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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
[NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
[NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19598
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AMERICAN BUSINESS INFORMATION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE (State or other jurisdiction of 47-0751545
incorporation or organization) (I.R.S. Employer
Identification No.)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
(Address of principal executive offices)
(402) 593-4500
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.0025 PAR VALUE
CLASS B COMMON STOCK, $0.0025 PAR VALUE
SERIES A PREFERRED SHARE PURCHASE RIGHTS
SERIES B PREFERRED SHARE PURCHASE RIGHTS
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Class A Common Stock and
Class B Common Stock on March 18, 1998 as reported on the NASDAQ National Market
System, was approximately $332 million. Shares of Common Stock held by each
officer and director and by each person who owns 5% or more of the outstanding
Class A Common Stock or Class B Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 18, 1998 registrant had outstanding 24,661,161 shares of Class A
Common Stock and 24,661,161 shares of Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 22, 1998, which will be filed within 120 days of
the end of fiscal year 1997, is incorporated into Part III hereof by reference.
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PART I
This Annual Report on Form 10-K and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995 including,
without limitations, statements related to potential future acquisitions and the
Company's strategy and plans for its business contained in Item 1 "Business,"
Item 2 "Properties" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Such forward-looking statements
are based on current expectations, estimates and projections about the Company's
industry, management's beliefs, and certain assumptions made by the Company's
management. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those set forth herein under "Factors That May Affect Operating Results"
on pages 24 through 28, as well as those noted in the documents incorporated
herein by reference. Unless required by law, the Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise. However, readers should
carefully review the risk factors set forth in other reports or documents the
Company files from time to time with the Securities and Exchange Commission,
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.
ITEM 1. BUSINESS.
THE COMPANY
American Business Information, Inc. (the "Company") is a leading provider
of business and consumer marketing information products 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 113 million households and 180 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 larger corporations. The Company's net sales increased at a
compounded annual growth rate of 36% to $193.3 million in 1997 from $55.8
million in 1993, both through the introduction of new products and distribution
channels and through the acquisition of complementary businesses.
The Company was originally incorporated in Nebraska in 1972, and was
reincorporated in Delaware in 1992. On October 3, 1997, the Company reclassified
its then existing Common Stock as Class B Common Stock, created a new class of
common stock designated Class A Common Stock consisting of 220,000,000 shares
(together, the "Reclassification"), and declared a dividend of one share of
Class A Common Stock for every share of Class B Common Stock then outstanding
(the "Stock Dividend"). The Stock Dividend had the effect of a two-for-one stock
split, and was paid on October 9, 1997. As a result of the Reclassification and
the Stock Dividend, options and rights to acquire Common Stock outstanding prior
to October 3, 1997 became options or rights to acquire, for each share of Common
Stock subject to such options or rights, both, but not either, one share of
Class A Common Stock and one share of Class B Common Stock. All share and per
share information for periods prior to the payment date of the Stock Dividend
contained in this Form 10-K has been restated to reflect the Reclassification
and the Stock Dividend.
Effective March 1998, the Company acquired certain assets and assumed
certain liabilities of Walter Karl, Inc., a national direct marketing source
firm, for approximately $19 million in cash.
On March 17, 1998, the Company filed suit in Delaware court to enjoin a
merger agreement whereby Great Universal Stores, PLC would acquire Metromail
Corporation ("Metromail") for $31.50 per share, and on March 18 the Company
submitted to the Metromail Board of Directors a proposal for the Company to
acquire Metromail for $33 per share. No offer can be made by the Company for
Metromail Common Stock without consent and approval of the Metromail Board. It
is possible that the Company may fail to acquire Metromail. If the Company does
acquire Metromail, it may fail to successfully integrate Metromail's operations
with its own, will be required to incur substantial debt to finance the
acquisition, and will be required to record very substantial acquisition-related
charges and to amortize substantial amounts of goodwill
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in future periods. Attention is directed to "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors that May
Affect Operating Results -- Integration of Recent and Future Acquisitions" and
"Financial and Accounting Issues Related to Acquisitions."
INDUSTRY BACKGROUND
Businesses, sales organizations and sales people have an ongoing need to
acquire new customers. Targeted marketing to businesses and consumers through
direct marketing, telesales and field sales is increasingly used as a
cost-effective means to identify and acquire new customers. As competition for
customers has heightened, marketing costs have increased while technological
advances have made information more accessible and less expensive. As a result,
it has become imperative for businesses to utilize their marketing resources
more efficiently through the targeted use of information products and data
processing services. The growth of business and consumer targeted marketing has
created a substantial and ongoing need for accurate and timely information to
help identify potential customers from the millions of businesses and hundreds
of millions of consumers in the United States and Canada.
The demand for business and consumer data is highly segmented among small
and medium size businesses, large corporations and individual consumers. For
many small and medium size businesses with limited resources, business
information and related analytical services have become fundamental marketing
tools. These businesses require accurate and comprehensive information on
specific segments of their customer population. The Company believes that
traditionally these small and medium size businesses have been unable to obtain
this information because they do not have the resources to collect it themselves
and marketing information vendors have not provided them with comprehensive and
affordable solutions. In contrast, larger corporations typically have their own
data and require data processing and management services in addition to the
blending of their in-house customized database with a more extensive data set to
achieve specific marketing requirements. Finally, individual consumers need very
specific reference information on a small number of businesses or consumers that
is easily accessible at low cost through a variety of delivery formats.
The Company believes that the increasing demand for sales and marketing
information products and data processing services has contributed and will
continue to contribute to growth and consolidation in the business and consumer
marketing information industry. The Company believes that economies of scale and
scope are available in the compilation and maintenance of large and in-depth
business and consumer databases that can then be leveraged to meet each segment
of demand in the business and consumer information market. The Company also
believes that the quality of data processing services is directly dependent upon
the scale and scope of the underlying databases. The Company further believes
that to optimize the value of a database, the provider of information products
and data processing services derived from that database must have a broad range
of well established distribution channels.
STRATEGY
The Company's objective is to be the leading provider of business and
consumer marketing information products and data processing services in the
United States and Canada by continuing to help its clients generate new
customers efficiently and effectively. The Company focuses on selling its lead
generation products to small and medium size businesses while marketing
reference products to consumers and more complete solutions to larger
corporations. The Company believes that it effectively competes in the business
and consumer marketing information industry by exploiting its competitive
strengths. These strengths include the Company's accurate and comprehensive
databases and its ability to leverage these databases by providing customers
with the specific data they need in a variety of formats through targeted
distribution channels. Key elements of the Company's growth strategy include:
Expand and Enhance the Proprietary Business Database. The Company continues
to invest substantial time and resources to maintain the quality and increase
the depth of its proprietary business database, which it believes contains the
most comprehensive and accurate business marketing information in the United
States and Canada. The Company expands and continually updates its business
database to strengthen its leadership position in business marketing information
products and data processing services. For example, the Company makes over 16
million telephone calls every year to verify records in the business database.
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Leverage the Databases. The Company continues to leverage its business
database by introducing new information products and new product delivery
formats to strengthen its competitive advantage in the business marketing
information industry. The Company sells a wide range of pre-packaged and
customized information products tailored to specific customer requirements on a
variety of delivery formats through targeted distribution channels. The Company
distributes its information products and data processing services through direct
mail, telemarketing, field sales offices, national accounts sales teams, retail
outlets and information resellers. The Company intends to respond to changes in
information technology by introducing new product delivery formats, such as
delivery over the Internet and business intranets and on DVD. The Company prices
its information products and services based on the type, amount and format of
the information provided to create an attractive marketing information solution
for its customers.
Increase Recurring Revenue. The Company intends to increase recurring
revenue in a number of ways. The Company encourages repeat purchases of its
information products by offering annual editions of its directories and monthly
subscription updates. The Company generates recurring revenue from royalties by
licensing its databases to other information providers and large corporations
for internal use. In addition, the Company sells its data processing services to
large corporations with ongoing information service requirements, and
subsequently sells its information products to these clients.
Replicate Business Database Strategy for Consumer Database. The Company
intends to utilize the strategies and targeted distribution channels developed
for its business information products and data processing services to serve
clients engaged in marketing to their consumers. The Company believes that its
consumer database is among the most accurate and comprehensive in the United
States, and its ability to offer customers both high quality business and
consumer data gives it a competitive advantage over other companies offering
marketing information. The Company's consumer database consists of data licensed
from third parties and as of February 1998, the Company is developing a
proprietary consumer white page file.
Enhance Product and Service Offerings Through Strategic Acquisitions. The
Company intends to continue expanding its database and data processing
capabilities not only through expansion of its existing business, but also
through the acquisition of complementary businesses. Since mid-1996, the Company
completed seven acquisitions that increased its presence in the consumer
marketing information industry, greatly increased its ability to provide data
processing solutions, added two consumer CD-ROM product lines and broadened its
offerings of business marketing information. The Company believes that there are
further opportunities to add to its product and service offerings and to expand
its distribution channels through strategic acquisitions. For further discussion
of the Company's recent acquisitions and potential acquisition of Metromail
Corporation,, see "Business -- the Company," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and Notes
2, 3, 6, 16 and 18 of Notes to Consolidated Financial Statements.
DATABASES
The Company believes that its databases are among the most comprehensive
and accurate in the United States, and that the maintenance and development of
these databases will be critical elements of the Company's continued success.
The Company continually updates its databases to reflect the formation of new
businesses, entities going out of business, changes relating to existing
businesses, such as new offices, new officers or new lines of business, and
changes of consumer names and addresses. The Company has invested and will
continue to invest significant time and resources in the creation, maintenance
and enhancement of its databases and related applications software.
Business Database. The Company's proprietary business database contains
information on over 11 million businesses in the United States and Canada. The
Company segments the business database into subsets such as growing businesses,
small business owners, big businesses, "work at home" businesses, female
executives and business owners, corporate affiliations, toll-free telephone
numbers and World Wide Web sites. The Company also adds depth to its business
database through the addition of data elements such as news headlines, public
filings, credit information and business owner biographies. The Company compiles
the information in the business database in two stages. First, the Company
inputs from approximately 5,000 sources including yellow page directories, state
directories, chamber of commerce directories, newspapers, business white pages,
telephone directories and other publicly available sources. Each business entry
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contains, where available: name of business, contact person, street address,
city, state, area code and telephone number, fax number, SIC code, product
brands sold by businesses, franchises, professional specialties, yellow page
classification, size of yellow page advertisement, year of first appearance in
the yellow pages, zip code, carrier route, county code, population code and
metropolitan statistical area. Second, the Company makes over 16 million
telephone calls each year to the businesses in the database to verify the
information and to obtain or confirm additional information for inclusion in the
database. The Company's proprietary automated and predictive dialing system
optimizes the efficiency of the telephone verification process. Information
obtained through the telephone verification process includes name of the owner
or manager, number of employees, primary business activity and address
verification. The Company regularly evaluates additional or alternative
questions to ask in telephone verification in order to improve the depth and
quality of its database.
The maintenance and development of the Company's business database require
sophisticated computer hardware and software to handle rapid compilation, order
processing, accounting, storage, sorting and quality control. The Company's
computer system allows a work force of over 500 employees to compile, program
and process data simultaneously. More than 20,000 proprietary software programs
operate the data compilation, demographic enhancement and order fulfillment
process. The Company's data entry personnel use on-line proprietary data
compilation software to access the database and update, change or verify each
record at a rate of approximately 1.3 million records per month. A separate
quality control group checks input quality and seeks to ensure that the
information that reaches the Company's database is approximately 99% accurate
from the original source. The Company has also developed proprietary software to
check the database for the accuracy of spelling, abbreviations and telephone
exchanges.
Consumer Database. The Company's consumer database, which primarily
consists of data licensed from third parties, contains information on over 113
million households, 180 million consumers, 60 million homeowners, and 22 million
mail order purchasers. The consumer database includes information in over 70
categories of demographic information including age, income, marital status,
gender, presence of children in households, credit card information, mortgage
data, vehicle information, recent changes of address and lifestyle selections.
The Company obtains information for its consumer database from publicly
available and third party directories, supplemented with information gathered
from warranty data, census data, buyer information, credit data and
self-reported lifestyle information. In addition, the Company updates and
maintains its consumer database using information licensed from the United
States Postal Service's National Change of Address, Delivery Sequence File and
Locatable Address Conversion Systems, allowing the Company to track consumers as
they move. These steps enable the Company to ensure high deliverability rates
for direct mail marketing. The Company is working to complete its own
proprietary consumer white page file, which it expects to complete during the
second quarter of 1998. The Company complies with the Direct Marketing
Association (the "DMA") guidelines with respect to the collection, distribution
and use of information about individuals.
"New Business" Database. The Company monitors and compiles information on
newly formed businesses throughout the United States by checking state filings,
business licenses and court documents. The Company verifies and sells the data
to allow clients to contact potential new customers as soon as possible, then
incorporates the information into its core business database.
Medical Databases. The Company maintains and markets a specialized database
on physicians and surgeons, and is creating a similar database on dentists. The
physician and surgeon database contains information on over 575,000 physicians
and surgeons nationwide. The database is compiled from third party sources, and
contains information on age, gender, professional school, specialties, and
personal interests.
PRODUCTS AND SERVICES
The Company offers a variety of business and consumer information products
and data processing services to assist its customers with activities such as
identifying and qualifying prospective customers, initiating direct mail
programs, telemarketing, estimating market potential, monitoring the
effectiveness of marketing efforts and surveying competitive markets. The
Company sells its information products through a variety of delivery formats,
including hard copy prospect lists, sales lead cards, mailing labels, diskettes,
CD-ROMs, the Internet, telephone and fax. The Company distributes its
information products and data processing services through direct mail,
telemarketing, field sales offices, national accounts sales teams, retail
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outlets and information resellers. More than 75% of the Company's net sales in
1997 were attributable to customers who had previously purchased the Company's
products. The Company's business is organized around three principal product
lines consisting of sales lead generation products, data processing services and
consumer CD-ROM products, which accounted for 67%, 22% and 11% of net sales,
respectively, in 1997.
Sales Lead Generation Products
Customized Sales Lead Generation Products. The Company's customized sales
lead generation products, which include hard copy prospect lists, sales lead
cards, mailing labels, diskettes and mapping products, are used by customers who
ask the Company to generate specific information for them. The Company markets
its customized sales lead generation products primarily to small and medium size
businesses, who use these materials to efficiently identify and communicate with
potential customers. The Company produces its sales lead generation products
using a combination of customized sorting criteria to meet the customer's
marketing objectives. The Company's telemarketing sales representatives work
with prospective customers to help them specify sorting criteria that will
produce marketing information materials optimized for each customer's business,
and guide them to understanding how this information can be used. For example,
with Sales Leads On A Map, customers can plot their leads on a street map, which
allows them to increase productivity, assign sales territories and measure sales
activity by knowing exactly where prospective customers are clustered. The
Company sells its customized sales lead generation products primarily through
direct mail, telemarketing and its field sales offices. Generally, sales lead
generation products are priced on a per name basis, which varies according to
the number of names supplied, the type of information required and the delivery
format selected.
Non-Stop Sales Leads. Non-Stop Sales Leads is a subscription program that
provides customers with a prospect database and monthly updates including new
leads for the market area, changes to the original database and a list of
companies that have gone out of business. The Company sells Non-Stop Sales Leads
to small, medium and large businesses who use the monthly new prospect updates
to acquire new customers, expand into new markets and replace lost customers.
The Company markets Non-Stop Sales Leads primarily through direct mail,
telemarketing and field sales offices. Customers pay an up-front fee for the
initial database of requested information and additional monthly subscription
fees for the updates.
Business Directories. The Company's printed business directories are
bundled with CD-ROMs and include such titles as State Business Directories,
American Manufacturers Directory, Big Business Directory, Credit Reference
Directory, Entrepreneurs Directory, Physicians & Surgeons Directory and U.S.
Business Directory. In addition, the Company also sells a number of business
directories on CD-ROM only, including titles such as Households USA,
Professionals, and Female Executives and Business Owners. The Company sells
these directories to small and large business marketers who use them for lead
generation, telemarketing and reference purposes, and are attracted to the
directories by their affordability, convenience and reference value. The printed
directories are useful for reference, while the CD-ROM products allow users to
sort, search and print marketing information. The Company sells its business
directories primarily through direct mail, telesales and its field sales
offices. Purchasers of business directories pay a one-time fee for the
directories when they initially acquire them, and can purchase annual updates.
For CD-ROM products, an annual license fee enables a customer to access and use
a specified number of names. Proprietary metering technologies for CD-ROM
products require purchasers to pay an additional fee to download additional
names and prevent purchasers from using the product longer than one year after
the installation date.
Telephone Information Service. The Company sells its telephone information
service, InfoAccess, to businesses that request instant company profiles,
business credit profiles and additional detailed information on businesses in
the United States and Canada. Business credit profiles allow a customer to
evaluate a company's credit history, qualify sales leads, learn about vendors,
suppliers or competitors and determine whether a prospective customer is likely
to pay bills on time. The Company prices its telephone information services on a
subscription basis.
Internet/Online Information Service. SalesLeadsUSA (www.SalesLeadsUSA.com)
allows businesses and consumers to define a target market, retrieve a count of
the number of businesses in a particular market or obtain a credit profile on a
particular company, all through the World Wide Web. Customers also use the site
for directory assistance, finding individuals in the white pages or businesses
in the yellow pages. Links to the service are also available on InfoSpace,
Microsoft, Netscape and Big Book and other national online
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information providers. SalesLeadsUSA provides customers with immediate access to
the Company's database 24 hours a day, seven days a week. The Company's
directory assistance information over the Internet is free. The Company sells
customer lists and business profiles over the Internet on a per name or per
profile basis.
Information Brokerage Services. The Company currently resells information
on consumers that it purchases from other suppliers. The Company resells this
data to businesses who use the information to target narrow segments of the
population. Purchasers can select consumer lists by age group, income range,
homeowner status, mortgage value, hobbies or interests, or geographical area.
The Company sells brokered information through direct mail, telemarketing, field
sales offices and its national accounts sales teams. The Company prices its
brokered information on a per name basis.
Data Processing Services
The Company's data processing services include "merge-purge" services,
market research services and data warehousing and analysis. Data processing
services are marketed primarily through national accounts sales teams. The
Company prices these services on a contract or per order basis depending upon
the nature of the services provided.
"Merge-Purge." Merge-purge services involve merging data from multiple
sources and purging out duplicative and erroneous data. Merge-purge services
enable clients to more accurately target customers. The Company sells its
merge-purge services primarily to large corporations, many of which use these
services on an ongoing basis, providing a steady stream of revenue.
Market Research Services. The Company offers a variety of market research
services, including customer and market profile analyses, market segmentation
reports, statistical marketing reports, list enhancements to update a customer's
in-house database, computerized name search service, and other analytical tools
and reports. The Company sells these market research services primarily to
medium and large businesses, who use the data to target their direct marketing
efforts on segments of the business or consumer population most likely to
respond positively.
Data Warehousing and Analysis. The information provided by the Company's
data warehousing and analysis allows customers to make more informed business
decisions by identifying the highest potential prospect group, determining
market size, conducting competitive analysis or determining sales goals,
marketing plans, budgetary priorities, site locations or territory assignments.
The Company sells data warehousing and analysis services to small, medium and
large businesses.
CONSUMER CD-ROM PRODUCTS
The Company's consumer CD-ROM products include titles such as 104 Million
Businesses and Households, Streets USA, American Yellow Pages, 88 Million
Households, 2 Million Fax Number Directory, Powerfinder, Powerfinder Pro and
Select Phone Deluxe. The Company markets its consumer CD-ROM products to
individual consumers and small office and home office businesses, who use these
products on their personal computers as an affordable way to find addresses and
phone numbers of businesses and consumers anywhere in the country. Customers can
view and select information to print to lists or labels or download the
information. The Company sells consumer CD-ROMs through direct mail and retail
outlets.
SALES AND MARKETING
The Company markets and sells its information products and data processing
services directly through direct mail, telemarketing, field sales offices and
national accounts sales teams and indirectly through distribution channels such
as value-added resellers and retail outlets. The sales and marketing channels
used by the Company vary by product. Sales lead generation products are sold
through direct mail, telesales, field sales offices and national accounts sales
teams. Data processing services are sold primarily through national accounts
sales teams. Consumer CD-ROM products are sold through direct mail,
telemarketing and retail outlets, and the Company licenses its databases to
information resellers and large corporations.
Direct Mail. The Company has traditionally marketed to businesses through
direct mail, in which the Company mails catalogs to prospective customers and
takes orders by mail or by telephone. In 1997, the Company mailed more than 32
million catalogs, letters and other pieces of mail primarily to small and
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medium size businesses. The Company sells its full line of sales lead generation
products, including customer lists, mailing labels, directories, CD-ROM
products, maps and credit reference guides, through direct mail. Direct mail
marketing allows the Company to reach a large number of customers at relatively
little cost, and generates a high volume of sales.
Telemarketing. The Company sells its sales lead generation products and
services through "outbound" telephone calls to small and medium size businesses.
In 1997, the Company initiated more than 750,000 telephone contacts with past
and prospective customers. Telemarketing allows the Company to contact dormant
accounts, occasional purchasers and repeat customers to create a more
consultative relationship between the client and the Company, and in turn to
generate more frequent sales.
Field Sales Offices. The Company's field sales offices sell the Company's
full line of sales lead generation products and services through direct or
telephone contact with small and medium size businesses, establishing
consultative relationships at the local level. The Company believes that through
field sales offices it can establish and maintain direct relationships with
businesses that are otherwise unresponsive to direct mail and telesales
contacts. As of December 31, 1997, the Company had field sales offices in 12
cities.
National Accounts. The Company's national accounts sales teams establish
ongoing relationships with larger corporations to sell data processing services
and information products. Data processing services for these clients include
generating mailing lists through merging and purging of databases, producing
customer profiles and market analysis, and managing and warehousing client data.
After selling data processing services to large corporations, the Company seeks
to sell its information products to these clients as well.
Retail Sales. The Company sells its consumer CD-ROM products
"off-the-shelf" to customers through retail sales outlets including computer
software stores, office supply stores, convenience stores, pharmacies and
supermarkets. The Company sells its consumer CD-ROM products principally through
wholesale distributors and also directly to retail outlets.
Database Licensing. The Company licenses its databases for distribution to
on-line information providers such as InfoSpace, Microsoft, Netscape and Big
Book and to large corporations for internal use. Licensees pay the Company
royalties for the use of its information products. In addition, some on-line
information services provide a link to the Company's World Wide Web site,
allowing potential customers to purchase additional products or services
directly from the Company.
COMPUTER OPERATIONS AND DATABASE PROTECTION
The Company compiles and maintains business databases on its redundant
computer systems located at its Omaha, Nebraska and Carter Lake, Iowa
facilities. The Company uses its Omaha facility primarily for compiling and
enhancing the business database. The Company uses its Carter Lake facility to
fulfill orders, produce directories and develop new software applications. By
maintaining its data entry operations in one location and its order-filling
capacity at the other, the Company believes it enhances its ability to control
the accuracy and costs of the compilation process.
Each of the data centers is protected by a fire suppression system and an
uninterrupted power supply battery backup system. The Company's data is
regularly backed up and stored off-site. The Company believes its computer
systems are adequate for its present requirements and that its operations can be
readily expanded in support of the Company's growth strategy. The Company is
building a new facility for the business and consumer database compilation
division in Papillion, Nebraska, which is anticipated to be completed in
mid-1998.
The Company maintains its consumer database and analytical data processing
capabilities at its Montvale, New Jersey facilities. The data is regularly
backed up and stored off-site. The Company has contracted with a third party to
load and access its consumer database in the event of loss at the Montvale
facility, and the Company believes that it could regenerate its analytical
capabilities through the lease of computer equipment in less than two weeks.
The Company's telecommunications equipment is also redundant. In the event
of a disaster at any of its locations, calls could be redirected to the other
location within 12 hours, thereby minimizing the effect of the disaster.
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INTELLECTUAL PROPERTY AND OTHER PROPRIETARY 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 in the ordinary course of their businesses and contain
terms and conditions prohibiting the unauthorized reproduction 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. While there can be no assurance
that the steps taken by the Company will be adequate to deter misappropriation
of its proprietary rights or independent third party development of
substantially similar products and technology, the Company believes that legal
protection of its database and software is less significant than the knowledge
and experience of the Company's management and personnel, and their ability to
develop, enhance and market existing and new products and services.
COMPETITION
The business environment in which the Company competes is highly
competitive. The Company believes that competition in its industry is based on
the quality and comprehensiveness of the information provided, the ability to
deliver the information in products and formats that the customer needs and, to
a lesser extent, on the pricing of information products and services. The
Company also believes that the ability to provide data processing to support
customer direct selling efforts can provide a key competitive advantage. A
number of small and large competitors are active in specific aspects of the
Company's business. Many such competitors have substantially greater financial,
technical and marketing resources than the Company. In business sales lead
generation products, the Company faces competition from 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, Donnelley Marketing, and many
smaller, regional directory publishers. In consumer sales lead generation
products, the Company competes with Metromail, Donnelly Marketing, R.L. Polk,
Trans Union, Equifax and Experian, both directly and through reseller networks.
In analytical data processing services, the Company competes with Acxiom, May &
Speh, Harte-Hanks Data Technologies and Direct Marketing Technologies. In
consumer products, the Company competes with certain small producers of CD-ROM
products. In addition, the Company faces competition to the extent similar
marketing information is available on the Internet.
EMPLOYEES
As of December 31, 1997, the Company employed a total of approximately
1,750 people on a full-time basis. None of the Company's employees is
represented by a labor union or is the subject of a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company's headquarters are located in a 148,000 square foot facility in
Omaha, Nebraska, where the Company performs data compilation, telephone
verification, data development services, and sales and administrative
activities. Order fulfillment and shipping are conducted at the Company's 30,000
square foot Carter Lake, Iowa facility, which is located 15 miles from its
headquarters. The Company owns both of these facilities, as well as adjacent
land for possible future expansion. In addition, the Company leases a 101,000
square foot facility in Montvale, New Jersey, which lease expires in September
1999. The Company also leases sales office space at various locations, the
aggregate rental obligations of which are not significant. The Company is
building a new 130,000 square foot facility for the business and consumer
database compilation division in Papillion, Nebraska, which is anticipated to be
completed in mid-1998.
ITEM 3. LEGAL PROCEEDINGS.
On March 17, 1998, the Company filed suit against Metromail Corporation, a
Delaware corporation ("Metromail"), certain officers and members of the Board of
Directors of Metromail and Great Universal
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Stores, P.L.C., a UK corporation ("GUS") in Delaware Chancery Court, alleging
that Metromail's Board of Directors breached their fiduciary obligation to
Metromail's Stockholders, including the Company, by failing to hold a full and
fair auction for Metromail prior to entering into an agreement to sell Metromail
to GUS (the "GUS Merger Agreement"). The complaint, seeks to enjoin the
consummation of the GUS Merger Agreement and certain other declaratory and
injunctive relief.
On March 20, 1998, GUS filed a counterclaim against the Company alleging,
among other things, that ABI tortiously interfered with the Merger Agreement and
Parent's prospective business relations with Metromail. The Counterclaim also
alleges that the Company breached a confidentiality agreement entered into by
the Company with the Metromail's financial advisor and of which GUS is a third
party beneficiary. As relief, the GUS claim seeks, among other things,
injunctive relief and actual, punitive and other damages in an amount to be
determined at trial, estimated by GUS to exceed $500 million, plus fees and
expenses. On March 27, 1998, the Delaware Chancery Court denied the Company's
motion for a preliminary injunction to block the GUS Merger Agreement. The
Company does not believe that the GUS counterclaim has merit and will vigorously
defend the suit, however there can be no assurance that this matter will be
resolved without a material adverse affect on the Company's financial condition
and stock price.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
At a Special Meeting of Stockholders of the Company held on October 3,
1997, the stockholders voted and approved the following items:
1. Proposal to amend Article IV of the Company's Certificate of
Incorporation, as amended, to (i) reclassify the existing common stock of
the Company as Class B Common Stock, which is identical to the existing
common stock except that each share will entitle its holder to ten votes,
(ii) authorize a new class of common stock, designated as Class A Common
Stock, with a preferential dividend right over the Class B Common Stock and
one vote per share, (iii) increase the number of authorized shares of
common stock from 75,000,000 to 295,000,000, consisting of 220,000,000
shares of Class A Common Stock and 75,000,000 shares of Class B Common
Stock, and (iv) establish the rights, powers and limitations of the Class A
Common Stock and the Class B Common Stock.
For: 17,205,524 Against: 2,965,639 Abstain: 16,860 Broker
Non-vote: 13,290
2. Proposal to approve the adoption of the Company's 1997 Class A
Common Stock Plan, including the reservation thereunder of 2,000,000 shares
of the Company's Class A Common Stock, contingent upon stockholder approval
of proposal No. 1.
For: 14,791,156 Against: 5,384,989 Abstain: 17,210 Broker
Non-vote: 7,958
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Vinod Gupta.......................... 51 Chairman of the Board
Scott Dahnke......................... 32 Chief Executive Officer and Director
Jon Wellman.......................... 45 President, Chief Operating Officer and Director
Steven Purcell....................... 47 Chief Financial Officer and Secretary
Allen Ambrosino...................... 54 Executive Vice President and President, Database
America ("DBA")
Gregory Back......................... 30 Executive Vice President, Corporate Planning and
Business Development
Monica Messer........................ 34 Executive Vice President and Chief Information
Officer
William Chasse....................... 38 Executive Vice President, Sales and Marketing
William Kerrey....................... 49 Senior Vice President, Licenses
Vinod Gupta is the founder of the Company and has been Chairman of the
Board of the Company since its incorporation in 1972. Mr. Gupta served as Chief
Executive Officer of the Company from the time of its
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incorporation in 1972 until September 1997. Mr. Gupta holds a B.S. in
Engineering from the Indian Institute of Technology, Kharagpur, India, and an
M.S. in Engineering and an M.B.A. from the University of Nebraska.
Scott Dahnke joined the Company as Chief Executive Officer in October 1997.
Prior to that time, Mr. Dahnke was with the consulting firm McKinsey & Company,
Inc., where he worked since August 1991, and had been a Partner since May 1997.
While at McKinsey, Mr. Dahnke served as a consultant to the Company since May
1997. Mr. Dahnke holds a B.S. in Mechanical Engineering from the University of
Notre Dame and an M.B.A. from Harvard Business School.
Jon Wellman has served as President, Chief Operating Officer and a director
of the Company since February 1997. Mr. Wellman joined the Company in August
1995 as Chief Financial Officer and Secretary. Mr. Wellman previously served as
Vice President and Chief Financial Officer at Signal Technology Corporation, a
defense electronics manufacturer, from December 1994 to July 1995, and was a
Partner with Coopers & Lybrand L.L.P., an independent public accounting firm,
from 1989 to November 1994. Mr. Wellman holds a B.S. in Business from the
University of Idaho.
Steven Purcell has served as Chief Financial Officer and Secretary of the
Company since April 1997. Prior to that time, Mr. Purcell served as the Chief
Financial Officer and Treasurer at Micro Warehouse, Inc., a direct mail computer
software and hardware distributor, from November 1991 until November 1996. Mr.
Purcell holds a B.S. in Accounting from the University of New Haven and an
M.B.A. from Radford University. Mr. Purcell is licensed as a Certified Public
Accountant.
Allen Ambrosino has served as Executive Vice President of the Company since
August 1997, and as President of DBA, which the Company acquired in February
1997, since November 1991. Mr. Ambrosino holds a B.S. in Business Administration
from Fairleigh Dickinson University.
Gregory Back joined the Company as Executive Vice President of Corporate
Planning and Business Development in October 1997. Prior to that time, Mr. Back
was with the consulting firm McKinsey & Company, Inc., where he worked from
September 1989 to September 1992 and again from September 1994 to September
1997. While at McKinsey, Mr. Back served as a consultant to the Company since
May 1997. Mr. Back also worked for Golder, Thoma, Cressey & Rauner, a private
equity firm, from June 1993 to August 1993. Mr. Back holds a B.A. in Economics
from Yale University and an M.B.A. from Stanford Business School.
Monica Messer has served as an Executive Vice President and Chief
Information Officer of the Company since February 1997, and served as a Senior
Vice President of the Company from January 1996 to January 1997. Ms. Messer
joined the Company in 1984 and has served as a Vice President of the Company
since 1985. Ms. Messer holds a B.S. in Business Administration from Bellevue
University.
William Chasse has served as Executive Vice President, Sales and Marketing
of the Company since October 1996, as a Senior Vice President from January 1995
to October 1996, and as a Vice President from 1990 to January 1995. Mr. Chasse
joined the Company in 1988. Mr. Chasse holds a B.S. in Business Administration
and an M.B.A. from the University of Nebraska.
William Kerrey has served as Senior Vice President, Licenses since August
1994, and served as a Vice President from 1989 to August 1994. Mr. Kerrey holds
a B.S. in Economics, a B.S. in Spanish and an M.S. in Agronomy from the
University of Nebraska.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Class A Common Stock and Class B Common Stock $0.0025 par
value, is traded on the NASDAQ National Market System under the symbols ABIIA
and ABIIB, respectively.
The Company's Class A Common Stock began trading on the Nasdaq National
Market on October 10, 1997. Since October 10, 1997 and prior to December 31,
1997, the high and low closing prices for the Company's Class A Common Stock
were $12.75 and $9.13, respectively.
The following table sets forth the high and low closing prices for the
Company's Class B Common Stock during each quarter of 1996 and 1997, as adjusted
to give effect to the Reclassification and the Stock Dividend:
CLASS B COMMON STOCK
HIGH LOW
------ ------
1997
First Quarter............................................. $11.69 $ 9.38
Second Quarter............................................ $11.69 $ 8.50
Third Quarter............................................. $15.75 $11.07
Fourth Quarter............................................ $13.63 $ 9.25
1996
First Quarter............................................. $ 9.69 $ 7.50
Second Quarter............................................ $ 9.88 $ 8.00
Third Quarter............................................. $ 9.31 $ 5.88
Fourth Quarter............................................ $11.38 $ 8.19
As of March 18, 1998, there were 95 and 90 stockholders of record of the
Class A Common Stock and Class B Common Stock, respectively.
The Company has not declared or paid any cash dividends on its capital
stock. Pursuant to certain financing arrangements, the Company has agreed not to
pay cash dividends in any four quarter period in excess of the lesser of $5
million or 25% of net income for such four quarter period. The Company currently
intends to retain future earnings to fund the development and growth of its
business and, therefore, does not anticipate paying cash dividends within the
foreseeable future. Any future payment of dividends will be determined by the
Company's Board of Directors and will depend on the Company's financial
condition, results of operations and other factors deemed relevant by its Board
of Directors.
RECENT SALES OF UNREGISTERED COMMON STOCK
In February 1997, the Company issued 2,180,747 unregistered shares of its
Class A Common Stock, $.0025 par value, and 2,180,747 unregistered shares of its
Class B Common Stock, $.0025 par value (as adjusted for the Reclassification and
the Stock Dividend), as partial consideration for the acquisition of the
outstanding stock of DBA Holdings, Inc. ("DBA") pursuant to an Agreement and
Plan of Merger between the Company and DBA ("the DBA Merger Agreement"). In
October 1997, the Company and the former stockholders of DBA agreed on a
purchase price adjustment pursuant to the DBA Merger Agreement, whereby the
Company agreed to issue an additional 139,829 unregistered shares of its Class A
Common Stock and 139,829 unregistered shares of its Class B Common Stock to the
former stockholders of DBA. The shares were actually issued in February 1998. In
the transaction, the Company relied upon the exemption provided for under
Section 4(2) of the Securities Act of 1933, as amended, for transactions by an
issuer not involving a public offering. Exemption under Section 4(2) was claimed
because the transaction was a negotiated transaction, only 3 entities or
individuals became the direct or indirect owners of the Company's stock, and
there was no form of general solicitation, advertising or plan of distribution.
See also Notes 3 and 17 of the Notes to Consolidated Financial Statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data for each of the years in
the five years ended December 31, 1997 has been derived from the Company's
audited Consolidated Financial Statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes set
forth on pages F-1 through F-20 of this Form 10-K. The Consolidated Financial
Statements as of December 31, 1997 and 1996, and for each of the years in the
three years ended December 31, 1997, are set forth on pages F-1 through F-20 of
this Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................................... $193,327 $108,298 $ 86,766 $ 69,603 $55,752
Costs and expenses:
Database and production costs............................. 55,090 29,272 23,999 18,153 13,973
Selling, general and administrative....................... 80,203 45,766 37,724 28,249 23,072
Depreciation and amortization............................. 34,415 4,855 3,469 3,125 2,651
Acquisition-related charges(1)............................ 56,098 21,500 -- -- --
-------- -------- -------- -------- -------
Total costs and expenses.................................... 225,806 101,393 65,192 49,527 39,696
-------- -------- -------- -------- -------
Operating income (loss)..................................... (32,479) 6,905 21,574 20,076 16,056
Other income (expense):
Investment income......................................... 3,748 3,194 1,322 1,109 1,172
Interest expense.......................................... (4,098) (209) (157) (247) (298)
Other..................................................... -- (943) -- -- --
-------- -------- -------- -------- -------
Income (loss) before income taxes and discontinued
operations................................................ (32,829) 8,947 22,739 20,938 16,930
Income taxes................................................ 6,987 3,400 8,421 7,710 5,941
-------- -------- -------- -------- -------
Income (loss) from continuing operations ................... (39,816) 5,547 14,318 13,228 10,989
Loss on discontinued operations(2).......................... -- (355) (2,317) (404) (214)
Loss from abandonment of subsidiary(2)...................... -- (1,373) -- -- --
-------- -------- -------- -------- -------
Net income (loss)........................................... $(39,816) $ 3,819 $ 12,001 $ 12,824 $10,775
======== ======== ======== ======== =======
Basic earnings (loss) per share............................. $ (0.82) $ 0.09 $ 0.29 $ 0.31 $ 0.26
======== ======== ======== ======== =======
Weighted average shares outstanding......................... 48,432 42,065 41,475 41,356 41,315
======== ======== ======== ======== =======
Diluted earnings (loss) per share........................... $ (0.82) $ 0.09 $ 0.28 $ 0.31 $ 0.26
======== ======== ======== ======== =======
Weighted average shares outstanding......................... 48,432 42,390 42,136 41,545 41,346
======== ======== ======== ======== =======
OTHER DATA:
Earnings before interest, taxes, depreciation and
amortization ("EBITDA"), as adjusted(3)................... $ 58,034 $ 33,260 $ 25,043 $ 23,201 $18,707
======== ======== ======== ======== =======
CASH FLOW DATA:
Net cash from (used in) operating activities................ $ 30,256 $ 12,321 $ 15,819 $ 18,086 $10,191
======== ======== ======== ======== =======
Net cash from (used in) investing activities................ (99,932) (13,824) (14,905) (12,394) (8,017)
======== ======== ======== ======== =======
Net cash from (used in) financing activities................ 72,832 (2,999) (2,406) (712) (766)
======== ======== ======== ======== =======
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $ 60,007 $ 45,727 $ 45,363 $ 35,411 $30,765
Total assets................................................ 194,911 107,877 91,241 77,783 61,027
Long-term debt, including current portion................... 82,000 1,135 2,039 3,821 4,587
Stockholders' equity........................................ 80,236 87,605 76,084 63,326 50,665
- ---------------
(1) In 1996, represents charges for the write-off of purchased in-process
research and development costs of approximately $10.0 million relating to
the acquisition of Digital Directory Assistance and approximately $11.5
million related to the change in estimated useful lives based on
management's evaluation of certain intangibles related to acquisitions prior
to 1995. In 1997, represents the write-off of $53.5 million of purchased
in-process research and development costs and $2.6 million of other
restructuring costs related to the acquisitions of DBA and Pro CD.
(2) During 1995, the Company sold American Business Communications for $3.0
million in the form of a non-recourse promissory note. The aggregate losses
from discontinued operations from this disposition were approximately $3.3
million from 1993 through 1996. In addition, in 1996 the Company recorded a
loss of $1.4 million attributable to the default by the purchaser on the
non-recourse promissory note delivered to the Company in this transaction.
(3) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to
exclude depreciation, amortization of intangible assets, net interest
expense, income taxes and acquisition-related charges. EBITDA is presented
because it is a widely accepted indicator of a company's ability to incur
and service debt. 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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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company is a leading provider of business and consumer marketing
information products and data processing services. 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 113 million households and 180
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 larger corporations.
The Company's business is organized around three principal product lines
consisting of sales lead generation products, data processing services and
consumer CD-ROM products, which accounted for 67%, 22% and 11% of net sales,
respectively, in 1997. Historically, the Company's revenue has been derived
predominantly through the sale of its sales lead generation products. The
Company began to recognize significant revenue from its data processing services
in 1997 and revenue from its consumer CD-ROM products increased substantially
between 1993 and 1997. Over 75% of the Company's net sales in 1997 were
attributable to customers who had previously purchased the Company's products.
No customer represented greater than 8% of net sales in 1997. The Company's net
sales increased at a compounded annual rate of 36% to $193.3 million in 1997
from $55.8 million in 1993, both through the introduction of new products and
new distribution channels and through the strategic acquisition of complementary
businesses.
The Company has supplemented its internal growth through strategic
acquisitions. The Company has completed seven acquisitions since mid-1996.
Through these acquisitions, the Company has increased its presence in the
consumer marketing information industry, greatly increased its ability to
provide data processing solutions, added two consumer CD-ROM product lines and
broadened its offerings of business marketing information. The following table
summarizes these acquisitions:
ACQUIRED COMPANY KEY ASSET DATE ACQUIRED
---------------- --------- -------------
Digital Directory Assistance........... Consumer CD-ROM Products August 1996
County Data Corporation................ New Businesses Database November 1996
Marketing Data Systems................. Data Processing Services November 1996
BJ Hunter.............................. Canadian Business Database December 1996
DBA.................................... Consumer Database and Data February 1997
Processing Services
Pro CD................................. Consumer CD-ROM Products August 1997
Walter Karl............................ Data Processing Services March 1998
The Company incurred acquisition-related charges to operations, consisting
of the write-off of acquired in-process research and development and other
restructuring charges of an aggregate of approximately $10.0 million in 1996 in
connection with the acquisition of Digital Directory Assistance and $56.1
million in 1997 in connection with the acquisitions of DBA and Pro CD. In
addition, the Company expects to amortize an aggregate of approximately $92.5
million in goodwill and other intangibles over periods of 1 to 15 years in
connection with acquisitions completed since mid-1996 through 1997. Of this
amount, $19.0 million constitutes amortization of purchased databases associated
with the DBA acquisition and will be amortized over 12 months beginning on
February 1, 1997 which will result in $1.6 million being recognized in the three
months ended March 31, 1998. The Company expects to amortize additional goodwill
in future periods in connection with the acquisition of Walter Karl, Inc. for
$19 million in March 1998. The Company's results for 1997 do not include the
operations of Walter Karl. The Company's strategy is to continue growth both
internally and through future strategic acquisitions. While there are currently
no binding commitments with respect to any particular future acquisitions, the
Company has submitted to the Metromail Board of Directors
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a proposal to acquire Metromail for $33 per share. The Company frequently
evaluates the strategic opportunities available to it and intends to
aggressively pursue acquisitions of complementary products, technologies or
businesses that it believes fit its business strategy. See Notes 2, 3, 6, 16 and
18 of Notes to Consolidated Financial Statements.
The Company's revenue is primarily generated from the sale of its products
and services and the licensing of its data to third parties. Revenue from the
sale of products and services is generally recognized when the product is
delivered or the services are performed. A portion of revenue from data
licensing is recognized at the time the initial set of data is delivered, with
the remaining portion being deferred and recognized over the license term as the
Company provides updated information. Reserves are established for estimated
returns and uncollectible amounts.
The Company's operating expenses are determined in part based on the
Company's expectations of future revenue growth and are substantially fixed in
the short term. As a result, unexpected changes in revenue will have a
disproportionate effect on net income in any given period. The Company's
database and production costs are generally expensed as incurred and relate
principally to maintaining, verifying and updating its database, fulfilling
customer orders and the direct costs associated with the production of CD-ROM
titles. Costs to develop new databases, including the consumer database
currently under development, are capitalized by the Company and amortized upon
the successful completion of the databases over a period not to exceed 5 years.
Selling, general and administrative expenses consist principally of salaries and
benefits associated with the Company's sales force as well as costs associated
with its catalogs and other promotional materials.
Since 1996, database and production costs have increased as a percentage of
net sales as a result of higher costs associated with data processing services
and CD-ROM production. To the extent that data processing and CD-ROM sales
constitute a greater percentage of net sales, the Company expects database and
production costs to increase as a percentage of net sales in the future.
The Company is building infrastructure for continued growth and increased
sales and has heightened its investment in field sales operations and direct
marketing activities, and as a result, selling, general and administrative
expenses have grown substantially. Since 1996, the overall increase in selling,
general and administrative expenses has been offset by the overall increase in
the sales of data processing services and CD-ROM products, which bear a slightly
lower selling, general and administrative cost margin than the same margin
associated with the net sales of sales lead generation products. To the extent
that data processing and CD-ROM sales constitute a greater percentage of net
sales, the Company expects selling, general and administrative costs to decrease
as a percentage of net sales in the future.
The Company has been profitable on an operating basis in each year since
its inception in 1972. The Company incurred a net loss in 1997, due to
acquisition-related write-offs of acquired in-process research and development,
restructuring charges and increased amortization of goodwill and other
intangibles in connection with the acquisitions of DBA, Pro CD and other
businesses. Excluding these acquisition-related write-offs and amortization, the
Company would have been profitable in 1997.
During 1995, the Company sold American Business Communications for $3.0
million in the form of a non-recourse promissory note. The aggregate losses from
discontinued operations from this disposition were approximately $3.3 million
from 1993 through 1996. In addition, in 1996 the Company recorded a loss of $1.4
million attributable to the default by the purchaser on the non-recourse
promissory note delivered to the Company in this transaction.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statement of operations data expressed as a percentage of net
sales:
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Net sales................................................... 100% 100% 100%
Costs and expenses:
Database and production costs............................. 29 27 28
Selling, general and administrative....................... 41 42 43
Depreciation and amortization............................. 18 5 4
Acquisition-related charges............................... 29 20 --
--- --- ---
Total costs and expenses............................... 117 94 75
--- --- ---
Operating income (loss)..................................... (17) 6 25
Other income, net........................................... -- 2 2
--- --- ---
Income (loss) before income taxes and discontinued
operation................................................. (17) 8 27
Income taxes................................................ 4 3 10
--- --- ---
Income (loss) from continuing operations.................... (21) 5 17
Loss on discontinued operations and abandonment of
subsidiary................................................ -- 1 3
--- --- ---
Net income (loss)........................................... (21)% 4% 14%
=== === ===
1997 COMPARED TO 1996
Net Sales. Net sales for 1997 were $193.3 million, an increase of $85.0
million, or 78%, from $108.3 million in 1996. Of this increase, approximately
$54.4 million were attributable to the net sales of DBA for the period from
February 1, 1997, the date of acquisition, through December 31, 1997. In
addition, net sales in 1996 and 1997 also increased as a result of acquisitions
completed in the third and fourth quarters of 1996.
Net sales of sales lead generation products for 1997 were $128.9 million, a
44% increase from $89.7 million in 1996. Excluding the effect of acquisitions
completed after July 1996, net sales of sales lead generation products for 1997
were $106.8 million, a 19% increase from 1996. Net sales of sales lead
generation products attributable to acquired companies and included in 1997 were
approximately $22.0 million, or 17% of net sales.
Net sales of data processing services for 1997 were $42.7 million, as
compared to $4.6 million in 1996. This increase is directly attributable to the
acquisitions of DBA and Marketing Data Systems.
Net sales of consumer CD-ROM products for 1997 were $21.7 million, a 56%
increase from $13.9 million in 1996. This increase was primarily attributable to
the acquisitions of Digital Directory Assistance in August 1996 and Pro CD in
August 1997.
Database and Production Costs. Database and production costs for 1997 were
$55.1 million, an 88% increase from $29.3 million in 1996. These costs
constituted 29% of net sales in 1997 and 27% of net sales in 1996. The increase
as a percentage of net sales was the result of higher database and production
costs associated with sales of data processing services and CD-ROM products. As
previously noted, net sales of data processing services for 1997 were $42.7
million, as compared to $4.6 million in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1997 were $80.2 million, a 75% increase from $45.8
million in 1996. These expenses constituted 41% of net sales in 1997 and 42% as
a percentage of net sales in 1996. This decrease as a percentage of net sales
was the result of the increase in net sales of data processing services from 4%
of total net sales in 1996 to 22% of total net sales in 1997. Since 1996, the
overall increase in selling, general and administrative expenses as a percentage
of net sales has been offset by the overall increase in the sales of data
processing services and CD-ROM products,
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which bear a slightly lower selling, general and administrative cost margin than
the same margin associated with the net sales of sales lead generation products.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for 1997 were $34.4 million, as compared to $4.9 million in 1996. These
expenses constituted 18% of net sales in 1997, and 5% of net sales in 1996. Of
such increases, $21.7 million represented amortization of acquired database
costs and purchased data processing costs related to the acquisition of DBA,
which are being amortized over lives of one or two years. The remaining increase
reflects additional depreciation on property and equipment additions and
amortization of intangibles for certain other acquisitions recorded since July
1996.
Acquisition-Related Charges. As part of the acquisition of Digital
Directory Assistance in August 1996, the Company recorded charges of $10.0
million in 1996 for acquired in-process research and development costs.
Additionally, in September 1996, the Company recorded a charge of $11.5 million
due to the change in estimated useful lives based on management's evaluation of
the remaining lives of certain intangibles related to acquisitions made prior to
1995. These acquisition-related charges constituted $21.5 million, or 20%, of
net sales in 1996.
As part of the acquisition of DBA in February 1997 and Pro CD in August
1997, the Company recorded charges totaling $56.1 million, or 29% of net sales,
in 1997 for acquired in-process research and development costs as well as other
related integration and organizational restructuring costs.
Operating Income (Loss). As a result of the factors previously described,
the Company had an operating loss of $(32.5) million, or (17)% of net sales in
1997, as compared to operating income of $6.9 million, or 6% of net sales in
1996. Excluding the effect of the amortization and acquisition related charges
previously described, the Company would have had operating income of $27.9
million, or 14% of net sales, in 1997, and operating income of $18.9 million, or
17% of net sales, in 1996.
Other Income (Expense), Net. Other income (expense), net for 1997 was
$(0.4) million, as compared to $2.0 million in 1996. This decrease was primarily
attributable to interest expense incurred on the Company's credit facility, of
which $78.0 was outstanding at December 31, 1997. The Company had no outstanding
borrowings under a credit facility at December 31, 1996.
Income Taxes. A provision for income taxes at a combined federal and state
tax rate of 38% was recorded with respect to 1997 and 1996.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA").
As a result of the factors previously described, the Company had an EBITDA of
$1.9 million or 1% of net sales in 1997, as compared to an EBITDA of $11.8
million, or 11% of net sales in 1996. Excluding the effect of the
acquisition-related charges previously described, the Company would have had an
EBITDA of $58.0 million, or 30% of net sales in 1997, and an EBITDA of $33.3
million, or 31% of net sales in 1996.
1996 COMPARED TO 1995
Net Sales. Net sales for 1996 were $108.3 million, a 25% increase from
$86.8 million in 1995. Net sales of sales lead generation products for 1996 were
$89.7 million, an 18% increase from $75.9 million in 1995. Net sales of consumer
CD-ROM products for 1996 were $13.9 million, a 74% increase from $8.0 million in
1995. Net sales of data processing services were $4.6 million, a 64% increase
from $2.8 million in 1995.
Database and Production Costs. Database and production costs for 1996 were
$29.3 million, an increase of 22% from $24.0 million in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1996 were $45.8 million, an increase of 21% from
$37.7 million in 1995. This increase was primarily attributable to an overall
increase in direct marketing activities for all of the Company's products and
services, continued investment in the Company's field sales organization and
promotional marketing of consumer CD-ROM products, partially offset by a
one-time charge of $3.1 million in 1995 to recognize compensation expense
related to the repurchase of capital stock from a former officer of the Company.
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Depreciation and Amortization Expenses. Depreciation and amortization of
goodwill and other intangibles were $4.9 million in 1996, as compared to $3.5
million in 1995, primarily due to the increased amortization related to
acquisitions.
Acquisition-Related Charges. During the third quarter of 1996, the Company
recorded acquisition-related charges to continuing operations of $10.0 million
for acquired in-process research and development associated with the acquisition
of Digital Directory Assistance and $11.5 million associated with a change in
the estimated useful lives of certain intangible assets related to acquisitions
prior to 1995.
Operating Income. As a result of the factors previously described,
operating income in 1996 was $6.9 million, as compared to $21.6 million in 1995.
Excluding the acquisition-related charges previously described, the Company
would have had operating income of $28.4 million, or 26% of net sales in 1996.
Other Income, Net. Other income, net for 1996 was $2.0 million, as compared
to $1.2 million in 1995, primarily due to net realized gains of $1.3 million on
the sale of marketable securities during 1996 compared to net realized losses of
$339,000 on the sale of marketable securities during 1995. Interest expense
increased slightly due to the addition of capitalized equipment leases during
early 1996. Other expenses consist of a permanent write-down on an equity
investment included in other assets of the consolidated balance sheet and costs
associated with a pooling-of-interests transaction.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA").
As a result of the factors previously described, the Company had an EBITDA of
$11.8 million, or 11% of net sales in 1996, as compared to an EBITDA of $25.0
million, or 29% of net sales in 1995. Excluding the effect of the
acquisition-related charges previously described, the Company would have had an
EBITDA of $33.3 million, or 31% of net sales in 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
included cash and cash equivalents of $10.7 million and marketable securities of
$24.0 million. In February 1997, the Company entered into a $65.0 million credit
facility in connection with the acquisition of DBA. In August 1997, the Company
increased this credit facility to $100.0 million. The primary reason for the
increase was to finance the acquisition of Pro CD. As of December 31, 1997,
$78.0 million of this facility had been drawn upon, and the Company had working
capital of $67.5 million. See Note 18 of Notes to Consolidated Financial
Statements.
Net cash provided by operating activities for 1997 totaled $37.9 million.
The Company spent approximately $4.9 million related to acquisitions of
furniture and equipment and $4.2 million related to building and improvements in
1997. The Company is building a new facility for the consumer and business
database compilation division in Papillion, Nebraska, with an estimated cost of
$8.0 million, which is anticipated to be completed in mid-1998.
The Company paid $102.0 million in cash during 1997 in connection with the
acquisition of certain businesses. This amount includes $8.1 million, $18.9
million and $75.0 million associated with the acquisitions of Digital Directory
Assistance, Pro CD and DBA, respectively.
The Company believes that its existing sources of liquidity and cash
generated from operations, 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. In particular, if the Company is successful in
acquiring Metromail Corporation, the Company expects to incur substantial new
debt obligations.
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FACTORS THAT MAY AFFECT OPERATING RESULTS
Integration of Recent and Future Acquisitions. Since mid-1996, the Company
has completed seven acquisitions, including the August 1996 acquisition of
certain assets and liabilities of Digital Directory Assistance, the November
1996 merger with County Data Corporation and acquisition of certain assets and
liabilities of Marketing Data Systems, the December 1996 acquisition of certain
assets and liabilities of BJ Hunter, the February 1997 merger with Database
America ("DBA"), the August 1997 acquisition of certain assets and liabilities
of Pro CD and the March 1998 acquisition of Walter Karl, Inc. The Company also
made a number of other acquisitions in prior periods. The Company's strategy
includes continued growth through acquisitions of complementary products,
technologies or businesses, which, if implemented, will 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, financial and
accounting issues set forth in "-- Financial and Accounting Issues Related to
Acquisitions," 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 has submitted to the Metromail Board
of Directors a proposal to acquire Metromail for $33 per share. The Company
frequently evaluates the strategic opportunities available to it and intends to
aggressively pursue opportunities that it believes fit its business strategy.
Financial and Accounting Issues Related to Acquisitions. In connection with
the acquisitions completed since mid-1996, the Company issued approximately 3.7
million shares of Class A Common Stock and 3.7 million shares of Class B Common
Stock, and paid approximately $127.1 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 and Pro
CD, the Company incurred approximately $97.0 million in debt. See Note 18 to
Notes to Consolidated Financial Statements. 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 charges to operations and will be required to
amortize goodwill and other intangibles over periods of 1 to 15 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 such as the potential acquisition of Metromail
Corporation 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.
Recent Changes in Senior Management; Constraints on Management
Resources. The Company has experienced rapid growth, particularly as a result of
its recent acquisitions, and believes that as a result the hiring and retention
of senior management will be essential to the Company's ability to manage growth
successfully. In 1996 and 1997, the lack of 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. While the Company believes it has filled many key management
positions since the beginning of 1997, there can be no assurance that the
Company will be successful in attracting and retaining senior management
personnel in the future. The Company hired Scott Dahnke as its Chief Executive
Officer in October 1997, Steven Purcell as its Chief Financial Officer in April
1997, Gregory Back as its Executive Vice President of Corporate Planning and
Business Development, Joseph Szczepaniak as the President of the Company's
Consumer CD-ROM division and Kevin Hall as Senior Vice President of Special
Projects in October 1997 and Rick Puckett as its Corporate Controller in
September 1997. Messrs. Purcell,
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Szczepaniak and Puckett had no prior experience with the Company. Messrs.
Dahnke, Back and Hall served as consultants to the Company since May 1997, but
did not have experience with the day-to-day management of the Company. This new
management team does not have experience working together or working with the
Company's other senior management and personnel. Failure of the new management
team to manage growth, work together or work effectively with the Company's
other senior management could result in disruptions in operations or the
departure of key personnel, which in turn could have a material adverse effect
on the Company's business, financial condition or results of operations.
Fluctuations in Operating Results; Failure to Achieve Anticipated
Growth. 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
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. In addition, the Company typically experiences increases
in revenue in the two months following introduction of new editions of its
consumer CD-ROM products. 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'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
will have a disproportionate effect on net income in any given period. Long term
growth will be adversely affected if the Company fails to broaden its existing
product and service offerings, increase sales of products and services, or
expand into new markets, or fails to 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
internal growth or growth through acquisitions, there could be an adverse affect
on the Company's business, financial condition, results of operations or stock
price.
Risk of Product Returns. The Company has agreements that allow retailers
certain rights to return the Company's consumer CD-ROM products and consumers
may also seek to return such products to the Company. In the past the Company
has offered customers a money-back guarantee on its products. Accordingly, the
Company is exposed to the risk of product returns from retailers, distributors,
and direct purchasers, particularly in the case of products sold shortly before
introduction of the next year's edition of the same product. 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 adversely affect the Company's business, financial
condition and results of operations.
Restatement of Financial Statements. The Company was required to restate
its financial statements twice in 1997. One restatement was required in
connection with the recognition of compensation expense associated with a former
officer of the Company and the other was required in connection with recognition
and amortization of goodwill associated with an acquisition. Because of these
recent restatements of financial statements, any future restatement of the
Company's financial statements, to the extent it is material, could have an
adverse affect on the Company's results of operations and stock price.
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 the Internet, 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. Failure of the Company to successfully shift its products
to the Internet or DVD or to successfully introduce products that take advantage
of other technological changes may thus have an adverse effect on the Company's
business, results of operations and financial condition.
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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 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. In addition, the Company's Class A Common Stock and Class
B Common Stock have been trading for a very short time. While the Company
expects the Class A Common Stock and Class B Common Stock prices to remain
roughly equal in most market conditions, the difference in rights of the two
classes, coupled with the general volatility of the Company's stock price
described above, could cause the Class A Common Stock and Class B Common Stock
to trade at different prices. In the event of a tender offer or other
unsolicited attempt to acquire the Company, shares of Class B Common Stock would
likely trade at a substantial premium to shares of Class A Common Stock as a
result of the disparity of voting rights. Future issuances of both Class A
Common Stock and Class B Common Stock could affect the price for either or both
classes of Common Stock. For the foregoing reasons, the price for the Company's
Class A Common Stock may be subject to substantial fluctuation.
Competition. The business and consumer marketing information industry is
highly competitive. In particular, 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. 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. In business sales lead
generation products, the Company faces competition from 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, Donnelley Marketing and many
smaller, regional directory publishers. In consumer sales lead generation
products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk,
Trans Union, Equifax and Experian (a subsidiary of Great Universal Stores,
P.L.C), both directly and through reseller networks. In data processing
services, the Company competes with Acxiom, May & Speh, Harte-Hanks Data
Technologies and Direct Marketing Technologies (a subsidiary of Great Universal
Stores, P.L.C). In consumer products, the Company competes with certain small
producers of CD-ROM products. In addition, the Company faces competition to the
extent similar information is available on the Internet.
Risks Associated with Computer Systems and Software Upgrades. The Year 2000
Issue is the result of computer programs being written using two digits rather
than four to define the applicable year. Any of the Company's computer programs
that have date-sensitive software may recognize a date using "00' as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such modifications and conversion are not made, or are not completed in time,
the Year 2000 Issue could have a material impact on the operations of the
Company.
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The Company has not completed an estimate of the total cost to reprogram,
or replace, and test all software for Year 2000 modifications. Although a formal
estimate has not been made, it believes that the costs to be charged to
operations to achieve Year 2000 compliance will be minimized as: 1) the Company
is already in the process of acquiring and implementing a new accounting and
financial reporting system and certain other internal business information
systems which would have been required even without the Year 2000 Issue (the
cost of these new systems are capitalizable), and 2) the Company leverages its
skilled information systems development and programming staff to complete
business critical portions of reprogramming and replacement efforts with
internal resources, thereby minimizing the extent of external costs incurred to
ensure Year 2000 compliance.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties failure to address their own Year 2000 issue.
It is the Company's goal to complete the critical risk elements of the Year
2000 remediation not later than September, 1999. However, the systems of other
companies on which the Company's systems rely may not be converted in a timely
fashion, or may fail to convert its software or may implement a conversion that
is incompatible with the Company's systems, which would have material adverse
effect on the Company. The Company believes that the current versions of its
products are currently, or will be, by the end of 1998, Year 2000 compliant, and
such products are subject to ongoing analysis and review.
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 Montvale, New Jersey. 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 and Proprietary 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 in the ordinary course of their businesses and contain
terms and conditions prohibiting the unauthorized reproduction 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.
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 DMA 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item (other than selected quarterly
financial data which is set forth below) is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-20 of this
Form 10-K.
The following table sets forth selected financial information for each of
the eight quarters in the two-year period ended December 31, 1997. This
information has been prepared by the Company on the same basis as the
consolidated financial statements and includes all normal recurring adjustments
necessary to present fairly this information when read in conjunction with the
Company's audited consolidated financial statements and the notes thereto.
1997 1996
QUARTER ENDED QUARTER ENDED
-------------------------------------------- -------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31 31 30 30 31
-------- ------- --------- -------- ------- ------- --------- --------
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 41,948 $47,008 $50,555 $53,816 $24,785 $24,325 $ 27,585 $31,603
Costs and expenses:
Database and production costs..... 11,415 13,111 14,148 16,416 6,274 6,654 7,745 8,599
Selling, general and
administrative.................. 17,986 20,079 21,331 20,807 10,152 10,113 11,409 14,092
Depreciation and amortization..... 6,356 9,056 8,985 10,018 1,164 1,165 962 1,564
Acquisition-related charges....... 51,798 -- 4,300 -- -- -- 21,500 --
-------- ------- ------- ------- ------- ------- -------- -------
Operating income (loss)............. (45,607) 4,762 1,791 6,575 7,195 6,393 (14,031) 7,348
Other income (expense).............. 42 41 (257) (176) 399 613 (238) 1,268
-------- ------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes
and discontinued operations....... (45,565) 4,803 1,534 6,399 7,594 7,006 (14,269) 8,616
Income taxes........................ 1,631 1,893 775 2,688 2,885 2,630 (5,389) 3,274
-------- ------- ------- ------- ------- ------- -------- -------
Income (loss) from continuing
operations........................ (47,196) 2,910 759 3,711 4,709 4,376 (8,880) 5,342
Loss on discontinued operations..... -- -- -- -- -- -- (355) --
Loss from abandonment of
subsidiary........................ -- -- -- -- -- -- (1,373) --
-------- ------- ------- ------- ------- ------- -------- -------
Net income (loss)................... $(47,196) $ 2,910 $ 759 $ 3,711 $ 4,709 $ 4,376 $(10,608) $ 5,342
======== ======= ======= ======= ======= ======= ======== =======
Basic earnings (loss) per share..... $ (1.02) $ 0.06 $ 0.02 $ 0.08 $ 0.11 $ 0.11 $ (0.25) $ 0.12
======== ======= ======= ======= ======= ======= ======== =======
Weighted average shares
outstanding....................... 46,412 48,678 48,774 48,848 41,566 41,602 41,680 43,402
======== ======= ======= ======= ======= ======= ======== =======
Diluted earnings (loss) per share... $ (1.00) $ 0.06 $ 0.02 $ 0.07 $ 0.11 $ 0.10 $ (0.25) $ 0.12
======== ======= ======= ======= ======= ======= ======== =======
Weighted average shares
outstanding....................... 47,298 49,461 50,273 49,945 41,854 41,923 41,925 44,003
======== ======= ======= ======= ======= ======= ======== =======
AS A PERCENTAGE OF NET SALES:
Net sales........................... 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Database and production costs..... 27 28 28 31 25 27 28 27
Selling, general and
administrative.................. 43 43 42 39 41 42 41 45
Depreciation and amortization..... 15 19 18 18 5 5 3 5
Acquisition-related charges....... 123 -- 9 -- -- -- 78 --
-------- ------- ------- ------- ------- ------- -------- -------
Operating income (loss)............. (109) 10 4 12 29 26 (51) 23
Other income (expense).............. -- -- (1) -- 2 3 (1) 4
-------- ------- ------- ------- ------- ------- -------- -------
Income (loss) before income taxes
and discontinued operations....... (109) 10 3 12 31 29 (52) 27
Income taxes........................ 4 4 2 5 12 11 20 10
Loss on discontinued operations and
abandonment of subsidiary......... -- -- -- -- -- -- (6) --
-------- ------- ------- ------- ------- ------- -------- -------
Net income (loss)................... (113)% 6% 2% 7% 19% 18% (38)% 17%
======== ======= ======= ======= ======= ======= ======== =======
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The required information regarding Directors of the registrant is
incorporated by reference to the information under the caption "Nominees for
Election at the Annual Meeting" and "Incumbent Directors whose Terms of Office
Continue After the Annual Meeting" in the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held on May 22, 1998.
The required information regarding Executive Officers of the registrant is
contained in Part I of this Form 10-K.
The required information regarding compliance with Section 16(a) of the
Securities Exchange Act is incorporated by reference to the information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 22, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to the information under the captions "Executive
Compensation," "Performance Graph," "Report of the Compensation Committee," and
"Certain Transactions" in the Company's definitive proxy statement for the
Annual Meeting of Stockholders to be held on May 22, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to the information under the caption "Security
Ownership" in the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 22, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the information under the captions "Certain
Transactions" in the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held on May 22, 1998.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. Financial Statements. The following Consolidated Financial Statements of
American Business Information, Inc. and Report of Independent Accountants are
included at pages F-1 through F-19 of this Form 10-K:
DESCRIPTION PAGE NO.
----------- --------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996, and 1995......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996, and 1995......................... F-6
Notes to Consolidated Financial Statements.................. F-7
2. Financial Statement Schedule. The following consolidated financial
statement schedule of American Business Information, Inc. and Subsidiaries for
the years ended December 31, 1997, 1996 and 1995 is filed as part of this Report
and should be read in conjunction with the Consolidated Financial Statements.
DESCRIPTION PAGE NO.
----------- --------
Schedule II Valuation and Qualifying Accounts.......................... S-1
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the consolidated financial statements or notes thereto.
3. Exhibits. The following Exhibits are filed as part of, or incorporated
by reference into, this report:
2.1 -- Asset Purchase Agreement between the Company and Digital
Directory Assistance, Inc. is incorporated herein by
reference to exhibits filed with the Company's current
report on Form 8-K dated September 10, 1996.
2.2 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of County Data Corporation is
incorporated herein by reference to exhibits filed with
Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996.
2.3 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of 3319971 Canada Inc. is
incorporated herein by reference to exhibits filed with
Company's Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1996.
2.4 -- Agreement and Plan of Reorganization between the Company
and the shareholders of Marketing Data Systems, Inc. is
incorporated herein by reference to the exhibits filed
with the Company's Registration Statement on Form S-3
(File No. 333-36669) filed on October 23, 1997.
2.5 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of DBA Holdings, Inc. is
incorporated herein by reference to exhibits filed with
the Company's Current Report on Form 8-K dated February
28, 1997.
2.6 -- Agreement and Plan of Reorganization between the Company
and the Shareholders of Pro CD, Inc. is incorporated
herein by reference to exhibits filed with the Company's
Current Report on Form 8-K dated September 8, 1997.
24
26
2.7 -- Stock Purchase Agreement between the Company and the shareholders of Walter Karl, Inc.
is incorporated herein by reference to the Company's Current Report on Form 8-K dated
February 24, 1998.
3.2 -- Bylaws are incorporated herein by reference to the Company's Registration Statement on
Form S-1 (File No. 33-42887), which became effective February 18, 1992.
3.3 -- Amended and Restated Certificate of Designations of Participating Preferred Stock,
filed in Delaware on October 3, 1997, is incorporated herein by reference to the
Company's Registration Statement on From 8-A, (File No. 97-690893), filed on October 6,
1997.
4.1 -- Rights Plan for Class A Common is incorporated herein by reference to the Company's
Registration Statement on Form 8-A, (File No. 97-690893), filed on October 6, 1997.
4.2 -- Rights Plan for Class B Common is incorporated herein by reference to the Company's
Registration Statement on Form 8-A, (File No. 97-690896), filed on August 6, 1997 and
amended on October 6, 1997.
4.3 -- Specimen of Class A Common Stock Certificate is incorporated herein by reference to the
exhibits filed with the company's Registration Statement on Form S-3 (File No.
333-36669) filed on October 23, 1997.
4.4 -- Specimen Class B Common Stock Certificate, filed herewith.
4.5 -- Amended and Restated Credit Agreement between the Company and First Union National Bank
is incorporated herein by reference to the exhibits filed with the Company's Current
Report on Form 8-K dated September 8, 1997.
4.6 -- Reference is made to Exhibits 3.1, 3.2, and 3.3 hereof.
10.1 -- Form of Indemnification Agreement with Officers and Directors is incorporated herein by
reference to the exhibits filed with the Company's Registration Statement on Form S-1
(File No. 33-51352), filed August 28, 1992.
10.2 -- Employment Agreement between the Company and Scott Dahnke is incorporated herein by
reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
10.3 -- Employment Agreement between the Company and Gregory Back is incorporated herein by
reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997.
10.5 -- Reference is made to Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7 and 4.5 hereof.
21.1 -- Subsidiaries and State of Incorporation, filed herewith.
23.1 -- Consent of Independent Accountants, filed herewith.
24.1 -- Power of Attorney (included on signature page)
27.1 -- Financial Data Schedule, filed herewith.
(a) Reports on Form 8-K:
On October 7, 1997 the Company filed a Current Report on Form 8-K dated
September 8, 1997, pursuant to Item 5 of that form, to report on the acquisition
of Pro CD.
On October 7, 1997, the Company filed a Current Report on Form 8-K,
pursuant to Item 5 of that form, to report on the Reclassification, the Stock
Dividend, and certain related matters. The report was amended on Form 8-K/A on
October 9, 1997 for technical reasons.
25
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMERICAN BUSINESS INFORMATION, INC.
By: /s/ STEVEN PURCELL
------------------------------------
Steven Purcell
Chief Financial Officer
(principal accounting officer)
Dated: March 27, 1998
26
28
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
American Business Information, Inc. and Subsidiaries:
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995....................... F-4
Consolidated Statements of Stockholders' Equity for the
Periods Ended December 31, 1997, 1996 and 1995......... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
American Business Information, Inc.:
We have audited the consolidated balance sheets of American Business
Information, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Business Information, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
------------------------------------
COOPERS & LYBRAND L.L.P.
Omaha, Nebraska
January 23, 1998
F-2
30
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 10,653 $ 7,497
Marketable securities..................................... 24,045 22,810
Trade accounts receivable, net of allowances of $6,013 and
$2,724, respectively................................... 49,409 29,630
Income taxes receivable................................... 345 1,105
Prepaid expenses.......................................... 3,475 3,267
Deferred marketing costs.................................. 3,417 1,263
-------- --------
Total current assets.............................. 91,344 65,572
-------- --------
Property and equipment, net................................. 25,117 18,886
Intangible assets, net of accumulated amortization.......... 73,741 17,410
Deferred income taxes....................................... 1,410 5,388
Other assets................................................ 3,299 621
-------- --------
$194,911 $107,877
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 716 $ 708
Payable to shareholders................................... 1,871 7,925
Accounts payable.......................................... 9,426 5,520
Accrued payroll expenses.................................. 4,910 2,352
Accrued expenses.......................................... 5,406 711
Deferred revenue.......................................... 4,238 2,117
Deferred income taxes..................................... 4,770 512
-------- --------
Total current liabilities......................... 31,337 19,845
-------- --------
Long-term debt, net of current portion...................... 81,284 427
Other liabilities........................................... 2,054 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0025 par value. Authorized 5,000,000
shares;
none issued or outstanding............................. -- --
Class A common stock, $.0025 par value. Authorized
220,000,000 shares; 24,460,332 shares issued and
outstanding at December 31, 1997 and 22,100,960 shares
issued and outstanding at December 31, 1996............ 61 --
Class B common stock, $.0025 par value. Authorized
75,000,000 shares; 24,625,332 shares issued and
24,460,332 shares outstanding at December 31, 1997 and
22,265,960 shares issued and 22,100,960 shares
outstanding at December 31, 1996....................... 62 55
Paid-in capital........................................... 69,055 37,268
Retained earnings......................................... 13,126 52,942
Treasury stock, at cost, 165,000 shares of Class B common
stock held at December 31, 1997 and 1996............... (2,281) (2,281)
Unrealized holding gain (loss), net of tax................ 213 (379)
-------- --------
Total stockholders' equity........................ 80,236 87,605
-------- --------
$194,911 $107,877
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
31
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Net sales............................................. $193,327 $108,298 $86,766
Costs and expenses:
Database and production costs....................... 55,090 29,272 23,999
Selling, general and administrative................. 80,203 45,766 37,724
Depreciation and amortization....................... 34,415 4,855 3,469
Acquisition-related charges......................... 56,098 21,500 --
-------- -------- -------
225,806 101,393 65,192
-------- -------- -------
Operating income (loss)............................... (32,479) 6,905 21,574
Other income (expense):
Investment income................................... 3,748 3,194 1,322
Interest expense.................................... (4,098) (209) (157)
Other............................................... -- (943) --
-------- -------- -------
Income (loss) before income taxes and discontinued
operations.......................................... (32,829) 8,947 22,739
Income taxes.......................................... 6,987 3,400 8,421
-------- -------- -------
Income (loss) from continuing operations.............. (39,816) 5,547 14,318
Loss on discontinued operations....................... -- (355) (2,317)
Loss from abandonment of subsidiary................... -- (1,373) --
-------- -------- -------
Net income (loss)..................................... $(39,816) $ 3,819 $12,001
======== ======== =======
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations............ $ (0.82) $ 0.13 $ 0.35
Loss on discontinued operations and abandonment of
subsidiary....................................... -- (0.04) (0.06)
-------- -------- -------
Net income (loss)................................... $ (0.82) $ 0.09 $ 0.29
======== ======== =======
Weighted average shares outstanding................... 48,432 42,065 41,475
======== ======== =======
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations............ $ (0.82) $ 0.13 $ 0.34
Loss on discontinued operations and abandonment of
subsidiary....................................... -- (0.04) (0.06)
-------- -------- -------
Net income (loss)................................... $ (0.82) $ 0.09 $ 0.28
======== ======== =======
Weighted average shares outstanding................... 48,432 42,390 42,136
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
32
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CLASS A CLASS B UNREALIZED TOTAL
COMMON COMMON PAID-IN RETAINED TREASURY HOLDING STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK GAIN (LOSS) EQUITY
------- ------- ------- -------- -------- ----------- -------------
Balances, December 31, 1994............... $-- $34 $26,573 $36,936 $ -- $(217) $ 63,326
Issuance of 188,250 shares of common
stock................................... -- -- 786 -- -- -- 786
Unrealized holding loss, net of tax....... -- -- -- -- -- (29) (29)
3 for 2 stock split....................... -- 17 (17) -- -- -- --
Net income................................ -- -- -- 12,001 -- -- 12,001
--- --- ------- -------- ------- ----- --------
Balances, December 31, 1995............... -- 51 27,342 48,937 -- (246) 76,084
Issuance of 2,441,950 shares of common
stock................................... -- 3 9,628 -- -- -- 9,631
Issuance of 1,120,000 shares of common
stock in pooling-of-interests
transaction............................. -- 1 86 186 -- -- 273
Tax benefit related to employee stock
options................................. -- -- 212 -- -- -- 212
Acquisition of treasury stock............. -- -- -- -- (2,281) -- (2,281)
Unrealized holding loss, net of tax....... -- -- -- -- -- (133) (133)
Net income................................ -- -- -- 3,819 -- -- 3,819
--- --- ------- -------- ------- ----- --------
Balances, December 31, 1996............... -- 55 37,268 52,942 (2,281) (379) 87,605
Issuance of 4,718,744 shares of common
stock................................... -- 7 31,261 -- -- -- 31,268
Tax benefit related to employee stock
options................................. -- -- 587 -- -- -- 587
2 for 1 stock dividend.................... 61 -- (61) -- -- -- --
Unrealized holding gain, net of tax....... -- -- -- -- -- 592 592
Net loss.................................. -- -- -- (39,816) -- -- (39,816)
--- --- ------- -------- ------- ----- --------
Balances, December 31, 1997............... $61 $62 $69,055 $13,126 $(2,281) $ 213 $ 80,236
=== === ======= ======== ======= ===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
33
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss)................................. $(39,816) $ 3,819 $ 12,001
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 34,415 4,855 3,469
Deferred income taxes.......................... (2,787) (6,307) 662
Impairment of other assets..................... -- 740 630
Loss on discontinued operations and abandonment
of subsidiary................................ -- 2,788 1,833
Net realized (gains) losses on sale of
marketable securities and other
investments.................................. (2,560) (1,267) 339
Acquisition-related charges.................... 56,098 21,500 --
Changes in assets and liabilities, net of
effect of acquisitions:
Trade accounts receivable.................... (7,445) (7,762) (4,108)
Prepaid expenses............................. 287 (1,117) (796)
Deferred marketing costs..................... (2,154) (267) (996)
Accounts payable............................. (4,854) (1,422) 2,480
Income taxes receivable and payable.......... 7,283 (128) (1,330)
Accrued expenses............................. (8,211) (3,111) 1,635
-------- -------- --------
Net cash provided by operating
activities.............................. 30,256 12,321 15,819
Cash flows from investing activities:
Proceeds from sales of marketable securities...... 19,596 18,865 15,787
Purchases of marketable securities................ (17,448) (17,348) (24,792)
Purchase of other investments..................... (2,000) -- --
Purchases of property and equipment............... (8,882) (6,755) (3,554)
Acquisitions of businesses, including minority
interest....................................... (84,224) (6,484) (1,174)
Consumer database costs........................... (3,398) (494) --
Software development costs........................ (2,898) (1,955) (512)
Other............................................. (678) 347 (660)
-------- -------- --------
Net cash used in investing activities..... (99,932) (13,824) (14,905)
Cash flows from financing activities:
Repayment of long-term debt....................... (7,193) (1,450) (3,192)
Proceeds from long-term debt...................... 86,000 -- --
Deferred financing costs.......................... (388) -- --
Repayment of note payable to shareholders......... (7,925) -- --
Acquisition of treasury stock..................... -- (2,281) --
Deferred offering costs........................... (339) -- --
Proceeds from exercise of stock options........... 2,090 520 786
Tax benefit related to employee stock options..... 587 212 --
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. 72,832 (2,999) (2,406)
Net increase (decrease) in cash and cash
equivalents....................................... 3,156 (4,502) (1,492)
Cash and cash equivalents, beginning................ 7,497 11,999 13,491
-------- -------- --------
Cash and cash equivalents, ending................... $ 10,653 $ 7,497 $ 11,999
======== ======== ========
Supplemental cash flow information:
Interest paid..................................... $ 3,616 $ 78 $ 165
======== ======== ========
Income taxes paid................................. $ 7,443 $ 8,280 $ 8,226
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
34
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
American Business Information, Inc. (ABI) and its subsidiaries, (the
Company), provides business and consumer marketing information products and data
processing services throughout the United States and Canada. These products
include customized business lists, business directories and other information
services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates and Assumptions. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements include
the accounts of ABI and its subsidiaries. Intercompany accounts and transactions
have been eliminated.
Revenue Recognition. The Company's revenue is primarily generated from the
sale of its products and services and the licensing of its data to third
parties. Revenue from the sale of products and services is generally recognized
when the product is delivered or the services are performed. A portion of
revenue from data licensing is recognized at the time the initial set of data is
delivered, with the remaining portion being deferred and recognized over the
license term as the Company provides updated information. Reserves are
established for estimated returns and uncollectible amounts.
Database Costs. Costs to maintain and enhance the Company's business
database are expensed as incurred. Costs to develop new databases are
capitalized and amortized upon the successful completion of the compilation
project, over a period not to exceed 5 years. The Company is currently
capitalizing costs associated with a compilation project to create a new
consumer database. Costs incurred as of December 31, 1997 related to the
database compilation effort totaled approximately $3.9 million, and are included
in intangible assets in the accompanying consolidated balance sheets.
Advertising Costs. Certain direct-response advertising costs are
capitalized and amortized over periods that correspond to the estimated revenue
stream of the individual advertising activity. All other advertising costs are
expensed as the advertising takes place. Total unamortized marketing costs at
December 31, 1997 and 1996, was $3.4 million and $1.3 million, respectively.
Total advertising expense for the years ended December 31, 1997, 1996, and 1995
was $15.9 million, $11.0 million, and $10.8 million, respectively.
Software Capitalization. Until technological feasibility is established,
software development costs are expensed as incurred. After that time, direct
costs are capitalized and amortized using the straight-line method over the
estimated economic life, generally one to four years. Unamortized software costs
included in intangible assets at December 31, 1997 and 1996, was $1.9 million,
$1.4 million, respectively. Amortization of capitalized costs during the years
ended December 31, 1997, 1996 and 1995, totaled approximately $2.5 million, $1.0
million, and $81 thousand, respectively.
Income taxes. The Company recognizes income taxes using the liability
method, under which deferred tax assets and liabilities are determined based on
the difference between financial and tax bases of assets and liabilities using
enacted tax rates.
Earnings Per Share. Statement of Financial Accounting Standards No. 128,
Earnings Per Share, was issued in February 1997 and is effective for financial
statements issued for fiscal periods ending after December 15, 1997. The
standard revises the calculation and presentation of earnings per share and
requires the presentation of "basic earnings per share" and "diluted earnings
per share."
F-7
35
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic earnings per share are based on the weighted average number of common
shares outstanding, including contingently issuable shares, which have been
restated to account for the stock dividend (See Note 17). Diluted earnings per
share are based on the weighted number of common shares outstanding, including
contingently issuable shares, plus dilutive potential common shares outstanding
(representing outstanding stock options).
The following data show the amounts used in computing earnings per share
and the effect on the weighted average number of shares of dilutive potential
common stock. Options on 1.1 million shares of common stock were not included in
computing diluted earnings per share for 1997 because their effects were
antidilutive.
1997 1996 1995
------ ------ ------
(AMOUNTS IN THOUSANDS)
Weighted average number of shares outstanding used in
basic EPS............................................. 48,432 42,065 41,475
Net additional common equivalent shares outstanding
after assumed exercise of stock options............... -- 325 661
------ ------ ------
Weighted average number of shares outstanding used in
diluted EPS........................................... 48,432 42,390 42,136
====== ====== ======
Invested Cash. Cash equivalents, consisting of highly liquid debt
instruments that are readily convertible to known amounts of cash and when
purchased have an original maturity of three months or less, are carried at cost
which approximates fair value. Marketable securities have been classified as
available-for-sale and are therefore carried at fair value, which are estimated
based on quoted market prices. Net unrealized gains and losses are reported as a
separate component of stockholders' equity. Unrealized and realized gains and
losses are determined by specific identification.
Property and Equipment. Property and equipment (including equipment
acquired under capital leases) are stated at cost and are depreciated or
amortized primarily using straight-line methods over the estimated useful lives
of the assets, as follows:
Buildings and improvements.................................. 30 years
Office furniture and equipment.............................. 5 to 7 years
Computer equipment.......................................... 5 years
Capitalized equipment leases................................ 5 years
Intangibles. Intangible assets are stated at cost and are amortized using
the straight-line method over the estimated useful lives of the assets, as
follows:
Goodwill.................................................... 8 to 15 years
Distribution networks....................................... 2 years
Noncompete agreements....................................... Term of agreements
Purchased data processing software.......................... 2 years
Acquired database costs..................................... 1 year
Core technology costs....................................... 3 years
Customer base costs......................................... 3 years
Tradename costs............................................. 10 years
Perpetual software license agreement........................ 10 years
Software development costs.................................. 1 to 4 years
F-8
36
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1996, the Company shortened the lives for goodwill and distribution
networks in recognition of more rapid changes in the businesses acquired to 8
years and 2 years, respectively. Prior to 1996, goodwill and distribution
networks were amortized over 30 and 15 years, respectively.
All of the Company's long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future cash flows is less than the
carrying amount of the asset, a loss is recognized.
Reclassifications. Certain reclassifications were made to the 1996 and 1995
financial statements to conform to the 1997 presentation.
3. ACQUISITIONS
Effective August 1996, the Company acquired certain assets and assumed
certain liabilities of Digital Directory Assistance, Inc. (DDA), a publisher of
PhoneDisc CD-ROM products. The total purchase price was approximately $16.9
million of which $4.0 million was paid in September 1996, $7.9 million in the
form of a promissory note issued to the sellers paid in January 1997, and the
remaining amount through the issuance of 600,000 unregistered shares of the
Company's Class A Common Stock and 600,000 unregistered shares of the Company's
Class B Common Stock. The acquisition was accounted for under the purchase
method of accounting. In addition to purchased in-process research and
development costs of $10.0 million (See Note 16), goodwill recorded as part of
the purchase was $10.0 million, which is being amortized over 8 years.
Effective November 1996, the Company acquired the common stock of County
Data Corporation (CDC), a national new business database compiler. Total
consideration for the acquisition was 560,000 unregistered shares of the
Company's Class A Common Stock and 560,000 unregistered shares of the Company's
Class B Common Stock. The acquisition was accounted for under the
pooling-of-interests method of accounting. The accompanying consolidated
financial statements have not been restated to reflect this acquisition, as the
net sales and net income of CDC were not significant for the periods presented.
Effective November 1996, the Company acquired certain assets and assumed
certain liabilities of Marketing Data Systems, Inc. (MDS), a provider of data
warehousing, research and analysis services for target marketing applications to
Fortune 1000 companies. Total consideration for the acquisition was $2.4
million, consisting of $1.0 million in cash and 118,000 unregistered shares of
the Company's Class A Common Stock and 118,000 shares of the Company's Class B
Common Stock. The acquisition has been accounted for under the purchase method
of accounting. Substantially all of the purchase price was allocated to goodwill
which is being amortized over 8 years.
Effective December 1996, the Company acquired all of the Common Stock of
Kadobec Investments, Inc., (operating as B.J. Hunter), which provides lead
generation products in Canada. Total consideration for the acquisition was $3.1
million, consisting of $876 thousand in cash and 150,000 unregistered shares of
the Company's Class A Common Stock and 150,000 shares of the Company's Class B
Common Stock. The acquisition has been accounted for under the purchase method
of accounting. The Company allocated substantially all of the purchase price to
goodwill which is being amortized over 8 years.
Effective February 1, 1997, the Company acquired all issued and outstanding
common stock of DBA Holdings, Inc. and Subsidiaries (operating as Database
America Companies, or DBA), a provider of data processing and analytical
services for marketing applications, and compiler of information on consumers
and businesses in the United States. Total consideration, as adjusted, for the
acquisition was approximately $103.5 million, consisting of $75.0 million in
cash, partially funded using a revolving credit facility (See Note 7), and
approximately 2.3 million unregistered shares of the Company's Class A Common
Stock and 2.3 million unregistered shares of the Company's Class B Common Stock.
In October 1997, the Company and the former stockholders of DBA agreed to a
purchase price adjustment, pursuant to which the Company agreed to issue to the
former DBA stockholders an additional 139,829 unregistered shares of its Class A
Common Stock
F-9
37
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 139,829 unregistered shares of its Class B Common Stock. As of December 31,
1997, these additional shares of the Company's stock had not been issued to the
former DBA shareholders, and this liability of approximately $1.9 million is
included in payable to shareholders in the accompanying consolidated balance
sheets. The acquisition has been accounted for under the purchase method of
accounting. In addition to purchased in-process research and development costs
of $49.2 million (See Note 16), intangibles and goodwill recorded as part of the
purchase included acquired database costs of $19.0 million, purchased data
processing software of $9.4 million, noncompete agreements of $1.7 million and
goodwill of $20.8 million. Goodwill is being amortized over 15 years.
Effective August 1997, the Company acquired certain assets and assumed
certain liabilities of Pro CD, Inc. (Pro CD) from Acxiom Corporation (Acxiom), a
provider of telephone directory and other business software products on CD-ROM
to consumers. The acquisition has been accounted for under the purchase method
of accounting. Total consideration for the acquisition was $18 million in cash,
funded using a revolving credit facility (See Note 7). In conjunction with the
acquisition of Pro CD, the Company entered into a Data License Agreement with
Acxiom in which Acxiom will pay to the Company $8 million over a two year
period. Additionally, the Company entered into a Technology License Agreement
with Acxiom in which the Company will pay to Acxiom $8 million over a two year
period. In addition to purchased in-process research and development costs of
$4.3 million (See Note 16), intangibles and goodwill recorded as part of the
purchase included core technology, customer base, and tradename costs totaling
$5.9 million, noncompete agreements of $5.2 million and goodwill of $6.2
million. Goodwill is being amortized over 10 years.
Operating results for each of these acquisitions are included in the
accompanying consolidated statements of operations from the respective
acquisition dates. Assuming the above described companies had been acquired on
January 1, of the year preceding the acquisition, and excluding the write-offs
of in-process research and development costs, unaudited pro forma consolidated
revenues, net income (loss) and net income (loss) per share would have been as
follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales................................. $206,578 $187,325 $101,404
Net income (loss)......................... $ 29,187 $(26,054) $ 9,564
Basic earnings (loss) per share........... $ 0.60 $ (0.53) $ 0.22
Diluted earnings (loss) per share......... $ 0.60 $ (0.52) $ 0.21
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.
F-10
38
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. MARKETABLE SECURITIES
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GROSS GAIN GROSS LOSS VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
At December 31, 1997
Municipal bonds.......................... $ 824 $ 1 $ (2) $ 823
Corporate bonds.......................... 2,459 4 (66) 2,397
Common stock............................. 20,372 1,429 (1,030) 20,771
Preferred stock.......................... 47 7 -- 54
------- ------ ------- -------
$23,702 $1,441 $(1,098) $24,045
======= ====== ======= =======
At December 31, 1996
Municipal bonds.......................... $11,450 $ 35 $ (132) $11,353
U.S. government and agency............... 808 7 (5) 810
Corporate bonds.......................... 5,751 17 (58) 5,710
Common stock............................. 5,365 18 (496) 4,887
Preferred stock.......................... 47 3 -- 50
------- ------ ------- -------
$23,421 $ 80 $ (691) $22,810
======= ====== ======= =======
Scheduled maturities of marketable debt securities at December 31, 1997,
are as follows:
LESS THAN ONE TO FIVE TO MORE THAN
1 YEAR 5 YEARS 10 YEARS 10 YEARS
--------- ------- -------- ---------
(IN THOUSANDS)
Municipal bonds............................. $ 82 $ 251 $-- $491
Corporate bonds............................. 1,111 1,286 -- --
------ ------ --- ----
$1,193 $1,537 $-- $491
====== ====== === ====
For the year ended December 31, 1997, proceeds from sales of marketable
securities approximated $19.6 million while realized gains totaled $2.6 million
and realized losses totaled $86 thousand. For the year ended December 31, 1996,
proceeds approximated $18.9 million while realized gains totaled $1.6 million
and realized losses totaled $343 thousand.
5. PROPERTY AND EQUIPMENT
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Land and improvements...................................... $ 1,733 $ 1,220
Buildings and improvements................................. 13,040 9,084
Furniture and equipment.................................... 26,608 21,597
Capitalized equipment leases............................... 2,014 1,437
------- -------
43,395 33,338
Less accumulated depreciation and amortization:
Owned property........................................... 17,502 14,188
Capitalized equipment leases............................. 776 264
------- -------
Property and equipment, net........................... $25,117 $18,886
======= =======
The Company has entered a commitment to construct an additional facility in
Papillion, Nebraska, near the existing Company's Ralston, Nebraska, location.
The estimated cost of the project is $8 million and is
F-11
39
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated to be completed in mid 1998. The Company anticipates funding the
project with cash flows from operations and a revolving credit facility.
Under the terms of its capital lease agreements, the Company is required to
pay ownership costs, including taxes, licenses and maintenance. The Company also
leases office space under operating leases expiring at various dates through
October 2007. Certain of these leases contain renewal options. Rent expense was
$2.6 million, $952 thousand, and $593 thousand in the years ended December 31,
1997, 1996 and 1995, respectively.
Following is a schedule of the future minimum lease payments as of December
31, 1997:
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
1998........................................................ $ 750 $2,541
1999........................................................ 245 1,972
2000........................................................ 70 710
2001........................................................ -- 362
2002........................................................ -- 167
------ ------
Total future minimum lease payments......................... $1,065 $5,752
======
Less amounts representing interest.......................... 65
------
Present value of net minimum lease payments................. $1,000
======
6. INTANGIBLE ASSETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Goodwill................................................... $ 44,598 $19,093
Noncompete agreements...................................... 6,925 --
Core technology............................................ 1,100 --
Customer base.............................................. 1,100 --
Tradename.................................................. 3,700 --
Purchased data processing software......................... 9,400 --
Acquired database costs.................................... 19,000 --
Perpetual software license agreement....................... 8,000 --
Software development costs................................. 1,865 1,955
Consumer database costs.................................... 3,892 494
Other deferred costs....................................... 1,662 --
-------- -------
101,242 21,542
Less accumulated amortization.............................. 27,501 4,132
-------- -------
$ 73,741 $17,410
======== =======
F-12
40
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FINANCING ARRANGEMENTS
Long-term debt consisted of the following:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Uncollateralized bank revolving line of credit, provides
for maximum borrowings of $100 million at December 31,
1997. Facility provides for borrowings with interest at
bank's base rate or LIBOR plus 0.375%-0.625%, based on
the Company's funded debt ratio. The rate in effect at
December 31, 1997 was 6.5%. Principal is due February
2000. Effective July 1997, The Company entered into an
interest rate swap whereby $30 million of outstanding
credit bears a fixed interest rate of 6.74%. The interest
rate swap terminates in July 1999. Interest is payable at
the earliest of the end of each applicable interest
period or quarterly...................................... $78,000 $ --
Uncollateralized bank revolving line of credit, provides
for maximum borrowings of $5 million. Facility provides
for borrowings with interest at bank's LIBOR plus 2.150%
The rate in effect at December 31, 1997 was 8.43%.
Principal is due January 2000. Interest is payable
monthly.................................................. 3,000 --
Bank note assumed in acquisition, repaid in January 1997... -- 225
Computer lease obligations (See Note 5).................... 1,000 910
------- ------
82,000 1,135
Less current portion....................................... 716 708
------- ------
Long-term debt............................................. $81,284 $ 427
======= ======
Future maturities by calendar year of long-term debt as of December 31,
1997 are as follows (in thousands):
1998........................................................ $ 716
1999........................................................ $ 210
2000........................................................ $81,074
The Company is subject to certain financial covenants on the $100 million
revolving credit facility, including maximum funded debt ratio, minimum interest
coverage ratio, and minimum tangible net worth tests. Additionally, the Company
is required to pay an annual commitment fee on the average unused amount of the
facility, ranging from 0.15%-0.25% based on the Company's funded debt ratio.
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 December 31, 1997, the Company was a party to one interest rate swap
agreement which expires in July 1999. The agreement entitles the Company to
receive from counterparties on a monthly basis the amounts, if any, by which the
Company's interest payments on $30 million of outstanding debt of its $100
million revolving line of credit due in February 2000 exceed 6.74%, and to pay
to counterparties on a monthly basis the amounts, if any, by which the Company's
interest payments on $30 million of outstanding debt of its $100 million
revolving line of credit are less than 6.74%.
F-13
41
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has not declared or paid any cash dividends on its capital
stock. Pursuant to certain financing arrangements, the Company has agreed not to
pay cash dividends in any four quarter period in excess of the lesser of
$5,000,000 or 25% of net income for such four quarter period.
8. INCOME TAXES
The provision for income taxes on continuing operations consists of the
following:
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Current:
Federal..................................... $9,163 $ 8,782 $7,101
State....................................... 742 925 658
------ ------- ------
9,905 9,707 7,759
------ ------- ------
Deferred:
Federal..................................... (2,688) (6,159) 615
State....................................... (230) (148) 47
------ ------- ------
(2,918) (6,307) 662
------ ------- ------
$6,987 $ 3,400 $8,421
====== ======= ======
Loss on discontinued operations and abandonment of subsidiary is presented
net of income tax benefits of $1.1 million in 1996 and $1.3 million in 1995.
The effective income tax rate varied from the federal statutory rate as
follows:
FOR THE YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS)
Tax provision computed at statutory rate of
35%......................................... $(11,490) $3,131 $7,959
State taxes, net.............................. 424 530 401
Amortization of nondeductible intangibles..... 637 29 --
In-process research and development........... 17,220 -- --
Nondeductible expense, nontaxable income and
other....................................... 196 (290) 61
-------- ------ ------
$ 6,987 $3,400 $8,421
======== ====== ======
F-14
42
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred tax asset (liability) were as follows:
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Marketable securities.................................... $ -- $ 232
Intangible assets........................................ 2,242 5,758
Accrued vacation......................................... 399 291
Accrued expenses......................................... -- 369
Accounts receivable...................................... -- 317
Other assets............................................. 521 521
------- -------
3,162 7,488
------- -------
Deferred tax liabilities:
Accounts receivable...................................... (2,876) --
Marketable securities.................................... (130) --
Depreciation............................................. (1,126) (824)
Prepaid expenses and other............................... (2,390) (1,788)
------- -------
(6,522) (2,612)
------- -------
Net deferred tax asset (liability)......................... $(3,360) $ 4,876
======= =======
9. STOCK INCENTIVES
As of December 31, 1997, a total of 5.0 million shares of the Company's
Class A Common Stock and 5.0 million shares of the Company's Class B Common
Stock have been reserved for issuance to officers, key employees and
non-employee directors under the Company's 1992 Stock Option Plan. In addition,
as of December 31, 1997, a total of 2.0 million shares of the Company's Class A
Common Stock have been reserved for issuance to officers, key employees and
non-employee directors under the Company's 1997 Class A Common Stock Option
Plan.
Options are generally granted at the stock's fair market value on the date
of grant, vest generally over a four or five year period and expire five or six
years, respectively, from date of grant. Options issued to shareholders holding
10% or more of the Company's stock are generally issued at 110% of the stock's
fair market value on the date of grant and vest over periods ranging from five
to six years with early vesting if certain financial goals are met. Certain
options issued to directors at the stock's fair market value vested immediately
and expire five years from grant date. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards issued in or subsequent to 1995 consistent with the provisions
of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) -- as reported.............. $(39,816) $3,819 $12,001
Net income (loss) -- pro forma................ $(41,503) $3,072 $11,779
Basic earnings (loss) per share -- as
reported.................................... $ (0.82) $ 0.09 $ 0.29
Diluted earnings (loss) per share -- as
reported.................................... (0.82) 0.09 0.28
Basic earnings (loss) per share -- pro
forma....................................... $ (0.86) $ 0.07 $ 0.29
Diluted earnings (loss) per share -- pro
forma....................................... $ (0.84) $ 0.07 $ 0.28
F-15
43
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The above pro forma results are not likely to be representative of the
effects on reported net income for future years since options vest over several
years and additional awards generally are made each year.
The fair value of the weighted average of each year's option grants is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997, 1996
and 1995: dividend yield of 0%; expected volatility of 19.16% (1997) and 15.52%
(1996 and 1995); risk free interest rate based on the U.S. Treasury strip yield
at the date of grant; and expected lives of 4.0 to 6.0 years.
During 1995, the Company agreed to repurchase, at fair market value,
583,750 shares of common stock from a former officer of the Company for $3.1
million. The charge of $3.1 million is reflected as selling, general and
administrative expense in the accompanying 1995 consolidated statement of
operations. The actual shares were repurchased and retired in 1996. The
following information has been restated to reflect the stock dividend (See Note
17). Each option to purchase shares of common stock outstanding prior to the
Stock Dividend was converted into an option to purchase both, but not either,
shares of Class A Common Stock and Class B Common Stock.
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE AVERAGE EXERCISE
------------------ ----------------- -----------------
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------ --------- ----- --------- -----
Outstanding beginning of period.......... 5,203,800 $ 7.58 2,913,750 $5.49 2,188,500 $4.33
Granted.................................. 2,799,250 11.81 3,964,000 8.19 996,000 7.69
Exercised................................ 357,250 5.87 (705,950) 4.32 (188,250) 4.18
Forfeited/Expired........................ 167,750 8.95 (968,000) 6.00 (82,500) 4.22
--------- ------ --------- ----- --------- -----
Outstanding end of period................ 7,478,050 $ 9.22 5,203,800 $7.58 2,913,750 $5.49
========= ====== ========= ===== ========= =====
Options exercisable at end of period..... 1,344,550 $ 7.10 585,050 $5.53 757,500 $5.49
========= ====== ========= ===== ========= =====
Shares available for options that may be
granted................................ 1,660,000 2,796,200 886,250
========= ========= =========
Weighted-average grant date fair value of
options, granted during the
period -- exercise price equals stock
market price at grant.................. $ 3.30 $2.00 $1.91
====== ===== =====
Weighted-average grant date fair value of
options granted during the
period -- exercise price exceeds stock
market price at grant.................. $2.10
=====
F-16
44
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- --------- ----------- ---------
$3.80 to $4.09............................. 78,250 0.3 years $ 3.90 78,250 $ 3.90
$4.10 to $5.45............................. 353,800 1.5 years 4.51 247,300 4.50
$5.46 to $6.82............................. 691,500 2.9 years 6.21 247,500 6.06
$6.83 to $8.18............................. 787,500 3.4 years 7.46 172,500 7.54
$8.19 to $9.54............................. 2,901,000 3.6 years 8.67 557,000 8.73
$9.55 to $10.90............................ 324,000 4.2 years 10.40 -- --
$10.91 to $12.27........................... 1,142,000 4.4 years 11.14 42,000 11.06
$12.28 to $13.63........................... 1,200,000 4.7 years 13.00 -- --
--------- --------- ------ --------- ------
$3.80 to $13.63............................ 7,478,050 3.7 years $ 9.22 1,344,550 $ 7.10
========= ========= ====== ========= ======
10. SAVINGS PLAN
Employees who meet certain eligibility requirements can participate in the
Company's 401(k) Savings and Investment Plan. Under the plan, the Company may,
at its discretion, match a percentage of the employee contributions. The Company
recorded expenses related to its matching contributions of $782 thousand, $115
thousand and $80 thousand in the years ended December 31, 1997, 1996 and 1995,
respectively.
11. RELATED PARTY TRANSACTIONS
Included in other assets at December 31, 1997 and December 31, 1996, are
investments of $71 thousand and $571 thousand, respectively, in companies that
were partially owned by certain members of the Board of Directors of the Company
at the time the investments were made. At December 31, 1997, the remaining
investment included $71 thousand in IDE Corporation. The Company owns less than
10% of either company and accounts for these investments on the cost method.
The Company paid $364 thousand, $48 thousand, and $148 thousand in 1997,
1996 and 1995, respectively, to Annapurna Corporation for consulting services
and related expenses in connection with acquisition activity conducted by the
Company. Annapurna Corporation is 100% owned by a significant stockholder. The
Company also paid $145 thousand, $156 thousand, and $0 in the years ended
December 31, 1997, 1996 and 1995, respectively, to a Director of the Company for
consulting services in connection with acquisition activity conducted by the
Company.
The Company utilizes a law firm of which one member of the Board of
Directors is a partner to the firm. Legal fees paid to the law firm totaled $146
thousand, $91 thousand, and $115 thousand in the years ended December 31, 1997,
1996 and 1995, respectively.
12. DISCONTINUED OPERATIONS
On June 1, 1995, the Company transferred substantially all of the assets
and liabilities of its wholly-owned subsidiary, American Business
Communications, Inc. ("ABC") to a wholly-owned subsidiary of Baker University.
The Company received $3.0 million in the form of a 7.52% non-recourse promissory
note, due in equal monthly installments through 2005. ABC recorded net sales of
$6.7 million and $2.9 million during 1994 and 1995, respectively.
F-17
45
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1996, Baker University defaulted on the note and the Company
abandoned any remaining net assets of the business. As a result, the Company
recorded a loss from abandonment of subsidiary of $1.4 million, net of tax.
13. SUPPLEMENTAL CASH FLOW INFORMATION
The Company made certain acquisitions in 1997 and 1996 (See Note 3) and
assumed liabilities as follows:
1997 1996
-------- -------
(IN THOUSANDS)
Fair value of assets........................................ $134,555 $28,107
Cash paid................................................... (84,224) (6,484)
Promissory note issued...................................... -- (7,925)
Common stock issued......................................... (29,178) (9,382)
-------- -------
Liabilities assumed......................................... $ 21,153 $ 4,316
======== =======
In conjunction with the transfer of ABC in 1995, approximately $6.8 million
of assets, less liabilities of $1.0 million, were exchanged for a $3.0 million
note receivable. As a result, the Company recognized an impairment of $1.8
million net of a tax benefits, which is included in loss on discontinued
operations.
During 1997, the Company acquired computer equipment totaling $577 thousand
under a capital lease obligation (See Note 5).
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1997 and 1996. Statement
of Financial Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments, defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties.
The carrying amounts shown in the following table are included in the
consolidated balance sheets under the indicated captions.
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(AMOUNTS IN THOUSANDS)
Financial assets
Cash and cash equivalents................. $10,653 $10,653 $ 7,497 $ 7,497
Marketable securities..................... 23,833 24,045 23,421 22,810
Other assets.............................. 2,071 2,000 621 621
Financial liabilities
Payable to shareholders................... (1,871) (1,871) (7,925) (7,925)
Long-term debt............................ (81,284) (81,284) (427) (427)
Derivatives
Interest rate swaps....................... -- 133 -- --
F-18
46
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents and payable to shareholders. The carrying amounts
approximate fair value because of the short maturity of those instruments.
Marketable securities. The fair values of debt securities and equity
investments are based on quoted market prices at the reporting date for those or
similar investments.
Other assets, including investments in other companies. Investments in
companies not traded on organized exchanges are valued on the basis of
comparisons with similar companies whose shares are publicly traded.
Long-term debt. Given the short term nature of the revolving lines of
credit as well as the variable rate of interest associated with $78 million of
the outstanding debt at December 31, 1997, fair value approximates carrying
value.
Interest rate swap. The fair value of the interest rate swap was calculated
based on discounted cash flows of the difference between the swap rate and the
estimated market rate for similar terms.
15. 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.
16. ACQUISITION-RELATED CHARGES
As part of the acquisition of DDA in August 1996 (See Note 3), the Company
recorded acquisition-related charges for purchased in-process research and
development costs totaling $10.0 million for write-offs in conjunction with the
merger of DDA, which related to projects that had not met technological
feasibility. Additionally in 1996, the Company recorded an acquisition-related
charge totaling $11.5 million due to the change in estimated useful lives based
on management's evaluation of the remaining lives of certain intangibles related
to acquisitions prior to 1995.
As part of the acquisition of DBA in February 1997 (See Note 3), the
Company recorded acquisition-related charges totaling $51.8 million for
write-offs in conjunction with the merger of DBA for purchased in-process
research and development costs which related to projects that had not met
technological feasibility ($49.2 million), as well as other related integration
and organizational restructuring costs ($2.6 million).
As part of the acquisition of Pro CD in August 1997 (See Note 3), the
Company recorded acquisition-related charges totaling $4.3 million for
write-offs in conjunction with the merger of Pro CD for purchased in-process
research and development costs which related to projects that had not met
technological feasibility.
17. STOCK RECLASSIFICATION AND STOCK DIVIDEND AND STOCKHOLDERS RIGHTS PLANS
On October 3, 1997, the Company's Board of Directors and shareholders
approved the reclassification of the existing common stock as Class B Common
Stock and authorized 220,000,000 shares of a new Class A Common Stock. The Board
also declared a two-for-one stock split, effected in the form of a stock
dividend of one share of Class A Common Stock for each share of Class B Common
Stock then outstanding. Accordingly all share and per share information has been
restated to reflect the stock split. Each share of Class A Common Stock entitles
the holder to one vote and a non-cumulative dividend of $0.02 per year, when and
as declared by
F-19
47
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Board of Directors in preference to any dividend on Class B Common Stock.
Each share of Class B Common Stock entitles the holder to ten votes.
On October 3, 1997, the Company adopted a stockholder rights plan with
respect to its Class A Common Stock and adopted certain changes to the plan it
had adopted on July 21, 1997 with respect to its Class B Common Stock, under
which the Board declared a dividend distribution of one Preferred Stock purchase
rights to holders of each share of Class A Common Stock and Class B Common
Stock. The rights are not exercisable until ten days after a person or group
announces the acquisition of 15% or more of the Company's voting stock or
announces a tender offer for 15% or more of the Company's outstanding common
stock. Each right entitles the holder to purchase common stock at one half the
stock's market value. The rights are redeemable at the Company's option for
$0.001 per Right at any time on or prior to public announcement that a person
has acquired 15% or more of the Company's voting stock. The rights are
automatically attached to and trade with each share of Common Stock.
18. SUBSEQUENT EVENTS
Effective March 1998, the Company acquired certain assets and assumed
certain liabilities of Walter Karl, Inc., a national direct marketing service
firm that provides list management, list brokerage, database marketing and
direct marketing services to a wide array of customers. Total consideration for
the acquisition was approximately $19 million. The acquisition has been
accounted for under the purchase method of accounting. Substantially all of the
purchase price was allocated to goodwill.
On March 17, 1998, the Company filed suit in Delaware court to enjoin a
merger agreement whereby Great Universal Stores, PLC ("GUS") would acquire
Metromail Corporation ("Metromail") for $31.50 per share, and on March 18 the
Company submitted to the Metromail Board of Directors a proposal for the Company
to acquire Metromail for $33 per share. No offer can be made by the Company for
Metromail Common Stock without consent and approval of the Metromail Board. It
is possible that the Company may fail to acquire Metromail. If the Company does
acquire Metromail, it may fail to successfully integrate Metromail's operations
with its own, will be required to incur substantial debt to finance the
acquisition, and will be required to record very substantial acquisition-related
charges and to amortize substantial amounts of goodwill in future periods.
On March 20, 1998, GUS filed a counterclaim against the Company alleging,
among other things, that ABI tortiously interfered with the Merger Agreement and
Parent's prospective business relations with Metromail. The Counterclaim also
alleges that the Company breached a confidentiality agreement entered into by
the Company with the Metromail's financial advisor and of which GUS is a third
party beneficiary. As relief, the GUS claim seeks, among other things,
injunctive relief and actual, punitive and other damages in an amount to be
determined at trial, estimated by GUS to exceed $500 million, plus fees and
expenses. On March 27, 1998, the Delaware Chancery Court denied the Company's
motion for a preliminary injunction to block the GUS Merger Agreement. The
Company does not believe that the GUS counterclaim has merit and will vigorously
defend the suit, however there can be no assurance that this matter will be
resolved without a material adverse affect on the Company's financial condition
and stock price.
F-20
48
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
ADDITIONS
----------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------------- ---------- ----------
Allowance for doubtful accounts
receivable:.................... (A)
December 31, 1995.............. $ 404 $1,585 $ -- $ 965 $1,024
December 31, 1996.............. $1,024 $1,485 $ 364* $1,284 $1,589
December 31, 1997.............. $1,589 $1,272 $ 961* $2,387 $1,435
Allowance for sales returns:..... (B)
December 31, 1995.............. $ -- $ 800 $ -- $ -- $ 800
December 31, 1996.............. $ 800 $3,401 $ 929* $3,995 $1,135
December 31, 1997.............. $1,135 $7,748 $2,477* $6,782 $4,578
- ---------------
* Recorded as a result of acquisitions
(A) Charge-offs during the period indicated
(B) Returns processed during the period indicated
S-1
49
INDEX TO EXHIBITS
AMERICAN BUSINESS INFORMATION, INC.
ANNUAL REPORT ON FORM 10-K
Exhibit
No. Description
- ------- -----------
2.1 Asset Purchase Agreement between the Company and Digital Directory
Assistance, Inc. is incorporated herein by reference to exhibits filed
with the Company's current report on Form 8-K dated September 10, 1996.
2.2 Agreement and Plan of Reorganization between the Company and the
Shareholders of County Data Corporation is incorporated herein by
reference to exhibits filed with Company's Annual Report on Form 10-K
for the Fiscal Year Ended December 31, 1996.
2.3 Agreement and Plan of Reorganization between the Company and the
Shareholders of 3319971 Canada Inc. is incorporated herein by reference
to exhibits filed with Company's Annual Report on Form 10-K for the
Fiscal Year Ended December 31, 1996.
2.4 Agreement and Plan of Reorganization between the Company and the
shareholders of Marketing Data Systems, Inc. is incorporated herein by
reference to the exhibits filed with the Company's Registration
Statement on Form S-3 (File No. 333-36669) filed on October 23, 1997.
2.5 Agreement and Plan of Reorganization between the Company and the
Shareholders of DBA Holdings, Inc. is incorporated herein by reference
to exhibits filed with the Company's Current Report on Form 8-K dated
February 28, 1997.
2.6 Agreement and Plan of Reorganization between the Company and the
Shareholders of Pro CD, Inc. is incorporated herein by reference to
exhibits filed with the Company's Current Report on Form 8-K dated
September 8, 1997.
2.7 Stock Purchase Agreement between the Company and the Shareholders of
Walter Karl, Inc. is incorporated herein by reference to the
Company's Current Report on Form 8-K dated February 24, 1998.
3.2 Bylaws are incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-42887), which became
effective February 18, 1992.
3.3 Amended and Restated Certificate of Designations of Participating
Preferred Stock, filed in Delaware on October 3, 1997, is incorporated
herein by reference to the Company's Registration Statement on From
8-A, (File No. 97-690893), filed on October 6, 1997.
4.1 Rights Plan for Class A Common is incorporated herein by reference to
the Company's Registration Statement on Form 8-A, (File No. 97-690893),
filed on October 6, 1997.
4.2 Rights Plan for Class B Common is incorporated herein by reference to
the Company's Registration Statement on Form 8-A, (File No. 97-690896),
filed on August 6, 1997 and amended on October 6, 1997.
50
4.3 Specimen of Class A Common Stock Certificate is incorporated herein by
reference to the exhibits filed with the company's Registration
Statement on Form S-3 (File No. 333-36669) filed on October 23, 1997.
4.4 Specimen Class B Common Stock Certificate, filed herewith
4.5 Amended and Restated Credit Agreement between the Company and First
Union National Bank is incorporated herein by reference to the exhibits
filed with the Company's Current Report on Form 8-K dated September 8,
1997.
4.6 Reference is made to Exhibits 3.1, 3.2, and 3.3 hereof.
10.1 Form of Indemnification Agreement with Officers and Directors is
incorporated herein by reference to the exhibits filed with the
Company's Registration Statement on Form S-1 (File No. 33-51352), filed
August 28, 1992.
10.2 Employment Agreement between the Company and Scott Dahnke is
incorporated herein by reference to the exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10.3 Employment Agreement between the Company and Gregory Back is
incorporated herein by reference to the exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
10.5 Reference is made to Exhibits 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.7 and 4.5
hereof.
21.1 Subsidiaries and State of Incorporation, filed herewith.
23.1 Consent of Independent Accountants, filed herewith.
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule, filed herewith.