<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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 SEPTEMBER 30, 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 W 120TH AVENUE,
BROOMFIELD, COLORADO 80021
(Address of principal executive offices) (Zip Code)
(303) 410-5100
(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:
9,967,522 shares outstanding as of November 10, 1999.
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ABACUS DIRECT CORPORATION
INDEX TO FORM 10-Q
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
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<S> <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 12
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURE 15
INDEX TO EXHIBITS 16
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 23,019 $ 16,008 $ 48,988 $ 34,458
Cost of revenues 3,970 2,374 10,433 6,602
-------- -------- -------- --------
Gross profit 19,049 13,634 38,555 27,856
Operating expenses:
Selling and marketing 4,923 3,489 13,065 9,425
General and administrative 1,817 1,283 4,460 3,527
Research and development 898 400 2,279 1,251
Facility relocation and other -- 360 -- 360
-------- -------- -------- --------
Total operating expenses 7,638 5,532 19,804 14,563
-------- -------- -------- --------
Income from operations 11,411 8,102 18,751 13,293
Equity in losses of joint venture (208) -- (573) --
Interest and other income, net 297 191 864 496
-------- -------- -------- --------
Income before income taxes 11,500 8,293 19,042 13,789
Provision for income taxes 4,520 3,303 7,484 5,309
======== ======== ======== ========
Net income $ 6,980 $ 4,990 $ 11,558 $ 8,480
======== ======== ======== ========
Net income per common share -- basic $ 0.70 $ 0.51 $ 1.17 $ 0.87
Net income per common share -- diluted $ 0.66 $ 0.49 $ 1.10 $ 0.83
Weighted average number of outstanding
common shares -- basic 9,931 9,721 9,896 9,702
Weighted average number of outstanding
common shares -- diluted 10,575 10,202 10,511 10,195
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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ABACUS DIRECT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,465 $ 24,263
Accounts receivable (less allowance for doubtful accounts
of $1,448 and $963 at September 30, 1999 and December 31,
1998, respectively) 22,822 12,034
Prepaid expenses and other current assets 1,899 630
Income taxes receivable -- 1,107
Deferred taxes 727 727
------------ ------------
Total current assets 50,913 38,761
Property and equipment, net 7,410 4,488
Deferred taxes and other assets 3,644 71
============ ============
Total assets $ 61,967 $ 43,320
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 595 $ 614
Accrued expenses and other 7,579 5,463
Current obligations under capital leases 332 326
Income taxes payable 2,335 --
------------ ------------
Total current liabilities 10,841 6,403
Obligations under capital leases, net of current portion 362 613
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; 9,949
and 9,858 shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively 10 10
Additional paid-in capital 15,505 12,603
Retained earnings 35,249 23,691
------------ ------------
Total stockholders' equity 50,764 36,304
------------ ------------
Total liabilities and stockholders' equity $ 61,967 $ 43,320
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
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ABACUS DIRECT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 11,558 $ 8,480
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,087 1,157
Equity in losses of joint venture 573 --
Loss on disposal of equipment -- 1
Facility relocation and other -- 183
Changes in assets and liabilities:
Accounts receivable, net (10,788) (5,945)
Prepaid expenses and other assets (4,647) (46)
Accounts payable (19) 51
Accrued expenses 2,116 573
Income taxes payable 4,670 3,150
------------ ------------
Net cash provided by operating activities 5,550 7,604
INVESTING ACTIVITIES
Purchases of property and equipment (5,009) (1,510)
Loan to joint venture (333) --
Investment in joint venture (435) --
------------ ------------
Net cash used in investing activities (5,777) (1,510)
FINANCING ACTIVITIES
Principal payments on capital leases (245) (10)
Issuance of stock 1,674 639
------------ ------------
Net cash provided by financing activities 1,429 629
------------ ------------
Net increase (decrease) in cash 1,202 6,723
Cash and cash equivalents at beginning of period 24,263 10,490
============ ============
Cash and cash equivalents at end of period $ 25,465 $ 17,213
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 62 $ 2
Income taxes paid $ 2,561 $ 2,264
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
5
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ABACUS DIRECT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL INFORMATION.
These condensed consolidated financial statements are unaudited and
have been prepared by Abacus Direct Corporation ("Abacus" or 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, 1999. Certain reclassifications have been made in
the fiscal 1998 financial statements to conform to the 1999 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, 1998.
NOTE 2. EARNINGS PER SHARE.
Earnings per share ("EPS") are computed in accordance with Statement of
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings Per Share," which
specifies the computation, presentation, and disclosure requirements of 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 period in which
they have an anti-dilutive effect. The difference between Basic and Diluted
weighted average number of common shares outstanding is attributable entirely to
dilutive effect of outstanding stock options. The dilutive effects of stock
options were arrived at by applying the treasury stock method, assuming the
Company was to purchase common shares with the proceeds from stock option
exercises. The Company has no issued preferred stock from which dividends would
reduce earnings available to common shareholders.
NOTE 3. SUBSEQUENT EVENT.
On June 13, 1999, Abacus entered into the Merger Agreement with
DoubleClick pursuant to which DoubleClick has agreed to acquire Abacus. The
acquisition is to be effected through the issuance of 1.05 shares of DoubleClick
common stock in exchange for each share of common stock of Abacus outstanding
immediately prior to the consummation of the transaction and the assumption of
Abacus' stock options outstanding at the effective date of the merger, based on
such exchange ratio. Upon consummation of the transaction the stockholders of
Abacus will own approximately 19.0% of the issued and outstanding common stock
of DoubleClick. The amount of such consideration was determined based upon arm's
length negotiations between DoubleClick and Abacus. The Merger Agreement also
provides for the payment by Abacus to DoubleClick of a fee (the "Termination
Fee") of $30 million, if the agreement is terminated under certain circumstances
The transaction is intended to qualify as a tax-free reorganization under
Internal Revenue Code of 1986, as amended, and is intended to be accounted for
as a pooling of interests. The consummation of the transaction is subject to the
satisfaction of certain conditions, including the approval of the stockholders
of Abacus and DoubleClick.
In connection with the transaction, DoubleClick and Abacus also entered
into a Stock Option Agreement on June 13, 1999, pursuant to which Abacus has
granted to DoubleClick an option to purchase up to 1,974,516 newly-issued shares
of Abacus common stock under certain circumstances similar to those requiring
the payment of the Termination Fee. A copy of the Stock Option Agreement is
incorporated herein by reference as Exhibit 10.1. In addition, certain
affiliates of Abacus have agreed to vote in favor of approval of the Merger
Agreement.
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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 September 30, 1999 Compared to Three Months Ended
September 30, 1998
Net Revenues. Net revenues increased 43.8% to $23.0 million for the
three months ended September 30, 1999 from $16.0 million for the three months
ended September 30, 1998 due primarily to an increase in sales to existing and
new catalog clients and revenues from direct marketing clients outside the
catalog industry. During the three months ended September 30, 1999, $3.6 million
or 15.7% of net revenues were derived from annual fee-based subscription
contracts, for which revenues are recognized ratably over the term of the
subscription agreement.
Cost of Revenues. Cost of revenues increased 67.2% to $4.0 million for
the three months ended September 30, 1999 from $2.4 million for the three months
ended September 30, 1998 due primarily to increases in staff, contract labor
dedicated to the Year 2000 Issue, rent, depreciation and processing costs
associated with supporting higher revenues. Cost of revenues as a percentage of
net revenues increased to 17.2% for the three months ended September 30, 1999
from 14.8% for the three months ended September 30, 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 41.1% to $4.9 million for the three months ended September 30, 1999
from $3.5 million for the three months ended September 30, 1998. The increase in
selling and marketing expenses is due primarily to an increase in sales staff,
which resulted in higher training costs, travel expenses and rent, and higher
commissions associated with higher revenues. 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. Selling and marketing expenses at 21.4% of net revenues for the three
months ended September 30, 1999 was comparable to 21.7% of net revenues for the
same period in 1998.
General and Administrative. General and administrative expenses
increased 41.6% to $1.8 million for the three months ended September 30, 1999
from $1.3 million for the three months ended September 30, 1998. The increase in
general and administrative expenses resulted primarily from an increase in staff
to support overall Company growth and related increases in travel expenses and
rent, higher legal fees related to the Company's continued dependence on outside
counsel for all legal advice, higher performance bonuses and an increase in
external recruiting fees and moving expenses. General and administrative
expenses for the three months ended September 30, 1999 were comparable to 8.0%
of net revenues for the same period in 1998.
Research and Development. Research and development expenses increased
124.5% to $898,000 for the three months ended September 30, 1999 from $400,000
for the three months ended September 30, 1998. The increase in research and
development expenses resulted primarily from higher salaries and employee
related expenses, rent and travel. Research and development expenses increased
as a percentage of net revenues to 3.9% for the three months ended September 30,
1999 compared to 2.5% for the same period in 1998 due primarily to an increase
in personnel assigned to the development of new products and improvement of
existing products.
Operating Profit. Operating profit increased 40.8% to $11.4 million
from $8.1 million for the three months ended September 30, 1998. The increase in
operating profit is due primarily to the combined
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effect of higher revenues and the fixed cost nature of certain expenses, which
did not increase proportionately. The operating margin of 49.6% for the three
months ended September 30, 1999 was comparable to the operating margin of 50.6%
for the same period in 1998. Typically, revenue is much higher during the third
quarter of each year, which results from a seasonal revenue pattern inherent in
the business of the Company. Accordingly, the margins achieved during the third
quarter are not indicative of the operating margin expected for the fourth
quarter and year ended December 31, 1999.
Equity in Losses of Joint Venture. Equity in the losses of joint
venture for three months ended September 30, 1999 of $208,000 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 fourth quarter of 1999 as well as invest an additional $500,000
in cash to develop its operations during the remainder of 1999.
Interest and Other Income, Net. Net interest income for the three
months ended September 30, 1999 increased 55.5% to $297,000 from $191,000 for
the three months ended September 30, 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 September 30, 1999 increased to $4.5 million from $3.3 million for
the same period in 1998. The increase in tax is due principally to higher
pre-tax income. For the three months ended September 30, 1999, the Company's
effective tax rate increased to 39.3% from an annual rate of 38.5% that was in
effect during the same period in 1998. The increase in the effective tax rate is
due primarily to a valuation allowance recorded against the tax benefit from
equity investee losses.
Net Income. Net income for the three months ended September 30, 1999
increased 39.9% to $7.0 million or $0.66 per common share (diluted) compared
with net income of $5.0 million or $0.49 per common share (diluted) for the
three months ended September 30, 1998. The increase in net income and net income
per common share reflects higher operating and net interest income.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Net Revenues. Net revenues increased 42.2% to $49.0 million for the
nine months ended September 30, 1999 from $34.5 million for the nine months
ended September 30, 1998 due primarily to an increase in sales to existing and
new clients and revenues from direct marketing clients outside the catalog
industry. During the nine months ended September 30, 1999, $10.2 million or
20.8% of net revenues were derived from annual fee-based subscription contracts.
Cost of Revenues. Cost of revenues increased 58.0% to $10.4 million for
the first nine months ended September 30, 1999 from $6.6 million for the first
nine months ended September 30, 1998, due primarily to increases in staff,
contract labor dedicated to the Year 2000 Issue, rent, depreciation and
processing costs associated with supporting higher revenues. Cost of revenues
increased as a percentage of net revenues to 21.3% for the nine months ended
September 30, 1999 from 19.2% for the nine months ended September 30, 1998, due
primarily to increases in employee and non-employee staffing levels, Year 2000
Issue spending and higher software, hardware and systems processing costs
required to support higher revenues.
Selling and Marketing Expenses. Selling and marketing expenses
increased 38.6% to $13.1 million for the nine months ended September 30, 1999
from $9.4 million for the nine months ended September 30, 1998. The increase in
selling and marketing expenses is due primarily to an increase in sales staff,
which resulted in higher training costs, travel expenses and rent, and higher
commissions associated with higher revenues. 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
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customers. Selling and marketing expenses at 26.7% of net revenues for the nine
months ended September 30, 1999 was comparable to 27.3% of net revenues for the
same period in 1998.
General and Administrative. General and administrative expenses
increased 26.5% to $4.5 million for the nine months ended September 30, 1999
from $3.5 million for the nine months ended September 30, 1998. The increase in
general and administrative expenses resulted primarily from an increase in staff
to support overall Company growth and related increases in travel expenses and
rent, higher legal fees related to the Company's continued dependence on outside
counsel for all legal advice and an increase in external recruiting fees and
moving expenses. General and administrative expenses for the nine months ended
September 30, 1999 decreased to 9.1% of net revenues compared to 10.2% for the
nine months ended September 30, 1998 due primarily to the fixed cost nature of
certain expenses which did not increase proportionately with the growth in
revenues.
Research and Development. Research and development expenses increased
82.2% to $2.3 million for the nine months ended September 30, 1998 from $1.3
million for the nine months ended September 30, 1998. The increase in research
and development expenses resulted primarily from higher salaries and employee
related expenses, rent and travel. Research and development expenses increased
as a percentage of net revenues to 4.7% for the nine months ended September 30,
1999 compared to 3.6% for the same period in 1998 due primarily to an increase
in personnel assigned to the development of new products and the improvement of
existing products.
Operating Profit. Operating profit increased 41.1% to $18.7 million
from $13.3 million for the nine months ended September 30, 1999. The increase in
operating profit was due to increased spending on information technology,
research and development and staffing levels throughout the Company that were
offset by higher net revenues. Operating profit of 38.3% of net revenues for the
nine months ended September 30, 1999 was comparable to 38.6% of net revenues for
the same period in 1998.
Equity in Losses of Joint Venture. Equity in the losses of joint
venture for nine months ended September 30, 1999 of $573,000 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 fourth quarter of 1999, and will invest an additional $500,000
in cash to develop its operations during the remainder of 1999.
Interest and Other Income, Net. Net interest income for the nine months
ended September 30, 1999 increased 74.2% to $864,000 from $496,000 for the nine
months ended September 30, 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 nine
months ended September 30, 1999 increased to $7.5 million from $5.3 million for
the same period in 1998. The increase in tax is due principally to higher
pre-tax income. For the nine months ended September 30, 1999, the Company's
effective income tax rate increased to 39.3% from an annual rate of 38.5% that
was in effect during the same period in 1998. The increase in the effective tax
rate is due primarily to a valuation allowance recorded against the tax benefit
from equity investee losses.
Net Income. Net income for the nine months ended September 30, 1999
increased 36.3% to $11.6 million or $1.10 per common share (diluted) compared
with net income of $8.5 million or $0.83 per common share (diluted) for the nine
months ended September 30, 1998. 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
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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 nine months
ended September 30, 1999 was $5.6 million compared to $7.6 million for the nine
months ended September 30, 1998. For the nine months ended September 30, 1999,
the decrease in operating cash flow was due primarily to the prepayment of
expenses, which includes expenditures for services intended to improve database
accuracy, 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 same period in the prior year. As of
September 30, 1999, net working capital was $40.1 million compared to $32.4
million in the prior year, an increase of $7.7 million.
On June 13, 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement") with DoubleClick, Inc.
("DoubleClick") pursuant to which DoubleClick has agreed to acquire Abacus. In
connection with the merger, Abacus plans to record a one-time charge during the
fourth quarter relating to expenses incurred with this transaction.
Cash used in investing activities was $5.8 million for the nine months
ended September 30, 1999 compared to $1.5 million for the nine months ended
September 30, 1998. These activities represent capital expenditures for computer
equipment and peripheral systems, office equipment necessary to support revenue
growth and the Company's investments in Abacus Direct Europe, B.V. During the
nine months ended September 30, 1999, the Company has made additional equity
investment in Abacus Direct Europe, B.V. in the amount of $435,000 and also made
loan of $333,000. The Company plans to invest approximately $500,000 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 spent $4.0 million on office furniture, computer
equipment, leasehold improvements and other relocation expenses during 1999.
During the nine months ended September 30, 1999, net cash generated
from financing activities was $1.4 million compared to $649,000 for the nine
months ended September 30, 1998, due primarily to proceeds received from the
exercise of employee stock options that were partially offset by principal
payments on an existing capital lease obligation.
The Company's principal sources of liquidity are cash generated from
operations as well as cash and cash equivalents, which totaled approximately
$25.5 million at September 30, 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 during the next twelve months.
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.
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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 has modified its
proprietary software so that its computer systems will properly utilize dates
beyond December 31, 1999. The Company presently believes that with these
modifications to existing software the Year 2000 Issues related to its internal
systems can be mitigated.
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. Of
those surveyed, approximately 15% have responded acknowledging Year 2000
deficiencies. 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. In order to minimize the impact on the business operations of
the Company, a process has been developed to convert non-compliant data files
contributed by Abacus Alliance members. 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. Approximately 75% of third parties have responded to
requests for information. Some of these vendors have certified their products to
be Year 2000 compliant while others 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. Abacus
believes that those third parties who have Year 2000 issues or have not
responded to Abacus will not have a material adverse impact on this business
operations of the Company since such third parties have either pledged to be
Year 2000 compliant or are not critical vendors of Abacus' core business,
payroll or accounting systems. If however, 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 during the fourth quarter of 1999. The
total remaining cost of the Year 2000 project is estimated at $100,000 to
$200,000 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 September 30, 1999, the Company has incurred and expensed
approximately $1.1 million 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 been developing its contingency plans in the event its
Year 2000 remediation efforts are unsuccessful, which will be completed during
the fourth quarter. While the Company has not identified a reasonably likely
worst case scenario in the event it does not 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
11
<PAGE> 12
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 merger with DoubleClick, 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; (viii) the
ability to successfully consummate the merger between Abacus and DoubleClick and
successfully operate the combined companies, and (ix) 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.
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. As of September 30, 1999, all of the Company's
investments are in securities that mature within 90 days. 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.
12
<PAGE> 13
PART II
ITEM 5. OTHER INFORMATION
DOUBLECLICK MERGER
On June 13, 1999, Abacus entered into the Merger Agreement with
DoubleClick pursuant to which DoubleClick has agreed to acquire Abacus. The
acquisition is to be effected through the issuance of 1.05 shares of DoubleClick
common stock in exchange for each share of common stock of Abacus outstanding
immediately prior to the consummation of the transaction and the assumption of
Abacus' stock options outstanding at the effective date of the merger, based on
such exchange ratio. Upon consummation of the transaction the stockholders of
Abacus will own approximately 19.0% of the issued and outstanding common stock
of DoubleClick. The amount of such consideration was determined based upon arm's
length negotiations between DoubleClick and Abacus. The Merger Agreement also
provides for the payment by Abacus to DoubleClick of a fee (the "Termination
Fee") of $30 million, if the agreement is terminated under certain
circumstances. The transaction is intended to qualify as a tax-free
reorganization under Internal Revenue Code of 1986, as amended, and is intended
to be accounted for as a pooling of interests. The consummation of the
transaction is subject to the satisfaction of certain conditions, including the
approval of the stockholders of Abacus and DoubleClick.
In connection with the transaction, DoubleClick and Abacus also entered
into a Stock Option Agreement on June 13, 1999, pursuant to which Abacus has
granted to DoubleClick an option to purchase up to 1,974,516 newly-issued shares
of Abacus common stock under certain circumstances similar to those requiring
the payment of the Termination Fee. A copy of the Stock Option Agreement is
incorporated herein by reference as Exhibit 10.1. In addition, certain
affiliates of Abacus have agreed to vote in favor of approval of the Merger
Agreement.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
2.1 -- Agreement and Plan of Merger and Reorganization
dated as of June 13, 1999 by and among
DoubleClick, Inc., Atlanta Merger Corp. and Abacus
Direct Corporation. Incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K
filed by the Company on June 18, 1999 (the "Form
8-K").
10.1 -- Stock Option Agreement dated as of June 13, 1999
by and between DoubleClick, Inc. and Abacus Direct
Corporation. Incorporated by reference to Exhibit
2.1 to the Current Report on Form 8-K filed by the
Company on June 18, 1999 (the "Form 8-K").
27.01 -- Financial Data Schedule (for electronic filing
only)
14
<PAGE> 15
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: November 15, 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)
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C> <C>
2.1 -- Agreement and Plan of Merger and Reorganization
dated as of June 13, 1999 by and among
DoubleClick, Inc., Atlanta Merger Corp. and Abacus
Direct Corporation. Incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K
filed by the Company on June 18, 1999 (the "Form
8-K").
10.1 -- Stock Option Agreement dated as of June 13, 1999
by and between DoubleClick, Inc. and Abacus Direct
Corporation. Incorporated by reference to Exhibit
2.1 to the Current Report on Form 8-K filed by the
Company on June 18, 1999 (the "Form 8-K").
27.01 -- Financial Data Schedule (for electronic filing
only)
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,465
<SECURITIES> 0
<RECEIVABLES> 24,270
<ALLOWANCES> 1,448
<INVENTORY> 0
<CURRENT-ASSETS> 50,913
<PP&E> 7,410
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,967
<CURRENT-LIABILITIES> 10,841
<BONDS> 362
0
0
<COMMON> 10
<OTHER-SE> 50,754
<TOTAL-LIABILITY-AND-EQUITY> 50,764
<SALES> 0
<TOTAL-REVENUES> 48,988
<CGS> 10,433
<TOTAL-COSTS> 19,804
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,042
<INCOME-TAX> 7,484
<INCOME-CONTINUING> 18,751
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,558
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.10
</TABLE>
