<PAGE> 1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 1-8260
PRIMARK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MICHIGAN 38-2383282
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1000 WINTER STREET, SUITE 4300N, WALTHAM, MA 02451-1241
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
781-466-6611
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGES
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
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.
[X] Yes [ ] No
Number of shares outstanding of each of the registrant's classes of common
stock, as of April 30, 1999:
Common Stock, without par value: 20,667,553
===============================================================================
<PAGE> 2
PRIMARK CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
COVER....................................................... i
INDEX....................................................... ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements............................. 2
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial
Condition..................................... 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................. 17
SIGNATURE................................................... 18
</TABLE>
ii
<PAGE> 3
PART I
FINANCIAL INFORMATION
PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value)........................................... $ 27,628 $ 51,630
Billed receivables less allowance for doubtful accounts of
$4,543 and $3,762, respectively......................... 99,974 88,770
Unbilled and other receivables............................ 10,309 13,203
Other current assets...................................... 25,473 15,806
Net assets of discontinued operations..................... -- 8,900
-------- --------
163,384 178,309
-------- --------
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less accumulated amortization of $84,688 and
$81,048,
respectively............................................ 578,194 526,624
Capitalized data and other intangible assets, less
accumulated amortization of $31,132 and $29,670,
respectively............................................ 38,717 38,703
Capitalized software, less accumulated amortization of
$20,615 and $18,578, respectively....................... 43,791 37,765
Other..................................................... 10,731 9,797
-------- --------
671,433 612,889
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer equipment........................................ 69,716 79,837
Leasehold improvements.................................... 18,617 19,267
Other..................................................... 27,070 10,901
-------- --------
115,403 110,005
Less-accumulated depreciation............................. (62,894) (58,649)
-------- --------
52,509 51,356
-------- --------
$887,326 $842,554
======== ========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable............................................. $ 68,250 $ 6,750
Accounts Payable.......................................... 8,239 12,059
Accrued employee payroll and benefits..................... 23,214 31,924
Taxes payable............................................. 30,842 41,318
Deferred income........................................... 93,645 80,004
Current portion of long-term debt, including capital lease
obligations............................................. 890 640
Other..................................................... 60,655 53,441
-------- --------
285,735 226,136
-------- --------
LONG-TERM DEBT AND OTHER CURRENT LIABILITIES
Long-term debt, including capital lease obligations....... 150,663 151,489
Deferred income taxes..................................... 11,441 9,599
Other..................................................... 15,970 15,152
-------- --------
178,074 176,240
-------- --------
Total liabilities....................................... 463,809 402,376
COMMITMENTS AND CONTINGENCIES (NOTE 5)
COMMON SHAREHOLDERS' EQUITY
Common stock and additional paid-in-capital............... 77,364 90,239
Retained earnings......................................... 357,849 355,380
Accumulated other comprehensive income.................... (11,696) (5,441)
-------- --------
Total common shareholders' equity....................... 423,517 440,178
-------- --------
Total liabilities and shareholders' equity................ $887,326 $842,554
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
2
<PAGE> 4
PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
OPERATING REVENUES.......................................... $117,344 $104,411
OPERATING EXPENSES
Cost of services.......................................... 49,167 40,949
Selling, general and administrative....................... 45,582 39,094
Depreciation.............................................. 4,985 4,106
Amortization of goodwill.................................. 4,158 4,122
Amortization of other intangible assets................... 3,992 4,823
-------- --------
Total operating expenses............................... 107,884 93,094
-------- --------
Operating income....................................... 9,460 11,317
OTHER INCOME AND (DEDUCTIONS)
Interest income and (expense) -- net...................... (3,417) (3,824)
Other income and (expense) -- net......................... 163 (436)
-------- --------
Total other income and (deductions).................... (3,254) (4,260)
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES....... 6,206 7,057
INCOME TAX EXPENSE.......................................... 3,518 3,435
-------- --------
INCOME FROM CONTINUING OPERATIONS........................... 2,688 3,622
DISCONTINUED OPERATIONS
Discontinued operations, net of income tax expense of
$3,724................................................. -- 4,898
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................................. 2,688 8,520
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Cumulative Effect of Change in Accounting Principle (net
of $108 tax benefit) see footnote 4.................... (219) --
-------- --------
NET INCOME.................................................. $ 2,469 $ 8,520
======== ========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations......................... $ 0.13 $ 0.13
Discontinued operations................................... -- 0.18
Cumulative effect of change in accounting for derivative
financial instruments.................................. (0.01) --
-------- --------
Total earnings per share............................... $ 0.12 $ 0.32
======== ========
EARNINGS PER COMMON SHARE -- ASSUMING DILUTION
Income from continuing operations......................... $ 0.13 $ 0.13
Discontinued operations................................... -- 0.17
Cumulative effect of change in accounting for derivative
financial instruments.................................. (0.01) --
-------- --------
Total earnings per share............................... $ 0.12 $ 0.30
======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING
Basic..................................................... 20,984 26,942
Effect of Dilutive Securities............................. 463 1,299
-------- --------
Diluted................................................... 21,447 28,241
-------- --------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
3
<PAGE> 5
PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 2,469 $ 8,520
Adjustments to reconcile net income to net cash flows from
operating activities:
Discontinued operations................................... -- (4,898)
Cash (contributed to) discontinued operations............. -- (2,373)
Depreciation and amortization............................. 13,135 13,051
Other charges and credits -- net.......................... (136) (3,691)
Changes in operating working capital, excluding the effect
of acquisitions:
(Increase) in billed, unbilled and other
receivables -- net.................................... (4,846) (14,309)
(Increase) in other current assets..................... (3,051) (6,120)
(Decrease) increase in accounts payable................ (2,311) 333
(Decrease) in accrued payroll and benefits............. (7,809) (6,381)
(Decrease) increase in income and other taxes
payable -- net........................................ (2,931) 9,415
Increase in deferred income............................ 9,479 13,772
Increase in other current liabilities.................. 2,230 4,644
--------- ---------
Net cash provided from operating activities.......... 6,229 11,963
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of short-term notes payable...................... 207,973 100,045
Repayment of short-term notes payable..................... (146,473) (97,647)
Common stock repurchased and retired...................... (16,077) --
Common stock issuance..................................... 3,202 5,109
Other..................................................... (75) (335)
--------- ---------
Net cash provided from financing activities.......... 48,550 7,172
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (6,642) (4,804)
Capitalized software...................................... (4,303) (3,880)
Purchase of subsidiaries -- net of acquired cash.......... (66,831) --
Proceeds from sale of discontinued operations............. 8,900 --
Tax paid on sale of discontinued operations............... (8,943) --
Other -- net.............................................. (620) --
Cash provided by (contributed to) discontinued
operations............................................. -- (1,008)
--------- ---------
Net cash used for investing activities............... (78,439) (9,692)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (342) (38)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (24,002) 9,405
CASH AND CASH EQUIVALENTS, JANUARY 1........................ 51,630 12,780
--------- ---------
CASH AND CASH EQUIVALENTS, MARCH 31......................... $ 27,628 $ 22,185
========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
4
<PAGE> 6
PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
COMMON STOCK
Balance -- beginning of period.............................. $ 425 $ 536
Issued for employee stock purchase and option plans......... 4 4
Retirement of common stock.................................. (14) --
-------- --------
Balance at March 31......................................... 415 540
-------- --------
ADDITIONAL PAID IN CAPITAL
Balance -- beginning of period.............................. 89,814 274,834
Tax benefit relating to stock option plans.................. 626 1,390
Issued for employee stock purchase and option plans......... 2,572 3,715
Retirement of common stock.................................. (16,063) --
-------- --------
Balance at March 31......................................... 76,949 279,939
-------- --------
RETAINED EARNINGS
Balance -- beginning of period.............................. 355,380 198,658
Net income.................................................. 2,469 8,520
-------- --------
Balance at March 31......................................... 357,849 207,178
-------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance -- beginning of period.............................. (5,441) (3,057)
Net gain on derivative instruments designated as cash flow
hedges.................................................... 106 --
Foreign currency translation adjustments.................... (6,361) 192
-------- --------
Balance at March 31......................................... (11,696) (2,865)
-------- --------
TOTAL COMMON SHAREHOLDERS' EQUITY........................... $423,517 $484,792
======== ========
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
5
<PAGE> 7
PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 1998
-------- -------
(IN THOUSANDS
OF DOLLARS)
<S> <C> <C>
NET INCOME.................................................. $ 2,469 $8,520
------- ------
Other comprehensive income, net of tax:
Net gain on derivative instruments designated as cash flow
hedges.................................................... 106 --
Cumulative translation adjustment........................... (6,361) 192
------- ------
OTHER COMPREHENSIVE INCOME (LOSS)........................... (6,255) 192
------- ------
COMPREHENSIVE INCOME (LOSS)................................. $(3,786) $8,712
======= ======
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
6
<PAGE> 8
PRIMARK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITIONS
During the three months ended March 31, 1999, the Company made the
acquisitions described below, each of which has been accounted for as a
purchase. Accordingly, the purchase price has been allocated on a preliminary
basis to the identifiable net assets acquired based upon estimates of their fair
market values as of the acquisition date and the excess of purchase price over
the estimated fair value of total net assets acquired was allocated to goodwill.
The consolidated financial statements include the operating results of each
business from the date of acquisition.
<TABLE>
<CAPTION>
A-T EXTEL
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $35,306 $30,669
Acquisition Fees............................................ 825 1,250
Other....................................................... 34 --
------- -------
Total Consideration.................................... $36,165 $31,919
Acquired Cash............................................... (1,253) --
------- -------
Net Consideration...................................... $34,912 $31,919
======= =======
Excess of Purchase Price over Fair Value.................... $30,029 $30,283
======= =======
</TABLE>
a. A-T
On February 5, 1999 Primark acquired all of the outstanding shares of A-T
for $34.9 million, which is net of acquired cash. The excess of purchase price
over fair value of net assets acquired of approximately $30.0 million will be
amortized on a straight-line basis over 40 years. Founded in 1987, A-T's
customers are users of real time information such as money managers, traders,
banks and other institutional investors.
b. Extel
On February 19, 1999 the Company acquired the Company Fundamental Data
business and the Extel brand name ("Extel") from The Financial Times Group, part
of Pearson plc, for $31.9 million, subject to certain post closing adjustments.
The excess of purchase price over fair value of net assets acquired of
approximately $30.3 million will be amortized on a straight-line basis over 25
years. Extel is a widely recognized brand name in the European and Asian markets
and provides summarized company "tear sheets" for rapid corporate analysis,
historical company fundamental information, image-based data, textual corporate
profiles and company news to the investment industry worldwide.
2. RESTRUCTURING AND INTEGRATION CHARGES
Effective June 1, 1998, the Company was reorganized in order to focus
solely on its information services businesses. In connection with this
reorganization, the Company recorded $68.7 million in operating expenses for
direct and other reorganization related costs in June 1998. The restructuring
charge included the write-off of intangible assets for (i) $25.0 million of
previously capitalized software related to the planned integration of several
product offerings on common software platforms, (ii) $1.5 million of data that
has been determined to be duplicative and will not be used as a result of the
software platform integration, (iii) write-off of $23.9 million of goodwill
associated with software and data, which was established as part of purchase
accounting, (iv) write-off of $7.2 million of goodwill related to DAFSA, and (v)
write-off of $3.1 million of a trademark no longer used in the restructured
organization. The level of impairment has been determined based upon the
discounted value of estimated future cash flows.
7
<PAGE> 9
PRIMARK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An additional $8.0 million of the charge relates primarily to the
integration of domestic and international sales offices and efficiencies gained
from technological advancements. The provision includes $2.9 million for
salaries and termination benefits in the phased reduction of approximately 61
employees and $5.1 million for abandonment of leased facilities, including
leasehold improvements. Salaries and termination benefits, which may be in the
form of one-time or periodic payments, are made once the employee ceases
employment. These employees are in management, sales and administrative support.
The liability associated with abandoned lease space will be utilized over the
life of the lease, starting on the date of abandonment.
As of March 31, 1999, the restructuring accrual was $4.3 million, which
represents $3.7 million related to the abandonment of leased facilities expected
to be utilized over the remainder of the applicable leases, and $623,000 related
to staff reductions.
Details of activity related to the restructuring and other staff reductions
in 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 UTILIZED DEC. 31, 1998
PROVISION IN 1998 ACCRUAL
--------- --------- -------------
(AMOUNTS IN 000'S)
<S> <C> <C> <C>
Abandonment of leased facilities, including
leasehold improvements............................ $5,156 $ 883 $4,273
Salaries and termination benefits................... 2,871 1,890 981
------ ------ ------
Total............................................... $8,027 $2,773 $5,254
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, 1998 UTILIZED MAR. 31, 1999
ACCRUAL IN 1999 ACCRUAL
------------- -------- -------------
(AMOUNTS IN 000'S)
<S> <C> <C> <C>
Abandonment of leased facilities, including
leasehold improvements......................... $4,273 $563 $3,709
Salaries and termination benefits................ 981 359 623
------ ---- ------
Total............................................ $5,254 $922 $4,332
====== ==== ======
</TABLE>
3. REPURCHASE OF COMMON STOCK
On July 3, 1998, the Company implemented an open market purchase program to
buy up to 2,000,000 shares of its common stock from time to time, depending on
market conditions. On November 10, 1998, the Board of Directors approved an
expansion of the open market purchase program by an additional 2,000,000 shares,
bringing the total potential buyback to 4,000,000 shares. As a result, under the
two repurchase programs totaling 4,000,000 shares, the Company had authority
remaining to buy back up to 1,728,054 additional shares of its common stock as
of March 31, 1999. For the three months ended March 31, 1999, 703,446 shares
were purchased at a total cost of $16,077,225. In April 1999, the Company
repurchased an additional 93,800 shares for $2.0 million. Under the Company's
existing line of credit agreement, the Company has capacity to spend up to
$36,659,000 on its stock repurchase program at March 31, 1999.
4. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 133, (FAS 133), "Accounting for Derivative Instruments
and Hedging Activities." FAS 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Depending on the nature of the
underlying exposure being hedged, changes in the fair value of derivatives are
either recognized in the statement of operations or other comprehensive income.
The ineffective portion of a derivative's change in fair value is recognized in
the statement of operations. In accordance with the Company's risk management
policy, Primark uses foreign currency options and foreign currency forward
contracts. The Company does not hold or issue derivative instruments for trading
purposes.
8
<PAGE> 10
PRIMARK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Forward and option contracts related to foreign exchange market risk are
utilized to reduce the exposure of the Company's anticipated foreign revenues,
net of cash operating expenses, to excessive foreign currency fluctuations. A
significant portion of Primark's revenues are denominated in currencies other
than the U.S. Dollar. For the quarter ended March 31, 1999, approximately 59% of
total revenues were denominated in non-U.S. dollar currencies of which
approximately 33%, 19% and 7% were denominated in U.K. Sterling, currencies of
Continental Europe, and Asian currencies, respectively. The majority of
Primark's revenues are generated from subscription arrangements of up to two
years in duration.
Additionally, a significant percentage of Primark's operating costs are
denominated in foreign currencies. Primark maintains significant production,
product development, sales and administrative functions in the United Kingdom.
Also, Primark maintains local sales and customer service functions in most
financial centers of Europe and Asia. For the quarter ended March 31, 1999,
approximately 59% of operating income excluding goodwill amortization was
denominated in non-U.S. Dollar currencies. This 59% can be broken down between a
negative margin of (10%) in U.K Sterling, 54% in Continental Europe and 15% in
Asia. The primary market risk that Primark faces is the U.S. Dollar
strengthening versus the Euro, Swiss Franc, Swedish Krona and Japanese Yen.
The Company principally enters into contracts to deliver foreign currencies
for U.K. Sterling at agreed-upon exchange rates with maturities not exceeding
two years. The Company accounts for these instruments as cash flow hedges. In
accordance with FAS 133, the fair value of changes of derivative instruments
related to the effective portion of cash flow hedges are initially recorded as a
component of other comprehensive income. Unrealized gains and losses on cash
flow hedges accumulate in other comprehensive income and are reclassified into
earnings when the forecasted transaction affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately. At March 31,
1999, the fair value of these instruments was $164,000 recorded in other current
assets with the offset to other comprehensive income, net of applicable income
taxes. The gain will be recognized in revenues over the next 12 months as the
forecasted revenues are recognized.
Forward and option contracts are also entered into to protect anticipated
repatriations of excess cash flow, primarily for the U.K., under intercompany
loan agreements or other financial transactions. The Company accounts for these
instruments as fair value hedges and changes in the fair market value of such
contracts are recorded each period in non-operating income or loss. During the
quarter ended March 31, 1999, there was no significant change in the value of
hedges designated as fair value hedging instruments.
Certain foreign subsidiaries of the Company loan excess cash to the U.K. as
part of the Company's cash management program. All such loans are denominated in
the currency of the lending entity. The Company's U.K. subsidiary designates
such foreign currency loans as hedges in its net investment in foreign
subsidiaries, and the gain or loss resulting from periodic revaluation of such
loans is recorded as part of the cumulative translation adjustment.
The cumulative effect of a change in accounting principle due to adoption
of FAS 133 as of January 1, 1999 had a $219,000 negative impact on earnings.
5. CONTINGENCIES
There have been no other significant developments with respect to the
Company's contingent liabilities which were disclosed in the Company's 1998
Annual Report on Form 10-K. Management cannot predict the final disposition of
such issues, but believes that adequate provision has been made in the financial
statements and that the ultimate resolution of any outstanding issues will not
have a material adverse effect on the Company's financial condition.
9
<PAGE> 11
PRIMARK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DISCONTINUED OPERATIONS
The accompanying consolidated financial statements reflect the operating
results of The Analytic Science Corporation ("TASC") and Triad International
Maintenance Corporation ("TIMCO") separately from the Company's continuing
operations for 1998. Interest expense has been allocated to discontinued
operations based upon the ratio of net assets to total consolidated net assets.
The net assets of discontinued operations represent the net book value of the
Company's investment in TASC and TIMCO and consist principally of working
capital, fixed assets, goodwill and other non-current assets and liabilities. A
purchase price adjustment of $8.9 million associated with the sale of TASC was
received by Primark in January of 1999.
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS MARCH 31, 1998
- ----------------------- ------------------
(AMOUNTS IN 000'S)
<S> <C>
INCOME
TASC...................................................... $ 3,756
TIMCO..................................................... 1,142
--------
Total................................................ $ 4,898
========
NET ASSETS
TASC...................................................... $162,685
TIMCO..................................................... 42,926
--------
Total................................................ $205,611
========
</TABLE>
7. GENERAL
In the opinion of management, the accompanying balance sheets and related
interim statements of income and cash flows include all adjustments (consisting
only of normal recurring items) necessary for their fair presentation in
conformity with generally accepted accounting principles. Preparing financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. Examples include
provision for bad debts and the length of asset lives. Actual results may differ
from these estimates. Interim results are not necessarily indicative of results
for a full year. The information included in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and financial statements
and notes thereto included in the Primark Corporation 1998 Annual Report on Form
10-K.
10
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Primark Corporation reported income from continuing operations for the
first quarter 1999 at $2.7 million ($0.13 per share) compared to $3.6 million
($0.13 per share) in the first quarter of 1998. Earnings per share remained flat
despite the drop in net income due primarily to the Company's aggressive share
repurchase program and other capital structure improvements made in 1998.
Net income for the three months ended March 31, 1999 was $2.5 million
($0.12 per share), compared to $8.5 million ($0.32 per share) for the three
months ended March 31, 1998. Included in net income for the first quarter of
1999 is a loss, net of tax, of $0.2 million ($0.01 per share) associated with
the cumulative effect of a change in accounting principle for the adoption of
Statement of Financial Accounting Standards No. 133 ("FAS 133), "Accounting for
Derivative Instruments and Hedging Activities." Discontinued operations for the
three months ended March 31, 1998 include $4.9 million ($0.17 per share) for the
operating results of TASC and TIMCO, the Company's former applied technology and
aircraft maintenance operations, respectively.
During the first quarter of 1999, the Company acquired the businesses of
A-T Financial Information Inc. ("A-T") and Extel.
A-T was acquired for a total purchase price of approximately $34.9 million.
Founded in 1987, A-T is a leading provider of Windows-compatible real-time
financial market data and software to money managers, traders, banks and other
institutional investors. A-T has launched a competitive Internet site for
individual investors, which is marketed as "A-T Attitude." The company reported
approximately $13 million in revenues for 1998, which is an increase of 29% over
the prior year.
Management plans to integrate A-T's leading real-time data and software
capabilities with the full range of Primark's financial information products. In
April of 1999, A-T released a new North American market datafeed, called Primark
SpeedFeed which is collected directly from 35 sources. Management believes that
this new feed will enable Primark to offer superior quality Internet and
institutional products, especially when combined with the many unique databases
available from Primark today. For example, by combining A-T's robust North
American coverage with the European market data collected by our ICV unit in
London, Primark will have excellent real-time and historical coverage for the
world's two largest financial markets. Building on Primark's extensive presence
in Asia and developing countries, management intends to expand this capability
to the rest of the globe.
Management also intends to use A-T's capabilities in the planned Primark
Global Equity Service for investors located in the United States, Europe, Asia
and other parts of the world. This service will combine real-time and historical
securities prices, indices, company financial reports and documents, ownership,
insider trading, earnings estimates, broker research, market-related economic
analysis, forecasts and news -- with securities trading and portfolio management
capabilities.
Distinctive features of the Primark Global Equities Service will be its
global coverage of countries, markets, industries and securities, together with
Primark forecasts and analytical tools. Most of the data will be drawn from
Primark's financial and economic information businesses, along with third party
information such as Dow Jones News to complete the service.
The Primark Global Equities Service will consist of several regional
equities products, which will also be combined into a worldwide service. The
first regional product, called Primark EuroTOPIC, will be released in the third
quarter, including real-time prices, news, investment information, analytic
software and trading capabilities for the European market.
In February of 1999, the Company Fundamental Data business and the Extel
brand name were acquired from The Financial Times Group, part of Pearson plc,
for approximately $31.9 million in cash, subject to certain post closing
adjustments. Extel, perhaps best known for its "Extel Card" company tearsheets
for rapid corporate analysis, provides historical company accounts, image-based
data, textual corporate profiles and
11
<PAGE> 13
company news to the investment industry worldwide. The acquired business had
revenues of approximately $18 million in 1998.
Management intends to integrate the Extel data production operation within
its Worldscope operation while leveraging the premier Extel name by providing
Extel branded information across the full range of Primark's product lines. This
will be done both by integrating Extel corporate and historical news content
with Primark's current products and through adding value to Extel products with
Primark's data and functionality. Extel's strength in the Europe and
Asia-Pacific regions complements Primark's existing North American strength.
Primark will also incorporate elements of Extel data into its existing and
planned real-time information services. These services are being strengthened
through the acquisition of real-time provider A-T. Extel data will be included
on real-time products such as TOPIC as part of Primark's drive to become the
world's leading supplier of equity data.
The acquired businesses of A-T and Extel have been made part of the Primark
Financial Information Division (PFID) and their financial results are included
with PFID.
The following table summarizes the operating results of Primark by
Division:
<TABLE>
<CAPTION>
REVENUE 1999 1998 % CHANGE
- ------- ------- ------- --------
<S> <C> <C> <C>
PFID 83,022 75,199 10.4%
PFAD 21,818 17,559 24.3%
PDID 12,504 11,653 7.3%
------- -------
117,344 104,411 12.4%
======= =======
</TABLE>
<TABLE>
<CAPTION>
EBITDA 1999 1998
- ------ ------- -------
<S> <C> <C> <C>
PFID 16,746 19,019 (12.0)%
PFAD 6,042 5,071 19.2%
PDID 609 1,067 (43.0)%
Corp (802) (789) (1.7)%
------- -------
22,595 24,368 (7.3)%
======= =======
</TABLE>
<TABLE>
<CAPTION>
OPERATING INCOME 1999 1998
- ---------------- ------- -------
<S> <C> <C> <C>
PFID 6,919 9,493 (27.1)%
PFAD 4,178 3,316 26.0%
PDID (474) (258) (83.7)%
Corp (1,163) (1,234) 5.8%
------- -------
9,460 11,317 (16.4)%
======= =======
</TABLE>
EBITDA represents operating income plus depreciation and amortization
expense and should not be considered in isolation from, or as a substitute for,
operating income, net income or cash flows from operating activities computed in
accordance with generally accepted accounting principles. While not a required
disclosure under generally accepted accounting principles, EBITDA is a widely
used measure of a company's performance in its industry because it assists in
comparing performance on a consistent basis without regard to depreciation and
amortization, which may vary significantly depending on accounting methods
(particularly where acquisitions are involved). Management of the company
believes that EBITDA is a meaningful measure given the widespread industry
acceptance as a basis for financial analysis. Further, certain of the company's
debt agreements include financial covenants that are based upon EBITDA, as
defined above. Due to the variety of methods that may be used by companies and
analysts to calculate EBITDA, the EBITDA measures presented herein may not be
comparable to that presented by other companies.
12
<PAGE> 14
Revenues from continuing operations during the first quarter were reported
at $117.3 million compared to $104.4 million in 1998, a 12.4% increase. A-T and
Extel combined, contributed approximately $3.5 million to revenues in the first
quarter of 1999. Operating margins in 1999 are lower due to the cost of
developing and supporting new products being introduced in 1999 and expenses
associated with completing our integration efforts.
PFID
The following table reflects the growth rate from first quarter 1998
compared to first quarter 1999 within the Primark Financial Information Division
(PFID) for its major products.
<TABLE>
<S> <C>
Datastream Research......................................... 8.8%
Primark Information Management Services..................... 35.3%
ICV Topic Products.......................................... 12.4%
Disclosure Traditional Products............................. (26.2)%
Disclosure Electronic Products.............................. 30.5%
</TABLE>
Primark continues to experience solid growth across all of the major
products within this division with the exception of the Disclosure traditional
product line. Excluding Disclosure's traditional products, management expects
this strong performance to continue due to synergy created by recent
acquisitions and due to new products and enhancements to existing products
expected to be released in 1999.
PFAD
The Primark Financial Analytics Division (PFAD) had another strong quarter
with growth in revenues of 24.3%, growth in EBITDA of 19.2% and growth in
operating income of 26%. The Baseline product leads this growth with an increase
in revenues of 41%, followed by IBES at 18% and Vestek at 13%. Management
expects this strong performance to continue with the sale of new or recently
released products such as IBES on Baseline, Trapeze and Active Express.
PDID
The Primark Decision Information Division (PDID) derives revenues from two
major sources. Under the brand name of the Yankee Group, this division sells
planning subscription and consulting services to both the vendors and users of
telecommunications and computing capabilities. Growth in revenues from these
services was up 26% in the quarter.
Under the brand name of Primark WEFA, PDID sells subscriptions to economic
services as well as economic consulting for analysis and planning. Revenues
dropped by 7% in the first quarter as a result of product transitioning and the
timing of when certain work associated with consulting services are performed.
WEFA's customer base and product line is expanding from services provided to
traditional corporate economists, a market which is flat to down, to marketing,
financial and operating professionals, a market growing robustly. This drop in
revenues is the primary reason for the deterioration of margins within this
division. Management expects the revenues and margins at WEFA to improve
throughout the remainder of 1999.
Other comprehensive income dropped by approximately $6.3 million primarily
due to a change in the cumulative translation account resulting from the Dollar
weakening against the U.K. Sterling. The Company has a significant goodwill
asset denominated in U.K. Sterling.
Capital Resources and Liquidity
Primark's cash and cash equivalent balances decreased approximately $24.0
million during the three months ended March 31, 1999 as a result of operating
activities contributing $6.2 million, financing operations generating $48.6
million and investing activities absorbing $78.4 million.
13
<PAGE> 15
The $5.7 million decrease in cash flows from operating activities is a
result of decreased earnings at the operating level as well as timing
differences associated with working capital accounts.
Financing activities, for the most part, reflect a net increase of $61.5
million on Primark's revolving credit facility, resulting in $219.8 million of
funded debt outstanding as of March 31, 1999. On July 3, 1998, the Company
implemented an open market purchase program to buy up to 2,000,000 shares of its
common stock from time to time, depending on market conditions. In addition, on
November 10, 1998, the Board of Directors approved an expansion of the open
remaining market purchase program by 2,000,000 shares, bringing the total
potential buyback to 4,000,000 shares. As a result under the two repurchase
programs totaling 4,000,000 shares, the Company had authority to buy back up to
1,728,054 additional shares of its common stock as of March 31, 1999. For the
three months ended March 31, 1999, 703,446 shares were purchased at a total cost
of $16.1 million. In April 1999, the Company repurchased an additional 93,800
shares for $2.0 million. Under the Company's existing line of credit agreement,
the Company has capacity to spend up to $36.7 million on its stock repurchase
program at March 31, 1999. Additionally, Primark received proceeds of $3.2
million on the issuance of common stock associated with stock option and
employee stock purchase plans.
Investing activities included the use of $66.8 million for the purchase by
Primark of two companies in the first quarter, Extel and A-T. Additionally,
investing activities included $6.6 million of capital expenditures and $4.3
million of capitalized software. The capital expenditures consisted primarily of
computer equipment purchases, which totaled $5.7 million in the first quarter.
Capitalized software represents expenditures primarily on new product offerings
within the Primark Financial Information Division. In early 1999, the Company
received $8.9 million in cash associated with a purchase price adjustment from
the sale of its TASC subsidiary in April of 1998. This amount was offset by $8.9
million of taxes paid in 1999 on the gains realized on the sale of discontinued
operations in 1998. Management estimates that it will be required to pay
approximately $20.0 million of additional taxes in 1999 associated with the gain
on the sale of discontinued operations realized in 1998.
Newly Adopted Accounting Standards
Effective January 1, 1999, the Company adopted Statement of Financial
Accounting Standards No. 133, ("FAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Depending on the nature of
the underlying exposure being hedged, changes in the fair value of derivatives
are either recognized in the statement of operations or other comprehensive
income. The ineffective portion of a derivative's change in fair value is
recognized in the statement of operations. In accordance with the Company's risk
management policy, Primark uses foreign currency options and foreign currency
forward contracts. The Company does not hold or issue derivative instruments for
trading purposes.
The cumulative effect of a change in accounting principle due to adoption
of FAS 133 as of January 1, 1999 had a $219,000 negative impact on earnings.
Foreign Currency Exchange Risk Management
Forward and option contracts related to foreign exchange market risk are
utilized to reduce the exposure of the company's anticipated foreign revenues,
net of foreign cash operating expenses, to excessive foreign currency
fluctuations. A significant portion of Primark's revenues are denominated in
currencies other than the U.S. Dollar. For the quarter ended March 31, 1999,
approximately 59% of total revenues were denominated in non-U.S. Dollar
currencies of which approximately 33%, 19% and 7% are denominated in U.K.
Sterling, currencies of Continental Europe and Asian currencies, respectively.
The majority of Primark's revenues are generated from subscription arrangements
of up to two years in duration.
Additionally, a significant percentage of Primark's operating costs are
denominated in foreign currencies. Primark maintains significant production,
product development, sales and administrative function in the United Kingdom.
Also, Primark maintains local sales and customer service functions in most
financial centers of Europe and Asia. For the quarter ended March 31, 1999,
approximately 59% of operating income excluding
14
<PAGE> 16
goodwill amortization was denominated in non-U.S. Dollar currencies. This 59%
can be broken down between a negative margin of (10%) in U.K. Sterling, 54% in
Continental Europe and 15% in Asia. The primary market risk that Primark faces
is the risk of the U.S. Dollar strengthening versus the Euro, Swiss Franc,
Swedish Krona, and Japanese Yen.
Primark Corporation has adopted value at risk ("VAR") analysis as a
management tool to quantify the potential impact of exchange rate volatility on
future operating income. VAR is a measure of the potential loss on a portfolio
within a specified time horizon, at a specified confidence interval, measured on
a quarterly basis. The Company defines loss as the reduction in the value of the
rolling four quarter forecast of operating income denominated in U.S. Dollars.
Primark estimates there is a 5% chance that the forecast for operating income
for the next four quarters will deteriorate due to foreign exchange fluctuations
over the next calendar quarter by more than $2.74 million before hedging and
$1.96 million after taking into account the Company's hedging portfolio,
representing cover of 28% as of March 31, 1999.
The Company principally enters into contracts to deliver foreign currencies
for U.K. Sterling at agreed-upon exchange rates with maturities not exceeding
two years. The Company accounts for these instruments as cash flow hedges. In
accordance with FAS 133, the fair value of changes of derivative instruments
related to the effective portion of cash flow hedges are initially recorded as a
component of other comprehensive income. Unrealized gains and losses on cash
flow hedges accumulate in other comprehensive income and are reclassified into
earnings when the forecasted transaction affects earnings. The ineffective
portion of the gain or loss is reported in earnings immediately. At March 31,
1999, the fair value of these instruments was $164,000 recorded in other current
assets with the offset to other comprehensive income, net of applicable income
taxes. The gain will be recognized in revenues over the next 12 months as the
forecasted revenues are recognized.
Forward and option contracts are also entered into to protect anticipated
repatriations of excess cash flow, primarily from the U.K., under intercompany
loan agreements or other financial transactions. The Company accounts for these
instruments as fair value hedges and changes in the fair market value of such
contracts are recorded each period in non-operating income or loss. During the
quarter ended March 31, 1999, the net gain on fair value hedging contracts was
immaterial.
Certain foreign subsidiaries of the Company loan excess cash to the U.K. as
part of the Company's cash management program. All such loans are denominated in
the currency of the lending entity. The Company's U.K. subsidiary designates
such foreign currency loans as hedges in the net investment in foreign
subsidiaries, and the gain or loss resulting from periodic revaluation of such
loans is recorded to a separate component of the cumulative translation
adjustment.
Restructuring and Integration Charges
Effective June 1, 1998, the Company was reorganized in order to focus
solely on its information services businesses. In connection with this
reorganization, the Company recorded $68.7 million in operating expenses for
direct and other reorganization related costs in June 1998, which was
subsequently adjusted to $68.0 million.
The following summarizes the first quarter activity pertaining to the
restructuring accrual:
<TABLE>
<CAPTION>
DEC. 31, 1998 UTILIZED IN MAR. 31, 1999
ACCRUAL 1999 ACCRUAL
------------- ----------- -------------
(AMOUNTS IN 000'S)
<S> <C> <C> <C>
Abandonment of leased facilities, including
improvements.................................... $4,273 $563 $3,709
Salaries and termination benefits................. 981 359 623
------ ---- ------
Total................................... $5,254 $922 $4,332
====== ==== ======
</TABLE>
15
<PAGE> 17
Year 2000 Readiness Disclosure
The Year 2000 (Y2K) issue relates to a complex set of potential problems
arising from the ways in which computer software and hardware handle dates. Many
older systems use a two-digit date format that may create ambiguities once the
new century begins.
The Company has been actively addressing all known Y2K issues since 1995,
with the goal of providing continuous and reliable service to the Company's
customers and a seamless transition to the new millennium. The Company's Y2K
plan focuses on each of the Company's internal systems, products and third
parties with which the Company has a significant business relationship. In
addition to the databases and software that the Company provides to its
customers, the Company is reviewing, fixing, and testing all aspects of its
internal operations -- from hardware systems, software, and desktop PC programs
to physical security systems. This effort involves key data suppliers, hardware
manufacturers, telecommunications companies and electric utilities. The Company
is also prepared to assist its users with Y2K issues relating to their internal
systems that directly interface with the Company's systems. All Primark
companies are working together to achieve compliance by sharing information and
resources. The Company believes that all material systems will be compliant by
September of 1999.
All Primark companies dealing with the Y2K issues must address the effect
this issue will have on their significant business relationships, including
suppliers and customers. The Company is undertaking steps to work with third
party vendors to understand their ability to continue to provide services and
products.
The Company has notified all customers with older products which are not
Y2K compliant and which the Company will no longer support. All other Company
products are Y2K compliant.
The Company is undertaking a rigorous verification of suppliers. Primark
business units incorporate data derived from many different suppliers. A major
component of the Y2K project is reviewing every one of the suppliers to ensure
compliance on their part. Where there is any doubt that a supplier will not be
taking reasonable actions to ensure compliance, the Company will seek
alternatives within a suitable time frame.
The Company projects to incur costs related to its Y2K initiative of $5.0
million for the year ended December 31,1999 which includes incentive bonuses to
be earned by the technical staff. The Company expects to resolve every
significant Y2K problem and have the solutions thoroughly tested by September
30, 1999.
The Company expects its Y2K efforts will be successful. However, the
Company's products and services as well as the tools that Primark uses to
conduct its Y2K evaluation are dependent on technological components, equipment
and software that were developed by third parties and that may not be Y2K
compliant. Failure of such third party components, equipment or software to
operate properly with regard to the Y2K could interrupt ongoing operations or
require the company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business and
operating results.
Certain Factors that May Affect Future Results
In addition to historical information presented here, this report includes
statements that may constitute forward-looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Although Primark believes the expectations contained in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove correct. This information may involve risks and uncertainties that could
cause the actual results of Primark to differ materially from the
forward-looking statements. Factors which could cause or contribute to such
differences include, but are not limited to (i) the risks associated with
operating on a global basis, including fluctuations in the value of foreign
currencies relative to the U.S. dollar, and the ability to successfully hedge
such risks, (ii) the extent to which Primark seeks growth through acquisitions,
and the ability to identify and consummate acquisitions on satisfactory terms,
(iii) uncertainty regarding the development and market acceptance of new
products, (iv) loss of market share through competition, (v) deterioration in
economic conditions, particularly in the financial services industry, and (vi)
Primark's inability to complete the implementation of its Y2K plans on a timely
basis.
16
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is provided under the caption
"Foreign Currency Exchange Risk Management" under Item 2--Management's
Discussion and Analysis of Financial Condition and Results of Operations. Also
see item 7A. Quantitative and Qualitative Disclosures About Market Risk in
Primark's 1998 10-K.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27* Financial Data Schedule
(b) The Company filed report Form 8-K on March 3, 1999 regarding the
acquisition of Extel.
The Company filed report Form 8-K/A on April 7, 1999 regarding the
acquisition of Extel.
- ---------------
* Indicates document filed herewith.
17
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMARK CORPORATION
By: /s/ STEPHEN H. CURRAN
--------------------------------------
Stephen H. Curran
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 27,628
<SECURITIES> 0
<RECEIVABLES> 110,283<F1>
<ALLOWANCES> 4,543
<INVENTORY> 0
<CURRENT-ASSETS> 163,384
<PP&E> 115,403
<DEPRECIATION> 62,894
<TOTAL-ASSETS> 887,326
<CURRENT-LIABILITIES> 285,735
<BONDS> 150,663
0
0
<COMMON> 415
<OTHER-SE> 423,102<F2>
<TOTAL-LIABILITY-AND-EQUITY> 887,326
<SALES> 0
<TOTAL-REVENUES> 117,344
<CGS> 0
<TOTAL-COSTS> 107,884
<OTHER-EXPENSES> (976)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,230
<INCOME-PRETAX> 6,206
<INCOME-TAX> 3,518
<INCOME-CONTINUING> 2,688
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (219)
<NET-INCOME> 2,469
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
<FN>
<F1>AMOUNT REPRESENTS NET ACCOUNTS RECEIVABLE.
<F2>AMOUNT INCLUDES ADDITIONAL PAID-IN CAPITAL, RETAINED EARNINGS AND
ACCUMULATED OTHER COMPREHENSIVE INCOME.
</FN>
</TABLE>
