<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-28834
ABACUS DIRECT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-1118166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8774 YATES DRIVE,
WESTMINSTER, COLORADO 80030
(Address of principal executive offices) (Zip Code)
</TABLE>
(303) 657-2800
(Registrants telephone number, including area code)
Indicate by checkmark 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common Stock, $0.001 par
value: 9,716,771 shares outstanding as of May 8, 1998.
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ABACUS DIRECT CORPORATION
INDEX TO FORM 10-Q
MARCH 31, 1998
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<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations...............................
Balance Sheets.........................................
Statements of Cash Flows...............................
Notes to Condensed Financial Statements................
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................
SIGNATURE...................................................
INDEX TO EXHIBIT............................................
</TABLE>
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
ABACUS DIRECT CORPORATION
STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
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Net revenues................................................ $ 9,082 $5,525
Cost of revenues............................................ 1,971 1,303
------- ------
Gross profit.............................................. 7,111 4,222
Operating expenses:
Selling and marketing..................................... 3,026 1,505
General and administrative................................ 1,120 869
Research and development.................................. 442 366
------- ------
Total operating expenses.......................... 4,588 2,740
------- ------
Income from operations...................................... 2,523 1,482
Interest and other income, net.............................. 137 63
------- ------
Income before income taxes.................................. 2,660 1,545
Provision for income taxes.................................. 971 564
------- ------
Net income........................................ $ 1,689 $ 981
======= ======
Net income per common share -- basic........................ $ 0.17 $ 0.10
Net income per common share -- diluted...................... $ 0.17 $ 0.10
Weighted average number of outstanding common
shares -- basic........................................... 9,671 9,505
Weighted average number of outstanding common
shares -- diluted......................................... 10,173 9,970
</TABLE>
See accompanying Notes to Condensed Financial Statements
3
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ABACUS DIRECT CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
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(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $12,073 $10,490
Accounts receivable (less allowance for doubtful accounts
of $893 and $787 at March 31, 1998 and December 31,
1997, respectively).................................... 8,204 8,120
Prepaid expenses and other assets......................... 365 391
Income tax receivable..................................... -- 52
Deferred tax assets....................................... 474 474
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Total current assets.............................. 21,116 19,527
Property and equipment, net................................. 3,283 3,065
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Total assets...................................... $24,399 $22,592
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 252 $ 220
Accrued expenses and other................................ 2,228 3,180
Income taxes payable...................................... 620 --
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Total current liabilities......................... 3,100 3,400
Long-term obligations under capital lease................... 12 15
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000 shares authorized;
no shares issued and outstanding....................... -- --
Common stock, $0.001 par value; 25,000 shares authorized;
9,701 and 9,638 shares issued and outstanding at March
31, 1998 and December 31, 1997, respectively........... 10 10
Additional paid-in capital................................ 7,323 6,902
Retained earnings......................................... 13,954 12,265
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Total stockholders' equity........................ 21,287 19,177
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Total liabilities and stockholders' equity........ $24,399 $22,592
======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements
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ABACUS DIRECT CORPORATION
STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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OPERATING ACTIVITIES
Net income................................................ $ 1,689 $ 981
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 364 240
Provision for doubtful accounts........................ 106 32
Changes in assets and liabilities:
Accounts receivable....................................... (190) (910)
Prepaid expenses and other assets......................... 26 (223)
Accounts payable.......................................... 32 12
Accrued expenses.......................................... (952) (110)
Income taxes payable...................................... 783 386
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Net cash provided by operating activities......... 1,858 408
INVESTING ACTIVITIES
Purchases of property and equipment....................... (582) (881)
------- ------
Net cash provided by (used in) investing
activities....................................... (582) (881)
FINANCING ACTIVITIES
Principal payments on long-term debt...................... (3) (3)
Issuance (repurchases) of stock........................... 310 --
------- ------
Net cash provided by (used in) financing
activities....................................... 307 (3)
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Net increase (decrease) in cash............................. 1,583 (476)
Cash and cash equivalents at beginning of period............ 10,490 5,924
------- ------
Cash and cash equivalents at end of period.................. $12,073 $5,448
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid............................................. $ 1 $ 1
Income taxes paid......................................... $ 189 $ 178
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Additional paid-in capital -- exercise of non-qualified
stock options.......................................... $ 111 $ --
</TABLE>
See accompanying Notes to Condensed Financial Statements
5
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ABACUS DIRECT CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL INFORMATION
These condensed financial statements are unaudited and have been prepared
by Abacus Direct Corporation (the "Company") in accordance with generally
accepted accounting principles for interim financial information and with the
instructions under Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been reflected in these
condensed financial statements. Operating results for the quarter are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. Certain reclassifications have been made in the fiscal 1997
financial statements to conform to the 1998 presentation. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2. NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"),
which specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS"). SFAS 128 replaces the presentation of primary and
fully diluted EPS with basic and diluted EPS. Basic EPS excludes all dilution
and is based upon the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that would occur
if securities or other contracts to issue common stock were exercised or
converted into common stock. Common equivalent shares are excluded from the
computation in periods in which they have an anti-dilutive effect. The Company
adopted SFAS 128 during the fourth quarter of fiscal 1997 and has restated all
previously reported per share amounts to conform to the new presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion may be understood more fully by reference to the
financial statements, notes to the financial statements, and management's
discussion and analysis contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, as filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Revenues. Revenues increased 64.4% to $9.1 million for the three months
ended March 31, 1998 from $5.5 million for the three months ended March 31, 1997
due primarily to an increase in sales to existing customers, revenues from new
customers and, to a lesser extent, revenues from tests associated with
developing direct marketing initiatives outside the consumer catalog business of
the Company. Revenues from those customers that joined the Abacus Alliance prior
to the first quarter of 1997 accounted for 86.9% of total revenues for the three
months ended March 31, 1998 while customers joining the Alliance after that
period represented 13.1% of revenues.
Cost of Revenues. Cost of revenues increased 51.2% to $2.0 million for the
first three months ended March 31, 1998 from $1.3 million for the first three
months ended March 31, 1997, due primarily to increased staff, depreciation and
processing costs associated with supporting higher revenues. Cost of revenues
decreased as a percentage of net revenues to 21.7% for the three months ended
March 31, 1998 from 23.6% for the three months ended March 31, 1997, due
primarily to the fixed nature of a large portion of software, hardware and
systems processing costs which did not increase at the same rate as net
revenues.
Selling and Marketing Expenses. Selling and marketing expenses increased
101.0% to $3.0 million or 33.3% of net revenues for the three months ended March
31, 1998 from $1.5 million or 27.2% of net revenues for the three months ended
March 31, 1997. The increase in selling and marketing expenses is due primarily
to an increase in sales staff and associated expenses, higher commissions as a
result of significantly higher revenues, and the addition of marketing personnel
dedicated to developing direct marketing initiatives outside of the consumer
catalog business of the Company. The increase in the Company's sales force is
intended to reduce the average number of accounts serviced by an account
manager, improve customer service, and derive more revenues from customers. The
Company continued its development of direct marketing initiatives outside the
consumer catalog business during the first quarter of 1998. Through the initial
stages of development, the Company has incurred, and expects to continue to
incur, costs in personnel, statistical modeling and other related areas without
an offsetting increase in revenues. While early testing in these areas and
initial customer response appear favorable, there can be no assurance that
meaningful revenues will be generated from these initiatives.
General and Administrative. General and administrative expenses increased
28.9% to $1.1 million for the three months ended March 31, 1998 from $869,000
for the three months ended March 31, 1997. The increase in general and
administrative expenses resulted primarily from an increase in staff to support
overall Company growth, higher professional fees and an increase in rent.
General and administrative expenses for the three months ended March 31, 1998
decreased to 12.3% of net revenues compared to 15.7% for the three months ended
March 31, 1997.
Research and Development. Research and development expenses increased 21.0%
to $442,000 or 4.9% of net revenues for the three months ended March 31, 1998
from $366,000 or 6.6% of net revenues for the three months ended March 31, 1997.
The increase in expense resulted from additional staff and development efforts
to achieve improvements in service efficiency in addition to the development of
new services.
Operating Profit. Operating profit increased 70.3% for the three months
ended March 31, 1998 to $2.5 million or 27.8% of net revenues from $1.5 million
or 26.8% of net revenues for the three months ended March 31, 1997. The
increases in operating profit and operating margin are due primarily to the
combined effect of higher revenues and the fixed cost nature of certain
expenses, which did not increase proportionately.
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This improvement in operating profit and margin was partially offset by growing
investments in the development of direct marketing initiatives outside the
consumer catalog business and the increase in sales staff.
Interest and Other Income, Net. Net interest income for the three months
ended March 31, 1998 increased 118.5% to $137,000 from $63,000 for the three
months ended March 31, 1997. The increase in interest income was due primarily
to interest earned on higher Company cash balances resulting from internally
generated funds.
Income Taxes. The Company's provision for income taxes for the three months
ended March 31, 1998 increased to $971,000 from $564,000 for the same period in
1997. For the three months ended March 31, 1998 and 1997, the Company's
effective income tax rate was 36.5%.
Net Income. Net income for the three months ended March 31, 1998 increased
72.2% to $1.7 million or $0.17 per common share (diluted) compared with net
income of $981,000 or $0.10 per common share (diluted) for the three months
ended March 31, 1997. The increase in net income and net income per common share
reflects higher operating and net interest income.
Seasonality. The Company's business is seasonal in nature. The third and
fourth quarters of each year include the peak selling season during which the
Company supplies the direct marketing industry with data services in advance of
the fall and holiday seasons. In the first and second quarters, orders are fewer
and smaller. As a result, cost of operations, sales and marketing, general and
administrative, and research and development expenses as a percentage of net
revenues are usually higher and operating profit is usually lower during the
first half of each year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are cash generated from
operations as well as cash and cash equivalents, which totaled approximately
$12.1 million at March 31, 1998. Historically, the Company has funded its
operations through cash flow from operations and debt and equity financing.
Cash provided by operating activities was $1.9 million for the three months
ended March 31, 1998 compared to $408,000 for the three months ended March 31,
1997. For the three months ended March 31, 1998, the increase in net cash
provided by operating activities was due primarily to higher net income and
lower investment in working capital. Cash provided by operating activities for
the three months ended March 31, 1997 was attributable to higher net income,
which was partially offset by additional investment in working capital,
primarily accounts receivable, to support the increase in net revenues as
compared to the same period during the previous year.
Cash used in investing activities was $582,000 for the three months ended
March 31, 1998 compared to $881,000 for the three months ended March 31, 1997.
These activities represent capital expenditures for computer equipment and
peripheral systems and office equipment necessary to support growth in the
Company's revenues. For the remainder of 1998, the Company anticipates making
additional investments in its computing infrastructure. Financing activities
have consisted primarily of the issuance of common stock and payments made
pursuant to a capital lease obligation. During the three months ended March 31,
1998, net cash generated from financing activities of $307,000 was due primarily
to proceeds received from the exercise of employee stock options. For the
comparable period in 1997, cash used by financing activities of $3,000 resulted
from principal payments on a capital lease obligation. The Company believes that
its cash flow from operations and cash on hand will provide adequate resources
to meet its capital requirements and operational needs for the foreseeable
future.
FORWARD-LOOKING INFORMATION
Certain statements in this Form 10-Q and elsewhere (such as in other
filings by the Company with the Securities and Exchange Commission, press
releases, presentations by the Company or its management and oral statements)
may constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
include those relating to future opportuni-
8
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ties, the outlook of customers, the expansion of the Abacus Alliance, the
reception of new services and technologies, the success of new initiatives and
the likelihood of incremental revenues offsetting expenses related to those new
initiatives. In addition, such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results expressed or implied by such forward-looking statements.
Such factors include: (i) demand for the Company's services from the direct
marketing industry; (ii) governmental regulation regarding privacy issues; (iii)
the actions of current and potential new competitors; (iv) rapid changes in
technology; (v) changes in postal rates and paper prices; (vi) overall economic
conditions; and (vii) other risks detailed from time to time in the Company's
periodic earnings releases and reports filed with the Securities and Exchange
Commission, as well as the risks and uncertainties discussed in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents and short-term marketable securities, which is
designed for safety of principal, liquidity and diversification. Such
investments are subject to inherent interest rate risk as they mature and are
renewed at current market rates. The Company does not presently use derivative
financial instruments to adjust its risk profile. The Company is subject to
competitive and fluctuating economic conditions of the direct marketing industry
as a result of the Company's activities in such industry.
9
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibit is hereby filed as part of this Quarterly Report on
Form 10-Q.
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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<C> <S>
27.1 -- Financial Data Schedule (For Electronic Filing Only)
</TABLE>
10
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SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1998 ABACUS DIRECT CORPORATION
By: /s/ CARLOS E. SALA
----------------------------------
Carlos E. Sala
Senior Vice President -- Finance
and Chief Financial Officer
11
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INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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<C> <S>
27.1 -- Financial Data Schedule (for electronic filing only)
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 12,073
<SECURITIES> 0
<RECEIVABLES> 9,097
<ALLOWANCES> 893
<INVENTORY> 0
<CURRENT-ASSETS> 21,116
<PP&E> 6,422
<DEPRECIATION> 3,139
<TOTAL-ASSETS> 24,399
<CURRENT-LIABILITIES> 3,100
<BONDS> 12
0
0
<COMMON> 10
<OTHER-SE> 21,277
<TOTAL-LIABILITY-AND-EQUITY> 24,399
<SALES> 0
<TOTAL-REVENUES> 9,082
<CGS> 1,971
<TOTAL-COSTS> 4,588
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 106
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 2,660
<INCOME-TAX> 971
<INCOME-CONTINUING> 2,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,689
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
