operating income (loss) adjusted
to exclude depreciation and amortization, impairment of assets,
non-cash stock compensation expense and in-process research and
development charges. EBITDA is presented because it is a widely
accepted indicator of a company's ability to incur and service debt
and of the Company's cash flows from operations excluding any
non-recurring items. However, EBITDA, as adjusted, does not purport
to represent cash provided by operating activities as reflected in
the Company's consolidated statements of cash flows, is not a
measure of financial performance under generally accepted accounting
principles ("GAAP") and should not be considered in isolation or as
a substitute for measures of performance prepared in accordance with
GAAP. Also, the measure of EBITDA, as adjusted, may not be
comparable to similar measures reported by other companies.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
infoUSA is a leading provider of business and consumer information, data
processing and database marketing services. The Company's key assets include
proprietary databases of nearly 14 million businesses and 250 million consumers
in the United States and Canada. We believe our proprietary content is the most
comprehensive and accurate data available. We leverage these key assets by
selling through multiple distribution channels to over 4 million customers,
which include small and medium-size businesses, Fortune 1000 companies,
consumers, and Internet users.
Operating costs increased significantly from 1999 to 2000, due to our
execution of the planned expansion of certain Internet initiatives, including
infoUSA.com, BusinessCreditUSA.com, Videoyellowpages.com and ListBazaar.com.
Most of the operating cost increase was due to selling, general and
administrative expenses, whereas database and production costs increased
moderately. For the year ended December 31, 2000, net sales for the four
Internet divisions increased $10.0 million, or 64% from the year ended December
31, 1999, although total operating costs for the Internet divisions increased
$33.9 million to $41.3 million, or 457% from the year ended December 31, 1999.
Marketing costs specific to the Internet initiatives represent the principal
source of the increase.
During the fourth quarter of 2000, the Company reevaluated its Internet
strategy. The Company realized spending was too high on advertising and brand
activities that were not profitable. The Company cut back on investments in all
four Internet initiatives. The operations of Videoyellowpages.com were
discontinued in December of 2000, as the Company realized it did not have the
resources required to make this idea succeed. The Company dramatically cut back
the marketing expenses in BusinessCreditUSA.com and ListBazaar.com. businesses
and rolled them back into the core business. Leveraging off of the high traffic
from the infoUSA.com and our partner's website, we have been able to make
BusinessCreditUSA.com and List Bazaar.com profitable.
We also reduced the staff and infrastructure in infoUSA.com. The issuance
of subsidiary stock to outside investors allowed the Company to execute our
planned expansion of infoUSA.com without affecting working capital of core
business operations. However, the dramatic changes in the Internet market
required us to focus on preserving the remaining investment and revise our
strategy to that of turning infoUSA.com into a profitable subsidiary.
infoUSA.com reduced its staff from approximately 85 people to 15 people by the
end of 2000, with most of the administrative, overhead and support functions
being rolled back under the parent company. Effective August 30, 2001, the
Company eliminated the minority interest of infoUSA.com, through the acquisition
of assets. For the year ended December 31, 2001, operating costs for the 3
remaining Internet divisions decreased $35.1 million to $6.2 million, from the
year ended December 31, 2000.
During 2001, the large business segment continued to experience softer
customer demand due to the macroeconomic downturn that began in the fourth
quarter of 2000. As a result, some of its Fortune 1000 customers were impacted
by budgetary constraints and forced to postpone capital spending decisions.
Therefore, the large business segment cut costs to be in line with reduced
revenue expectations. The large business segment has reduced its operating cost
structure and is well positioned to continue to focus on expense control and
profitable revenue growth through the development and introduction of innovative
new products. These include the recently introduced infoConnect(DM) ONE PASS
that provides for automated data enhancement and file cleansing services, and
MarketZone DS, a premier e-CRM solution that integrates the entire suite of
Donnelley products to create a real-time customer content integration and
decision support tool.
The Company had previously made certain disclosures relative to the
continuing results of operations of acquired companies where appropriate and
possible. However, the Company has immediately integrated the operations of the
acquired companies into existing operations of the Company for all acquisitions
completed since 1997. Generally, the results of operations for these acquired
activities are no longer separately accounted for from existing activities. The
Company cannot report on the results of operations of acquired companies upon
completion of the integration as the results are "commingled" with existing
results. Additionally, upon integration of acquired operations, the Company
frequently combines acquired products or features with existing products, and
experiences significant cross-selling of products between business units,
including sales of acquired products by existing business units and sales by
acquired business units of existing products.
15
CRITICAL ACCOUNTING POLICIES
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
management's most difficult, subjective or complex judgments:
- Revenue recognition and related estimates of valuation allowances
for doubtful accounts, sales returns and other allowances;
- Database acquisition, development and maintenance expenses; and
- Valuation of long-lived and intangible assets and goodwill.
Revenue recognition. Our revenue has historically been derived
predominantly through the sale of customized sales lead generation products. We
have successfully capitalized on new markets and applications for our
proprietary databases, as our company expanded product and service offerings. We
began to recognize significant revenue from data processing services in 1997,
following the acquisition of Database America and continued expanding our data
processing revenue with the acquisition of Donnelley Marketing in July of 1999.
The acquisition of Donnelley Marketing enhanced our proprietary consumer
database and database marketing services. The merger made us the only company in
our industry to offer proprietary business and consumer data, data processing,
and database marketing services and gave us the ability to offer complete
solutions and fulfill substantially all the database, data processing, and
database marketing needs of our Fortune 1000 customers. With the expansion of
our Consumer Products Division, and the acquisition of Pro CD and Digital
Directory Assistance, revenue from consumer CD-Rom products increased
substantially between 1993 and 1997. Retail sales of consumer products generate
leads for our subscription sales department which is highly profitable. Walter
Karl was acquired in 1998 and combined with JAMI Marketing Services to form what
is now know as Walter Karl, our list brokerage business. Finally, the Company
has recognized strong Internet license revenue and Internet content sales since
1999 and believes there is significant opportunity to expand the market for our
products and services over the Internet. We estimate that no customer
represented greater than approximately 4% of net sales in 2001. As described
below, significant management judgments and estimates must be made and used in
connection with the revenue recognized in any accounting period.
Approximately 53% of our revenue is recognized when the product is shipped
to the customer. This revenue recognition policy applies to prospect lists,
mailing labels, published directories, other sales lead products and DVD and CD
information products. These product sales are typically evidenced by a written
purchase order or by credit card authorization. Sales of DVD and CD information
products occur with rights of return. Therefore, we also estimate and record an
allowance for product returns and reduce the amount of recognized revenue by
anticipated product returns. The estimate of the product returns is made by
giving consideration to the historical trends in sales and product returns,
estimates of product inventory currently in the channel of distribution, and the
timing and release of new product versions.
Revenues derived from data processing services represent approximately 27%
of our revenues. Data processing 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 represents
approximately 20% of our revenue. Licenses are typically evidenced by written
contracts. 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, we recognize revenue from the licensing arrangement on a straight-line
basis over the life of the agreement. We adopted this policy in 2000 because we
believe this method better reflects the service commitment inherent in the
licensing agreements in light of a growing proportion of such long-term and
continuous access agreements. We also license data to customers with no such
commitments. In those cases, we recognize revenue when the data is shipped to
the customer and collectibility of the revenue is reasonably assured.
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.
16
Database Costs. The Company's database and production costs are generally
charged to expense as incurred and relate principally to maintaining, verifying
and updating its databases, fulfilling customer orders and the production of
DVD/CD titles. Costs to develop new databases are capitalized by the Company and
amortized upon the successful completion of the databases, over a period ranging
from one to five years. Our cost of maintaining the Company's 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.
At December 31, 2001, capitalized database costs (net of accumulated
amortization) were $10 thousand, or less than one percent of total assets.
Because we expense the costs of maintaining and verifying the Company's 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.
Related party transactions. As discussed in Note 12 to the audited
Consolidated Financial Statements included elsewhere in this Form 10-K, the
Company paid $2.1 million to Annapurna Corporation, which is 100% owned by Mr.
Gupta, who is Chairman and Chief Executive Officer of the Company, for employee
travel expenses. The expenses are authorized by the Company's management and
board of directors to support Mr. Gupta's responsibilities related to business
development, new acquisitions and other strategic initiatives. Arrangements
between the Company and Annapurna Corporation are subject to periodic review by
the Company's management and board of directors.
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 consider
important which could trigger an impairment review include the following:
- Significant underperformance relative to expected historical or
projected future operating results,
- Significant changes in the manner or use of the acquired assets or
the strategy for our overall business,
- Significant negative industry or economic trends,
- Significant decline in our stock price, and
- Our market capitalization relative to net book value.
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
intangible assets, long-lived assets, and goodwill amounted to $284.7 million as
of December 31, 2001.
In 2002, Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" became effective and as a result, we will
cease to amortize approximately $16.5 million of goodwill. We had recorded
approximately $16.5 million of amortization on these amounts during 2001 and
would have recorded approximately $31.5 million of amortization during 2002. In
lieu of amortization, we are required to perform an initial impairment review of
our goodwill in 2002 and an annual impairment review thereafter. We expect to
complete our initial review during the first six months of 2002.
While we do currently do not expect to record an impairment charge upon
completion of the initial impairment review, there can be no assurance that at
the time the review is completed, or after the annual review thereafter, a
material impairment charge will not be recorded.
17
The Company has supplemented its internal growth through strategic
acquisitions. The Company has completed fourteen acquisitions since mid-1996.
Through these acquisitions, the Company has increased its presence in the
consumer marketing information industry, greatly increased its ability to
provide data processing solutions, added two consumer CD-ROM product lines,
increased its presence in list management and list brokerage services and
broadened its offerings of business and consumer marketing information. The
following table summarizes these acquisitions:
TRANSACTION
PRINCIPAL TYPE OF VALUE
ACQUIRED COMPANY KEY ASSET BUSINESS SEGMENT ACQUISITION DATE ACQUIRED (IN MILLIONS)(1)
---------------- --------- ---------------- ----------- ------------- ----------------
Digital Directory
Assistance .......... Consumer CD-Rom Products Small business Asset purchase August 1996 $ 17
County Data
Corporation ......... New Businesses Database Small business Pooling-of-interests November 1996 $ 11
Marketing Data
Systems ............. Data Processing Services Large business Asset purchase November 1996 $ 3
BJ Hunter ............ Canadian Business Database Small business Stock purchase December 1996 $ 3
Database America Consumer Database and Data
Companies ........... Processing Services Large business Stock purchase February 1997 $ 105
Pro CD ............... Consumer CD-Rom Products Small business Asset purchase August 1997 $ 18
Walter Karl .......... Data Processing and List Large business Stock purchase March 1998 $ 19
Management Services
JAMI Marketing ....... List Management Services Large business Asset purchase June 1998 $ 13
Contacts Target
Marketing ........... Canadian Business Database Small business Asset purchase July 1998 $ 1
Donnelley Marketing .. Consumer Database and Large business Stock purchase July 1999 $ 200
Data Processing Services
American Church Lists Religious Institution
Database Small Business Stock purchase March 2000 $ 2
IdEXEC ............... Executives Database Large Business Asset purchase May 2000 $ 7
Getko Direct Response Canadian Consumer Database
and Data Processing Services Small Business Asset Purchase May 2000 $ 2
infoUSA.com minority
interest ............ Internet license and products Small Business Asset Purchase August 2001 $ 25
Polk City Directories Business Directories Products Directories Asset purchase October 2001 $ 6
----------
(1) Transaction value includes total consideration paid including cash paid,
debt and stock issued plus long-term debt repaid or assumed at the date of
acquisition plus, in the case of DBA, a subsequent purchase price
adjustment in October 1997.
As part of these strategic acquisitions, the Company has incurred various
acquisition-related charges to integrate operations, consisting of: 1) $0.5
million in 2001, in connection with the acquisition of Polk City Directories, 2)
$2.3 million in 2000, for the attempted acquisition of the consumer database
division of R.L. Polk and the acquisitions of idEXEC, American Church Lists and
Getko Direct Response, 3) $9.8 million in 1999 in connection with the
acquisition of Donnelley Marketing, 4) $10.1 million in 1998 in connection with
the acquisitions of Walter Karl and JAMI Marketing and for certain internal
restructuring charges, 5) $56.1 million in 1997 in connection with the
acquisitions of DBA and Pro CD. In addition, the Company has amortized goodwill
and other intangibles over periods of up to 20 years in connection with
acquisitions completed since mid-1996. However, effective January 1, 2002, the
Company will no longer amortize all goodwill and certain other intangible assets
due to new accounting rules, described in the "Accounting Standards" section
that follows. The Company's results for 1999 do not include the operations of
American Church Lists, idEXEC and Getko Response, and the results for 2000 and
1999 do not include the minority interests of infoUSA.com and Polk City
Directories. While there are currently no binding commitments with respect to
any particular future acquisitions, the Company frequently evaluates the
strategic opportunities available and intends to pursue strategic acquisitions
of complementary products, technologies or businesses that it believes fit its
business strategy. In connection with future acquisitions, the Company expects
that it will be required to incur additional acquisition-related charges to
operations.
Associated with the acquisitions previously described, the Company has
recorded amortization expense on goodwill and other purchased intangibles as
summarized in the following table (amounts in thousands):
FISCAL YEAR AMOUNT
----------- ------
1997..................... $ 27,661
1998..................... 18,147
1999..................... 22,061
2000..................... 32,190
2001..................... 30,254
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statement of operations data expressed as a percentage of net
sales. The amounts and related percentages may not be fully comparable due to
the acquisition of Donnelley Marketing in July 1999, American Church Lists in
March 2000 and idEXEC and Getko Direct Response in May 2000, the minority
interest in infoUSA.com in August 2001 and Polk City Directories in October
2001:
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------ ------ ------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales .................................................. 100% 100% 100%
Costs and expenses:
Database and production costs ............................ 28 33 30
Selling, general and administrative ...................... 39 49 41
Depreciation and amortization ............................ 17 17 13
Impairment of assets ..................................... -- 1 2
Acquisition costs ........................................ -- 1 2
Non-cash stock compensation .............................. -- 1 --
Restructuring charges .................................... 2 2 --
Provision for litigation settlement ...................... -- -- --
------ ------ ------
Total costs and expenses ......................... 86 104 88
------ ------ ------
Operating income (loss) .................................... 14 (4) 12
Other income, net .......................................... (8) (1) 2
------ ------ ------
Income (loss) before income taxes from continuing
operations ............................................... 6 (5) 14
Income tax expense ......................................... 4 -- 5
------ ------ ------
Income (loss) from continuing operations ................... 2 (5) 9
------ ------ ------
Discontinued operations, net of tax ........................ -- (2) --
------ ------ ------
Income (loss) before cumulative effect of a change
in accounting principle .................................. 2 (7) 9
Cumulative effect of a change in accounting principle,
net of tax ............................................... -- (3) --
------ ------ ------
Net income (loss) .......................................... 2% (10)% 9%
====== ====== ======
EBITDA, as adjusted(1) ..................................... 31% 15% 28%
====== ====== ======
OTHER DATA:
SALES BY SEGMENT:
Small business ........................................... $133.7 $140.2 $129.9
Large business ........................................... 155.0 165.5 136.0
------ ------ ------
Total ............................................ $288.7 $305.7 $265.9
====== ====== ======
SALES BY SEGMENT AS A PERCENTAGE OF NET SALES:
Small business ........................................... 46% 46% 49%
Large business ........................................... 54 54 51
------ ------ ------
Total ............................................ 100% 100% 100%
====== ====== ======
----------
(1) "EBITDA, as adjusted," is defined as operating income (loss) adjusted to
exclude depreciation and amortization, impairment of assets, non-cash
stock compensation expense and in-process research and development
charges. EBITDA, as adjusted, is presented because it is a widely accepted
indicator of a company's ability to incur and service debt and of the
Company's cash flows from operations excluding any non-recurring items.
However, EBITDA, as adjusted, does not purport to represent cash provided
by operating activities as reflected in the Company's consolidated
statements of cash flows, is not a measure of financial performance under
generally accepted accounting principles ("GAAP") and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with GAAP. Also, the measure of EBITDA, as
adjusted, may not be comparable to similar measures reported by other
companies.
19
2001 COMPARED TO 2000
Net sales
Net sales for 2001 were $288.7 million, a decrease of 6% from $305.7
million in 2000. The decrease in net sales is principally due to softer customer
demand and a general slow-down in the United States economy. Net sales of the
small business segment for 2001 were $133.7 million, a 5% decrease from $140.2
million in 2000. The decrease in net sales is principally due to softer customer
demand related to the general slow-down in the United States economy and the
tragic events of September 11. $9.0 million of the decrease specifically related
to the sale of content to list brokers and resellers, who are more adversely
affected by the economic downturn. The net sales amounts are not fully
comparable due to the acquisition of Polk City Directories in October 2001. The
Company immediately integrated the operations of Polk City Directories into
existing operations and cannot report the results of operations of Polk City
Directories upon completion of the integration, as the results are commingled
with existing results. Additionally, upon integration of acquired operations,
the Company frequently combines acquired products or features with existing
products, and experiences significant cross-selling of products between business
units, including sales of acquired products by existing business units and sales
by acquired business units of existing products. The small business 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. This segment also includes the sale of
content via the Internet.
Net sales of the large business segment for 2001 were $155.0 million, a 6%
decline from $165.5 million in 2000. The decrease in net sales is principally
due to softer customer demand related to the general slow-down in the United
States economy and the adverse impact from the continued decline by its Internet
license customers. License revenues were $46.5 million in 2001, a decline of
$5.1 million from $51.6 million for 2000, primarily due to a decreased number of
Internet license customers directly related to the down turn experienced by many
Internet companies since early 2000.
Database and production costs
Database and production costs for 2001 were $80.9 million, or 28% of net
sales, compared to $101.8 million, or 33% of net sales for 2000. The decrease in
database and production costs as a percentage of net sales is primarily due to
headcount reductions and favorable changes in product sales mix in the large
business segment and reduced costs associated with the Internet businesses
initiated by the Company in December 2000. Database and production costs for the
large business segment were 22% of net sales for 2001, a decrease of $8.5
million, compared to the rate of 26% of net sales for 2000. Database and
production costs for corporate activities for 2001 decreased $3.9 million
compared to 2000, due to decreased data compilation and data acquisition costs.
Database and production costs for the Internet businesses decreased $4.9 million
to $0.7 million for 2001, compared to $5.6 million for 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses for 2001 were $112.4 million,
or 39% of net sales, compared to $149.7 million, or 49% of net sales for the
same period of 2000. The decrease in selling, general and administrative
expenses is principally due to: 1) reduced marketing and advertising costs,
principally related to the various Internet initiatives, and 2) headcount
reductions between December 2000 and June 2001. Marketing and advertising costs
for 2001 were $12.2 million, or 4% of net sales, compared to $31.8 million, or
10% of net sales for 2000. Marketing and advertising expenses related to the
various Internet divisions were $0.3 million for 2001, reflecting a decrease of
$13.8 million, or 5% of net sales, compared to $14.1 million for 2000. Marketing
and advertising expenses related to the core businesses were $11.9 million for
2001, or $5.7 million lower compared to 2000. Salaries and wages for marketing
and general administration for 2001 were $63.3 million, or 22% of net sales, a
reduction of $15.9 million compared to $79.2 million, or 26% of net sales for
2000.
20
Depreciation and amortization expenses
Depreciation and amortization expenses for 2001 were $48.1 million
(comprised of $30.2 million for amortization of goodwill and other intangible
assets and $17.9 million for depreciation of operating assets), or 17% of net
sales, compared to $52.2 million (comprised of $32.2 million for amortization of
goodwill and other intangible assets and $20.0 million for depreciation of
operating assets), or 17% of net sales for 2000. The decrease in depreciation
and amortization expenses is principally due to certain intangible assets and
software development costs becoming fully amortized.
Non-cash stock compensation expense
Non-cash stock compensation expenses were $0.4 million, or less than 1% of
net sales, compared to $3.1 million, or 1% of net sales for 2000. The decrease
in non-cash stock compensation expense is principally due to the workforce
reduction of infoUSA.com, described above in the "Overview" section.
Additionally, due to the fact that the Company eliminated the minority interest
in its infoUSA.com subsidiary through the purchase of assets, it did not and
will not incur non-cash stock compensation expense related to the infoUSA.com
subsidiary options during the fourth quarter of 2001 and subsequent periods.
Restructuring costs
During 2001, the Company recorded restructuring charges of $4.9 million
due to a lease termination agreement and charges related to workforce
reductions. On July 30, 2001, infoUSA.com, a subsidiary of the Company,
negotiated a lease termination agreement for its Foster City, California
facility. The Company paid $4.7 million to satisfy the remaining eight year term
of the lease agreement, and recorded additional charges of $2.8 million for
costs of the lease settlement not previously recorded. The Company also recorded
$2.1 million for workforce reduction charges that included involuntary employee
separation costs for approximately 265 employees discharged during 2001, in
administration, sales support and marketing functions.
During 2000, the Company recorded restructuring charges totaling $5.8
million as a part of the Company's overall strategy to reduce costs and continue
commitment to its core businesses. The cost containment program included a
reduction in the planned investment in the Company's Internet businesses and
plans to reduce total headcount. The Company recorded an accrual of $3.7 million
for lease payments for the former Foster City, California facility and an
accrual of $2.1 million for workforce reductions of approximately 350 employees.
Employees discharged during 2000 received cash severance payments totaling $2.1
million during the first six months of 2001, with no severance payments
remaining deferred and payable as of June 30, 2001.
Litigation settlement charge
The Company is involved in various legal proceedings, including product
liability and other matters of a nature considered normal to its business.
During 2001, the Company settled two legal matters totaling $1.1 million.
Acquisition costs
During 2001, the Company recorded charges of $0.5 million related to the
Company's acquisition of Polk City Directories, representing costs to integrate
these operations into the Company's existing operations. These costs were not
directly related to the acquisition of Polk City Directories, and therefore
could not be capitalized as part of the purchase price.
During 2000, the Company recorded acquisition costs of $2.3 million,
including $0.5 million principally related to the Company's acquisition of
American Church Lists, idEXEC and Getko, representing costs to integrate these
acquired operations into the Company's existing operations. The Company also
recorded $1.8 million of costs associated with the Company's bid to acquire the
consumer database division of R.L. Polk.
Operating income
Including the factors previously described, the Company had operating
income of $40.4 million, or 14% of net sales for 2001, compared to an operating
loss of $11.4 million, or 4% of net sales for 2000.
Operating income for the small business segment for 2001 was $60.4
million, or 45% of net sales, as compared to $32.4 million, or 23% of net sales
for 2000. The increase in operating income as a percentage of net sales is
principally due to staffing reductions previously described and the Company's
cost reduction efforts related to various
21
Internet initiatives. Substantially all costs related to the Internet divisions
are included in the small business segment. See the sections "Overview" and
"Selling, general and administrative expenses" for additional information
describing the Internet divisions and the effects on the results of operations.
Operating income for the large business segment for 2001 was $81.1
million, or 52% of net sales, as compared to $75.5 million, or 46% of net sales
for 2000. The increase in operating income as a percentage of net sales is
principally related to the Company's staffing reductions previously described
and a change in the product sales mix previously described in the section
"Database and production costs."
Other expense, net
Other expense net, was $24.1 million, or 8% of net sales, and $4.5
million, or 1% of net sales, for 2001 and 2000, respectively. Other expense is
comprised of interest expense, investment income, minority interest in
subsidiary and other income or expense items which do not represent components
of operating income or expense of the Company.
Interest expense was $25.3 million and $26.7 million for 2001 and 2000,
respectively. Investment income was $1.0 million and $1.3 million, for 2001 and
2000, respectively. During the year 2000, infoUSA.com, a subsidiary of the
Company, completed additional venture capital financing and recorded a gain of
$14.6 million on the issuance of stock of this subsidiary. The issuance of
subsidiary stock to outside investors allowed the Company to continue to execute
its planned expansion related to infoUSA.com as an online provider of white and
yellow page directory assistance and an internet destination for sales and
marketing tools and information, without effecting working capital of existing
operations.
Minority interest in loss of subsidiary of $0.3 million and $6.3 million
for 2001 and 2000, respectively, represents the minority investors' share of
infoUSA.com's net loss for the periods then ended. Effective August 30, 2001,
the Company eliminated the minority interest of its subsidiary, infoUSA.com,
through the acquisition of the subsidiary's operating assets.
Income taxes
A provision for income taxes of $11.4 million and $1.3 million was
recorded for 2001 and 2000, respectively. The gain the Company recorded on the
issuance of subsidiary stock during 2000 was not subject to income tax expense.
The provisions for income taxes also reflect the inclusion of amortization of
certain intangibles in taxable income not deductible for tax purposes.
Discontinued operations, net of tax
During December 2000, the Company closed the operations of its
VideoYellowPages.com Internet unit. VideoYellowPages.com recorded revenues of
$0.2 million and operating expenses of $6.9 million, for a pre-tax operating
loss of $6.7 million and an after-tax loss of $4.2 million during 2000. Included
in the operating expenses of $6.9 million for 2000, the Company recorded asset
impairment charges of $1.2 million and restructuring charges of $0.1 million
related to discontinuing the operations of VideoYellowPages.com.
Cumulative effect of accounting change, net of tax
During 2000, the Company changed its revenue recognition method for data
licensing revenue. Effective January 1, 2000 the Company began to recognize
revenue on data license arrangements on a straight-line basis. This change in
method was made because a growing proportion of such license revenue is from
long-term and continuous access agreements. The Company believes the newly
adopted method better reflects the service commitment inherent in its various
license agreements. The cumulative effect of the change in method of $10.3
million is net of income tax benefit of $3.5 million.
EBITDA, as adjusted
The Company's EBITDA, as adjusted was $89.0 million, or 31% of net sales
for 2001, compared to $46.0 million, or 15% of net sales for 2000.
22
2000 COMPARED TO 1999
Net sales
Net sales for 2000 were $305.7 million, a 15% increase from $265.9 million
in 1999. Net sales of the small business segment were $140.2 million, an 8%
increase from $129.9 million in 1999. The small business segment principally
engages in the selling of sales lead generation and consumer CD-Rom and DVD
products to small to medium sized companies, small office and home office
businesses and individual consumers. This segment also includes the sale of
content via the Internet. The acquisitions of American Church Lists in March
2000, idEXEC and Getko in May 2000 contributed to the increase, although the
sales associated with these acquired entities were not significant. The overall
increase in the net sales of the small business segment is principally due to
the acquisition of Donnelley in July 1999 and the related sale of Donnelley's
consumer data by this segment although the amount can not be accurately
quantified.
Generally, upon integration of an acquired business, the Company
frequently combines acquired products or features with existing products, and
experiences significant cross-selling of products between business units,
including sales of acquired products by existing business units and sales of
existing products by acquired business units. Additionally, effective January 1,
2000, the operations related to Donnelley were reorganized and certain
operations that were previously included in the large business segment have been
included in the small business segment from January 1, 2000 forward. The small
business segment has experienced growth in its vertical market groups including
the middle markets, government, library, medical and field sales offices groups.
Additionally, the Company recorded Internet content sales of $3.9 million in
2000, an 18% increase from $3.3 million in 1999. The increase in net sales by
the small business segment described above was partially offset by a decrease in
the net sales of consumer CD-Rom products. The Company recorded net sales of
$10.8 million of consumer CD-Rom products during 2000, compared to $19.0 million
in 1999. The decline in net sales of consumer CD-Rom products is the result of
general market conditions and the Company's unsatisfactory execution of
merchandising programs with retailers and a change in the timing of new product
releases.
Net sales of the large business segment were $165.5 million, a 22%
increase from $136.0 million in 1999. Included in the large business segment are
sales of data processing services and Internet-based database licenses. The
increase in net sales for the large business segment is due to the following: 1)
acquisition of Donnelley in July 1999 and idEXEC in May 2000, 2) increased sales
of Internet-based database licenses, and 3) increased sales of marketing
database licenses due to the addition of certain significant license
arrangements. Additionally, the amounts are not fully comparable as effective
January 1, 2000, the operations related to Donnelley were reorganized and
certain operations that were previously included in the large business segment
have been included in the small business segment from January 1, 2000 forward.
The amount of sales transferred to the small business segment due to the
reorganization can not be accurately quantified for reasons previously
described.
Certain comparative information related to the large business segment
includes: 1) net sales of Internet-based database licenses for 2000 were $20.2
million, a 62% increase from $12.5 million in 1999, and 2) net sales of data
processing services were $77.1 million, a 3% increase from $74.8 million in
1999.
Database and production costs
Database and production costs for 2000 were $101.8 million, or 33% of net
sales, an increase of 3% of net sales compared to $78.6 million, or 30% of net
sales for 1999. The increase in database and production costs as a percentage of
net sales is partially due to the acquisition of Donnelley in July 1999. Sales
associated with the Donnelley operations have a larger composition of data
processing and client services than the sales associated with the remainder of
the Company's operations.
The increase in database and production costs as a percentage of net sales
is principally due to the execution of the Company's planned expansion related
to various Internet initiatives. Database and production costs related to the
various Internet divisions increased $4.6 million to $5.6 million, or 2% of net
sales for 2000, compared to $1.0 million, or less than 1% of net sales for 1999.
The increase for the Internet divisions is due to additional information
technology and data content costs.
23
Selling, general and administrative expenses
Selling, general and administrative expenses for 2000 were $149.7 million,
or 49% of net sales, an increase of 8% of net sales compared to $108.4 million,
or 41% of net sales for 1999. The increase in selling, general and
administrative expenses as a percentage of net sales is principally due to the
execution of the Company's planned expansion related to various Internet
initiatives. Selling, general and administrative costs related to the various
Internet divisions increased $19.1 million, to $25.5 million, or 8% of net sales
for 2000, compared to $6.4 million, or 2% of net sales for 1999. The increase in
selling, general and administrative expenses related to the Internet divisions
included the following items: 1) increase in advertising costs of $8.6 million
for a total of $11.9 million for 2000, 2) increase in salaries and wages of $6.7
million for a total of $8.8 million for 2000, 3) increase in bad debt of $1.1
million for a total of $1.3 million for 2000, 4) increase in building lease,
taxes and maintenance expenses of $1.2 million for a total of $1.4 million for
2000 and, 5) increase of travel and entertainment costs of $0.8 million for a
total of $1.0 million for 2000.
Depreciation and amortization expenses
Depreciation and amortization expenses for 2000 were $52.2 million, or 17%
of net sales, compared to $34.9 million, or 13% of net sales for 1999. The
increase in depreciation and amortization expenses is primarily due to the
acquisition of Donnelley in July 1999.
Impairment of assets
During 2000, the Company recorded asset impairment charges totaling $2.1
million, or 1% of net sales. The impairment charges included: 1) $1.0 million
for the infoPix business photograph database and related equipment, 2) $0.9
million for infoUSA.com public offering costs and certain leasehold improvements
for the Foster City, CA facility, and 3) $0.2 million for capitalized software
costs related to the Company's data warehousing project which was discontinued
due to the Company's cost containment plans previously described.
During 1999, the Company recorded asset impairment charges totaling $5.6
million, or 2% of net sales. The impairment charges included: 1) a write-down of
$3.9 million on the Company's existing consumer database white pages file which
was impaired due to the addition of the more complete Donnelley consumer file
with the acquisition of Donnelley in July 1999, and 2) a write-down of $1.7
million on certain leasehold improvements and in-process construction projects
which were abandoned due to the move of data processing services operations from
Montvale, NJ to Greenwich, CT.
Acquisition costs
During 2000, the Company recorded various integration-related charges of
$2.3 million, or 1% of net sales. These costs included $0.5 million related to
the integration of American Church Lists, idEXEC and Getko into the Company's
existing operations and $1.8 million associated with the Company's unsuccessful
bid to acquire the consumer database division of R.L. Polk.
During 1999, the Company recorded various integration-related charges of
$4.2 million, or 2% of net sales. The integration-related charges included
consulting costs, management bonuses, direct travel and entertainment costs and
other direct integration-related charges. These costs were not directly related
to the acquisition of Donnelley, and therefore could not be capitalized, but
were costs associated with the integration of Donnelley operations into the
Company's existing operations.
Non-cash stock compensation expense
During 2000, the Company recorded a non-cash charge of $3.1 million, or 1%
of net sales, related to the issuance of stock options for infoUSA.com, a
subsidiary of the Company. The non-cash charges represent compensation in the
form of stock option and warrant grants by the subsidiary to non-employees and
vendors.
Restructuring charges
During 2000, the Company recorded restructuring charges of $5.8 million as a
part of the Company's overall strategy to reduce costs and continue commitment
to its core businesses. The cost containment program included a reduction in the
planned investment in the Company's Internet businesses and plans to reduce
total headcount from 2,200 to 1,841. The Company recorded a $3.7 million accrual
for the lease buyout of the Foster City, California facility and $2.1 million
for workforce reduction charges. The workforce reduction charges included
involuntary employee
24
separation costs for approximately 350 employees that included charges of $0.8
million for employees in the Company's Internet businesses, $0.7 million for
employees of the large business segment, $0.4 million for employees of the small
business segment and $0.2 for administrative employees. As of December 31, 2000,
employees received cash severance payments totaling $0.3 million during 2000
with $1.8 million paid during 2001. At December 31, 2000, these deferred
payments were classified in the Statement of Consolidated Financial Position as
other liabilities.
Operating income
Including the factors previously described, the Company had an operating
loss of $11.4 million, or 4% of net sales for 2000, compared to operating income
of $34.1 million, or 12% of net sales for 1999. Excluding acquisition-related,
integration, restructuring and asset impairment charges previously described,
the Company would have had an operating loss of $1.2 million, or less than 1% of
net sales for 2000, compared to $43.8 million, or 16% of net sales for 1999.
Operating income for the small business segment for 2000 was $32.4
million, or 23% of net sales, as compared to $61.7 million, or 48% of net sales
for 1999. The decrease in operating income as a percentage of net sales is
principally due to the Company's execution of the planned expansion related to
various Internet initiatives. Substantially all costs related to the Internet
divisions are included in the small business segment. See the sections "Selling,
general and administrative expenses" and "database and production costs"
previously described, for additional information describing the Internet
divisions, the effects on the results of operations and expected trend for 2001.
Operating income for the large business segment for 2000 was $75.5
million, or 46% of net sales, as compared to $55.9 million, or 41% of net sales
for 1999. The increase in operating income as a percentage of net sales is
partially due to the overall increase in sales of marketing database licenses
and Internet-based database licenses, as the cost margins associated with these
products are lower than the cost margins associated with the remainder of the
large business segment's products. Additionally, the Company implemented a cost
reduction program as part of the acquisition of Donnelley in July 1999.
Subsequent to the acquisition of Donnelley, the Company was successful in
reducing operating costs related to the acquired operations and achieved its
desired cost reduction levels by the end of 1999.
Other income (expense), net
Other income (expense), net was $(4.5) million, or (1)% of net sales, and
$4.5 million, or 2% of net sales, 2000 and 1999, respectively. Other income
(expense) is comprised of interest expense, investment income, minority interest
in subsidiary and other income or expense items which do not represent
components of operating income (expense) of the Company.
Investment income was $1.3 million and $14.2 million for 2000 and 1999,
respectively. During 1999, the Company realized a gain of $10.3 million on the
disposition of its holdings in InfoSpace.com common stock, the proceeds of which
were used to reduce the debt outstanding incurred as part of the acquisition of
Donnelley.
Interest expense was $26.7 million and $18.6 million for 2000 and 1999,
respectively. The increase in interest expense is primarily the result of the
addition of the Deutsche Bank Credit Facilities used to finance the acquisition
of Donnelley in July 1999.
Minority interest in subsidiary of $6.3 million for 2000, represents the
unaffiliated investors' share of infoUSA.com's net loss for the period then
ended.
During 2000, infoUSA.com, a subsidiary of the Company, completed
additional private equity financing. As a result of the issuance of stock of
this subsidiary, the Company recorded a gain of $14.6 million. The issuance of
subsidiary stock to outside investors allowed the Company to continue to execute
its planned expansion related to infoUSA.com as an online provider of white and
yellow page directory assistance and an Internet destination for sales and
marketing tools and information without affecting working capital of existing
operations. The dramatic changes in the Internet market during the fourth
quarter 2000 and the first quarter of 2001 has required the Company to focus on
preserving the remaining investment and revise its strategy for turning
infoUSA.com into a profitable subsidiary. The Company has initiated cost
reduction plans, as described above, for infoUSA.com and the other Internet
businesses to achieve profitable operations during fiscal year 2001.
25
Income taxes
A provision for income taxes of $1.3 million and $14.0 million was
recorded for 2000 and 1999, respectively. The gain the Company recorded on the
issuance of subsidiary stock is not subject to income tax expense. The
provisions for these periods also reflect the inclusion of amortization of
certain intangibles in taxable income not deductible for tax purposes. The
provisions for the periods beginning January 1, 2000 do not include the net
losses associated with infoUSA.com, as this entity is not included in the
Company's consolidated federal income tax return from this date forward.
The income tax expense is higher (or benefit is lower) than expected
principally due to significant nondeductible expenses related to the
amortization of intangible assets arising from acquisitions and valuation
reserves recognized for deferred tax assets related to net operating losses
generated by the Company's subsidiary infoUSA.com. These items are offset in
part by the gains on issuance of subsidiary stock by infoUSA.com, which is not
subject to income tax expense.
Loss from discontinued operations, net of tax
During December 2000, the Company closed the operations of its
VideoYellowPages.com Internet unit and recorded a loss from discontinued
operations of $4.2 million, net of income tax benefit. The loss is comprised of
two components: 1) the loss of $3.4 million, net of tax, for the full fiscal
year, and 2) charges totaling $0.8 million, net of tax, for assets to be
disposed of or abandoned by the Company related to the discontinued operations.
Extraordinary item, net of tax
During the first quarter of 1999, the Company repurchased $9.0 million of
its 9 1/2% Senior Subordinated Notes (the "Notes"). In connection with the
repurchase of the Notes, the Company recorded a gain of $0.1 million, net of
deferred financing costs of $0.4 million written-off in proportion to the face
amount of Notes purchased and retired.
Cumulative effect of accounting changes, net of tax
During 2000, the Company changed its method of accounting for data
licensing arrangements sold with updates to record revenue on a straight-line
basis over the license term. This new adopted method of accounting was made
because it better reflects the service commitment inherent in the Company's
licensing agreements in light of the growing proportion of such license revenue
resulting from long-term and continuous access agreements. The Company believes
the new method better reflects the service commitment inherent in its various
license agreements. The cumulative effect of the change in method of $10.3
million is net of income tax benefit of $3.5 million.
EBITDA, as adjusted
Excluding the non-cash stock compensation expense and non-cash portion of
the acquisition costs and restructuring charges, the Company's EBITDA, as
adjusted, was $46.0 million, or 15% of net sales for 2000, and $74.6 million, or
28% of net sales for 1999.
LIQUIDITY AND CAPITAL RESOURCES
General information
During 1999 in conjunction with the acquisition of Donnelley, the Company
negotiated a credit arrangement ("Senior Debt Credit facility") that includes a
revolving credit facility of $25.0 million, as amended. During 2000, the Company
sought and obtained certain modifications to the Senior Debt Credit facility to
permit continued availability of borrowing under such credit facility. As of
December 31, 2001, the Company had no borrowings under the revolving credit
facility, with the exception of two outstanding letters of credit in the amount
of $6.3 million reducing the availability under the revolving credit facility to
$18.7 million.
During the first quarter of 2002, the Company continued to make voluntary
payments on its Senior Debt Credit facility, with voluntary payments totaling
$4.1 million.
On March 6, 2002, the Company refinanced the Senior Debt Credit facility
administered by Deutsche Bank with Banc of America Securities, LLC. Available
borrowings under the new Senior Debt Credit facility are $47.0 million for Term
A, $45.0 million for Term B and $18.0 million under a revolving credit facility.
The Company is subject to certain financial covenants in the Senior Debt Credit
facility, including funded debt leverage ratio, senior debt
26
leverage ratio, fixed charge coverage ratio and minimum consolidated EBITDA.
Management believes the Company has been in compliance with all restrictive
covenants of the Company's current and new Senior Debt Credit facility described
above. Refer to Note 8 to the Company's audited Consolidated Financial
Statements "Financing Arrangements," included elsewhere in this Form 10-K, for
additional information regarding the Company's long-term debt.
The Company believes that its existing sources of liquidity and cash
generated from operations, assuming no significant acquisitions, will satisfy
the Company's projected working capital and other cash requirements for at least
the next 12 months. To the extent the Company experiences growth in the future,
the Company anticipates that its operating and investing activities may use
cash. Any such future growth and any acquisitions of other technologies,
products or companies may require the Company to seek additional equity or debt
financing, which may not be available or may be dilutive.
Consolidated Statements of Cash Flows Information:
As of December 31, 2001, the Company's principal sources of liquidity
included cash and cash equivalents of $4.4 million. As of December 31, 2000, the
Company had working capital of $19.9 million, with substantially all the working
capital held by infoUSA.com. The Company's access to the working capital of its
subsidiary, infoUSA.com, was restricted. The amount of working capital that was
not restricted as to access in 2000 was $7.2 million.
Net cash provided by operating activities during 2001 totaled $54.5
million compared to net cash provided by operating activities of $36.2 million
during 2000.
During 2001, the Company spent $22.7 million for acquisitions of
businesses and minority interests of a subsidiary, net of cash acquired, $5.9
million for additions of property and equipment, and $2.4 million related to
software and database development costs. The Company used $41.9 million on the
repayment of long-term debt, and received cash proceeds of $2.4 million from a
mortgage on a building the Company acquired.
During 2000, the Company spent $9.2 million for additions of property and
equipment, $8.8 million for acquisitions of businesses, net of cash acquired,
$11.6 million related to software and database development costs. The Company
used $22.3 million on the repayment of long-term debt, and received cash
proceeds of $22.8 million on the issuance of stock in its subsidiary infoUSA.com
and $4.2 million from the exercise of stock options.
During 1999, the Company spent $9.0 million for additions of property and
equipment, $10.4 million related to internal software development costs and $577
thousand related to database development costs.
The Company acquired Donnelley Marketing effective July 1999. The Company
paid $206.4 million related to the acquisition, including consideration paid for
the acquisition of $200.0 million and $6.4 million for capitalized acquisition
costs. As part of the acquisition, the Company borrowed $165.0 million under a
credit facility. The Company paid financing costs of $4.0 million to secure the
financing arrangement. The Company also utilized existing cash and marketable
securities of approximately $45.0 million to purchase Donnelley.
During 1999, the Company spent $6.6 million to repurchase common stock of
the Company and $8.4 million to repurchase outstanding Senior Subordinated Notes
of the Company.
During 1999, the Company's subsidiary received $10.0 million on the
issuance of common stock of a subsidiary and $7.8 million on proceeds from the
exercise of stock options.
The following table summarizes the Company's contractual obligations as of
December 31, 2001:
LESS THAN 1 TO 4 TO AFTER
1 YEAR 3 YEARS 5 YEARS 5 YEARS
--------- ------- ------- --------
(IN THOUSANDS)
Long-term debt ............................ $19,770 $45,277 $43,624 $116,998
Capital lease obligations ................. 2,882 1,210 -- --
Operating leases .......................... 6,369 8,548 3,882 3,635
Unconditional purchase obligations ........ -- -- -- --
Other long-term obligations ............... -- -- -- --
------- ------- ------- --------
Total cash contractual obligations ........ $29,021 $53,035 $47,506 $120,633
======= ======= ======= ========
27
Consolidated Balance Sheet Information:
Trade accounts receivable decreased from $58.5 million at December 31,
2000 to $44.9 million at December 31, 2001. The Company's related days sales
outstanding ("DSO") calculation for the fiscal year 2001 was 56 days, compared
to 69 days for the fiscal year 2000. The decrease is principally due to the
enforcement of stricter credit policies and the implementation of more
aggressive collection practices.
Intangible assets, net of amortization, decreased from $296.1 million at
December 31, 2000 to $284.7 million at December 31, 2001. The decrease is
principally due to the amortization of capitalized software development costs
and assets related to the acquisitions described in the "Overview" section.
Depreciation and amortization expense totaled $48.1 million during 2001.
Accrued expenses decreased from $14.8 million at December 31, 2000 to $9.2
million at December 31, 2001 principally due to the payments for restructuring
liabilities of $4.7 million related to the cost reduction program initiated in
December 2000, as described in the "Overview" and "Restructuring costs" sections
above.
Deferred revenue included in current liabilities decreased from $19.4
million at December 31, 2000 to $17.4 million at December 31, 2001. The decrease
is primarily due to a decrease in Internet license agreements, as the Company
recognizes revenue on data license arrangements with updates on a straight-line
basis.
Long term debt decreased from $258.7 million at December 31, 2000 to
$225.7 million at December 31, 2001. The Company made repayments on long-term
debt totaling $41.9 million during 2001. The Company made voluntary prepayments
of $22.5 million and $12.2 million of scheduled payments on the Senior Debt
Credit Facility.
Long term deferred revenue at December 31, 2001 of $9.0 million represents
a customer prepayment on a long-term data license arrangement.
ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations", which requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 142, "Goodwill and Other Intangible Assets". This statement:
- replaces the requirement to amortize goodwill and certain other
intangible assets with an annual impairment test, and
- requires an evaluation of the useful lives of intangible assets and
an impairment test for goodwill upon adoption.
Goodwill and intangible assets with indefinite lives that result from
acquisitions of businesses and minority interests after June 30, 2001, are not
subject to amortization under the provisions of SFAS 142. The provisions of this
statement are fully effective for fiscal years beginning after December 15,
2001, so the Company must adopt the provisions of SFAS 142 in the financial
statements for the quarter ended March 31, 2002. Beginning January 1, 2002, the
Company ceased the amortization of goodwill, the result of which is no further
expense for the amortization of these intangible assets in 2002 and future
years. Amortization expense for goodwill and intangible assets with indefinite
lives was $16.5 million in 2001, compared to total intangible asset amortization
of $30.3 million for 2001. The Company has not yet completed the evaluation
whether or not it has any impairment charges in our consolidated financial
statements that may result from the initial impairment test that is required
upon adoption of SFAS 142. The Company expects to complete this initial
impairment test within the first six months of 2002. We currently do not expect
to record an impairment charge upon completion of the initial impairment review.
However, there can be no assurance that at the time the review is completed a
material impairment charge will not be recorded.
In October 2001, the Financial Accounting Standards Board also issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
provisions of this statement are effective for fiscal years beginning after
December 15, 2001. Therefore, the Company is required to adopt the provisions of
SFAS No. 144 in its financial statements for the quarter ended March 31, 2002.
Management does not expect the adoption of this statement to significantly
impact the consolidated financial statements.
28
FACTORS THAT MAY AFFECT OPERATING RESULTS
Our Internet strategy is subject to review and revision.
Our Internet strategy is to leverage our proprietary content into multiple
vertical market applications and provide marketing solutions for electronic
commerce applications. The strategy of developing more efficient and profitable
applications of our content through the Internet is evolving. We cannot
guarantee that our customers will choose to have our products and services
delivered to them over the Internet. If we are successful in developing Internet
applications, we may face strong competition from current and potential
competitors, including other Internet companies and other providers of business
and consumer databases. We will review our Internet strategy from time to time
and may continue to revise it.
Our markets are highly competitive and many of our competitors have greater
resources than we do.
The business and consumer marketing information industry in which we
operate is highly competitive. Intense competition could harm us by causing,
among other things, price reductions, reduced gross margins, and loss of market
share. Our competition includes:
- In consumer sales lead generation products, Acxiom, Experian (a
subsidiary of Great Universal Stores, P.L.C. ("GUS")), and Equifax,
both directly and through reseller networks.
- In data processing services, Acxiom, Experian, Direct Marketing
Technologies (a subsidiary of GUS) and Harte-Hanks Communications,
Inc.
- In business sales lead generation products, Experian and Dun's
Marketing Services ("DMS"), a division of Dun & Bradstreet. DMS,
which relies upon information compiled from Dun & Bradstreet's
credit database, tends to focus on marketing to large companies.
- In business directory publishing, we compete with Regional Bell
Operating Companies and many smaller, regional directory publishers.
- In consumer products, certain smaller producers of CD-Rom products.
- Technologies which companies may install and implement in-house as
part of their internal information systems functions, instead of
purchasing or outsourcing such functions.
In addition, we may face competition from new entrants to the business and
consumer marketing information industry as a result of the rapid expansion of
the Internet, which creates a substantial new channel for distributing business
information to the market. Many of our competitors have longer operating
histories, better name recognition and greater financial resources than we do,
which may enable them to implement their business strategies more readily than
we can.
We are highly leveraged. If we are unable to service our debt as it becomes due,
our business would be harmed.
As of December 31, 2001, we had total indebtedness of approximately $225.7
million, including $106.0 million of Notes due under an indenture (the
"Indenture") and $99.1 million under a $195 million Senior Secured Credit
facility. On March 12, 2002, the Company refinanced the Senior Secured Credit
facility with Banc of America Securities, LLC. Under the refinanced Senior
Secured Credit facility, the payment terms of the Term Loans A and B were
changed such that the total debt will be due on December 31, 2005. Substantially
all of our assets are pledged as security under the terms of the Senior Secured
Credit facility. The indebtedness under the Senior Secured Credit facility was
incurred in connection with our acquisition of Donnelley Marketing in 1999.
Our ability to pay principal and interest on the Notes issued under the
Indenture and the indebtedness under the Senior Secured 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
Senior Secured 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 Notes issued under
29
the Indenture and the Senior Secured Credit facility) or seeking additional
equity capital. We may not be able to implement any such measures or obtain
additional financing or terms that are favorable or satisfactory to us, if at
all.
The terms of our current indebtedness may restrict our ability to take certain
actions that fit our business strategy.
Our existing credit facilities contain certain covenants which restrict
our ability to:
- Incur additional indebtedness;
- Pay dividends and make certain other similar payments;
- Guarantee indebtedness of others;
- Enter into certain transactions with affiliates;
- Consummate certain asset sales, certain mergers and consolidations,
sales or other dispositions of all or substantially all of our
assets
- Acquire other companies; and
- Obtain dividends or certain other payments from our subsidiaries.
These restrictions may impair our ability to take certain actions that fit
our business strategy. A breach of any of these covenants could result in an
event of default under the terms of our existing credit facilities. Upon the
occurrence of an event of default, the lenders could elect to declare all
amounts outstanding, together with accrued interest, to be immediately due and
payable. If the payment of any such indebtedness is accelerated, our assets may
not be sufficient to repay in full the indebtedness under our credit facilities
and our other indebtedness. Moreover, if we were unable to repay amounts owed to
the lenders under our credit facilities, the lenders could foreclose on our
assets that secure the indebtedness.
Under the terms of our current indebtedness, the occurrence of a change of
control of infoUSA could have serious adverse financial consequences to us.
If a change of control of infoUSA were to occur, we would in certain
circumstances be required to make an offer to purchase all outstanding Notes
under the Indenture at a purchase price equal to 101% of the principal amount of
the Notes, together with accrued and unpaid interest. There can be no guarantee
that, if this were to happen, we would have sufficient funds to purchase the
Notes. In addition, a change of control and any repurchase of the Notes upon a
change of control may constitute an event of default under our other current or
future credit facilities. In that event, our obligations under such credit
facilities could be declared due and payable by the lenders, and the lenders may
also have the right to be paid for all outstanding obligations under such credit
facilities before we repurchase any of the Notes.
Fluctuations in our operating results may result in decreases in the market
price of our common stock.
Our operating results may fluctuate on a quarterly and annual basis. Our
expense levels are relatively fixed and are based, in part, on our expectations
as to future revenues. As a result, unexpected changes in revenue levels may
have a disproportionate effect on operating performance in any given period. In
some period or periods our operating results may be below the expectations of
public market analysts and investors. Our failure to meet analyst or investor
expectations could result in a decrease in the market price of our common stock.
If we do not adapt our products and services to respond to changes in
technology, they could become obsolete.
We provide marketing information and services to our customers in a
variety of formats, including printed formats, electronic formats such as CD-Rom
and DVD, and over the Internet. Advances in information technology may result in
changing customer preferences for products and product delivery formats. If we
do not successfully adapt our products and services to take advantage of changes
in technology and customer preferences, our business, financial condition and
results of operations would be adversely affected.
We have adopted an Internet strategy because we believe that the Internet
represents an important and rapidly evolving market for marketing information
products and services. Our business, financial condition and results of
operations would be adversely affected if we:
30
- Fail to develop products and services that are well suited to the
Internet market;
- Experience difficulties that delay or prevent the successful
development, introduction and marketing of these products and
services; or
- Fail to achieve sufficient traffic to our Internet sites to generate
significant revenues, or to successfully implement electronic
commerce operations.
Changes in laws and regulations relating to data privacy could adversely affect
our business.
We engage in direct marketing, as do many of our customers. Certain data
and services provided by us are subject to regulation by federal, state and
local authorities in the United States as well as those in Canada and 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. Compliance with existing federal, state and local laws and
regulations and industry self-regulation has not to date seriously affected our
business, financial condition or results of operations. Nonetheless, federal,
state and local laws and regulations designed to protect the public from the
misuse of personal information in the marketplace and adverse publicity or
potential litigation concerning the commercial use of such information may
increasingly affect our operations. This could result in substantial regulatory
compliance or litigation expense or a loss of revenue.
Our business would be harmed if we do not successfully integrate future
acquisitions.
Our business strategy includes continued growth through acquisitions of
complementary products, technologies or businesses. We have made fourteen
acquisitions since mid-1996 and completed the integration of these acquisitions
into our existing business by the end of 2001. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
exposures from changes in interest rates on long-term debt as the majority of
the Company's debt is at fixed rates. At December 31, 2001, the fair value of
the Company's long-term debt is based on quoted market prices at the reporting
date or is estimated by discounting the future cash flows of each instrument at
rates currently offered to the Company for similar debt instruments of
comparable maturities. At December 31, 2001, the Company had long-term debt with
a carrying value of $225.7 million and estimated fair value of approximately
$222.6 million. The market risk is estimated as the potential decrease in fair
value of the Company's long-term debt resulting from a hypothetical increase of
10% in the rates currently offered to the Company. An increase in interest rates
would result in approximately a $3.3 million decrease in fair value of the
Company's long-term debt.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item (other than selected quarterly
financial data which is set forth below) is incorporated by reference to the
Consolidated Financial Statements 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, 2001. This unaudited
information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal recurring adjustments
necessary to present fairly this information when read in conjunction with the
Company's audited consolidated financial statements and the notes thereto.
2001 QUARTER ENDED 2000 QUARTER ENDED
----------------------------------------- --------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- -------- ----- ---- --------- --------
31 30 30 31 31 30 30 31
-- -- -- -- -- -- -- --
STATEMENT OF
OPERATIONS DATA:
Net sales(6) ......................... $73,853 $70,909 $68,498 $75,478 $ 81,521 $77,669 $76,076 $ 70,402
Costs and expenses:
Database and production
costs ............................. 21,387 19,526 19,032 20,935 25,683 25,676 26,027 24,444
Selling, general and
administrative .................... 27,261 26,682 26,341 32,118 37,244 40,039 35,801 36,638
Depreciation and
amortization ...................... 12,733 12,189 11,736 11,469 12,158 13,490 13,123 13,424
Impairment of assets(1) ............. -- -- -- -- -- -- -- 2,135
Acquisition costs(2) ................ -- -- -- 493 1,380 821 86 --
Non-cash stock compensation ......... 77 225 146 -- 1,222 1,685 1,229 (1,023)
Litigation settlement charges(3) ..... -- -- -- 1,104 -- -- -- --
Restructuring charges(4) ............. 876 767 2,989 267 -- -- -- 5,800
------- ------- ------- ------- -------- ------- ------- --------
Operating income (loss) .............. 11,519 11,520 8,254 9,092 3,834 (4,042) (190) (11,016)
Other income (expense), net .......... (6,729) (6,268) (5,146) (5,907) (3,877) 7,396 (5,187) (2,805)
------- ------- ------- ------- -------- ------- ------- --------
Income (loss) from continuing
operations before income taxes,
extraordinary item and cumulative
effect of a change in accounting
principle .......................... 4,790 5,252 3,108 3,185 (43) 3,354 (5,377) (13,821)
Income tax expense ................... 2,936 3,047 2,874 2,514 247 1,364 1,141 (1,433)
------- ------- ------- ------- -------- ------- ------- --------
Income (loss) from continuing
operations before
extraordinary item and cumulative
effect of a change in accounting
principle .......................... 1,854 2,205 234 671 (290) 1,990 (6,518) (12,388)
Discontinued operations, net of tax(5) -- -- -- -- (1,004) (611) (733) (1,813)
Cumulative effect of accounting
change, net of tax(6) .............. -- -- -- -- (10,266) -- -- --
------- ------- ------- ------- -------- ------- ------- --------
Net income (loss) .................... $ 1,854 $ 2,205 $ 234 $ 671 $(11,560) $ 1,379 $(7,251) $(14,201)
======= ======= ======= ======= ======== ======= ======= ========
Basic earnings (loss) per share
from continuing operations ......... $ 0.04 $ 0.05 $ 0.00 $ 0.01 $ (0.01) $ 0.04 $ (0.13) $ (0.24)
======= ======= ======= ======= ======== ======= ======= ========
Diluted earnings (loss) per share
from continuing operations ......... $ 0.04 $ 0.05 $ 0.00 $ 0.01 $ (0.01) $ 0.04 $ (0.13) $ (0.24)
======= ======= ======= ======= ======== ======= ======= ========
Basic earnings (loss) per
share .............................. $ 0.04 $ 0.05 $ 0.00 $ 0.01 $ (0.23) $ 0.03 $ (0.14) $ (0.28)
======= ======= ======= ======= ======== ======= ======= ========
Diluted earnings (loss) per
share .............................. $ 0.04 $ 0.05 $ 0.00 $ 0.01 $ (0.23) $ 0.03 $ (0.14) $ (0.28)
======= ======= ======= ======= ======== ======= ======= ========
Weighted average shares
outstanding - basic ................ 50,609 50,571 50,571 50,891 49,610 49,900 50,751 50,858
======= ======= ======= ======= ======== ======= ======= ========
Weighted average shares
outstanding - diluted .............. 50,609 50,571 50,587 50,903 49,610 49,928 50,751 50,858
======= ======= ======= ======= ======== ======= ======= ========
32
2001 QUARTER ENDED 2000 QUARTER ENDED
------------------------------------------ --------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
----- ---- --------- -------- ----- ---- --------- --------
31 30 30 31 31 30 30 31
-- -- -- -- -- -- -- --
STATEMENT OF
OPERATIONS DATA:
AS A PERCENTAGE OF NET SALES:
Net sales .............................. 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Database and production costs ......... 29 28 28 28 32 33 34 35
Selling, general and administrative ... 37 38 39 43 46 52 47 52
Depreciation and amortization ......... 17 17 17 15 15 17 17 19
Impairment of assets .................. -- -- -- -- -- -- -- 3
Acquisition costs ..................... -- -- -- 1 2 1 -- --
Non-cash stock compensation ........... -- -- -- -- 2 2 2 (1)
Litigation settlement charges ......... -- -- -- 1 -- -- -- --
Restructuring charges ................. 1 1 4 -- -- -- -- 8
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) ............... 16 16 12 12 5 (5) -- (16)
Other income (expense), net ............ (9) (9) (8) (8) (5) 10 (7) (4)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing
operations before income
taxes, discontinued operations and
cumulative effect of a change in
accounting principle ................ 7 7 4 4 -- 4 (7) (20)
Income taxes ........................... 4 4 4 (3) -- 1 2 (2)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from continuing operations
before discontinued operations and
cumulative effect of a change in
accounting principle ................ 3 3 -- 1 -- 3 (9) (17)
Discontinued operations,
net of tax .......................... -- -- -- -- (1) (1) (1) (3)
Cumulative effect of accounting change,
net of tax .......................... -- -- -- -- (13) -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ...................... 3% 3% --% 1% (14)% 2% (10)% (20)%
===== ===== ===== ===== ===== ===== ===== =====
(1) During 2000, the Company recorded a write-down of $2.1 million for certain
capitalized software development costs, fixed assets related to the
abandoned infoPIX business photograph project, as well as proposed public
offering and leasehold improvement costs of infoUSA.com, a subsidiary of
the Company.
(2) Includes the following acquisition costs: 1) $0.5 million associated with
the acquisition and integration of Polk City Directories (2001), 2) $1.8
million for the attempted acquisition of the consumer database division of
R.L. Polk and $0.5 million related to the acquisitions of idEXEC, American
Church Lists and Getko Direct Response (2000).
(3) During 2001, the Company settled legal issues totaling $1.1 million in
connection with arbitration of two contractual disputes.
(4) During 2001, the Company recorded the following restructuring charges: 1)
$2.3 million severance costs for approximately 265 employees terminated
during 2001, and 2) lease termination costs of $2.6 million associated
with the infoUSA.com Foster City, California location.
During 2000, the Company recorded charges of $2.1 million severance for
approximately 350 employees terminated during December 2000 and lease
termination costs of $3.7 million associated with the infoUSA.com Foster
City, California location.
(5) During December 2000, the Company discontinued the operations of its
VideoYellowPages.com Internet unit and recorded a loss during 2000 of $4.2
million, net of tax. The loss is comprised of two components: 1) the loss
of its results of operations of $3.4 million, net of tax for the full
fiscal year, and 2) charges totaling $0.8 million, net of tax, for asset
impairments. The loss from this discontinued operation for 1999 was $1.5
million, net of tax.
(6) During 2000, the Company changed its revenue recognition method for data
licensing revenue. Effective January 1, 2000, the Company began to
recognize revenue on data license arrangements on a straight-line basis.
This change in method was made because a growing proportion of such
license revenue is from long-term and continuous access agreements. The
Company believes the newly adopted method of accounting better reflects
the service commitment inherent in its various license agreements. The
cumulative effect of the change in method of $10.3 million, is net of
income tax benefit of $3.5 million, for the year ending December 31, 2000.
The accompanying interim financial information for 2000 has been restated
to recognize revenues according to the newly adopted method as of January
1, 2000. The change in revenue recognition for data licensing revenue
resulted in an increase (decrease) of $623 thousand, $(1.2) million, $255
thousand and $940 thousand for the quarters ending March 31, June 30,
September 30 and December 31, 2000, respectively.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information regarding Directors of the registrant is
incorporated by reference to the information under the caption "Nominees for
Election at the Annual Meeting" and "Incumbent Directors whose Terms of Office
Continue After the Annual Meeting" in the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 3, 2002.
The required information regarding Executive Officers of the registrant is
contained in Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference to the information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 3, 2002.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the information under the captions "Board
Compensation," "Executive Compensation," "Report of the Compensation Committee,"
and "Certain Transactions" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held on May 3, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the information under the caption "Security
Ownership" in the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 3, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the information under the captions "Certain
Transactions" in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 3, 2002.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the Report:
1. Financial Statements. The following Consolidated Financial
Statements of infoUSA Inc. and Subsidiaries and Report of Independent
Accountants are included elsewhere in this Form 10-K:
DESCRIPTION PAGE NO.
----------- --------
infoUSA Inc. and Subsidiaries:
Independent Auditors' Report.................................................... 40
Consolidated Balance Sheets as of December 31, 2001 and 2000.................... 41
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999.............................................. 42
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the Years Ended December 31, 2001, 2000 and 1999......................... 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999.............................................. 44
Notes to Consolidated Financial Statements...................................... 45 to 60
Independent Auditors' Report on Financial Statement Schedule.................... 61
2. Financial Statement Schedule. The following consolidated
financial statement schedule of infoUSA Inc. and Subsidiaries for the
years ended December 31, 2001, 2000 and 1999 is filed as part of this
Report and should be read in conjunction with the Consolidated Financial
Statements.
DESCRIPTION PAGE NO.
------------------------------------------------------- --------
Schedule II Valuation and Qualifying Accounts.......... 62
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes
thereto.
3. Exhibits. The following Exhibits are filed as part of, or
incorporated by reference into, this report:
2.1 -- Asset Purchase Agreement between the Company and
Digital Directory Assistance, Inc. is incorporated
herein by reference to exhibits filed with the
Company's Current Report on Form 8-K dated
September 10, 1996.
2.2 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of County Data
Corporation is incorporated herein by reference to
Exhibits filed with Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31,
1996.
2.3 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of 3319971 Canada
Inc. is incorporated herein by reference to
Exhibits filed with Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31,
1996.
2.4 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of Marketing Data
Systems, Inc. is incorporated herein by reference
to exhibits filed with the Company's Registration
Statement on Form S-3 (File No. 333-36669) filed
October 23, 1997.
2.5 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of DBA Holdings, Inc.
is incorporated herein by reference to exhibits
filed with the Company's Current Report on Form
8-K dated February 28, 1997.
2.6 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of Pro CD, Inc. is
incorporated herein by reference to exhibits filed
with the Company's Current Report on Form 8-K
Dated September 8, 1997.
35
2.7 -- Stock Purchase Agreement between the Company and
the Shareholders of Walter Karl, Inc. is
incorporated herein by reference to exhibits filed
with the Company's Current Report on Form 8-K
Dated February 24, 1998.
2.8 -- Asset Purchase Agreement between the Company and
JAMI Marketing Services, Inc. is incorporated
herein by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1998.
2.9 -- Agreement and Plan of Reorganization by and among
the Company, Hugo Acquisition Corporation, First
Data Corporation, First Data Information
Management Group, Inc., DM Holdings, Inc.,
Donnelley Marketing Holdings, Inc., and Donnelley
Marketing, Inc. is incorporated herein by
reference to exhibits filed with the Company's
Current Report on Form 8-K dated May 28, 1999.
3.1 -- Certificate of Incorporation, as amended through
October 22, 1999, is Incorporated herein by
reference to exhibits filed with Company's
Registration Statement on Form 8-A, as amended,
filed March 20, 2000.
3.2 -- Bylaws are incorporated herein by reference to the
Company's Registration Statement on Form S-1 (File
No. 33-42887), which became effective February 18,
1992.
3.3 -- Amended and Restated Certificate of Designation of
Participating Preferred Stock, filed in Delaware
on October 22,1999, is incorporated herein by
reference to exhibits filed with the Company's
Registration Statement on Form 8-A, as amended,
Filed March 20, 2000.
4.1 -- Preferred Share Rights Agreement is incorporated
herein by reference to the Company's Registration
Statement on Form 8-A, as amended, filed March 20,
2000.
4.2 -- Specimen of Common Stock Certificate is
Incorporated herein by reference to the exhibits
filed with the Company's Registration Statement on
Form 8-A, as amended), filed March 20, 2000.
4.4 -- Purchase Agreement dated June 12, 1998 between the
Company, BT Alex. Brown Incorporated, Goldman,
Sachs & Co. and Hambrecht & Quist LLC is
incorporated herein by reference to exhibits filed
with the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1998.
4.5 -- Indenture dated as of June 18, 1998 (the
"Indenture") by and between the Company and State
Street Bank and Trust Company of California, N.A.,
as Trustee is incorporated herein by reference to
Exhibits filed with the Company's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1998.
4.6 -- Exchange and Registration Rights Agreement dated
as of June 18, 1998 by and among the Company and
BT Alex. Brown Incorporated, Goldman, Sachs & Co.
and Hambrecht & Quist LLC as the Initial
Purchasers is incorporated herein by reference to
Exhibits filed with the Company's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1998.
4.7 -- Form of New 9 1/2% Senior Subordinated Note due
2008 is incorporated herein by reference to
exhibits filed with the Company's Registration
Statement on Form S-4 (File No. 333-61645), filed
December 15, 1999.
4.8 -- Credit Agreement by and among infoUSA, Inc.,
various Lenders (as defined therein) and Bank of
America, N.A. dated as of March 6, 2002, filed
herewith.
36
4.9 -- Pledge Agreement by and among infoUSA, Inc.,
various Lenders (as defined therein) and Bank of
America, N.A. dated as of March 6, 2002, filed
herewith.
4.10 -- Security Agreement by and among infoUSA, Inc.,
various Lenders (as defined therein) and Bank of
America, N.A. dated as of March 6, 2002, filed
herewith.
4.11 -- Subsidiaries Guaranty Agreement by and among
infoUSA, Inc., various Lenders (as defined
therein) and Bank of America, N.A. dated as of
March 6, 2002 , filed herewith.
10.1 -- Form of Indemnification Agreement with Officers
and Directors is incorporated herein by reference
to exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 33-51352), filed
August 28, 1992.
10.2 -- 1992 Stock Option Plan as amended is incorporated
herein by reference to exhibits filed with the
Company's Registration Statement on Form S-8 (File
No. 333-37865), filed October 14, 1997.
10.3 -- 1997 Stock Option Plan as amended is incorporated
herein by reference to exhibits filed with the
Company's Registration Statement on Form S-8 (File
No. 333-82933), filed July 15, 1999.
10.4 -- Employment Agreement dated February 11, 1997
between the Company and Allen F. Ambrosino,
incorporated herein by reference to exhibits filed
with the Company's Annual Report on Form 10-K for
the Year ended December 31, 2001.
10.5 -- Amended and Restated Database License Agreement
between Donnelley Marketing, Inc. and First Data
Resources, Inc. dated as of July 23, 1999 is
incorporated herein by reference to exhibits filed
with the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1999.
10.6 -- Covenant not to compete by First Data Corporation
to infoUSA Inc. dated as of July 23, 1999 is
incorporated herein by reference to exhibits filed
with the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1999.
18.1 -- Preferability Letter from KPMG to the Company
dated March 30, 2001, incorporated herein by
reference to exhibits filed with the Company's
Annual Report on Form 10-K for the Year ended
December 31, 2001.
21.1 -- Subsidiaries and State of Incorporation, filed
herewith.
23.1 -- Consent of Independent Accountants, filed
herewith.
24.1 -- Power of Attorney, filed herewith.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the quarter ended December
31, 2001.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
infoUSA INC.
By: /s/ STORMY L. DEAN
-----------------------------------
Stormy L. Dean
Chief Financial Officer
(principal accounting and financial
officer)
Dated: March 27, 2002
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
------------------------------ --------------------------------- --------------
/s/ VINOD GUPTA Chairman of the Board and Chief March 27, 2002
--------------- Executive Officer (principal
Vinod Gupta executive officer)
/s/ STORMY L. DEAN Chief Financial Officer March 27, 2002
------------------ (principal accounting officer
Stormy L. Dean and principal financial officer)
/s/ J. ROBERT KERREY Director March 27, 2002
--------------------
J. Robert Kerrey
/s/ ROB S. CHANDRA Director March 27, 2002
------------------
Rob S. Chandra
/s/ CYNTHIA H. MILLIGAN Director March 27, 2002
-----------------------
Cynthia H. Milligan
/s/ GEORGE F. HADDIX Director March 27, 2002
--------------------
George F. Haddix
/s/ ELLIOT S. KAPLAN Director March 27, 2002
--------------------
Elliot S. Kaplan
/s/ HAROLD ANDERSEN Director March 27, 2002
-------------------
Harold Andersen
/s/ PAUL A. GOLDNER Director March 27, 2002
-------------------
Paul A. Goldner
38
infoUSA INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
infoUSA Inc. and Subsidiaries:
Independent Auditors' Report.................................................. 40
Consolidated Balance Sheets as of December 31, 2001 and 2000.................. 41
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999............................................ 42
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the Years Ended December 31, 2001, 2000 and 1999....................... 43
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999............................................ 44
Notes to Consolidated Financial Statements.................................... 45 to 60
Independent Auditors' Report on Financial Statement Schedule.................. 61
Schedule II -- Valuation and Qualifying Accounts.............................. 62
39
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
infoUSA Inc.:
We have audited the accompanying consolidated balance sheets of infoUSA Inc. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of infoUSA Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, during 2000 the
Company changed its method of accounting for data licensing arrangements sold
with updates.
/s/ KPMG LLP
------------
KPMG LLP
Omaha, Nebraska
January 18, 2002, except
as to the third paragraph
of Note 8 which is
March 6, 2002
40
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Current assets:
Cash and cash equivalents, including restricted cash of $20,511 in 2000 $ 4,382 $ 21,693
Marketable securities .................................................. 1,037 102
Trade accounts receivable, net of allowances of $4,670 and
$4,724, respectively ................................................ 44,890 58,501
List brokerage trade accounts receivable ............................... 16,992 13,499
Income taxes receivable ................................................ -- 4,267
Prepaid expenses ....................................................... 6,861 6,067
Deferred income taxes .................................................. 1,251 --
Deferred marketing costs ............................................... 2,058 2,469
--------- ---------
Total current assets ........................................... 77,471 106,598
--------- ---------
Property and equipment, net .............................................. 51,640 54,709
Intangible assets, net ................................................... 284,675 296,060
Other assets ............................................................. 5,302 6,178
--------- ---------
$ 419,088 $ 463,545
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...................................... $ 19,770 $ 17,779
Accounts payable ....................................................... 7,760 11,484
List brokerage trade accounts payable .................................. 15,031 13,981
Accrued payroll expenses ............................................... 7,891 7,458
Accrued expenses ....................................................... 9,240 14,828
Income taxes payable ................................................... 4,030 --
Deferred income taxes .................................................. -- 1,688
Deferred revenue ....................................................... 17,419 19,437
--------- ---------
Total current liabilities ...................................... 81,141 86,655
--------- ---------
Long-term debt, net of current portion ................................... 205,900 240,873
Deferred income taxes .................................................... 27,250 29,955
Deferred revenue ......................................................... 9,000 12,000
Minority interest ........................................................ -- 3,092
Stockholders' equity:
Preferred stock, $.0025 par value. Authorized 5,000,000
shares; none issued or outstanding .................................. -- --
Common stock, $.0025 par value. Authorized 295,000,000
shares; 51,850,339 shares issued and 50,891,248 shares
outstanding at December 31, 2001 and 51,519,872 shares
issued and 50,520,620 outstanding at December 31, 2000 .............. 130 129
Paid-in capital ........................................................ 93,551 96,539
Retained earnings ...................................................... 11,801 6,837
Treasury stock, at cost, 959,091 shares held at December
31, 2001 and 999,252 shares held at December 31, 2000 ............... (7,028) (7,271)
Notes receivable from officers ......................................... (1,296) --
Unamortized stock compensation ......................................... -- (4,543)
Accumulated other comprehensive loss ................................... (1,361) (721)
--------- ---------
Total stockholders' equity ..................................... 95,797 90,970
--------- ---------
Commitments and contingencies $ 419,088 $ 463,545
========= =========
See accompanying notes to consolidated financial statements.
41
infoUSA INC. SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
--------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Net sales ................................................... $ 288,738 $ 305,668 $ 265,853
Costs and expenses:
Database and production costs (excluding non-cash stock
compensation expense of $19 for year ended
December 31, 2000) ...................................... 80,880 101,831 78,644
Selling, general and administrative (excluding
non-cash stock compensation expense
of $448 and $3,094 for years ended December 31, 2001 and
2000, respectively) ...................................... 112,402 149,721 108,435
Depreciation and amortization ............................. 48,127 52,195 34,933
Impairment of assets ...................................... -- 2,135 5,599
Acquisition costs ......................................... 493 2,287 4,166
Non-cash stock compensation ............................... 448 3,113 --
Restructuring charges ..................................... 4,899 5,800 --
Provision for litigation settlement ....................... 1,104 -- --
--------- --------- ---------
248,353 317,082 231,777
--------- --------- ---------
Operating income (loss) ..................................... 40,385 (11,414) 34,076
Other income (expense):
Investment income ......................................... 953 1,250 14,196
Interest expense .......................................... (25,285) (26,651) (18,579)
Minority interest ......................................... 282 6,294 --
Gain on issuance of subsidiary stock ...................... -- 14,634 8,886
--------- --------- ---------
Income (loss) from continuing operations before
income taxes, extraordinary item and cumulative
effect of change in accounting principle .................. 16,335 (15,887) 38,579
Income tax expense .......................................... 11,371 1,320 14,047
--------- --------- ---------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
a change in accounting principle .......................... 4,964 (17,207) 24,532
Discontinued operation:
Loss from discontinued operations, net of tax ............. -- (3,389) (1,474)
Loss on disposal of discontinued operations, net of tax ... -- (771) --
Extraordinary item, net of tax .............................. -- -- 128
Cumulative effect of a change in accounting principle,
net of tax ................................................ -- (10,266) --
--------- --------- ---------
Net income (loss) ........................................... $ 4,964 $ (31,633) $ 23,186
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations ................. $ 0.10 $ (0.34) $ 0.51
Loss on discontinued
operation
and abandonment of subsidiary ............................ -- (0.08) (0.03)
Change in accounting principle ............................ -- (0.21) --
--------- --------- ---------
Net income (loss) ......................................... $ 0.10 $ (0.63) $ 0.48
========= ========= =========
Weighted average shares outstanding ....................... 50,651 50,304 48,470
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations .................. $ 0.10 $ (0.34) $ 0.51
Loss on discontinued
operation
and abandonment of subsidiary ............................ -- (0.08) (0.03)
Change in accounting principle ............................ -- (0.21) --
--------- --------- ---------
Net income (loss) ......................................... $ 0.10 $ (0.63) $ 0.48
========= ========= =========
Weighted average shares outstanding ....................... 50,651 50,304 48,613
========= ========= =========
PRO FORMA AMOUNTS ASSUMING THE NEW REVENUE RECOGNITION METHOD
IS APPLIED RETROACTIVELY FOR NET INCOME (LOSS) FROM
CONTINUING OPERATIONS:
Basic earnings (loss) per share ..................... $ 0.45
=========
Diluted earnings (loss) per share ................... 0.45
=========
See accompanying notes to consolidated financial statements.
42
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
----- ------- -------- -----
Balances, December 31, 1998 .................. $ 124 $ 72,476 $ 15,284 $(2,951)
Comprehensive income:
Net income ............................... -- -- 23,186 --
Foreign currency translation
adjustments ............................ -- -- -- --
Change in unrealized gain, net of tax .... -- -- -- --
----- -------- -------- -------
Total comprehensive income ........... -- -- -- --
----- -------- -------- -------
Issuance of 1,096,288 shares of common
stock .................................... 3 7,771 -- --
Issuance of 78,510 shares of treasury
stock for Company's match of 401(k) plan
contribution ............................. -- 160 -- 334
Tax benefit related to employee stock
options .................................. -- 1,618 -- --
Acquisition of treasury stock .............. -- -- -- (6,553)
----- -------- -------- -------
Balances, December 31, 1999 .................. 127 82,025 38,470 (9,170)
Comprehensive loss:
Net loss ................................. -- -- (31,633) --
Foreign currency translation adjustments . -- -- -- --
Change in unrealized gain, net of tax .... -- -- -- --
----- -------- -------- -------
Total comprehensive income ........... -- -- -- --
----- -------- -------- -------
Issuance of 800,324 shares of common
stock .................................... 2 6,227 -- --
Issuance of 330,238 shares of treasury
stock for Company's match of 401(k) plan
contribution ............................. -- 66 -- 1,899
Tax benefit related to employee stock
options .................................. -- 221 -- --
Capital contribution by principal
stockholder .................................. -- 140 -- --
Amortization of stock compensation ......... -- -- -- --
Unamortized stock compensation ............. -- 7,860 -- --
----- -------- -------- -------
Balances, December 31, 2000 .................. 129 96,539 6,837 (7,271)
----- -------- -------- -------
Comprehensive income:
Net income ............................... -- -- 4,964 --
Change in unrealized loss, net of tax .... -- -- -- --
----- -------- -------- -------
Total comprehensive income ........... -- -- 4,964 --
----- -------- -------- -------
Issuance of 320,000 shares of common stock
in connection with stock option exercises . 1 1,279 -- --
Interest on notes receivable ............... -- -- -- --
Issuance of 40,161 shares of treasury
stock for Company's match of 401(k) plan
contribution ............................. -- (123) -- 243
Capital withdrawal by principal stockholder -- (49) -- --
Unamortized stock compensation ............. -- (4,095) -- --
----- -------- -------- -------
Balances, December 31, 2001 .................. $ 130 $ 93,551 $ 11,801 $(7,028)
===== ======== ======== =======
NOTES ACCUMULATED TOTAL
UNAMORTIZED RECEIVABLE OTHER STOCK-
STOCK FOR COMPREHENSIVE HOLDERS'
COMPENSATION OFFICER STOCK INCOME (LOSS) EQUITY
------------ ------------- ------------- ------
Balances, December 31, 1998 .................. $ -- $ -- $ 3,314 $ 88,247
Comprehensive income:
Net income ............................... -- -- -- 23,186
Foreign currency translation
adjustments ............................ -- -- (641) (641)
Change in unrealized gain, net of tax .... -- -- (3,314) (3,314)
--------- --------- --------- ---------
Total comprehensive income ........... -- -- -- 19,231
--------- --------- --------- ---------
Issuance of 1,096,288 shares of common
stock .................................... -- -- -- 7,774
Issuance of 78,510 shares of treasury
stock for Company's match of 401(k) plan
contribution ............................. -- -- -- 494
Tax benefit related to employee stock
options .................................. -- -- -- 1,618
Acquisition of treasury stock .............. -- -- -- (6,553)
--------- --------- --------- ---------
Balances, December 31, 1999 .................. -- -- (641) 110,811
Comprehensive loss:
Net loss ................................. -- -- -- (31,633)
Foreign currency translation adjustments . -- -- (27) (27)
Change in unrealized gain, net of tax .... -- -- (53) (53)
--------- --------- --------- ---------
Total comprehensive income ........... -- -- -- (31,713)
--------- --------- --------- ---------
Issuance of 800,324 shares of common
stock .................................... -- -- -- 6,229
Issuance of 330,238 shares of treasury
stock for Company's match of 401(k) plan
contribution ............................. -- -- -- 1,965
Tax benefit related to employee stock
options .................................. -- -- -- 221
Capital contribution by principal
stockholder .................................. -- -- -- 140
Amortization of stock compensation ......... 2,559 -- -- 2,559
Unamortized stock compensation ............. (7,102) -- -- 758
--------- --------- --------- ---------
Balances, December 31, 2000 .................. (4,543) -- (721) 90,970
--------- --------- --------- ---------
Comprehensive income:
Net income ............................... -- -- -- 4,964
Change in unrealized loss, net of tax .... -- -- (640) (640)
--------- --------- --------- ---------
Total comprehensive income ........... -- -- (640) 4,324
--------- --------- --------- ---------
Issuance of 320,000 shares of common stock
in connection with stock option exercises . -- (1,280) -- --
Interest on notes receivable ............... -- (16) -- (16)
Issuance of 40,161 shares of treasury
stock for Company's match of 401(k) plan
contribution ............................. -- -- -- 120
Capital withdrawal by principal stockholder -- -- -- (49)
Unamortized stock compensation ............. 4,543 -- -- 448
--------- --------- --------- ---------
Balances, December 31, 2001 .................. $ -- $ (1,296) $ (1,361) $ 95,797
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
43
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
--------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ................................................. $ 4,964 $(31,633) $ 23,186
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................... 48,127 52,195 35,109
Amortization of deferred financing fees ......................... 1,494 1,285 1,362
Deferred income taxes ........................................... (5,644) (5,938) (2,528)
Net realized gains on sale of marketable securities
and other investments ......................................... -- -- (12,920)
Gain on issuance of subsidiary stock ............................ -- (14,634) (8,886)
Non-cash stock option compensation expense ...................... 448 3,113 --
Non-cash 401(k) contribution in common stock .................... 120 1,965 --
Tax benefit related to employee stock options ................... -- 221 1,618
Non-cash acquisition costs ...................................... -- 615 --
Minority interest in loss
of consolidated subsidiary .................................... (282) (6,294) --
Impairment of other assets ...................................... -- 2,135 5,599
Non-cash withdrawal by principal shareholder .................... (49) -- --
Non-cash interest earned on notes from officers ................. (16) -- --
Cumulative effect of accounting change .......................... -- 13,709 --
Changes in assets and liabilities, net of
effect of acquisitions:
Trade accounts receivable ..................................... 15,368 8,706 (13,224)
List brokerage trade accounts receivable ...................... (3,493) 3,235 1,097
Prepaid expenses .............................................. 198 (4,763) (3)
Deferred marketing costs ...................................... 411 488 1,408
Accounts payable .............................................. (4,221) 3,028 (1,850)
List brokerage trade accounts payable ......................... 1,050 (2,394) (2,193)
Income taxes receivable and payable, net ...................... 8,297 (5,966) 7,086
Accrued expenses and deferred revenue ......................... (12,223) 17,078 (3,866)
-------- -------- ---------
Net cash provided by operating activities .................. 54,549 36,151 30,995
-------- -------- ---------
Cash flows from investing activities:
Proceeds from sales of marketable securities ...................... -- -- 32,106
Purchases of marketable securities ................................ (1,032) (32) (4,184)
Purchase of other investments ..................................... -- -- (1,000)
Purchases of property and equipment ............................... (5,876) (9,150) (9,048)
Acquisitions of businesses and minority interests,
net of cash acquired ............................................ (22,738) (8,751) (206,968)
Database development costs ........................................ -- (99) (577)
Software development costs ........................................ (2,382) (11,459) (10,400)
-------- -------- ---------
Net cash used in investing activities ....................... (32,028) (29,491) (200,071)
-------- -------- ---------
Cash flows from financing activities:
Repayment of long-term debt ....................................... (41,931) (22,299) (13,540)
Proceeds from long-term debt ...................................... 2,437 -- 165,000
Proceeds from sale of subsidiary common stock ..................... -- 22,845 10,000
Deferred financing costs .......................................... (338) (559) (3,989)
Acquisition of treasury stock ..................................... -- -- (6,553)
Repurchase of Senior Subordinated Notes ........................... -- -- (8,370)
Proceeds from exercise of stock options ........................... -- 4,200 7,771
-------- -------- ---------
Net cash provided by (used in) financing activities ......... (39,832) 4,187 150,319
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents ................ (17,311) 10,847 (18,757)
Cash and cash equivalents, beginning of year ........................ 21,693 10,846 29,603
-------- -------- ---------
Cash and cash equivalents, end of year .............................. $ 4,382 $ 21,693 $ 10,846
======== ======== =========
Supplemental cash flow information:
Interest paid ..................................................... $ 24,588 $ 25,939 $ 18,299
======== ======== =========
Income taxes paid ................................................. $ 8,230 $ 8,116 $ 7,047
======== ======== =========
See accompanying notes to consolidated financial statements.
44
infoUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
infoUSA Inc. and its subsidiaries (the Company) provide business and
consumer marketing information products and data processing services throughout
the United States, Canada and the United Kingdom. These products include
customized business lists, business directories and other information services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash Equivalents. Cash equivalents, consisting of highly liquid debt
instruments that are readily convertible to known amounts of cash and when
purchased have an original maturity of three months or less, are carried at cost
which approximates fair value.
Marketable Securities. Marketable securities have been classified as
available-for-sale and are therefore carried at fair value, which are estimated
based on quoted market prices. Unrealized gains and losses, net of related tax
effects, are reported as other comprehensive income within the statement of
stockholders' equity until realized. Unrealized and realized gains and losses
are determined by specific identification. When management determines that a
decline in the value of marketable investment securities is
other-than-temporary, the impairment loss is recorded as realized in income and
the book value of the investment is reduced.
List brokerage trade accounts receivable and trade accounts payable. For
all list brokerage services, the Company serves as a broker between unrelated
parties who wish to purchase a certain list and unrelated parties who have the
desired list for sale. Accordingly, the Company recognizes trade accounts
receivable and trade accounts payable, reflecting a "gross-up" of the two
concurrent transactions. The transactions are not structured providing for the
right of offset. List brokerage sales are reflected net of costs on the
accompanying consolidated statement of operations.
Advertising Costs. Direct marketing costs associated with the mailing and
printing of brochures and catalogs are capitalized and amortized over a period
of six months which corresponds to the estimated revenue stream of the
individual advertising activities. All other advertising costs are expensed as
the advertising takes place. Total unamortized marketing costs at December 31,
2001 and 2000, was $2.1 million and $2.5 million, respectively. Total
advertising expense for the years ended December 31, 2001, 2000, and 1999 was
$12.2 million, $31.8 million, and $21.0 million, respectively.
Property and Equipment. Property and equipment (including equipment
acquired under capital leases) are stated at cost and are depreciated or
amortized primarily using straight-line methods over the estimated useful lives
of the assets, as follows:
Building and improvements ..................................... 30 years
Office furniture and equipment ................................ 7 years
Computer equipment ............................................ 3 years
Capitalized equipment leases .................................. 5 years
Intangibles. Intangible assets are stated at cost and are amortized using
the straight-line method over the estimated useful lives of the assets, as
follows:
Goodwill ...................................................... 7 to 20 years
Distribution networks ......................................... 2 years
Noncompete agreements ......................................... Term of agreements
Purchased data processing software ............................ 2 to 7 years
Database costs ................................................ 1 to 5 years
Core technology costs ......................................... 3 years
Customer base costs ........................................... 3 to 15 years
Tradename costs ............................................... 10 to 20 years
Perpetual software license agreement .......................... 10 years
Software development costs .................................... 1 to 5 years
Workforce costs ............................................... 5 to 8 years
45
Goodwill resulting from acquisitions of businesses and minority interests
after June 30, 2001, are not subject to amortization in accordance with the
requirements of Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets.
Software Capitalization. Until technological feasibility is established,
software development costs are expensed as incurred. After that time, direct
costs are capitalized and amortized equal to the greater of the ratio of current
revenues to the estimated total revenues for each product or the straight-line
method, generally over one year for software developed for external use and over
two to five years for software developed for internal use. Unamortized software
costs included in intangible assets at December 31, 2001 and 2000, were $5.8
million and $10.2 million, respectively. Amortization of capitalized costs
during the years ended December 31, 2001, 2000 and 1999, totaled approximately
$7.0 million, $10.6 million, and $5.1 million, respectively. During 2000, the
Company recorded an impairment of $0.2 million on the unamortized balance of
certain data warehousing project costs.
Database Development Costs. Costs to maintain and enhance the Company's
existing business and consumer databases are expensed as incurred. Costs to
develop new databases, which primarily represent direct external costs, are
capitalized with amortization beginning upon successful completion of the
compilation project. Database development costs are amortized straight-line over
the expected lives of the databases generally ranging from one to five years.
Unamortized database development costs included in intangible assets at December
31, 2001 and 2000, were $10 thousand and $73 thousand, respectively.
Amortization of capitalized costs during the years ended December 31, 2001,
2000, and 1999 totaled approximately $63 thousand, $151 thousand, and $796
thousand, respectively. During 2000, the Company recorded an impairment of $0.8
million on the unamortized balance of the Company's infoPix database.
Long-lived assets. All of the Company's long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future cash
flows is less than the carrying amount of the asset, an impairment loss is
recognized in operating results. The impairment loss is measured using
discounted cash flows or quoted market prices, when available. The Company also
periodically reevaluates the remaining useful lives of its long-lived assets
based on the original intended and expected future use or benefit to be derived
from the assets. Changes in estimated useful lives are reflected prospectively
by amortizing the remaining book value at the date of the change over the
adjusted remaining estimated useful life. During 2000, the Company recorded
impairments totaling $1.1 million for certain infoUSA.com leasehold
improvements, infoUSA.com capitalized public offering costs, and for certain
equipment related to the infoPix business photograph project.
Revenue Recognition. The Company's revenue is primarily generated from the
sale of its products and services and the licensing of its data to third
parties. Revenue from sales lead and directory products are recognized when the
product is shipped. Revenue for consumer products sold through retail
distribution channels are recognized when shipped, net of a reserve for product
returns. Database and data processing services are recognized and billed on a
time and materials basis as services are rendered. During 2000, the Company
changed its method of accounting for data licensing arrangements sold with
updates to record revenue on a straight-line basis over the license term. This
newly adopted method of accounting better reflects the service commitment
inherent in the Company's licensing agreements in light of the growing
proportion of such licensing revenue from long-term and continuous access
agreements. The cumulative effect of the change in method for periods prior to
January 1, 2000 of $10.3 million (net of income taxes of $3.5 million), or $.21
per share, is shown as the cumulative effect of a change in accounting principle
in the accompanying 2000 Consolidated Statement of Operations. The change to a
more preferable revenue recognition method increased fiscal year 2000 revenues
by $609 thousand. The quarterly supplemental data for 2000 has been restated to
recognize revenues according to the newly adopted method as of January 1, 2000.
Assuming the above described revenue recognition policy had been implemented on
January 1, 1999, pro forma net sales and pro forma net income from continuing
operations in 1999 would have been decreased by $4.4 million and $1.9 million,
respectively.
Reserves are established for estimated returns and uncollectible amounts
on sales of product where the customer has the right of return. Royalty revenue
is recognized at the time it is earned under the Company's license agreements.
Advertising revenue is typically derived from advertising agreements in which
the Company receives a fixed fee or a fee based on a per impression or click
through basis and is recognized as the Company fulfills the terms of the
agreement. Revenue from revenue-sharing agreements is recognized after the
transaction has occurred and in the period the obligation to pay is reported by
the product or service provider.
Change in Ownership Interest - Gains or losses from a change in ownership
of a consolidated subsidiary, or an unconsolidated affiliate are recognized in
the consolidated statements of operations in the period of change.
46
Stock-based compensation. The Company and its subsidiaries account for its
employee stock options using the intrinsic value method. When both the number of
shares that an individual employee is entitled to receive and the option price
are known at the grant date, total compensation cost for the Company's grant of
stock options to employees is measured at the grant date. Compensation cost is
recognized as expense over the periods in which the employee performs the
related services, which is generally presumed to be the vesting period.
Compensation cost for stock options and warrants granted to non-employees
and vendors is measured based upon the fair value of the stock option or warrant
granted. When the performance commitment of the non-employee or vendor is not
complete as of the grant date, the Company estimates the total compensation cost
using a fair value method at the end of each period. Generally, the final
measurement of compensation cost occurs when the non-employee or vendors related
performance commitment is complete. Changes, either increases or decreases, in
the estimated fair value of the options between the date of the grant and the
final vesting of the options result in a change in the measure of compensation
cost for the stock options or warrants. Compensation cost is recognized as
expense over the periods in which the benefit is received.
Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Valuation allowances, if any, are established when necessary to
reduce deferred tax assets to the amount that is more likely than not to be
realized.
Derivative Instruments and Hedging Activities. In June 1998 the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Certain
Hedging Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activity, an Amendment of
SFAS 133." SFAS No. 133 and SFAS No. 138 require that all derivative instruments
be recorded on the balance sheet at their respective fair values. SFAS No. 133
and SFAS No. 138 are effective for all fiscal quarters of all fiscal years
beginning after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No. 138
on January 1, 2001. In accordance with the transition provisions of SFAS 133,
the Company recorded a net-of-tax cumulative-effect-type adjustment of $0.3
million in accumulated other comprehensive income to recognize at fair value the
Company's interest rate swap which was designated as a cash-flow hedging
instrument.
All derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, the Company designates the
derivative as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment ("fair value" hedge) or a hedge
of a forecasted transaction or the variability of cash flows to be received or
paid related to a recognized asset or liability ("cash flow" hedge). The Company
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge or
that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively.
Changes in the fair value of a derivative that is highly effective and
that is designated and qualifies as a cash-flow hedge are recorded in other
comprehensive income, until earnings are affected by the variability in cash
flows of the designated hedged item.
Earnings (Loss) Per Share. Basic earnings per share are based on the
weighted average number of common shares outstanding, including contingently
issuable shares. Diluted earnings per share are based on the weighted number of
common shares outstanding, including contingently issuable shares, plus dilutive
potential common shares outstanding (representing outstanding stock options).
The following data show the amounts used in computing earnings per share
and the effect on the weighted average number of shares of dilutive potential
common stock. In 2001, the exercise price of all outstanding options were higher
than the average market price of the underlying common stock and were therefore
not dilutive. Options on 242 thousand shares of common stock were not included
in computing diluted earnings per share for 2000 because their effects were
antidilutive, due to the Company's net loss in 2000.
47
FOR THE YEARS ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS)
Weighted average number of shares outstanding
used in basic EPS .................................. 50,651 50,304 48,470
Net additional common equivalent shares
outstanding after assumed exercise of stock
options ............................................ -- -- 143
------ ------ ------
Weighted average number of shares outstanding
used in diluted EPS ................................ 50,651 50,304 48,613
====== ====== ======
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New Accounting Standards. In June 2001, the Financial Accounting Standards
Board issued SFAS No. 141, "Business Combinations," which requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method.
In June 2001, the Financial Accounting Standards Board also issued SFAS
No. 142, "Goodwill and Other Intangible Assets". This statement:
- replaces the requirement to amortize goodwill and certain other
intangible assets with an annual impairment test, and
- requires an evaluation of the useful lives of intangible assets and
an impairment test for goodwill upon adoption.
Goodwill and intangible assets with indefinite lives that result from
acquisitions of businesses and minority interests after June 30, 2001, are not
subject to amortization under the provisions of SFAS 142. The provisions of this
statement are fully effective for fiscal years beginning after December 15,
2001, so the Company must adopt the provisions of SFAS 142 in the financial
statements for the quarter ended March 31, 2002. Beginning January 1, 2002, the
Company ceased the amortization of goodwill, the result of which is no further
expense for the amortization of these intangible assets in 2002 and future
years. Goodwill resulting from transactions occurring after June 30, 2001, is
also not amortizable during 2001. Amortization expense related to goodwill and
other intangible assets with indefinite lives and not amortizable after January
1, 2002, were $16.5 million, $16.3 million and $10.9 million, in 2001, 2000 and
1999, respectively. The Company has not yet completed the evaluation whether or
not it has any impairment charges in our consolidated financial statements that
may result from the initial impairment test that is required upon adoption of
SFAS 142. The Company expects to complete this initial impairment test within
the first six months of 2002. We currently do not expect to record an impairment
charge upon completion of the initial impairment review. However, there can be
no assurance that at the time the review is completed a material impairment
charge will not be recorded.
In October 2001, the Financial Accounting Standards Board also issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The
provisions of this statement are effective for fiscal years beginning after
December 15, 2001. Therefore, the Company is required to adopt the provisions of
SFAS No. 144 in its financial statements for the quarter ended March 31, 2002.
Management does not expect the adoption of this statement to significantly
impact the consolidated financial statements.
3. ACQUISITIONS
Effective October 1, 2001, the Company purchased the business of Polk City
Directories through an acquisition of assets from Equifax. Polk City Directories
provides printed reference guides listing business and residential information,
that will complement and expand our state and national directory product
offerings. Total consideration for the acquisition was $6.0 million in cash
(excluding any acquisition-related costs). The acquisition has been accounted
for under the purchase method of accounting, and accordingly, the operating
results of Polk City Directories have been included in the Company's financial
statements since the date of acquisition. The Company has recorded goodwill of
$4.4 million, in its preliminary purchase price allocation of the net assets
acquired. The purchase price allocation is subject to adjustment in 2002 when
the opening balance sheet is finalized. The goodwill resulting from this
acquisition has not been amortized in the 2001 financial statements, in
accordance with the requirements of SFAS 142.
48
Effective August 30, 2001, the Company purchased the minority interest of
its subsidiary, infoUSA.com, through the acquisition of assets. Total
consideration for the acquisition was $24.7 million, comprised of $15.7 million
of restricted cash, $3.0 million cash provided by operations and a $6.0 million
subordinated note, bearing 6% interest and payable in two years. Intangible
assets recorded as a result of the purchase include goodwill of $19.6 million.
The goodwill resulting from this acquisition has not been amortized in the 2001
financial statements, in accordance with the requirements of SFAS 142.
Effective May 2000, the Company acquired certain assets and assumed
certain liabilities of Getko Direct Response of Canada ("Getko"), a Cendant
Corporation company. Getko provides Canadian list and data processing services
for the direct marketing industry. Total consideration for the acquisition was
$1.6 million. The acquisition has been accounted for under the purchase method
of accounting, and accordingly, the operating results of Getko have been
included in the Company's financial statements since the date of acquisition.
Intangibles recorded as part of the purchase included goodwill of $1.5 million,
which is being amortized over 15 years.
Effective May 2000, the Company acquired certain assets and assumed
certain liabilities of idEXEC, a Thomson Financial company. idEXEC provides a
worldwide database of 60,000 large businesses and 400,000 executives for
business-to-business prospecting, marketing, and research applications. Total
consideration for the acquisition was $7.3 million, consisting of $5.1 million
in cash, and 391,000 shares of common stock at a recorded value of $2.2 million.
The Company determined the fair value of its shares issued for the purchase
using the average share price for the Company's common stock prior to and
subsequent to the announcement date of May 2, 2000. The acquisition has been
accounted for under the purchase method of accounting, and accordingly, the
operating results of idEXEC have been included in the Company's financial
statements since the date of acquisition. Intangibles recorded as part of the
purchase included goodwill of $8.4 million, which is being amortized over 15
years.
Effective March 2000, the Company acquired all issued and outstanding
common stock of American Church Lists, a national proprietary database of
religious institutions, organizations and affiliations. Total consideration for
the acquisition was $2.0 million. The acquisition has been accounted for under
the purchase method of accounting, and accordingly, the operating results of
American Church Lists have been included in the Company's financial statements
since the date of acquisition. Intangibles recorded as part of the purchase
included goodwill of $1.9 million, which is being amortized over 15 years.
Effective July 1999, the Company acquired all issued and outstanding
common stock of Donnelley Marketing, Inc. (Donnelley), a division of First Data
Corporation. Donnelley is a national consumer database and database marketing
company. Total consideration for the acquisition was $200.0 million in cash,
funded using a combination of existing cash and borrowings under new senior
secured credit facilities. The acquisition has been accounted for under the
purchase method of accounting, and accordingly, the operating results of
Donnelley have been included in the Company's financial statements since the
date of acquisition. Goodwill and other intangibles recorded included goodwill
of $144.5 million, non-compete agreements of $6.1 million, trade names of $7.7
million, and purchased data processing software of $64.1 million, which are
being amortized over lives of 20 years, 5 years, 20 years, and 7 years,
respectively. In addition, as part of the purchase of Donnelley, the Company
recorded accruals related to acquisition costs and facility closure costs
totaling $2.3 million. The Company subsequently paid all $2.3 million of these
costs. The amount of intangibles recorded by the Company exceeded the purchase
price due to the Company recording deferred taxes established for certain
intangibles not currently deductible for tax purposes and an accrual related to
costs associated with the integration of acquired operations into existing
operations.
Operating results for each of these acquisitions are included in the
accompanying consolidated statements of operations from the respective
acquisition dates. Assuming the above described companies had been acquired on
January 1, 2000, included in the accompanying consolidated statements of
operations, unaudited pro forma consolidated net sales, net income (loss) and
net income (loss) per share would have been as follows:
FOR THE YEARS ENDED
---------------------------------
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Net sales ......................................... $318,187 $348,587
Net income (loss) from continuing
operations ...................................... $ 2,032 $(31,652)
Basic earnings (loss) per share ................... $ 0.04 $ (0.63)
Diluted earnings (loss) per share ................. $ 0.04 $ (0.63)
49
The pro forma information provided above does not purport to be indicative
of the results of operations that would actually have resulted if the
acquisitions were made as of those dates or of results which may occur in the
future. Pro forma net income includes adjustments for amortization of intangible
assets and income taxes.
4. MARKETABLE SECURITIES
At December 31, 2001 and 2000, marketable securities available for-sale
consist of common stock and mutual funds, which the Company believes cost
approximates fair market value. For the years ended December 31, 2001 and 2000,
there were no proceeds or realized gains (losses) from the sale of marketable
securities. Proceeds from sales of marketable securities were $32.1 million,
while gross realized gains totaled $13.1 million and realized losses totaled
$0.2 million, for the year ended December 31, 1999.
5. COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) were as
follows:
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS)
Other comprehensive income (loss):
Unrealized gain (loss) from investments:
Unrealized gains (losses) ............................ $ (268) $ (85) $ (5,345)
Related tax expense .................................. 102 32 2,031
--------- --------- ---------
Net .............................................. (166) (53) (3,314)
--------- --------- ---------
Interest rate swap agreement:
Gains (losses) ....................................... $ (850) -- --
Related tax expense .................................. 323 -- --
--------- --------- ---------
Net .............................................. (527) -- --
--------- --------- ---------
Foreign currency translation adjustments ............. (668) (668) (641)
--------- --------- ---------
Accumulated other comprehensive income (loss) ........ $ (1,361) $ (721) $ (3,955)
========= ========= =========
6. PROPERTY AND EQUIPMENT
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
Land and improvements ................................ $ 3,225 $ 3,334
Buildings and improvements ........................... 30,427 26,571
Furniture and equipment .............................. 61,666 58,028
Capitalized equipment leases ......................... 15,592 15,080
-------- --------
110,909 103,013
Less accumulated depreciation and amortization:
Owned property ..................................... 53,101 44,311
Capitalized equipment leases ....................... 6,168 3,993
-------- --------
Property and equipment, net ................ $ 51,640 $ 54,709
======== ========
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
Goodwill.............................. $ 264,494 $ 233,144
Noncompete agreements................. 13,534 13,534
Core technology....................... 4,800 4,800
Customer base......................... 8,372 8,372
Trade names........................... 15,802 15,802
Purchased data processing software.... 73,478 73,478
Acquired database costs............... 19,000 19,000
Work force costs...................... 1,338 1,338
Perpetual software license agreement.. 8,000 8,000
Software development costs............ 5,801 10,152
Database costs........................ 10 73
Deferred financing costs.............. 10,894 10,557
---------- ----------
425,523 398,250
Less accumulated amortization......... 140,848 102,190
---------- ----------
$ 284,675 $ 296,060
========== ==========
50
8. FINANCING ARRANGEMENTS
Long-term debt consists of the following:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
9 1/2% Senior Subordinated Notes ..................................... $ 106,000 $ 106,000
Senior Secured Credit Facilities -- Term A Loan ...................... 30,583 52,314
Senior Secured Credit Facilities -- Term B Loan ...................... 68,488 84,455
Senior Secured Credit Facilities -- Revolving Credit Facility ........ -- --
Mortgage note, collateralized by deed of trust. Note bears a
variable interest rate of Libor plus 2.75%. Principal is due
October 2006. Interest is payable monthly .......................... 8,100 8,940
Mortgage note, collateralized by deed of trust. Note bears a
variable interest rate of Libor plus 2.50%. Principal is due
August 2006. Interest is payable monthly ........................... 2,359 --
Uncollateralized note payable for purchase of infoUSA.com minority
interest. Note bears a fixed interest rate of 6.0%. Principal is due
August 2003. Interest is payable monthly ........................... 6,000 --
Uncollateralized note payable for leasehold improvements. Note bears a
fixed interest rate of 5.0%. Principal is due September 2003.
Interest is payable quarterly ...................................... 433 433
Capital lease obligations (See Note 16) .............................. 3,707 6,510
--------- ---------
225,670 258,652
Less current portion ................................................. 19,770 17,779
--------- ---------
Long-term debt ....................................................... $ 205,900 $ 240,873
========= =========
Future maturities by calendar year of long-term debt as of December 31,
2001 are as follows (in thousands):
2002......... $ 19,770
2003......... $ 26,307
2004......... $ 18,970
2005......... $ 42,937
2006......... $ 687
Thereafter... $116,998
On March 6, 2002, the Company refinanced the Senior Secured Credit
facility administered by Deutsche Bank with Banc of America Securities, LLC.
Under the refinanced Senior Secured Credit facility, the payment terms of the
Term Loans A and B were changed such that the total debt will be due in March
2006. Available borrowings under the new Senior Secured Credit facility are
$47.0 million for Term A with a maturity of 3 years, $45.0 million for Term B
with a maturity of 4 years and $18.0 million under a revolving credit facility
with a maturity of 3 years. The new payment terms are reflected in the
accompanying consolidated balance sheet at December 31, 2001 and in the
preceding summary of long term debt. As of March 6, 2002, the Company had no
borrowings under the new Revolving Credit Facility, with the exception of two
outstanding letters of credit totaling $6.3 million reducing the availability
under the Revolving Credit Facility to $11.7 million. In 2002, the Company
wrote-off deferred financing costs of $3.0 million in connection with the
refinancing of these Senior Secured Credit facilities.
On June 18, 1998, the Company completed a private placement of 9 1/2%
Senior Subordinated Notes due June 15, 2008 with an aggregate principal balance
of $106.0 million. The Notes are subject to various covenants, including among
other things, limiting additional indebtedness and the ability to pay dividends.
In January 1999, the Company exchanged registered 9 1/2% Senior Subordinated
Notes (the "Notes") for the unregistered notes pursuant to a Registration
Statement on Form S-4 declared effective by the Securities & Exchange
Commission. Interest on the Notes will accrue from the original issuance date of
the unregistered notes and will be payable semi-annually in arrears on June 15
and December 15 of each year, commencing on December 15, 1998, at the rate of 9
1/2% per annum. The Notes are redeemable, in whole or in part, at the option of
the Company, on or after June 15, 2003, at designated redemption prices outlined
in the Indenture governing the Notes, plus any accrued interest to the date of
redemption. In the event of a change in control, each holder of Notes will have
the right to require the Company to repurchase such holder's Notes at a price
equal to 101% of the principal amount thereof, plus any accrued interest to the
repurchase date.
During 1999, the Company negotiated a $195.0 million Senior Debt Credit
Facility ("Credit Facility") borrowing arrangement with Deutsche Bank, comprised
of: Term Loan A Facility in the amount of $65.0 million which provides for
grid-based interest pricing based upon the Company's consolidated leverage ratio
and ranges from base rate + 1.75% to 2.25% for base rate loans and from LIBOR +
2.75% to 3.25% for LIBOR loans with a maturity of 5 years; a Term Loan B
Facility in the amount of $100.0 million which provides interest at base rate +
3.00% for base rate loans
51
and LIBOR + 4.00% for LIBOR loans with a maturity of 7 years; and a Revolving
Credit Facility in the amount of $30.0 million which provides the same interest
pricing as the Term Loan A Facility with a maturity of 5 years. Substantially
all assets of the Company are pledged as security under the terms of the Credit
Facility. As of December 31, 2001, the Term Loan A Facility had balance of $30.6
million, with an interest rate of 5.25% and a Term Loan B balance of $68.5
million, with an interest rate of 6.10%.
As of December 31, 2001, the Company had no borrowings under the Revolving
Credit Facility, with the exception of two outstanding letters of credit
totaling $6.3 million reducing the availability under the Revolving Credit
Facility to $18.7 million. Additionally, the Company is required to pay a
commitment fee of 0.5% on the average unused amount of the Revolving Credit
Facility.
Interest rate swap agreements are used by the Company to reduce the
potential impact of increases in interest rates on floating-rate long term debt
(See Note 15).
The Company is subject to certain financial covenants in the Credit
Facility, including minimum consolidated interest coverage ratio, maximum
consolidated leverage ratio and minimum consolidated EBITDA. Management believes
the Company is in compliance with or has obtained waivers for all restrictive
covenants of the Company's various debt facilities.
9. INCOME TAXES
The provision for income taxes before extraordinary items consists of the
following:
FOR THE YEARS ENDED
----------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS)
Current:
Federal .............. $ 10,441 $ 4,843 $ 14,401
State ................ 900 415 1,271
-------- -------- --------
11,341 5,258 15,672
-------- -------- --------
Deferred:
Federal .............. 28 (3,627) (2,308)
State ................ 2 (311) (220)
-------- -------- --------
30 (3,938) (2,528)
-------- -------- --------
$ 11,371 $ 1,320 $ 13,144
======== ======== ========
The effective income tax rate for continuing operations varied from the
Federal statutory rate as follows:
FOR THE YEARS ENDED
-------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS)
Expected Federal income taxes at statutory rate
of 35% ............................................ $ 5,724 $ (5,560) $ 12,671
State taxes, net of Federal effects ................. 586 68 683
Amortization of nondeductible intangibles ........... 4,577 4,595 2,619
Gain on of subsidiary common stock .................. -- (5,122) (3,110)
Change in valuation allowance ....................... -- 6,805 --
Other ............................................... 484 534 281
-------- -------- --------
$ 11,371 $ 1,320 $ 13,144
======== ======== ========
52
The components of the net deferred tax assets (liabilities) were as
follows:
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Unrealized losses ............................ $ 425 $ 32
Accounts receivable .......................... 1,123 --
Accrued vacation ............................. 1,158 1,066
Accrued expenses ............................. -- 1,440
Net operating losses ......................... -- 6,805
--------- ---------
2,706 9,343
Less valuation allowance ..................... -- (6,805)
--------- ---------
2,706 2,538
--------- ---------
Deferred tax liabilities:
Intangible assets ............................ (29,428) (30,074)
Accounts receivable .......................... -- (293)
Depreciation ................................. (1,464) (1,133)
Deferred marketing costs ..................... (782) (938)
Prepaid expenses and other assets ............ (2,312) (1,743)
--------- ---------
(33,986) (34,181)
--------- ---------
Net deferred tax liabilities ......... $ (31,280) $ (31,643)
========= =========
Loss on discontinued operations and cumulative effect of accounting change
are presented net of income tax benefits of $6.0 million for the year ended
December 31, 2000.
The Company had a valuation allowance for deferred tax assets at December
31, 2000 of $6,805 and a change in the valuation allowance of $6,805 for the
year ended December 31, 2000. The Company had no valuation allowance at December
31, 2001 or 1999. The entire valuation allowance related to net operating losses
generated by a majority owned subsidiary which was not included in the Company's
consolidated group for tax purposes. As discussed in Note 3, the Company
eliminated the minority interest of this subsidiary during 2001. The transaction
resulted in the net operating losses and related valuation allowance of the
subsidiary being acquired by the minority shareholders. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, carryback
opportunities, and tax planning strategies in making this assessment. In order
to fully realize the deferred tax asset, the Company's subsidiary will need to
generate future taxable income prior to the expiration of the net operating loss
carryforwards. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes a valuation allowance of $6,805 as of December
31, 2000 and an increase in the valuation allowance of $6,805 for the year ended
December 31, 2000 is appropriate.
10. STOCK OPTION PLANS
As of December 31, 2001, a total of 10.0 million and 5.0 million shares of
the Company's Common Stock have been reserved for issuance to officers, key
employees and non-employee directors under the Company's 1992 Stock Option Plan
and the Company's 1997 Common Stock Option Plan, respectively. Options are
generally granted at the stock's fair market value on the date of grant, vest
generally over a four or five year period and expire five or six years,
respectively, from date of grant. Options issued to shareholders holding 10% or
more of the Company's stock have generally been issued at 110% of the stock's
fair market value on the date of grant and vest over periods ranging from five
to six years with early vesting if certain financial goals are met. Certain
options issued to directors at the stock's fair market value vested immediately
and expire five years from grant date.
The Company's partially-owned subsidiary, infoUSA.com, sponsored an Equity
Incentive Plan in which shares of common stock were reserved for issuance to
officers, directors, employees and consultants of the subsidiary. Options
granted during 2000 totaled 3.3 million options, with a weighted average
exercise price of $1.61. No options were granted during 2001. The Company has
recorded a non-cash charge of $0.4 million and $3.1 million during 2001 and
2000, respectively, related to the issuance of stock options and warrants of
infoUSA.com common stock. The non-cash charge was calculated based on an
estimated fair value for the common stock of the subsidiary of $.96 per share as
of December 31, 2000. The charge was recorded as an addition to paid-in-capital.
Options to purchase common stock of the infoUSA.com subsidiary were effectively
retired with the Company's acquisition of the minority interest during 2001. The
Company reduced additional paid-in-capital and unamortized stock compensation by
$4.2 million
53
in connection with this transaction.
In October 2001, the company implemented a stock option program for
certain executive employees whereby fully vested options to purchase 320,000
shares of common stock were issued at fair value on the grant date. The options
were immediately exercised by the employees and, in lieu of cash for the
exercise price, the Company accepted full recourse notes receivable of $1.2
million from the employees for the exercise price. The notes receivable bear
interest at 5%. The grant of stock options has been accounted for using fixed
plan accounting under APB 25 because, in management's view, the interest rates
on the notes are at market rates, the employees have sufficient personal assets
to back the notes and the Company has the intent to exercise its recourse rights
against the employee's personal assets in the event of a default.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standard (SFAS) No. 123 "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plan. Had compensation cost for the Company's stock option plan
been determined based on the fair value at the grant date, the Company's net
income (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
FOR THE YEARS ENDED
-----------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) -- as reported...................... $ 4,964 $(31,633) $ 23,186
Net income (loss) -- pro forma........................ $ 2,902 $(34,220) $ 20,176
Basic earnings (loss) per share -- as reported........ $ 0.10 $ (0.63) $ 0.48
Basic earnings (loss) per share -- pro forma.......... $ 0.06 $ (0.68) $ 0.42
Diluted earnings (loss) per share -- as reported...... $ 0.10 $ (0.63) $ 0.48
Diluted earnings (loss) per share -- pro forma........ $ 0.06 $ (0.68) $ 0.42
The above pro forma results are not likely to be representative of the
effects on reported net income for future years since options vest over several
years and additional awards generally are made each year.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 2001, 2000 and 1999: expected
volatility of 12.34% (2001), 10.26% (2000) and 9.51% (1999); risk free interest
rate based on the U.S. Treasury strip yield at the date of grant; and expected
lives of 4 to 6 years.
The following information relates to options to purchase the Company's
common stock:
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
---------------- ---------------- ----------------
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding beginning of
period ........................ 7,129,381 $ 8.66 7,921,134 $ 8.74 7,094,036 $ 9.33
Granted ......................... 2,268,000 7.38 852,100 6.85 2,697,335 6.57
Exercised ....................... (320,000) 4.00 (409,224) 10.32 (1,322,298) 6.84
Forfeited/expired ............... (2,529,979) 8.41 (1,234,629) 7.97 (547,939) 10.57
---------- ------ ---------- ------ ---------- ------
Outstanding end of period ....... 6,547,402 $ 8.54 7,129,381 $ 8.66 7,921,134 $ 8.74
========== ====== ========== ====== ========== ======
Options exercisable at end of
Period ........................ 3,748,173 $ 9.13 4,389,852 $ 9.03 3,453,689 $ 9.13
========== ====== ========== ====== ========== ======
Shares available for options
that may be granted ........... 4,306,948 1,146,395 1,139,938
========== ========== ==========
Weighted-average grant date
fair value of options,
granted during the period
-- exercise price equals
stock price at grant .......... $ -- $ -- $ 1.66
====== ====== ======
54
The following table summarizes information about stock options outstanding
at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- ---------
$4.28 to $5.70.............. 208,000 3.1 years $ 5.08 97,784 $ 5.08
$5.70 to $7.13.............. 2,485,964 3.0 years 6.56 1,203,743 6.39
$7.13 to $8.55.............. 1,881,937 3.1 years 8.50 649,434 8.47
$8.55 to $9.98.............. 4,000 0.2 years 9.38 4,000 9.38
$9.98 to $11.40............. 1,345,501 0.4 years 10.72 1,234,807 10.69
$11.40 to $12.83............ 160,000 1.3 years 12.04 145,410 12.02
$12.83 to $14.25............ 462,000 1.2 years 13.37 412,995 13.41
--------- --------- -------- --------- --------
$4.28 to $14.25............. 6,547,402 2.4 years $ 8.54 3,748,173 $ 9.13
========= ========= ======== ========= ========
11. SAVINGS PLAN
Employees who meet certain eligibility requirements can participate in the
Company's 401(k) Savings and Investment Plan. Under the plan, the Company may,
at its discretion, match a percentage of the employee contributions. The Company
recorded administration expenses for matching contributions totaling $1.8
million, $2.4 million and $1.1 million in the years ended December 31, 2001,
2000 and 1999, respectively.
During 1999, the Company began making matching contributions to its 401(k)
Plan using treasury stock. Contribution expense is measured as the fair value of
the Company's common stock on the date of the grant. During 2001, the Company
contributed 40,161 shares at a recorded value of $120 thousand. During 2000, the
Company contributed 335,999 shares at a recorded value of $2.0 million. During
1999, the Company contributed 78,510 shares at a recorded value of $494
thousand. In 2000, the Company made a change allowing the matching contributions
to be made in either cash or stock.
12. RELATED PARTY TRANSACTIONS
Annapurna Corporation, which is 100% owned by Mr. Gupta, who is the
Chairman and Chief Executive Officer of the Company, has fractional ownership in
certain aircraft with NetJets. Annapurna Corporation bills the Company when the
Company's employees and officers use the aircraft. The Company paid a total of
$2.1 million, $2.0 million and $3.5 million in 2001, 2000 and 1999,
respectively, to Annapurna Corporation for usage of the aircraft and other
travel and entertainment expenses. The Company also paid Annapurna Corporation
$49 thousand in 2001 for costs related to Polk City Directory acquisition. These
costs were capitalized.
The Company paid Everest Investment Management $120 thousand in 2001 for
rented office space in a building adjacent to the Company's facility and $500
thousand in 1999 for investment advisory fees on certain transactions. Everest
Investment Management is 40% owned by Mr. Gupta.
Mr. Gupta also paid for Company expenses totaling $129 thousand in 2001and
$140 thousand in 2000 related to entertainment and investment management
services. The 2000 expenses were recorded as a contribution of capital. During
1999, Mr. Gupta received a loan for $2.6 million, which was repaid with interest
shortly after the borrowing.
In 2001, the Company invested $1 million in the Everest(3) Fund, a blend
of three index funds (S&P 500, Dow Jones and Nasdaq 100). Everest Funds
Management LLC manages the fund. Mr. Gupta, who is the Chairman and Chief
Executive Officer of the Company, owns 100% of the voting stock in Everest Funds
Management LLC.
During 2001, the Company acquired a building adjacent to the Company's facility
by assuming a mortgage from Everest Investment Management, which is 40% owned by
Mr. Gupta. The purchase price for the building was $2.8 million.
55
13. SUPPLEMENTAL CASH FLOW INFORMATION
The Company made certain acquisitions during 2001, 2000 and 1999 (See Note
3) and assumed liabilities as follows:
2001 2000 1999
-------- -------- ---------
(IN THOUSANDS)
Fair value of assets $ 30,894 $ 14,460 $ 247,201
Cash paid .................... (22,738) (8,751) (206,968)
Common stock issued .......... -- (2,248) --
-------- -------- ---------
Liabilities assumed .......... $ 8,156 $ 3,461 $ 40,233
======== ======== =========
The Company acquired computer equipment under capital lease obligations
totaling $512 thousand and $3.2 million, in the years ended December 31, 2001
and 2000, respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 2001 and 2000. The
fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts shown in the following table are included in the
consolidated balance sheets under the indicated captions.
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------ -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(AMOUNTS IN THOUSANDS)
Financial assets:
Cash and cash equivalents .... $ 4,382 $ 4,382 $ 21,693 $ 21,693
Marketable securities ....... 1,037 1,037 102 102
Other assets - nonmarketable
investment securities ..... 4,124 4,124 3,000 3,000
Financial liabilities:
Long-term debt .............. 225,670 222,630 258,652 203,498
Derivatives:
Interest rate swaps ......... (2,252) (2,252) -- (522)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents. The carrying amounts approximate fair value
because of the short maturity of those instruments.
Marketable securities. The fair values of debt securities and equity
investments are based on quoted market prices at the reporting date for those or
similar investments.
Other assets, including investments in other companies. Investments in
companies not traded on organized exchanges are valued on the basis of
comparisons with similar companies whose shares are publicly traded. Values for
companies not publicly traded on organized exchanges may also be based on
analysis and review of valuations performed by others independent of the
Company.
Long-term debt. The 9 1/2% Senior Subordinated Notes due June 2008 are
valued based on quoted market prices at the reporting date. All other debt
obligations are valued at the discounted amount of future cash flows.
Interest rate swap. The fair value of the interest rate swap was
calculated based on discounted cash flows of the difference between the swap
rate and the estimated market rate for similar terms.
15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has an interest-rate related derivative instrument to manage
its exposure on its debt instruments. The Company does not enter into derivative
instruments for any purpose other than cash flow hedging purposes. That is, the
Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in
interest rates, the Company exposes itself to credit risk and market risk.
Credit risk is the failure of the counterparty to perform under the terms of the
56
derivative contract. When the fair value of a derivative contract is positive,
the counterparty owes the Company, which creates credit risk for the Company.
When the fair value of a derivative contract is negative, the Company owes the
counterparty and, therefore, it does not possess credit risk. The Company
minimizes the credit risk in derivative instruments by entering into
transactions with high-quality counterparties whose credit rating is higher than
Aa.
Market risk is the adverse effect on the value of a financial instrument
that results from a change in interest rates. The market risk associated with
interest-rate contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken.
The Company assesses interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging opportunities. The
Company maintains risk management control systems to monitor interest rate cash
flow risk attributable to the Company's outstanding debt obligations as well as
the Company's offsetting hedge positions. The risk management control systems
involve the use of analytical techniques, including cash flow sensitivity
analysis, to estimate the expected impact of changes in interest rates on the
Company's future cash flows.
The Company uses variable-rate debt to finance its operations. The debt
obligations expose the Company to variability in interest payments due to
changes in interest rates. Management believes it is prudent to limit the
variability of a portion of its interest payments. To meet this objective,
management has entered into an interest rate swap agreement to manage
fluctuations in cash flows resulting from interest rate risk. These swaps change
the variable-rate cash flow exposure on the debt obligations to fixed- cash
flows. Under the terms of the interest rate swaps, the Company receives variable
interest rate payments and makes fixed interest rate payments, thereby creating
the equivalent of fixed-rate debt.
Changes in the fair value of interest rate swaps designated as hedging
instruments that effectively offset the variability of cash flows associated
with variable-rate, long-term debt obligations are reported in Accumulated Other
Comprehensive Income. These amounts subsequently are reclassified into interest
expense as a yield adjustment of the hedged debt obligation in the same period
in which the related interest affects earnings.
Interest expense for the year ended December 31, 2001 includes $0.6
million of net losses representing cash flow hedge ineffectiveness arising from
differences between the critical terms of the interest rate swap and the hedged
debt obligation when it affects earnings.
As of December 31, 2001, $0.5 million of deferred losses on derivative
instruments accumulated in other comprehensive income are expected to be
reclassified to earnings during the next 12 months. Transactions and events
expected to occur over the next twelve months that will necessitate
reclassifying these derivative gains to earnings include the repricing of
variable-rate debt.
16. COMMITMENTS AND CONTINGENCIES
Under the terms of its capital lease agreements, the Company is required
to pay ownership costs, including taxes, licenses and maintenance. The Company
also leases office space under operating leases expiring at various dates
through April 2011. Certain of these leases contain renewal options. Rent
expense on operating lease agreements was $5.2 million, $6.5 million, and $4.6
million in the years ended December 31, 2001, 2000 and 1999, respectively.
Following is a schedule of the future minimum lease payments as of
December 31, 2001:
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
2002....................................... $ 2,882 $ 6,369
2003....................................... 1,173 5,242
2004....................................... 37 3,306
2005....................................... -- 2,282
2006....................................... -- 1,600
-------- ---------
Total future minimum lease payments........ 4,092 $ 18,799
=========
Less amounts representing interest......... 385
--------
Present value of net minimum lease payments $ 3,707
========
The Company and its subsidiaries are involved in other legal proceedings,
claims and litigation arising in the ordinary course of business. Management
believes that any resulting liability should not materially affect the Company's
financial position, results of operations, or cash flows.
57
17. ACQUISITION COSTS, LITIGATION SETTLEMENT CHARGES, ASSET IMPAIRMENT AND
RESTRUCTURING CHARGES
During 2001, the Company recorded acquisition costs totaling $0.5 million,
representing general and administration costs incurred to integrate the Polk
City Directories acquisition. These costs were not directly related to the
acquisition of Polk City Directories and therefore could not be capitalized as
part of the purchase price.
During 2001, the Company recorded restructuring charges of $4.9 million
due to a lease termination agreement and charges related to workforce
reductions. On July 30, 2001, infoUSA.com, a subsidiary of the Company,
negotiated a lease termination agreement for the abandoned Foster City,
California facility, and paid $4.7 million to satisfy the remaining eight year
term of the lease agreement. As a result, the Company recorded additional
charges of $2.8 million for costs of the lease settlement not previously
recorded. The Company also recorded $2.1 million for workforce reduction charges
that included involuntary employee separation costs for approximately 265
employees discharged during 2001, in administration, sales support and marketing
functions.
During 2001, the Company settled legal issues totaling $1.1 million in
connection with arbitration of two contractual disputes.
During 2000, the Company recorded acquisition costs totaling $2.3 million.
The Company recorded charges of $0.5 million related to the Company's
acquisition of American Church Lists, idEXEC and Getko (see Note 3). These
charges represent general and administration costs incurred to integrate these
acquired operations into the Company's existing operations. These costs were not
directly related to the acquisition of these companies, and therefore could not
be capitalized as part of the purchase price. Additionally, the Company recorded
charges of $1.8 million associated with the Company's unsuccessful bid to
acquire the consumer database division of R.L. Polk.
During 2000, the Company recorded restructuring charges totaling $5.8
million as a part of the Company's overall strategy to reduce costs and continue
commitment to its core businesses. The commitment to its core businesses program
included a reduction in the planned investment in the Company's Internet
businesses and a reduction in total headcount from 2,200 to 1,841. The Company
recorded a $3.7 million lease buy-out accrual for abandoned space at the Foster
City, California facility and $2.1 million for workforce reduction accruals. The
workforce reduction charges included involuntary employee separation costs for
approximately 350 employees that included charges of $0.8 million for employees
in the Company's Internet businesses, $0.7 million for employees of the large
business segment, $0.4 million for employees of the small business segment and
$0.2 for administrative employees. As of December 31, 2000, employees received
cash severance payments totaling $0.3 million during 2000 with $1.8 million
deferred and paid in 2001. At December 31, 2000, these deferred payments were
classified in the accompanying Consolidated Balance Sheets as accrued expenses.
During 2000, as a result of the Company's strategy to increase the
commitment to the core businesses and the reduction in the investment to the
Company's Internet businesses, the Company recorded asset impairment charges
totaling $2.1 million. The impairment charges included $0.2 million (see Note 2)
of capitalized software costs, $0.8 million (see Note 2) of capitalized database
costs, and $1.1 million (see Note 2) for long-lived assets including photography
equipment, leasehold improvements and capitalized public offering costs.
As part of the acquisition of Donnelley Marketing in July 1999 (See Note
3), the Company recorded acquisition costs of $4.2 million, which included
consulting costs, management bonuses, direct travel and entertainment costs and
other direct integration-related charges.
During 1999, the Company recorded asset impairment charges totaling $5.6
million. As a direct result of the acquisition of Donnelley in July 1999 (See
Note 3) and the addition of the Donnelly consumer database file, the Company
recorded a write-down of $3.9 million (See Note 2) on the unamortized balance of
the Company's existing consumer database white pages file which was impaired due
to the addition of the more complete Donnelley consumer file. Additionally, the
Company transferred its data processing services function from Montvale, NJ to
an existing Company location in Greenwich, CT. As a direct result of this move
and the abandonment of certain leasehold improvements and in-process
construction projects, the Company recorded a write-down of $1.7 million (See
Note 2) on the remaining net book value of the impaired assets.
58
18. DISCONTINUED OPERATIONS
During December 2000, the Company shut down the operations of its
VideoYellowPages.com Internet unit and recorded a loss from discontinued
operations in the year ended December 31, 2000 of $4.2 million, net of income
tax benefit of $3.5 million. The loss is comprised of two components: 1) the
loss from operations of $3.4 million net of tax, for the full fiscal year, and
2) charges totaling $0.8 million net of tax, for assets to be disposed of or
abandoned by the Company related to the discontinued operation. For the year
ended December 31, 1999, the Company recorded a loss from discontinued
operations for VideoYellowPages.com of $1.5 million, net of income tax benefit
of $0.9 million. The Company began its operations of VideoYellowPages.com in
late 1998.
19. STOCK COMBINATION AND STOCKHOLDERS RIGHTS PLAN
On October 21, 1999, the Company received shareholder approval to combine
and reclassify its then outstanding Class A common stock and Class B common
stock into a single class of common stock. The combination had no effect on the
total number of shares outstanding, with each of the Company's Class A and Class
B shares converted on a one-for-one basis for the reclassified single class of
common stock. Each share of stock is entitled to a single vote. Accordingly, all
share information included in the accompanying consolidated financial statements
has been restated to reflect the combination of Class A common stock and Class B
common stock into one class of common stock.
In connection with the combination and reclassification of its Class A
common stock and Class B common stock into a single class of common stock, the
Company also combined the stockholder rights plans with respect to its Class A
common stock and Class B common stock into a single plan. The rights are not
exercisable until ten days after a person or group announces the acquisition of
15% or more of the Company's voting stock or announces a tender offer for 15% or
more of the Company's outstanding common stock. Each right entitles the holder
to purchase common stock at one half the stock's market value. The rights are
redeemable at the Company's option for $0.001 per Right at any time on or prior
to public announcement that a person has acquired 15% or more of the Company's
voting stock. The rights are automatically attached to and trade with each share
of common stock.
20. GAIN ON ISSUANCE OF SUBSIDIARY STOCK
During 2000, infoUSA.com, a subsidiary of the Company, completed
additional private equity financing. The Company issued approximately 776
thousand shares of convertible preferred stock for approximately $2.7 million or
$3.42 per share. The Company also issued approximately 4.3 million shares of
convertible preferred stock for approximately $20.2 million or $4.66 per share.
As a result of the issuance of the convertible preferred stock of this
subsidiary, the Company ownership in infoUSA.com went from 83% at December 31,
1999 to approximately 67% at December 31, 2000, which resulted in a gain of
$14.6 million.
During 1999, infoUSA.com issued approximately 2.9 million shares of
convertible preferred stock for approximately $10 million or $3.42 per share. As
a result of the issuance of the convertible preferred stock, the Company's
ownership in infoUSA.com went from 100% to approximately 83% and a gain of $8.9
million was recorded. There were no deferred income taxes recorded due to the
gain being a non-taxable transaction.
21. SEGMENT INFORMATION
The Company currently manages existing operations utilizing financial
information accumulated and reported for two business segments.
The small business segment principally engages in the selling of sales
lead generation and consumer CD-Rom products to small to medium sized companies,
small office and home office businesses and individual consumers. This segment
includes the sale of content via the Internet.
The large business segment principally engages in the selling of data
processing services, licensed databases, database marketing solutions and list
brokerage and list management services to large companies. This segment includes
the licensing of databases for Internet directory assistance services. The small
business and large business segments reflect actual net sales, direct order
production, and identifiable direct sales and marketing costs related to their
operations. The remaining indirect costs are presented as a reconciling item in
Corporate Activities.
Corporate activities principally represent the information systems
technology, database compilation, database verification, and administrative
functions of the Company. Investment income (loss), interest expense, income
taxes,
59
amortization of intangibles, and depreciation expense are only recorded in
corporate activities. The Company does not allocate these costs to the two
business segments. The small business and large business segments reflect actual
net sales, direct order production, and identifiable direct sales and
marketing-related costs related to their operations. The Company records unusual
or non-recurring items including acquisition-related and restructuring charges
and provisions for litigation settlement in corporate activities to allow for
the analysis of the sales business segments excluding such unusual or
non-recurring charges.
The Company accounts for property and equipment on a consolidated basis.
The Company's property and equipment is shared by the Company's business
segments. Depreciation expense is recorded in corporate activities.
The Company has no intercompany sales or intercompany expense
transactions. Accordingly, there are no adjustments necessary to eliminate
amounts between the Company's segments.
The following tables summarize certain segment information:
FOR THE YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales ........................... $133,722 $155,016 $ -- $288,738
Non-cash stock compensation ......... -- -- 448 448
Acquisition costs ................... -- -- 493 493
Operating income (loss) ............. 60,447 81,149 (101,209) 40,385
Investment income ................... -- -- 953 953
Interest expense .................... -- -- 25,285 25,285
Income (loss) before income taxes and
discontinued operations ........... 60,447 81,149 (125,261) 16,335
FOR THE YEAR ENDED DECEMBER 31, 2000
---------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales ........................... $140,242 $165,426 $ -- $305,668
Non-cash stock compensation ......... -- -- 3,113 3,113
Impairment of assets ................ -- -- 2,135 2,135
Acquisition costs ................... -- -- 2,287 2,287
Restructuring charges ............... -- -- 5,800 5,800
Operating income (loss) ............. 32,397 75,527 (119,338) (11,414)
Investment income ................... -- -- 12,250 12,250
Interest expense .................... -- -- 26,651 26,651
Income (loss) before income taxes and
discontinued operations ........... 32,397 75,527 (123,811) (15,887)
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales ........................... $129,897 $135,956 $ -- $265,853
Impairment of assets ................ -- -- 5,599 5,599
Acquisition costs ................... -- -- 4,166 4,166
Operating income (loss) ............. 61,668 55,898 (83,490) 34,076
Investment income ................... -- -- 23,082 23,082
Interest expense .................... -- -- 18,579 18,579
Income (loss) before income taxes and
discontinued operations ........... 61,668 55,898 (78,987) 38,579
60
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Stockholders and Board of Directors
infoUSA Inc.:
Under date of January 18, 2002, except as to the third paragraph of Note 8 which
is March 6, 2002, we reported on the consolidated balance sheets of infoUSA Inc.
and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2000, which are included in the Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule in the Form 10-K. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, during 2000 the
Company changed its method of accounting for data licensing arrangements sold
with updates.
/s/ KPMG LLP
------------
KPMG LLP
Omaha, Nebraska
January 18, 2002
61
infoUSA INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-------------------------------------- ---------- ---------- ---------- ---------- ----------
Allowance for doubtful accounts
receivable: ........................ (A)
December 31, 1999 .................. $2,700 $1,839 $1,586* $3,543 $2,582
December 31, 2000 .................. $2,582 $2,371 $ 98* $2,860 $2,191
December 31, 2001 .................. $2,191 $2,878 $ -- $2,114 $2,955
Allowance for sales returns: ......... (B)
December 31, 1999 .................. $4,589 $6,506 $ -- $6,609 $4,486
December 31, 2000 .................. $4,486 $7,752 $ -- $9,705 $2,533
December 31, 2001 .................. $2,533 $3,133 $ -- $3,952 $1,714
----------
* Recorded as a result of acquisitions
(A) Charge-offs during the period indicated
(B) Returns processed during the period indicated
62
EXHIBIT INDEX
2.1 -- Asset Purchase Agreement between the Company and
Digital Directory Assistance, Inc. is incorporated
herein by reference to exhibits filed with the
Company's Current Report on Form 8-K dated
September 10, 1996.
2.2 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of County Data
Corporation is incorporated herein by reference to
Exhibits filed with Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31,
1996.
2.3 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of 3319971 Canada
Inc. is incorporated herein by reference to
Exhibits filed with Company's Annual Report on
Form 10-K for the Fiscal Year Ended December 31,
1996.
2.4 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of Marketing Data
Systems, Inc. is incorporated herein by reference
to exhibits filed with the Company's Registration
Statement on Form S-3 (File No. 333-36669) filed
October 23, 1997.
2.5 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of DBA Holdings, Inc.
is incorporated herein by reference to exhibits
filed with the Company's Current Report on Form
8-K dated February 28, 1997.
2.6 -- Agreement and Plan of Reorganization between the
Company and the Shareholders of Pro CD, Inc. is
incorporated herein by reference to exhibits filed
with the Company's Current Report on Form 8-K
Dated September 8, 1997.
2.7 -- Stock Purchase Agreement between the Company and
the Shareholders of Walter Karl, Inc. is
incorporated herein by reference to exhibits filed
with the Company's Current Report on Form 8-K
Dated February 24, 1998.
2.8 -- Asset Purchase Agreement between the Company and
JAMI Marketing Services, Inc. is incorporated
herein by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the
Fiscal Year ended December 31, 1998.
2.9 -- Agreement and Plan of Reorganization by and among
the Company, Hugo Acquisition Corporation, First
Data Corporation, First Data Information
Management Group, Inc., DM Holdings, Inc.,
Donnelley Marketing Holdings, Inc., and Donnelley
Marketing, Inc. is incorporated herein by
reference to exhibits filed with the Company's
Current Report on Form 8-K dated May 28, 1999.
3.1 -- Certificate of Incorporation, as amended through
October 22, 1999, is Incorporated herein by
reference to exhibits filed with Company's
Registration Statement on Form 8-A, as amended,
filed March 20, 2000.
3.2 -- Bylaws are incorporated herein by reference to the
Company's Registration Statement on Form S-1 (File
No. 33-42887), which became effective February 18,
1992.
3.3 -- Amended and Restated Certificate of Designation of
Participating Preferred Stock, filed in Delaware
on October 22,1999, is incorporated herein by
reference to exhibits filed with the Company's
Registration Statement on Form 8-A, as amended,
Filed March 20, 2000.
4.1 -- Preferred Share Rights Agreement is incorporated
herein by reference to the Company's Registration
Statement on Form 8-A, as amended, filed March 20,
2000.
4.2 -- Specimen of Common Stock Certificate is
Incorporated herein by reference to the exhibits
filed with the Company's Registration Statement on
Form 8-A, as amended), filed March 20, 2000.
4.4 -- Purchase Agreement dated June 12, 1998 between the
Company, BT Alex. Brown Incorporated, Goldman,
Sachs & Co. and Hambrecht & Quist LLC is
incorporated herein by reference to exhibits filed
with the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1998.
4.5 -- Indenture dated as of June 18, 1998 (the
"Indenture") by and between the Company and State
Street Bank and Trust Company of California, N.A.,
as Trustee is incorporated herein by reference to
Exhibits filed with the Company's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1998.
4.6 -- Exchange and Registration Rights Agreement dated
as of June 18, 1998 by and among the Company and
BT Alex. Brown Incorporated, Goldman, Sachs & Co.
and Hambrecht & Quist LLC as the Initial
Purchasers is incorporated herein by reference to
Exhibits filed with the Company's Quarterly Report
on Form 10-Q for the Quarter ended June 30, 1998.
4.7 -- Form of New 9 1/2% Senior Subordinated Note due
2008 is incorporated herein by reference to
exhibits filed with the Company's Registration
Statement on Form S-4 (File No. 333-61645), filed
December 15, 1999.
4.8 -- Credit Agreement by and among infoUSA, Inc.,
various Lenders (as defined therein) and Bank of
America, N.A. dated as of March 6, 2002, filed
herewith.
4.9 -- Pledge Agreement by and among infoUSA, Inc.,
various Lenders (as defined therein) and Bank of
America, N.A. dated as of March 6, 2002, filed
herewith.
4.10 -- Security Agreement by and among infoUSA, Inc.,
various Lenders (as defined therein) and Bank of
America, N.A. dated as of March 6, 2002, filed
herewith.
4.11 -- Subsidiaries Guaranty Agreement by and among
infoUSA, Inc., various Lenders (as defined
therein) and Bank of America, N.A. dated as of
March 6, 2002 , filed herewith.
10.1 -- Form of Indemnification Agreement with Officers
and Directors is incorporated herein by reference
to exhibits filed with the Company's Registration
Statement on Form S-1 (File No. 33-51352), filed
August 28, 1992.
10.2 -- 1992 Stock Option Plan as amended is incorporated
herein by reference to exhibits filed with the
Company's Registration Statement on Form S-8 (File
No. 333-37865), filed October 14, 1997.
10.3 -- 1997 Stock Option Plan as amended is incorporated
herein by reference to exhibits filed with the
Company's Registration Statement on Form S-8 (File
No. 333-82933), filed July 15, 1999.
10.4 -- Employment Agreement dated February 11, 1997
between the Company and Allen F. Ambrosino,
incorporated herein by reference to exhibits filed
with the Company's Annual Report on Form 10-K for
the Year ended December 31, 2001.
10.5 -- Amended and Restated Database License Agreement
between Donnelley Marketing, Inc. and First Data
Resources, Inc. dated as of July 23, 1999 is
incorporated herein by reference to exhibits filed
with the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1999.
10.6 -- Covenant not to compete by First Data Corporation
to infoUSA Inc. dated as of July 23, 1999 is
incorporated herein by reference to exhibits filed
with the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1999.
18.1 -- Preferability Letter from KPMG to the Company
dated March 30, 2001, incorporated herein by
reference to exhibits filed with the Company's
Annual Report on Form 10-K for the Year ended
December 31, 2001.
21.1 -- Subsidiaries and State of Incorporation, filed
herewith.
23.1 -- Consent of Independent Accountants, filed
herewith.
24.1 -- Power of Attorney, filed herewith.