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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, 1999
[ ] 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)
DELAWARE 84-1118166
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11101 WEST 120TH AVENUE,
BROOMFIELD, COLORADO 80021
(Address of principal executive offices) (Zip Code)
(303) 410-5100
(Registrants telephone number, including area code)
8774 YATES DRIVE, WESTMINSTER, COLORADO 80030
(Former address, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for 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:
9,882,722 shares outstanding as of May 7, 1999.
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ABACUS DIRECT CORPORATION
INDEX TO FORM 10-Q
MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURE 13
INDEX TO EXHIBIT 14
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
ABACUS DIRECT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net revenues $ 12,753 $ 9,082
Cost of revenues 3,033 1,971
-------- --------
Gross profit 9,720 7,111
Operating expenses:
Selling and marketing 4,014 3,026
General and administrative 1,526 1,120
Research and development 573 442
-------- --------
Total operating expenses 6,113 4,588
-------- --------
Income from operations 3,607 2,523
Equity in losses of joint venture (138) --
Interest and other income, net 275 137
-------- --------
Income before income taxes 3,744 2,660
Provision for income taxes 1,475 971
-------- --------
Net income $ 2,269 $ 1,689
======== ========
Net income per common share -- basic $ 0.23 $ 0.17
Net income per common share -- diluted $ 0.22 $ 0.17
Weighted average number of outstanding
common shares -- basic 9,867 9,671
Weighted average number of outstanding
common shares -- diluted 10,418 10,173
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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ABACUS DIRECT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $25,551 $24,263
Accounts receivable (less allowance for doubtful accounts
of $1,469 and $963 at March 31, 1999 and December 31, 1998,
respectively) 12,426 12,034
Prepaid expenses and other current assets 1,149 630
Income taxes receivable -- 1,107
Deferred taxes 727 727
------- -------
Total current assets 39,853 38,761
Property and equipment, net 4,330 4,488
Deferred taxes and other assets 70 71
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Total assets $44,253 $43,320
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 474 $ 614
Accrued expenses and other current liabilities 3,695 5,463
Current obligations under capital leases 329 326
------- -------
Total current liabilities 4,498 6,403
Obligations under capital leases, net of current portion 531 613
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; 9,879
and 9,858 shares issued and outstanding at March 31, 1999
and December 31, 1998, respectively 10 10
Additional paid-in capital 13,253 12,603
Retained earnings 25,961 23,691
------- -------
Total stockholders' equity 39,224 36,304
------- -------
Total liabilities and stockholders' equity $44,253 $43,320
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
4
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ABACUS DIRECT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,269 $ 1,689
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 627 364
Equity in losses of joint venture 138 --
Changes in assets and liabilities:
Accounts receivable, net (392) (84)
Prepaid expenses and other current assets (519) 26
Income taxes receivable 1,386 783
Accounts payable (140) 32
Accrued expenses and other current liabilities (1,898) (952)
-------- --------
Net cash provided by operating activities 1,471 1,858
INVESTING ACTIVITIES
Purchases of property and equipment (469) (582)
Investment in joint venture (7) --
-------- --------
Net cash used in investing activities (476) (582)
FINANCING ACTIVITIES
Principal payments on capital leases (79) (3)
Issuance of common stock 372 310
-------- --------
Net cash provided by financing activities 293 307
-------- --------
Net increase (decrease) in cash 1,288 1,583
Cash and cash equivalents at beginning of period 24,263 10,490
-------- --------
Cash and cash equivalents at end of period $ 25,551 $ 12,073
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 19 $ 1
Income taxes paid -- 189
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
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ABACUS DIRECT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
These condensed consolidated 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 consolidated financial statements. Operating results for the quarter
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. Certain reclassifications have been made in the fiscal
1998 consolidated financial statements to conform to the 1999 presentation. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
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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, 1998 as filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Revenues. Net revenues increased 40.4% to $12.8 million for the
three months ended March 31, 1999 from $9.1 million for the three months ended
March 31, 1998 due primarily to an increase in sales to existing and new catalog
clients and revenues generated from direct marketing clients outside the catalog
industry. During the first quarter of 1999, the Company introduced a
subscription pricing alternative where clients have access to its services for
an annual fee. This pricing alternative is designed to encourage clients to use
more of the Company's services and to dedicate more resources to work with
Abacus employees to improve performance. At March 31, 1999, the Company had 140
titles under this type of agreement representing approximately $14.0 million in
revenue during 1999.
Cost of Revenues. Cost of revenues increased 53.9% to $3.0 million for
the three months ended March 31, 1999 from $2.0 million for the three months
ended March 31, 1998, due primarily to increases in staff, contract labor
dedicated to the Year 2000 Issue, depreciation and processing costs associated
with supporting higher revenues. Cost of revenues increased as a percentage of
net revenues to 23.8% in 1999 from 21.7% in 1998 due primarily to an increase in
employee and non-employee staffing levels and higher software, hardware and
systems processing costs required to support higher revenues.
Selling and Marketing Expenses. Selling and marketing expenses
increased 32.7% to $4.0 million or 31.5% of net revenues for the three months
ended March 31, 1999 from $3.0 million or 33.3% of net revenues for the three
months ended March 31, 1998. The increase in selling and marketing expenses is
due primarily to an increase in sales staff and associated expenses, an increase
in bad debt expense, higher commissions as a result of higher revenues, and the
addition of marketing personnel dedicated to selling the Company's services to
other non-catalog direct marketing clients. 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.
General and Administrative. General and administrative expenses
increased 36.3% to $1.5 million for the three months ended March 31, 1999 from
$1.1 million for the three months ended March 31, 1998. The increase in general
and administrative expenses resulted primarily from an increase in staff and
executive management to support overall Company growth along with higher salary
increases and higher legal and other professional fees. General and
administrative expenses decreased as a percentage of net revenues to 12.0% for
the three months ended March 31, 1999 from 12.3% for the three months ended
March 31, 1998 due primarily to the fixed cost nature of certain expenses which
did not increase proportionately with the growth in net revenues.
Research and Development. Research and development expenses increased
29.6% to $573,000 for the three months ended March 31, 1999 from $442,000 for
the three months ended March 31, 1998. The increase in research and development
expenses resulted primarily from an increase in staff and related expenses to
develop technologies and processes to deliver new and better data service
products to existing and prospective clients and to adapt the Company's
statistical techniques to support the addition of other non-catalog direct
marketing clients. Since the increase in the amount of expenses did not increase
at the same rate as net revenues for the three months ended March 31, 1999,
research and development expenses decreased as a percentage of net revenues to
4.5% in 1999 compared to 4.9% for the same period in 1998.
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Operating Profit. Operating profit increased 43.0% to $3.6 million or
28.3% of net revenues for the three months ended March 31, 1999 from $2.5
million or 27.8% of net revenues for the three months ended March 31, 1998. The
increases in operating profit and operating margin are due primarily to the
combined effect of higher net revenues and the fixed cost nature of certain
expenses, which did not increase proportionately. The improvement in operating
profit and margin was partially offset by additional expenditures to provide
services to other non-catalog direct marketing clients as well as higher
investments in information technology and higher staffing levels throughout the
Company.
Equity in Losses of Joint Venture. Equity in losses of joint venture
for the three months ended March 31, 1999, of $138,000 represents the Company's
share of losses in Abacus Direct Europe, B.V., its joint venture with VNU, which
commenced operations during the fourth quarter of 1998. The Company anticipates
that it will recognize additional losses from Abacus Direct Europe, B.V. during
the second and third quarters of 1999 as well as invest approximately $2.0
million in cash to develop its operations during the remainder of 1999.
Interest and Other Income, Net. Net interest income increased to
$275,000 for the three months ended March 31, 1999 from $137,000 for the same
period in 1998. 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, 1999 increased to $1.5 million from $971,000 for the same
period in 1998. The increase in tax is due principally to higher pre-tax income.
For the three months ended March 31, 1999, the Company's effective tax rate
increased to 39.4% from 36.5% during the same period in 1998. The increase in
the effective tax rate is due primarily to the Company's presence in more states
and a valuation allowance recorded against the tax benefit from equity investee
losses.
Net Income. Net income for the three months ended March 31, 1999 was
$2.3 million or $0.22 per diluted common share compared with net income of $1.7
million or $0.17 per diluted common share for the three months ended March 31,
1998. The increase in net income and net income per common share reflects higher
operating income 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 cash provided by operating activities for the three
months ended March 31, 1999 was $1.5 million compared to $1.9 million for the
three months ended March 31, 1998. For the three months ended March 31, 1999,
the decrease in operating cash flow was due primarily to the payment of accrued
expenses and additional investment in working capital (primarily accounts
receivable) to support the increase in net revenues, which was partially offset
by higher net income as compared to the prior year. As of March 31, 1999, net
working capital increased by $3.0 million to $35.4 million compared to $32.4
million as of December 31, 1998.
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Cash used in investing activities for the three months ended March 31,
1999 was $476,000 compared to $582,000 for the three months ended March 31,
1998. These activities represent capital expenditures for computer equipment and
peripheral systems and office equipment necessary to support revenue growth and
the Company's investments in Abacus Direct Europe, B.V. The Company plans to
invest approximately $2.0 million to develop the operations of the joint venture
during the remainder of 1999. As a result of the Company's relocation to a new
headquarters facility in Broomfield, Colorado in April 1999, the Company plans
to spend approximately $1.8 million of its cash reserves for office furniture,
leasehold improvements and other relocation expenses during the second quarter
of 1999.
During the three months ended March 31, 1999, net cash generated from
financing activities was $293,000 compared to $307,000 for the three months
ended March 31, 1998 due primarily to proceeds received from the exercise of
employee stock options that were partially offset by principal payments on
capital lease obligations.
The Company's principal sources of liquidity are cash generated from
operations as well as cash and cash equivalents, which totaled $25.6 million at
March 31, 1999. Historically, the Company has funded its operations through cash
flow from operations and debt and equity financing. The Company believes that
its cash flow from operations and cash on hand will provide sufficient resources
to meet its capital requirements and operational needs for the foreseeable
future.
YEAR 2000 ISSUE
For many years, computer systems and applications were often programmed
to assume that the century portion of a date was "19" to conserve the use of
storage and memory. This assumption resulted in the use of two-digits (rather
than four) to define an applicable year. Accordingly, computer systems that rely
on two-digits to define an applicable year may recognize a date using "00" as
the year 1900, rather than the year 2000 (the "Year 2000 Issue"). This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process or transmit data
or engage in normal business activities.
The Company has completed the assessment of its Year 2000 readiness for
its internal information technology systems and non-information technology
systems. As part of the Company's remediation efforts, it will modify or replace
its proprietary 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, in certain instances, conversions to new
software, the Year 2000 Issues related to its internal systems can be mitigated.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material adverse impact on
the operations of the Company.
The Company has communicated with members of the Abacus Alliance and is
in the process of determining the extent to which the Company is vulnerable to
the Abacus Alliance members' failure to remediate their own Year 2000 Issues. As
a result of its own internal assessment of the transactional files contributed
by the Abacus Alliance members, the Company has determined that those files
which contain date-sensitive data may require modification or conversion to
recognize the correct century prior to loading to the Abacus Alliance database.
Similarly, demographic and change of address information that is obtained from
third parties and used to enhance the transactional data on the Abacus Alliance
database may also require conversion or modification to be Year 2000 compliant.
The Company has also communicated with a significant number of its
external suppliers to determine the extent to which the Company is vulnerable to
those third parties' failure to remediate their own Year 2000 Issues. Primarily,
the Year 2000 Issues from external suppliers relates to the Company's accounting
and invoicing software systems, statistical software, data sorting software, and
payroll processing. Some of these vendors have certified their products to be
Year 2000 compliant while others
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are preparing to make them compliant in 1999. In the event the Company is
operating a version of software or using a vendor's product that is not Year
2000 ready, it plans to either upgrade to the new version or product or seek
substitutes that are Year 2000 compliant. To the extent that the systems of
third parties or other companies on which the Company's systems rely are not
timely converted or if such conversion is incompatible with the Company's
systems, the Company's operations may be materially adversely affected.
The Company is utilizing both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. Costs
incurred by the Company in its Year 2000 remediation efforts must be expensed as
incurred. In addition, the replacement of computer hardware or software to
comply with the Year 2000 Issue may result in a charge to income. The Company
plans to complete its Year 2000 project in September 1999. The total remaining
cost of the Year 2000 project is estimated at $350,000 to $550,000 and is being
funded through operating cash flow and is not expected to have a material effect
on the results of operations or financial condition of the Company. Through
March 31, 1999, the Company has incurred and expensed approximately $615,000
related to the assessment of, and preliminary efforts in connection with, its
Year 2000 project and the development of a remediation plan. The Company has not
yet developed any contingency plans in the event its Year 2000 remediation
efforts are unsuccessful, but plans to do so during this year. While the Company
has not identified a reasonably likely worst case scenario in the event it
doesn't become Year 2000 compliant, the Company continues to evaluate the Year
2000 Issue and is attempting to address any Year 2000 deficiencies.
The Company's total Year 2000 project cost and estimates to complete
include the estimated costs and time associated with the impact of a third
party's Year 2000 Issue, and are based on presently available information.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company. The cost of
the project and the date on which the Company plans to complete the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
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 opportunities, the outlook of customers, the
expansion of the Abacus Alliance, the reception of new services, technologies
and pricing methods, resolution of the Year 2000 Issue, existing and potential
partnerships, strategic alliances and joint ventures, development and execution
of an internet related strategy, 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) changes in
technology; (v) the seasonality and cyclical nature of the direct marketing
industry; (vi) changes in postal rates and paper prices; (vii) the nature and
amount of the Company's revenues and expenses; and (viii) overall economic
conditions and 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents, which is designed for conservation 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.
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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.
27.01 -- Financial Data Schedule
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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 17, 1999 ABACUS DIRECT CORPORATION
By: /s/ CARLOS E. SALA
--------------------------------------
Carlos E. Sala
Senior Vice President- Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer and duly authorized officer)
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INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27.01 Financial Data Schedule (for electronic filing only)
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 25,551
<SECURITIES> 0
<RECEIVABLES> 13,895
<ALLOWANCES> 1,469
<INVENTORY> 0
<CURRENT-ASSETS> 39,853
<PP&E> 4,330
<DEPRECIATION> 0
<TOTAL-ASSETS> 44,253
<CURRENT-LIABILITIES> 4,498
<BONDS> 531
0
0
<COMMON> 10
<OTHER-SE> 39,214
<TOTAL-LIABILITY-AND-EQUITY> 44,253
<SALES> 0
<TOTAL-REVENUES> 12,753
<CGS> 3,033
<TOTAL-COSTS> 6,113
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,744
<INCOME-TAX> 1,475
<INCOME-CONTINUING> 3,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,269
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
