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| IUSA > SEC Filings for IUSA > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
This discussion and analysis contains forward-looking statements, including without limitation statements in the discussion of comparative results of operations, accounting standards and liquidity and capital resources, within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, which are subject to the "safe harbor" created by those sections. Our actual future results could differ materially from those projected in the forward-looking statements. Some factors which could cause future actual results to differ materially from our recent results or those projected in the forward-looking statements are described in Item 1A "Risk Factors" above. We assume no obligation to update the forward-looking statements or such factors.
General
Overview
We report results in three segments: the Data Group, the Services Group, and the Marketing Research Group. We believe that by organizing all of our businesses that sell proprietary content into a single segment, we can effectively deploy sales and marketing resources. We also believe that this organization creates opportunities for cross selling proprietary databases under one brand name.
On June 1, 2008, we changed our Company name from infoUSA Inc. to infoGROUP Inc. (the "Company" or "infoGROUP" or "we"). We are a Delaware corporation incorporated in 1972.
Our key strategic initiatives for 2009 include:
• Continuing our focus on improved corporate governance, including operating under our recently revamped formal policies, functioning under the guidance of our restructured majority independent Board and working with our new management team.
• Continuing and expanding our initiatives of outreach, transparency and communications with our shareholders and the entire investment community.
• Accelerating our organic, profitable growth by leveraging our leadership position as a data provider across our subsidiaries, creating both internal and external strategic alliances to add value to new and existing customers, and capitalizing on our existing cross selling opportunities among subsidiaries. We anticipate concentrating our efforts on these opportunities for internal growth, instead of pursuing revenue growth primarily through acquisitions.
• Reinvesting in the business to expand our product offerings, particularly in the integrated digital realm. We plan to provide our customers new products and services, including more internet based and interactive marketing solutions.
• Improving our financial foundation, by taking costs out of the business (without jeopardizing service to our customers), continuing to aggressively reduce our debt levels and leveraging our high margin products to increase profitability.
Financial Performance
Operating income for 2008 was $28.2 million, or 4% of net sales, down from $86.5 million, or 13% of net sales, for 2007. The primary reason for the decrease in operating income was the result of $34.3 million in non-
recurring charges incurred during 2008 related to the Derivative Litigation and the Special Litigation Committee's investigation, as described in Item 3, "Legal Proceedings." These charges included $23.6 million in legal expenses and professional fees and $10.7 million in severance payments primarily to the former CEO of the Company, Vinod Gupta, in connection with the Stipulation of Settlement entered into on August 20, 2008 by the parties to the Derivative Litigation. The Company also incurred $16.7 million in charges during 2008 for the impairment, write-down and loss on sale of assets of $11.5 million, facility closure costs of $2.0 million and severance costs associated with the restructuring of Guideline and Direct Media of $1.7 million and $1.5 million, respectively.
Mergers and Acquisitions
Internal revenue growth is our primary objective. However, we still pursue
opportunities for strategic acquisitions when presented with appropriate
opportunities. As described in the notes to the accompanying consolidated
financial statements, we acquired Direct Media, Inc. in 2008, a provider of list
brokerage and list management services, and the following entities in 2007:
(1) expresscopy.com, a provider of printing and mailing services (2) Guideline,
Inc., a provider of customer business and market research and analysis (3) NWC
Research, a provider of research services, (4) SECO Financial, a provider of
financial services industry marketing, and (5) Northwest Research Group, a
provider of research services.
We work to integrate the operations of the acquired companies into existing operations as resources and business constraints permit. Due to recent and potential future acquisitions, future results of operations may vary from and may not be directly comparable to historical data.
Summary of Acquisitions
Through acquisitions, we have increased our presence in the consumer marketing information industry, greatly increased our ability to provide data processing and e-mail marketing solutions, increased our presence in list management and list brokerage services and broadened our offerings of business and consumer marketing
information. Additionally, most recently we have added research businesses to complement our existing services. The following table summarizes the more significant acquisitions since January 1, 2004:
Principal
Business Type of Transaction
Acquired Company Key Asset Segment Acquisition Date Acquired Value(1)
(In millions)
Triplex Data processing Services Group Stock purchase February 2004 8
services
Edith Roman List brokerage and Services Group Stock purchase June 2004 14
management
services
OneSource International Data Group Stock purchase June 2004 109
database and
Internet browser
applications
@Once E-mail solutions Services Group Asset purchase January 2005 8
provider and
e-mail list
business
Millard Group List brokerage and Services Group Stock purchase November 2005 14
management
services
Mokrynskidirect List brokerage and Services Group Asset purchase June 2006 7
management
services
Digital Connexxions Corp. E-mail solutions Services Group Asset purchase October 2006 4
provider and
e-mail list
business
Rubin Response Services, Inc. List brokerage and Services Group Asset purchase November 2006 2
management
services
Opinion Research Corporation Social and market Research Group Stock purchase December 2006 132
research services
expresscopy.com Printing and Data Group Asset purchase June 2007 8
mailing services
NWC Research Social and market Research Group Asset purchase July 2007 8
research services
Guideline, Inc. Market research Research Group Stock purchase August 2007 39
services
Northwest Research Group Market research Research Group Asset purchase October 2007 2
services
SECO Financial Financial services Data Group Asset purchase October 2007 1
industry marketing
Direct Media, Inc. List brokerage and Services Group Asset purchase January 2008 18
management
services
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(1) Transaction value includes total consideration paid including cash paid, debt and stock issued plus long-term debt repaid or assumed at the date of acquisition as well as subsequent purchase price adjustments.
We frequently evaluate the strategic opportunities available and intend to pursue strategic acquisitions of complementary products, technologies or businesses that we believe fit our business strategy. In connection with future acquisitions, we expect that we will be required to incur additional acquisition-related charges to operations.
Associated with the acquisitions previously described, we recorded amortization expense on other purchased intangibles as summarized in the following table (amounts in thousands):
Fiscal Year Amount
2004 $ 15,875
2005 18,098
2006 14,909
2007 17,495
2008 17,524
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Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 2 to the audited consolidated financial statements. Of those policies, we have identified the following to be the most critical because they are the most important to our
portrayal of our results of operations and financial condition and they require subjective or complex management judgments:
• revenue recognition and related estimates of valuation allowances for doubtful accounts, sales returns and other allowances;
• database acquisition, development and maintenance expenses;
• valuation of long-lived and intangible assets and goodwill; and
• income taxes.
Revenue recognition. Revenue from the sale of prospect lists (paper form or electronic), mailing labels, published directories, other sales lead products and DVD information products are recognized upon shipment. These product sales are typically evidenced by a written purchase order or by credit card authorization.
List management revenue is recognized net of costs upon shipment of the list to the third party. List brokerage revenue is recognized net of costs upon verification from third party of the actual list used and shipped. List brokerage revenue is recognized on a net basis because the Company acts as an agent or broker (including performing services, in substance, as an agent or broker) with compensation on a commission or fee basis.
Data processing and e-mail customer retention solution revenues are billed on a time and materials basis, with the recognition of revenue occurring as the services are rendered to the customer.
Revenue from the licensing of the Company's data to third parties and the sale of the Company's subscription-based products are recognized on a straight-line basis over the life of the agreement, when the Company commits to provide the customer either continuous data access (i.e. "24/7" access via the Internet) or updates of data files over a period of time. Licenses and subscriptions are evidenced by written contracts. The Company also licenses data to customers with no such commitments. In those cases, the Company recognizes revenue when the data is shipped to the customer, provided all revenue recognition criteria have been met.
Services performed in the Marketing Research Group vary from contract to contract and are not uniformly performed over the term of the arrangement.
Revenues under fixed-price contracts are recognized on a proportional performance basis. Performance is based on the ratio of costs incurred to total estimated costs where the costs incurred represent a reasonable surrogate for output measures of contract performance, including survey design, data collection, survey analysis and presentation of deliverables to the client. Progress on a contract is matched against project costs and costs to complete on a periodic basis. Provision for estimated contract losses, if any, is made in the period such losses are determined. Customers are obligated to pay as services are performed, and in the event that a client cancels the contract, the client is responsible for payment for services performed through the date of cancellation.
Revenues under cost-reimbursement contracts are recognized as costs are incurred. Applicable estimated profits are included in earnings in the proportion that incurred costs bear to total estimated costs. Incentives, award fees or penalties related to performance are also considered in estimating revenues and profit rates based on actual and anticipated awards.
Revenues under time-and-materials contracts are recognized as costs are incurred.
Revenue for our retainer contracts are charged to customers on a fixed monthly subscription fee basis to access On-Demand Business Research services, and revenues are recognized ratably over the term of each subscription. Retainer fees are required to be paid in advance by customers on either a monthly, quarterly or annual basis, and all billed amounts relating to future periods are recorded as deferred revenue on the Company's balance sheet.
Revenue for our deposit contracts are charged to customers on a fixed annual fee basis, which entitles them to access any of the Company's service offerings throughout the contract period, up to the total amount of the annual deposit fee. Since deposit account customers can "spend" their contract fee at any time within the annual contract period, deposit account revenues are only recognized within the contract period as services are actually provided to customers, with any unused deposit amounts recognized as revenue in the final month of the contract. As with
retainer fees, deposit contract fees are required to be paid in advance, primarily annually, and any billed amounts relating to future periods are recorded as deferred revenue on the Company's balance sheet.
Unbilled receivables are invoiced based upon the achievement of specific events as defined by each contract including deliverables, timetables and incurrence of certain costs. Unbilled receivables are classified as a current asset. Reimbursements of out-of-pocket expenses are included in revenues with corresponding costs incurred by the Company included in cost of revenues.
The Company assesses collectibility of revenues and the Company's allowance for doubtful accounts based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from the Company's customers. An allowance for doubtful accounts is established to record the Company's trade accounts receivable at estimated net realizable value. If the Company determines that collection of revenues are not reasonably assured at or prior to the delivery of the Company's products, the Company recognizes revenue upon the receipt of cash. Cash-basis revenue recognition periodically occurs in those cases where the Company sells or licenses its information products to a poorly capitalized company. However, sales recognized on this basis are not a significant portion of the Company's total revenues.
Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from revenues in the consolidated statements of operations.
Database Costs. Our database and production costs are generally charged to expense as incurred and relate principally to maintaining, verifying and updating our databases, fulfilling customer orders and the production of DVD titles. Costs to develop new databases are capitalized and amortized upon the successful completion of the databases, over a period ranging from one to five years. Our cost of maintaining consumer and business databases does not necessarily vary directly with revenues since a significant portion of the cost is the maintenance and verification of our existing data. Consequently, operating income may vary significantly with changes in revenue from period-to-period, as our ability to adjust certain elements of our cost structure is limited in the short-run.
Because we expense the costs of maintaining and verifying our existing database, we believe that our balance sheet does not include an asset for the value of our database. We believe that our databases of consumer and business information are valuable intellectual property assets. Our success in marketing our products and services depends, in large part, on our ability to maintain an accurate and reliable database of business and consumer information.
Valuation of long-lived and intangible assets and goodwill. We assess the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we considered important, which could trigger an impairment review, included the following:
• significant underperformance relative to historical or projected future operating results;
• significant changes in the manner or use of the acquired assets or the strategy for our overall business;
• significant negative industry or economic trends;
• significant decline in our stock price; and
• our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure impairment based on estimated fair value of the assets. Net property and equipment, net intangible assets, long-lived assets, and goodwill amounted to $594.2 million as of December 31, 2008.
Impairment of Goodwill
The goodwill impairment test is a two-step process. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired, and the second step of the impairment test is not necessary. However, if the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss. The second step is essentially a purchase
price allocation exercise, which allocates the newly determined fair value of the reporting unit to the assets. For purposes of the allocation, the fair values of all assets, including both recognized and unrecognized intangible assets, are determined. The residual goodwill value is then compared to the carrying value of goodwill to determine the impairment charge.
We completed a goodwill impairment test as of October 31, 2008 and 2007, respectively. Additionally, in accordance with Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), we concluded that events had occurred and circumstances had changed during the fourth quarter of 2008, which required us to perform an interim period goodwill impairment test as of December 31, 2008. During the fourth quarter of 2008, we experienced a significant decline in market capitalization due to an overall decline in economic conditions.
At December 31, 2008, we had three reporting units that had goodwill and therefore required testing pursuant to SFAS 142. The three reporting units represent the Company's reporting segments.
We considered both the income approach and the market approach in assessing the fair value of each reporting unit. Under the income approach, the fair value of the reporting unit is based on the present value of estimated future cash flows. The income approach requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, and discount rates. As a result of the deterioration of the economic conditions in the United States in the second half of 2008, the projections used took into account current economic factors and the effect on future revenue and operating income. We used the Gordon growth model to calculate residual values. The Gordon growth model refers to the concept of taking the residual year cash flow and determining the value of a growing, perpetual annuity. The long-term growth rate used for each reporting unit ranged between 2.5% and 3.0%. The Company used weighted-average costs of capital ranging between 12.7% and 15.8% in its discounted cash flows analyses. Under the market approach, several relative pricing measures for comparable companies are examined to determine a fair value for each reporting unit. We determined that the fair value of the reporting units under both approaches as of December 31, 2008, October 31, 2008 and October 31, 2007 exceeded its carrying amount. Thus, the goodwill of these reporting units was not impaired. Future adverse changes in expected operating results and/or unfavorable changes in other economic factors used to estimate fair values could result in non-cash impairment charges in future periods under SFAS 142.
Impairment of Intangible and Other Assets
We assessed the impairment of long-lived assets and intangible assets as of December 31, 2008 as required pursuant to Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). As a result of the declining profitability of expresscopy.com, SECO Financial and infoUK, recoverability tests were performed for these asset groups. These tests included comparisons of undiscounted cash flows to the current carrying values of the each asset group. Since the carrying values exceeded the undiscounted cash flows, an impairment was recognized and allocated between all long-lived assets within each asset group. Impairments for the year ended December 31, 2008 for expresscopy.com, SECO Financial and infoUK were $2.5 million, which included $1.1 million for impairments of property and equipment, $0.2 million and $2.7 million, respectively. In addition, the Company recorded an impairment of $0.6 million for a OneSource database and $0.9 million for development costs for a Salesgenie product no longer being utilized.
Income Taxes. Accounting for income taxes requires significant judgments in the development of estimates used in income tax calculations. Such judgments include, but would not be limited to, the likelihood we would realize the benefits of net operating loss carryforwards, the adequacy of valuation allowances, and the rates used to measure transactions with foreign subsidiaries. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The judgments and estimates used are subject to challenge by domestic and foreign taxing authorities. It is possible that either domestic or foreign taxing authorities could challenge those judgments and estimates and draw conclusions that would cause us to incur tax liabilities in excess of those currently recorded. Changes in the geographical mix or estimated amount of annual pretax income could impact our overall effective tax rate.
To the extent recovery of deferred tax assets is not likely based on estimation of future taxable income in each jurisdiction, we record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than
not to be realized. Although we have considered future taxable income along with prudent and feasible tax planning strategies in assessing the need for the valuation allowance, should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to deferred tax assets would be charged to income in the period any such determination was made. Likewise, in the event we were able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to deferred tax assets would increase income in the period any such determination was made.
Results of Operations
The following table sets forth, for the periods indicated, certain items from the statement of operations data expressed as a percentage of net sales. The amounts and related percentages may not be fully comparable due to our acquisitions in 2006, 2007 and 2008.
Year Ended December 31,
2008 2007 2006
Consolidated Statements of Operations Data:
Net sales 100 % 100 % 100 %
Costs and expenses:
Cost of goods and services 42 40 27
Selling, general and administrative 48 41 52
Depreciation and amortization of operating assets 3 3 3
Amortization of intangible assets 3 3 3
Total operating costs and expenses 96 87 85
Operating income 4 13 15
Other expense, net (2 ) (3 ) (3 )
Income before income taxes 2 10 12
Income tax expense 1 4 4
Net income 1 % 6 % 8 %
Other Data: ($ in millions )
Sales by Segment:
Data Group $ 309.5 $ 330.5 $ 299.4
Services Group 163.3 136.8 120.9
Marketing Research Group 265.5 221.5 14.6
Total $ 738.3 $ 688.8 $ 434.9
Sales by Segment as a Percentage of Net Sales:
Data Group 42 % 48 % 69 %
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