1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15(d) of the
------ Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999 or
Transition report pursuant to Section 13 or 15(d) of the
------ Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 0-19598
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infoUSA INC.
---------------------------------------------------
(exact name of registrant specified in its charter)
DELAWARE 47-0751545
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 593-4500
--------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
48,485,093 shares of Common Stock at October 27, 1999
2
infoUSA INC.
INDEX
PAGE NO
PART I - FINANCIAL INFORMATION 3
Item 1. Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations for the
three months and nine months ended September 30,
1999 and 1998 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of
results of Operations 12 - 24
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 24
PART II - OTHER INFORMATION 25
Item 2. Change in Securities 26
Item 4. Submission of Matters to a Vote of
Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
Index to Exhibits 28
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infoUSA INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
PART I
FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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4
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 765 $ 29,603
Marketable securities .................................... 505 20,620
Trade accounts receivable, net of allowances of $5,358 and
$7,289, respectively ................................... 63,783 40,126
List brokerage trade accounts receivable ................. 12,978 17,831
Income taxes receivable .................................. -- 3,387
Prepaid expenses ......................................... 3,982 2,371
Deferred marketing costs ................................. 3,525 4,365
--------- ---------
Total current assets ............................. 85,538 118,303
--------- ---------
Property and equipment, net ................................ 49,928 40,264
Intangible assets, net of accumulated amortization ......... 306,353 109,378
Other assets ............................................... 3,375 2,828
--------- ---------
$ 445,194 $ 270,773
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................ $ 6,173 $ 1,580
Accounts payable ......................................... 12,814 7,226
List brokerage trade accounts payable .................... 13,734 18,847
Accrued payroll expenses ................................. 4,928 2,830
Accrued expenses ......................................... 10,301 12,465
Income taxes payable ..................................... 3,692 --
Deferred revenue ......................................... 5,931 4,534
Deferred income taxes .................................... 1,310 664
--------- ---------
Total current liabilities ........................ 58,883 48,146
--------- ---------
Long-term debt, net of current portion ..................... 269,664 126,679
Deferred income taxes ...................................... 24,087 7,701
Commitments and contingencies
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; 49,849,550 shares issued and 48,485,093
outstanding at September 30, 1999 and 49,544,750
shares issued and 49,236,750 outstanding at
December 31, 1998 ...................................... 124 124
Paid-in capital .......................................... 73,954 72,476
Retained earnings ........................................ 28,334 15,284
Treasury stock, at cost, 1,364,457 shares held at
September 30, 1999 and 308,000 shares held at
December 31, 1998 ...................................... (9,313) (2,951)
Accumulated other comprehensive income (loss) ............ (539) 3,314
--------- ---------
Total stockholders' equity ....................... 92,560 88,247
--------- ---------
$ 445,194 $ 270,773
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales ............................... $ 75,166 $ 55,072 $ 188,259 $ 172,528
Costs and expenses:
Database and production costs ......... 22,484 17,978 55,774 49,469
Selling, general and administrative ... 32,998 41,199 79,096 91,696
Depreciation and amortization ......... 10,826 7,824 22,553 21,078
Provision for litigation settlement ... -- 4,500 -- 4,500
Impairment of assets .................. 5,599 -- 5,599 --
Acquisition-related, integration
and restructuring charges ........... 3,682 1,216 3,682 10,093
--------- --------- --------- ---------
75,589 72,717 166,704 176,836
--------- --------- --------- ---------
Operating income (loss) ................. (423) (17,645) 21,555 (4,308)
Other income (expense):
Investment income ..................... 9,829 212 14,017 16,306
Interest expense ...................... (5,783) (3,081) (11,831) (6,225)
--------- --------- --------- ---------
Income (loss) before income taxes and ... 3,623 (20,514) 23,741 5,773
extraordinary item
Income taxes ............................ 2,571 (7,115) 10,819 4,907
--------- --------- --------- ---------
Income (loss) before extraordinary item . 1,052 (13,399) 12,922 866
Extraordinary item, net of tax .......... -- -- 128 --
--------- --------- --------- ---------
Net income (loss) ....................... $ 1,052 $ (13,399) $ 13,050 $ 866
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.02 $ (0.27) $ 0.27 $ 0.02
Extraordinary item .................... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ..................... $ 0.02 $ (0.27) $ 0.27 $ 0.02
========= ========= ========= =========
Weighted average shares outstanding ... 48,345 49,360 48,401 49,319
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 0.02 $ (0.27) $ 0.27 $ 0.02
Extraordinary item .................... -- -- -- --
--------- --------- --------- ---------
Net income (loss) ..................... $ 0.02 $ (0.27) $ 0.27 $ 0.02
========= ========= ========= =========
Weighted average shares outstanding ... 48,378 49,360 48,444 50,467
========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................... $ 13,050 $ 866
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ......... 22,553 21,078
Deferred income taxes ................. 933 (5,361)
Net realized gains on sale of
marketable securities investments ... (12,764) (17,603)
Impairment of other assets ............ 5,599 2,000
Provision for litigation settlement ... -- 4,500
Acquisition-related, integration and
restructuring charges .............. -- 10,093
Changes in assets and liabilities, net
of effect of acquisitions:
Trade accounts receivable ......... (9,205) 8,992
List brokerage trade accounts ..... 4,853 (4,732)
receivable
Prepaid expenses and other assets . (412) 49
Deferred marketing costs .......... 840 (1,013)
Accounts payable .................. 4,054 (2,948)
List brokerage trade accounts
payable ......................... (4,834) 3,104
Income taxes receivable and
payable ......................... 7,079 (4,205)
Accrued expenses and other
liabilities ..................... (3,086) (5,518)
--------- ---------
Net cash provided by
operating activities .......... 28,660 9,302
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable
securities .............................. 31,668 36,443
Purchases of marketable securities ........ (4,184) (15,691)
Purchases of other investments ............ -- (3,000)
Purchases of property and equipment ....... (8,102) (16,692)
Acquisitions of businesses ................ (206,080) (30,906)
Consumer database costs ................... -- (868)
Software development costs ................ (5,540) (4,573)
Other ..................................... (203) --
--------- ---------
Net cash used in
investing activities ............ (192,441) (35,287)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ............... (12,473) (110,617)
Proceeds from long-term debt .............. 165,000 154,800
Purchase of treasury stock ................ (6,553) --
Deferred financing costs .................. (3,989) (5,901)
Repurchase of senior subordinated notes ... (8,370) --
Proceeds from exercise of stock options ... 1,477 1,150
Tax benefit related to employee stock
options ................................. -- 401
--------- ---------
Net cash provided by
financing activities ............ 135,092 39,833
Effect of exchange rate fluctuations
on cash ................................. (149) --
--------- ---------
Net (decrease) increase in cash and cash .... (28,838) 13,848
equivalents
Cash and cash equivalents, beginning ........ 29,603 10,653
--------- ---------
Cash and cash equivalents, ending ........... $ 765 $ 24,501
========= =========
Supplemental cash flow information:
Interest paid ............................. $ 9,140 $ 3,403
========= =========
Income taxes paid ......................... $ 2,918 $ 9,630
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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infoUSA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting of normal recurring adjustments,
necessary to fairly present the financial information included therein.
The Company suggests that this financial data be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1998 included in the Company's 1998 Annual Report on Form 10-K
filed with the Securities and Exchange Commission. Results for the interim
period presented are not necessarily indicative of results to be expected for
the entire year.
2. EARNINGS PER SHARE INFORMATION
The following table shows the amounts used in computing earnings per share and
the effect on the weighted average number of shares of dilutive potential common
stock.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------ ------ ------ ------
Weighted average number of shares
outstanding used in basic EPS ...... 48,345 49,360 48,401 49,319
Net additional common stock equivalent
shares outstanding after assumed
exercise of stock options .......... 33 -- 43 1,148
------ ------ ------ ------
Weighted average number of shares
outstanding used in diluted EPS .... 48,378 49,360 48,444 50,467
====== ====== ====== ======
3. SEGMENT INFORMATION
The Company currently manages existing operations utilizing financial
information accumulated and reported for two general 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.
As described above, the small business and large business segments are
principally engaged in the sale of certain designated products, although each
segment may sell any of the Company's products.
Corporate activities principally represent the information systems
technology, database compilation, database verification, and administrative
functions of the Company. Investment income (loss), interest expense, income
taxes, amortization of intangibles, and depreciation expense are only recorded
in corporate activities. The Company does not allocate these costs to the two
business segments. The small business and large business segments reflect actual
net sales, direct order production, and identifiable direct sales and
marketing-related costs related to their operations. The Company records unusual
or non-recurring items including acquisition-related, integration and
restructuring charges, provisions for litigation settlement, and asset
impairment charges 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
majority of the Company's property and equipment is shared by the Company's
business segments. Depreciation expense is recorded in corporate activities.
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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 table summarizes segment information:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales..................... $ 31,737 $43,429 $ -- $75,166
Impairment of assets.......... -- -- 5,599 5,599
Acquisition-related,
integration and
restructuring charges....... -- -- 3,682 3,682
Operating income (loss)....... 13,201 15,229 (28,853) (423)
Investment income............. -- -- 9,829 9,829
Interest expense.............. -- -- 5,783 5,783
Income (loss) before income
taxes and extraordinary
item........................ 13,201 15,229 (24,807) 3,623
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales.................... $ 30,699 $24,373 $ -- $55,072
Provision for litigation
settlement................... -- -- 4,500 4,500
Acquisition-related,
integration and
restructuring charges...... -- -- 1,216 1,216
Operating income (loss)...... 13,130 4,685 (35,460) (17,645)
Investment income............ -- -- 212 212
Interest expense............. -- -- 3,081 3,081
Income (loss) before income
taxes and extraordinary
item....................... 13,130 4,685 (38,329) (20,514)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
-----------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales..................... $ 98,246 $90,013 $ -- $ 188,259
Impairment of assets.......... -- -- 5,599 5,599
Acquisition-related,
integration and
restructuring charges....... -- -- 3,682 3,682
Operating income (loss)....... 46,787 35,495 (60,727) 21,555
Investment income............. -- -- 14,017 14,017
Interest expense.............. -- -- 11,831 11,831
Income (loss) before income
taxes and extraordinary
item........................ 46,787 35,495 (58,541) 23,741
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
-------- -------- ---------- ------------
(IN THOUSANDS)
Net sales..................... $101,955 $70,573 $ -- $ 172,528
Provision for litigation
settlement.................. -- -- 4,500 4,500
Acquisition-related,
integration and
restructuring charges....... -- -- 10,093 10,093
Operating income (loss)....... 45,981 21,211 (71,500) (4,308)
Investment income............. -- -- 16,306 16,306
Interest expense.............. -- -- 6,225 6,225
Income (loss) before income
taxes and extraordinary
item........................ 45,981 21,211 (61,419) 5,773
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4. COMPREHENSIVE INCOME
Comprehensive income (loss), including the components of other comprehensive
income (loss), is as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
------------------------ -----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
--------- --------- --------- ---------
(IN THOUSANDS)
Net income (loss).................... $ 1,052 $(13,399) $13,050 $ 866
Other comprehensive income (loss):
Unrealized gain (loss) from
investments:
Unrealized gains (losses)........ (9,751) (1,273) (7,136) 14,569
Related tax expense.............. 3,705 484 2,712 (5,536)
------- -------- ------- --------
Net.............................. (6,046) (789) (4,424) 9,033
------- -------- -------- --------
Reclassification adjustment for net
gains (losses) realized on sale of
marketable securities:
Realized gains (losses).......... 48 -- 1,944 (16,547)
Related tax expense.............. (18) -- (739) 6,288
------- -------- ------- --------
Net.............................. 30 -- 1,205 (10,259)
------- -------- ------- --------
Foreign currency translation
adjustments...................... -- -- (634) --
------- -------- ------- --------
Total other comprehensive income
(loss)........................... (6,016) (789) (3,853) (1,226)
------- -------- ------- --------
Comprehensive income (loss).......... $(4,964) $(14,188) $ 9,197 $ (360)
======= ======== ======= ========
The components of accumulated other comprehensive income is as follows:
FOREIGN ACCUMULATED
CURRENCY UNREALIZED OTHER
TRANSLATION GAINS ON COMPREHENSIVE
ADJUSTMENTS SECURITIES INCOME
----------- ---------- -------------
(IN THOUSANDS)
Balance at September 30, 1999 $ (634) $ 95 $ (539)
====== ======= =======
Balance at September 30, 1998 $ -- $(1,013) $(1,013)
====== ======= =======
5. ACQUISITION
Effective July 1, 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. 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 further described below. The acquisition has been accounted
for using 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 based on
management's preliminary estimates included goodwill of $182.1 million,
non-compete agreements of $10.0 million and purchased data processing software
of $20.0 million, which are being amortized over lives of 20 years, 5 years, and
5 years, respectively. The Company is in the process of performing a valuation
analysis to allocate the cost of the acquisition, which is anticipated to be
completed prior to December 31, 1999.
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Operating results for Donnelley are included in the accompanying consolidated
statements of operations from the acquisition date. Assuming Donnelley had been
acquired on January 1, 1998, and excluding the write-off of in-process research
and development costs included in acquisition-related, integration and
restructuring charges in the accompanying consolidated statements of operations,
unaudited pro forma consolidated net sales, net income and net income per share
would have been as follows:
FOR THE NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net sales............................... $230,794 $237,572
Net income.............................. $ 10,081 $ 220
Basic earnings per share................ $ 0.21 $ 0.00
Diluted earnings per share.............. $ 0.21 $ 0.00
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.
6. CREDIT AGREEMENT
During July 1999, the Company negotiated a $195.0 million Senior Secured Credit
Facilities ("Credit Facilities") 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 + 1.25% to 2.00% for base rate loans and from
LIBOR + 2.25% to 3.00% 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 +
2.50% for base rate loans and LIBOR + 3.50% 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 Facilities.
In connection with the acquisition of Donnelley during July 1999, the Company
borrowed $165.0 million under the Credit Facilities. The Company has
subsequently made repayments of $10.2 million of the Credit Facilities utilizing
proceeds received from the sales of marketable securities.
As of September 30, 1999, The Company had no borrowings under 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. At
September 30, 1999, the Company was a party to one interest rate swap agreement
which expires in September 2002. The agreement entitles the Company to receive
from counterparties on a semi-annual basis the amounts, if any, by which the
Company's interest payments on $60.5 million of outstanding debt under the
Credit Facilities exceed 6.385%, and to pay counterparties on a semi-annual
basis the amounts, if any, by which the Company's interest payments on $60.5
million of outstanding debt under the Credit Facilities are less than 6.385%.
The Company is subject to certain financial covenants in the Credit Facilities,
including minimum consolidated interest coverage ratio, maximum consolidated
leverage ratio and minimum consolidated EBITDA. Additionally, the Company is
required to pay a commitment fee of 0.5% on the average unused amount of the
Revolving Credit Facility.
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7. IMPAIRMENT OF ASSETS
During the quarter ended September 30, 1999, as a direct result of the
acquisition of Donnelley in July 1999 and the addition of the Donnelly consumer
database file (see Note 5), the Company recorded a write-down of $3.9 million 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.
During the quarter ended September 30, 1999, 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 on the remaining net book value of the
impaired assets.
8. ACQUISITION-RELATED, INTEGRATION AND RESTRUCTURING CHARGES
During the quarter ended September 30, 1999, the Company incurred various
integration-related charges totaling $3.7 million. 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.
9. CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings, claims and
litigation arising in the ordinary course of business. Management believes that
any resulting liability should not materially affect the Company's financial
position, results of operations, or cash flows.
10. SUBSEQUENT EVENT
On October 21, 1999, the Company received shareholder approval to combine and
reclassify its Class A common stock and Class B common stock into a single class
of common stock. The combination has 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.
Effective October 25, 1999, the Company's shares began trading on Nasdaq under
the symbol "IUSAD". It will retain this symbol for approximately 20 trading
days, after which it will permanently trade as "IUSA".
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.
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infoUSA INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading provider of business and consumer marketing information
and data processing services. The Company's products and services help its
clients generate new customers more effectively at lower cost. The Company's key
assets include a proprietary database of over 11 million businesses and a
consumer database of over 115 million households and 195 million individuals in
the United States and Canada, which the Company believes are among the most
comprehensive and accurate available. The Company leverages these key assets by
selling a broad range of marketing information products and data processing
services through targeted distribution channels primarily to small and medium
size businesses and also to consumers and large corporations.
This discussion and analysis contains forward-looking statements, including
without limitations statements in the discussion of database and production
costs, year 2000 readiness disclosure, accounting standards and liquidity and
capital resources, within the meaning of Section 21E of the Securities Exchange
Act of 1934 and Section 27A of the Securities Act of 1933, which are subject to
the "safe harbor" created by those sections. The Company's actual future results
could differ materially from those projected in the forward-looking statements.
Some factors which could cause future actual results to differ materially from
the company's recent results or those projected in the forward-looking
statements are described in "Factors Affecting Operating Results" below. The
Company assumes no obligation to update the forward-looking statement or such
factors.
RESULTS OF OPERATIONS
The Company had previously made certain disclosures relative to the continuing
results of operations of acquired companies where appropriate and possible,
although the Company has in the case of all acquisitions since 1996, immediately
integrated the operations of the acquired companies into existing operations of
the Company. Generally, the results of operations for these acquired activities
are no longer separately accounted for from existing activities. The Company
cannot report on the results of operations of acquired companies upon completion
of the integration as the results are combined with existing results.
Additionally, upon integration of acquired operations, the Company frequently
combines acquired products or features with existing products, and experiences
significant cross-selling of products between business units, including sales of
acquired products by existing business units and sales by acquired business
units of existing products. Due to recent and potential future acquisitions,
future results of operations will not be comparable to historical data. While
the results cannot be accurately quantified, acquisitions have had a significant
impact on net sales.
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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 Walter Karl in March 1998, JAMI Marketing Services (JAMI) in
June 1998, and Donnelley Marketing in July 1999:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30,
1999 1998 1999 1998
------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... 100% 100% 100% 100%
Costs and expenses:
Database and production costs............................. 30 33 30 29
Selling, general and administrative....................... 44 75 42 53
Depreciation and amortization............................. 15 14 12 12
Provision for litigation settlement....................... -- 8 -- 2
Impairment of assets...................................... 7 -- 3 --
Acquisition-related, integration, and restructuring
charges................................................. 5 2 2 6
------- ------- ------- -------
Total costs and expenses............................... 101 132 89 102
------- ------- ------- -------
Operating income (loss)..................................... (1) (32) 11 (2)
Other income (expense), net................................. 5 (5) 2 5
------- -------- ------- -------
Income (loss) before income taxes and extraordinary item.... 4 (37) 13 3
Income taxes................................................ 3 (13) 6 2
------- -------- ------- -------
Income (loss) before extraordinary item..................... 1 (24) 7 1
Extraordinary item, net of tax.............................. -- -- -- --
------- ------- ------- -------
Net income (loss)........................................... 1% (24)% 7% 1%
======= ======= ======= =======
OTHER DATA:
SALES BY SEGMENT:
Small business....................................... $ 31.7 $ 30.7 $ 98.3 $ 101.9
Large business....................................... 43.5 24.4 90.0 70.6
------- ------- ------- --------
Total................................................ $ 75.2 $ 55.1 $ 188.3 $ 172.5
======= ======= ======= ========
SALES BY SEGMENT AS A PERCENTAGE OF NET SALES:
Small business....................................... 42% 56% 52% 59%
Large business....................................... 58 44 48 41
------- ------- ------- -------
Total................................................ 100% 100% 100% 100%
======= ======= ======= =======
Earnings before, interest, taxes, depreciation and
amortization, (EBITDA), as adjusted (1)................... $19,684 $(4,105) $53,389 $31,363
======= ======== ======= =======
EBITDA, as adjusted, as a percentage of net sales........... 26% --% 28% 18%
======= ====== ======= =======
(1) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to
exclude depreciation, amortization of intangible assets, acquisition-related,
integration and restructuring charges, provision for litigation settlement and
impairment of assets. 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 unusual or non-recurring items.
However, EBITDA, as adjusted, does not purport to represent cash provided by
operating activities as reflected in the Company's consolidated statements of
cash flows, is not a measure of financial performance under generally accepted
accounting principles ("GAAP") and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. Also,
the measure of EBITDA, as adjusted, may not be comparable to similar measures
reported by other companies.
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1999 COMPARED TO 1998
NET SALES
Net sales for the quarter ended September 30, 1999 were $75.2 million, an
increase of 37% from $55.1 million for the same period in 1998. Net sales of the
small business segment for the third quarter of 1999 were $31.7 million, a 3%
increase from $30.7 million for the same period in 1998. The increase in net
sales of the small business segment is principally due to an increase in net
sales of consumer CD-ROM products. The Company recorded net sales of consumer
CD-ROM products of $4.6 million and $2.9 million for the quarters ended
September 30, 1999 and 1998, respectively. Effective for fiscal year 1999, the
Company modified its retail distribution strategy to better match its sale of
consumer CD-ROM products to distributors with the sell-through at the retail
level. Net sales of the large business segment for the third quarter of 1999
were $43.5 million, a 78% increase from $24.4 million in the third quarter of
1998. The Company recorded net sales of data processing services of $23.2
million and $16.9 million for the quarters ended September 30, 1999 and 1998,
respectively. The increase in net sales for the large business segment and in
data processing services is principally due to the acquisition of Donnelley
effective July 1, 1999. During the first quarter of 1999, a significant data
processing services customer transferred the same processing in-house. The
increase in data processing services sales as a result of the acquisition of
Donnelley and increased sales of data processing services by the Company's
National Accounts salesforce was offset by the loss of this significant
customer.
Net sales for the nine months ended September 30, 1999 were $188.3 million, an
increase of 9% from $172.5 million for the same period in 1998. Net sales of the
small business segment for the nine months ended September 30, 1999 were $98.3
million, a 4% decrease from $101.9 million for the same period in 1998. The
decrease in net sales of the small business segment is principally due to the
decrease in net sales of consumer CD-ROM products. The Company recorded net
sales of consumer CD-ROM products of $13.5 million and $16.7 million for the
nine months ended September 30, 1999 and 1998, respectively. Effective for
fiscal year 1999, the Company modified its retail distribution strategy to
better match its sale of consumer CD-ROM products to distributors with the
sell-through at the retail level. Net sales of the large business segment for
the nine months ended September 30, 1999 were $90.0 million, a 27% increase from
$70.6 million for the same period in 1998. The Company recorded net sales of
data processing services of $51.3 million during the nine months ended September
30, 1999, compared to $45.9 million during the same period in 1998. The increase
in net sales for the large business segment and in data processing services is
principally due to the acquisition of Donnelley effective July 1, 1999. During
late 1998, a significant data processing services customer notified the Company
that it intended to perform the same processing in-house. The customer
represented 6% of total net sales during fiscal year 1998. During the first
quarter of 1999, the customer transferred a significant portion of the business
in-house. The increase in data processing services sales as a result of the
acquisition of Donnelley and increased sales of data processing services by the
Company's National Accounts salesforce was offset by the loss of this customer.
DATABASE AND PRODUCTION COSTS
Database and production costs for the quarter ended September 30, 1999 were
$22.5 million, or 30% of net sales, compared to $18.0 million, or 33% of net
sales, for the same period in 1998. The decrease in database and production
costs as a percentage of net sales between these two quarterly periods is
principally the result of the write-down of $0.9 million the Company recorded
during the third quarter of 1998 on its remaining 1998 consumer CD-ROM product
inventory on hand. For the nine months ended September 30, 1999, these costs
were $55.8 million, or 30% of net sales, compared to $49.5 million, or 29% of
net sales for the same period in 1998. Since 1996, database and production costs
have increased as a percentage of net sales as a result of higher costs
associated with data processing services, CD-ROM production, and list brokerage
services. To the extent that data processing and list brokerage services
constitute a greater percentage of net sales, the Company expects database and
production costs to increase as a percentage of net sales. Factors contributing
to the increase in database and production costs as a percentage of net sales
include: 1) an overall increase in list brokerage and data processing services
sales, 2) the acquisition of Donnelley in July 1999 which historically has
generated significant sales of data processing services, and 3) the addition of
consumer database compilation costs associated with the Company's roll-out of
the consumer white pages file during the second quarter of 1998. The overall
increase in database and production costs was partially offset by a decrease in
consumer CD-ROM sales.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the quarter ended September 30,
1999 were $33.0 million, or 44% of net sales, compared to $41.2 million, or 75%
of net sales, for the same period in 1998. For the nine months ended September
30, 1999, these costs were $79.1 million, or 42% of net sales, compared to $91.7
million, or 53% of net sales for the same period in 1998. The decrease in
selling, general and administrative expenses for the three and nine month
periods ended September 30, 1999 from the same periods in 1998, represented as a
percentage of net sales, is partially the result of the following items recorded
during the third quarter of 1998: 1) increase in estimates for reserves for bad
debts of $3.5 million, 2) increase in estimates for reserves related to price
protection and cooperative advertising for consumer CD-ROM products of $5.3
million, 3) decrease in estimated benefit period related to deferred advertising
costs of $2.7 million, and 4) $0.6 million related to executive severance costs.
During late 1997 and early 1998, the Company ramped-up its sales force
anticipating a targeted incremental increase in net sales. The Company
subsequently did not achieve the targeted incremental increase in net sales.
During the third quarter of 1998, the Company enacted certain cost reduction
measures as described in the section "Acquisition-related and Restructuring
Charges" to counter prior measures taken. During the period from the fourth
quarter of 1998 through the second quarter of 1999, the Company focused on the
reduction of operating expenses, successfully completing during mid-1999 the
cost reduction program implemented during the third quarter of 1998. The
principal factor contributing to the overall decrease in selling, general and
administrative expenses in both actual amounts and as percentages of net sales
relates to the decrease in salaries and wages. The number of total employees
reduced from approximately 2,050 employees as of June 30, 1998 to 1,575
employees as of June 30, 1999.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses for the quarter ended September 30, 1999
were $10.8 million, or 15% of net sales, compared to $7.8 million, or 14% of net
sales for the same period in 1998. For the nine months ended September 30, 1999,
these costs were $22.6 million, or 12% of net sales, compared to $21.1 million,
or 12% of net sales for the same period in 1998. Amortization of acquired
database costs and purchased data processing software associated with the
acquisition of DBA in February 1997 totaled $0.4 million and $5.1 million during
the nine months ended September 30, 1999 and 1998, respectively.
PROVISION FOR LITIGATION SETTLEMENT
The Company recorded a provision for litigation settlement of $4.5 million, or
8% of net sales, during the third quarter of 1998 related to a dispute centered
around a license agreement between DBA and Experian Information Solutions, Inc.
prior to the Company's acquisition of DBA in February 1997.
IMPAIRMENT OF ASSETS
The Company recorded asset impairment charges totaling $5.6 million, or 7% of
net sales, during the third quarter of 1999. The impairment charges included: 1)
a write-down of $3.9 million on the net 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 with the acquisition of
Donnelley in July 1999, and 2) a write-down of $1.7 million on the net book
value of 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-RELATED, INTEGRATION AND RESTRUCTURING CHARGES
For 1998, in addition to the write-off of purchased in-process research and
development costs (purchased IPR&D) of $3.8 million recorded in connection with
the acquisition of Walter Karl in March 1998, included in acquisition-related
and restructuring charges in the accompanying consolidated statement of
operations are: $3.0 million of costs associated with the Company's bid to
acquire Metromail Corporation, $0.7 million associated with the Company's
offering to sell Class A Common Stock which was not completed, $1.4 million for
restructuring costs related to the Company's compilation and sales activities
for new businesses enacted during the first quarter of 1998 further described
below, and $1.2 million for restructuring costs related to certain cost
reduction measures enacted during the third quarter of 1998 further described
below.
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During the quarter ended September 30, 1999, the Company recorded various
integration-related charges totaling $3.7 million. 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.
RESTRUCTURING CHARGES
During the first quarter of 1998 the Company recorded a restructuring charge of
$1.4 million related to the closing of the CDC new business compilation and
sales center and moving these operations from Vermont to Nebraska. All 45 of the
CDC employees were terminated, and severance charges recorded totaled $0.6
million. The restructuring charges also included lease termination costs of $0.3
million and a write-off of $0.5 million of leasehold improvement costs
associated with the closed Vermont facility. The restructuring, including
recording the payments and write-downs described, was completed by September 30,
1998.
During the third quarter of 1998 the Company recorded a restructuring charge of
$1.2 million which included $0.6 million in severance for 244 employees
terminated as a result of the implementation of certain cost reduction measures.
These employees were primarily in support and administration positions but some
under-performing sales personnel were also terminated. The restructuring charges
also included $0.4 million related to the planned closing of four field sales
offices. Additionally, the Company recorded a write-down of $0.2 million related
to leasehold improvement costs at facilities leased by the Company which were
being closed. The restructuring, including recording the payments and
write-downs described, was completed by June 30, 1999.
OPERATING INCOME (LOSS)
Including the factors previously described, the Company had operating loss of
$(0.4) million, or (1)% of net sales for the quarter ended September 30, 1999,
as compared to operating loss of $(17.6) million, or (32)% of net sales for the
same period in 1998. For the nine months ended September 30, 1999, operating
income was $21.6 million, or 11% of net sales, compared to an operating loss of
$(4.3) million, or (2)% of net sales for the same period in 1998.
Excluding acquisition-related, integration and restructuring, provision for
litigation settlement and asset impairment charges previously described, the
Company would have had operating income of $8.9 million, or 12% of net sales for
the quarter ended September 30, 1999, as compared to an operating loss of
$(11.9) million, or (22)% of net sales for the same period in 1998. For the nine
months ended September 30, 1999, operating income would have been $30.8 million,
or 16% of net sales, compared to $10.3 million, or 6% of net sales for the same
period in 1998.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $4.0 million, or 5% of net sales, and $(2.9)
million, or (5)% of net sales, for the quarter ended September 30, 1999 and
1998, respectively, and $2.2 million, or 2% of net sales, and $10.1 million, or
5% of net sales, for the nine months ended September 30, 1999 and 1998,
respectively.
Interest expense was $5.8 million and $3.1 million for the quarter ended
September 30, 1999 and 1998, respectively, and $11.8 million and $6.2 million
for the nine months ended September 30, 1999 and 1998, respectively. The
increase in interest expense is principally the result of servicing debt under
the Company's 9 1/2% Senior Subordinated Notes Due 2008 which were issued in
June 1998 and the addition of the Deutsche Bank Credit Facilities used to
finance the acquisition of Donnelley in July 1999.
Investment income was $9.8 million and $0.2 million for the quarter ended
September 30, 1999 and 1998, respectively, and $14.0 million and $16.3 million
for the nine months ended September 30, 1999 and 1998, respectively. The Company
recorded realized gains on the sale of marketable securities totaling $9.4
million and $0.0 million for the quarters ended September 30, 1999 and 1998,
respectively, and $12.8 million and $17.6 million for the nine months ended
September 30, 1999 and 1998, respectively.
During the third quarter of 1999, the Company realized a gain of $8.8 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.
During the second quarter of 1998, the Company realized a gain of $16.5 million
on the disposition of its holdings in Metromail Corporation common stock. This
realized gain was partially offset during the second quarter of 1998 when the
Company recorded a loss of $2.0 million
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on the write-off of an investment. During the first quarter of 1997, the Company
made an investment of $2.0 million in preferred stock of an issuer, representing
less than 20% of the issuer's outstanding stock. During 1998 the issuer
commenced a reorganization and sought funding from other outside investors,
diluting the Company's investment in this entity to a nominal value.
Additionally, the Company obtained knowledge that the issuer was incurring
significant losses and the intended line of business of this start-up entity had
significantly changed. Accordingly, the Company wrote-off this investment, which
was accounted for on a cost basis, during the second quarter of 1998.
INCOME TAXES
A provision for income taxes of $2.6 million and $(7.1) million was recorded for
the quarter ended September 30, 1999 and 1998, respectively, and $10.8 million
and $4.9 million for the nine months ended September 30, 1999 and 1998,
respectively. Acquisition-related charges of $3.8 million were included in
income before income taxes for the nine months ended September 30, 1998, but are
not deductible for tax purposes. The provisions for these periods also reflect
the inclusion of amortization on certain intangibles in taxable income not
deductible for tax purposes.
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.
EBITDA, AS ADJUSTED
Excluding acquisition-related, integration and restructuring, provision for
litigation settlement and asset impairment charges previously described, the
Company's EBITDA, as adjusted, was $19.7 million, or 26% of net sales, and
$(4.1) million, or (7)% of net sales, for the quarter ended September 30, 1999
and 1998, respectively, and $53.4 million, or 28% of net sales, and $31.4
million, or 18% of net sales, for the nine months ended September 30, 1999 and
1998, respectively.
YEAR 2000 READINESS DISCLOSURE
In 1996 the Company began preparing its computer-based systems for Year 2000
("Y2K") computer software compliance. The Company's Y2K project covers both
traditional computer based systems and infrastructure ("IT Systems") and
computer based facilities and equipment ("Non IT Systems"). The Company's
project has seven phases: Inventory, Assessment, Detailed Planning & Solution
Design, Renovation, Testing, Implementation and Contingency Planning.
The Company performed an inventory and assessment of its IT Systems. Some
systems were fully compliant, while others required fixes to be applied. The
Company replaced or corrected systems as a part of a larger infrastructure
improvement effort. Infrastructure improvements are ongoing and will continue
throughout 1999. The Company also completed an inventory and assessment of its
NON-IT Systems, some of which will be affected by the millennium rollover. Not
all affected systems require fixes; some are inconsequential or have nuisance
effects and will not be addressed. The Company has completed the replacement of
critical non-compliant Non-IT systems.
The Company's Y2K project also considers the readiness of critical vendors. The
Company believes that the most reasonable likely worst case Y2K scenario is that
a small number of vendors will be unable to supply goods for a short time after
January 1, 2000. Plans have been developed and put into action to address those
concerns.
The Company has incurred approximately $5.0 million of Y2K cost. These costs
fall into three categories: 1) systems replacement, 2) specific Y2K assessment
effort, and 3) expense cost of Y2K Project office. Future expenses are estimated
to include approximately $0.5 million of additional cost to be incurred prior to
December 31, 1999. Additionally, the Company replaced its accounts receivable
accounting system at a total cost of approximately $3.0 million. The replacement
of this system, which was capitalized as a property addition, assisted in the
remediation of certain Y2K issues.
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The foregoing information constitutes "Year 2000 Readiness Disclosure" within
one meaning for the Year 2000 Informant Readiness Disclosure Act of 1998.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities (Statement No. 133). This standard requires a
public company to recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
In July 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No.
133" (Statement No. 137). Statement No. 137 delayed the effective date for
Statement No. 133 for one year. The Company is required to adopt Statement No.
133 in the first quarter of 2001. The Company has not yet assessed the impact
this standard will have on its financial condition or results of operations at
the time of adoption; however, the impact will ultimately depend on the amount
and type of derivative instruments held at the time of adoption, if any.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated Statements of Cash Flows Information:
As of September 30, 1999, the Company had working capital of $26.7 million.
During July 1999, the Company negotiated a new credit facilities arrangement
which provided for a Revolving Credit Facility of $30.0 million. See footnote 6.
"Credit Agreement" of the notes to the accompanying consolidated financial
statements for additional information. As of September 30, 1999, the Company had
no borrowings under the Revolving Credit Facility.
Net cash provided by operating activities during the nine month period ended
September 30, 1999 totaled $28.7 million, compared to net cash provided by
operating activities of $9.3 million during the comparable period of 1998.
During the nine month period ended September 30, 1999, the Company spent $8.1
million for additions of property and equipment and $5.5 million related to
internal software development costs.
The Company acquired Donnelley effective July 1, 1999. The Company has paid
$206.1 million related to the acquisition, including consideration paid for the
acquisition of $200.0 million and $6.1 million for capitalized acquisition
costs. As part of the acquisition, the Company borrowed $165.0 million under the
Credit Facilities. The Company paid financing costs of $4.0 million to secure
the financing arrangement. The Company utilized existing cash and marketable
securities of approximately $45.0 million to purchase Donnelley.
During the nine month period ended September 30, 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.
Consolidated Balance Sheets information:
Cash and cash equivalents decreased from $29.6 million at December 31, 1998 to
$(2.9) million at September 30, 1999 and marketable securities decreased from
$20.6 million at December 31, 1998 to $0.5 million at September 30, 1999. The
Company utilized existing cash and cash equivalents and marketable securities of
approximately $45.0 million to purchase Donnelley.
Trade accounts receivable increased from $40.1 million at December 31, 1998 to
$63.8 million at September 30, 1999 and property and equipment, net increased
from $40.3 million at December 31, 1998 to $49.9 million at September 30, 1999
principally due to the acquisition of Donnelley in July 1999.
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List brokerage trade accounts receivable decreased from $17.8 million at
December 31, 1998 to $13.0 million at September 30, 1999. List brokerage trade
accounts payable decreased from $18.8 million at December 31, 1998 to $13.7
million at September 30, 1999. The balance of list brokerage trade accounts
receivable and list brokerage trade accounts payable may fluctuate significantly
and is dependent on the specific timing of cash receipts and disbursements. The
Company customarily pays the selling broker shortly after being paid by the
buying broker.
Intangible assets, net increased from $109.4 million at December 31, 1998 to
$296.8 million at September 30, 1999. Goodwill and other intangibles recorded
for the Donnelley acquisition based on management's preliminary estimates
included goodwill of $172.5 million, non-compete agreements of $10.0 million and
purchased data processing software of $20.0 million.
Total accounts payable increased from $7.2 million at December 31, 1998 to $12.8
million at September 30, 1999 principally due to the inclusion of overdrawn cash
accounts totaling $3.6 million in accounts payable at September 30, 1999.
Total accrued expenses decreased from $12.5 million at December 31, 1998 to
$10.3 million at September 30, 1999 principally due to the payment of $4.6
million to Experian Information Solutions, Inc. during the first quarter of 1999
in connection with arbitration of a contractual dispute. This decrease was
partially offset due the acquisition of Donnelley in July 1999.
Long-term debt increased from $126.7 million at December 31, 1998 to $269.7
million at September 30, 1999 due to the borrowing of $165.0 million under the
Credit Facilities to purchase Donnelley. This increase was offset by the
Company's repurchase of $9.0 million of its infoUSA 9 1/2% Senior Subordinated
Notes during the first quarter of 1999 and repayments totaling $10.2 million on
the Credit Facilities during the third quarter of 1999.
Treasury stock increased from $3.0 million at December 31, 1998 to $9.3 million
at September 30, 1999 principally due to the purchase in the open market of 1.1
million shares of common stock during the first quarter of 1999 at a total cost
of $6.6 million.
The Company believes that its existing sources of liquidity and cash generated
from operations, assuming no major acquisitions, will satisfy the Company's
projected working capital and other cash requirements for at least the next 12
months. To the extent the Company experiences growth in the future, the Company
anticipates that its operating and investing activities may use cash. Any such
future growth and any acquisitions of other technologies, products or companies
may require the Company to obtain additional equity or debt financing, which may
not be available or may be dilutive.
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FACTORS THAT MAY AFFECT OPERATING RESULTS
INTEGRATION OF RECENT AND FUTURE ACQUISITIONS
Since mid-1996, the Company has completed nine significant acquisitions,
including the August 1996 acquisition of Digital Directory Assistance, the
November 1996 merger with County Data Corporation and acquisition of Marketing
Data Systems, the December 1996 acquisition of BJ Hunter, the February 1997
merger with Database America ("DBA"), the August 1997 acquisition of Pro CD, the
March 1998 acquisition of Walter Karl, the June 1998 acquisition of JAMI
Marketing and the July 1999 acquisition of Donnelley Marketing, Inc.
("Donnelley"). The acquisition of Donnelley was extremely significant, with
consideration paid by the Company totaling $200.0 million, funded using a
combination of existing cash and cash borrowed under new senior secured credit
facilities. The Company also made a number of other acquisitions in prior
periods. In March 1998, the Company attempted to acquire Metromail Corporation
("Metromail") for approximately $850.0 million, including the assumption of
debt, and may in the future evaluate other acquisitions of that magnitude. The
Company's strategy includes continued growth through acquisitions of
complementary products, technologies or businesses, which, if implemented, may
result in the diversion of management's attention from the day-to-day operations
of the Company's business and may include numerous other risks, including
difficulties in the integration of operations, databases, products and
personnel, difficulty in applying the Company's internal controls to acquired
businesses and particular problems, liabilities or contingencies related to the
businesses being acquired. To the extent that efforts to integrate recent or
future acquisitions fail, there could be a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company has not made any binding commitments with respect to any particular
future acquisitions, the Company frequently evaluates the strategic
opportunities available to it and intends to pursue opportunities that it
believes fit its business strategy.
RECENT CHANGES IN SENIOR MANAGEMENT
In the past two years, the Company has undergone significant changes in its
senior management team, even as it has experienced growth both internally and
through acquisitions. The Company hired a number of senior managers in September
and October 1997, who ceased their employment with the Company between July and
September 1998. These managers did not resign because of any disagreements with
the Company's Board or other senior management, and much of the Company's
remaining senior management team has been with the Company for many years.
During 1999, the Company made two significant senior management team additions.
Susan Henricks was appointed to Executive Vice President in August 1999. Ms.
Henricks previously served as managing director of client development for First
Data Corporation, and as President and Chief Executive Officer of Metromail
Corporation. Jack McGovern was appointed Chief Financial Officer in July 1999.
The Company is currently organized into three major sales groups headed by group
presidents. Al Ambrosino, who has been with the Company or its subsidiary for 19
years, DJ Thayer, who has been with the Company for 8 years, and William Chasse,
who has been with the Company for 11 years, have each been named group
president. In the past, limitations on senior management resources resulted in a
few key individuals taking on multiple roles and responsibilities in the
Company, which in turn placed a significant strain on the Company's senior
management. Failure of Company's senior management to adjust to new
responsibilities, manage growth or work together effectively could result in
disruptions of operations or the departure of additional key personnel, which in
turn could have a material adverse effect on the Company's business, financial
condition, results of operations and stock price.
FLUCTUATIONS IN OPERATING RESULTS
The Company believes that future operating results will be subject to
quarterly and annual fluctuations, and that long term growth will depend upon
the Company's ability to expand its present business and complete strategic
acquisitions. The Company's net sales on a quarterly basis can be affected by
seasonal characteristics and certain other factors. For example, the Company
typically experiences higher revenue from its sales leads products in the fall
of each year due to increases in direct marketing by the Company's clients in
the fourth quarter of each year. Revenue from sales lead generation products is
generally lower in the summer due to decreased direct marketing activity of the
Company's customers during that time. The Company typically experiences
decreases in net sales of consumer CD ROM products just prior to the
introduction of new editions of these products. The Company's operating expenses
are determined in part based on the Company's expectations of future revenue
growth and are substantially fixed. As a result, unexpected changes in revenue
levels, such as those discussed above, have a disproportionate effect on
operating performance in any given period. If the Company is required to record
charges in the future, such charges could materially and adversely affect the
Company's business, financial condition or results of operations. Long term
growth will be materially adversely affected if the Company fails to
successfully exploit the Internet as a market for its products and services,
broaden its existing product and service offerings, increase sales of products
and services, expand into new markets, or complete acquisitions or successfully
integrate acquired operations into its existing operations. To the extent there
are fluctuations in operating results or the Company fails to achieve long-term
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internal growth or growth through acquisitions, there could be a material
adverse effect on the Company's business, financial condition or results of
operations.
RISK OF PRODUCT RETURNS
The Company has agreements that allow retailers certain rights to return its
consumer CD-ROM products. Accordingly, the Company is exposed to the risk of
product returns from retailers and distributors, particularly in the case of
products sold shortly before introduction of the next year's edition of the same
product. Consumers may also seek to return consumer CD-ROM products, although
historically returns from consumers have been low. At the time of product sales,
the Company establishes reserves based on estimated future returns of products,
taking into account promotional activities, the timing of new product
introductions, seasonal variations in product returns, distributor and retailer
inventories of the Company's products and other factors. Actual product returns
could differ from estimates, and product returns that exceed the Company's
reserves could materially adversely affect the Company's business, financial
condition and results of operations. In addition, changes in estimates of
reserves for product returns can have a material and adverse effect on the
Company's operating results.
EFFECTS OF LEVERAGE
As of September 30, 1999, the Company had total indebtedness of
approximately $275.8 million, including $106.0 million of Notes under an
indenture under which State Street Bank and Trust Co. of California is trustee
(the "Indenture"). The Indenture permits the Company to incur substantial
additional indebtedness (including, subject to certain conditions, an additional
$85.0 million of senior subordinated notes under the Indenture).
Total indebtedness at September 30, 1999 includes indebtedness of $154.8
million under a $195.0 million Senior Secured Credit Agreement under which Bank
Boston, N.A. acts as administrative agent for a group of lenders. Substantially
all assets of the Company are pledged as security under the terms of the Credit
Agreement. This indebtedness was incurred in connection with the Company's
acquisition of Donnelley.
The Company's ability to pay principal and interest on the Notes issued
under the Indenture and the Credit Agreement and to satisfy its other debt
obligations will depend upon its future operating performance, which performance
will be affected by prevailing economic conditions and financial, business and
other factors, certain of which are beyond the control of the Company. The
Company's ability to pay principal and interest on the Notes issued under the
Indenture and to satisfy its debt obligations other than in connection with the
Credit Agreement may also depend upon the future availability of revolving
credit borrowings under the Credit Agreement. Such availability will depend on,
among other things, the Company's ability to meet certain specified financial
ratios and maintenance tests. The Company expects that, based on current and
expected levels of operations, its operating cash flow should be sufficient to
meet its operating expenses, to make necessary capital expenditures and to
service its debt requirements as they become due. If the Company is unable to
service its indebtedness, it will be forced to take actions, such as reducing or
delaying acquisitions and/or capital expenditures, selling assets, restructuring
or refinancing its indebtedness (including the Notes issued under the Indenture
and the Credit Agreement) or seeking additional equity capital. There is no
assurance that any of these remedies could be effected on satisfactory terms, if
at all.
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Company's existing debt obligations, including the Notes issued under
the Indenture and the Credit Agreement, contain certain covenants limiting,
subject to certain exceptions, the incurrence of indebtedness, payment of
dividends or other restricted payments, issuance of guarantees, entering into
certain transactions with affiliates, consummation of certain asset sales,
certain mergers and consolidations, sales or other dispositions of all or
substantially all of the assets of the Company and imposing restrictions on the
ability of a subsidiary to pay dividends or make certain payments to the Company
and its subsidiaries. The Company's ability to comply with such covenants may be
affected by events beyond its control. A breach of any of these covenants could
result in an event of default under the terms of the Company's existing debt
obligations. Upon the occurrence of an event of default, the lenders under these
debt obligations 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, there can be no assurance that the assets of the
Company would be sufficient to repay in full any such indebtedness and the other
indebtedness of the Company. Moreover, if the Company were unable to repay
amounts owed to the lenders under the Credit Agreement, such lenders could
proceed against the collateral granted to them to secure that indebtedness.
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RISKS ASSOCIATED WITH CHANGES IN TECHNOLOGY
Advances in information technology may result in changing customer
preferences for products and product delivery formats in the business and
consumer marketing information industry. The Company believes it is presently
the leading provider of marketing information on CD-ROM. However, the Company
believes that if customers increasingly look to digital video disc ("DVD") or
other new technology for information resources, the market for business and
consumer information on CD-ROM may contract and prices for CD-ROM products may
have to decrease or CD-ROM products may become obsolete. The Company plans to
introduce products on DVD. Failure of the Company to improve sales of CD-ROM
products or to successfully sell its products on DVD or to successfully
introduce products that take advantage of other technological changes may thus
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that the Internet represents an important and rapidly
evolving market for marketing information products and services. As such, the
Company has recently begun to focus more heavily on the Internet, and to develop
plans to exploit its new market more fully in the future. The Company may fail
to develop products and services that are well adapted to the Internet market,
to achieve market acceptance of its products and services, to achieve sufficient
traffic to its Internet sites to generate significant net sales, or to
successfully implement electronic commerce operations. Any such failure could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The business and consumer marketing information industry is highly
competitive. Many of the Company's principal or potential future competitors are
much larger than the Company and have much larger capital bases from which to
develop and compete with the Company. The Company faces increasing competition
in consumer sales lead generation products and data processing services from
Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions
of Experian, Direct Marketing Technologies and Metromail. In business sales lead
generation products, the Company faces competition from 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, the
Company competes primarily with Regional Bell Operating Companies and many
smaller, regional directory publishers. In consumer sales lead generation
products, the Company competes with Acxiom, R.L. Polk, Experian and Equifax,
both directly and through reseller networks. In data processing services, the
Company competes with Acxiom / May & Speh, Experian, Direct Tech, Snyder
Communications, Inc. and Harte-Hanks Communications, Inc. In consumer products,
the Company competes with certain smaller producers of CD-ROM products. In
addition, the rapid expansion of the Internet creates a substantial new channel
for distributing business information to the market, and a new avenue for future
entrants to the business and consumer marketing information industry. There is
no guarantee that the Company will be successful in this new market.
LOSS OF DATA CENTERS
The Company's business depends on computer systems contained in the
Company's data centers located in Omaha, Nebraska, Carter Lake, Iowa and
Greenwich, Connecticut. A fire or other disaster affecting any of the Company's
data centers could disable the Company's computer systems. Any significant
damage to any of the data centers could have a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company regards its databases and software as proprietary. The Company's
databases are copyrighted, and the Company depends on trade secret and
non-disclosure safeguards for protection of its software. The Company
distributes its products under agreements that grant customers a license to use
the Company's products for specified purposes and contain terms and conditions
prohibiting the unauthorized reproduction and use of the Company's products. In
addition, the Company generally enters into confidentiality agreements with its
management and programming staff and limits access to and distribution of its
proprietary information. There can be no assurance that the foregoing measures
will be adequate to protect the Company's intellectual property.
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RESTATEMENT OF FINANCIAL RESULTS
The Form 10-Q for the quarters ended March 31, 1998, June 30, 1998 and
September 30, 1998 were restated to accurately account for the acquisition of
Walter Karl and the related IPR&D charge as a result of receiving a valuation
report reflecting the retroactive application of the Securities and Exchange
Commission's new guidelines for valuing purchased IPR&D. During the first
quarter of 1998, the Company had originally recorded an IPR&D charge of $9.2
million. During the fourth quarter of 1998, the Company performed a new
valuation following the new guidance and the IPR&D charge was adjusted to $3.8
million.
DIRECT MARKETING REGULATION AND DEPENDENCE UPON MAIL CARRIERS
The Company and many of its customers engage in direct marketing. Certain
data and services provided by the Company are subject to regulation by federal,
state and local authorities. In addition, growing concerns about individual
privacy and the collection, distribution and use of information about
individuals have led to self-regulation of such practices by the direct
marketing industry through guidelines suggested by the Direct Marketing
Association and to increased federal and state regulation. Compliance with
existing federal, state and local laws and regulations and industry
self-regulation has not to date had a material adverse effect on the Company's
business, financial condition or results of operations. Nonetheless, federal,
state and local laws and regulations designed to protect the public from the
misuse of personal information in the marketplace and adverse publicity or
potential litigation concerning the commercial use of such information may
increasingly affect the operations of the Company, which could result in
substantial regulatory compliance or litigation expense or a loss of revenue.
Certain proposed federal legislation could also create proprietary rights in
certain "white pages" information that is presently in the public domain, which
could in turn increase the cost to the Company of acquiring data or disrupt its
ability to do so. The direct mail industry depends and will continue to depend
upon the services of the United States Postal Service and other private mail
carriers. Any modification by the United States Postal Service of its rate
structure, any increase in public or private postal rates generally or any
disruption in the availability of public or private postal services could have a
negative impact on the demand for business information, direct mail activities
and the cost of the Company's direct mail activities.
FINANCIAL AND ACCOUNTING ISSUES RELATED TO ACQUISITIONS
In connection with the acquisitions completed since mid-1996, the Company
issued approximately 7.4 million shares of Common Stock and paid approximately
$358.4 million in cash. The issuance of stock in these or future transactions
may be dilutive to existing stockholders to the extent that earnings of the
acquired companies do not offset the additional number of shares outstanding. In
connection with the acquisitions of DBA, Pro CD and Walter Karl, the Company
incurred approximately $97.0 million in debt. In connection with the acquisition
of Donnelley, the Company incurred approximately $165.0 million in debt. In
connection with future acquisitions, the Company may incur substantial amounts
of debt. Servicing such debt may result in decreases in earnings per share, and
the inability on the part of the Company to service such debt would result in a
material adverse effect on the Company's business, financial condition and
results of operations. Finally, the Company expects that future acquisitions
will generally be required to be accounted for using the purchase method. As a
result of such accounting treatment, the Company may be required to take charges
to operations or to amortize goodwill in connection with future acquisitions. As
a result of acquisitions completed since mid-1996, the Company was required to
take significant acquisition-related, integration and restructuring charges to
operations and will be required to amortize goodwill and other intangibles over
periods of 1 to 20 years. The acquisition-related charges and amortization of
goodwill and other intangibles have had and will continue to have an adverse
effect on net income. To the extent that future acquisitions result in
substantial charges to operations, incurrence of debt and amortization of
goodwill and other intangibles, such acquisitions could have an adverse effect
on the Company's net income, earnings per share and overall financial condition.
VOLATILITY AND UNCERTAINTIES WITH RESPECT TO STOCK PRICE
As with other companies that have experienced rapid growth, the Company has
experienced and is likely to continue to experience substantial volatility in
its stock price. Factors such as announcements by either the Company or its
competitors of new products or services or of changes in product or service
pricing policies, quarterly fluctuations in the Company's operating results,
announcements of technical innovations, announcements relating to strategic
relationships or acquisitions by the Company or its competitors, changes in
earnings estimates, opinions or ratings by analysts, and general market
conditions or market conditions within the business and consumer marketing
information industry, among other factors, may have significant impact on the
Company's stock price. Should the
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Company fail to introduce, enhance or integrate products or services on the
schedules expected, its stock price could be adversely affected. It is likely
that in some future quarter the Company will fail to achieve anticipated
operating results, and this failure could have a material adverse effect on the
Company's stock price. For the foregoing reasons, the price for the Company's
Common Stock may be subject to substantial fluctuation.
PURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a change of control of the Company in certain
circumstances, the Company is required to make an offer to purchase all
outstanding 9 1/2% Senior Subordinated Notes at a purchase price equal to 101%
of the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of purchase. There can be no assurance that the Company will
have available funds sufficient to purchase the Notes upon such change of
control. In addition, any change of control, and any repurchase of the Notes
upon a change of control, may constitute an event of default under any revolving
credit facility which the Company may enter into, and in that event the
obligations of the Company thereunder could be declared due and payable by the
lenders thereunder. Upon the occurrence of an event of default, the lenders
under such a credit facility may have the ability to block repurchases of the
Notes for a period of time and upon any acceleration of the obligations under
such a credit facility, the lenders thereunder would be entitled to receive
payment of all outstanding obligations thereunder before the Company may
repurchase any of the Notes tendered pursuant to an offer to repurchase the
Notes upon such change of control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in market risks since fiscal yearend 1998, other
than for the new Credit Agreement and interest rate swap agreement described in
Note 6. "Credit Agreement" in the accompanying notes to the consolidated
financial statements.
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infoUSA INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
PART II
OTHER INFORMATION
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infoUSA INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1999
PART II
ITEM 2. CHANGES IN SECURITIES
On October 21, 1999, the stockholders of the Company approved an amendment to
the Company's Certificate of Incorporation to (i) authorize a new class of
common stock, designated as Common Stock (the "Reclassified Common Stock"), (ii)
combine and reclassify the Company's Class A and Class B Common Stock into the
Reclassified Common Stock on a one-for-one basis, and (iii) establish the
rights, powers and limitations of the Reclassified Common Stock. Each share of
the Reclassified Common Stock entitles the holder thereof to one vote per share.
The combination of the shares has no effect on the total number of shares
outstanding.
Effective October 21, 1999, the Board of Directors combined and merged the
Company's Series A Preferred Shares Rights Agreement and Series B Preferred
Shares Rights Agreement into a single Amended and Restated Preferred Shares
Rights Agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders of the Company held on October 21, 1999,
the stockholders voted and approved the following item:
1. To (i) authorize a new class of common stock, designated as Common Stock
(the "Reclassified Common Stock"), (ii) combine and reclassify the
Company's Class A and Class B Common Stock into the Reclassified Common
Stock on a one-for-one basis, and (iii) establish the rights, powers, and
limitations of the Reclassified Common Stock.
Total Stock
FOR: 204,425,643 AGAINST: 3,678,730 ABSTAIN: 42,201 NON-VOTE None
Class A Common Stock
FOR: 18,714,323 AGAINST: 246,419 ABSTAIN: 5,562 NON-VOTE None
Class B Common Stock
FOR: 185,711,320 AGAINST: 3,432,311 ABSTAIN: 36,459 NON-VOTE None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
(b) Report on Form 8-K
On October 6, 1999, the Company filed Amendment No. 1 to a Current Report on
Form 8-K dated July 23, 1999, pursuant to Item 7 of that form, to report
certain pro forma financial information and financial statements related to
the acquisition of Donnelley Marketing, Inc.
On August 6, 1999, the Company filed a Current Report on Form 8-K dated July
23, 1999, pursuant to Items 2 and 7 of that form, to report the acquisition
of Donnelley Marketing, Inc.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
InfoUSA INC.
Date: November 15, 1999 /S/ VINOD GUPTA
----------------------------------------
Vinod Gupta, Chief Executive Officer and
Chairman of the Board
/S/ JACK J. MCGOVERN
----------------------------------------
Jack J. McGovern, Chief Financial Officer
(principal financial officer)
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
28