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, 2001 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
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.
50,571,248 shares of Common Stock at November 7, 2001
infoUSA INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000
Consolidated Statements of Operations for the three months and
nine months ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
Index to Exhibits
2
infoUSA INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2001
PART I
FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
3
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents ................................... $ 2,896 $ 21,693
Marketable securities ....................................... 1,134 102
Trade accounts receivable, net of allowances of
$2,694 and $4,724, respectively ........................... 50,106 58,501
List brokerage trade accounts receivable .................... 17,115 13,499
Income taxes receivable ..................................... 467 4,267
Prepaid expenses ............................................ 3,715 6,067
Deferred marketing costs .................................... 2,123 2,469
------------ ------------
Total current assets ................................ 77,556 106,598
------------ ------------
Property and equipment, net ................................... 50,119 54,709
Intangible assets, net ........................................ 288,429 296,060
Other assets .................................................. 5,416 6,178
------------ ------------
$ 421,520 $ 463,545
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................... $ 17,040 $ 17,779
Accounts payable ............................................ 7,309 11,484
List brokerage trade accounts payable ....................... 15,503 13,981
Accrued payroll expenses .................................... 6,132 7,458
Accrued expenses ............................................ 7,669 14,828
Deferred income taxes ....................................... 1,291 1,688
Deferred revenues ........................................... 17,920 19,437
------------ ------------
Total current liabilities ........................... 72,864 86,655
------------ ------------
Long-term debt, net of current portion ........................ 216,768 240,873
Deferred income taxes ......................................... 28,299 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; 51,530,339 shares issued and 50,571,248
outstanding at September 30, 2001 and 51,519,872 shares
issued and 50,520,620 outstanding at December 31, 2000 .... 129 129
Paid-in capital ............................................. 92,269 96,539
Retained earnings ........................................... 11,130 6,837
Treasury stock, at cost, 959,091 shares held at
September 30, 2001 and 999,252 held at December 31,
2000....................................................... (7,028) (7,271)
Unamortized stock compensation expense ...................... -- (4,543)
Accumulated other comprehensive loss ........................ (1,911) (721)
------------ ------------
Total stockholders' equity .......................... 94,589 90,970
------------ ------------
$ 421,520 $ 463,545
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
4
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Net sales ........................................ $ 68,498 $ 76,076 $ 213,260 $ 235,266
Costs and expenses:
Database and production costs
(excluding non-cash stock compensation
expense of $1,162 and $3,999 for the
periods ended September 30, 2000,
respectively) ................................. 19,032 26,027 59,945 77,386
Selling, general and administrative
(excluding non-cash stock compensation
expense of $146 and $448 for the periods ended
September 30, 2001 and $67 and $137 for the
periods ended September 30, 2000,
respectively) .................................. 26,341 35,801 80,284 113,084
Depreciation and amortization .................... 11,736 13,123 36,658 38,771
Non-cash stock compensation expense .............. 146 1,229 448 4,136
Restructuring charges ............................ 2,989 -- 4,632 --
Acquisition costs ................................ -- 86 -- 2,287
------------ ------------ ------------ ------------
Total operating costs and expenses ............... 60,244 76,266 181,967 235,664
------------ ------------ ------------ ------------
Operating income (loss) .......................... 8,254 (190) 31,293 (398)
Other income (expense):
Investment income .............................. 190 403 863 840
Gain on issuance of subsidiary stock ........... -- -- -- 14,634
Minority interest in (income/loss) of
subsidiary ................................... 609 1,095 282 2,795
Interest expense ............................... (5,945) (6,685) (19,288) (19,937)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle ..... 3,108 (5,377) 13,150 (2,066)
Income taxes ..................................... 2,874 1,141 8,857 2,752
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle ......................... 234 (6,518) 4,293 (4,818)
Discontinued operations, net of tax .............. -- (733) -- (2,348)
Cumulative effect of change in accounting
principle, net of tax ........................ -- -- -- (10,266)
------------ ------------ ------------ ------------
Net income (loss) ................................ $ 234 $ (7,251) $ 4,293 $ (17,432)
============ ============ ============ ============
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations ....... $ 0.00 $ (0.13) $ 0.08 $ (0.10)
Loss on discontinued operations ................ -- (0.01) -- (0.05)
Cumulative effect of change in accounting
principle .................................... -- -- -- (0.20)
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 0.00 $ (0.14) $ 0.08 $ (0.35)
============ ============ ============ ============
Weighted average shares outstanding ............ 50,571 50,751 50,570 49,905
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations ....... $ 0.00 $ (0.13) $ 0.08 $ (0.10)
Loss on discontinued operations ................ -- (0.01) -- (0.05)
Cumulative effect of change in accounting
principle .................................... -- -- -- (0.20)
------------ ------------ ------------ ------------
Net income (loss) .............................. $ 0.00 $ (0.14) $ 0.08 $ (0.35)
============ ============ ============ ============
Weighted average shares outstanding ............ 50,587 50,751 50,570 49,905
============ ============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
5
infoUSA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................... $ 4,293 $ (17,432)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ....................... 36,658 38,771
Amortization of deferred financing costs ............ 868 868
Deferred income taxes ............................... (3,811) (2,542)
Gain on issuance of subsidiary stock ................ -- (14,634)
Non-cash stock option compensation expense .......... 448 4,136
Non-cash 401(k) contribution in common stock ........ 120 1,541
Acquisition costs ................................... -- 615
Minority interest in gain (loss) of subsidiary ...... (282) (2,795)
Cumulative change in accounting principle ........... -- 10,266
Changes in assets and liabilities, net of
effect of acquisitions:
Trade accounts receivable ......................... 7,675 1,120
List brokerage trade accounts receivable .......... (3,616) 2,719
Prepaid expenses and other assets ................. 3,834 (3,172)
Deferred marketing costs .......................... 346 (657)
Accounts payable .................................. (4,175) 5,958
List brokerage trade accounts payable ............. 1,522 (1,480)
Income taxes receivable and payable, net .......... 5,558 (3,164)
Accrued expenses and deferred revenue ............. (15,166) 14,391
------------ ------------
Net cash provided by operating activities ........ 34,272 34,509
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities .................... (1,032) (32)
Purchases of property and equipment ................... (2,964) (8,215)
Acquisitions of businesses and minority interest ...... (16,326) (9,308)
Software and database development costs ............... (1,501) (9,944)
------------ ------------
Net cash used in investing activities ................. (21,823) (27,499)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt ........................... (31,246) (21,122)
Proceeds from sale of subsidiary common stock ......... -- 22,845
Deferred financing costs .............................. -- (708)
Proceeds from exercise of stock options ............... -- 4,200
------------ ------------
Net cash provided by (used in) financing activities .... (31,246) 5,215
Net increase (decrease) in cash and cash equivalents ... (18,797) 12,225
Cash and cash equivalents, beginning ................... 21,693 10,846
------------ ------------
Cash and cash equivalents, ending ...................... $ 2,896 $ 23,071
============ ============
Supplemental cash flow information:
Interest paid ......................................... $ 17,476 $ 16,568
============ ============
Income taxes paid ..................................... $ 6,212 $ 8,059
============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
6
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, 2000 included in the Company's 2000 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.
Effective January 1, 2000, the Company changed its revenue recognition method
for data licensing revenue and 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.
The Company uses derivative financial instruments to manage the risk of a change
in interest rates on $60.5 million of the debt incurred for the acquisition of
Donnelley Marketing in July 1999. The Company does not enter into derivative
financial instruments for trading or speculative purposes. The Company adopted
SFAS No. 133 effective January 1, 2001. Upon adoption, the Company's interest
rate swap agreement was designated as a cash flow hedge. The Company recorded a
transition adjustment at January 1, 2001 of $0.3 million, net of tax, as an
accumulated other comprehensive loss to record the derivative financial
instrument on the Company's financial statements. During the quarter ended
September 30, 2001, the Company recorded an unrealized loss on the above
derivative financial instrument of $307 thousand, net of tax, as an accumulated
other comprehensive loss in the stockholders equity section of the Consolidated
Balance Sheet. In addition, a gain of $0.1 million was recorded as a reduction
in interest expense in the other income section of the Consolidated Statement of
Operations. For the nine months ended September 30, 2001, the Company recorded
an unrealized loss on the above derivative financial instrument of $1.2 million,
net of tax, as an accumulated other comprehensive loss in the stockholders
equity section of the Consolidated Balance Sheet. In addition, a charge of $0.5
million was recorded as interest expense in the other income (expense) section
of the Consolidated Statement of Operations.
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. Options on 0.1 million and 0.5 million shares of common stock were not
included in computing diluted earnings per share for the three months and nine
months ended September 30, 2000, respectively, because their effects were
antidilutive as the Company recorded a net loss for the period.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
(IN THOUSANDS) (IN THOUSANDS)
2001 2000 2001 2000
-------- -------- -------- --------
Weighted average number of shares
outstanding used in basic EPS .................. 50,571 50,751 50,570 49,905
Net additional common stock equivalent shares
outstanding after assumed exercise of
stock options .................................. 16 -- -- --
-------- -------- -------- --------
Weighted average number of shares outstanding
used in diluted EPS ............................ 50,587 50,751 50,570 49,905
======== ======== ======== ========
3. SEGMENT INFORMATION
The Company currently manages existing operations utilizing financial
information accumulated and reported for two business segments.
7
The small business segment principally engages in the selling of sales lead
generation and consumer DVD products to small and 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, 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 Company records unusual or non-recurring items including
acquisition costs, non-cash stock compensation expense, gain on issuance of
subsidiary stock and minority interest in loss (gain) of subsidiary 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 table summarizes segment information:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
------------- ------------- ----------- -------------
(IN THOUSANDS)
Net sales ......................... $ 29,878 $ 38,620 $ -- $ 68,498
Non-cash stock compensation ....... -- -- 146 146
Operating income (loss) ........... 13,716 18,047 (23,509) 8,254
Investment income ................. -- -- 190 190
Interest expense .................. -- -- 5,945 5,945
Income (loss) from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle ....................... 13,716 18,047 (28,655) 3,108
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
------------- ------------- ----------- -------------
(IN THOUSANDS)
Net sales ......................... $ 34,274 $ 41,802 $ -- $ 76,076
Non-cash stock compensation ....... -- -- 1,229 1,229
Acquisition costs ................. -- -- 86 86
Operating income (loss) ........... 9,577 19,049 (28,816) (190)
Investment income ................. -- -- 403 403
Interest expense .................. -- -- 6,685 6,685
Income (loss) from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle ....................... 9,577 19,049 (34,003) (5,377)
8
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
------------ ------------ ---------- ------------
(IN THOUSANDS)
Net sales ......................... $ 96,834 $ 116,426 $ -- $ 213,260
Non-cash stock compensation ....... -- -- 448 448
Operating income (loss) ........... 46,550 58,810 (74,067) 31,293
Investment income ................. -- -- 863 863
Interest expense .................. -- -- 19,288 19,288
Income (loss) from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle ....................... 46,550 58,810 (92,210) 13,150
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------------------------------
SMALL LARGE CORPORATE CONSOLIDATED
BUSINESS BUSINESS ACTIVITIES TOTAL
------------- ------------- ----------- -------------
(IN THOUSANDS)
Net sales ......................... $ 110,173 $ 125,093 $ -- $ 235,266
Non-cash stock compensation ....... -- -- 4,136 4,136
Acquisition costs ................. -- -- 2,287 2,287
Operating income (loss) ........... 31,443 55,763 (87,604) (398)
Investment income ................. -- -- 840 840
Interest expense .................. -- -- 19,937 19,937
Income (loss) from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle ....................... 31,443 55,763 (89,272) (2,066)
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), including the components of other comprehensive
income (loss), is as follows:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
------------------------------- -------------------------------
SEPT 30, SEPT 30, SEPT 30, SEPT 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
Net income (loss) ................................ $ 234 $ (7,251) $ 4,293 $ (17,432)
Other comprehensive income (loss):
Unrealized gain (loss) from investments:
Unrealized gains (losses) .................... -- (39) (24) (39)
Related tax expense .......................... -- -- 9 --
------------- ------------- ------------- -------------
Net .......................................... -- (39) (15) (39)
------------- ------------- ------------- -------------
Interest rate swap agreement:
Gains (losses) ............................... (495) -- (1,944) --
Related tax expense .......................... 188 -- 739 --
------------- ------------- ------------- -------------
Net .......................................... (307) -- (1,205) --
------------- ------------- ------------- -------------
Foreign currency translation
adjustments .................................. -- -- -- (27)
------------- ------------- ------------- -------------
Total other comprehensive income
(loss) ......................................... (307) (39) (1,190) (66)
------------- ------------- ------------- -------------
Comprehensive income ............................. $ (73) $ (7,290) $ 3,103 $ (17,498)
============= ============= ============= =============
The components of accumulated other comprehensive income (loss) is as
follows:
FOREIGN ACCUMULATED
CURRENCY GAINS/(LOSSES) UNREALIZED OTHER
TRANSLATION ON DERIVATIVE GAINS/(LOSSES) COMPREHENSIVE
ADJUSTMENTS INSTRUMENTS ON SECURITIES INCOME (LOSS)
------------ -------------- -------------- -------------
(IN THOUSANDS)
Balance at September 30, 2001 ..... $ (668) $ (1,175) $ (68) $ (1,911)
============ ============ ============ ============
Balance at December 31, 2000 ...... $ (668) $ -- $ (53) $ (721)
============ ============ ============ ============
9
5. NON-CASH STOCK COMPENSATION EXPENSE
The Company's subsidiary, infoUSA.com, sponsors an Equity Incentive Plan in
which shares of common stock are reserved for issuance to officers, directors,
employees and consultants of the subsidiary. There were no subsidiary options
granted during the nine months ended September 30, 2001. The Company uses
Accounting Principles Bulletin (APB) Opinion No. 25 to account for stock-based
compensation to employees and directors of the Company and Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
and FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans and other related FASB
Interpretations for stock-based compensation to non-employees of the Company. As
such, the Company has recorded a non-cash charge of $0.1 million and $1.2
million, during the quarters ended September 30, 2001 and 2000 respectively,
related to stock options for infoUSA.com. For the nine months ended September
30, 2001 and 2000, the Company has recorded non-cash charges of $0.4 million and
$4.1 million, respectively, related to stock options for infoUSA.com. The
charges were recorded as an addition to paid-in-capital. During the quarter
ended September 30, 2001, the Company eliminated the minority interests in its
subsidiary, infoUSA.com, through the acquisition of assets. As a result of the
purchase, the Company's obligation associated with the subsidiary stock options
was eliminated. Therefore, the Company wrote-off $1.8 million of Unamortized
Stock Compensation and reduced the Paid-in Capital components of stockholders
equity.
6. RESTRUCTURING CHARGES
During the quarter ended September 30, 2001, the Company recorded
restructuring charges of $3.0 million due to a lease termination agreement and
charges related to additional 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. The
Company recorded charges of $2.8 million for costs of the lease settlement not
previously accrued and $0.2 million for workforce reduction charges that
included involuntary employee separation costs for approximately 50 employees in
administration, sales support and marketing functions.
During the fourth quarter of 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 abandoned Foster
City, California facility and an accrual of $2.1 million for workforce
reductions of approximately 350 employees. As of June 30, 2001, employees
received cash severance payments totaling $2.1 million during the first six
months of 2001, with no severance payments from the 2000 workforce reductions
remaining deferred and payable as of June 30, 2001.
7. ACQUISITION COSTS
During the quarter ended September 30, 2000, the Company recorded charges of
$86 thousand 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. These costs were not directly
related to the acquisition of these companies, and therefore could not be
capitalized as part of the purchase price. For the nine months ended September
30, 2000, the Company recorded acquisition costs of $2.3 million, including $0.9
million of costs described above and $1.4 million associated with the Company's
bid to acquire the consumer database division of R.L. Polk.
8. GAIN ON ISSUANCE OF SUBSIDIARY STOCK
During the nine months ended September 30, 2000, infoUSA.com, a subsidiary
of the Company, issued approximately 5.1 million shares of convertible preferred
stock for approximately $22.8 million or $4.47 per share. As a result of the
issuance of the convertible preferred stock, the Company's ownership in
infoUSA.com decreased from approximately 83 percent at December 31, 1999 to
approximately 67 percent at September 30, 2000 and a gain of $14.6 million was
recorded. No deferred income taxes were recorded due to the gain being a
non-taxable transaction. infoUSA.com is an online provider of white and yellow
page directory assistance and an Internet destination for sales and marketing
tools and information.
9. DISCONTINUED OPERATIONS, NET OF TAX
During December 2000, the Company closed the operations of its
VideoYellowPages.com Internet unit. VideoYellowPages.com recorded a loss from
discontinued operations for the quarter ended September 30, 2000 of $0.7
million, net of income tax benefit of
10
$0.4 million. For the nine months ended September 30, 2000, the Company recorded
a loss from discontinued operations related to VideoYellowPages.com of $2.3
million, net of income tax benefit of $1.4 million.
10. ACQUISITION
Effective August 30, 2001, the Company eliminated 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.
11. 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.
12. SUBSEQUENT EVENTS
Effective October 1, 2001, the Company acquired the assets of Polk City
Directories from Equifax. Polk City Directories provides printed reference
guides listing business and residential information. Consideration for the
acquisition was $6.0 million in cash (excluding any acquisition-related costs),
funded using existing cash generated from operations. The acquisition will be
accounted for using the purchase method of accounting. As part of the
acquisition, the Company anticipates recording goodwill and other intangibles
totaling approximately $6 million.
11
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 information, data
processing and database marketing services. The Company's key assets include
proprietary databases of 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 3 million customers that
include small and medium-size businesses, Fortune 1000 companies, consumers, and
Internet users.
This discussion and analysis contains forward-looking statements, including
without limitation statements in the discussion of comparative results of
operations, accounting standards and liquidity and capital resources, within the
meaning of Section 21E of the 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 following table sets forth, for the periods indicated, selected
financial information and other data. The amounts and related percentages may
not be fully comparable due to the acquisitions of American Church Lists during
March 2000, idEXEC in May 2000 and Getko Direct Response of Canada (Getko) in
May 2000:
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT 30, 2001 SEPT 30, 2000 SEPT 30, 2001 SEPT 30, 2000
------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ....................................................... 100% 100% 100% 100%
Costs and expenses:
Database and production costs ................................. 28 34 28 33
Selling, general and administrative ........................... 38 47 38 48
Depreciation and amortization ................................. 17 17 17 16
Non-cash stock compensation expense ........................... -- 2 -- 2
Restructuring charges ......................................... 4 -- 2 --
Acquisition costs ............................................. -- -- -- 1
------------ ------------ ------------ ------------
Total costs and expenses ................................... 88 100 85 100
------------ ------------ ------------ ------------
Operating income (loss) ....................................... 12 0 15 0
Other income (expense), net ................................... (8) (7) (9) (1)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle .... 4 (7) 6 (1)
Income taxes .................................................. 4 2 4 1
------------ ------------ ------------ ------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle ................... 0 (9) 2 (2)
Discontinued operations, net of tax ........................... -- (1) -- (1)
Cumulative effect of change in accounting principle, net
of tax ..................................................... -- -- -- (4)
------------ ------------ ------------ ------------
Net income (loss) ............................................. 0% (10)% 2% (7)%
============ ============ ============ ============
OTHER DATA:
SALES BY SEGMENT:
(in thousands)
Small business ........................................... $ 29,878 $ 34,274 $ 96,834 $ 110,173
Large business ........................................... 38,620 41,802 116,426 125,093
------------ ------------ ------------ ------------
Total .................................................... $ 68,498 $ 76,076 $ 213,260 $ 235,266
============ ============ ============ ============
SALES BY SEGMENT AS A PERCENTAGE OF NET SALES:
Small business ........................................... 44% 45% 45% 47%
Large business ........................................... 56 55 55 53
------------ ------------ ------------ ------------
Total .................................................... 100% 100% 100% 100%
============ ============ ============ ============
Amortization expense of goodwill and related intangibles(1) .... $ 7,584 $ 8,238 $ 22,894 $ 24,308
============ ============ ============ ============
Earnings before, interest, taxes, depreciation and
amortization, (EBITDA), as adjusted (2) .................... $ 20,136 $ 14,162 $ 68,399 $ 42,509
============ ============ ============ ============
EBITDA, as adjusted, as a percentage of net sales .............. 29% 19% 32% 18%
============ ============ ============ ============
Cash Flow Data: (in thousands)
Net cash from operating activities ........................ $ 34,272 $ 34,509
============ ============
Net cash used in investing activities ..................... (21,823) 27,499)
============ ============
Net cash used in financing activities ..................... (31,246) 5,215
============ ============
12
(1) This represents amortization expense recorded by the Company on all
intangibles recorded as part of the acquisition of other companies, and excludes
amortization related to deferred financing costs, software development costs,
and other intangible assets not recorded as part of an acquisition of another
company.
(2) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to
exclude depreciation, amortization and non-cash stock compensation expenses.
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.
Overview
The Company has supplemented its internal growth through strategic
acquisitions. The Company has completed thirteen acquisitions since mid-1996.
Through these acquisitions, the Company has increased its presence in the
consumer marketing information industry, significantly increased its ability to
provide data processing solutions, added two consumer CD-Rom product lines,
increased its presence in list management and list brokerage services and
broadened its offerings of business marketing information.
As a part of these strategic acquisitions, the Company has 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 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. 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, a number of the acquisitions have
had a significant impact on net sales.
During 1999, operating costs increased significantly due to the Company's
execution of the planned expansion of certain Internet initiatives, including
infoUSA.com, BusinessCreditUSA.com, VideoYellowPages.com and ListBazaar.com.
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. The Company realized it did not have the
resources required to make this idea succeed. The Company cut back dramatically
the investment in BusinessCreditUSA.com and ListBazaar.com businesses and have
rolled them back into the core business. Leveraging off of the high traffic from
the infoUSA.com and our partner's website, we are able to make
BusinessCreditUSA.com and List Bazaar.com profitable and successful distribution
channels for our proprietary content and Business Credit Reports. 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 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 core business operations. The
dramatic changes in the Internet market required us to focus on preserving the
remaining investment and revise our strategy for turning infoUSA.com into a
profitable subsidiary. infoUSA.com reduced its staff from approximately 85
people to 14 people by the end of June 2001, with most of the administrative,
overhead and support functions being rolled back under the parent company.
13
In summary, EBITDA, as adjusted, increased from $42.5 million for the nine
months ended September 30, 2000 to $68.4 million for the nine months ended
September 30, 2001, principally due to the following: 1) reducing the investment
for the four Internet initiatives late in 2000 previously described resulting in
cost savings of approximately $17.0 million, and 2) staffing reductions
(excluding staffing reductions related to the Internet initiatives described
above) initiated between December 2000 and September 2001 totaling 24% of the
total workforce resulting in cost savings of approximately $8.7 million.
Net sales
Net sales of the Company for the quarter ended September 30, 2001 were $68.5
million, a decrease of 10% from $76.1 million for the same period of 2000. Net
sales for the nine months ended September 30, 2001 were $213.3 million, a
decrease of 9% from the $235.3 million for the same period of 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 the quarter ended September 30,
2001 were $29.9 million, a 13% decrease from $34.3 million for the same period
of 2000. The decrease in net sales is principally due to softer customer demand,
a general slow-down in the United States economy and the tragic events of
September 11. $1.8 million of the decrease specifically related to the sale of
content to list brokers and resellers. Net sales of the small business segment
for the nine months ended September 30, 2001 were $96.8 million, a 12% decrease
from the $110.2 million for the same period of 2000. A significant portion of
the decrease in net sales for the period, is due to a $7.5 million decrease in
the sale of content to list brokers and resellers who are more adversely
affected by the economic downturn. 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. The net sales amounts are not fully comparable due to the acquisition
of American Church Lists in March 2000 and Getko Direct Response of Canada
(Getko) in May 2000. The Company immediately integrated the operations of the
acquired companies into existing operations. The Company cannot report 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.
Net sales of the large business segment for the quarter ended September 30,
2001 were $38.6 million, a 8% decline from $41.8 million for the same period of
2000. Net sales of the large business segment for the nine months ended
September 30, 2001 were $116.4 million, a 7% decrease from the $125.1 million
for the same period of 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 a postal rate increase that temporarily
reduced mail advertising activity by its customers. These amounts are not fully
comparable due to the acquisition of idEXEC in May 2000. The Company immediately
integrated the operations of idEXEC into existing operations and cannot report
the results of idEXEC separately 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.
Database and production costs
Database and production costs for the quarter ended September 30, 2001 were
$19.0 million, or 28% of net sales, compared to $26.0 million, or 34% of net
sales for the same period of 2000. For the nine months ended September 30, 2001,
database and production costs were $59.9 million, or 28% of net sales, compared
to $77.4 million or 33% of net sales for the same period in 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 23% of net sales for the nine months ended September
30, 2001, a decrease of $6.5 million, compared to the rate of 26% of net sales,
for the same period of 2000. Database and production costs for corporate
activities, decreased $3.6 million for the nine months ended September 30, 2001
compared to the same period of 2000, due to decreased data compilation and data
acquisition costs. Database and production costs for the Internet businesses
decreased $3.8 million to $0.9 million for the nine months ended September 30,
2001, compared to $4.7 million for the same period of 2000.
14
Selling, general and administrative expenses
Selling, general and administrative expenses for the quarter ended September
30, 2001 were $26.3 million, or 38% of net sales, compared to $35.8 million, or
47% of net sales for the same period of 2000. For the nine months ended
September 30, 2001, selling, general and administrative expenses were $80.3
million, or 38% of net sales, compared to $113.1 million, or 48% 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 the nine months ended September 30, 2001, were $9.5 million, or 14% of net
sales, compared to $26.3 million, or 35% of net sales, for the same period of
2000. Marketing and advertising expenses related to the various Internet
divisions were $0.2 million for the nine months ended September 30, 2001,
reflecting a decrease of $12.3 million, or 18% of net sales, compared to $12.5
million for the same period of 2000. Marketing and advertising expenses related
to the core businesses were $4.5 million lower for the nine months ended
September 30, 2001 compared to the same period of 2000. The Company has reduced
total headcount from 2,166 in September 2000, to 1,560 as of September 30, 2001.
Salaries and wages for marketing and general administration for the nine months
ended September 30, 2001 were $45.7 million, or 21% of net sales, a reduction of
$13.5 million compared to $59.2 million, or 25% of net sales, for the same
period of 2000.
Depreciation and amortization expenses
Depreciation and amortization expenses for the quarter ended September 30,
2001 were $11.7 million, or 17% of net sales, compared to $13.1 million, or 17%
of net sales for the same period of 2000. For the nine months ended September
30, 2001, depreciation and amortization expenses were $36.7 million, or 17% of
net sales, compared to $38.8 million, or 16% of net sales for the same period in
2000. The decrease in depreciation and amortization expenses is principally due
to certain intangible assets and website development costs becoming fully
amortized.
Non-cash stock compensation expense
During the quarter ended September 30, 2001, the Company recorded a non-cash
charge of $0.1 million, or less than 1% of net sales, compared to $1.2 million,
or 2% of net sales, for the same period of 2000, related to the issuance of
stock options for infoUSA.com, a subsidiary of the Company. For the nine months
ended September 30, 2001, non-cash stock compensation expenses were $0.4
million, or less than 1% of net sales, compared to $4.1 million, or 2% of net
sales for the same period of 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
acquisition of assets, it will not incur non-cash stock compensation expense
related to the options for the fourth quarter 2001 and subsequent periods.
Restructuring costs
During the quarter ended September 30, 2001, the Company recorded
restructuring charges of $3.0 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, and recorded additional
charges of $2.8 million for costs of the lease settlement not previously
recorded. The Company also recorded $0.2 million for workforce reduction charges
that included involuntary employee separation costs for approximately 50
employees in administration, sales support and marketing functions.
During the fourth quarter of 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 abandoned Foster
City, California facility and an accrual of $2.1 million for workforce
reductions of approximately 350 employees. Employees 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.
Acquisition costs
During the quarter ended September 30, 2000, the Company recorded charges of
$86 thousand 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. These costs were not directly
related to the acquisition of these companies, and therefore could not be
capitalized as part of the purchase price.
For the nine months ended September 30, 2000, the Company recorded
acquisition costs of $2.3 million, including $0.9 million principally related to
the Company's acquisition of American Church Lists, idEXEC and Getko,
representing costs to integrate these
15
acquired operations into the Company's existing operations. The Company also
recorded $1.4 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 $8.3 million, or 12% of net sales for the quarter ended September 30, 2001,
compared to an operating loss of $0.2 million, or less than (1)% of net sales
for the same period in 2000. For the nine months ended September 30, 2001, the
Company had operating income of $31.3 million, or 15% of net sales, compared to
an operating loss of $0.4 million, or less than (1)% of net sales for the same
period in 2000.
Operating income for the small business segment for the quarter ended
September 30, 2001 was $13.7 million, or 46% of net sales, as compared to $9.6
million, or 28% of net sales for the same period in 2000. For the nine months
ended September 30, 2001, operating income for the small business segment was
$46.6 million, or 48% of net sales, compared to $31.4 million, or 29% of net
sales for the same period of 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 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 the quarter ended
September 30, 2001 was $18.0 million, or 47% of net sales, as compared to $19.0
million, or 46% of net sales for the same period in 2000. For the nine months
ended September 30, 2001, operating income for the large business segment was
$58.8 million or 51% of net sales, compared to $55.8 million, or 45% of net
sales for the same period in 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 income (expense), net
Other income (expense) net, was $(5.1) million, or (8)% of net sales, and
$(5.2) million, or (7)% of net sales, for the quarters ended September 30, 2001
and 2000, respectively. For the nine months ended September 30, 2001, other
income (expense) net, was $(18.1) million, or (9)% of net sales, compared to
$(1.7) million, or (1)% of net sales for the same period of 2000. 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.
Interest expense was $5.9 million and $6.7 million for the quarters ended
September 30, 2001 and 2000, respectively. For the nine months ended September
30, 2001 and 2000, interest expense was $19.3 million and $20.0 million,
respectively. Investment income was $0.2 million and $0.4 million, for the
quarters ended September 30, 2001 and 2000, respectively. For the nine months
ended September 30, 2001 and 2000, interest income was $0.9 million and $0.8
million, respectively.
During the year 2000, infoUSA.com, a subsidiary of the Company, completed
additional venture capital financing. For the nine months ended September 30,
2000, the Company 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 (income) loss of subsidiary of $0.6 million and $1.1
million for the quarters ended September 30, 2001 and 2000, respectively,
represents the unaffiliated investors' share of infoUSA.com's net loss (income)
for the period then ended. For the nine months ended September 30, 2001 and
2000, respectively, minority interest in (income) loss of subsidiary of $0.3
million and $2.8 million, represents the unaffiliated investors' share of
infoUSA.com's net loss (income) for the period then ended.
Income taxes
A provision for income taxes of $2.9 million and $1.1 million was recorded
for the quarters ended September 30, 2001 and 2000, respectively. For the nine
months ended September 30, 2001, a provision for income taxes of $8.9 million
was recorded compared to $2.8 million recorded for the same period of 2000. The
gain the Company recorded on the issuance of subsidiary stock during the nine
month period ended September 30, 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.
16
Discontinued operations, net of tax
During December 2000, the Company closed the operations of its
VideoYellowPages.com Internet unit. VideoYellowPages.com recorded revenues of
$0.1 million and operating expenses of $1.3 million, for a pre-tax operating
loss of $1.2 million and an after-tax loss of $0.7 million, during the third
quarter of 2000. VideoYellowPages.com recorded revenues of $0.2 million and
operating expenses of $4.0 million, for a pre-tax operating loss of $3.8 million
and an after-tax loss of $2.3 million, for the nine month period ended September
30, 2000.
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 $20.1 million, or 29% of net sales for
the quarter ended September 30, 2001, and $14.2 million, or 19% of net sales for
the same period in 2000. For the nine months ended September 30, 2001, the
Company's EBITDA, as adjusted was $68.4 million, or 32% of net sales, compared
to $42.5 million, or 18% of net sales for the same period in 2000.
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 Credit Facility to permit
continued availability of borrowing under such facility. As of September 30,
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.
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. Management believes
the Company is in compliance with all restrictive covenants of the Company's
various debt facilities.
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 obtain additional equity or
debt financing, which may not be available or may be dilutive.
Consolidated Statements of Cash Flows Information:
As of September 30, 2001, the Company's principal sources of liquidity
included cash and cash equivalents of $2.9 million. As of September 30, 2001,
the Company had working capital of $4.7 million. During the third quarter of
2001, the Company eliminated the minority interests of its subsidiary,
infoUSA.com through the acquisition of assets. According to the terms of the
purchase agreement, $15.7 million of restricted cash held by the subsidiary was
returned to the minority investors. Therefore, these restrictions on the
Company's cash are no longer in effect.
Net cash provided by operating activities during the nine months ended
September 30, 2001, totaled $34.3 million compared to $34.5 million during the
same period of 2000. For the nine months ended September 30, 2000, the Company
recorded the receipt of $14.0 million that represented a customer prepayment on
a long-term data license agreement. For the nine months ended September 30,
2001, the Company made cash payments of $2.1 million for severance payments and
$3.7 million for lease payments on the abandoned Foster City, California
facility, described in the "Restructuring costs" section above. Therefore, net
cash provided by operating activities, as adjusted for the items described
above, totaled $40.1 million, compared to $20.3 million for the nine months
ended September 30, 2001 and 2000, respectively.
17
During the nine months ended September 30, 2001, the Company spent $3.0
million for additions of property and equipment, $1.5 million related to
software and database development costs, $1.0 million for the purchase of
marketable securities and $31.2 million on the repayment of long-term debt.
During the quarter ended September 30, 2001, the Company eliminated the minority
interests in its subsidiary, infoUSA.com, through the purchase of assets for
$16.3 million, comprised of $15.7 million of restricted cash described above and
$3.0 million, net of $2.4 million royalties due from the subsidiary. During the
nine months ended September 30, 2000, the Company spent $9.3 million for the
acquisitions of businesses. The Company acquired American Church Lists in March
2000 for $2.1 million, Getko in May 2000 for $1.7 million and idEXEC in May 2000
for $5.5 million in cash.
The Company made two voluntary prepayments totaling $10.0 million on its
Senior Debt Credit Facility during the quarter ended September 30, 2001. During
the nine months ended September 30, 2001, the Company has made voluntary
prepayments of $16.0 million on its Senior Debt Credit Facility.
During the nine months ended September 30, 2000, the Company received cash
proceeds of $22.8 million on the issuance of stock by its subsidiary infoUSA.com
and $4.2 million from the exercise of stock options.
Consolidated Balance Sheet Information:
Trade accounts receivable decreased from $58.5 million at December 31, 2000
to $50.1 million at September 30, 2001, with related days sales outstanding
("DSO") of 71 days compared to 63 days, respectively. The decrease is
principally due to the enforcement of stricter credit policies and the
performance of more aggressive collection practices.
Intangible assets, net of amortization, decreased from $296.1 million at
December 31, 2000 to $288.4 million at September 30, 2001. The decrease is
attributed to the amortization of capitalized software development costs and
assets related to the acquisitions described in the "Overview" section.
Depreciation and amortization expense totaled $36.7 million during the nine
months ended September 30, 2001. Although, the reduction described above was
offset by an increase in goodwill of $19.6 million, due to the Company's
elimination of the minority interests in its subsidiary infoUSA.com, through the
purchase of assets.
Accounts payable decreased from $11.5 million at December 31, 2000 to $7.3
million at September 30, 2001. The decrease is principally due to decreased
spending on marketing and advertising programs for the Internet businesses
described in the "Selling, general and administrative expenses" section, and
improved cash flows generated by operating activities.
Accrued expenses decreased from $14.8 million at December 31, 2000 to $7.7
million at September 30, 2001. The decrease is principally due to: 1) a
reduction of $3.2 million for accrued employee benefit plan contributions, and
2) a net reduction of $5.8 million in restructuring liabilities described in the
"Restructuring costs" section.
Long term debt decreased from $258.7 million at December 31, 2000 to $233.8
million at September 30, 2001. The Company made repayments on long-term debt
totaling $31.2 million during the nine months ended September 30, 2001. During
the quarter ended September 30, 2001, the Company issued a $6 million
subordinated note, bearing six percent interest and payable in two years, as a
part of the elimination of the minority interests in its subsidiary infoUSA.com,
through the purchase of assets.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivatives be
recognized as either assets or liabilities in the balance sheet and measured at
their fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(ii) a hedge of the exposure to variable cash flows of a forecasted transaction
or (iii) a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available-for-sale
security or a foreign-currency denominated forecasted transaction. SFAS 133, as
amended by Statement of Financial Accounting Standards No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company uses derivative financial instruments to manage the risk of a
change in interest rates on $60.5 million of the debt incurred for the
acquisition of Donnelley Marketing in July 1999. The Company does not enter into
derivative financial instruments for trading or speculative purposes. The
Company adopted SFAS No. 133 effective January 1, 2001. Upon adoption, the
Company's
18
interest rate swap agreement was designated as a cash flow hedge. The Company
recorded a transition adjustment at January 1, 2001 of $0.3 million, net of tax,
as an accumulated other comprehensive loss to record the derivative financial
instrument on the Company's financial statements. During the nine months ended
September 30, 2001, the Company recorded an unrealized loss on the above
derivative financial instrument of $1.2 million, net of tax, as an accumulated
other comprehensive loss in the stockholders equity section of the Consolidated
Balance Sheet. In addition, a charge of $0.5 million was recorded as interest
expense in the other income (expense) section of the Consolidated Statement of
Operations.
On July 20, 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations and No. 142, Goodwill and Other Intangible Assets.
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Business combinations accounted for as
poolings-of-interests and initiated prior to June 30, 2001 are grandfathered.
SFAS 142 replaces the requirement to amortize intangible assets with indefinite
lives and goodwill with a requirement for an impairment test. SFAS 142 also
requires an evaluation of intangible assets and their useful lives and a
transitional impairment test for goodwill and certain tangible assets upon
adoption. After transition, the impairment tests will be performed annually.
SFAS 142 is effective for fiscal years beginning after December 15, 2001, as of
the beginning of the year. For the nine months ended September 30, 2001, the
Company has expensed $22.9 million due to amortization of intangible assets,
that under the new accounting rules will not be expensed.
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 we introduced in fiscal 2000 -- of being an
incubator of Internet database companies -- has been revised to a strategy of
developing more efficient and profitable applications of our content through the
Internet. 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, May & Speh (a subsidiary of
Acxiom), Experian, Direct Marketing Technologies (a subsidiary of GUS),
Snyder Communications, Inc. (a subsidiary of Havas Advertising) and
HarteHanks, 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, from 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 IS 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.
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We are highly leveraged. If we are unable to service our debt as it becomes due,
our business would be harmed.
As of September 30, 2001, we had total indebtedness of approximately $233.8
million, including $106.0 million of Notes under an indenture (the "Indenture")
and $108.7 million under a $195 million Senior Secured Credit Agreement.
Substantially all of our assets are pledged as security under the terms of the
Credit Agreement. The indebtedness under the Credit Agreement 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 Credit Agreement and to satisfy our other debt
obligations will depend upon our future operating performance. Our performance
will be affected by prevailing economic conditions and financial, business and
other factors. Certain of these factors are beyond our control. The future
availability of revolving credit under the Credit Agreement 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 the Indenture
and the Credit Agreement) or seeking additional equity capital. We may not be
able to implement any such measures or obtain additional financing.
The terms of our current indebtedness 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.
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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:
- 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 thirteen
acquisitions since mid-1996 and completed the integration of these acquisitions
into our existing business by the end of 2000. 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to significant future earnings or cash flow
exposures from changes in interest rates on long-term debt as a significant
portion of the Company's debt is at fixed interest rates and the Company has
entered into long-term interest rate swap agreements used to reduce the
potential impact of changes in interest rates on floating rate debt. The Company
is not exposed to material future earnings or cash flow exposures from
fluctuations in foreign currency exchange rates as operating results related to
foreign operations are not material.
21
infoUSA INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2001
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Report on Form 8-K
None
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SIGNATURES
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 10, 2001 /s/ STORMY L. DEAN
-----------------------------------------
Stormy L. Dean, Chief Financial Officer
(principal financial officer)
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