<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended March 31, 1998 or
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 0-19598
------------------
AMERICAN BUSINESS INFORMATION, INC.
- --------------------------------------------------------------------------------
(exact name of registrant specified in its charter)
DELAWARE 47-0751545
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 593-4500
-----------------------------
(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 at least 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.
24,663,661 shares of Class A Common Stock and 24,663,661
shares of Class B Common Stock at April 23, 1998
<PAGE> 2
AMERICAN BUSINESS INFORMATION, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION 2
Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of Results of Operations 8 - 16
PART II - Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits
</TABLE>
<PAGE> 3
AMERICAN BUSINESS INFORMATION, INC.
Form 10-Q
For the Quarter
Ended March 31, 1998
Part 1
FINANCIAL INFORMATION AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
2
<PAGE> 4
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 14,499 $ 10,653
Marketable securities .............................................. 40,803 24,045
Trade accounts receivable, net of allowances of $7,678 and
$6,013, respectively ............................................ 55,544 49,409
Income taxes receivable ............................................ -- 345
Prepaid expenses ................................................... 4,345 3,475
Deferred marketing costs ........................................... 4,027 3,417
------------ ------------
Total current assets ....................................... 119,218 91,344
------------ ------------
Property and equipment, net .......................................... 29,238 25,117
Intangible assets, net of accumulated amortization ................... 96,178 73,741
Deferred income taxes ................................................ -- 1,410
Other assets ......................................................... 3,494 3,299
------------ ------------
$ 248,128 $ 194,911
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................. $ 902 $ 716
Payable to shareholders ............................................ -- 1,871
Accounts payable ................................................... 19,905 9,426
Accrued payroll expenses ........................................... 6,287 4,910
Accrued expenses ................................................... 12,850 5,406
Income taxes payable ............................................... 1,521 --
Deferred revenue ................................................... 4,511 4,238
Deferred income taxes .............................................. 7,163 4,770
------------ ------------
Total current liabilities .................................. 53,139 31,337
------------ ------------
Long-term debt, net of current portion ............................... 100,338 81,284
Deferred income taxes ................................................ 5,691 --
Other liabilities .................................................... 2,232 2,054
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0025 par value. Authorized 5,000,000 shares;
none issued or outstanding ...................................... -- --
Class A common stock, $.0025 par value. Authorized 220,000,000
shares; 24,663,661 shares issued and outstanding at
March 31, 1998 and 24,460,332 shares issued and
outstanding at December 31, 1997 ................................. 62 61
Class B common stock, $.0025 par value. Authorized 75,000,000
shares; 24,828,661 shares issued and 24,663,661 shares
outstanding at March 31, 1998 and 22,625,332 shares issued
and 24,460,332 shares outstanding at December 31, 1997 ............ 62 62
Paid-in capital .................................................... 72,052 69,055
Retained earnings .................................................. 6,686 13,126
Treasury stock, at cost, 165,000 shares of Class B common stock
held at March 31, 1998 and December 31, 1997 .................... (2,281) (2,281)
Unrealized holding gain (loss), net of tax ......................... 10,147 213
------------ ------------
Total stockholders' equity ................................. 86,728 80,236
------------ ------------
$ 248,128 $ 194,911
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 5
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
----------------------------
MARCH 31, MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
Net sales .................................... $ 55,380 $ 41,948
Costs and expenses:
Database and production costs .............. 15,405 11,415
Selling, general and administrative ........ 23,394 17,986
Depreciation and amortization .............. 6,828 6,356
Acquisition-related and restructuring
charges .................................. 13,852 51,798
----------- -----------
59,479 87,555
----------- -----------
Operating loss ............................... (4,099) (45,607)
Other income (expense):
Investment income .......................... 996 550
Interest expense ........................... (1,279) (508)
----------- -----------
Loss before income taxes ..................... (4,382) (45,565)
Income taxes ................................. 2,058 1,631
----------- -----------
Net loss ..................................... $ (6,440) $ (47,196)
=========== ===========
BASIC EARNINGS PER SHARE:
Net loss ................................... $ (0.13) $ (1.02)
=========== ===========
Weighted average shares outstanding ........ 49,395 46,412
=========== ===========
DILUTED EARNINGS PER SHARE:
Net loss ................................... $ (0.13) $ (1.02)
=========== ===========
Weighted average shares outstanding ........ 49,395 46,412
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE> 6
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------
MARCH 31, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (6,440) $ (47,196)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ......................... 6,828 5,728
Deferred income taxes ................................. (2,096) 1,963
Net realized (gains) losses on sale of
marketable securities investments ................... (985) --
Acquisition-related and restructuring
charges ............................................. 13,852 51,798
Changes in assets and liabilities, net of
effect of acquisitions:
Trade accounts receivable ........................... 796 (1,943)
Prepaid expenses .................................... (57) (670)
Deferred marketing costs ............................ (610) 246
Accounts payable .................................... (399) 244
Income taxes receivable and payable ................. 2,267 (1,358)
Accrued expenses .................................... 4,133 2,598
------------ ------------
Net cash provided by operating
activities ..................................... 9,023 11,410
Cash flows from investing activities:
Proceeds from sales of marketable securities ............. 1,166 15,404
Purchases of marketable securities ....................... (786) (9,593)
Purchases of other investments ........................... -- (2,000)
Purchases of property and equipment ...................... (2,966) (2,924)
Acquisitions of businesses ............................... (18,368) (64,264)
Consumer database costs .................................. (698) --
Software development costs ............................... (1,084) (885)
------------ ------------
Net cash used in investing activities ............ (22,736) (64,262)
Cash flows from financing activities:
Repayment of long-term debt .............................. (2,167) (343)
Proceeds from long-term debt ............................. 19,000 62,000
Payment of note payable to shareholders .................. -- (7,925)
Proceeds from exercise of stock options .................. 726 307
------------ ------------
Net cash provided by (used in) financing
activities ..................................... 17,559 54,039
Net increase (decrease) in cash and cash
equivalents .............................................. 3,846 1,187
Cash and cash equivalents, beginning ....................... 10,653 7,497
------------ ------------
Cash and cash equivalents, ending .......................... $ 14,499 $ 8,684
============ ============
Supplemental cash flow information:
Interest paid ............................................ $ 1,426 $ 317
============ ============
Income taxes paid ........................................ $ 1,794 $ 157
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE> 7
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting of normal recurring adjustments
and other adjustments as described in Note 2, necessary to fairly present the
financial information included therein.
The Company suggests that this financial data be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1997 included in the Company's 1997 Annual Report on Form 10-K, as
amended filed with the Securities and Exchange Commission. Results for the
interim period presented are not necessarily indicative of results to be
expected for the entire year.
2. ACQUISITIONS AND ACQUISITION-RELATED AND RESTRUCTURING CHARGES
Effective March 1998, the Company acquired certain assets and assumed certain
liabilities of Walter Karl, Inc. (Walter Karl), a national direct marketing
service firm that provides list management, list brokerage, database marketing
and direct marketing services to a wide array of customers. Total consideration
for the acquisition was approximately $18.4 million in cash, funded using a
revolving credit facility (See Note 3). The acquisition has been accounted for
under the purchase method of accounting. As part of the acquisition, the Company
performed an evaluation analysis and recorded acquisition-related charges of
$9.2 million for the write-off of purchased in-process research and development
costs which related to projects that had not met technological feasibility.
Intangibles and goodwill recorded as part of the purchase included goodwill of
$13.0 million (to be amortized over 15 years), core technology of $7.0 million
(to be amortized over 8 years), tradenames and customer base of $6.4 million (to
be amortized over 15 years), and $0.8 million of other intangibles (to be
amortized over 15 years).
In addition to the write-off of purchased in-process research and development
costs of $9.2 million previously described, included in acquisition-related and
restructuring charges in the accompanying consolidated statement of operations
during the first quarter of 1998 are: $2.6 million of costs associated with the
Company's bid to acquire Metromail Corporation, $0.7 million associated with the
Company's offering to sell Class A Common Stock which was not completed, and
$1.4 million for restructuring costs related to the Company's compilation and
sales activities for new businesses. The $1.4 million of restructuring costs is
comprised of $0.6 million for severance pay, $0.3 million for lease termination
costs, and $0.5 million for the abandonment of certain assets. The
restructuring, including recording the payments and writedowns described, is
anticipated to be completed by December 31, 1998.
Not included in the first quarter's results is the unrealized gain on the
Company's investment in Metromail Corporation's common stock, estimated to be
approximately $17 million. It is anticipated that this gain will be realized
during the second quarter of 1998 upon the completion of the tender offer for
Metromail Corporation by Great Universal Stores P.L.C.
3. REVOLVING CREDIT AGREEMENT
The Company maintains an unsecured $100 million Credit Facility with First Union
National Bank of North Carolina ("FUNB"). At March 31, 1998, total borrowings
under this facility were $97.0 million. Interest expense on the facility, which
is currently based on LIBOR plus 0.50% based on the Company's funded debt ratio,
was approximately $1.2 million for the three months ended March 31, 1998. As a
result of the acquisition of Walter Karl in March 1998, the Company would have
violated the minimum tangible net worth debt covenant restriction of the Credit
Facility. Concurrent with the acquisition, the Company entered into a waiver
agreement with FUNB and the syndicate lenders waiving, for an interim period of
time, the minimum tangible net worth restriction thereby permitting the
acquisition of Walter Karl.
6
<PAGE> 8
4. EARNINGS PER SHARE INFORMATION
The following data show the amounts used in computing earnings per share and
the effect on the weighted average number of shares of dilutive potential common
stock. Options on 1.3 million and 0.9 million shares of common stock were not
included in computing diluted earnings per share for the first quarter of 1998
and 1997, respectively, because their effects were antidilutive.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
---------------------------
MARCH 31, MARCH 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Weighted average number of shares outstanding
used in basic EPS .............................. 49,395 46,412
Net additional common equivalent shares
outstanding after assumed exercise of stock
options .......................................... -- --
------------ ------------
Weighted average number of shares outstanding
used in diluted EPS .............................. 49,395 46,412
============ ============
</TABLE>
5. CHANGE IN ACCOUNTING POLICIES
In 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement is effective for fiscal
years beginning after December 15, 1997, which will expand disclosures made by
the Company and will have no impact on consolidated financial position, results
of operations or cash flows.
In 1998, the Accounting Standards Committee issued Statement of Accounting
Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which is effective for fiscal years
beginning after December 15, 1998. The SOP provides guidance on when costs
incurred for internal-use computer software are and are not capitalized, and on
the accounting for such software that is marketed. The Company plans to adopt
the provisions of this SOP in 1998 and the adoption is not expected to have an
impact on consolidated financial position, results of operations or cash flows.
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Reclassification of
financial statements for earlier periods provided for comparative purposes is
required. The following is a reconciliation of net loss per the accompanying
consolidated statements of operations to comprehensive income (loss) for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
----------------------------
MARCH 31, MARCH 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net loss ....................................... $ (6,440) $ (47,196)
Other comprehensive income (loss):
Unrealized gain (loss) from investments:
Unrealized holding gains (losses) arising
during the period, net of income taxes of
$6,069 and $189, respectively ............. 9,902 (309)
Reclassification adjustment for net (gains)
losses included in net income, net of
income taxes of $18 and $0, respectively .. 32 --
------------ ------------
Net unrealized gain from investments ........ 9,934 (309)
------------ ------------
Other comprehensive income .................. 9,934 (309)
------------ ------------
Comprehensive income (loss) .................... $ 3,494 $ (47,505)
============ ============
</TABLE>
6. CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. Management believes
that any resulting liability should not materially affect the Company's
financial position, results of operations, or cash flows. See also Part II, Item
1.
7
<PAGE> 9
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading provider of business and consumer marketing information
and data processing services. The Company's products and services help its
clients generate new customers more effectively at lower cost. The Company's key
assets include a proprietary database of over 11 million businesses and a
consumer database of over 113 million households and 180 million individuals in
the United States and Canada, which the Company believes are among the most
comprehensive and accurate available. The Company leverages these key assets by
selling a broad range of marketing information products and data processing
services through targeted distribution channels primarily to small and medium
size businesses and also to consumers and large corporations.
This discussion and analysis contains forward-looking statements, including
without limitations statements in the discussion of net sales, database and
production costs and liquidity and capital resources, within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933, which are subject to the "safe harbor" created by those
sections. The Company's actual future results could differ materially from those
projected in the forward-looking statements. Some factors which could cause
future actual results to differ materially from the company's recent results or
those projected in the forward-looking statements are described in "Factors
Affecting Operating Results" below. The Company assumes no obligation to update
the forward-looking statement or such factors.
8
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's consolidated statement of operations data expressed as a
percentage of net sales, and selected other financial data expressed as
designated within the table:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
---------------------------
MARCH 31,
CONSOLIDATED STATEMENT OF OPERATIONS DATA: ---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net sales ............................................................ 100% 100%
Costs and expenses:
Database and production costs ...................................... 28 27
Selling, general and administrative ................................ 42 43
Depreciation and amortization ...................................... 12 15
Acquisition-related and restructuring charges ...................... 25 124
---------- ----------
Total costs and expenses ........................................ 107 209
---------- ----------
Operating loss ....................................................... (7) (109)
Other income (expense), net .......................................... (1) --
---------- ----------
Loss before income taxes ............................................. (8) (109)
Income taxes ......................................................... 4 4
---------- ----------
Net income (loss) .................................................... (12)% (113)%
========== ==========
OTHER DATA:
SALES BY PRODUCT GROUP AS A PERCENTAGE OF NET SALES:
Sales Lead Generation Products ................................ 64% 76%
Data Processing Services ...................................... 23 12
Consumer CD-ROM Products ...................................... 13 12
---------- ----------
Total ......................................................... 100% 100%
========== ==========
Earnings before, interest, taxes, depreciation and amortization
("EBITDA"), as adjusted (1) .......................................... $ 16,581 $ 12,547
========== ==========
</TABLE>
(1) "EBITDA, as adjusted" is defined as operating income (loss) adjusted to
exclude depreciation, amortization of intangible assets, net interest expense,
income taxes and acquisition-related and restructuring charges. EBITDA is
presented because it is a widely accepted indicator of a company's ability to
incur and service debt. However, EBITDA, as adjusted, does not purport to
represent cash provided by operating activities as reflected in the Company's
consolidated statements of cash flows, is not a measure of financial performance
under generally accepted accounting principles ("GAAP") and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP. Also, the measure of EBITDA, as adjusted, may not be
comparable to similar measures reported by other companies.
9
<PAGE> 11
FIRST QUARTER 1998 COMPARED TO FIRST QUARTER 1997
Net Sales. Net sales for the quarter ended March 31, 1998 were $55.4
million, a 32% increase from $42.0 million for the same period in 1997. Net
sales of sales lead generation products for the first quarter of 1998 were $35.7
million, an 11% increase from $32.1 million in the first quarter of 1997. Net
sales of data processing services for the first quarter of 1998 were $12.6
million, a 152% increase from $5.0 million for the same period in 1997. Net
sales of consumer CD-ROM products for the first quarter of 1998 were $7.1
million, a 45% increase from $4.9 million for the same period in 1997.
Factors contributing to the increase in net sales include: the increase in
the number of sales representatives from 871 as of March 31, 1997 to 1,069 as of
March 31, 1998; the enhancement of existing and development of new sales lead
generation and consumer CD-ROM products; the increase in the number of mailing
pieces mailed from 6.1 million during the first quarter of 1997 to 8.9 million
during the same period of 1998; the increase in the amount of direct mail
advertising costs from $2.9 million during the first quarter of 1997 to $3.8
million during the same period of 1998; the acquisitions of Pro CD, Inc. in
August 1997 and Walter Karl, Inc. in March 1998, and the acquisition of the
Database America Companies ("DBA") in February 1997, in which the Company
recorded the results of operations for DBA (which includes the majority of the
Company's data processing services) for only two months during the first quarter
of 1997.
Database and Production Costs. Database and production costs for the first
quarter of 1998 were $15.4 million, a 35% increase from $11.4 million for the
first quarter of 1997. These costs constituted 28% of net sales for the period
ended March 31, 1998 and 27% of net sales for the same period in 1997. Since the
first quarter of 1997, database and production costs have increased as a
percentage of sales as a result of higher costs associated with data processing
services and CD-ROM production. To the extent that data processing services and
CD-ROM sales constitute a greater percentage of net sales, the Company expects
database and production costs to increase as a percentage of sales in the
future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first quarter of 1998 were $23.4 million, a 30%
increase from $18.0 million for the first quarter of 1997. These expenses
constituted 42% of net sales in the period ended March 31, 1998 and 43% of net
sales in the same period in 1997. Since the first quarter of 1997, selling,
general and administrative expenses as a percentage of net sales has decreased
due to the overall increase in the sales of data processing services and CD-ROM
products, which bear a slightly lower selling, general and administrative cost
margin than the same margin associated with the net sales of sales lead
generation products. This decrease was partially offset by the increase in
selling and marketing activities.
10
<PAGE> 12
Depreciation and Amortization Expenses. Depreciation and amortization
expenses for the first quarter of 1998 were $6.8 million, as compared to $6.4
million for the same period of 1997. These expenses constituted 12% of net sales
in 1998, and 15% of net sales in 1997. Amortization on acquired database costs
and purchased data processing software associated with the acquisition of the
Database America Companies in February 1997 totaled $2.8 million for the period
ended March 31, 1998, and $3.9 million for the period ended March 31, 1997. The
decrease in amortization on acquired database costs and purchased data
processing software of $1.1 million was more than offset by additional
depreciation on property and equipment additions and amortization of intangibles
for the acquisitions of Pro CD, Inc. in August 1997 and Walter Karl, Inc. in
March 1998.
Acquisition-Related and Restructuring Charges. As part of the acquisition of
Walter Karl, Inc. in March 1998, the Company recorded a charge of $9.2 million
during the first quarter of 1998 for the write-off acquired in-process research
and development costs. Also included in acquisition-related and restructuring
charges for the first quarter of 1998 are $2.6 million of costs associated with
the Company's bid to acquire Metromail Corporation, $0.7 million associated with
the Company's offering to sell Class A Common Stock which was not completed, and
$1.4 million for restructuring costs related to the Company's compilation and
sales activities for new businesses. These acquisition-related and restructuring
charges totaled $13.9 million, and represented 25% of net sales during the first
quarter of 1998. As part of the acquisition of the Database America Companies in
February 1997, the Company recorded charges totaling $51.8 million, or 124% of
net sales, during the first quarter of 1997 for the write-off of acquired
in-process research and development costs as well as other related integration
and organizational restructuring costs.
Operating Income (Loss). As a result of the factors previously described,
the Company had an operating loss of $(4.1) million, or (7)% of net sales in
1998, as compared to operating loss of $(45.6) million, or (109)% of net sales
in 1997. Excluding the effect of the amortization on acquired database costs and
purchased data processing software and acquisition-related and restructuring
charges previously described, the Company would have had operating income of
$12.5 million, or 23% of net sales, in 1998, and operating income of $10.1
million, or 24% of net sales, in 1997.
Other Income (Expense), Net. Other income (expense), net for 1998 was $(0.3)
million, as compared to $0.04 million in 1997. This decrease was primarily
attributable to interest expense incurred on the Company's unsecured revolving
line of credit, of which $97.0 million was outstanding at March 31, 1998. The
Company had $60.0 million in outstanding borrowings under the same credit
facility at March 31, 1997.
Income Taxes. A provision for income taxes of $2.1 million and $1.6 million
was recorded for the first quarter of 1998 and 1997, respectively. Acquisition-
related charges of $9.2 million and $49.2 million were included in taxable
income during the first quarter of 1998 and 1997, respectively. The provision
for these periods also reflects the inclusion of amortization on certain
intangibles in taxable income not deductible for tax purposes.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA"),
As Adjusted. Excluding the effect of the acquisition-related and restructuring
charges previously described, the Company would have had an EBITDA of $16.6
million, or 30% of net sales during the first quarter of 1998, and an EBITDA of
$12.5 million, or 30% of net sales during the same period of 1997.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $14.5 million and marketable securities with a fair
market value of $40.8 million, which includes an unrealized gain of
approximately $16.5 million on the Company's investment in Metromail
Corporation's common stock. As of March 31, 1998, $97.0 million of the Company's
$100.0 million revolving credit facility had been drawn upon, and the Company
had working capital of $66.1 million.
Net cash provided by operating activities during the first quarter of 1998
totaled $9.0 million. The Company spent approximately $3.0 million related to
property additions during the same period. The Company is building a new
facility for the consumer and business database compilation division in
Papillion, Nebraska, with an estimated cost of $8.0 million, which is
anticipated to be completed in mid-1998. The Company is also building a new
sales center and data processing services facility in Montebello, New York, with
an estimated cost of $12.0 million, which is presently anticipated to be
completed during 1999.
The Company paid approximately $18.4 million in cash during the first
quarter of 1998 in connection with the acquisition of Walter Karl, Inc.
Not included in the first quarter's results is the unrealized gain on the
Company's investment in Metromail Corporation's common stock, estimated to be
approximately $16.5 million. It is anticipated that this gain will be realized
during the second quarter of 1998 upon the completion of the acquisition of
Metromail Corporation by Great Universal Stores P.L.C.
The Company believes that its existing sources of liquidity and cash
generated from operations, assuming no major acquisitions, will satisfy the
Company's projected working capital and other cash requirements for at least the
next 12 months. To the extent the Company experiences growth in the future, the
Company anticipates that its operating and investing activities may use cash.
Any such future growth and any acquisitions of other technologies, products or
companies may require the Company to obtain additional equity or debt financing,
which may not be available or may be dilutive.
12
<PAGE> 14
FACTORS THAT MAY AFFECT OPERATING RESULTS
INTEGRATION OF RECENT AND FUTURE ACQUISITIONS
Since mid-1996, the Company has completed seven acquisitions, including
the August 1996 acquisition of Digital Directory Assistance, the November 1996
merger with County Data Corporation and acquisition of Marketing Data Systems,
the December 1996 acquisition of BJ Hunter, the February 1997 merger with
Database America ("DBA"), the August 1997 acquisition of Pro CD, and the March
1998 acquisition of Walter Karl. The Company also made a number of other
acquisitions in prior periods. The Company recently attempted to acquire
Metromail Corporation for approximately $850 million, including assumption of
debt, and may in the future evaluate other acquisitions of this magnitude. The
Company's strategy includes continued growth through acquisitions of
complementary products, technologies or businesses, which, if implemented, may
result in the diversion of management's attention from the day-to-day operations
of the Company's business and may include numerous other risks, including
difficulties in the integration of operations, databases, products and
personnel, difficulty in applying the Company's internal controls to acquired
businesses and particular problems, liabilities or contingencies related to the
businesses being acquired. To the extent that efforts to integrate recent or
future acquisitions fail, there could be a material adverse effect on the
Company's business, financial condition and results of operations. While the
Company has not made any binding commitments with respect to any particular
future acquisitions, the Company frequently evaluates the strategic
opportunities available to it and intends to aggressively pursue opportunities
that it believes fit its business strategy.
RECENT ADDITIONS TO SENIOR MANAGEMENT
The Company has experienced rapid growth, particularly as a result of
its recent acquisitions, and believes that the hiring and retention of senior
management will be essential to the Company's ability to manage growth
successfully. In 1996 and 1997, the lack of senior management resources resulted
in a few key individuals taking on multiple roles and responsibilities in the
Company, which in turn placed a significant strain on the Company's senior
management. While the Company has filled many key management positions since the
beginning of 1997, there can be no assurance that the Company will be successful
in attracting and retaining senior management personnel in the future.
The Company hired Scott Dahnke as its Chief Executive Officer in
October 1997, Steven Purcell as its Chief Financial Officer in April 1997,
Gregory Back as its Executive Vice President of Corporate Planning and Business
Development, Joseph Szczepaniak as the President of the Company's Consumer
CD-ROM division and Kevin Hall as Senior Vice President of Special Projects in
October 1997 and Rick Puckett as its Corporate Controller in September 1997.
Messrs. Purcell, Szczepaniak and Puckett had no prior experience with the
Company. Messrs. Dahnke, Back and Hall had served as consultants to the Company
since May 1997, but did not have experience with the day-to-day management of
the Company. This new management team has limited experience working together or
working with the Company's other senior management and personnel. Failure of the
new management team to manage growth, work together or work effectively with the
Company's other senior management could result in disruptions in operations or
the departure of key personnel, which in turn could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company's founder and chairman of the Board, Vinod Gupta, expects
to remain an active chairman of the Board; however, Mr. Gupta may be offered an
appointed position with the Federal Government. If such an appointment is
offered to and accepted by Mr. Gupta, Mr. Gupta will be required to resign as an
employee and director of the Company but he will not be required to divest
himself of his shares in the Company.
13
<PAGE> 15
FLUCTUATIONS IN OPERATING RESULTS
The Company believes that future operating results will be subject to
quarterly and annual fluctuations, and that long term growth will depend upon
the Company's ability to expand its present business and complete strategic
acquisitions. The Company's net sales on a quarterly basis can be affected by
typically seasonal characteristics and certain other factors. For example, the
Company experiences higher revenue from its sales leads products in the fall of
each year due to increases in direct marketing by the Company's clients in the
fourth quarter of each year. In addition, the Company typically experiences
increases in revenue in the two months following introduction of new editions of
its consumer CD-ROM products. Revenue from sales lead generation products is
generally lower in the summer due to decreased direct marketing activity of the
Company's customers during that time. The Company's operating expenses are
determined in part based on the Company's expectations of future revenue growth
and are substantially fixed. As a result, unexpected changes in revenue levels
will have a disproportionate effect on operating performance in any given
period. Long term growth will be materially adversely affected if the Company
fails to broaden its existing product and service offerings, increase sales of
products and services, or expand into new markets, or fails to complete
acquisitions or successfully integrate acquired operations into its existing
operations. To the extent there are fluctuations in operating results or the
Company fails to achieve long-term internal growth or growth through
acquisitions, there could be a material adverse affect on the Company's
business, financial condition or results of operations.
RISK OF PRODUCT RETURNS
The Company has agreements that allow retailers certain rights to
return the Company's consumer CD-ROM products. Accordingly, the Company is
exposed to the risk of product returns from retailers and distributors,
particularly in the case of products sold shortly before introduction of the
next year's edition of the same product. Consumers may also seek to return
consumer CD-ROM products, although historically returns from consumers have been
low. At the time of product sales, the Company establishes reserves based on
estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, seasonal variations in
product returns, distributor and retailer inventories of the Company's products
and other factors. Actual product returns could differ from estimates, and
product returns that exceed the Company's reserves could adversely affect the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH CHANGES IN TECHNOLOGY
Advances in information technology may result in changing customer
preferences for products and product delivery formats in the business and
consumer marketing information industry. The Company believes it is presently
the leading provider of marketing information on CD-ROM. However, the Company
believes that if customers increasingly look to the Internet, digital video disk
("DVD") or other new technology for information resources, the market for
business and consumer information on CD-ROM may contract and prices for CD-ROM
products may have to decrease or CD-ROM products may become obsolete. The
Company plans to offer and sell its products and services increasingly over the
Internet and to introduce products on DVD. Failure of the Company to
successfully sell its products over the Internet or on DVD or to successfully
introduce products that take advantage of other technological changes may thus
have a material adverse effect on the Company's business, results of operations
and financial condition.
14
<PAGE> 16
COMPETITION
The business and consumer marketing information industry is highly
competitive. Many of the Company's principal or potential future competitors are
much larger than the Company and have much larger capital bases from which to
develop and compete with the Company. The Company faces increasing competition
in consumer sales lead generation products and data processing services from
Great Universal Stores, P.L.C. ("GUS") as a result of GUS' recent acquisitions
of Experian, Direct Marketing Technologies and Metromail. In business sales lead
generation products, the Company faces competition from Dun's Marketing Services
("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information
compiled from Dun & Bradstreet's credit database, tends to focus on marketing to
large companies. In business directory publishing, the Company competes
primarily with Regional Bell Operating Companies, Donnelley Marketing and many
smaller, regional directory publishers. In consumer sales lead generation
products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk,
Trans Union Experian and Equifax, both directly and through reseller networks.
In data processing services, the Company competes with Acxiom, May & Speh,
Direct Marketing Technologies and Harte-Hanks Data Technologies. In consumer
products, the Company competes with certain smaller producers of CD-ROM
products. In addition, the rapid expansion of the Internet creates a substantial
new channel for distributing business information to the market, and a new
avenue for future entrants to the business and consumer marketing information
industry. There is no guarantee that the Company will be successful in this new
market.
LOSS OF DATA CENTERS
The Company's business depends on computer systems contained in the
Company's data centers located in Omaha, Nebraska, Carter Lake, Iowa and
Montvale, New Jersey. A fire or other disaster affecting any of the Company's
data centers could disable the Company's computer systems. The Company recently
experienced a fire at its facility in Carter Lake, Iowa, although damage was not
extensive. Any significant future damage to any of the data centers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company regards its databases and software as proprietary. The
Company's databases are copyrighted, and the Company depends on trade secret and
non-disclosure safeguards for protection of its software. The Company
distributes its products under agreements that grant customers a license to use
the Company's products in the ordinary course of their businesses and contain
terms and conditions prohibiting the unauthorized reproduction of the Company's
products. In addition, the Company generally enters into confidentiality
agreements with its management and programming staff and limits access to and
distribution of its proprietary information. There can be no assurance that the
foregoing measures will be adequate to protect the Company's intellectual
property.
15
<PAGE> 17
DIRECT MARKETING REGULATION AND DEPENDENCE UPON MAIL CARRIERS
The Company and many of its customers engage in direct marketing.
Certain data and services provided by the Company are subject to regulation by
federal, state and local authorities. In addition, growing concerns about
individual privacy and the collection, distribution and use of information about
individuals have led to self-regulation of such practices by the direct
marketing industry through guidelines suggested by the Direct Marketing
Association and to increased federal and state regulation. Compliance with
existing federal, state and local laws and regulations and industry
self-regulation has not to date had a material adverse effect on the Company's
business, financial condition or results of operations. Nonetheless, federal,
state and local laws and regulations designed to protect the public from the
misuse of personal information in the marketplace and adverse publicity or
potential litigation concerning the commercial use of such information may
increasingly affect the operations of the Company, which could result in
substantial regulatory compliance or litigation expense or a loss of revenue.
Certain proposed federal legislation could also create proprietary rights in
certain "white pages" information that is presently in the public domain, which
could in turn increase the cost to the Company of acquiring data or disrupt its
ability to do so. The direct mail industry depends and will continue to depend
upon the services of the United States Postal Service and other private mail
carriers. Any modification by the United States Postal Service of its rate
structure, any increase in public or private postal rates generally or any
disruption in the availability of public or private postal services could have a
negative impact on the demand for business information, direct mail activities
and the cost of the Company's direct mail activities.
FINANCIAL AND ACCOUNTING ISSUES RELATED TO ACQUISITIONS
In connection with the acquisitions completed since mid-1996, the
Company issued approximately 3.7 million shares of Class A Common Stock and 3.7
million shares of Class B Common Stock, and paid approximately $145.5 million in
cash. The issuance of stock in these or future transactions may be dilutive to
existing stockholders to the extent that earnings of the acquired companies do
not offset the additional number of shares outstanding. In connection with the
acquisitions of DBA, Pro CD and Walter Karl, the Company incurred approximately
$97.0 million in debt. In connection with future acquisitions, the Company may
incur substantial amounts of debt. Servicing such debt may result in decreases
in earnings per share, and the inability on the part of the Company to service
such debt would result in a material adverse effect on the Company's business,
financial condition and results of operations. Finally, the Company expects that
future acquisitions will generally be required to be accounted for using the
purchase method. As a result of such accounting treatment, the Company may be
required to take charges to operations or to amortize goodwill in connection
with future acquisitions. As a result of acquisitions completed since mid-1996,
the Company was required to take significant acquisition-related charges to
operations and will be required to amortize goodwill and other intangibles over
periods of 1 to 15 years. The acquisition-related charges and amortization of
goodwill and other intangibles have had and will continue to have an adverse
effect on net income. To the extent that future acquisitions result in
substantial charges to operations, incurrence of debt and amortization of
goodwill and other intangibles, such acquisitions could have an adverse effect
on the Company's net income, earnings per share and overall financial condition.
VOLATILITY AND UNCERTAINTIES WITH RESPECT TO STOCK PRICE
As with other companies that have experienced rapid growth, the Company
has experienced and is likely to continue to experience substantial volatility
in its stock price. Factors such as announcements by either the Company or its
competitors of new products or services or of changes in product or service
pricing policies, quarterly fluctuations in the Company's operating results,
announcements of technical innovations, announcements relating to strategic
relationships or acquisitions by the Company or its competitors, changes in
earnings estimates, opinions or ratings by analysts, and general market
conditions or market conditions within the business and consumer marketing
information industry, among other factors, may have significant impact on the
Company's stock price. Should the Company fail to introduce, enhance or
integrate products or services on the schedules expected, its stock price could
be adversely affected. It is likely that in some future quarter the Company will
fail to achieve anticipated operating results, and this failure could have a
material adverse effect on the Company's stock price. In addition, the Company's
Class A Common Stock and Class B Common Stock have been trading for a very short
time. While the Company expects the Class A Common Stock and Class B Common
Stock prices to remain roughly equal in most market conditions, the difference
in rights of the two classes, coupled with the general volatility of the
Company's stock price described above, could cause the Class A Common Stock and
Class B Common Stock to trade at different prices. In the event of a tender
offer or other unsolicited attempt to acquire the Company, shares of Class B
Common Stock would likely trade at a substantial premium to shares of Class A
Common Stock as a result of the disparity of voting rights. Future issuances of
both Class A Common Stock and Class B Common Stock could effect the price for
either or both classes of Common Stock. For the foregoing reasons, the price for
the Company's Class A Common Stock may be subject to substantial fluctuation.
16
<PAGE> 18
AMERICAN BUSINESS INFORMATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 1998
PART II
OTHER INFORMATION
17
<PAGE> 19
AMERICAN BUSINESS INFORMATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 1998
PART II
ITEM 1. LEGAL PROCEEDINGS
On March 17, 1998, the Company filed suit in Delaware court to enjoin a
merger agreement whereby Great Universal Stores, PLC ("GUS") would acquire
Metromail Corporation ("Metromail") for $31.50 per share. On March 20, 1998, GUS
filed a counterclaim against the Company alleging, among other things, that ABI
tortiously interfered with the Merger Agreement and Parent's prospective
business relations with Metromail. The Counterclaim also alleges that the
Company breached a confidentiality agreement entered into by the Company with
Metromail's financial advisor and of which GUS is a third party beneficiary. As
relief, the GUS claim seeks, among other things, injunctive relief and actual,
punitive and other damages in an amount to be determined at trial, estimated by
GUS to exceed $500 million, plus fees and expenses. On March 27, 1998, the
Delaware Chancery Court denied the Company's motion for a preliminary injunction
to block the GUS Merger Agreement. The Company does not believe that the GUS
counterclaim has merit and will vigorously defend the suit, however there can be
no assurance that this matter will be resolved without a material adverse affect
on the Company's financial condition. On March 30, 1998, the Metromail Board of
Directors accepted a proposal to be acquired by GUS for $34.50 per share.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Report on Form 8-K
On February 24, 1998, the Company filed a Current Report on
Form 8-K related to the acquisition of Walter Karl, Inc.
18
<PAGE> 20
S I G N A T U R E S
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.
AMERICAN BUSINESS INFORMATION, INC.
Date: May 15, 1998 /S/ STEVEN PURCELL
---------------------- -----------------------------------------
Steven Purcell, Chief Financial Officer
(principal financial officer)
19
<PAGE> 21
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000879437
<NAME> AMERICAN BUSINESS INFORMATION, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,499
<SECURITIES> 40,803
<RECEIVABLES> 55,544
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 119,218
<PP&E> 49,142
<DEPRECIATION> 19,904
<TOTAL-ASSETS> 248,128
<CURRENT-LIABILITIES> 53,139
<BONDS> 100,338
0
0
<COMMON> 124
<OTHER-SE> 86,604
<TOTAL-LIABILITY-AND-EQUITY> 248,128
<SALES> 0
<TOTAL-REVENUES> 55,380
<CGS> 0
<TOTAL-COSTS> 59,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,279
<INCOME-PRETAX> (4,382)
<INCOME-TAX> 2,058
<INCOME-CONTINUING> (6,440)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (6,440)
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