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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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 1-8260
PRIMARK CORPORATION
(Exact name of registrant as specified in its charter)
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
(Address of principal executive offices) (Zip Code)
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.
Yes [X] No [ ]
Number of shares outstanding of each of the registrant's classes of common
stock, as of October 30, 1998:
Common Stock, without par value: 21,240,905
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PRIMARK CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
COVER...................................................................... 1
INDEX...................................................................... 2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition............... 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................. 15
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURE................................................................. 16
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PART I -- FINANCIAL INFORMATION
PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents, at cost (which approximates
market value).......................................... $ 30,022 $ 12,780
Billed receivables less allowance for doubtful accounts
of $2,833 and $2,756, respectively..................... 89,731 70,084
Unbilled and other receivables.......................... 11,603 9,546
Federal and state income tax benefit.................... -- 21,304
Other current assets.................................... 27,690 24,036
Net assets of discontinued operations (Note 2).......... 13,198 197,330
-------- ----------
172,244 335,080
-------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Goodwill, less accumulated amortization of $77,021 and
$41,834, respectively.................................. 517,547 556,737
Capitalized data and other intangible assets, less
accumulated amortization of $27,487 and $20,710,
respectively........................................... 39,360 47,512
Capitalized software, less accumulated amortization of
$16,168 and $20,162, respectively...................... 30,077 48,645
Other................................................... 4,454 8,980
-------- ----------
591,438 661,874
-------- ----------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Computer equipment...................................... 59,374 63,169
Leasehold improvements.................................. 16,594 17,631
Other................................................... 26,530 9,806
-------- ----------
102,498 90,606
Less-accumulated depreciation........................... (54,852) (43,751)
-------- ----------
47,646 46,855
-------- ----------
$811,328 $1,043,809
======== ==========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable........................................... $ 93,565 $ 27,602
Accounts Payable........................................ 14,592 14,125
Accrued employee payroll and benefits................... 26,849 24,585
Taxes payable........................................... 61,222 10,717
Deferred income......................................... 78,366 69,931
Current portion of long-term debt, including capital
lease obligations...................................... 817 11,301
Other accrued expenses.................................. 58,253 43,814
-------- ----------
333,664 202,075
-------- ----------
LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt, including capital lease obligations..... 8,842 331,260
Deferred income taxes................................... 16,261 21,133
Other................................................... 15,740 18,370
-------- ----------
40,843 370,763
-------- ----------
Total liabilities.................................. 374,507 572,838
COMMITMENTS AND CONTINGENCIES (NOTE 8)
COMMON SHAREHOLDERS' EQUITY
Common stock and additional paid-in-capital............. 88,862 275,370
Retained earnings....................................... 350,454 198,658
Cumulative foreign translation adjustment............... (2,495) (3,057)
-------- ----------
Total common shareholders' equity.................. 436,821 470,971
-------- ----------
Total liabilities and shareholders' equity......... $811,328 $1,043,809
======== ==========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
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PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, SEPT 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
OPERATING REVENUES....................................... $108,534 $99,113 $321,819 $294,726
OPERATING EXPENSES
Cost of services..................................... 45,020 37,361 129,221 116,783
Selling, general and administrative.................. 40,284 37,418 120,933 115,957
Depreciation......................................... 4,328 4,306 12,831 13,187
Amortization of goodwill............................. 3,820 3,957 11,755 11,823
Amortization of other intangible assets.............. 2,991 4,233 12,164 12,108
Restructuring Charge................................. -- -- 68,677 6,800
-------- ------- -------- --------
Total operating expenses........................ 96,443 87,275 355,581 276,658
-------- ------- -------- --------
Operating income................................ 12,091 11,838 (33,762) 18,068
-------- ------- -------- --------
OTHER INCOME AND (DEDUCTIONS)
Interest expense..................................... (2,064) (4,090) (7,618) (11,805)
Foreign currency gain (loss)......................... 636 (12) 996 2,325
Investment and other income (deductions) -- net...... (70) 288 1,840 (377)
-------- ------- -------- --------
Total other income and (deductions)............. (1,498) (3,814) (4,782) (9,857)
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES.... 10,593 8,024 (38,544) 8,211
INCOME TAX EXPENSE (BENEFIT)............................. 4,682 4,637 (100) 8,533
-------- ------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................ 5,911 3,387 (38,444) (322)
-------- ------- -------- --------
DISCONTINUED OPERATIONS
Discontinued operations, net of income tax
(benefit)/expense of $103,000, $(560,000),
$(700,000) and $(892,000) respectively............ 1,835 4,216 7,947 13,074
Gain on disposal of discontinued operations, net of
income tax expense of $7,683,000, $0, $108,735,000
and $0, respectively.............................. 14,189 -- 187,414 --
-------- ------- -------- --------
Total Discontinued Operations................... 16,024 4,216 195,361 13,074
-------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY LOSS......................... 21,935 7,603 156,917 12,752
EXTRAORDINARY ITEM-LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of income tax benefit of $3,614,000 and $1,379,000
respectively........................................... -- -- (5,121) (1,955)
-------- ------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK.................... $ 21,935 $ 7,603 $151,796 $ 10,797
======== ======= ======== ========
EARNINGS PER COMMON SHARE -- BASIC
Income from continuing operations.................... $ 0.27 $ 0.13 $ (1.52) $ (0.01)
Discontinued operations.............................. 0.73 0.16 7.71 0.49
Extraordinary item................................... -- -- (0.20) (0.07)
-------- ------- -------- --------
Total earnings per share........................ $ 0.99 $ 0.29 $ 5.99 $ 0.41
======== ======= ======== ========
EARNINGS PER COMMON SHARE -- ASSUMING DILUTION
Income from continuing operations.................... $ 0.26 $ 0.12 $ -- $ --
Discontinued operations.............................. 0.70 0.15 -- --
Extraordinary item................................... -- -- -- --
-------- ------- -------- --------
Total earnings per share........................ $ 0.96 $ 0.28 $ -- $ --
======== ======= ======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING
Basic................................................ 22,088 25,931 25,343 26,415
Effect of Dilutive Securities........................ 709 1,417 -- --
-------- ------- -------- --------
Diluted.............................................. 22,797 27,348 25,343 26,415
-------- ------- -------- --------
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
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PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPT 30, SEPT 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
Balance -- Beginning of period..................... $328,519 $182,137 $198,658 $178,943
Add -- Net Income.................................. 21,935 7,603 151,796 10,797
-------- -------- -------- --------
Balance -- End of period........................... $350,454 $189,740 $350,454 $189,740
======== ======== ======== ========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
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PRIMARK CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 151,796 $ 10,797
Adjustments to reconcile net income to net cash flows
from operating activities:
Discontinued operations................................ (7,947) (13,074)
Gain on Sale of subsidiary............................. (187,414)
Loss on extinguishment of intangible assets............ 60,650 18,749
Extraordinary loss on early extinguishment of debt..... 5,121 1,955
Cash provided by (contributed to) discontinued
operations............................................ (9,270) (9,149)
Depreciation and amortization.......................... 36,750 40,656
Other charges and credits -- net....................... (5,455) (5,549)
Changes in operating working capital, excluding the
effect of acquisitions:
Increase in billed, unbilled and other
receivables-net................................. (21,121) (5,028)
(Increase) decrease in other current assets....... (3,392) 4,482
Decrease (increase) in accounts payable........... 1,581 (6,427)
Increase in accrued payroll and benefits.......... 1,587 87
(Decrease) increase in income and other taxes
payable -- net.................................. 8,164 (5,745)
Increase in deferred income....................... 8,032 2,062
Increase in other current liabilities............. 13,228 4,596
---------- ----------
Net cash provided from operating
activities................................ 52,310 38,412
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of short-term notes payable................... 665,135 157,746
Repayment of short-term notes payable.................. (599,172) (154,795)
Issuance of long-term debt............................. -- 100,000
Repayment of long-term debt............................ (332,504) --
Common stock repurchased and retired................... (195,417) (26,633)
Common stock issuance.................................. 8,909 3,928
Debt issue costs and other............................. (939) (2,831)
Call Premium........................................... (4,900) --
---------- ----------
Net cash provided from financing
activities................................ (458,888) 77,415
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... (14,486) (17,576)
Capitalized software................................... (12,591) (14,121)
Purchase of subsidiaries -- net of acquired cash....... (4,826) (88,090)
Proceeds from sale of subsidiary....................... 502,000 --
Tax paid on sale of subsidiary......................... (43,000) --
Other -- net........................................... 171 1,087
Cash provided by (contributed to) discontinued
operations............................................ (3,495) (5,911)
---------- ----------
Net cash used for investing activities....... 423,773 (124,611)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 47 (344)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ 17,242 (9,128)
CASH AND CASH EQUIVALENTS, JANUARY 1,....................... 12,780 25,276
---------- ----------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30,.................... $ 30,022 $ 16,148
========== ==========
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
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PRIMARK CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 1997 Annual
Report on Form 10-K.
2. DISCONTINUED OPERATIONS
The accompanying consolidated financial statements reflect the operating
results of TASC and TIMCO separately from the Company's continuing operations
for all periods presented. 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 represents the net book value of the
Company's investment in TASC and TIMCO and consists principally of working
capital, fixed assets, goodwill and other non-current assets and liabilities.
A) Sale of TASC
On April 1, 1998, the Company completed the sale of TASC and its affiliated
weather information companies to Litton Industries for $432 million in cash plus
an estimated equity adjustment of $11.5 million. The equity adjustment is based
upon changes in TASC's consolidated equity account, less certain inter-company
transactions, from September 30, 1997 through the date of the closing. On July
27, 1998, Litton sent notification that it was contesting specific components of
the equity adjustment totaling $4.2 million. Both Litton and the Company are in
the process of establishing the protocol to resolve all disputed amounts.
The Company recorded a gain on the sale of $173.2 million which includes
the $11.5 million equity adjustment, transaction costs of $5.4 million, taxes of
$101.1 million and the net book value of TASC's assets. The cash, net of all
transaction costs and taxes, to be received by the Company from the foregoing
sale will be approximately $337.0 million.
B) Sale of TIMCO
On September 22, 1998, the Company completed the sale of all of the
outstanding common stock of its heavy aircraft maintenance unit, the Triad
International Maintenance Corporation (TIMCO), to Aviation Sales Maintenance,
Repair & Overhaul Company (AVS), a division of Aviation Sales Company. The
transaction was executed in accordance with a Stock Purchase Agreement dated
August 10, 1998 for a cash purchase price of $70 million. Pursuant to the Stock
Purchase Agreement, a working capital adjustment of $1.3 million, based upon
TIMCO's closing balance sheet as of September 22, 1998, has been recorded as a
receivable at September 30, 1998. The $1.3 million was received by wire in
November, 1998.
The Company recorded a gain on the sale of $14.2 million which includes the
$1.3 million working capital adjustment, transaction costs of $850,000, taxes of
$8.7 million and the net book value of TIMCO's assets. The cash, net of all
closing adjustments and taxes to be received by the Company from the foregoing
sale will be approximately $52.0 million.
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DISCONTINUED OPERATIONS
NINE MONTHS
QUARTER ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Income/(Loss)
TASC............................ $ -- $4,211 $3,755 $13,428
TIMCO........................... 1,835 5 4,192 (354)
------ ------ ------ -------
Total...................... $1,835 $4,216 $7,947 $13,074
------ ------ ------ -------
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
Net Assets
TASC............................ $11,500 $155,376
TIMCO........................... 1,698 41,954
------- --------
Total...................... $13,198 $197,330
======= ========
3. RESTRUCTURING AND INTEGRATION CHARGES
Effective June 1, 1998, the Company was reorganized in order to
strategically focus solely on its information services businesses. In connection
with this reorganization, the Company recorded a pre-tax charge of $77.4
million, of which $8.7 million is recorded as an Extraordinary Item (see
Refinancing Footnote) and the remaining $68.7 million is recorded within
operating expenses for direct and other reorganization related costs.
The 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 previously discussed, (iii) write-off of
$23.9 million of goodwill associated with software and data written off 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.
An additional $8.0 million of the restructuring charge relates primarily to
the integration of domestic and international sales offices and efficiencies
gained from technological advancements that will result in the phased reduction
of approximately 61 employees.
There was no utilization of the restructure accrual in the third quarter.
The remaining accrual is expected to be utilized within one year. Details of the
unutilized restructuring and integration costs as of September 30, 1998 are as
follows (000's):
SECOND QUARTER UTILIZED SEPTEMBER 30,
1998 PROVISION TO DATE 1998 PROVISION
-------------- -------- --------------
(IN THOUSANDS)
Abandonment of leased facilities,
including leasehold improvements...... $5,156 $ -- $5,156
Salaries and termination benefits....... 2,871 185 2,686
------ ---- ------
Total.............................. $8,027 $185 $7,842
====== ==== ======
Cash flow expenditures, net of tax recovery, will be funded by the
Company's cash flows from operating activities. The overall restructuring plan,
when fully implemented, will reduce amortization and other costs by over $7.0
million, net of tax, for each of the next several years. The 1997 restructuring
charges relating specifically to DAFSA and Disclosure have been fully utilized
in prior quarters.
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4. REFINANCING
On April 1, 1998, the Company amended the terms of its revolving credit
facility and term loan agreement. Under the terms of the revised agreement,
which became effective April 1, 1998, the Company used the proceeds from the
sale of TASC to (i) prepay all amounts outstanding on the Company's $112 million
senior callable bonds, including a 4.375% premium aggregating $4.9 million, (ii)
prepay $220 million of the Company's outstanding term loan together with accrued
interest thereon, and (iii) prepay approximately $500,000 of the Company's other
indebtedness.
In conjunction with the above, the Company replaced its outstanding $75
million credit facility with a $225 million revolving credit facility which
expires in 2002. Interest on the borrowings under the new revolving credit
facility is payable at rates ranging from 0.375% to 1.00% above the current
prevailing LIBOR rate of interest. Pursuant to the credit facility negotiations,
the Company incurred fees of $125,000 upon the sale of TASC and $325,000 for
increasing the amounts allowed to be drawn on the line for the repurchase of
Company shares as part of the "Dutch Auction" self-tender offer.
As a result of the prepayment of debt and amended terms of the revolving
credit facility, the Company wrote off the associated deferred financing costs,
and paid a call premium of $4.9 million related to the prepayment of the $112
million of senior callable bonds. This resulted in an extraordinary loss of $8.7
million, or $5.1 million on an after tax basis for the quarter ended June 30,
1998. As of September 30, 1998, $93,565,000 is outstanding under the revolving
credit facility.
5. REPURCHASE OF COMMON STOCK
On May 20, 1998, the Company announced a "Dutch Auction" self-tender offer,
which expired on June 17, 1998. The Company purchased 4,540,000 shares at $34
per share under this arrangement. Total cost of these shares was $154.6 million,
including legal and accounting fees. 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. As of September 30, 1998,
1,518,500 shares had been repurchased at a total cost of $40.8 million. On
October 2, 1998, the Company purchased additional 50,000 shares at a total cost
of $1,454,000. Year to date, the Company has purchased a total of 6,108,500
shares at a total cost of $196.6 million, representing approximately 22.5% of
its total outstanding common stock. On November 10, 1998, the Company announced
that the Board of Directors approved the expansion of the open market purchase
program by an additional 2,000,000 shares, bringing the total potential buyback
to 8,540,000 shares, or approximately 31% of the Company's total outstanding
before the "Dutch Auction." The Company is using proceeds from the sale of TASC
and TIMCO as well as its revolving credit facility to fund the common stock
repurchases.
6. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, Earnings Per Share, which became effective for fiscal years ending
after December 15, 1997. The prior years' earnings per share have been
retroactively restated in accordance with this statement. Basic earnings per
share was determined by dividing net income by the weighted average shares of
common stock outstanding during the year. Diluted earnings per share reflects
the dilution due to stock options based on the treasury stock method.
SFAS No. 128, states that if there is a loss from continuing operations, a
company should not include options and other potential common shares in the
denominator of a dilutive per-share computation even if including these
potential common shares in other dilutive per-share computations may be dilutive
to their comparable basic per-share amounts. Therefore, the "Earnings Per Common
Share -- Basic and Dilutive" included within the Company's Statements of Income
exclude the dilutive effect of options and other potential common shares for the
nine months ended September 30, 1998 and 1997, respectively.
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If options and other potential common shares were included, weighted
average common and common equivalent shares outstanding and the related dilutive
earnings per common share would have been as follows (in thousands except per
share amounts):
PRO-FORMA WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1998 1997
---- ----
Basic....................................................... 25,343 26,415
Effect of Dilutive Securities............................... 1,042 1,163
------ ------
Diluted..................................................... 26,385 27,578
------ ------
PRO-FORMA EARNINGS PER COMMON SHARE -- ASSUMING DILUTION BENEFIT
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------
1998 1997
---- ----
Income from continuing operations........................... $(1.46) $(0.01)
Discontinued operations..................................... 7.40 0.47
Extraordinary item.......................................... (0.19) (0.07)
------ ------
Total earnings per share............................... $ 5.75 $ 0.39
------ ------
7. NEWLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants (AICPA) Statements of
Positions (SOP) No. 97-2, "Software Revenue Recognition," and No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Adoption of these pronouncements did not have a material effect
on the reported results of operations or financial position.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which was issued by the Financial
Accounting Standards Board (FASB) in June of 1997. This standard requires
companies to report and display comprehensive income and its components in a
full set of general-purpose financial statements beginning with this year's
Annual Report on Form 10-K. The following table provides a reconciliation of net
income to comprehensive income.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Net Income.................................... $21,935 $ 7,603 $151,796 $10,797
Cumulative Translation Adjustment............. 1,239 4,694 562 2,328
Tax Benefit of Option Exercise................ 83 406 2,568 778
------- ------- -------- -------
Comprehensive Income.......................... $23,257 $12,703 $154,926 $13,903
Also in June of 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which will be applicable
beginning with this year's Annual Report on Form 10-K.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of
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the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the financial statements of
the Company.
8. CONTINGENCIES
There have been no other significant developments with respect to the
Company's contingent liabilities which were disclosed in the Company's 1997
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Primark reported net income of $21.9 million ($0.96 per share assuming
dilution) and 151.8 million ($5.99 per share) for the three and nine months
ended September 30, 1998, respectively. Net income for the three and nine months
ended September 30, 1997 was $7.6 million ($0.28 per share assuming dilution)
and $10.8 million ($0.41 per share). In accordance with SFAS No. 128, per share
calculations for the nine months ended September 30, 1998 and 1997 exclude the
impact of dilutive securities due to the loss from continuing operations
resulting from restructuring charges.
The five significant events which have affected net income for the year
have been the sale of TIMCO, the commercial impact of global economic and
financial market uncertainty, the sale of TASC, the recapitalization of the
Company using the proceeds from the sale of TASC, and the restructuring of the
Company. The sale of TIMCO and the commercial impact of recent financial market
uncertainty were third quarter events. The TIMCO sale was finalized on September
22, 1998 for $70 million resulting in an after tax gain of $14.2 million which
has been recorded to discontinued operations.
The beginning of the third quarter was somewhat stronger than the end, due
to the sharp drop in the financial markets in late August and the subsequent
volatility and uncertainty. Many of the Company's customers had large trading
losses and/or had made loans that became uncollectable and had to be written
off. These unfavorable circumstances have caused customers to announce layoffs
and cost controls to compensate for their lower earnings. As a result, the
Company's sales of new products, new subscriptions and one-time items to the
financial industry have softened and we expect this to continue through
year-end. Unfortunately, this slowdown occurs at the very time the Company is
experiencing higher expenses for new product development, rollout and support,
particularly Global Access Piranha, the Primark Information Optimizer and the
Primark/Dow Jones Equities Service. The uncertainty in financial markets has
affected more market segments than just the financial industry itself.
Accounting firms, law firms and consultants are big users of Primark's products,
especially material supplied by Disclosure. With fewer IPOs, secondary offerings
and high-yield debt issues, their business with the financial industry is down,
resulting in Primark doing less business with these specialized segments.
The September 30, 1998 net income year to date results reflects TASC as
part of discontinued operations. TASC was sold in the second quarter for $432
million in cash plus an estimated equity adjustment of $11.5 million. The equity
adjustment is based upon changes in TASC's consolidated equity account, less
certain inter-company transactions, from September 30, 1997 through the date of
the closing. On July 27, 1998, Litton sent notification that it was contesting
specific components of the equity adjustment totaling $4.2 million. Both Litton
and the Company are in the process of establishing the protocol to resolve all
disputed amounts.
The proceeds from the sale of TASC were used by the Company to repay $220
million of commercial bank debt and $112 million of senior notes in the second
quarter. The related unamortized deferred bank cost together with the call
premium on the senior notes was written off as an extraordinary loss totaling
$5.1 million, net of tax. Net income for the nine months ended September 30,
1997 includes the effect of a $2.0 million (after tax) extraordinary loss ($0.07
per share) for the write off of debt issue costs associated with prior debt that
was successfully refinanced. The Company instituted a corporate restructuring
plan to reflect
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the sale of TASC and position the Primark product lines in a more integrated
fashion to address market needs and opportunities. The restructuring plan,
including the extraordinary loss mentioned previously, resulted in a $77.4
million charge to operating income in the second quarter, and lowered net income
$59.8 million.
The Company had income from continuing operations of $5.9 million ($0.26
per share on a dilutive basis) for the three months ended September 30, 1998
compared to $3.4 million ($0.12 per share on a dilutive basis) for the same
period last year. When restructuring items are not included, for the nine months
ended September 30, 1998 the Company had $16.3 million of income from continuing
operations ($0.62 per share on a pro forma dilutive basis) compared to $5.9
million earned last year ($0.21 per share on a pro forma dilutive basis).
Including restructuring charges, the loss from continuing operations was $38.4
million ($1.52 per share, basic and diluted) and $0.3 million ($0.01 per share,
basic and diluted) for the nine months ended September 30, 1998 and 1997,
respectively.
Continuing Operations
The most important decision made by management in 1998 was to sell
unrelated businesses and to create more value from its information service
business by reorganizing the Company into three operating divisions. These three
divisions are the Primark Financial Information Division, the Primark Financial
Analytics Division, and the Primark Decision Information Division, plus the
supporting Primark Data Company. Primark can serve its customers better while
improving margins through this new structure.
The Primark Financial Information Division consists of the businesses of
Datastream/ICV, including Primark Investment Management Services, Disclosure,
and Worldscope. This Division accounts for approximately 70% of Primark's
consolidated revenues and is focused on developing "enterprise wide" products
and services for major financial institutions on a global basis. It also has
responsibility for all real-time and transactional products, investment
accounting, and the reference and consumer markets. This division grew revenues
6.5% and 4.8% for the three and nine months ended September 30, 1998,
respectively. The Primark Financial Information Division has experienced
double-digit percentage revenue growth on a year to date basis across all
product groups with the exception of Disclosure's traditional paper document and
CD-ROM business. While currency had little impact on the three months ended
September 30, there were adverse currency effects on year to date operating
income, primarily for the Datastream/ICV product lines. Offsetting the negative
impact of currency movements was a gain on currency transactions of $1.0 million
for the nine months ended September 30, 1998. Datastream/ICV's real time and
transactional products, lead by Topic 3, are the leading providers of on-line
equity trading products in the UK with a market share of approximately 69%. The
Topic 3 product line has grown 24.5% and 29.4% for the quarter and year to date,
respectively, exclusive of the effect of currency. The Disclosure product lines
have exhibited growth in the electronic product revenues of 25.4% and 23.6% for
the three and nine month periods, respectively. This increase, however, was more
than offset by decreases in Disclosure's traditional paper document and CD ROM
business where revenue of $11.6 million were down by 17.3% and 18.7% for the
three and nine months ended September 30, 1998, respectively. Management
believes that new products to be released in the latter part of 1998 through the
first half of 1999, together with Disclosure's legacy paper document and CD-ROM
business stabilizing, should result in improved growth and profitability
prospects for this Division.
The Primark Financial Analytics Division accounts for approximately 18% of
Primark's consolidated revenues and includes the businesses of I/B/E/S,
Baseline, and Vestek. This Division develops and markets a wide variety of
analytical products, which combine databases, advanced software, analytical
techniques, and forecasts for all phases of the investment process for money
managers, fund sponsors, and other investors. This division grew revenues 23.1%
and 27.0% for the three and nine months ended September 30, 1998, respectively.
Revenues from the sale of I/B/E/S data and analytical solutions increased 16.7%
and 24.1%, Baseline product increased revenues 41.5% and 36.6% and Vestek's
revenues increased 10.6% and 15.6% for the three and nine months ended September
30, 1998, respectively.
The Primark Decision Information Division accounts for approximately 12% of
Primark's consolidated revenues and acquires, develops and operates information
content businesses that are primarily focused in areas other than the financial
marketplace. However, it also provides products and services for decision
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support to financial customers as well. This division contains the businesses of
WEFA and the Yankee Group. This division has grown revenues 9.4% and 13.6% for
the three and nine-month periods ended September 30, 1998.
Restructuring Charges
Effective June 1, 1998, the Company was reorganized to strategically focus
solely on its information services businesses. In connection with this
reorganization, the Company recorded a pre-tax charge of $77.4 million, of which
$8.7 million is recorded as an extraordinary loss on early extinguishment of
debt and the remaining $68.7 million is recorded within operating expenses for
direct and other reorganization related costs. The associated tax benefit of the
extraordinary item and the other restructuring charges is $3.6 million and $14.0
million, respectively.
The effect of the $68.7 million charge was to reduce 1998 year to date
earnings per share on a pro forma dilutive basis by $2.07. The restructuring
charge was the result of a decision to implement a new organizational structure
designed to better serve the Company's customers, more quickly capitalize on
evolving market opportunities and improve margins. The restructuring charge in
1998 includes: (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 previously
discussed, (iii) write-off of $23.9 million of goodwill associated with software
and data written-off 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. An
additional $8.0 million of the restructuring charge relates primarily to the
integration of domestic and international sales offices and efficiencies gained
from technological advancements that will result in the phased reduction of
approximately 61 employees.
Capital Resources and Liquidity
The Company's cash and cash equivalent balances increased $17.2 million
during the nine months ended September 30, 1998 primarily as a result of
operating activities contributing $52.3 million, investing activities providing
$423.8 million and financing activities using $458.9 million. Most of the $52.3
million of operating cash flows is from net income from continuing operations
plus the non cash charges taken for restructuring, the early extinguishment of
debt and depreciation and amortization.
Financing activities for the year used $458.9 million and were affected by
the following three transactions: a) use of the proceeds from the sale of TASC
to pay down debt, b) amounts borrowed under the Company's line of credit for
shares repurchased under the "Dutch Auction" self tender offer and share
repurchase program, and c) common stock issuance pursuant the Company's option
plans. The Company used the proceeds from the sale of TASC to (i) prepay all
amounts outstanding on the Company's $112 million senior callable bonds,
including a 4.375% premium aggregating $4.9 million together with the accrued
interest thereon, (ii) prepay $220 million of the Company's outstanding term
loan together with accrued interest thereon, and (iii) prepay $500,000 of the
Company's other indebtedness. In conjunction with the sale of TASC, the Company
replaced its outstanding $75 million credit facility with a $225 million
revolving credit facility which expires in 2002. Interest on the borrowings
under the new revolving credit facility is payable at rates ranging from 0.375%
to 1.00% above the prevailing LIBOR rate of interest.
On May 20, 1998, the Company announced a "Dutch Auction" self-tender offer,
which expired on June 17, 1998. The Company purchased 4,540,000 shares at $34
per share under this arrangement. Total cost of these shares was $154.6 million,
including legal and accounting fees. 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. As of September 30, 1998,
1,518,500 shares had been repurchased at a total cost of $40.8 million. On
October 2, 1998, the Company purchased an additional 50,000 shares at a total
cost of $1,454,000. Year to date, the Company has purchased a total of 6,108,500
shares at a total cost of $196.6 million, representing approximately 22.5% of
its total outstanding common stock. On November 10, 1998 the Company announced
that the Board of Directors approved the expansion of the open market
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purchase program by an additional 2,000,000 shares, bringing the total potential
buyback to 8,540,000 shares, or approximately 31% of the Company's total
outstanding before the "Dutch Auction." The Company is using proceeds from the
sale of TASC and TIMCO as well as its revolving credit facility to fund the
common stock repurchases.
On September 22, 1998 the Company completed the sale of TIMCO for $70
million. On April 1, 1998 the Company completed the sale of TASC and its
affiliated weather information companies to Litton Industries for $432 million
in cash. The Company has paid $43.0 million in taxes to date of the amount owed
on both the TASC and TIMCO sales. Investing activities also included $14.5
million for capital expenditures and $12.6 million for software. Capital
expenditures consisted primarily of computer equipment purchases while
capitalized software relates primarily to software used to improve the delivery
of the Company's products and services.
Year 2000 Readiness Disclosure
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act. 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 in passing into the new century.
The Company has a Y2K plan that it is actively pursuing to address the
Company's Y2K issues. The Company began working on the Y2K problem in 1995, with
the goal to provide 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, electric utilities, and more. 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, sharing resources
and holding corporate-wide reviews. The Company believes that all material
systems will be compliant by June of 1999.
All organizations dealing with the Year 2000 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 parties to
understand their ability to continue providing services and products to support
the Company's operations through the change to the Year 2000. If any significant
Year 2000 problems are identified with third parties, contingency plans will be
developed. For example, Primark products incorporate data derived from many
different suppliers. A major component of the Y2K projects is reviewing each 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.
There are some older products that are not Y2K compliant that the Company
will no longer support after 1999. All affected customers have been notified.
All other Company products are Y2K compliant.
The Company incurred $1.5 million related to the Y2K procedures in 1997 and
expects to incur costs of $2.7 million and $2.6 million for the years ended
December 31, 1998 and 1999, respectively. The Company expects to resolve every
significant Y2K problem and have the solutions thoroughly tested by June 30,
1999.
While the Company expects its Year 2000 efforts will be successful, if the
modifications and replaced systems are not made compliant in a timely manner, it
could result in a material effect on the Company. Additionally, the Company's
products and services, are dependent on technological components, equipment and
software that were developed by third parties and that may not be Year 2000
compliant. Failure of such third party components, equipment or software to
operate properly with regard to the Year 2000 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.
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The European Economic and Monetary Union
Beginning January 1, 1999, member states of the Economic and Monetary Union
(EMU) may begin trading in either their local currencies or the euro, the
official currency of the EMU. Parties are free to choose the unit they prefer in
contractual relationship during the transitional period, beginning January 1999
and ending June 2002.
The Company has focused on the opportunities presented by the euro in order
to become recognized by the market as a leader in euro preparedness.
Technologically, a major milestone was reached at the end of September when all
of the Company's "customer-facing" software was euro ready and available for
customers to carry out their internal testing. On the content front, the Company
continues to enhance its euro preparedness through the rapid expansion of euro
data and indices. For example, the Company recently added euro denominated index
futures contracts, the HSBC Euroblock smaller companies index and certain
indices from the European Commission. The Company is also producing its own data
such as calculated synthetic benchmark bond yields for the Eurozone, synthetic
exchange rates and short-term interest rate series.
The Company has shared its euro expertise with its customers in 19 "euro
forums" being held around the world. These have been extremely well attended.
Additionally, the Company is being asked by many major buy- and sell-side
organizations to provide consultancy on the correct treatment of historical data
beginning January 4th next year.
Certain Factors That May Affect Future Results
In addition to historical information contained herein, 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
Year 2000 plans on a timely basis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27* Financial Data Schedule
(b) The Company filed a report on Form 8-K on October 2, 1998 regarding the
disposition of TIMCO.
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* Indicates document filed herewith.
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: November 13, 1998
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