1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 20-F
(MARK ONE)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 0-26936
THE DIALOG CORPORATION PLC
(FORMERLY KNOWN AS M.A.I.D PLC)
N/A
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
ENGLAND
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
THE COMMUNICATIONS BUILDING,
48 LEICESTER SQUARE,
LONDON WC2H 7DB, ENGLAND
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
NONE NONE
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT.
AMERICAN DEPOSITARY SHARES, EACH REPRESENTING 4 ORDINARY SHARES OF PAR VALUE
L0.01
(TITLE OF CLASS)
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
OF THE ACT.
NONE
(TITLE OF CLASS)
Indicate the number of outstanding shares of each of the issuer's classes
of capital of common stock as of the close of the period covered by the annual
report.
151,467,107 ORDINARY SHARES, PAR VALUE L0.01
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 proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by checkmark which financial statement item the registrant has
elected to follow.
[X] Item 17 [ ] Item 18
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1 Description of Business............................. 3
ITEM 2 Description of Property............................. 24
ITEM 3 Legal Proceedings................................... 25
ITEM 4 Control of Registrant............................... 26
ITEM 5 Nature of Trading Market............................ 27
ITEM 6 Exchange Controls and Other Limitations Affecting
Security Holders.......................................... 28
ITEM 7 Taxation............................................ 28
ITEM 8 Selected Financial Data............................. 33
ITEM 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 36
ITEM 10 Directors and Officers of Registrant............... 46
ITEM 11 Compensation of Directors and Officers............. 47
ITEM 12 Options to Purchase Securities from Registrant or
Subsidiaries.............................................. 48
ITEM 13 Interest of Management in Certain Transactions..... 52
PART II
ITEM 14 Description of Securities to be Registered......... 52
PART III
ITEM 15 Defaults upon Senior Securities.................... 52
ITEM 16 Changes in Securities and Changes in Security for
Registered Securities..................................... 53
PART IV
ITEM 17 Financial Statements............................... 53
ITEM 18 Financial Statements............................... *
ITEM 19 Financial Statements and Exhibits.................. 53
- -------------------------
* The Registrant has responded to Item 17 in lieu of responding to this Item.
2
3
The following Annual Report on Form 20-F and Annual Report to Shareholders
are intended to be an integrated document and should be read together. This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
those projected in the forward-looking statements as a result of the Factors
Affecting Operations set forth in Item 9 of the report on Form 20-F.
In this Annual Report, the "Company", the "Group" and "Dialog" refer to The
Dialog Corporation plc and its subsidiary undertakings except as the context
otherwise requires. References to fiscal years are to the Company's fiscal year
ended 31 December of each year.
CURRENCY TRANSLATIONS
Unless otherwise indicated, all amounts in this Annual Report are expressed
in pounds sterling ("L") or in United States dollars ("U.S. dollars" or "$").
Each pound sterling is comprised of 100 pence ("p").
The Financial Statements of The Dialog Corporation plc are presented in
pounds sterling, although a significant portion of the Company's revenues and
expenses are denominated in other currencies, primarily in U.S. dollars.
Fluctuations in the exchange rates between dollars and pounds sterling could
have an adverse effect on the Company's results of operations, particularly its
operating margins, and could result in exchange losses. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition". For
additional information on exchange rates between pounds sterling and the U.S.
dollar, see "Exchange Rates" in Item 8 of this Report.
The following table sets forth certain information with respect to the
Midmarket Rate for pounds sterling expressed in dollars per pound sterling.
These translations should not be construed as a representation that the pound
sterling amounts actually represent such dollar amounts or could be converted
into dollars at such rate or any other rate. The Company in the preparation of
its Financial Statements included elsewhere herein does not use such rates. See
Note 1 of the Notes to the Financial Statements.
YEAR ENDED 31 DECEMBER AVERAGE(1) HIGH LOW PERIOD END
---------------------- ---------- ------ ------ ----------
1993....................................... $1.502 $1.590 $1.418 $1.480
1994....................................... 1.532 1.643 1.460 1.565
1995....................................... 1.578 1.641 1.527 1.553
1996....................................... 1.562 1.711 1.497 1.711
1997....................................... 1.634 1.711 1.578 1.645
1998....................................... 1.658 1.719 1.615 1.664
1999 (through 21 May)...................... 1.626 1.664 1.590 1.601
- ---------------
(1) Represents the average of the Midmarket Rates on the last day of each month
during the relevant period. On 21 May 1999, the Midmarket Rate was $1.601 to
L1.00.
The Company's Financial Statements are prepared in accordance with
accounting principles generally accepted in the United Kingdom ("U.K. GAAP").
U.K. GAAP differs in certain respects from accounting principles generally
accepted in the United States ("U.S. GAAP").
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
The Company was incorporated and registered in England and Wales in
February 1985 as a private limited company and, in February 1994, reregistered
as a public limited company with the name M.A.I.D. plc ("M.A.I.D."). On 14
November 1997, M.A.I.D. plc acquired Knight-Ridder Information, Inc. and Knight-
3
4
Ridder Information AG (collectively, "KRII") from Knight-Ridder, Inc. (the
"Acquisition"), and the Company name was changed to The Dialog Corporation plc
("The Dialog Corporation"). The Dialog Corporation's registered office is in The
Communications Building, 48 Leicester Square, London WC2H 7DB, England, and its
telephone number is 011-44-171-930-6900. The Company's web site is
www.dialog.com. As used herein, the "Company" refers collectively to The Dialog
Corporation and its subsidiaries, including KRII and M.A.I.D., their
subsidiaries subsequent to the Acquisition, and to M.A.I.D. and its subsidiaries
alone prior to the Acquisition.
The Company was founded with the objective to develop and operate the first
specialized online database of market research reports in response to the needs
of the advertising and marketing industries. The first database, delivered via a
DOS platform, was developed using M.A.I.D.'s InfoSort indexing system, and
launched in the U.K. in October 1985.
M.A.I.D.'s principal online business information service, Profound, was
launched in June 1995 to provide users -- business professionals as well as
information specialists such as corporate librarians -- with a powerful, easy to
use, personal computer-based tool to search for and retrieve information from
over 5,000 diverse content publishers. M.A.I.D.'s information providers include
well known market research firms such as Frost & Sullivan, and other sources,
such as Dun & Bradstreet Limited, Disclosure Incorporated, Moody's Investors
Services and Standard & Poor's Corporation.
Profound (www.profound.com) was fully integrated onto the Internet in March
1996, when M.A.I.D. took the services inherent in Profound and reengineered them
to an open web solution. By adapting the technology to Internet standards and
protocols, M.A.I.D. allowed end-users to access high-quality, structured
business information utilizing Internet technology.
The Profound databases are extensively indexed using M.A.I.D.'s proprietary
indexing system, InfoSort, a classification system which enables users to search
through multiple databases to pinpoint and access relevant information quickly
and efficiently. Both the InfoSort technology and the success of the Profound
software development program have facilitated the opportunity to customize the
Profound service for specific partners. This enables the Company to
cost-effectively penetrate new distribution channels based on established
customer franchises through strategic alliances with companies such as
CompuServe, Fujitsu and AltaVista.
In August 1997, the Company acquired 70% of Muscat Limited
(www.muscat.co.uk). Muscat's sophisticated linguistic inference technology
provides enhanced searching capabilities for the various products being
developed by the Company. Muscat's software permits intelligent and natural
language queries on unstructured databases, using a probabilistic strategy that
matches ideas rather than just matching words.
On 14 November 1997, the acquisition of KRII was completed and The Dialog
Corporation plc was formed. KRII was one of the world's largest providers of
online professional information services, with long standing relationships with
over 20,000 corporations, government organizations and academic institutions in
the U.S. and in over 120 countries worldwide. Through its core business, the
U.S.-based DIALOG, Canadian-based Infomart and European-based DataStar services,
KRII was a world leader in its core market of providing online services to
research libraries in corporate, government and academic institutions. The
acquisition of KRII and the subsequent formation of The Dialog Corporation
established the Company as a leader in the online professional information
industry.
A suite of powerful information systems, Dialog Select
(www.dialogselect.com), was launched in July 1998. This product range was
developed for business professionals, and is available via the Internet. A
separate product has been developed for ten major market sectors including
business, news and media, government, medicine, intellectual property,
technology, pharmaceuticals, chemicals, energy and agriculture.
The launch of the U.K.'s first ever Internet-based government-supported
National Exporters Database was also announced in July 1998. It was built as a
result of a five-year contract awarded by the British Government's Department of
Trade and Industry ("DTI"). The Company, on behalf of the DTI, operates the
database (www.tradeuk.com), which utilizes InfoSort indexing technology and
Muscat's search engine. On 1 September 1998, the second phase of the service was
launched by the DTI, including an automated Export
4
5
Sales Leads Service which delivers leads from Foreign Office commercial staff
abroad to U.K. exporters via the Internet.
In August 1998, the Company announced a substantial five-year contract from
the British Broadcasting Corporation (BBC). Dialog provides and runs an
Electronic News Cuttings (ENC) service, delivering essential information to its
staff. The service utilizes the Company's proprietary indexing technology,
InfoSort. Articles are indexed to InfoSort standards and customized by Dialog in
accordance with existing terms currently used by BBC personnel, thus tailoring
InfoSort terms specifically for BBC usage.
The Company announced, in August 1998, the launch of the GlobalNews Plus
news file, incorporating World Reporter. Key to this launch has been the
indexing of World Reporter to InfoSort standards, providing GlobalNews Plus
users with unlimited access to more than 1,250 newspapers, business magazines
and newswires from around the world for a flat fee. World Reporter, the result
of a joint venture between the Company, Dow Jones Information Publishing Inc.
and FT Business Enterprises Limited, delivers premier business news from
emerging and developed economies around the world.
In October 1998, the Company exercised its option to purchase Responsive
Database Services, Inc. ("RDS") for $2.85 million (L1.7 million). RDS develops
and produces business information and social science databases that are
available to users such as business professionals, public, academic and
specialist libraries through online information services, CD-ROM and the
Internet.
The Company strengthened its eCommerce strategy through the acquisition of
Write Works Limited in November 1998. Write Works Limited, based in Oxford,
England, had developed the U.K.'s first online purchasing and management control
system for businesses. Following the acquisition of Write Works Limited,
Dialog's business to business eCommerce solution, Office Shopper
(www.officeshopper.com), was launched in December 1998. It has a client base of
over 150 corporations including TK Max, ISS, EMI Music and ActionAid. The
Company acquired 100% of the share capital of Write Works Limited, through a
combination of cash consideration and an issue of shares, for a maximum
consideration of L6.0 million to be paid over two years.
In December 1998, the Company announced the launch of LiveIntranet, which
incorporates the first automatic indexing solution for corporate desktops.
LiveIntranet, a web based knowledge management system, is the first service that
allows companies to automatically index and categorize both internal and
external knowledge to the InfoSort standard. Company information and external
news and information are coded to the same standard terms so that they are
easily organized and retrieved by corporate end-users.
COMPETITIVE STRENGTHS
The Company is a leading provider of Internet-based information, knowledge
management, technology and eCommerce solutions to the corporate market with a
number of competitive strengths.
- Strong Revenue Base. KRII's long-standing relationships with information
specialists and its historically high subscriber retention rates are
complemented by M.A.I.D's strength in the growing end-user market. This
provides the Company with a strong presence across both user groups in
the online business information services market and an established base
of revenues with which to pursue growth in the end-user market.
- Large Collection of High Value Content. The combination of the Profound,
DIALOG and DataStar databases has formed one of the largest collections
of high value online information in the world, with over 9 terabytes of
information, or 6 billion pages of text and over 3 million image
documents. The Company's focus on the provision of high value content is
intended to distinguish it from providers of low value, commodity
products such as news and stock quotes.
- High Quality Customer Base. The Company's customer base of leading
international corporations includes 100 percent of pharmaceutical,
electronics, aerospace, cosmetics and brokerage companies and 90 percent
of chemical companies in the U.S. Fortune 500. Additionally, a
substantial majority of the world's major management consulting firms are
customers.
5
6
- Global Presence. The Company has customers in over 120 countries across
the globe and a sales presence, either directly or through an agent, in
39 countries. The Company provides the largest archival service in Europe
and the largest English language service in Japan. DIALOG, DataStar,
Infomart and Profound services provide the Company's global customer base
with online, high value business information from leading content
publishers from around the world.
- Proprietary Technologies. The Company has developed its proprietary
InfoSort technology over the last 14 years. It is cutting edge software
for the indexing and categorization of unstructured data. Recent
development of the technology enables it to be deployed on corporate
desktops. Dialog also owns 70% of Muscat, which offers sophisticated
natural language search and retrieval software, and uses linguistic
inference to search unstructured data to match concepts, rather than
simple word matching used by most search engines today. In addition, it
owns the eCommerce software inherent in the Office Shopper product. The
Company believes that these technologies offer it a significant
competitive advantage in the information services, knowledge management,
and business to business eCommerce environment.
STRATEGY OF THE DIALOG CORPORATION
The Company's strategy is to maintain and enhance its position as a leading
global provider of Internet-based information, knowledge management, technology
and eCommerce solutions to the corporate market. The Company intends to execute
its strategy through the following initiatives:
- Creation of three new operating divisions. The Company recently announced
the formation of three new divisions: (i) Information Services Division
for the development and expansion of the existing online information
business to information professionals and end-users; (ii) Web Solutions
and Internet Software Division to license the InfoSort indexing and
Muscat search technologies of the Company for corporate knowledge
management solutions and for customised special projects such as the DTI
and BBC; and (iii) eCommerce Division for the roll out of Office Shopper
to facilitate business to business procurement and the licensing of the
underlying eCommerce technology to enable businesses world-wide to create
storefronts on the Internet.
- Content. The Dialog Corporation offers one of the most comprehensive and
authoritative sources of information available. Content areas include
News & Media, Medicine, Business & Finance, Pharmaceuticals, Intellectual
Property, Chemicals, Government and Regulations, Food & Agriculture,
Science and Technology, Social Sciences, Energy & Environment, and
Reference. The Company intends to focus on the provision of high value,
specialist content in order to meet customers' requirements and content
will not be acquired without analyzing its value to the customer. The
Company also reviews the content currently available on its databases to
ensure that the provision of that information is being made on a
profitable and/or strategic basis. The Company's focus in this area is to
provide its combined customer base with additional features and content
and progressively to make available all databases on a seamless searching
basis, comparable to that which Profound currently offers its users. The
Company's InfoSort based indexing technology will enable The Dialog
Corporation to integrate new content cost effectively and will avoid the
requirement to design, implement and maintain each new database
separately.
- Sales and marketing. The Company pursues a focused and global strategy to
sales and marketing. During the period, the sales forces of KRII and
M.A.I.D were successfully merged into a new operation serving 39
countries. The requirement for sales offices is driven by the need to win
and support customers in key geographic areas. The Company's marketing
functions are co-ordinated on a regional basis, with marketing personnel
located in regional offices where there is sufficient strategic
justification. Regional marketing personnel then support the sales staff
within that region. Customer service is a key priority and much of the
service, particularly in the areas of general and technical customer
inquiries and customer training, has been implemented through electronic
systems.
- New Product Development. The Company continues to develop its product
range with new, cutting edge products such as The Dialog Intranet
Toolkit, The Intranet Delivery Tool, LiveIntranet, Office
6
7
Shopper, and the licensing of its proprietary technologies. Dialog
believes that this strategy will not only broaden its current customer
base in the information industry from information professionals to
business end users, but will also allow it to penetrate new and rapidly
growing markets, such as knowledge management and business to business
eCommerce.
- Budgetary Control. Further steps were taken during 1998 to improve the
operational efficiency of the business, such as the move of the U.S.
headquarter office from Mountain View, California to Cary, North
Carolina. On a global basis, the Company was able to achieve annualized
cost savings of $47 million (L28 million), which were greater than
original estimates. The appointment of Patrick Sommers in October 1998,
to the new post of Chief Operating Officer has strengthened the
management team and his focus on the budgetary process has begun to
further improve the operations of the business. The Company does not
expect to achieve further cost savings during 1999.
- Pricing. The Company believes that it provides its services at a
competitive rate when compared to the pricing of its competitors'
services. During the year, changes were made to the pricing structure to
simplify the structure and make it more competitive for the end user
market. In June 1998, the Company introduced a new pricing structure that
eliminated charges for connect time and gave customers the option of flat
fee packages. The DIAL (Dialog Interactive Access Language) Unit was
launched as a method of calculating charges. A DIAL Unit represents the
usage of system resources necessary to execute search commands. It frees
the customer from the pressure of connect time charging and ignores
activities associated with preparing a search strategy, reading
documentation including Bluesheets and Help Sheets, browsing and viewing
title lists and search output, configuring and preparing alerts and
establishing user preferences. The Company continues to evaluate its
pricing strategies, constantly seeking to improve and evolve within its
rapidly changing markets.
- Alliances. The Company continues to seek to increase revenues by
expanding its distribution, service and technological capabilities
through the establishment of strategic alliances with companies such as
Fujitsu, AltaVista and CompuServe. Throughout 1998, Dialog entered three
such partnerships, compared to fifteen in 1997, nine in 1996 and four in
1995. The Company believes that these various distribution strategies
serve to increase the Company's exposure amongst a wider population of
potential users.
- Technology. Following the Acquisition, the Company believed that the way
to make all its databases available to customers on their preferred
interface -- i.e. Dialog, DataStar or Profound -- would be via the
physical integration of its three main data centres. Further
investigation showed that this would be costly and disruptive. The plan
was revised to provide the same effective integration through creating
connectivity between the various software systems. The highest priority
project in this plan involves linking the various products to a unified
customer database. The integration of the rest of the accounting and
billing systems will then be started.
Non-core businesses. During the year, the Company sold its stake in
NewsEdge, Inc. and Easynet Group plc. The proceeds of L7.1 million, net of
associated disposal expenses, were used to pay down corporate debt. On February
2, 1999, the Company announced the disposal of the CARL Library systems and the
UnCover document delivery service for $2.25 million (L1.4 million).
PRODUCTS AND SERVICES
The merger of M.A.I.D and KRII in November 1997 added the DIALOG and
DataStar products and associated services to the Company's existing product
range. With the introduction of the three new divisions, the (i) Information
Services Division, (ii) Web Solutions, and (iii) eCommerce Division, the
combined group's operations are comprised of the Online Services, Internet
Services, Intranet Services, as well as other technology and business to
business products and services.
7
8
INFORMATION SERVICES DIVISION -- ONLINE SERVICES
DIALOG, which was launched in 1972, was a pioneer online information
service and is one of the world's largest commercial online information
services, with a powerful and precise search capability. The service provides
users with access to almost 600 databases, including the full text of over 7,500
publications, from a broad range of disciplines.
Profound is an online business intelligence service, which enables users to
access online a variety of information, including market research reports,
breaking and archived business news, company statistics, brokerage research,
economic analysis, and up-to-date stock market and commodity prices. Users may
also automatically track companies, industries or issues by predefined search
criteria, through a Custom Alert feature. Furthermore, the service incorporates
Incremental Viewer technology, developed and patented by the Company, which
allows the user to view and utilize the first part of a document whilst the
remainder is downloading, thus saving time and cost. Profound also utilizes The
Dialog Corporation's proprietary data indexing technology, InfoSort, which
allows fast, accurate and seamless searching across all Profound databases.
DataStar is one of Europe's leading online business information services.
Users may access over 300 databases, covering areas such as business and
finance, intellectual property, law, government, news, reference and medicine.
In particular, DataStar contains an extensive collection of pharmaceutical and
European Union legislative information.
Infomart is a Canadian-based online service, which is provided by a joint
venture with Southam, Inc. Infomart customers have access to over 90 news and
business databases, primarily containing Canada-specific information.
INFORMATION SERVICES DIVISION -- INTERNET SERVICES
DIALOG Web (www.dialogweb.com), launched in 1997, provides Internet access
to the full range of DIALOG databases. It is designed to enable information
professionals to utilize the power, precision and full functionality of DIALOG
using the DIALOG command language through a user-friendly Web interface, with
built-in help options.
DIALOG Select (www.dialogselect.com), launched in 1998, provides a
Web-based, easy-to-use guided search service with access to over 300 of the most
popular DIALOG databases. The DIALOG Select search parameters were designed to
mimic traditional Internet search engines and enable the end-user to retrieve
information by keyword, title, author, journal, company name or other selected
criteria, eliminating the need for training and prior online searching
experience. The service is designed to address the specific information needs of
professional end-users in the high-tech, pharmaceutical, legal, consumer
product, and media industries.
DIALOG Classic (www.dialogclassic.com), also launched in 1998, provides
high-speed access to classic Dialog using an internet browser. Searchers are
connected to the Dialog mainframe Web server, providing them with direct access
to the extensive content and functionality of classic Dialog.
Profound (Internet) (www.profound.com), launched in 1996, enables users to
access the Profound databases over the Internet, via an easy-to-use Web-based
interface which lends itself in particular to the end-user market. The Custom
Alert feature is included in this version of the product. Profound also provides
a feature known as Portfolio. Portfolio enables end-users to set up a portfolio
of stocks in publicly quoted companies and receive an update as to the value of
such portfolio as often as requested. In addition, the Portfolio template allows
end-users to conveniently access the latest news and research associated with
each of their stock holdings or companies of interest by providing icon-based
links to other Profound databases.
DataStar Web (www.datastarweb.com), also launched in 1996, enables
Internet-based basic and advanced level searching of the DataStar databases,
specializing in information about and for Europe. This service may also be
integrated into an organization's intranet.
8
9
INFORMATION SERVICES DIVISION -- INTRANET SERVICES
LiveIntranet, launched in December 1998, is a web-based knowledge
management system, and the first service that allows companies to automatically
index and categorize both internal and external knowledge to the InfoSort
standard. Company information and external news and research are indexed to the
same terms so that they are easily organized and retrieved by corporate
end-users. Live and archived news and online databases can be incorporated with
internally generated information. Businesses using external news services can
also specify intra-day updates as well as daily news reporting. Users can add
commentary to external data -- adding value to information before it is
disseminated. The new service greatly facilitates the sharing of knowledge
across the entire enterprise, in a way that is designed exclusively for the
customer. Aimed at companies with an existing Intranet infrastructure, the
service includes consultancy as well as sophisticated indexing technology, which
enables intelligent searching and sharing of information.
Dialog Intranet Toolkit, launched in February 1999, gives information
professionals the ability to build custom search and information sites on their
corporate Intranet, providing tailor-made information resources to departments,
workgroups or individuals through the organization. The software enables the
information professional to create interfaces either by using templates and
search forms provided by the Company or by creating their own search forms.
Complex search commands, which leverage the information professional's search
expertise and knowledge of Dialog's wealth of content, remain hidden to the end
user. The fact that the service is fully customizable means that the information
professional is able to determine how and where information is available to
users throughout the organization. The same Intranet site may be developed
further to point to other information resources internally, such as the
company's own databases or externally, on the Internet.
Intranet Delivery Tool, launched in April 1999, is a major enhancement to
the Dialog Intranet Toolkit that enables information professionals to share
Dialog's customized current awareness alerts and interactive search results with
the entire organization over the corporate intranet. With the addition of the
Intranet Delivery Tool, organizations can also create Intranet sites to display
customized Dialog Alerts and interactive search results. Dialog data can be
categorized according to its application, such as company and competitor news,
industry headlines, or research and development. The Delivery Tool provides a
design template for the intranet site, or information professionals can design
their own site by modifying those templates. The sites can be incorporated into
other search sites created with the Intranet Toolkit or can be linked back to
those areas for additional information. Once the site is set up, information
professionals can take advantage of Dialog's powerful search engine to create
searches that pinpoint the exact information needed. Alert and search output can
be distributed from the products that support the Dialog command language.
DIALOG@Site provides enterprise-wide access to the current DIALOG OnDisc
CD-ROM collection, via an Internet browser. Some customers prefer the option of
receiving information in CD-ROM format rather than online, because they are able
to provide access to information for very large numbers of internal users from a
centrally controlled resource. As the content is loaded behind the company's
firewall, rather than via the Internet, security risks are minimized. Subject
areas include business, science and technology, medicine, and law.
INFORMATION SERVICES DIVISION -- OTHER PRODUCTS AND SERVICES
Profound LiveWire is a news alerting service, launched at the end of 1996,
which applies InfoSort technology to 28 newswire feeds, allowing real-time news,
relevant to a user's predefined criteria, to be delivered automatically to their
desktop. All incoming newswire documents are matched against the end-user's
profile. When a match is found, the document is sent to a server on the
customer's site, which then notifies a program running on the end-user's PC. The
user may configure this program to scroll all incoming stories in a small window
on the top of the screen, in a format similar to that of a ticker feed. The data
is indexed to InfoSort standards, so the user will only receive relevant
information. Profound LiveWire thus enables individuals to receive their
personal, live newsfeed to track the stories, issues and events that most affect
their business.
9
10
DIALOG Direct is an interactive document delivery service that provides
organizations with tables of contents and full-text articles from key medical,
pharmaceutical, and agrochemical industry publications. These items are
delivered simultaneously to a pre-defined email distribution list within an
organization, so enabling timely access to key information.
DIALOG OnDisc is the CD-ROM product line, offering over 85 titles for both
information professionals and end-users in the fields of biomedicine, science
and technology, and business and finance.
DIALOG and DataStar Alerts are current awareness services that
automatically alert users to new information on subjects specified by them, and
then deliver the results via email, fax, or regular mail to designated
recipients.
The Library is an open access virtual library -- an essential reference
tool for users of information products from The Dialog Corporation. The service
provides access to a variety of materials including newsletters, product guides,
database specification sheets and subject guides. The Library is a free,
web-based service, which is accessed via The Dialog Corporation's website.
WEB SOLUTIONS DIVISION
Dialog's Web Solutions strategy leverages our proprietary technologies, and
strategic alliances with leading global companies in the provision and
distribution of knowledge management and Internet technologies.
InfoSort is the Company's proprietary indexing technology. It is a powerful
information management system that automatically and electronically reads
documents and automatically assigns index categories by identifying key topics.
Controlled indexing terms are created using the same categorization terms, rule
bases and thesauri, and then applied to documents across multiple databases from
multiple sources. InfoSort technology creates multi-dimensional "virtual links"
between articles, files, reports, e-mails, letters and other documents so
searches can be executed across the full spectrum of information sources that
embody an organization's "knowledge". Typical searches of large databases yield
thousands of matches because most search strategies are based on matching a
specific word to words within target documents or abstracts. InfoSort makes it
possible to search by a subject -- as opposed to matching single words -- by
indexing documents based on analysis of their content. InfoSort can be deployed
on a corporate intranet, making it possible for users to index new documents as
they are created or acquired, using terminology unique to their organization.
The end result is that users are immediately able to find precisely the
information they require, empowering organizations to capitalize on information
and knowledge.
Muscat is a subsidiary of the Dialog Corporation located in Cambridge, U.K.
Muscat's flagship product is a sophisticated search engine that uses a
probabilistic strategy that goes beyond matching words; it matches ideas. Muscat
analyses search terms to identify "concepts of interest." It then applies the
concepts it has discerned to all the information sources that can be
accessed -- intranet databases, web sites, external information sources -- and
suggests new "concepts" to help users find important related information.
ECOMMERCE DIVISION
Dialog's eCommerce strategy leverages the Company's leading global market
position in the provision of on line data, as well as extensive service and
technology strengths in electronic data indexing, searching, retrieval and
alerting systems.
Dialog OfficeShopper is a business-to-business eCommerce solution, which
offers corporations the ability to purchase office supplies at competitive
prices through their corporate intranet and effectively manage purchasing costs.
Dialog OfficeShopper features an enhanced user friendly interface and search
capabilities, making business purchasing quick and easy. The system comprises a
database of user details including spend limits and preferences, and details of
more than 150,000 products from over 80 suppliers, a functionality to provide
budget comparison and invoice status and an interface which enables the user to
search for goods and purchase online.
10
11
The following table shows net sales of Dialog by operating division in each
of the three years ended 31 December 1996, 1997 and 1998:
NET SALES
--------------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
L L L
MILLION % MILLION % MILLION %
Information Services Division................ 21.4 100.0 43.9 95.2 165.3 96.8
Web Services Division........................ -- -- 0.4 0.9 4.0 2.3
eCommerce Division........................... -- -- -- -- 0.1 0.0
Other(1)..................................... -- -- 1.8 4.0 1.4 0.8
---- ----- ---- ----- ----- -----
Total.............................. 21.4 100.0 46.1 100.0 170.8 100.0
==== ===== ==== ===== ===== =====
- ---------------
(1) The "Other" category relates to royalties earned from the provision of hotel
Internet access.
CONTENT
Agreements with Content Providers. The Company continually seeks to expand
its databases through contracting with third party sources of information and
developing the Company's own proprietary databases. The Company's agreements
with third party information publishers generally run from three to five years
and are automatically renewed for succeeding one year terms unless terminated by
the Company or the information publisher.
Royalties are paid to information providers in accordance with content
license agreements. For a significant portion of Dialog's databases, the royalty
obligation presently is determined as a function of net revenues (generally, net
of discounts, including reseller or distributor discounts, and allowance for
doubtful accounts) received by Dialog. In certain other instances, the royalty
payment calculation is tied to gross usage of the provider's database. The
Dialog Corporation is seeking to move to contracts which facilitate the sales of
fixed price and intranet deals.
Pricing. In markets other than the U.S., Profound subscribers typically pay
$10,000 for the fully featured version of Profound, as well as usage fees that
are based on the quantity and quality of chargeable data downloaded. In the
U.S., the Profound subscription fee varies from $3,500 to $10,000 per year,
depending on the level of services purchased. The $10,000 subscription fee
entitles Profound customers to full, unrestricted access to all Profound
databases and features; an unlimited number of actual users per physical site;
use of the Company's groupware software programs; and on-site training and
technical assistance. Subscription fees are typically billed annually in
advance, while usage fees are billed monthly by the Company to the subscriber.
Profound also enables the coding of usage fees to a particular user, to assist
the subscriber in tracking such fees. U.S. Profound subscribers who pay annual
fees of less than $10,000 per year receive a portion of the benefits of the full
Profound subscription.
Pricing for the Dialog product range is primarily based on "pay-per-view"
basis, with a $75 monthly minimum. Charges are incurred based on output, search
time costs measured in DIAL Units, as well as telecommunications charges. A DIAL
Unit represents the usage of system resources necessary to execute search
commands and DIAL Unit prices vary by database.
The DataStar product has traditionally been priced on a "pay-as-you-go"
basis, with fees tied to the type and volume of chargeable data downloaded, and
the time a user is connected to the mainframe computer. Subscribers also pay a
minimal annual fee for password, documentation and basic training courses.
In recent years, a trend has developed for subscribers to any of Dialog's
Services to pay under fixed-price arrangements. The Company is now offering such
packages to customers, whose expenditure patterns may be taken into
consideration when determining a fixed-price contract. The Company also enters
into fixed-price agreements with customers utilizing its intranet services.
Approximately 30% of Dialog's revenues are now derived from fixed fee contracts.
11
12
ALLIANCES/INVESTMENTS
In addition to its wholly owned operations and subsidiaries, the Company is
engaged in joint ventures and has entered into a number of investment,
development, and distribution arrangements, designed to increase its market
penetration and enhance its content databases, as follows:
JOINT VENTURES
Frost and Sullivan -- July 1997 -- An agreement was signed with Frost and
Sullivan to form a 50:50 joint venture company, Frost & Sullivan Electronic
Distribution LLC, which owns electronic distribution rights to Frost & Sullivan
material. As part of the venture, the Company will provide Frost & Sullivan with
the technology necessary to apply InfoSort indexing to all its material at
source.
KMK DigiTex Ltd. -- October 1996 -- KRII created KMK Digitex with Maruzen
Company, Ltd. and Kinokuniya Company, Ltd., the companies that had previously
acted as the distributors for DIALOG in Japan. The Company owns 52 percent of
KMK, which provides sales, marketing, customer support and certain financial
functions on behalf of the Company in the Japanese market.
Infomart DIALOG Ltd. -- January 1994 -- Infomart was established in Canada
as a 50:50 joint venture between KRII and the Southam Corporation, Inc., which
is controlled by the Hollinger Corporation. IDL operates the Infomart online
service and acts as the Company's sales agent in the Canadian market.
INVESTMENTS
Muscat Limited -- August 1997 -- The Company acquired a 70 percent interest
in Muscat, an information retrieval technology company, whose software enables
intelligent and natural language queries of unconstructed and constructed
databases. The Company will use this software to enhance the existing
capabilities of various products.
Fourth Communications Network Inc. -- February 1997 -- The Company
transferred its hotel Internet access technology (and existing hotel contracts)
to 4th Network and became their agent in Europe. In consideration, 4th Network
issued to the Company shares in 4th Network, providing the Company with an
ongoing stake in the global hotel Internet business. The Company has been
closely monitoring its investment in 4th Network, which had been expected to
achieve an IPO or alternative significant fund raising. As this has not
occurred, the Company has determined that it would be prudent to write down 50
percent of its investment, creating an exceptional charge of $2.8 million (L2.3
million) in 1998.
World Reporter -- September 1996 -- KRII entered into an agreement with Dow
Jones Information Publishing Inc. and F.T. Business Enterprises Ltd. to develop
and maintain an electronic database containing information from major
newspapers, news magazines and trade publications across the world. This
information resource is known as World Reporter and is distributed independently
through the partners' respective electronic information services.
Market Intelligence Research Corporation, trading as Frost &
Sullivan -- April 1996 -- KRII invested $8.1 million in a 14.98 percent
shareholding in Frost and Sullivan, which enabled Frost & Sullivan to expand its
range of research reports. In connection with this investment, the Company
secured key market research for inclusion in its databases. The Company
currently has an option to acquire all the outstanding equity of Frost &
Sullivan. This option is exercisable on certain fixed dates between now and May
2000 at a price which is a fixed multiple of Frost & Sullivan's prior year's
revenues.
Easynet Group plc -- February 1996 -- An agreement was signed whereby
Easynet became a preferred ISP to the Company in the U.K. and France. The
Company also acquired an equity stake in Easynet, which represented
approximately 10.4 percent of that company's outstanding equity as of 31
December 1997. The Company disposed its stake in Easynet Group plc, yielding net
proceeds of L3.2 million in May of 1998.
Teltech Resource Network Corporation ("Teltech") -- August 1995 -- KRII
made a minority investment in Teltech, a privately-held information service
company with its headquarters in Minneapolis,
12
13
Minnesota, which specializes in on-demand research and knowledge management
consulting services. As at 31 December 1998, the Company owned approximately
15.2 percent of the outstanding equity of Teltech.
Responsive Database Services Inc. ("RDS") -- April 1994 -- KRII agreed to
provide funds to RDS, a privately-held start-up database production company
founded by the former president of Predicast, one of the pioneers of the online
industry. The firm produces two databases for the Company: Business & Industry
and Best Management Practices. In October 1998, the Company exercised its option
to purchase RDS for cash of $2.85 million (L1.72 million). The Company has
historically provided all the financing for RDS and has consolidated its results
within the group financial statements. Since January 1998, RDS has generated
sufficient cash inflow to fund all its operations. Goodwill of $2.85 million
arising as a result of this transaction will be capitalised and amortised to the
profit and loss account over a twenty five-year period.
Individual, Inc. ("Individual") -- September 1993 -- KRII acquired a
minority stake in Individual, a publicly traded information service company,
which specializes in providing personalized alerts based on news databases and
whose services are delivered via the Web, e-mail or fax. As of 31 December 1997,
the Company owned approximately 5.48 percent of Individual's outstanding common
stock. In February 1998, Individual, Inc. was renamed NewsEDGE Corporation,
following its merger with Desktop Data Inc. On 6 May 1998, The Dialog
Corporation disposed of its investment in NewsEDGE Corporation for net proceeds,
after associated expenses, of $6.5 million (L3.9 million).
TECHNOLOGY DEVELOPMENT ARRANGEMENTS
AltaVista Company -- April 1997 -- The Company announced an agreement with
AltaVista Company, for the Company to integrate its proprietary InfoSort
indexing mechanism with AltaVista search technology.
Thorn -- July 1996 -- The Company signed an agreement with Thorn Business
Communications to provide hotel chains across Europe with high-speed, in-room
television Internet services. Further to developing this service, the Company
transferred its hotel Internet access technology and existing contracts to
Fourth Communications Network Inc. in February 1997. See "Investments," above.
Adobe -- In February 1995, M.A.I.D entered into an agreement with Adobe
Systems, Inc. ("Adobe") under which M.A.I.D licensed Adobe's Acrobat software
for inclusion in Profound. Data accessible under Acrobat is identified by a
symbol on the screen. Acrobat allows the data to be viewed and downloaded in its
original format, rather than in a simple text format. This is particularly
valuable for reports and other data including tables, charts and other graphics,
since presentation in text only format often jumbles the columns and rows of
most tables and charts and otherwise mixes up graphics, making them hard to
comprehend and losing the sense of the original document.
DISTRIBUTION AGREEMENTS
IFG Technology and Development -- September 1998 -- The Company announced
an agreement with IFG Technology and Development plc, whereby The Dialog
Corporation is to deliver a customised business information service for users of
the BusinessGOLD service in Ireland and the U.K.
Fujitsu -- April 1997 -- The Company announced an agreement whereby Fujitsu
would take over sales and support of the existing range of Profound products in
Japan through its G-Search subsidiary. Additionally, the Company, Fujitsu and
G-Search will co-operate on future research and development of services for the
consumer market.
CompuServe -- November 1992 -- KRII signed an agreement to provide two
DIALOG products, Knowledge Index and a Newspaper Archive to CompuServe. In
addition, CompuServe has marketed and branded information from DataStar since
1994.
In March 1996, the Company and CompuServe signed an agreement to provide an
Internet-based business information service, branded and marketed by CompuServe
to its members and to users of the Internet. The service, part of CompuServe
Interactive (CSI), was designed to allow users to track investments, U.S.
company information and news events in a personalized, automated format. In
September
13
14
1997, the Company announced an agreement to develop a customized online business
information service for CompuServe users in the U.K.
Telebase -- December 1987 -- KRII signed an agreement whereby Telebase
agreed to resell information from DIALOG to the users of its information
services over multiple channels including Telebase EasyNet, AT&T EasyLink,
CompuServe, InfoCue (via Nifty in Japan) and the EasyNet Web service.
West Publishing -- August 1985 -- KRII signed an agreement with West
Publishing to provide access to selected DIALOG databases under the DIALOG brand
to Westlaw subscribers. Beginning in 1991, DIALOG provided a customized
interface, which Westlaw has sold to its customers under the brand "DIALOG on
Westlaw".
SPECIAL PROJECTS
Department of Trade and Industry -- March 1998 -- The Dialog Corporation
was awarded a five-year contract by the U.K. government's Department of Trade
and Industry, to build and operate an online export sales lead service. This
service incorporates an online leads matching service enabling business
opportunities, identified by the U.K.'s Foreign & Commonwealth Office (FCO)
posts around the world, to be brought to the attention of potential U.K.
exporters. The service also includes a database of archived export sales leads
for U.K. companies to search for opportunities abroad. In addition, subscribers
will be able to access additional data relevant to export activity, such as
company news and country information.
British Broadcasting Corporation -- August 1998 -- the Company announced a
substantial five-year contract from the British Broadcasting Corporation (BBC).
Dialog provides and runs an Electronic News Cuttings (ENC) service, delivering
essential information to their staff. The service utilizes the Company's
proprietary indexing technology, InfoSort. Articles are indexed to InfoSort
standards and are mapped to existing terms currently used by BBC personnel, thus
tailoring InfoSort terms specifically for BBC usage.
INDUSTRY, MARKETS & CUSTOMERS
The online information services industry provides users with access to
information that is obtained from multiple content providers. Online services
can be divided into two categories: (i) consumer services, which are aimed at
providing low cost or free services such as stock quotes or briefings to a
variety of end-users; and (ii) business services, which are aimed at providing
high value information such as market research and corporate data to business
end-users.
The online services industry is rapidly expanding as service providers are
increasing their ability to provide quick, accurate and efficient access to data
as the demand for information from businesses throughout the world is
increasing. The demand for online business information services is also being
driven by a shift away from traditional print media towards electronic media as
an information source. Within the professional research services segment of the
industry, information specialists such as the corporate librarian have
historically been targeted and have accounted for the majority of segment
revenues. Information specialists have historically received training to use the
various research services available due to the different and complex proprietary
command languages, capabilities and content of each service.
Today, the online research segment of the market for online services is
undergoing a fundamental change as the target user has been expanded beyond
information specialists to business end-users, who require services through
their desktop personal computers. A number of factors have contributed to this
shift including a rapid increase in the number of personal computers, the
development of "user-friendly" interfaces and increased computer literacy of
business professionals throughout the world. In addition, the availability of
modems and Internet access is anticipated to increase as greater numbers of
hardware manufacturers include these devices as standard features of the
personal computers, which they supply. This, in turn, is expected to result in
an increase in the number of business end-users who can be reached directly by
online services. The total number of end-users is also expected to increase as
online service providers begin offering services through corporate intranets,
thereby gaining access to a potentially captive audience. Intranets, which are
effectively private Internets operated by corporations, utilize the same
distribution and display protocols as
14
15
used in Web browser environments. According to industry sources, the size of the
intranet market is also increasing with an estimated 56% of all U.S. companies
already having an installed intranet in 1996 and an additional 26% intending to
install an intranet in 1997. As a result, the number of customers who subscribe
to an online business service has substantially increased in the last several
years and is expected to continue expanding for the foreseeable future.
There are a number of different online service providers ranging from small
niche providers, which generally provide low value, commoditized information, to
large companies, including certain content providers, which provide high value
information. The Internet has facilitated the entry of small providers and the
direct provision of content by data sources, particularly by eliminating the
need for a customized delivery mechanism. This, in turn, has increased price
competition in basic business information such as news headlines and stock
quotes, which are increasingly available at low or no cost. Significant
differentiating factors between service providers in the business segment of the
market are the ability to provide a breadth of information that is aggregated
from high quality sources and the ability to provide this information through an
intuitive, flexible, easy-to-use, cost effective delivery system. According to
industry sources, large corporations, which already spend over $20 billion in
the aggregate on information, have historically selected a limited number of
suppliers, preferring to deal with known aggregators and are expected to
continue using the large service providers.
At 31 December 1998, The Dialog Corporation had over 20,000 corporate
clients in 120 countries. The number given for corporate clients is a figure for
site subscriptions and can represent anything from a single user to a site with
hundreds of users.
As of 31 December 1998, approximately 50 percent of the 100 largest U.K.
corporations (as measured by the Financial Times Stock Exchange index) were
clients of The Dialog Corporation. As of 31 December 1998, over 50 percent of
the U.S. Fortune 500 corporations were clients of the Company. Within the U.S.
Fortune 500, 100 percent of pharmaceutical, electronics, aerospace, cosmetics
and brokerage companies and over 90 percent of chemical companies are customers.
Additionally, a substantial majority of the world's major management consulting
firms are customers.
Within each corporate client, there is generally a large potential group of
users of The Dialog Corporation's products, representing a significant number of
potential users within the Company's existing customer base.
SALES AND MARKETING
The Company markets its services through direct sales forces in 39 offices
and through 24 independent sales representatives/agents around the world.
As of 31 December 1998 the Company's sales force consisted of approximately
351 full-time sales, marketing and customer support staff in 39 offices
worldwide. The telemarketers contact potential customers by telephone to explain
the products and qualify customer leads which are then given to the salespersons
for personal follow up. The salespersons are responsible for calling on
potential customers and obtaining new subscriptions to the products. Once a
field salesperson has procured a new customer subscription, that client is
assigned to an account manager, who ensures that the client receives any needed
technical support (on-site if requested by a client) and seeks to expand the
number of individual users and the amount of usage within the client
organization. Field sales personnel are paid a minimum base salary and are
otherwise compensated on a commission basis for new subscriptions. Telemarketers
are compensated by a base salary and commissions based upon qualified leads that
subscribe to DIALOG, DataStar or Profound products. Account managers are
compensated with a base salary and commission based upon re-subscription targets
and usage fees generated from the accounts they manage.
Independent sales representatives/agents are compensated on a commission
calculated as a percentage of subscription and usage fees from clients they
recruit or clients who resubscribe. Independent sales representatives also
provide client service directly to the clients in their territory.
15
16
TECHNOLOGY AND PRODUCT DEVELOPMENT
During 1998, as predicted, the demand for new or enhanced products was
strongest for those delivered through the Internet and corporate intranets.
Dialog released several new versions of its Dialog product range, including
DialogSelect, with an increased emphasis on specialised vertical market
offerings, DialogWeb, DialogClassic, Dialog@Site, as well as The Dialog Intranet
Toolkit and Intranet Delivery Tool.
InfoSort. The Company believes that the technology that led to M.A.I.D.'s
strong position in the online business information industry was primarily
InfoSort. InfoSort is an indexing system, which ensures a uniform, reliable and
precise means of retrieving information from many different sources. InfoSort is
described in more detail in the Products and Services section. The acquisition
of KRII brought many new subject areas and databases that can benefit from this
system, as well as ongoing software research projects, which are very relevant
to this field. The Company regards the intelligent use of indexing and
categorization software as one of its chief strengths. As software products are
developed to make the best use of data on individual networks, there are now
opportunities to sell this technology in addition to information. There are
further plans to sell database, indexing and categorization products, which
complement the vast amount of data that the Company can distribute from its data
centers.
Muscat. The Company's awareness of the importance of new information
retrieval technologies led it to acquire a majority interest in Muscat in August
of 1997. Muscat's database search engine, with leading-edge probabilistic
retrieval technology, is now a powerful tool that can be utilized to add value
to the Company's range of products.
Internet. The convergence of the online information industry technologies
with those of the Internet created a period of very rapid change for The Dialog
Corporation and all of its competitors. In 1996, Profound was the first major
online service to be fully migrated to the Internet. Further development
utilizing this technology was a key strategy for the Company in 1997, and
continued throughout 1998 with product enhancements for many of its Internet
based services. The Company continues to develop its range of Internet product
offerings.
Intranets. One area in which the Company concentrated its research and
development efforts was in intranet products, launching LiveIntranet in 1998.
Intranets use the same communications protocols and user interfaces as the
Internet -- services are accessed via ordinary browsers -- but avoid the need to
transmit information over public networks. This can instantly remove the speed
of access issues that are the biggest weakness of the Internet.
Knowledge Management. In order to focus resources on the rapidly growing
knowledge management market place, The Dialog Corporation has recently created a
separate Web Solutions division to concentrate on this area. It will further
develop knowledge management products such as LiveIntranet, and will also look
at other ways of packaging the Company's categorization, indexing and search
technologies -- primarily its proprietary InfoSort and Muscat technologies -- as
the Company anticipates further benefits from the integration of these two
technologies. The Company also markets InfoSort and Muscat to companies
directly.
eCommerce. The Company continues to develop its business to business
eCommerce product Office Shopper, adding Muscat search technology. The Company
anticipates the launch of a U.S. version of Office Shopper in 1999. It is
believed that this is a rapidly growing market, offering significant
opportunities for Dialog.
The search engines for DIALOG and DataStar provided highly complex search
capabilities for information specialists worldwide. In recent years, the open
system environment had permitted the development of end-user products designed
for business professionals and scientists. Some of these products were initially
developed for a Windows interface and all of these are now available on the Web.
These services enabled users to search the complex KRII databases more quickly
and easily.
16
17
DATA CENTER AND TELECOMMUNICATIONS LINKS
Data Centers. The Company's data is now stored in four data centers around
the globe: Palo Alto, California; Slough, England; Bern, Switzerland and Ottawa,
Canada. The Palo Alto and Bern centers are leased directly by the Company and
the equipment is owned and operated by the Company. The Slough facility is owned
and operated by a third party, as is the Ottawa center, which supports the
Infomart service. The data centers all have the capacity to service
substantially more simultaneous users than the Company currently services at
this time. The Company's goal is to maintain sufficient excess capacity to
provide adequate time for the Company to add additional capacity in the event of
a substantial sudden increase in data storage and usage. No assurances can be
given that the Company will be successful in this effort.
The largest data center is located in Palo Alto, and contains Halon fire
suppression, dual power feeds from two grids, and is further protected by a
diesel power generator.
The Slough facility also contains Halon fire suppression and air
conditioning and is further protected by an uninterruptible power supply system.
The Company obtains electrical power from a local source, as well as the British
National Grid, and as an additional back-up, maintains battery-powered
electrical facilities which would allow it to maintain operation for at least 30
minutes in the event that no power was available. Software and related files are
backed up regularly and stored in a secure location off-site to be available in
the event of a system failure.
Telecommunications Links. Several major international information networks
such as British Telecom, MCI Communications Corp., GLOBALONE, IBM, and
CompuServe carry the Company's services. Through these networks, using an
appropriate personal computer and a modem, end users virtually throughout the
world can dial a local number to connect to the Company's systems.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company considers its InfoSort indexing system, Muscat and DIALOG
search engines to be critical to its future success. The Company regards its
InfoSort indexing system and related software, its Muscat intelligent search
engine software, and its DIALOG search engine and related software, as
proprietary. It relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
its intellectual property and proprietary rights. The Company has been granted a
patent on the Incremental Viewer feature of its Profound service, and in
addition, there are several patents pending, primarily relating to its InfoSort
technologies. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use the Company's proprietary rights without
authorization, or to develop similar technology independently. Furthermore, the
laws of certain countries in which the Company makes its products and services
available do not protect the Company's intellectual property rights to the same
extent as the laws of the U.K. and the U.S. The Company generally does not
include in its software any mechanisms to prevent or inhibit unauthorized use,
but requires the execution of a license agreement, which permits use of the
Company's products by registered customers. If misappropriation of the Company's
proprietary rights were to occur to any substantial degree, the Company's
results or operations could be materially adversely affected. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate.
While the Company is not currently engaged in any litigation or legal
proceedings with respect to its intellectual property, there can be no assurance
that third parties will not claim the Company's current or future products
infringe on the proprietary rights of others. The Company expects that software
developers increasingly will be subject to such claims as the number of products
and services in the online information services industry grows. Any such claims,
with or without merit, could result in costly litigation or might require the
Company to enter into royalty or licensing agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the Company
or at all.
In addition, the Company has historically generated only a small amount of
data itself, and has relied almost entirely upon the licensing of data from
third party providers. The Company's right to use and distribute information
through its online services depends almost entirely on the rights of its third
party
17
18
providers to license such information. There can be no assurance that third
parties will not claim that the Company's current or future products infringe on
the proprietary rights of others. The Company expects that software developers
and online information providers increasingly will be subject to such claims as
the number of products and services in the online information services industry
grows. Any such claims, with or without merit, could result in costly litigation
or might require the Company to enter into royalty or licensing agreements or
pay amounts in respect of past usage. Such royalty or license agreements, if
required, may not be available on terms acceptable to the Company or at all.
The name "Dialog" and all Dialog product names, including, but not limited
to, "InfoSort", "Profound", "Profound for Intranets", "Profound LiveWire",
"DataStar", "DialogClassic", "DIALOG Web", "DIALOG Select", "DataStar Web",
"DIALOG@Site", "DIALOG Direct", "DIALOG Direct", "DIALOG OnDisc", and
"SourceOne", "LiveIntranet", "Dialog Intranet Toolkit", "Dialog Intranet
Delivery Tool", "Office Shopper", "Muscat", are trademarks of the Company.
Applications to register certain of these marks have been filed in certain
countries, including Australia, Canada, Germany, Great Britain and the United
States. Some of such applications have matured to registrations. All other
trademarks or registered trademarks used in this Report on Form 20-F are the
property of their respective owners.
COMPETITION
The business information industry is intensely competitive and is
characterized by rapid technological change. The industry includes both
extremely large and well-capitalized companies as well a smaller competitors.
The Company is a leading international supplier of online information.
Nevertheless, the Company competes or may compete directly or indirectly with
the following competitors in its three operating divisions. In its Company's
Information Services Division, the Company competes or may compete directly or
indirectly with (i) news and information providers such as Dow Jones & Co.,
Inc., Reed Elsevier plc, Pearson plc and Reuters Ltd.; (ii) market data or
services companies providing near real time quotes and news; (iii) traditional
print media companies that are increasingly searching for opportunities for the
online provision of news, including those seeking to establish world wide web
(the "Web") sites on the Internet; (iv) third party providers of software that
allows end-users to aggregate and filter a variety of information services, such
as NewsEDGE Corporation; (v) providers of network-based software systems such as
Microsoft Corporation which could, in the future, ally with competing news and
other information providers; (vi) information services companies that provide
information regarding particular industry segments, such as Ovid Technologies,
Inc. with respect to biomedical data, STN International with respect to chemical
data, Questel-Orbit with respect to intellectual property data and El Village
with respect to engineering data; and (vii) to a lesser degree, consumer
oriented online services such as CompuServe, America Online, Inc. and Prodigy
Services Company. In its Web Solutions and Internet Software Division, the
Company competes or may compete directly or indirectly with companies such as
Inktomi, Verity, and Autonomy. In its eCommerce Division, the Company competes
directly or indirectly with OfficeDepot.com, OfficeMax.com and Viking Direct
plc.
EMPLOYEES
As of 31 December 1998, the Company had a total of 904 full-time employees,
of which 240 were based in the U.K., 428 were based in the U.S. and 236 were
based throughout the rest of the world. The Company's future success depends in
significant part on the continued service of its key management, sales, product
development and operational personnel and on its ability to continue to attract,
motivate and retain highly qualified employees. Competition for such personnel
is intense and there can be no assurance that the Company will be successful in
attracting, retaining or motivating key personnel. None of the Company's
employees, other than those in France, are represented by a collective
bargaining organization and the Company has never experienced any work
stoppages.
RISK FACTORS
This Report on Form 20-F contains forward-looking statements that involve
risks and uncertainties that could cause actual results to differ materially
from those contemplated by such forward-looking statements,
18
19
including the factors set forth herein and elsewhere in this Report. See "Item
1: Description of Business" and "Item 9: Management's Discussion and Analysis of
Financial Condition and Results of Operations". Although the Company believes
that the assumptions underlying the forward-looking statements contained herein
are reasonable, any of the assumptions could be inaccurate, and therefore, there
can be no assurance that the forward-looking statements in this Report will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
HISTORY OF LOSSES; ACCUMULATED DEFICIT; FUTURE OPERATING RESULTS UNCERTAIN
The Company has incurred net losses in four of the last five fiscal years.
As of 31 December 1998, the Company had an accumulated deficit of approximately,
on a U.K. GAAP basis, L249 million. There can be no assurance that the Company
will be profitable on a quarterly or annual basis in the future. The Company's
limited operating history and the relative immaturity of its markets, together
with the factors described under "-- Fluctuations in Operating Results," make
the prediction of future operating results impossible. The Company's past
financial performance should not be considered indicative of future results.
Although the Company has experienced usage growth in recent periods, there can
be no assurance that the Company's revenues will continue to increase or will
not decrease. Future operating results will depend on many factors, including
the growth of the market for the Company's products and services, demand for the
Company's products and services, the level of competition, the Company's success
in expanding its sales force and the ability of the Company to develop and
market new products and product enhancements and to control costs, as well as
general economic conditions. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations."
FLUCTUATIONS IN OPERATING RESULTS
Operating results may fluctuate as a result of many factors, including the
announcement, introduction and acceptance of new products, services and
enhancements by the Company and its competitors, the relative mix of new
subscription revenue compared to usage fees, royalty rates payable to data
sources, the relative mix of subscriptions, variations in which data sources
generate usage fees in a given period, competitive conditions in the industry,
loss of significant customers or data sources, interruptions or price changes in
telecommunications service, spending patterns of the Company's clients, currency
fluctuations and general economic conditions. There can be no assurance that the
Company's usage or subscription revenues will not decline in the future as a
result of cost cutting measures by the Company's clients, particularly if there
were a general economic decline in one or more of the industries in which the
Company has a strong customer base (e.g., pharmaceuticals or aerospace). The
Company's operating expenses are based in significant part on its expectations
regarding future revenues and are fixed to a large extent in the short term.
Accordingly, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant revenue
shortfall would therefore have a material adverse effect on the Company's
results of operations.
DEPENDENCE ON DATA SOURCES
The Company's success depends to a substantial degree on its ability to
provide users access to a breadth of data from many different sources.
Historically, the Company has generated only a small amount of data itself, and
has relied almost entirely upon the ability to license data from third party
providers. Certain data sources, such as Reuters Limited ("Reuters"), have
limited the availability of their data to third party distributors such as the
Company. In addition, certain data sources will provide their content only in
exchange for data which they in turn may distribute. While the Company believes
that the breadth and brand name recognition of its data sources strengthen the
Company's ability to access data sources, there can be no assurance that the
Company will be able to continue to increase the number of data sources or that
existing data sources will renew the Company's contracts as they expire, either
on economic terms that are beneficial to the Company or at all. If the Company
were to lose access to significant content providers or if the terms
19
20
upon which the Company is able to license data from its significant content
providers were to change materially, the Company's results of operations could
be materially adversely affected.
DEPENDENCE ON PROFOUND, DIALOG AND DATASTAR SERVICES
The Company has derived a significant majority of its revenues from service
subscriptions and related usage fees for Profound and from service charges and
downloading charges for Dialog, DataStar and related services. The Company's
strategy is to reduce efforts and expenditures on certain products and services
that have been identified as non-core and to continue to focus on providing
Profound, Dialog and DataStar and related services as its principal line of
business, integrating the three services so that, over time, each becomes simply
a different method of viewing the same content. As a result, the Company is
expected to become less diversified and any factor adversely affecting revenues
generated from Profound, Dialog and DataStar and related services as well as any
factor adversely impacting the integration of the three techniques would have a
material adverse effect on the Company's results of operations. The Company's
future financial performance will depend principally on the market's continued
acceptance of Profound, Dialog and DataStar particularly in the U.K., the U.S.
and Europe, and the Company's ability to sell Profound, Dialog and DataStar to
additional customers and increase usage revenues derived from existing
customers. Additionally, the Company's future financial performance will depend
upon market acceptance of any new products. There can be no assurance that the
Company will be able to successfully market Profound, Dialog and DataStar or any
integrated versions of these services or that the Company will successfully
maintain or increase its revenues through this strategy.
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' EQUITY
The Company is highly leveraged. As of 31 December 1998, on a U.K. GAAP
basis, the Company had an aggregate principal amount (excluding unused credit)
of L154.5 million of outstanding indebtedness, including L46.1 million of senior
indebtedness, and a stockholders' deficit of L94.8 million. The indenture (the
"Indenture") pursuant to which the Company's 11% Senior Subordinated Notes due
2007 (the "Notes") were issued permits the Company and its Restricted
Subsidiaries (as defined in the Indenture) to incur additional indebtedness,
including senior indebtedness, subject to certain limitations, and the Company
and certain of its subsidiaries have additional borrowing capacity on a
revolving credit basis under its $92.5 million senior credit facility (the
"Senior Credit Facility") and the $25 million revolving credit facility (the
"Revolving Credit Facility" and together with the Senior Credit Facility, the
"Senior Credit Facilities"). On 17 May 1999, the Company announced that it had
secured an additional $25 million facility from The Chase Manhattan Bank that
has enabled the release of some of the funds previously earmarked for debt
repayments to be invested in the high growth market opportunities of Information
Services, Web Solutions and eCommerce. The additional facility increases the
size of the Senior Credit Facility by $11.5 million.
The Company's high degree of leverage could have important consequences to
holders of the Company's equity and Notes, including the following: (i) the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) certain of the Company's borrowings are at variable rates of
interest (including borrowings under the Senior Credit Facilities), which
exposes the Company to the risk of increased interest rates; (iv) the
indebtedness outstanding under the Senior Credit Facilities is secured and
matures prior to the maturity of the Notes; (v) the Company may be substantially
more leveraged than certain of its competitors, which may place the Company at a
competitive disadvantage; and (vi) the Company's substantial degree of leverage
may limit its flexibility to adjust to changing market conditions, reduce its
ability to withstand competitive pressures and make it more vulnerable to a
downturn in general economic conditions or its business. In the future, the
Company's ability to meet its debt service obligations will be dependent upon
the Company's future performance, which will be subject to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control.
20
21
VOLATILITY OF ORDINARY SHARE PRICE; VOLATILITY OF ADS PRICE
The Company's Ordinary Shares are listed on the London Stock Exchange and
are publicly traded in the U.K. The Company's American Depositary Shares
("ADSs") have been traded on the Nasdaq National Market since November 1995. The
trading price of the Ordinary Shares on the London Stock Exchange, and the ADSs
on the Nasdaq National Market have been subject to wide fluctuations. In
addition, in recent years the stock market in general, and the shares of
technology companies in particular, have experienced extreme price and volume
fluctuations. This volatility has had a substantial effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance. These broad market fluctuations may adversely affect the market
price of the Ordinary Shares and ADSs. The market price of the Ordinary Shares
and ADSs are directly affected by economic and political conditions in the
United Kingdom, in part because the Ordinary Shares are listed and traded on the
London Stock Exchange and are subject to local conditions and press comment but
also are a result of differences between operating results reported under U.S.
and U.K. GAAP.
RISK OF SYSTEM FAILURE OR INADEQUACY
The Company's operations are dependent on its ability to protect its
computer equipment and the information stored in its data centers against damage
that may be caused by fire, earthquake, flooding, power loss, telecommunications
failures, unauthorized intrusion and other events. One of the Company's primary
data centers consists of mainframes in a clustered multi-processing
configuration; this data center is protected by an uninterruptible power supply
system with short-term battery back-up and security and authorization procedures
as well as by fire suppression equipment. Similarly, another primary data center
in Palo Alto, California, which houses its Dialog service, is protected by a
back-up power supply system and by fire suppression equipment. The Company and
vendor employees remain onsite to address potential interruptions in services.
Software and related data files are backed-up regularly and stored off-site for
both data centers and the Company also has a contingency plan that is designed
to reduce the risk of extended interruption of the Company's services in the
event of damage to, or other failure of, these two data centers. Although the
Company generally does not maintain, or have agreements with third parties for
the use of, redundant computing resources, it has entered into an agreement with
a third party for the use of redundant computing resources in the event of a
significant interruption at the Palo Alto data center. Notwithstanding the
availability of such resources, operations could remain significantly
interrupted as back-up copies of data files are loaded and such computing
resources become operational. The precautions taken with respect to data centers
in Bern, Switzerland, Ottawa, Canada, and Slough, England are less extensive
than those taken at its Palo Alto site. There can be no assurance that the
measures in place at the Company's various sites will be sufficient to eliminate
the risk of extended interruption in the Company's operations. Any damage or
failure that causes interruption in the Company's operations could have a
material adverse effect on the Company's results of operations. Additionally,
although the primary data center in Palo Alto, California lies along a major
fault line, the Company does not maintain earthquake insurance. Accordingly, any
losses caused by interruption of the Company's operations as a result of an
earthquake, or other losses resulting from an earthquake, would not be mitigated
by insurance and could have a material adverse effect on the Company's results
of operations.
Additionally, Profound, Dialog and DataStar data are transmitted beyond the
data centers using transmission methods which are not within the control of the
Company, including telecommunications systems and the Internet. The Company
currently relies on several companies to provide dial-up access to the Company's
services and the dependence is expected to increase as the Company expands its
use of alliance resellers such as CompuServe, Inc. ("CompuServe"). Any damage or
failure that causes interruption in these transmission methods could have a
material adverse effect on the Company's results of operations.
COMPETITION
The business information services industry is intensely competitive and is
characterized by rapid technological change. The industry includes both
extremely large and well-capitalized companies as well as smaller competitors.
The Company is a leading international supplier of online information.
Nevertheless, the
21
22
Company competes or may compete directly or indirectly with the following
categories of competitors: (i) large, well established news and information
providers such as Dow Jones & Co., Inc. (through its Dow Jones News Retrieval
service), Reed Elsevier plc (through its Lexis-Nexis service), Pearson plc
(through its FT Profile service) and Reuters Ltd. (through its Reuters Business
Briefing service); (ii) market data or services companies providing near real
time quotes and news; (iii) traditional print media companies that are
increasingly searching for opportunities for online provision of news, including
those seeking to establish world wide web (the "Web") sites on the Internet;
(iv) third party providers of software that allows end-users to aggregate and
filter a variety of information services, such as NewsEDGE Corporation; (v)
providers of network-based software systems such as Microsoft Corporation
("Microsoft) which could, in the future, ally with competing news and other
information providers; (vi) information services companies that provide
information regarding particular industry segments, such as Ovid Technologies,
Inc. with respect to biomedical data, STN International with respect to chemical
data, Questel-Orbit with respect to intellectual property data and EI Village
with respect to engineering data; and (vii) to a lesser degree, consumer
oriented online services such as CompuServe, America Online, Inc. and Prodigy
Services Company. Many of these companies and other market participants not
named above have substantially greater technical, financial and marketing
resources than the Company. In addition, several companies including NewsEDGE
Corporation have begun to compete in the provision of business information to
end users through computer networks by using filtering agents and "push
technology." Some of the Company's current and potential competitors may own all
or a substantial part of the data in their databases. The Company owns a very
small percentage of the data in its database and relies almost entirely upon its
ability to license data from third-party providers to which it pays royalties.
Competitors who own their own data have no such royalty obligation on their own
data and may limit or preclude access by the Company to their data, which may
give such competitors a pricing or competitive advantage over the Company. Given
that the Web has reduced the costs associated with widespread dissemination of
information and consequently, to a degree, reduced the need for information
aggregators such as the Company, the Company believes it may face increased
competition from data sources as such sources increasingly seek to deliver their
data themselves or directly control the delivery of such data.
The Company believes that the overall cost to the user of retrieving useful
information through an online service is an important competitive factor. This
cost includes such elements as subscription fees, usage fees, online charges and
other items. The Company could be required to reduce its subscription fees or
otherwise alter the pricing structure for its products in response to
competitive pressures. There can be no assurance that any such action or
increased competition, on the basis of price, breadth of data sources or other
factors, would not have a material adverse effect on the Company's results of
operations.
DEPENDENCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its InfoSort indexing system and related software,
Muscat information search and retrieval system and Dialog search engine as
proprietary. The Company relies primarily on a combination of statutory and
common law copyright, trademark and trade secret laws, customer licensing
agreements, employee and third-party nondisclosure agreements and other methods,
rather than patents, to protect its proprietary rights. However, the Company is
currently in the process of seeking several patents for its InfoSort
technologies and has secured a patent for its Incremental Viewer. The Company
considers the InfoSort indexing system, the Muscat information search and
retrieval system and the Dialog search engine to be critical to its future
success. Despite these precautions, it may be possible for a third party to copy
or otherwise obtain and use the Company's proprietary rights without
authorization, or to develop similar technology independently. Furthermore, the
laws of certain countries in which the Company makes its products and services
available do not protect the Company's intellectual property rights to the same
extent as the laws of the U.K. and the U.S. The Company does not generally
include in its software any mechanisms to prevent or inhibit unauthorized use,
but instead requires the execution of a license agreement which permits use of
the Company's products by registered subscribers and end users. If
misappropriation of the Company's proprietary rights were to occur to any
substantial degree, the Company's results of operations could be materially
adversely affected. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate. See "-- Description of
Business -- Intellectual Property and Proprietary Rights."
22
23
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS AND SERVICES
The online information market is influenced by rapidly changing technology,
changes in customer needs and frequent introductions of new or enhanced products
and services. Accordingly, the Company believes that its future success will
depend to a great extent upon its ability to meet these changes by enhancing its
existing products and services, increasing its market presence and the market's
awareness of the Company's brand names and developing and introducing new
products and services on a timely basis. Any failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, or any significant delays in development or introduction of new
products and services, could result in a loss of competitiveness or revenues and
thereby have a material adverse effect on the Company's results of operations.
Additionally, new products, when first released by the Company, may contain
undetected errors or "bugs" that, despite testing by the Company, are discovered
only after a product has been installed and used by customers. There can be no
assurance that errors will not be discovered in the future, causing delays in
product introduction and resulting in negative market reactions to the new
product or service.
The Company anticipates that the Internet will become an important source
of, or conduit for, business information. However, it is not clear what the
economics or other ramifications of any such use of the Internet to provide
data, or access to data, would be. Some content providers have announced their
intentions not to make their content available over the Web because of concern
that data could be downloaded and stored with multiple end-uses, effectively
cannibalizing the original print data source. Such concerns among content
providers may undermine the Company's data offerings over the Web, adversely
affecting the Company's results of operations. In the past, the Company has been
required to assist potential international subscribers in establishing Web
connectivity in order to grow in new global areas. Additionally, the Internet
may not prove to be a viable, reliable commercial delivery method because of
inadequate development of the necessary infrastructure, such as reliable network
backbones or timely development of complementary services, such as high-speed
modems. The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. There can be no
assurance that the Internet infrastructure will continue to be able to support
the demands placed on it by this continued growth or will not be adversely
affected by increased governmental regulation. See "-- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent upon a limited
number of members of senior management of the Company and other key employees.
The loss of the service of one or more key employees could have a material
adverse effect on the Company. In addition, the Company believes that its future
success also depends on its continuing ability to identify, hire, train and
retain highly qualified technical and managerial personnel. Competition for such
personnel is intense, and the Company has experienced difficulty in identifying
and hiring qualified software developers and other technical personnel. There
can be no assurance that the Company will be able to attract, assimilate or
retain highly technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material adverse effect upon the Company's current business, cost reduction
strategies, integration strategy, new business plans, new product development
efforts and future business prospects.
CURRENCY FLUCTUATIONS
A significant portion of the Company's revenue historically has been
denominated in currencies other than the pound sterling (the currency in which
the financial statements are stated), mainly the U.S. dollar. During 1998,
approximately 80% of the Company's total revenue was denominated in U.S.
dollars. Fluctuations in the value of the currencies in which the Company
conducts its business relative to the U.S. dollar have caused and will continue
to cause dollar-translated amounts to vary from one period to another. Due to
the number of currencies involved, the constantly changing currency exposures
and the volatility of currency exchange rates, the Company cannot predict the
effect of exchange rate fluctuations upon future operating results. To date, the
Company has not undertaken hedging transactions to cover its currency
transaction exposure but may undertake such transactions in a limited manner in
the future. See "Managements Discussion and Analysis of Consolidated Financial
Condition and Results of Operations."
23
24
RISKS ASSOCIATED WITH WORLDWIDE OPERATIONS
The Company's data centers are located in Switzerland, Canada, England and
the United States, and its sales and marketing operations are located in the
United Kingdom, Bern, Switzerland and Cary, North Carolina. The geographic
distance between these locations has in the past led, and could in the future
lead, to logistical and communications difficulties. There can be no assurance
that the geographic, time zone, language and cultural differences between the
Company's British, North American and Swiss personnel and operations will not
result in problems that materially adversely affect the Company's business,
operating results and financial condition. Further, the Company's operations may
be directly affected by economic and political conditions in the countries where
the Company does business.
The Company expects to commit additional time and resources to expanding
its worldwide sales and marketing activities, localizing its products for
selected markets and developing local sales and support channels. There can be
no assurance that such efforts will be successful. Failure to sustain or
increase worldwide revenue could have a material adverse effect on the Company's
business, operating results and financial condition. Worldwide operations are
subject to a number of risks, including the costs of localizing products for
different countries, longer accounts receivable collection periods in certain
geographic regions, especially Europe, and greater difficulty in accounts
receivable collections, unexpected changes in regulatory requirements,
dependence on independent resellers and technology standards, import and export
restrictions and tariffs, difficulties and costs of staffing and managing
international operations, potentially adverse tax consequences, political
instability, the burdens of complying with multiple, potentially conflicting
laws and the impact of business cycles and regional economic instability.
Approximately 80% of the Company's sales in 1998 were denominated in U.S.
Dollars, with the remainder in Pounds Sterling, Swiss Francs and, to a lesser
extent, other currencies. An increase in the value of the U.S. Dollar relative
to foreign currencies could make the Company's products more expensive and,
therefore, less competitive in other markets. See "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations".
YEAR 2000 COMPLIANCE
The Company is in the process of implementing a program designed to ensure
that all software used in connection with the Company's services and internal
operations systems will manage and manipulate data involving the transition of
dates from 1999 to 2000 without functional or data abnormality and without
inaccurate results related to such dates. The Company currently anticipates that
this program will not require additional manpower, although there can be no
assurance that this will be the case. The Company currently anticipates that
costs associated with this program will be approximately L3 million, L1 million
of which was expended in 1998 and L2 million expected to be expended in 1999,
although there can be no assurance that this will be the case or that the
Company will not incur additional costs in connection with such program. In
addition, there can be no assurance that the implementation of such program will
not have a material adverse effect on the Company.
CONTENT PROVIDER AUDIT
The Company has developed and maintained a sophisticated software package
designed to track database usage for purposes of customer billing and content
provider royalty accounting. From time to time, content providers have exercised
their right to audit their royalty payment streams from the Company. Any finding
of a material inaccuracy upon completion of such audits could have a material
adverse effect on the Company's operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's head office and principal place of business in the U.K. is
The Communications Building, 48 Leicester Square, London WC2H 7DB where it
leases approximately 14,300 square feet for its executive offices and U.K.
content and product development departments. The Company also leases an office
at
24
25
Southwark, London, covering approximately 11,500 square feet, used primarily as
a regional sales headquarters for Europe, the Middle East and Africa.
The Company's U.S. operations are based in Cary, North Carolina and in
Mountain View, California. The Company leases approximately 63,743 square feet
of office space in Cary, which serves as the sales and administrative
headquarters for the U.S. The Company also leases approximately 133,500 square
feet of office space in Mountain View (of which 88,532 square feet is leased to
sub-tenants), which houses the U.S. product development group.
The Company's principal data centre is in Palo Alto, California, where it
leases approximately 35,500 square feet of space. The facility is protected by a
fire suppression system, dual power feeds from two grids and a diesel powered
generator. The Company also leases approximately 20,900 square feet in Bern,
Switzerland which is both a data centre and a technical support facility for the
DataStar service. The Company's U.K. mainframe computers are located in Slough,
England, and are facilities managed by a third party specialist company.
The Company's field sales and support operations lease facilities in a wide
variety of locations in Europe, Asia and the United States. The Company believes
that its existing facilities are adequate for its current needs and that
additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to pending legal proceedings
that are considered to be ordinary routine litigation incidental to their
business and not material to the Group's consolidated financial position.
Save as set out below, no companies in the Group are involved in any legal
or arbitration proceedings which may have or may have had, during the fiscal
year ended 31 December 1998, a material adverse effect on the consolidated
financial position of the Group nor, to the Company's knowledge, are any
proceedings contemplated by any governmental authorities against any company in
the Group.
On 22 October 1997, Knight-Ridder Information, now trading as The Dialog
Corporation, and certain of its subsidiaries were named as defendants in a class
action lawsuit filed in the United States District Court for the Northern
District of California. The plaintiffs allege copyright infringement in
connection with the delivery of copies of full-text articles through its UnCover
business. The plaintiffs seek injunctive relief as well as restitution,
statutory damages and unspecified actual damages. Effective 1 January 1999, the
Company sold UnCover and CARL Corporation (a named defendant); however, the
Company has agreed to indemnify the purchaser with regard to the claims brought
in this action. On 31 March 1999, the trial court certified the plaintiff class.
On 1 April 1999, the United States Court of Appeals for the Ninth Circuit agreed
to hear an interlocutory appeal of the trial court's denial of the Group's
summary judgment motion. Management intends to defend this matter vigorously in
the event that an acceptable settlement cannot be reached. Management will also
vigorously pursue indemnification claims and insurance coverage that may be
applicable to this matter.
On March 3, 1999, the Company filed a complaint in the United States
District Court against The Fourth Communications Network, Inc. ("Fourth
Network") for failure to make required payments on a promissory note. This note
was tendered to the Company as a result of Fourth Network's failure to pay
guaranteed royalties pursuant to an agreement between the Company and Fourth
Network whereby the Company, among other things, transferred to Fourth Network
its right to supply a hotel chain with in-room Internet access (the "Transfer
Agreement"). Fourth Network has asserted counterclaims alleging that
representations made by the Company relating to the Transfer Agreement were
false. Fourth Network is seeking unspecified damages in excess of $100,000,
legal costs, and rescission of the Transfer Agreement. Management intends to
defend this matter vigorously in the event that an acceptable resolution cannot
be reached.
25
26
ITEM 4. CONTROL OF REGISTRANT
The following table sets forth certain information regarding the beneficial
ownership of Ordinary Shares by (a) each officer and executive director, and (b)
all directors and officers of the Company as a group. Unless otherwise noted in
the footnotes to the table, (i) the persons named in the table have sole voting
and investing power with respect to all Ordinary Shares indicated as being
beneficially owned by them and (ii) officers and directors can be reached at the
principal offices of the Company.
OWNERSHIP
------------------------
AMOUNT PERCENT OF
NAME OF BENEFICIAL OWNER OWNED CLASS(1)
------------------------ ---------- ----------
M Mander(2)................................................. 900,327 0.59%
D Wagner(3)................................................. 17,618,018 11.62%
D Mattey(4)................................................. 2,477,529 1.63%
S Maller(5)................................................. 125,668 0.08%
P Sommers(6)................................................ 8,000 0.01%
J Molle(7).................................................. 218,732 0.14%
C Morton(8)................................................. 280,865 0.19%
I Barton(9)................................................. 479,139 0.32%
M Hussey(10)................................................ 242,610 0.16%
A Thomas(11)................................................ 100,000 0.07%
R Swank(12)................................................. 38,844 0.03%
All executive officers and directors as a group (11
persons).................................................. 22,489,732 14.84%
- ---------------
(1) Based on 151,571,363 Ordinary Shares outstanding at 21 May 1999 and
excluding an aggregate of 1,756,330 that may be acquired by all executive
officers and directors as a group pursuant to the share option schemes
described in Item 12 of this Report. Calculations of percentage of
beneficial ownership assume the exercise by only the respective named
shareholder of all options for the purchase of Ordinary Shares held by such
shareholder which are exercisable within 60 days of 21 May 1999. The
details of share options exercisable within 60 days of 21 May 1999 are
contained in the notes below.
(2) Includes 9,327 Ordinary Shares held for the benefit of Mr. Mander by BDS
Nominees Limited.
(3) Includes (i) 1,334,060 Ordinary Shares held jointly by Mr. D Wagner and
Yaffa Wagner, (ii) 100,000 Ordinary Shares held in trust for the benefit of
Mr. D Wagner by the Daniel Wagner (M.A.I.D.) Trust, and (iii) 400,000
Ordinary Shares held by S Wagner, Mr. Wagner's wife. Also includes options
to purchase 183,238 Ordinary Shares.
(4) Includes (i) 600,000 Ordinary Shares held by Barclays Nominees (Branches)
Limited for the benefit of Mr. D Mattey, (ii) 560,000 Ordinary Shares held
jointly by Mr. D Mattey and Alan Mattey, and (iii) 200 Ordinary Shares held
by A Hurrell, Mr. Mattey's wife. Also includes options to purchase 142,329
Ordinary Shares.
(5) Includes options to purchase 100,227 Ordinary Shares.
(6) 8,000 Ordinary Shares are held in the form of American Depositary Receipts.
(7) Includes options to purchase 83,616 Ordinary Shares.
(8) Includes options to purchase 78,864 Ordinary Shares.
(9) Includes 20,640 Ordinary Shares held by A Barton, Mr. Barton's wife.
(10) 242,610 Ordinary Shares held for the benefit of Lord M Hussey by RBSTB
Nominees Limited.
(11) 100,000 Ordinary Shares held for the benefit of Mr. Thomas by BAT Holdings
Limited.
(12) 12,000 Ordinary Shares are held in the form of American Depositary
Receipts. Includes options to purchase 26,844 Ordinary Shares.
26
27
To the Company's knowledge, no other person is the owner of more than 10%
of the outstanding Ordinary Shares nor is the Company directly or indirectly
owned or controlled by any other corporation or any government.
There are no arrangements known to the Company the operation of which may,
at a subsequent date, result in a change of control of the Company.
ITEM 5. NATURE OF TRADING MARKET
The Company's Ordinary Shares are traded on the London Stock Exchange,
under the symbol "DLG" and American Depositary Shares ("ADSs"), each
representing four Ordinary Shares, are included for trading in the NASDAQ
National Market System under the symbol, "DIAL" (previously "DIALY"). The ADSs
are evidenced by ADRs issued by The Bank of New York, as Depositary under a
Deposit Agreement, dated as of 21 November 1995 among M.A.I.D., the Depositary
and the holders from time to time of ADRs. The ADSs are registered under the
Securities Exchange Act 1934, as amended.
The following tables set forth, for the periods indicated, (1) the reported
high and low closing sale prices for the Ordinary Shares based on the Daily
Official List of the London Stock Exchange and (2) the reported high and low
closing sale prices of the ADSs on NASDAQ since the commencement of trading of
the ADSs on 22 November 1995. The tables do not reflect trading after the
official close of the London Stock Exchange and NASDAQ for which no official
quotations exist.
THE LONDON STOCK
EXCHANGE
POUNDS PER SHARE
----------------
HIGH LOW
----- -----
1999
2nd Quarter (through to 21 May 1999)...................... 1.48 1.01
1st Quarter............................................... 1.22 0.57
1998
4th Quarter............................................... 1.83 0.47
3rd Quarter............................................... 2.36 1.48
2nd Quarter............................................... 1.95 1.41
1st Quarter............................................... 1.88 1.32
1997
4th Quarter............................................... 2.37 1.39
3rd Quarter............................................... 2.37 1.52
2nd Quarter............................................... 2.46 1.50
1st Quarter............................................... 2.05 1.50
1996
4th Quarter............................................... 3.14 1.86
3rd Quarter............................................... 3.28 2.59
2nd Quarter............................................... 3.41 1.96
1st Quarter............................................... 2.49 1.53
1995
4th Quarter............................................... 3.54 2.13
3rd Quarter............................................... 2.56 0.82
2nd Quarter............................................... 0.90 0.77
1st Quarter............................................... 0.85 0.63
1994
4th Quarter............................................... 0.71 0.45
3rd Quarter............................................... 0.81 0.46
2nd Quarter............................................... 0.87 0.43
1st Quarter (from March 25)............................... 1.10 0.87
27
28
NASDAQ
U.S. DOLLARS PER ADS
---------------------
HIGH LOW
------ -----
1999
2nd Quarter (through to 21 May 1999)................... 9 3/4 6 7/16
1st Quarter............................................ 8 1/16 4 1/4
1998
4th Quarter............................................ 12 1/8 3
3rd Quarter............................................ 16 1/4 9 5/8
2nd Quarter............................................ 14 9 1/8
1st Quarter............................................ 12 5/16 8 7/8
1997
4th Quarter............................................ 14 8 3/4
3rd Quarter............................................ 15 1/8 10 1/4
2nd Quarter............................................ 16 3/8 10 1/4
1st Quarter............................................ 13 3/8 10
1996
4th Quarter............................................ 20 3/8 12 1/2
3rd Quarter............................................ 20 1/2 15 3/4
2nd Quarter............................................ 20 1/2 11 3/4
1st Quarter............................................ 14 7/8 9 3/8
1995
4th Quarter (from November 22)......................... 18 1/4 13 1/8
On 21 May 1999, the closing market price of the Company's Ordinary Shares
was L1.06 per share and the ADS price was $6 3/4 per ADS. On such date,
1,606,257 Ordinary Shares and ADRs evidencing 3,839,651 ADSs (representing
15,358,604 Ordinary Shares) were held of record in the U.S. These Ordinary
Shares and ADRs were held by 69 record holders and 36 record holders,
respectively, and represented 1.06% and evidenced ADSs representing 10.13%,
respectively, of the total number of Ordinary Shares outstanding. Since certain
of these Ordinary Shares and ADRs were held by brokers or other nominees, the
number of recorded holders in the U.S. may not be representative of the number
of beneficial holders or of where the beneficial holders are resident.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no United Kingdom foreign exchange control restrictions
on remittances of dividends on Ordinary shares or on the conduct of the Group's
operations.
Under English Law and The Dialog Corporation's Memorandum and Articles of
Association, persons who are neither residents nor nationals of the United
Kingdom may freely hold, vote and transfer their Ordinary shares in the same
manner as United Kingdom residents or nationals.
ITEM 7. TAXATION
The following is a summary of certain U.S. Federal income and U.K. tax
consequences generally applicable to ownership by a beneficial owner of ADSs
representing Ordinary Shares and of Ordinary Shares not in ADS form that is not
resident in the United Kingdom and is (i) a citizen or resident of the United
States, (ii) a corporation created or organized in the United States or under
the laws of the United States or of any state, or (iii) an estate or trust, the
income of which is includable in gross income for United States federal income
tax purposes regardless of its source ("U.S. Holder") for the purpose of the
current double taxation convention between the United States and the United
Kingdom (the "Convention"). The summary is based on tax laws in effect in the
United Kingdom, the provisions of the U.S. Internal Revenue Code of 1986, as
amended (the "Code"), the final, temporary and proposed U.S. Treasury
regulations under the Code
28
29
and the administrative and judicial interpretations thereof, and the Convention,
all as in effect as of the date of this report, and all of which are subject to
change (possibly on a retroactive basis) and to differing interpretations. There
can be no assurance that the taxing authority of the United Kingdom or the U.S.
Internal Revenue Service (the "IRS") will not take a contrary view, and no
ruling from such taxing authorities has been or will be sought.
This summary assumes a U.S. holder holds ADSs as a capital asset, and
elects to credit, rather than deduct, foreign income taxes against the U.S. tax
liability.
The following discussion does not consider all aspects of United States
Federal income taxation that may be relevant to holders in light of their
personal circumstances. Further, it does not consider holders in special tax
situations, (including dealers in securities, financial institutions, insurance
companies, tax exempt organizations, holders of securities held as part of a
"straddle", "hedge" or "conversion transaction" with other investments, U.S.
holders liable to Alternative Minimum Tax, U.S. holders who are domestic
corporations and actually or constructively own 10% or more of the voting shares
of the Company, or situations in which the "functional currency" within the
meaning of Section 985(b) of the Code of an investor is not the U.S. dollar).
This summary also does not discuss the source of gain or loss from the
disposition of ADSs for purposes of foreign tax credit limitations. The
following discussion does not discuss the United States estate or gift tax
consequences or state and local tax consequences of holding or disposing of ADSs
representing Ordinary Shares or Ordinary Shares not in ADS form, or tax
consequences in countries other than the United Kingdom or the United States.
This summary does not address aspects of U.S. taxation other than U.S. Federal
income taxation that may be relevant to a U.S. holder, such as state and local
taxation. Therefore holders of ADSs should consult their own tax advisers as to
the particular tax consequences to them of ownership of the ADSs or the Ordinary
Shares.
For the purposes of the Convention and the Code, beneficial owners of ADSs
who are U.S. persons will be treated as the beneficial owners of the underlying
Ordinary Shares represented by the ADSs evidenced by the ADRs.
TAXATION OF DIVIDENDS UNDER U.K. LAW AND REFUNDS OF TAX CREDITS
The Company does not expect to pay dividends for the foreseeable future.
Should the Company begin paying dividends, under current U.K. taxation
legislation, no tax will be withheld from dividend payments by the Company. It
should be noted that, due to a change in U.K. tax legislation, dividends paid
after April 5, 1999 no longer carry a requirement to account for advance
corporation tax.
There is a tax credit in respect of any dividend paid by the Company at a
rate of 10% of the sum of the dividend and the tax credit on it (equivalent to
11.11% of the cash dividend).
U.S. residents may in certain circumstances be able to recover part of the
tax credit ("tax credit refund") under The Convention, as follows:
(a) Under the Convention, a U.S. Holder which is a U.S. corporation
which, alone or together with one or more associated corporations,
controls, directly or indirectly, at least 10% of the voting shares of the
Company, and whose holding is not effectively connected with a permanent
establishment in the U.K. through which it carries on business, will
generally be entitled to receive a tax credit refund equal to one half of
the tax credit to which a U.K. resident individual would be entitled,
subject to a withholding tax equal to 5% of the aggregate of the dividend
and the refunded half of the tax credit. Thus on a dividend of L100 (chosen
for illustrative purposes only), the U.S. Holder will be entitled to
receive a tax credit refund of L0.28. The procedure for obtaining the
repayment will be by completion of "U.S. Corporation Credit" Form (FD13).
(b) Under the Convention, a U.S. Holder who is an individual or
corporation (other than a corporation falling within paragraph (a) above)
will generally not be entitled to receive a tax credit refund.
29
30
Special rules also apply to a U.S. Holder which is a U.S. corporation and
(a) is a resident of the U.K., or (b) at least 25% of the capital of which is
held, directly or indirectly, by persons that are not individual residents or
citizens of the United States, and (i) which has imposed on it by the United
States in respect of a dividend a tax substantially less than the tax generally
imposed by the United States on corporate profits, or (ii) which receives more
than 80% of its gross income from sources outside the United States as
determined in accordance with the Convention. Additional special rules apply if
the U.S. Holder is exempt from U.S. Federal income tax on the dividend received
or if the U.S. Holder owns 10% or more of the class of shares in respect of
which the dividend is paid. All such U.S. Holders should consult their own tax
advisors with respect to such rules.
Under Section 812 of the Income and Corporation Taxes Act of 1988, the U.K.
Treasury has power to deny the payment of tax credit refunds under the U.K.'s
income tax conventions to certain corporations if they or an associated company
(as described in Section 812) have qualifying presence in a state which operates
a unitary system of corporation taxation. These provisions come into force only
if the U.K. Treasury so determines by statutory instrument. No determination has
been made to date.
U.K. TAXATION OF CAPITAL GAINS
All U.S. Holders, who are not resident or ordinarily resident in the United
Kingdom for U.K. tax purposes, provided that they have not recently left the
U.K. and intend to return within five years of departure and that they were not
resident in the U.K. for four out of the seven years prior to their departure
from the U.K., will not be liable for U.K. tax on capital gains realized on the
disposal of their ADSs or Ordinary Shares unless the ADSs or Ordinary Shares are
held in connection with a trade, profession or vocation carried on in the United
Kingdom through a U.K. branch or agency. Generally, gains realized in the course
of dealing in securities will be regarded as arising in the course of carrying
on a trade. In this case, a different U.K. treatment applies.
U.S. FEDERAL INCOME TAXATION OF DIVIDENDS
The gross amount of any dividend paid to a U.S. Holder (that is, the amount
of the dividend plus the related tax credit and before reduction for withholding
tax) will be included in gross income and treated as foreign source dividend
income of such U.S. Holder for U.S. Federal income tax purposes. For U.S.
Federal income tax purposes, a distribution will constitute a dividend only to
the extent paid out of current or accumulated earnings and profits of the
Company (as determined for U.S. Federal income tax purposes). The dividend will
not be eligible for the dividends received deduction allowed to U.S.
corporations. The amount includable in income will be the U.S. dollar value of
the payment (as of the time of payment) regardless of whether the payment is in
fact converted into U.S. dollars. Generally, any gain or loss resulting from
currency exchange fluctuations during the period from the date of the dividend
payment to the date such dividend payment is converted into U.S. dollars will be
treated as ordinary income or loss. Subject to certain limitations, the
applicable U.K. withholding tax will be treated as a foreign tax eligible for
credit against the U.S. Holder's Federal income tax. Special rules apply for
purposes of determining the foreign tax credit available to a U.S. corporation
which controls 10% or more of the voting shares of the Company.
U.S. FEDERAL INCOME TAXATION OF GAINS FROM SALE
A U.S. Holder will, upon the sale or exchange of an ADS or an Ordinary
Share, recognize the gain or loss for U.S. Federal income tax purposes in an
amount equal to the difference between the amount realized (or the U.S. dollar
value of the consideration received determined at the spot rate on the date of
disposition if the amount realized is denominated in a foreign currency) and the
U.S. Holder's tax basis (determined in U.S. dollars) in the ADS or the Ordinary
Share. Except as described below under "U.S., Passive Foreign Investment Company
Status", the gain or loss will be a capital gain or loss if the ADS or the
Ordinary Share was a capital asset in the hands of the U.S. Holder and will be
long-term if the ADS or the Ordinary Share was held for more than 12 months.
Special rules apply to U.S. persons holding 10% or more of the stock if the
company is a "controlled foreign corporation."
30
31
If a U.S. Holder receives any foreign currency on the sale of ADSs or
Ordinary Shares, the U.S. Holder may recognize an ordinary gain or loss as a
result of currency fluctuations between the date of the sale and the date the
sale proceeds are converted into U.S. dollars.
Neither the surrender of ADSs in exchange for the deposited Ordinary Shares
represented by the surrendered ADSs nor the deposit of Ordinary Shares for ADSs
representing the Ordinary Shares will be a taxable event for purposes of U.S.
Federal income tax, U.K. income and corporation tax or U.K. capital gains tax.
Accordingly, U.S. Holders will not recognize any gain or loss upon the surrender
of ADSs for Ordinary Shares or the deposit of Ordinary Shares for ADSs. See
"U.K. Stamp Duty and Stamp Duty Reserve Tax".
U.S. PASSIVE FOREIGN INVESTMENT COMPANY STATUS
Because the Company will receive interest income and may receive royalties
and other passive types of income, the Company may be, or may in the future
become, a Passive Foreign Investment Company ("PFIC") for U.S. Federal income
tax purposes. The Company will be a PFIC if either 75% or more of its gross
income in a tax year is passive income or the average percentage of its assets
(by value or, if the PFIC elects, the adjusted tax basis) which produce or are
held for the production of passive income is at least 50%. The Company will
monitor its status and will, promptly following the end of any taxable year for
which it determines it was a PFIC, notify U.S. Holders of such status.
If the Company is a PFIC, the direct and certain indirect U.S. Holders must
either (i) elect to report currently their pro rata share of the Company's
ordinary earnings and net capital gain even if they do not receive distributions
from the Company (the "qualified election"), or (ii) upon disposition of the
Ordinary Shares or ADSs or receipt of an "excess distribution" (as defined in
the Code), be subject generally to tax as if the gain or distribution were
ordinary income earned rateably over the period in which the Ordinary Shares or
ADSs were held (including payment of an interest charge on the deferred tax) and
face other adverse tax consequences.
The qualified election is made on a shareholder-by-shareholder basis. Each
shareholder should consult with its own tax adviser to decide whether to make
the qualified election. This election is made by attaching the shareholder
election statement, the PFIC annual information statement and Form 8621 to such
shareholder's timely filed income tax return with a copy of the shareholder
election statement being sent to the Internal Revenue Service Center, P.O. Box
21086, Philadelphia, Pennsylvania 19114. If the Company is (or under the
circumstances described above, was) a PFIC, copies of the Form 8621 must also be
filed every year, both with such shareholder's tax return and with the Internal
Revenue Service Center in Philadelphia, whether or not the qualified election is
made.
A shareholder may recognize foreign currency gain or loss, if any, with
respect to income included if the "qualified election" is made at the time it
received an actual distribution form the Company.
If the Company is a U.S. controlled foreign corporation (see below), the
PFIC rules only apply for any shareholder who owns less than 10% of the voting
stock of the Company.
U.S. CONTROLLED FOREIGN CORPORATIONS
If a U.S. Holder owns 10% or more of a "controlled foreign corporation"
(i.e., a foreign corporation more than 50% of the vote or value of which is held
(directly, indirectly or constructively) by "United States Shareholders" as
defined in Section 951(b) of the Code and hereinafter referred to as a "U.S.
Shareholder" and such controlled foreign corporation has certain types of
earnings or "United States property" (as defined in Section 956(c) of the Code)
then U.S. Shareholders may have to include certain amounts in their gross
income, irrespective of whether the controlled foreign corporation has made
distributions. Further, U.S. persons who directly, indirectly or constructively
own at least 10%, or have acquired at least 5% in the year, of the voting shares
of a non-U.S. corporation may be required to file Form 5471 with the IRS.
31
32
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to dividend
payments (or other taxable distribution) in respect of ADSs made within the U.S.
to a non-corporate U.S. person, and "backup withholding" at a rate of 31% will
apply to such payments if the holder or beneficial owner fails to provide an
accurate taxpayer identification number in the manner required by U.S. law and
applicable regulations, if there has been notification from the Internal Revenue
Service of a failure by the holder or beneficial owner to report all interest or
dividends required to be shown on its federal income tax returns or, in certain
circumstances, if the holder or beneficial owner fails to comply with applicable
certification requirements. Certain corporations and persons that are not U.S.
persons may be required to establish their exemption from information reporting
and backup withholding by certifying their status on Internal Revenue Services
Forms W-8 or W-9. The term "U.S. person" means a citizen or resident of the
U.S., a domestic partnership, a domestic corporation, and any estate or trust
(other than a foreign estate or trust).
In general, payment of the proceeds form the sale of ADSs to or through a
U.S. office of a broker is subject to both U.S. backup withholding and
information reporting unless the holder or beneficial owner certifies its
non-U.S. status under penalties of perjury or otherwise establishes an
exemption. U.S. information reporting and backup withholding generally will not
apply to a payment made outside the U.S. of the proceeds of a sale of ADSs
through an office outside the U.S. of a non-U.S. broker. However, U.S.
information reporting requirements (but not backup withholding) will apply to a
payment made outside the U.S. of the proceeds of a sale of ADSs through an
office outside the U.S. of a broker that is a U.S. person, that derives 50% or
more of its gross income for a specified three year period from the conduct of a
trade or business in the U.S., or that is a "controlled foreign corporation" as
to the U.S., unless the broker has documentary evidence in its files that the
holder or beneficial owner is a non-U.S. person or the holder or beneficial
owner otherwise establishes an exemption.
Amounts withheld under the backup withholding rules may be credited against
a holder's tax liability, and a holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the U.S. Internal Revenue Service.
U.K. ESTATE AND GIFT TAX
U.K. Inheritance ("IHT") is a tax levied at death on the value of an
individual's estate at death. IHT is also levied in respect of any gifts made
within seven years before an individual's death. It may also apply to certain
lifetime transfers or to property comprised in a trust or settlement. An
American domiciliary need only be concerned about liability for IHT to the
extent he is or is deemed to be also a U.K. domiciliary (or was a U.K.
domiciliary at the time he created any trust or settlement) or otherwise to the
limited extent of his U.K. assets. Under the Convention between the U.S. and the
U.K. relating to estate and gift taxes, ADSs or Ordinary Shares held by an
individual who is domiciled for the purpose of the Convention in the United
States and is not for the purposes of the Convention a national of the United
Kingdom will not, provided any applicable U.S. tax is paid, be subject to IHT on
the individual's death or on a gift of the ADSs or the Ordinary Shares within
seven years of his death unless the ADSs or the Ordinary Shares form part of the
business property of a permanent establishment of the individual in the United
Kingdom or, in the case of a holder who performed independent personal services,
pertain to a fixed base in the United Kingdom used for the performance of
independent personal services. In the exceptional case where the ADSs or
Ordinary Shares are subject both to IHT and to U.S. Federal gift or estate tax,
the Convention generally provides for tax paid in the United Kingdom to be
credited against tax payable in the United States or for tax paid in the United
States to be credited against tax payable in the United Kingdom based on
priority rules set forth in the Convention.
U.K. STAMP DUTY AND STAMP DUTY RESERVE TAX
U.K. stamp duty is payable in respect of certain documents and U.K. Stamp
Duty Reserve Tax ("SDRT") is imposed in respect of certain transactions in
securities. Transfers of the Ordinary Shares will be subject to ad valorem stamp
duty at the rate of L0.50 per L100 (or part of L100) of the full consideration
given
32
33
irrespective of the identity of the parties to the transfer and the place of
execution of any instrument of transfer.
There is generally no ad valorem stamp duty on a gift or on an instrument
of transfer which is neither a sale nor made in contemplation of sale. In those
cases, the instrument of transfer will either be exempt from stamp duty or a
fixed stamp duty of L0.50 (L5.00 on or after 1 October 1999) per instrument of
transfer will be payable.
An agreement to transfer the Ordinary Shares or any interest therein (but
not an agreement to transfer an interest in an ADS) for money or money's worth
will normally give rise to a charge to SDRT at the rate of L0.50 per L100 (or
part of L100) of the amount or value of the consideration given. The charge will
generally not arise, however, if an instrument transferring the Ordinary Shares
is executed in pursuance of the agreement and is duly stamped.
Charges to stamp duty at the rate of L1.50 per L100 (or part of L100) or
SDRT at the rate of 1.5% of the transfer price or value or of the issue price
will generally arise on the transfer or issue of Ordinary Shares to, or a
deposit of Ordinary Shares with, the Depositary or certain persons providing
clearance services (or their nominees or agents). In accordance with the terms
of the Deposit Agreement, any tax or duty payable by the Depositary on deposits
of the Ordinary Shares will be charged by the Depositary to the party to whom
ADRs are delivered against the deposits.
No U.K. stamp duty will be payable on the transfer of, or agreement to
transfer, an ADS or beneficial ownership of an ADS, so long as the instrument of
transfer and/or written agreement to transfer remains at all times outside the
U.K., and so long as any instrument of transfer and/or written agreement to
transfer is not executed in the U.K. and the transfer does not relate to any
matter or thing done or to be done in the U.K. In any other case, the transfer
of, or agreement to transfer, an ADS or beneficial ownership of an ADS could,
depending on all the circumstances of the transfer, give rise to a charge to ad
valorem stamp duty. The current rate of ad valorem stamp duty on a transfer of
stock or marketable securities, which would include the Ordinary Shares and ADSs
, is L0.50 per L100 (or part of L100) of the value of the consideration (a
transfer in contemplation of sale being stampable by reference to the value of
the property transferred).
A transfer of Ordinary Shares underlying ADSs by the Depositary at the
direction of the ADS seller directly to a purchaser may give rise to a liability
to ad valorem stamp duty. A transfer of Ordinary Shares from the Depositary to a
U.S. Holder or registered holder of an ADS upon cancellation of the ADS is
subject to a fixed U.K. stamp duty of L0.50 per instrument of transfer.
ITEM 8. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF INCOME DATA (IN THOUSANDS, EXCEPT FOR PER SHARE AND
PER ADS DATA):
The selected financial data set forth below as of 31 December, 1997 and
1998 and for the three years in the period ended 31 December 1998, have been
derived, in part, from the Financial Statements contained in the Company's
Annual Report to Shareholders for such years. The selected data should be read
in conjunction with the financial statements and related notes. Financial data
as of 31 December 1994, 1995 and 1996 and for the two years in the period ended
31 December 1999 have been derived from the Company's audited Financial
Statements contained in the Company's Annual Report to Shareholders.
The Company maintains its books and records and reports its results in
pounds sterling in accordance with U.K. generally accepted accounting principles
("GAAP"). The Financial Statements are prepared in accordance with U.K. GAAP,
which differ in certain significant respects from U.S. GAAP. A summary of the
principal differences between U.K. and U.S. GAAP, a reconciliation to U.S. GAAP
and a condensed U.S. GAAP balance sheet are set forth in Note 29 to the
Financial Statements. The financial results set forth below represent the
Company's financial results under U.K. GAAP, reconciled to U.S. GAAP.
33
34
AMOUNTS IN ACCORDANCE WITH U.K. GAAP (IN THOUSANDS):
YEAR ENDED 31 DECEMBER
-----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
Revenues............................... L 8,887 L13,642 L21,443 L 46,082 L170,762
Cost of Sales.......................... (3,628) (5,231) (7,237) (17,166) (71,618)
------- ------- ------- -------- --------
Gross profit........................... 5,259 8,411 14,206 28,916 99,144
Selling and marketing expenses......... (1,443) (6,063) (9,933) (17,013) (21,560)
General and administrative expenses.... (2,673) (5,742) (9,975) (22,662) (46,798)
Amortization of development costs...... (133) (744) (2,170) (11,548) (7,760)
Amounts written off investments........ -- -- -- -- (2,300)
------- ------- ------- -------- --------
Income/(loss) from operations.......... 1,010 (4,138) (7,872) (22,307) 20,726
Exceptional item-gain on sale of
business/fixed asset investments..... -- -- -- 4,035 2,069
Interest Income........................ 425 388 1,027 338 205
Interest Expense....................... (150) (295) (189) (2,498) (17,436)
------- ------- ------- -------- --------
Income/(loss) before (provision)/
benefit for income taxes............. 1,285 (4,045) (7,034) (20,432) 5,564
(Provision)/benefit for income taxes... (406) 416 (164) (323) (769)
------- ------- ------- -------- --------
879 (3,629) (7,198) (20,755) 4,795
Minority equity interest............... 3 (5) (28) 11 (356)
Net income/(loss)...................... L 882 L(3,634) L(7,226) L(20,744) L 4,439
------- ------- ------- -------- --------
Net income/(loss) per share............ L 0.011 L(0.044) L(0.078) L (0.205) L 0.029
------- ------- ------- -------- --------
Shares used to compute net
income/(loss) per share.............. 77,072 82,183 92,364 101,077 150,579
------- ------- ------- -------- --------
Equivalent net (loss)/income per ADS... L 0.046 L(0.177) L(0.313) L (0.821) L 0.118
CONSOLIDATED BALANCE SHEETS DATA (IN THOUSANDS):
AMOUNTS IN ACCORDANCE WITH U.K. GAAP:
YEAR ENDED 31 DECEMBER
-----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- -------- --------
Working Capital........................ L 9,149 L21,313 L 9,581 L 19,957 L(10,357)
Total assets........................... 18,843 39,035 33,705 124,510 109,542
Long-term liabilities.................. 2,342 1,742 938 170,264 144,438
Ordinary shareholders' equity.......... 13,481 31,659 26,037 (90,955) (93,741)
DIVIDENDS
Dialog has never declared or paid any cash dividends on its Ordinary
Shares. Any payment of dividends would be subject, under English law, to the
Companies Act 1985, which requires that all dividends must be approved by the
Company's Board of Directors and, in some cases, the shareholders, and may only
be paid from the Company's distributable profits and only to the extent that the
Company has retained earnings, both determined on an unconsolidated basis.
EXCHANGE RATES
The following table sets forth, for the period and dates indicated, the
average, high, low and end of period Midmarket Rates for pounds sterling
expressed in U.S. dollars per pound sterling. These translations should not be
construed as a representation that the pounds sterling amounts actually
represent such dollar amounts
34
35
or could be converted into dollars at such rates. Such rates are not used by the
Company in the preparation of its Financial Statements included elsewhere
herein.
YEAR ENDED 31 DECEMBER AVERAGE(1) HIGH LOW PERIOD END
---------------------- ---------- ------ ------ ----------
1994....................................... $1.532 $1.643 $1.460 $ 1.565
1995....................................... 1.578 1.641 1.527 1.553
1996....................................... 1.562 1.711 1.497 1.711
1997....................................... 1.634 1.711 1.578 1.645
1998....................................... 1.658 1.719 1.615 1.664
1999(through May 21)....................... 1.626 1.664 1.590 1.601(1)
- ---------------
(1) Represents the average of the Midmarket Rates on the last day of each month
during the relevant period. On 21 May 1999 the Midmarket Rate was $1.601 to
L1.00.
Fluctuations in the exchange rate between the pound sterling and the U.S.
dollar will affect the U.S. dollar amounts received by holders of the ADSs upon
conversion by the Depositary of cash dividends paid in pounds sterling on the
Ordinary Shares represented by the ADSs in the event of dividends being declared
and may affect the relative market prices of the ADSs in the U.S. and the
Ordinary Shares in the U.K.
The Company does not believe that changes in the exchange rates have had a
material effect on revenues from international operations. However, management
anticipate that the continued strength of sterling in the first quarter of 1999
will have an adverse impact on reported revenues.
35
36
ITEM 9.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY
The following discussion contains forward-looking statements based on
assumptions and estimates that are subject to significant uncertainty and
contingency. The Company's operating results could differ substantially. A
discussion of certain risks that could affect the Company's performance is set
forth under the caption "Item 1 -- Description of Business -- Risk Factors." The
Company disclaims any obligation to update these forward-looking statements for
subsequent events or circumstances.
The following discussion relates to the historical consolidated results of
operations and financial condition of the Company and should be read in
conjunction with the Consolidated Financial Statements of the Company included
in the 1998 Annual Report to Shareholders, which are prepared in accordance with
U.K. GAAP. A summary of the differences between U.K. GAAP and U.S. GAAP, a
reconciliation to U.S. GAAP and a condensed U.S. GAAP balance sheet are set
forth in Note 29 of the Notes to the Financial Statements. The most significant
differences between U.S. GAAP and U.K. GAAP as they relate to the Company (which
primarily relate to the treatment of purchased goodwill, the timing of the
recognition of subscription revenue and the treatment of product development
costs) are described in Note 29 to the Consolidated Financial Statements of the
Company included elsewhere herein. Except as noted below, all information and
discussion for the Company relates to the financial statements prepared in
accordance with U.K. GAAP. There are significant accounting differences in the
treatment of KRII resulting from the Acquisition. Under U.K. GAAP, all of the
goodwill and other intangible assets associated with the Acquisition were
written off upon completion of the Acquisition. Under U.S. GAAP, these assets
are amortized over the their ensuing life of 3 to 40 years.
The operating results for KRII are included from the date of acquisition,
14 November 1997, only. Accordingly, period comparisons may not be meaningful.
In any event, M.A.I.D.'s historical operating results are not indicative of the
nature of the Company's business and operating results subsequent to the
Acquisition. A detailed discussion of the operating results of KRII prior to the
Acquisition are set forth in the Company's Form F-4, dated 20 February 1998, on
file with the Securities and Exchange Commission.
SUMMARY
Group sales of L170.8 million in 1998 compare to reported sales of L46.1
million in 1997. Prior to the acquisition, KRII had been loss-making and the old
M.A.I.D. business had achieved a profit of L382,000 for the year ended 31
December 1997. The acquisition of KRII and subsequent merger of business
operations allowed for considerable cost savings. As a result, the Company
achieved profit before tax (excluding restructuring and other exceptional costs)
of L8.4 million for 1998 compared to a loss before tax (excluding restructuring
and other exceptional costs) of L5.9 million in 1997. After restructuring and
other exceptional costs, a pre-tax profit of L5.6 million was achieved.
The acquisition of KRII required a significant fund-raising exercise to pay
for the acquisition at a price, including a working capital adjustment, of $434
(L261) million, as well as funding the additional costs necessary to restructure
the enlarged business. The funds were raised through a mixture of equity, and
debt in the amount of $272.5 million. During 1998 the Company serviced debt
interest of $25.3 (L15.3) million and repaid senior debt in the amount of $15.9
(L9.6) million. The Company ended the year with total indebtedness of $256.6
(L154.2) million.
The online information market is influenced by rapidly changing technology,
changes in customer needs and frequent introductions of new or enhanced products
and services. Accordingly, the Company believes that its future success will
depend to a great extent upon its ability to meet these changes by enhancing its
products and services, increasing its market presence and the market's awareness
of the Company's brand names and developing and introducing new products and
services on a timely basis. The Company intends to finance these activities
through cash generated from its operations and through borrowings under its
Senior Credit Facilities. See "Business -- Risk Factors -- Rapid Technological
Change and Dependence on New Products and Services" and "Liquidity and Capital
Resources."
36
37
The Company's reported revenues and results from operations are subject to
material changes in exchange rates. The principal foreign currencies to which
the operations are currently exposed are the U.S. Dollar and the Swiss Franc.
The average rates of exchange for U.S. Dollars to Pounds Sterling, as used by
the Company in the preparation of its Consolidated Financial Statements, were
U.S.$:L 1.5730 in 1996, U.S.$:L 1.5401 in 1997 and U.S.$:L 1.6576 in 1998.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED 31 DECEMBER 1998 AND 1997
REVENUE. Group turnover of L170.8 million in 1998 represents the first full
year of operations following the acquisition of KRII and compares to reported
sales of L46.1 million in 1997. The revenues of KRII had been in steady decline
since 1996 and the rate of decline increased throughout 1997 as the acquisition
process came to its conclusion on 14 November 1997. As a consequence, Dialog
commenced the year 1998 with a lower revenue base than the pro-forma combined
average for 1997. Compared with the pro-forma revenues of M.A.I.D. and KRII
combined for 1997 of L183.5 million, Dialog revenues for 1998 show a 6.9%
decline.
On 2 February 1999 the Company announced the creation of three new
operating divisions: the Information Services Division; the Web Solutions and
Internet Software Division; and the eCommerce Division. For 1998 their
respective revenues amounted to 96.8%, 2.4% and 0%. In addition, the Company
recognized non-recurring guaranteed minimum royalties of L1.4 million (0.8%).
Information Services Division (ISD)
This division characterizes the development and expansion of the existing
online information business to information professionals and end-users. The main
product lines include Dialog, DataStar, Profound and CD-ROM which represent 71%,
14%, 10% and 5% respectively of total divisional sales for 1998.
Management's objective for the year was to halt the historic KRII declining
revenue trends and return them to growth. Following extensive customer hosting
sessions in the opening months of 1998, the Company experienced a positive trend
in both usage volumes and ISD revenues in the first quarter.
Through the acquisition process it had been identified that 24% of Dialog
revenues, or approximately $50 million, were based upon an hourly connect
pricing model. Given the Company's intention to release Internet-based
interfaces to the Dialog content, this would have accelerated the decline in
this element of revenues, as the Internet is a far quicker and more efficient
way for customers to gain access.
Therefore, in the second quarter, a series of price modifications were
announced to our customers. These were met with skepticism and concern from both
customers and the trade press. Additional modifications were announced and made
effective from September 1. These modifications had the effect of providing the
average Dialog customer with an estimated 10% price discount, which also had the
consequential effect of lowering the Dialog revenue base from which to build.
Since September 1998, however, the average for daily usage volumes has
increased.
Our efforts to turn around the declining DataStar revenues were ineffective
until we formally announced in June 1998 our commitment to building the DataStar
brand, headquartered in Bern, Switzerland. From that point, DataStar has
performed well, albeit from a lower revenue base.
Profound, which includes its subscription element and higher margins, was
not actively promoted during 1998, as the newly integrated sales teams focused
more closely on solidifying the larger Dialog revenue base and converting
customers to annual fixed price commitments.
Under U.K. GAAP subscription revenues are recognized when contractually due
and invoiced and the Company provides in full for the cost of the related
service obligations. Under U.S. GAAP, subscriptions are recognized rateably over
the subscription term which is usually twelve months. No adjustment is required
under U.S. GAAP for the "modular pricing" subscriptions since these
subscriptions are recognized rateably over the subscription term.
37
38
CD-ROM revenues are recognized ratably over the annual life of the
contracts sold. As a result of the Company's merger activities, the CD-ROM
division moved its headquarter functions from California to Oxford during the
fourth quarter of 1998. This did have a disruptive effect in the short term that
will impact the reported revenues for 1999. The move, which was successfully
completed by the year-end, provides a lower cost base and a firm foundation for
the future success of our CD-ROM operations.
Web Solutions and Internet Software Division (WSD)
This division was established to license InfoSort and Muscat search
technologies for corporate knowledge management solutions.
During 1998 the Company was successful in winning and implementing special
projects including both the Department of Trade and Industry (DTI) and the
British Broadcasting Corporation (BBC), and recognized L2.5 million in revenues
for the sale of technology and subsequent implementation at the customer site.
Building on existing proprietary technology and expertise gained during 1998,
the WSD intends to build upon the growing demand for knowledge management
solutions that bring together internal and external information into a simple
searchable solution.
In August 1997, the Company acquired a 70% stake in Muscat, which in 1998
achieved third party sales of L1.2 million for search engine licenses and
royalties from customers including Reuters, PA News Media, Interactive
Collector, DHL and the United Nations.
In addition, it is anticipated that WSD will generate revenues from the
development of a powerful Web search service for businesses using the Internet
to utilize Dialog's professional search capabilities when interrogating the Web.
eCommerce Division
In July 1998, Dialog announced its plans to target the electronic commerce
(eCommerce) market with a strategic focus on business-to-business applications
that leverage the Company's alliance and customer base.
The Company subsequently acquired 100% of the Oxford-based Write Works Ltd
in November 1998, which had developed the U.K.'s first online purchasing and
management control system for businesses. With an existing client base of over
100 corporations including TK Maxx, ISS, EMI Music and Action Aid, Write Works'
monthly sales tripled between January and September 1998. At the date of
acquisition, its procurement systems accounted for annualized sales in excess of
L750,000. Dialog's 1998 eCommerce revenues of L77,000 were derived entirely from
the activity of the Write Works Internet procurement service during the last six
weeks of the year. This service was rebranded as OfficeShopper immediately
following the acquisition.
Our strategy for 1999 and beyond involves the rollout of OfficeShopper.com
to the business community worldwide, leveraging the substantial Dialog customer
base and licensing the underlying eCommerce technology to enable businesses to
create their own eCommerce solutions.
GEOGRAPHICAL ANALYSIS OF REVENUE. As a result of the acquisition of KRII,
the Company is the largest online general reference service in the U.S., the
largest archival service in Europe, and provides the largest English language
service in Japan (source: Simba Information, Inc.).
Revenues from overseas operations outside the United Kingdom increased by
311% from L32.1 million in 1997 to L131.8 million in 1998, which compares to a
151% year on year increase in 1997. Overseas revenues now represent 77% of total
revenues, compared with 70% in 1997 and 60% in 1996.
The increase in revenues from overseas operations is mainly attributable to
North America, where revenues increased by 376% year on year. This resulted from
the impact of the acquisition of KRII.
COST OF SALES. Cost of sales increased by 316% from L17.2 million in 1997
to L71.6 million in 1998 and represented 37% and 42% of total turnover
respectively.
38
39
Due to the relative weighting of revenues to ISD, cost of sales consists
primarily of royalties paid by the Company to content publishers, whose
information is downloaded by a user through the Company's services. Also
relating to the Information Services Division are telecommunications charges and
computer processing costs, and, to a lesser degree, annual fixed fees paid to
some content providers irrespective of the level of usage of that provider's
information.
The significant increase in cost of sales from L17.2 million to L71.3
million for ISD reflects the Company's recognition of our first full year's
revenue from the merged operations of M.A.I.D. and KRII, which for 1997 included
the KRII usage revenues for the last six weeks of the year only. Due to the
relative weighting of the KRII revenues, which are predominantly usage-based,
compared to the revenues of M.A.I.D., which included a large subscription
element with negligible associated costs, the gross margin achieved in 1998 of
56.9% is more representative of the ISD margin anticipated by management.
Cost of sales for the newly formed WSD is anticipated to be lower as
technology-based sales, which consist of license fees and royalties, have
minimal associated direct costs. For 1998 the Company achieved revenues of L4.0
million, with negligible cost of sales. There were no comparable revenues for
1997.
In 1998 Write Works Ltd cost of sales represented 81% of sales, which sets
the benchmark expectation for our eCommerce Division's future activities.
OPERATING COSTS (EXCLUDING AMORTIZATION OF DEVELOPMENT COSTS AND
RESTRUCTURING COSTS). The integration of KRII and M.A.I.D. involved a reduction
in workforce of some 24% and the termination of 16 out of a total 57 office
leases, the cost of which was fully provided for as a restructuring cost in
1997. By reducing the scale of duplicated functions and by aligning the KRII
business model with that of M.A.I.D., management achieved a L28 million, or 33%,
reduction in the 1997 half year annualized operating cost base of the combined
entity. This exceeded management's expectations by L7 million.
DISTRIBUTION COSTS (EXCLUDING RESTRUCTURING COSTS). Distribution costs
consist of salaries and commissions paid to sales staff and account managers,
travel and entertainment and similar expenses incurred by sales personnel, and
marketing expenses, including advertisements, marketing literature and trade
shows.
As a result of the Acquisition, total distribution costs (before
restructuring costs) for the year were L21.6 million compared to L15.7 million
for 1997, which represent 12.7% and 34.1% of revenues respectively. The
significant reduction in distribution costs as a percentage of revenues was
achieved by successfully eliminating duplicate functions and improving
efficiencies of the combined sales operations of the enlarged Group. Following
the release of new products in the second half of 1998, additional sales and
sales support staff were added, which will have the effect of increasing
distribution costs in 1999. The Company had 351 sales personnel at the year-end
and is currently represented in 39 countries.
ADMINISTRATION EXPENSES (EXCLUDING RESTRUCTURING COSTS). As a result of the
Acquisition, total administration expenses (before restructuring costs) for the
year were L44.2 million compared to L13.4 million for 1997, which represent
25.9% and 29.1% of revenues respectively.
Administration expenses consist of all facilities costs (including the
Company's main offices in London, California, North Carolina and Bern,
Switzerland, which house the Company's management, sales, administrative and
editorial staff, and the Company's data centers); remuneration for all employees
other than persons directly involved in selling or account management; and
operating expenses for the Company's data centers (other than telecommunications
and processing charges included in cost of sales as described above).
The reduction in staff levels and facilities has led to savings in
administration expenses when compared to the pro-forma combined Group results
for the prior year.
AMORTIZATION OF PRODUCT DEVELOPMENT COSTS. The amortization of capitalized
product development costs for the Company amounted to L7.8 million, compared to
L3.6 million amortized in 1997. The amortization charge reflects the first full
year of amortization of the combined entity and benefits from the
rationalization derived from merging two companies which previously had been
developing products and technological implementations for the same market.
39
40
The Company continues to review on a regular basis the carrying value of
capitalized development costs to ensure their appropriateness. During 1998 the
Company made significant technological advances in developing and releasing new
Internet-based interfaces to the Dialog and DataStar content.
The majority of product development costs are amortized over 36 months with
effect from the date of commercial release, in accordance with our stated
accounting policy.
The amortization charge for 1998 includes amortization of costs associated
with previously capitalized development projects relating to Profound, Profound
for the Internet, DialogWeb, World Reporter and various completed Dialog
databases, together with DialogSelect with effect from the second half of the
year. Development costs associated with the KRII business gave rise to an
additional amortization charge of L344,000 for the six week period ended 31
December 1997.
Included within amortization for the year is L1.7 million, relating to
amortized database development costs in respect of the activities of Responsive
Database Services (RDS).
OPERATING PROFIT. The operating profit (before restructuring costs and
other exceptional items) of L25.6 million compares to a loss of L3.8 million in
1997. On revenues of L170.8 million, this represents an operating margin of 15%,
which compares to an operating margin of 3% based upon the combined achievements
of L5.2 million achieved in 1997 by both M.A.I.D. and KRII merged on a pro-forma
basis.
RESTRUCTURING COSTS AND OTHER EXCEPTIONAL ITEMS. The exceptional
restructuring charge booked in 1998 of L2.6 million relates to the move of our
U.S. headquarters from Mountain View, California to Cary, North Carolina (L1.8
million), anticipated additional costs arising from the termination of property
leases (L1.6 million) and various other restructuring charges (L0.9 million),
relating primarily to the integration of the sales force and one-off customer
hostings. These costs have been offset by a write back of L1.2 million relating
to data center convergence costs and L0.5 million relating to the removal of the
Knight-Ridder Information name. The move to Cary, North Carolina will allow the
Company to benefit from lower operating costs in the North Carolina Research
Triangle and was successfully completed by the year-end.
The exceptional restructuring costs for 1997 consist of a non-cash
write-off of capitalized development costs in the sum of L8.0 million, together
with L10.6 million in respect of costs and provisions relating to the one time
expense associated with the KRII and M.A.I.D. merger activities. These
activities were completed in the year under review, and gave rise to a cash
outflow of L6.9 million in the current year.
In 1997 the Company recognized an exceptional gain totaling L4.0 million
relating to the transfer of its 'Internet in Hotel' technology and associated
distribution contracts to Fourth Network Inc., in exchange for an equity stake
in the company. During 1998, the Board has been closely monitoring its
investment in Fourth Network Inc., which had expected to achieve an IPO or
alternative significant fund-raising. As this has not occurred to date, the
Board determined that it would be prudent to write down 50% of its investment
creating an exceptional charge of L2.3 million and cease recognition of future
minimum guaranteed revenues arising from the distribution contracts transferred.
During the first three-quarters of 1998, the Company recognized total royalties
of L1.4 million compared to L1.8 million in 1997.
In 1998, the Company disposed of its non-core investments in Easynet Group
plc and NewsEdge Corporation, realizing gross proceeds of L7.1 million and an
exceptional gain of L2.1 million. The proceeds were used to accelerate the
Company's repayment of debt.
INTEREST INCOME AND INTEREST EXPENSE. Net interest payable of L17.2 million
compares to L2.2 million for 1997. The debt interest serviced during 1997
included L2.4 million of interest payable in respect of the debt financing for
the acquisition of KRII for the last six weeks of the year.
The acquisition of KRII required a significant fund-raising exercise, which
included $272.5 (L163.8) million of debt. The debt raised consisted of a $92.5
(L55.6) million senior secured facility upon which interest is calculated at the
rate of 2.25 percentage points over U.S. Libor which was 5.09% as at 31 December
1998. The balance of $180.0 (L108.2) million relates to the subordinated loan
notes, which are registered on the London Stock Exchange and carry a fixed
interest rate of 11%.
40
41
The Company has obligations, in addition to interest charges, to repay
$21.9 (L13.2) million of senior debt in 1999.
Included within the net interest expense of L17.2 million is L0.9 million
of amortized bank debt fees that will continue to recur over the life of our
loan arrangements. Bank and related fees amounting to L6.9 million were paid in
connection with the debt raised to acquire KRII, and the unamortized value is
netted off against the carrying value of our loan indebtedness in accordance
with FRS4.
TAXATION. The Company's tax charge for 1998 relates entirely to the tax
arising on the profitable performance of its foreign sales subsidiaries. No tax
arises in the U.K. or U.S. as a result of past tax losses and tax losses carried
forward are approximately L15 million in the U.K., L8.7 ($14.5) million in the
U.S. and L1.6 (CHF 3.7) million in Switzerland.
As a result of the acquisition of KRII, the Company wrote off L204 ($337)
million of goodwill in 1997 to reserves in accordance with U.K. GAAP. This
differs from the tax treatment in the U.S. that allows such goodwill to be
written off over a 15 year period. As the acquisition was made through The
Dialog Corporation Inc., a wholly owned U.S. subsidiary, it is anticipated that
the Company will benefit from such tax amortization over the next 15 years, as
it is envisaged that the Company's U.S. operations will be profitable in future
years.
EARNINGS PER SHARE (EPS). The Company achieved an EPS of 4.8 (equivalent to
19.3 pence per ADR) pence before restructuring costs and other exceptional
items, compared to a loss of 6.2 pence per share (equivalent to 24.7 pence per
ADR) for 1997.
After accounting for restructuring costs and other exceptional items, the
Company achieved an EPS of 2.9 pence (equivalent to 11.8 pence per ADR),
compared to a loss of 20.5 pence per share (equivalent to 82.1 pence per ADR)
for 1997.
The dilutive impact of the Company's outstanding options did not have a
material effect on the reported EPS.
NET LOSS. Due to substantial difference under U.S. GAAP regarding
acquisition accounting, revenue recognition and research and development
expenses, the net loss under U.S. GAAP increased from L25.3 million in 1997 to
L34.1 million in 1998.
FISCAL YEAR ENDED DECEMBER 31, 1997 AND 1996
Revenue. Revenue of L46.1 million in 1997, which includes L17.5 million of
revenues generated by companies acquired, reflected an overall increase of 115%
over 1996. Core M.A.I.D. revenues accounted for L28.5 million, reflecting a 33%
increase over 1996. The mix of revenues has already been impacted by the
addition of the KRII revenue stream with effect from 14 November 1997. Usage
revenues, subscription revenues and other income amounted to 61%, 31% and 8%
respectively of total revenues during the year ended 31 December 1997; this
compares with 44%, 53% and 3% respectively during the year ended 31 December
1996.
Other revenues in 1997 amounted to L3.8 million compared to L0.6 million in
1996. In 1997, other revenues principally related to fees arising from various
alliance agreements signed during the year, including Primedia (iafrica) and the
South China Morning Post, for the design and implementation of Internet-based
business information services. Other revenues in 1996 principally related to
fees arising from the alliance agreement with CompuServe, for whom an
Internet-based business information service was designed during 1996 which
continued to generate revenues throughout the following year. The Company
recognized L1.8 million of guaranteed minimum royalties from Fourth
Communications Network Inc. ("4th Network") relating to the provision of
high-speed Internet access in hotel rooms, following the Company's transfer of
related technology to 4th Network in the first quarter of 1997. The acquisition
of Muscat Ltd. added L0.4 million of predominantly royalty-related sales during
the remainder of the year. These revenues are derived from a strong customer
base and typically have a very high gross margin.
41
42
Geographical Analysis of Revenue. Revenue from overseas operations outside
the United Kingdom increased by 151% from L12.8 million in 1996 to L32.1 million
in 1997, which compares to an 82% year on year increase in 1996.
The increase in revenues from overseas operations is mainly attributable to
North America, where revenues increased by 191% year on year. This resulted from
the continued growth in M.A.I.D.'s North American operations, together with the
impact of the acquisition of KRII, whose North American revenues constituted
approximately 62% during the last six weeks of the year.
Cost of Sales. Costs of sales increased by 137% from L7.2 million in 1996
to L17.2 million in 1997, and represented 34% and 37% of total turnover
respectively due mainly to the larger subscription and alliance component of the
M.A.I.D. stand-alone revenues.
Distribution Costs (excluding Restructuring Costs). For the M.A.I.D.
stand-alone business, distribution costs decreased 9% to L9.1 million in 1997
from L9.9 million in 1996. As previously reported, M.A.I.D. substantially
expanded its sales force in 1996 in order to increase revenue, with the result
that distribution costs during the second half of 1996 increased to L5.8
million. During the first half of 1997, M.A.I.D. refined its sales efforts,
particularly in the U.S., with a view to adding and retaining customers that
would yield higher long-term value. The reduction in expenses reflected a
decrease in telemarketing staff used to screen customer leads for sales staff,
together with a modification to the commission structure. Distribution costs
were further reduced in November 1997 when, a result of the acquisition, certain
of the M.A.I.D. customer service staff were replaced by more experienced KRII
customer service personnel.
The 1997 year-end result reflects an adjustment made in the fourth quarter
relating to M.A.I.D.'s reorganization of distributorship contracts in Japan and
South Africa. The L267,000 of associated net cost incurred during the first
quarter of 1997 was originally treated as an exceptional item, but given the
decreased materiality of this amount following the acquisition of KRII, these
costs were reallocated to distribution expenses in the fourth quarter.
As a result of the acquisition, the total distribution costs for the
continuing business (before restructuring costs) were L15.7 million.
Administration Expenses (excluding Restructuring Costs). Administration
expenses for the continuing business (before restructuring costs), including
L2.4 million in respect of acquired businesses, increased from L10.0 million in
1996 to L13.4 million in 1997.
For the M.A.I.D. stand-alone business these costs remained relatively
constant since the fourth quarter of 1996. Administration expenses also included
a provision of $1.0 million (L0.6 million) against total amounts due from 4th
Network.
Amortization of Product Development Costs (excluding Restructuring
Costs). The amortization of capitalized product development costs for the Group
amounted to L3.6 million, which included an increase from L2.2 million in 1996
to L3.2 million in 1997 for the M.A.I.D. stand-alone business. The increase
reflects a full annual charge for the CompuServe CSiWatchlist product and
various other alliance product development projects, the costs of which
commenced amortization in the fourth quarter of 1996. In addition, in September,
1997 the Company commenced amortizing the capitalized costs relating to Profound
LiveWire and Profound Intranets, both made available for commercial release
during the month. Development costs associated with the KRII business gave rise
to an amortization charge of L344,000 for the six week period ended 31 December
1997.
As a result of the acquisition, management reviewed the value of
capitalized development costs of both M.A.I.D. and KRII to ensure that, given
the enlarged group's combined product and information technology development
strategy for 1998 and beyond, all capitalized costs remain justifiable. Included
with the exceptional restructuring costs for the year was an L8.0 million
write-off of such costs where both stand-alone companies had developed similar
products or technological implementations of the same type, thus rendering one
or other without commercial value.
42
43
Operating Loss. The 1997 operating loss of L22.3 million is stated after an
exceptional restructuring charge of L18.6 million relating entirely to costs
arising as a result of the integration of KRII. The operating loss before
exceptional costs was L3.8 million, which compared with an operating loss of
L7.9 million in 1996.
The exceptional restructuring charges consisted of a non-cash write-off of
capitalized development costs in the sum of L8.0 million, representing 27% of
the combined capitalized development costs of the continuing businesses referred
to above. The remaining L10.6 million can be analyzed as follows:
- L5.3 million related to a provision for costs associated with the planned
integration of the M.A.I.D. and KRII data center activities;
- L2.2 million related to the provision for closure costs associated with
the termination of 16 property leases out of the total of 57 office
leases that existed after the acquisition;
- L1.5 million related to the severance costs that arose from the reduction
in workforce that took effect in the first few weeks after the
acquisition;
- L1.3 million related to a provision for costs associated with the removal
of the Knight-Ridder name and logo from all printed material, product and
signage; and
- L0.3 million related to various restructuring charges that had either
been incurred before the year end or were anticipated to be incurred
shortly thereafter.
Exceptional Gain. The exceptional gain totaling L4.0 million related to the
transfer of M.A.I.D.'s "Internet in Hotel" technology and distribution contracts
to 4th Network in February 1997.
Interest Income and Interest Expense. Net interest expense of L2.2 million
included L2.4 million of interest expense in respect of the debt financing for
the acquisition of KRII for the last six weeks of the year. For the M.A.I.D.
stand-alone business, net interest receivable fell from L838,000 in 1996 to
L108,000 in 1997 due to a reduction in cash on deposit. The higher cash balances
during 1996 reflected the receipt of net proceeds of L21.8 million raised from
the issue of American Depository Receipts (ADRs) in November 1995, offset by the
investment of these proceeds in the development of the Company's infrastructure
and product development, together with the settlement of accrued expenses
relating to the ADR issue. The interest income in 1996 included a realized
exchange gain of L0.2 million following the conversion in May 1996 of the
residual U.S. dollar ADR proceeds into Sterling.
The opening cash deposit in 1997 amounted to L8.0 million. The funds raised
for the Acquisition included some funding for the exceptional restructuring
costs referred to above, many of which had not been incurred by the year-end.
The closing cash position for the year was L13.7 million.
Taxation. The Group's tax charge for 1997 related entirely to the tax
arising on the profitable performance of its foreign sales subsidiaries. At
December 1997, the Group had total net operating tax losses carried forward of
approximately L13 million in the U.K. and $6 million in the U.S.
Net loss. Due to substantial difference under U.S. GAAP regarding
acquisition accounting, revenue recognition and research and development
expenses, the net loss under U.S. GAAP increased from L10.9 million in 1996 to
L25.2 million in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Acquisition in November 1997 for a price, including a working capital
adjustment of $434 (L261) million, required a significant fund-raising exercise.
In addition, further funds were required to restructure the enlarged business.
The funds were raised through the issuance of 54.5 million Ordinary Shares for
gross proceeds of L120 million, and dollar denominated debt in the amount of
$272.5 million, equivalent to L160.8 million at the time. During 1998 the
Company serviced debt interest of L15.3 million, as well as selling certain
quoted investments and repaying senior debt in the amount of L9.6 million. The
Company ended the year with total gross indebtedness of $257.0 (L154.5) million.
43
44
The Company's operating activities generated net cash of L34.2 million
during the year ended December 31, 1998, compared to L3.2 million in 1997. The
cash generated in 1998 from operating activities is shown net of L6.9 million of
costs relating to the one-off restructuring charges arising from the merger
activity of KRII and M.A.I.D.
The Company incurred net capital expenditure of L18.8 million during the
year 1998, compared to L4.6 million during the year ended 31 December 1997. The
net capital expenditure of L18.8 million is lower than the pro-forma capital
spend of both KRII and M.A.I.D. combined, both of which were independently
spending money on developing products and technological implementations for the
same market.
The Company's capital expenditure requirements are primarily for product
development, computer equipment for the Company's data centers and other
operations, related software, leasehold improvements and office equipment. For
1999, the Company estimates that its total capital expenditure requirements will
approximate to the levels expended in 1998 of L13.5 million on product
development and L5.5 million on fixed asset additions.
Under U.K. GAAP, for the presentation of cash flow statements, cash is
defined as cash in hand and deposits repayable on demand. Deposits are repayable
on demand if they can be withdrawn at any time without notice and without
penalty or if a maturity or period of notice of not more than 24 hours or one
working day has been agreed. Movements on deposits that are not repayable on
demand are disclosed in the main body of the cash flow statement.
During the year ended 31 December 1998 net receipts from the sale of cash
deposits with an original maturity of less than one year amounted to L620,000,
which compares to L5.4 million for 1997.
During the year, the Company made certain revisions to the fair value of
the assets and liabilities assumed upon the acquisition of KRII. The cash impact
of these fair value adjustments amounted to an outflow of cash of L2.3 million
and consisted primarily of additional funding of the non-core businesses through
to the date of disposal together with payments made under certain onerous
contracts.
In October, Dialog exercised its option to purchase Responsive Database
Services, Inc. (RDS) for cash of $2.85 (L1.7) million. RDS's electronic
information resources are used by business professionals and in public, academic
and special libraries. Dialog has historically provided all financing for RDS
and, accordingly, has consolidated its results within the Group financial
statements. Goodwill of $2.85 (L1.7) million arising as a result of this
transaction was capitalized and is being amortized to the profit and loss
account.
In November, Dialog acquired the entire share capital of Write Works' Ltd
for a total maximum consideration of L6.0 million. Write Works Ltd, located in
Oxford, has developed the U.K.'s first online purchasing and management control
system for businesses. The consideration was satisfied through an initial
payment of L1.0 million in cash and approximately L1.2 million in shares issued
by Dialog (at a price of L1.66 per share). Further consideration of up to a
maximum of L3.8 million in cash and shares (cash of L2.8 million and shares of
L1.0 million) will be paid on the achievement of Write Works' earnings targets
over the next two years. Goodwill of L6.0 million arising as a result of this
transaction was capitalized and is being amortized to the profit and loss
account.
In addition, the Company is committed (i) to pay its proportionate share of
the development costs for World Reporter, along with Dow Jones Information
Publishing, Inc. and FT Business Enterprises Limited through to 2001
(approximately L3.9 million at 31 December 1998), and (ii) under the terms of a
joint venture agreement with Frost & Sullivan, to provide monthly funding of
$200,000 until June 1999.
The Company had cash at bank and in hand on 31 December 1998 of L4.5
million, compared to L13.7 million on 31 December 1997. In addition, the Company
has a revolving bank facility of $25.0 (L15.0) million available, which was
undrawn at 31 December 1998. The Company has subsequently drawn down $19.0
(L11.4) million since 31 December 1998.
On 17 May 1999, the Company announced that it had secured an additional $25
million facility from The Chase Manhattan Bank that has enabled the release of
some of the funds previously earmarked for debt
44
45
repayments to be invested in the high growth market opportunities of Information
Services, Web Solutions and eCommerce. The additional facility increases the
size of the Senior Credit Facility by $11.5 million.
The Company has obligations, in addition to interest charges, to repay
$21.9 (L13.2) million of senior debt in 1999. In addition to focusing
considerable efforts on driving revenues for the core business, management
continues to explore a number of strategic initiatives and is actively engaged
in discussions which, subject to their outcome, will result in a substantial
reduction of the Group debt.
The Company has complied with its debt covenants during 1998 and expects to
meet its covenants for the current year and beyond.
Assets held for resale. On 2 February 1999, the Company announced the
disposal of CARL library systems and the UnCover document delivery business for
gross proceeds of $2.25 (L1.4) million. Both CARL and UnCover were acquired as
part of the acquisition of KRII and were not core to the Dialog product
offering. The disposal proceeds included an interest-bearing vendor loan note of
$1.25 million due in two years. After accounting for associated disposal costs,
the balance of L992,000 is shown as 'assets held for resale' within current
assets. Management originally anticipated achieving a higher sale price for
these businesses and therefore recognized a higher estimated value as at
December 1997. The difference between the estimated and actual disposal price
has been reflected as an adjustment to fair value, with the difference arising
treated as goodwill and written off directly to reserves. The operating results
for these non-core businesses for the period beginning 14 November 1997 have
been excluded from the Group's consolidated profit and loss account.
Investments. These include strategic investments in non-quoted companies
including: Frost & Sullivan (L4.8 million), a leading market research company;
Teltech Resources (L3.0 million), a redistributor of Dialog content; Fourth
Network Inc. (L2.3 million), which provides hotel room Internet access; and
Frost & Sullivan Electronic Distribution LLC, a joint venture (L2.2 million).
The Board has written down the investment in Fourth Network Inc. by 50% from its
previous carrying value of L4.6 million.
Included on the balance sheet for 1997 were investments in Easynet Group
plc (L2.1 million) and NewsEdge Corporation (L2.9 million), which were both sold
in May 1998 for L7.1 million, thereby realizing a gain of L2.1 million. The
proceeds were used to repay debt.
YEAR 2000
The Dialog Corporation is engaged in a multi-faceted program to address
Year 2000 compliance issues so that our customers will enjoy uninterrupted
access to the Company's collection of online information.
The program has identified three categories of risk: computer systems that
are supported in-house; systems and equipment not supported in-house, including
equipment with embedded microprocessors; and business partners of the Company,
including the risk that problems encountered by our business partners adversely
affect the operations of our business.
In order to determine the scale of the Year 2000 problem, The Company has
completed an analysis of our business processes and the systems used to support
these processes. The overall objective for Year 2000 compliance is to ensure
that there is no disruption to these processes and that the interpretation and
use of date information throughout the Company's products and services will
function properly with the date change. In particular, software changes will be
implemented so that customers will be able to search date fields in all our
databases with either two or four digits. A key goal is to achieve compliance by
September 1999 with the minimum of disruption to our customers and business
partners.
The total cost of achieving Year 2000 compliance can only be broadly
estimated at this particular point in time, especially as compliance is largely
to be achieved through the use of existing internal resources. However, it is
estimated that the total cost to the Group is likely to be L3 million,
approximately L1 million of which has already been incurred.
Management appreciates that information about the Company's plans in this
area is of great interest to both our investors and users. To this end,
management is providing regular updates on the progress of Year 2000 activities
on the Company's Web site.
45
46
EURO
The Company sees the introduction of the European single currency in
January 1999 as a strong business opportunity and has drawn up one common Euro
price list for Profound for use in all countries affected by the introduction of
the Euro. With effect from 1 February 1999, all customers in these countries are
now billed in Euros. Customers using the Dialog and DataStar services, although
billed in U.S. Dollars and Swiss Francs, have also been given the option to
settle their bills in Euros. During the initial transitional period, customers
will, of course, be free to settle in their local currency.
The costs associated with the above changes are not significant.
OTHER MATTERS
The Company failed to file this Form 20-F within 120 days of the end of the
Company's fiscal year as required by the indenture related to the issuance by
the Company of its 11% Senior Subordinated Notes due 2007 (the "Indenture").
Pursuant to that Indenture, the Company provided timely notice of default to the
Trustee on behalf of all holders of the Notes issued under the Indenture. In
addition, the Company was also required to provide notice of this event to the
facility agent under the terms of the Senior Credit Facilities and such notice
was duly provided. Under the terms of the Indenture the failure to file a report
on Form 20-F does not constitute an "event of default", as defined by the
Indenture, until the Trustee declares that such an event should be considered an
"event of default". As of the date of this Report, the Company has not received
such a declaration by the Trustee and therefore believes that the filing of this
Report on or before June 30, 1999 will remedy the default as of the date of
filing.
CONCLUSION
The Group's financial position changed dramatically during 1997 with the
Acquisition of KRII and the associated debt taken on to fund the transaction. As
a result of the acquisition, the Company is now a market leader for the
provision of professional online information, with significant revenues being
generated through the Internet. The enlarged Group's operating cost structure
has been materially rationalized during 1998 and the subdivision of the three
operating divisions should ensure that their performance is both measurable and
optimal.
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The directors and executive officers of the Company, their respective ages
and their positions with the Company are set forth in the following table.
DIRECTORS AGE POSITION POSITION HELD SINCE
--------- --- -------- -------------------
Michael Mander(1)..... 63 Chairman of the Board (2), Director 1988; 1987
Daniel Wagner......... 35 Chief Executive 1985
Patrick Sommers....... 52 Chief Operating Officer 1998
David Mattey.......... 36 Chief Financial Officer 1992; 1991
Stephen Maller........ 40 Chief Technology Officer 1996; 1991
Jason Molle........... 34 President -- the Americas 1997; 1991
Ciaran Morton......... 35 President -- Europe, Middle East, Africa & Asia Pacific 1997; 1990
Ian Barton(1)......... 53 Director 1986
Marmaduke Hussey(1)... 75 Director 1996
Allen Thomas(1)....... 59 Director; Deputy Chairman 1997
Richard Swank(3)...... 68 Director 1999; 1997
- ---------------
(1) Non-executive director and member of the Audit, Remuneration and Nomination
Committees.
(2) Michael Mander resigned as Chairman of the Board with effect from 28 May
1999. He will retire as a director after the Annual General Meeting on 1
July 1999.
(3) Non-executive director and member of the Remuneration and Nomination
Committees.
46
47
During 1998 The Dialog Corporation maintained insurance for the directors
and certain employees against liabilities in relation to the Company.
At each Annual General Meeting ("AGM") of The Dialog Corporation one third
of the directors shall retire from office by rotation. A retiring director shall
be eligible for re-election.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The following Summary Compensation Table sets forth the compensation earned
by the Company's directors and executive officers for services rendered in all
capacities to the Company and its subsidiaries for the fiscal year ended 31
December 1998.
SUMMARY COMPENSATION TABLE
AGGREGATE
PENSION COMPENSATION(1)
NAME PRINCIPAL POSITION FEES SALARY BENEFITS BONUS CONTRIBUTION L
---- ---------------------- ------ -------- -------- ------- ------------ ---------------
Michael Mander........ Chairman of the 51,120 -- -- -- -- 51,250
Board(2)
Daniel Wagner......... Chief Executive -- 165,250 2,828 -- -- 168,078
Patrick Sommers....... Chief Operating -- 39,677 -- -- -- 39,677
Officer (appointed 8
October 1998)
David Mattey.......... Chief Financial -- 141,586 2,794 -- -- 144,380
Officer
Stephen Maller........ Chief Technology -- 98,625 216 -- -- 98,841
Officer
Jason Molle........... President -- the -- 125,200 -- -- 3,314 128,514
Americas
Ciaran Morton......... President -- Europe, -- 114,000 10,880 -- -- 124,880
Middle East, Africa &
Asia Pacific
Ian Barton............ Director 20,000 -- -- -- -- 20,000
Marmaduke Hussey...... Director 20,000 -- -- -- -- 20,000
Allen Thomas.......... Deputy Chairman 20,000 -- -- -- -- 20,000
Richard Swank(3)...... Director -- -- -- -- -- --
Derek Smith(4)........ Executive -- 125,000 14,801 -- 3,600 143,401
Vice-President
Graham Burrows(4)..... Executive -- 30,894 -- -- -- 30,894
Vice-President
(appointed 8 October
1998)
Jeff Galt............. Executive -- 129,613 -- 110,853 3,010 243,476
Vice-President
(resigned 26 June
1998)
Marck Shipley......... Director of -- 91,606 -- 62,130 2,131 155,867
Information
Technology -- U.S.
(resigned 30 June
1998)
- ---------------
(1) Includes non-cash compensation.
(2) Michael Mander resigned as Chairman of the Board effective from 28 May 1999.
He will retire as a director after the Annual General Meeting on 1 July
1999.
(3) Richard Swank was appointed as a director on 15 March 1999.
(4) Derek Smith and Graham Burrows resigned on 2 February 1999.
The amounts disclosed as fees paid to the Chairman were paid to Close
Brothers Corporate Finance Ltd, his primary employer.
Thomas Teichman, who resigned as an executive director on 24 May 1996, was
paid L50,000 during the year under a consultancy agreement which terminated on
31 December 1998. His fees were paid to NewMedia Investors Ltd.
47
48
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
Options to Purchase Securities
The following table sets forth as of 21 May 1999, information as to all
outstanding options to purchase Ordinary Shares of the Company held by (i) each
director and executive officer of the Company, and (ii) all directors and
executive officers of the Company as a group.
NUMBER OF SECURITIES EARLIEST DATE LATEST DATE
UNDERLYING OPTIONS EXERCISE PRICE FROM WHICH FROM WHICH
NAME OF DIRECTOR OR EXECUTIVE OFFICER GRANTED (L PER SHARE) EXERCISABLE EXERCISABLE
- ------------------------------------- --------------------- -------------- ------------- -----------
Michael S. Mander................. -- -- -- --
Daniel M. Wagner.................. 163,636 1.10 24/03/97 24/03/04
19,602 0.88 01/05/99 31/10/99
30,000 1.73 30/04/01 30/04/05
130,000 1.50 08/10/01 08/10/05
17,045 0.99 01/07/04 31/12/04
David G. Mattey................... 122,727 1.10 24/03/97 24/03/04
19,602 0.88 01/05/99 31/10/99
30,000 1.73 30/04/01 30/04/05
120,000 1.50 08/10/01 08/10/05
17,045 0.99 01/07/04 31/12/04
Stephen Maller.................... 62,727 1.10 24/03/97 24/03/04
20,000 0.80 25/04/98 25/04/05
17,500 2.48 04/10/98 04/10/05
7,040 0.49 01/12/99 31/05/00
2,156 0.64 01/06/00 30/11/00
308 2.24 01/12/00 31/05/01
766 1.80 01/06/01 30/11/01
30,000 1.89 14/03/00 14/03/04
569 1.37 01/07/01 31/12/01
30,000 1.73 30/04/01 30/04/05
120,000 1.50 08/10/01 08/10/05
1,174 0.99 01/07/02 31/12/02
Jason B. Molle.................... 54,545 1.10 03/24/97 03/24/01
17,500 2.48 04/10/98 04/10/02
30,000 1.89 14/03/00 14/03/04
30,000 1.73* 30/04/99 30/04/08
120,000 1.50* 08/10/99 08/10/08
2,196 1.30** 31/03/99 31/03/99
Ciaran G. Morton.................. 61,364 1.10 24/03/97 24/03/04
17,500 2.48 04/10/98 04/10/02
35,204 0.49 01/12/99 31/05/00
30,000 1.89 14/03/00 14/03/04
30,000 1.73 30/04/01 30/04/05
120,000 1.50 08/10/01 08/10/05
Patrick Sommers................... 200,000 1.50* 08/10/99 08/10/08
2,352 1.31** 22/04/01 22/04/01
Ian J. Barton..................... -- -- -- --
Marmaduke J. Hussey............... -- -- -- --
Allen L. Thomas................... -- -- -- --
Richard Swank..................... 26,844 2.20*** 14/11/98 14/11/04
16,928 1.70*** 08/09/99 08/09/05
All directors and executive officers
as a group (11 persons)......... 1,756,330
- ---------------
* under the terms of the U.S. Stock Option Plan, options are granted in the
form of ADSs at an exercise price expressed in U.S. Dollars. Options granted
under the U.S. Stock Option Plan become exercisable in
48
49
cumulative increments as determined by the Remuneration Committee of the
Board of Directors. For the purpose of uniformity, all options detailed
above are expressed in Ordinary shares and in Pounds Sterling.
** under the terms of the Employee Stock Purchase Plan, rights are granted for
eligible U.S. employees to acquire beneficial ownership of Ordinary shares
of the Company by purchasing ADSs. The purchase price may not be less than
the lower of 85% of the fair market value of the ADSs on the offering date
or 85% of the fair market value of the ADSs on the purchase date. The
purchase price is accumulated by payroll deductions over the course of the
offering. There are two offerings a year. For the purpose of uniformity, all
rights to purchase ADSs under the Employee Stock Purchase Plan detailed
above are expressed in Ordinary shares and in Pounds Sterling.
*** options granted under an individual arrangement over ADSs at the prevailing
market value to Richard Swank previously during his appointment as a
non-executive director of the Company's U.S. subsidiary. The options vest
one year after the date of grant and remain exercisable for a further six
years. For the purpose of uniformity, all options detailed above are
expressed in Ordinary shares and in Pounds Sterling.
STOCK PLANS
The Company currently has in place five stock plans; the 1994 Executive
Share Option Scheme, the 1994 Saving related Share Option Scheme, the 1994
Unapproved Executive Share Option Scheme, the 1997 U.S. Stock Option Plan, and
the 1998 Employee Stock Purchase Plan.
1994 EXECUTIVE SHARE OPTION SCHEME
The Company has adopted, and the U.K. Inland Revenue has approved, the
Company's 1994 Executive Share Option Scheme (the "Executive Scheme"). The
Executive Scheme is administered by the Remuneration Committee of the Board of
Directors of the Company. Options to acquire Ordinary Shares may be issued by
the Company under the Executive Scheme until March 2004, provided that the
number of Ordinary Shares issued or issuable within the preceding ten years
pursuant to options issued under the Company's stock plans may not exceed, in
the aggregate, 10% of the Company's outstanding Ordinary Shares. Any full-time
director of the Company or its affiliates, and any other employee of the Company
or its affiliates who devotes substantially all of his working time to his
employment, is eligible to receive options under the Executive Scheme. Options
may only be granted within 42 days following the announcement of the Company's
annual and interim results.
As of 21 May 1999, options to acquire 1,632,176 Ordinary Shares had been
granted under the Executive Scheme. These options have exercise prices between
L0.80 and L2.48 per Ordinary Share and exercise periods which expire between 4
October 1999 and 1 April 2009. Options to acquire a total of 447,954 Ordinary
Shares have been granted under the Executive Scheme to executive officers and
directors of the Company.
Options granted under the Executive Scheme are not transferable (except
upon the death of the optionee) and may not be pledged. The exercise prices of
such options are determined by the Board of Directors, and may not be less than
the greater of the fair market value or the nominal value of the underlying
Ordinary Shares for the last trading day before the date of grant. An option
granted under the Executive Scheme generally (i) becomes exercisable three years
after the date on which it was granted, (ii) may not be exercised more than ten
years after the date of grant and (iii) terminates upon the cessation of the
optionee's employment with the Company or one of its affiliates. In certain
circumstances, however, including the death, disability or retirement of the
optionee, or if the optionee's employer ceases to be an affiliate of the
Company, an option issued under the Executive Scheme will be exercisable
notwithstanding one or more of the foregoing restrictions. In the event of a
change in control of the Company, options may, with the consent of the acquiring
company, be exchanged for the grant of options with similar rights for the
shares of the acquiring company.
Following the passing of the U.K. Finance Act 1996, the Executive Scheme is
subject to a limitation such that no option may be granted to any person under
the Executive Scheme if and to the extent that the grant of such option would
cause the aggregate market value of all Ordinary Shares which that person may
acquire under the Executive Scheme and any other discretionary stock option plan
which has been approved by the
49
50
U.K. Inland Revenue, to exceed L30,000. For the purposes of applying this
limitation, the market value of shares subject to an option is determined as at
the date the option was granted.
In the event of any increase or variation of the issued Ordinary Share
capital of the Company, by way of reorganization, rights issue, consolidation or
subdivision, or reduction of share capital, the exercise price and number of
Ordinary Shares issuable pursuant to the exercise of outstanding options shall
be adjusted by the Board of Directors in such manner as the Company's auditors
confirm in writing to be fair and reasonable, subject to the prior approval of
the U.K. Inland Revenue.
The Board may, without the prior consent of the U.K. Inland Revenue, amend
the Executive Scheme at any time, provided that the prior approval of the
shareholders is obtained in the case of alterations to certain provisions.
1994 SAVINGS RELATED SHARE OPTION SCHEME
The Company has adopted, and the U.K. Inland Revenue has approved, the
Company's 1994 Savings Related Share Option Scheme (the "Savings Scheme") to
provide employees of the Company and designated subsidiaries with an opportunity
to purchase Ordinary Shares through payroll deductions. The Savings Scheme is
administered by the Directors of the Company. Options to acquire Ordinary Shares
may be issued by the Company under the Savings Scheme until March 2004, provided
that the number of Ordinary Shares issued or issuable within the preceding ten
years pursuant to options issued under the Company's stock plans may not exceed,
in the aggregate, 10% of the Company's outstanding Ordinary Shares. Any employee
of the Company who is a U.K. resident for tax purposes and who has achieved six
months service with the Company is eligible to participate in the Savings
Scheme.
As of 21 May 1999, options to acquire 889,129 Ordinary Shares had been
granted under the Savings Scheme. These options have exercise prices between
L0.49 and L2.24 per Ordinary Share and exercise periods which expire between 31
October 1999 and 31 December 2004 Options to acquire a total of 120,511 Ordinary
Shares have been granted under the Savings Scheme to executive officers and
directors of the Company.
Each offering period under the Savings Scheme is 14 to 21 days long.
Eligible employees may participate in the Saving Scheme by authorizing payroll
deductions. The amount of authorized payroll deductions may not be less than L5,
nor more than L250, per month. Amounts withheld are applied at the end of 36
months in the case of a three year contract and sixty months in the case of a
five year contract. At the end of the contract a bonus is paid, currently equal
to two and three quarter months' contributions on a three year contract and
seven months' contributions on a five year contract (formerly three months'
contributions on a three year contract and nine months' contributions on a five
year contract). The purchase price may not be less than the greater of 85%
(formerly 80% up until December 1995) of the fair market value or the nominal
value underlying the Ordinary Shares on the last trading day before the
commencement of an offering period. Participants may withdraw their
contributions at any time before Ordinary Shares are purchased, and such
contributions will be returned to the participants with interest at the rate of
3% per annum if repayment is made on or after the first anniversary of
commencement of contributions. Employees are not obligated to purchase shares at
the end of the period referred to above.
1994 UNAPPROVED EXECUTIVE SHARE OPTION SCHEME
The Company has adopted the Company's 1994 Unapproved Executive Share
Option Scheme (the "Unapproved Scheme"). The Unapproved Scheme is administered
by the remuneration committee of the Board of Directors of the Company. Options
to acquire Ordinary Shares may be issued by the Company under the Unapproved
Scheme until March 2004, provided that the number of Ordinary Shares issued or
issuable within the preceding ten years pursuant to options issued under the
Company's stock plans may not exceed, in the aggregate, 10% of the Company's
outstanding Ordinary Shares. Any full-time director of the Company or its
affiliates, and any other employee of the Company or its affiliates who devotes
substantially all of his working time to his employment, is eligible to receive
options under the Unapproved Scheme.
50
51
As of 21 May 1999, options to acquire 2,724,838 Ordinary Shares had been
granted under the Unapproved Scheme. These options have exercise prices between
L1.10 and L2.87 per Ordinary Share and exercise periods which expire between 4
October 1999 and 1 April 2006. Options to acquire a total of 789,545 Ordinary
Shares have been granted under the Unapproved Scheme to executive officers and
directors of the Company.
Options granted under the Unapproved Scheme are not transferable (except
upon the death of the optionee) and may not be pledged. The exercise prices of
such options are determined by the Board of Directors, and may not be less than
the greater of the fair market value or the nominal value of the underlying
Ordinary Shares on the date of grant. An option granted under the Unapproved
Scheme generally (i) becomes exercisable three years after the date on which it
was granted, (ii) may not be exercised more than seven years after the grant and
(iii) terminates upon the cessation of the optionee's employment by the Company
or one of its affiliates. In certain circumstances, however, including the
death, disability or retirement of the optionee, or if the optionee's employer
ceases to be an affiliate of the Company, an option issued under the Unapproved
Scheme will become immediately exercisable notwithstanding one or more of the
foregoing restrictions. In the event of a change in control of the Company,
options may, with the consent of the acquiring company, be exchanged for the
grant of options with similar rights for the shares of the acquiring company.
An optionee may not hold options under the Unapproved Scheme to the extent
that the market value of the underlying Ordinary Shares, when added to the
market value of Ordinary Shares which the optionee may acquire pursuant to
outstanding options held by such optionee under the Unapproved Scheme and any
other discretionary share option plan of the Company, exceeds eight times the
optionee's annual salary and bonus, if any, during the relevant tax year.
In the event of any increase or variation of the issued Ordinary Share
capital of the Company, by way of reorganization, rights issue, consolidation or
subdivision, or reduction of share capital, the exercise price and number of
Ordinary Shares issuable pursuant to the exercise of outstanding options shall
be adjusted by the Board of Directors in such manner as the Company's auditors
confirm in writing to be fair and reasonable.
The Board may, without the prior consent of the U.K. Inland Revenue, amend
the Unapproved Scheme at any time, provided that the prior approval of the
shareholders is obtained in the case of alterations to certain provisions.
1997 U.S. STOCK OPTION PLAN
In November 1997, the Company adopted the 1997 U.S. Stock Option Plan (the
"U.S. Option Plan") which provides for the grant of both incentive and
non-statutory stock options over the Company's American Depositary Shares
(ADSs). Incentive stock options granted under the U.S. Option Plan are intended
to qualify as "Incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Non-statutory stock
options granted under the U.S. Option Plan are intended not to qualify as
incentive stock options under the Code. Under the terms of the U.S. Option Plan,
options to acquire ADSs may be granted by the Remuneration Committee of the
Board of Directors to any U.S. resident employee, including employee Directors.
The exercise price of incentive stock and non-statutory stock options under
the U.S. Option Plan may not be less than the fair market value of the ADSs
subject to the option on the date of the option grant, and in some cases, may
not be less than 110% of such fair market value. Options granted under the U.S.
Option Plan may become exercisable ("vest") in cumulative increments as
determined by the Remuneration Committee of the Board of Directors and lapse no
later than the tenth anniversary of the date of grant.
The number of shares over which options may be granted under the U.S.
Option Plan is consistent with institutional investor guidelines in respect of
overall limits applicable to employee share schemes. The number grantable to any
individual is also in line with such limits. As of 21 May 1999, options to
acquire 530,125 ADSs (equivalent to 2,120,500 Ordinary Shares) had been granted
under the U.S. Option Plan. These options have exercise prices between $8.00 and
$14.90 per ADS and exercise periods which expire between 14 November 2007 and 1
April 2009. Options to acquire 87,500 ADSs (equivalent to 350,000 Ordi-
51
52
nary Shares) have been granted under the U.S. Option Plan to executive officers
and directors of the Company.
1998 EMPLOYEE STOCK PURCHASE PLAN
In June 1998 the Company adopted the 1998 Employee Stock Purchase Plan (the
"Purchase Plan") which provides for the grant of rights ("Rights") to purchase
ADSs in the Company. The Rights are intended to qualify as options issued under
"employee stock purchase plans" as defined in Section 423(b) of the United
States Internal Revenue Code of 1986, as amended (the "Code"). Participation in
the Purchase Plan is offered to all U.S. resident employees, including employee
Directors. The initial offering began on 17 June 1998 (the "Offering Date") and
ended on 31 March 1999 (the "Purchase Date"). Thereafter, two year offerings
begin approximately every six months following the announcement of the interim
and final results. All Rights under an offering are linked to accumulated
payroll deductions over the course of the offering, and participants may
withdraw from the plan at any time during an offering (although their Rights
will then lapse). The purchase price of the ADSs is not less than the lesser of
85% of the fair market value of the ADSs on either the Offering date or the
Purchase date. The purchase price may include any U.K. stamp duty or stamp duty
reserve tax payable with respect to the issue of the ADSs.
The number of shares over which options may be granted under the Employee
Stock Purchase Plan is consistent with institutional investor guidelines in
respect of overall limits applicable to employee share schemes. The number
grantable to any individual is also in line with such limits. As of 21 May 1999,
options to acquire 67,720 ADSs (equivalent to 270,880 Ordinary Shares) had been
granted under the Employee Stock Purchase Plan. These options have exercise
prices between $8.50 and $10.49 per ADS and exercise periods which expire
between 30 September 2000 and 22 April 2001. Options to acquire 1,137 ADSs
(equivalent to 4,548 Ordinary Shares) have been granted under the Employee Stock
Purchase Plan to executive officers and directors of the Company.
INDIVIDUAL U.S. ARRANGEMENTS
Between 1997 and 1999 the Company granted options over ADSs at the
prevailing market value to certain individuals who are non-executive directors
of The Dialog Corporation, the Company's North American subsidiary. As of 21 May
1999, options to acquire 23,443 ADSs (equivalent to 93,772 Ordinary Shares) had
been granted under the individual U.S. arrangements. These options have exercise
prices between $8.00 and $14.90 per ADS and exercisable periods which expire
between 14 November 2004 and 1 April 2009. Options to acquire 10,943 ADSs
(equivalent to 43,772 Ordinary Shares) have been granted under individual U.S.
arrangements to executive officers and directors of the Company.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
There are no relevant interests of management in material transactions
entered into between 1 January 1998 and 31 December 1998.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
52
53
ITEM 16.CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Reference is made to "Item 19. Financial Statements and Exhibits" for a
list of all financial statements filed as part of this report.
ITEM 18. FINANCIAL STATEMENTS
Not applicable.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
DESCRIPTION PAGE
----------- ----
Report of Independent Accountants........................... 55
Consolidated Profit and Loss Account for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1997... F-2
Company Balance Sheets at December 31, 1998 and 1997........ F-3
Consolidated Cash Flow Statement for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-4
Notes to Consolidated Financial Statements.................. F-5
(b) Exhibits
99.1 Press Release dated June 9, 1999
99.2 Press Release dated June 17, 1999
53
54
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE DIALOG CORPORATION PLC
(formerly known as M.A.I.D plc)
(Registrant)
/s/ DAVID G. MATTEY
--------------------------------------
David G. Mattey
Chief Financial Officer
Dated: June 24, 1999
54
55
THE DIALOG CORPORATION PLC
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of The Dialog Corporation plc
We have audited the Consolidated Financial Statements of The Dialog
Corporation plc and its subsidiary undertakings contained on pages F-1 to F-54
which are expressed in pounds sterling except where specifically identified.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom which do not differ in any material respects from
auditing standards in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Dialog Corporation plc and its subsidiary undertakings at December 31, 1997
and 1998 and the consolidated results of their operations, and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of the consolidated loss expressed in pounds sterling for each of
the three years in the period ended December 31, 1998 and the determination of
consolidated shareholders' equity also expressed in pounds sterling at December
31, 1997 and 1998 to the extent summarised in Note 29 to the Consolidated
Financial Statements.
PricewaterhouseCoopers
Chartered Accountants
and Registered Auditors
London, England
May 28, 1999
55
56
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE YEARS ENDED 31 DECEMBER 1998, 1997 AND 1996
TOTAL TOTAL
CONTINUING RESTRUCTURING TOTAL CONTINUING RESTRUCTURING TOTAL
BUSINESS COSTS AND CONTINUING BUSINESS COSTS AND CONTINUING
BEFORE OTHER BUSINESS AFTER BEFORE OTHER BUSINESS AFTER
RESTRUCTURING EXCEPTIONAL RESTRUCTURING RESTRUCTURING EXCEPTIONAL RESTRUCTURING
NOTES COSTS ITEMS (NOTE 5) COSTS COSTS ITEMS (NOTE 5) COSTS
----- ------------- -------------- -------------- ------------- -------------- --------------
1998 1997
----------------------------------------------- -----------------------------------------------
L000 L000 L000 L000 L000 L000
TURNOVER.............. 2 170,762 -- 170,762 46,082 -- 46,082
Cost of sales......... (71,618) -- (71,618) (17,166) -- (17,166)
------- ------- ------- ------- ------- -------
GROSS PROFIT.......... 99,144 -- 99,144 28,916 -- 28,916
Distribution costs.... (21,605) 45 (21,560) (15,700) (1,313) (17,013)
Administrative
expenses............ (44,170) (2,628) (46,798) (13,415) (9,247) (22,662)
Amortisation/write-off
of development
costs............... (7,760) -- (7,760) (3,558) (7,990) (11,548)
Amounts written off
investments......... -- (2,300) (2,300) -- -- --
------- ------- ------- ------- ------- -------
OPERATING
PROFIT/(LOSS)....... 2,4 25,609 (4,883) 20,726 (3,757) (18,550) (22,307)
Gain on sale of fixed
asset investments... 5 -- 2,069 2,069 -- 4,035 4,035
Interest receivable... 205 -- 205 338 -- 338
Interest payable and
similar charges..... 6 (17,436) -- (17,436) (2,498) -- (2,498)
------- ------- ------- ------- ------- -------
PROFIT/(LOSS) ON
ORDINARY ACTIVITIES
BEFORE TAXATION..... 8,378 (2,814) 5,564 (5,917) (14,515) (20,432)
Taxation on
profit/(loss) on
ordinary
activities.......... 8 (769) -- (769) (323) -- (323)
------- ------- ------- ------- ------- -------
PROFIT/(LOSS) ON
ORDINARY ACTIVITIES
AFTER TAXATION...... 7,609 (2,814) 4,795 (6,240) (14,515) (20,755)
Minority equity
interests........... 23 (356) -- (356) 11 -- 11
------- ------- ------- ------- ------- -------
RETAINED PROFIT/
(DEFICIT)........... 21 7,253 (2,814) 4,439 (6,229) (14,515) (20,744)
======= ======= ======= ======= ======= =======
Earnings/(loss) per
share (pence)....... 9 4.8 2.9 (6.2) (20.5)
------- ------- ------- -------
Fully diluted
earnings/ (loss) per
share (pence)....... 9 4.8 2.9 (6.1) (20.4)
------- ------- ------- -------
1996
------
L000
TURNOVER.............. 21,443
Cost of sales......... (7,237)
------
GROSS PROFIT.......... 14,206
Distribution costs.... (9,933)
Administrative
expenses............ (9,975)
Amortisation/write-off
of development
costs............... (2,170)
Amounts written off
investments......... --
------
OPERATING
PROFIT/(LOSS)....... (7,872)
Gain on sale of fixed
asset investments... --
Interest receivable... 1,027
Interest payable and
similar charges..... (189)
------
PROFIT/(LOSS) ON
ORDINARY ACTIVITIES
BEFORE TAXATION..... (7,034)
Taxation on
profit/(loss) on
ordinary
activities.......... (164)
------
PROFIT/(LOSS) ON
ORDINARY ACTIVITIES
AFTER TAXATION...... (7,198)
Minority equity
interests........... (28)
------
RETAINED PROFIT/
(DEFICIT)........... (7,226)
======
Earnings/(loss) per
share (pence)....... (7.8)
------
Fully diluted
earnings/ (loss) per
share (pence)....... (7.7)
------
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
1998 1997 1996
----- ------- ------
L000 L000 L000
Gain/(loss) for the financial year.......................... 4,439 (20,744) (7,226)
Consolidated translation differences on foreign currency net
investments............................................... 680 (3,099) (477)
----- ------- ------
Total recognised gains and losses for the financial
year............................................. 5,119 (23,843) (7,703)
===== ======= ======
The profit and loss accounts shown above have been prepared on a historical
cost basis.
The notes on pages F-5 - F-54 form part of these financial statements.
F-1
57
CONSOLIDATED BALANCE SHEETS
AS AT 31 DECEMBER 1998 AND 1997
NOTES 1998 1997
----- -------- --------
L000 L000
FIXED ASSETS
Intangible assets........................................... 10 23,154 21,624
Goodwill.................................................... 11 7,676 --
Tangible assets............................................. 12 17,870 19,354
Investments................................................. 13 12,354 18,374
-------- --------
61,054 59,352
-------- --------
CURRENT ASSETS
Stocks...................................................... 221 232
Debtors: amounts due within one year........................ 14 42,781 43,205
Debtors: amounts due after one year......................... 14 -- 615
Assets held for resale...................................... 30 992 7,384
Cash and bank deposits...................................... 4,494 13,722
-------- --------
48,488 65,158
CREDITORS (amounts falling due within one year)............. 15 (58,845) (45,201)
-------- --------
NET CURRENT (LIABILITIES)/ASSETS............................ (10,357) 19,957
-------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 50,697 79,309
CREDITORS (amounts falling due after more than one year).... 16 (139,741) (162,681)
Provisions for liabilities and charges...................... 17 (4,697) (7,583)
-------- --------
NET LIABILITIES............................................. (93,741) (90,955)
======== ========
CAPITAL AND RESERVES - EQUITY
Called up share capital..................................... 18 1,514 1,502
Share premium account....................................... 19 152,128 150,341
Shares to be issued......................................... 20 967 --
Profit and loss account..................................... 21 (249,427) (243,524)
-------- --------
Equity shareholders' funds.................................. 22 (94,818) (91,681)
Minority equity interest.................................... 23 1,077 726
-------- --------
Total shareholders' funds......................... (93,741) (90,955)
======== ========
THE FINANCIAL STATEMENTS WERE APPROVED BY THE BOARD OF DIRECTORS ON 28 MAY
1999 AND SIGNED ON ITS BEHALF BY:
D Wagner D Mattey
Chief Executive Chief Financial Officer
The notes on pages F-5 - F-54 form part of these financial statements.
F-2
58
COMPANY BALANCE SHEETS
AS AT 31 DECEMBER 1998 AND 1997
NOTES 1998 1997
----- -------- --------
L000 L000
FIXED ASSETS
Intangible assets........................................... 10 4,650 4,157
Tangible assets............................................. 12 2,842 2,030
Investments................................................. 13 284,836 282,286
-------- --------
292,328 288,473
CURRENT ASSETS
Stocks...................................................... 27 28
Debtors..................................................... 14 40,734 29,139
-------- --------
Cash at bank and in hand.................................... -- 184
40,761 29,351
CREDITORS (amounts falling due within one year)............. 15 (55,435) (16,575)
-------- --------
NET CURRENT (LIABILITIES)/ASSETS............................ (14,674) 12,776
-------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES....................... 277,654 301,249
CREDITORS (amounts falling due after more than one year).... 16 (136,709) (155,806)
-------- --------
NET ASSETS.................................................. 140,945 145,443
======== ========
CAPITAL AND RESERVES - EQUITY
Called up share capital..................................... 18 1,514 1,502
Share premium account....................................... 19 152,128 150,341
Shares to be issued......................................... 20 967 --
Profit and loss account..................................... 21 (13,664) (6,400)
-------- --------
Total shareholders' funds......................... 22 140,945 145,443
======== ========
THE FINANCIAL STATEMENTS WERE APPROVED BY THE BOARD OF DIRECTORS ON 28 MAY
1999 AND SIGNED ON ITS BEHALF BY:
D Wagner D Mattey
Chief Executive Chief Financial Officer
The notes on pages F-5 - F-54 form part of these financial statements.
F-3
59
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 1998
NOTES 1998 1997 1996
----- -------- -------- -------
L000 L000 L000
NET CASH INFLOW/(OUTFLOW) FROM OPERATING
ACTIVITIES................................................ 25 34,151 3,175 (5,841)
-------- -------- -------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Dividends paid to minority shareholders in subsidiary
undertakings.............................................. -- (41) --
Interest received........................................... 205 353 885
Interest paid on bank loans and overdrafts.................. (15,251) (585) (3)
Interest paid on finance leases............................. (46) (119) (198)
-------- -------- -------
(15,092) (392) 684
-------- -------- -------
TAXATION PAID............................................... (349) (158) (20)
-------- -------- -------
CAPITAL EXPENDITURE
Payments to develop intangible assets....................... (11,762) (2,747) (3,237)
Payments to acquire tangible fixed assets................... (7,223) (1,987) (3,554)
Receipts from sale of tangible fixed assets................. 211 178 18
-------- -------- -------
(18,774) (4,556) (6,773)
-------- -------- -------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings......................... 11 (965) (262,623) (50)
Cash impact of revisions to fair values..................... (2,284) -- --
Payment to acquire minority interests in a subsidiary
undertaking............................................... 11 (1,720) -- --
Net cash acquired with subsidiary undertakings.............. (33) 11,907 --
Purchase of share in joint venture.......................... (1,086) (610) --
Expenses in connection with purchase of subsidiary
undertakings.............................................. (471) (3,857) --
Proceeds of sale of investments............................. 5 7,123 -- --
Payments made in connection with sale of technology......... -- (562) --
-------- -------- -------
564 (255,745) (50)
-------- -------- -------
CASH INFLOW/(OUTFLOW) BEFORE THE USE OF LIQUID RESOURCES AND
FINANCING................................................. 500 (257,676) (12,000)
-------- -------- -------
MANAGEMENT OF LIQUID RESOURCES
Cash withdrawn from deposit................................. 26 620 -- --
-------- -------- -------
Net receipts from sale of investments with original maturity
date of less than one year................................ -- 5,380 15,646
-------- -------- -------
FINANCING
Net proceeds on issue of Ordinary share capital............. 458 111,302 --
Net proceeds on issue of Senior Credit Facility............. -- 52,836 --
Net proceeds on issue of Senior Subordinated Notes.......... -- 102,844 --
Debt due within one year:
- - Repayment of loans........................................ (9,551) -- --
Expenses on issue of Ordinary share capital................. -- (755) (1,068)
Expenses on raising of Senior Credit Facility and Senior
Subordinated Notes........................................ (29) (1,608) --
Repayment of capital element of finance leases.............. (549) (1,491) (1,012)
-------- -------- -------
(9,671) 263,128 (2,080)
-------- -------- -------
(DECREASE)/INCREASE IN CASH................................. (8,551) 10,832 1,566
-------- -------- -------
RECONCILIATION OF NET CASH FLOW TO MOVEMENT
IN NET (DEBT)/FUNDS
(Decrease)/increase in cash in the period................... (8,551) 10,832 1,566
Cash used to decrease lease financing....................... 549 1,491 1,012
Cash acquired from issue of debt (net of expenses).......... 29 (154,072) --
Cash used to repay loans.................................... 9,551 -- --
Decrease in liquid resources and cash deposits with original
maturity dates of more than one year...................... (620) (5,380) (15,646)
-------- -------- -------
Change in net (debt)/funds from cash flows.................. 958 (147,129) (13,068)
Other non-cash changes...................................... (946) (119) --
New finance leases.......................................... -- (122) (464)
Effect of foreign exchange rate changes..................... 1,695 (4,422) 85
-------- -------- -------
Movement in net (debt)/funds in period...................... 1,707 (151,792) (13,447)
Net (debt)/funds at beginning of period..................... (145,904) 5,888 19,335
-------- -------- -------
Net (debt)/funds at end of period........................... 27 (144,197) (145,904) 5,888
======== ======== =======
The notes on pages F-5 - F-55 form part of these financial statements.
F-4
60
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The financial statements have been prepared under the historical cost
convention and in accordance with accounting standards applicable in the United
Kingdom. There are significant differences between generally accepted accounting
principles (GAAP) in the United Kingdom (UK) and the United States (US). A
summary of these differences together with the reconciliation of net
profit/(loss) and shareholders' equity from UK GAAP to US GAAP is provided in
note 29 to these financial statements. Certain additional disclosures have been
made to aid US readers of the financial statements. The following principal
accounting policies have been applied:
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Group accounts
The consolidated financial statements incorporate the financial statements
of the Company and its subsidiaries. All intercompany transactions and balances
have been eliminated. The accounts include the results of subsidiaries acquired
during the year from the relevant date of acquisition other than those
subsidiaries acquired with a view to resale.
Goodwill
Prior to 1 January 1998, goodwill arising as the difference between the
cost of acquisition of a subsidiary and the fair value of its net assets at the
date of acquisition was written off to reserves in the year of acquisition.
Goodwill arising on acquisitions since 1 January 1998 is capitalised and
subsequently written off over its estimated useful life, which currently ranges
from 10 - 20 years. Where necessary, adjustments to provisional fair values of
net assets acquired are adjusted to goodwill in the first full year following
the acquisition.
Turnover and revenue recognition
Turnover represents database subscription sales, online and usage charges
and design and implementation fees at invoiced amounts, exclusive of value added
and other sales taxes. Subscription revenues are recognised when contractually
due and invoiced. The costs of fulfilling obligations under the terms of the
subscription contract are accrued at the time the income is recognised. Online
and usage charges are recognised as the service is provided.
Most subscriptions are due and invoiced either annually or semi-annually in
advance and recognised in full at the commencement of the subscription term.
Some of the Group's US operations bill monthly under its 'modular pricing'
scheme, whereby subscriptions for access to the Group's service are raised on a
monthly basis and are accounted for accordingly.
Annual CD-ROM usage fees are deferred and amortised over the life of the
contract.
F-5
61
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fixed assets
Fixed assets are stated at cost. Depreciation is provided to write off the
cost, less estimated residual value, of all tangible fixed assets over their
expected useful lives and is calculated at the following rates:
Equipment including personal computers................... - 33% straight line
Leasehold improvements................................... - 20% straight line
Motor vehicles........................................... - 25% straight line
Mainframe computers...................................... - 20% straight line
Fixtures and fittings.................................... - 20% straight line
Leasehold improvements relate to the cost of refurbishment of the Group's
short leasehold properties.
Stocks
Stocks, which comprise consumable items, are stated at the lower of cost
and net realisable value.
Foreign currency
Transactions denominated in foreign currencies are recorded at the exchange
rate prevailing at the date of the transaction. Transactions to be settled at a
contract rate are recorded at that rate. Any gains or losses from the
translation of transactions denominated in foreign currencies are included in
the results of the operation. Assets and liabilities denominated in foreign
currencies are translated at the exchange rate ruling at the year-end. Profit
and losses of overseas companies are translated at average rates of exchange for
the period. Exchange differences arising out of the translation of accounts of
foreign subsidiaries, net of associated borrowings, are taken to reserves.
Financial instruments
Changes in the value of forward foreign exchange contracts are recognised
in the results in the same period as changes in the values of the assets and
liabilities they are intended to hedge. Any interest receipts arising from the
interest rate cap would be matched to those arising from the underlying debt
position.
Intangible fixed assets
Intangible fixed assets comprise both system and product development costs.
System development comprises costs associated with the Group's host
computer systems and databases, and includes software licence fees and
installation costs. These costs are amortised on a straight line basis over five
years in line with the depreciation policy for the computer hardware used to
host The Dialog Corporation's services.
Product development consists of the pre-launch costs associated with the
development of new products. These include the costs of consultancy,
programmers' salaries and related overheads including depreciation and lease
interest on computer hardware wholly used for product development. These costs
are amortised on a straight line basis over three years commencing in the first
month of revenue generation from the developed product.
Product development costs are reviewed regularly for impairment and
additional depreciation is charged, if necessary, to reduce the net amount
carried forward on a product by product basis to net revenues expected to be
generated from that product.
Indexing costs
The cost of indexing information on the databases is deferred and amortised
on a straight line basis over two years.
F-6
62
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fixed asset investments
Investments in subsidiaries and other fixed asset investments are stated in
the balance sheet at cost. Provision is made in full for diminution in value if
considered permanent.
Deferred taxation
Provision is made for timing differences between the treatment of certain
items for taxation and accounting purposes, to the extent that it is probable
that a liability or asset will crystallise.
Leased assets
Where assets are financed by leasing agreements that give rights
approximating to ownership ('finance leases'), the assets are treated as if they
had been purchased outright. The amount capitalised is the present value of the
minimum lease payments payable over the term of the lease. The corresponding
leasing commitments are shown as amounts payable to the lessor. Depreciation on
the relevant assets is charged to the profit and loss account except for that
proportion relating to assets wholly used for product development.
Lease payments are analysed between capital and interest using the
actuarial method. The interest is charged to the profit and loss account except
for that proportion relating to assets wholly used for product development. The
capital part reduces the amounts payable to the lessor.
All other leases are treated as operating leases. Their annual rentals are
charged to the profit and loss account on a straight line basis over the lease
term except where the costs are capitalised as development costs.
Pension costs
The Group operates defined contribution pension schemes in the UK, US and
Switzerland. The amount of contributions payable to the pension schemes are
charged to the profit and loss account as incurred.
Finance costs
Borrowings are stated net of the associated costs of raising the finance.
Such finance costs are charged to the profit and loss account over the term of
the related borrowing, increasing the outstanding borrowing to the amount of the
debt at the maturity date.
Content provider agreements
Certain of the Group's information provider agreements contain provisions
for either fixed fees or minimum royalty payments irrespective of the usage
revenues generated by the Group. The Group recognises these fixed fees or
minimum royalty payments on a pro-rata basis in accordance with the terms of the
contracts. The Group periodically reviews the projected revenues related to
these arrangements and makes provision if fixed fees or minimum royalty
commitments are not expected to be recovered from the related revenues.
Concentration of credit risk
The Group's policy is to place its cash, cash equivalents and investments
with high-quality financial institutions in order to limit the amount of credit
exposure. The Group performs ongoing evaluations of its customers' financial
condition and maintains reserves for potential credit losses, and such losses,
in the aggregate, have not exceeded management expectations. Financial
instruments which expose the Group to credit risk are cash equivalents,
investments and trade accounts receivable, which generally are not
collateralised.
F-7
63
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SEGMENTAL ANALYSIS
On 2 February 1999, the Company announced the creation of three new
operating divisions: the Information Services Division which provides an indexed
online delivery system sourced principally in the United Kingdom and North
America; the Web Solutions and Internet Software Division which licenses the
Group's search technologies for corporate knowledge management solutions; and
the eCommerce Division. Although these new divisions are not reportable
segments, the analysis of Group turnover has been revised accordingly.
1998 includes a full year's results of Knight-Ridder Information, Inc.
(KRII) as opposed to the previous year which only shows the results of KRII from
the date of acquisition, being 14 November 1997.
The composition of turnover is analysed as follows:
1998 1997 1996
------- ------ ------
L000 L000 L000
Information Services:
- - Usage sales........................................... 136,992 28,040 9,366
- - Subscription sales.................................... 10,561 14,092 11,462
- - CD-ROM sales.......................................... 8,737 1,134 --
- - Other sales........................................... 9,021 590 585
------- ------ ------
165,311 43,856 21,413
Web Solutions and Internet Software..................... 4,010 397 30
eCommerce............................................... 77 -- --
Other................................................... 1,364 1,829 --
------- ------ ------
170,762 46,082 21,443
======= ====== ======
The 'other' category relates to royalties earned from the provision of
hotel Internet access.
The composition of turnover by source is analysed as follows:
1998 1997 1996
------- ------ ------
L000 L000 L000
United Kingdom.......................................... 17,243 29,013 21,443
North America........................................... 129,478 14,367 --
Continental Europe...................................... 17,231 2,244 --
Rest of the world....................................... 6,810 458 --
------- ------ ------
170,762 46,082 21,443
======= ====== ======
The composition of turnover by destination is analysed as follows:
1998 1997 1996
------- ------ ------
L000 L000 L000
United Kingdom.......................................... 38,934 14,026 8,665
North America........................................... 96,952 20,377 6,991
Continental Europe...................................... 13,819 7,365 3,943
Rest of the world....................................... 21,057 4,314 1,844
------- ------ ------
170,762 46,082 21,443
======= ====== ======
F-8
64
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The composition of operating profit/(loss) is analysed as follows:
TOTAL
TOTAL RESTRUCTURING TOTAL TOTAL RESTRUCTURING CONTINUING
CONTINUING COSTS AND CONTINUING CONTINUING COSTS AND BUSINESS
BUSINESS BEFORE OTHER BUSINESS AFTER BUSINESS BEFORE OTHER AFTER
RESTRUCTURING EXCEPTIONAL RESTRUCTURING RESTRUCTURING EXCEPTIONAL RESTRUCTURING
COSTS ITEMS COSTS COSTS ITEMS COSTS
--------------- ------------- -------------- --------------- ------------- -------------
1998 1997
------------------------------------------------ -----------------------------------------------
L000 L000 L000 L000 L000 L000
United Kingdom.............. 8,498 (2,689) 5,809 (5,599) (5,983) (11,582)
North America............... 15,444 (2,781) 12,663 (375) (10,107) (10,482)
Continental Europe.......... 921 587 1,508 2,288 (2,429) (141)
Rest of the world........... 746 -- 746 (71) (31) (102)
------ ------ ------ ------ ------- -------
25,609 (4,883) 20,726 (3,757) (18,550) (22,307)
====== ====== ====== ====== ======= =======
1996
------
L000
United Kingdom.............. (4,850)
North America............... (3,900)
Continental Europe.......... 826
Rest of the world........... 52
------
(7,872)
======
The operating profit/(loss) for the United Kingdom for the periods under
review includes the central costs associated with the Group's worldwide head
office functions.
The composition of net assets and total assets by location is presented on
a basis consistent with the segmental analysis of operating profit/(loss). The
assets in any location are not necessarily matched with the turnover in that
location. The net assets and total assets for the United Kingdom for the periods
under review include those associated with the Group's worldwide head office
functions.
The composition of net (liabilities)/assets is analysed as follows:
1998 1997 1996
-------- -------- ------
L000 L000 L000
United Kingdom....................................... 13,003 20,387 15,153
North America........................................ 37,720 38,403 2,909
Continental Europe................................... 2,481 3,293 1,395
Rest of the world.................................... 1,514 5,807 623
-------- -------- ------
Net operating assets................................. 54,718 67,890 20,080
Unallocated net (liabilities)/assets................. (148,459) (158,845) 6,000
-------- -------- ------
(93,741) (90,955) 26,080
======== ======== ======
Unallocated net (liabilities)/assets comprise borrowings and cash deposits.
The composition of total assets is analysed as follows:
1998 1997 1996
------- ------- ------
L000 L000 L000
United Kingdom......................................... 28,382 28,287 21,280
North America.......................................... 66,546 78,325 3,770
Continental Europe..................................... 7,771 10,376 1,937
Rest of the world...................................... 6,843 7,522 718
------- ------- ------
Net operating assets................................... 109,542 124,510 27,705
Unallocated assets..................................... -- -- 6,000
------- ------- ------
109,542 124,510 33,705
======= ======= ======
Unallocated assets comprise cash deposits.
F-9
65
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. STAFF NUMBER AND COSTS
Staff costs (including Directors) consist of:
1998 1997 1996
------ ------ ------
L000 L000 L000
Wages and salaries....................................... 32,529 14,336 10,603
Social security costs.................................... 2,997 1,440 1,204
Other pension costs...................................... 910 51 --
------ ------ ------
36,436 15,827 11,807
====== ====== ======
Included above are staff costs of L9,260,000 (1997: L1,413,000; 1996:
L1,871,000) which represent costs of product and systems development and have
been treated in accordance with the accounting policy for intangible fixed
assets as set out in note 1 to these financial statements.
Pension arrangements
The Group operates defined contribution pension schemes in the UK, the US
and Switzerland. The pension cost charge represents contributions payable by the
Group to the funds and amounted to L910,000 (1997: L51,000; 1996: Lnil).
The assets of all the schemes are held by independent custodians and kept
entirely separate from the assets of the Group.
The average number of full-time employees during the year was:
1998 1997 1996
----- ---- ----
United Kingdom.............................................. 275 217 228
North America............................................... 573 289 147
Continental Europe.......................................... 99 43 26
Rest of the world........................................... 78 43 10
----- --- ---
1,025 592 411
===== === ===
F-10
66
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. OPERATING PROFIT/(LOSS)
This is arrived at after charging/(crediting):
1998 1997 1996
----- ------ -----
L000 L000 L000
Hire of plant and machinery -- operating leases............ -- 560 38
Hire of other assets -- operating leases................... 5,160 1,272 1,048
Depreciation:
-- on owned assets....................................... 7,069 4,378 1,323
-- on leased assets...................................... 893 516 484
Amortisation/write-off:
-- of development costs.................................. 7,699 11,548 2,170
-- of goodwill........................................... 61 -- --
Auditors' remuneration:
-- PricewaterhouseCoopers................................ 229 197 75
-- other................................................. 28 78 --
(Gain)/loss on foreign currency translations............... (290) (60) 26
Loss/(profit) on disposal of fixed assets.................. 17 (15) (2)
Net costs arising on reorganisation of Group's agency
arrangements............................................. -- 267 --
Write-off of fixed asset investment (see notes 5 and 13)... 2,300 -- --
The auditors' remuneration includes amounts in respect of the parent
company for the year ended 31 December 1998 of L100,000 (1997: L100,000; 1996:
L41,000).
Additional fees paid to PricewaterhouseCoopers (formerly Price Waterhouse)
for non-audit services amounted to L8,000 in 1998 (1997: L1,433,000; 1996:
Lnil). The fees paid in 1997 were in respect of the Company's acquisition of
KRII in November 1997 and the associated financing.
Of the exceptional item of L267,000, which was charged against operating
profit in 1997, L383,000 related to the cost of purchasing the Company's South
African agency, offset by a gain of L116,000 on the assignment of the Group's
former Japanese agency to Fujitsu.
The (loss)/profit for the year attributable to shareholders, dealt with in
the accounts of The Dialog Corporation plc, is:
1998 1997 1996
- ------ ----- ------
L000 L000 L000
(9,016) 4,120 (7,197)
As permitted by Section 230 of the Companies Act 1985, the profit and loss
account of the company is not presented.
5. RESTRUCTURING COSTS AND OTHER EXCEPTIONAL ITEMS
Exceptional restructuring costs of L2.6 million have been charged as a
result of the continuing integration of KRII. These costs consist of L1.8
million relating to the relocation of the US headquarters, L1.6 million relating
to the termination of property leases and L0.9 million of various other
restructuring charges, relating primarily to the integration of the sales force
and one-off customer hostings. These costs have been offset by a write-back of
L1.2 million relating to data centre convergence costs and L0.5 million relating
to the removal of the Knight-Ridder Information name.
An exceptional write-down of L2.3 million has been charged to the profit
and loss account relating to the Company's investment in Fourth Network
Communications, Inc. (4th Network). The write-down, equivalent to 50% of the
carrying value of the Company's investment, arose following the postponement of
an initial
F-11
67
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
public offering, originally scheduled for 1998, and the failure of 4th Network
to raise significant alternative funds. The Company continues to monitor closely
the carrying value of its investment in 4th Network.
On 6 May 1998, the Group disposed of its investment in NewsEdge
Corporation, an online service provider, for net proceeds of L3.9 million. This
resulted in a book profit on the disposal of L1.0 million.
On 13 May 1998, the Company disposed of its investment in Easynet Group
plc, an Internet and telecommunications company, for net proceeds, after
associated expenses, of L3.2 million. This resulted in a book profit on the
disposal of L1.1 million.
On 24 February 1997, the Company sold its hotel Internet access technology
(and existing hotel contracts) to 4th Network and became their agent in Europe.
In consideration the Company received 500,000 shares in 4th Network with an
aggregate value of L4,597,000. The costs associated with the transfer were
L562,000. There was no effect on the Group's tax charge as a result of this
exceptional gain.
During the year ended 31 December 1997, exceptional restructuring costs of
L18.6 million were charged as a result of the integration of KRII. Distribution
costs of L1.3 million related to the removal of the Knight-Ridder Information
name and logo from all printed materials, products and signage. Administrative
expenses of L9.3 million consisted of L5.3 million relating to data centre
integration costs, L2.2 million relating to the termination of property leases,
L1.5 million relating to severance costs and L0.3 million relating to various
other restructuring charges. Amortisation of L8.0 million related to the
write-off of previously capitalised product development costs where these
products were no longer being pursued by the enlarged Group.
6. INTEREST PAYABLE AND SIMILAR CHARGES
1998 1997 1996
------ ----- ----
L000 L000 L000
Bank loans and overdrafts:
- - on Senior Subordinated Notes.............................. 12,013 1,701 --
- - on Senior Credit Facility................................. 4,399 659 --
- - amortisation of debt fees................................. 946 -- --
- - on bank overdrafts........................................ 33 26 3
------ ----- ---
17,391 2,386 3
Finance Lease............................................... 45 118 198
------ ----- ---
17,436 2,504 201
Less: Lease finance costs capitalised....................... -- (6) (12)
------ ----- ---
17,436 2,498 189
====== ===== ===
7. DIRECTORS' EMOLUMENTS AND INTERESTS IN ORDINARY SHARES
1998 1997 1996
----- ---- ----
L000 L000 L000
Aggregate emoluments........................................ 1,326 773 650
Amounts paid to third parties............................... 51 38 38
Amounts paid to former Directors............................ 50 167 57
Contributions to money purchase pension schemes............. 12 -- --
----- --- ---
1,439 978 745
===== === ===
F-12
68
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Details of the full cost of each Director's remuneration package for the
year ended 31 December 1998 are as follows:
PENSION 1998 1997 1996
FEES SALARY BENEFITS CONTRIBUTIONS BONUS TOTAL TOTAL TOTAL
------- --------- -------- ------------- ------- --------- ------- -------
L L L L L L L L
M Mander (Chairman)................... 51,250 -- -- -- -- 51,250 37,500 37,500
D Wagner.............................. -- 165,250 2,828 -- -- 168,078 199,510 138,916
P Sommers (from 8 October 1998)....... -- 39,677 -- -- -- 39,677 -- --
D Mattey.............................. -- 141,586 2,794 -- -- 144,380 167,062 115,880
J Molle............................... 125,200 -- 3,314 -- 128,514 39,788 --
S Maller.............................. -- 98,625 216 -- -- 98,841 82,236 68,413
C Morton.............................. -- 114,000 10,880 -- -- 124,880 37,853 --
A Thomas.............................. 20,000 -- -- -- -- 20,000 3,750 --
I Barton.............................. 20,000 -- -- -- -- 20,000 15,000 15,000
M Hussey.............................. 20,000 -- -- -- -- 20,000 15,000 10,000
D Smith*.............................. -- 125,000 14,801 3,600 -- 143,401 161,858 78,209
J Galt (to 26 June 1998).............. -- 129,613 -- 3,010 110,853 243,476 35,920 --
M Shipley (to 30 June 1998)........... -- 91,606 -- 2,131 62,130 155,867 15,324 --
G Burrows (from 8 October 1998)*...... -- 30,894 -- -- -- 30,894 -- --
------- --------- ------ ------ ------- --------- ------- -------
111,250 1,061,451 31,519 12,055 172,983 1,389,258 810,801 463,918
======= ========= ====== ====== ======= ========= ======= =======
- ---------------
* Derek Smith and Graham Burrows resigned on 2 February 1999.
Fees for non-executive Directors were set by the executive Directors
following consultation with the Company's advisors.
Benefits include P11D benefits (non-cash compensation) for the UK
Directors, as detailed in the Remuneration Committee Report.
Each of the executive Directors have service agreements with the Company
for continuing employment unless and until terminated by either party by giving
not less than twelve months' notice, except Patrick Sommers who was appointed in
1998 with an initial three year service agreement with notice reduced to twelve
months in the third year of the agreement.
The amounts disclosed as fees paid to the Chairman were paid to Close
Brothers Corporate Finance Ltd, his primary employer.
Thomas Teichman, who resigned as an executive Director on 24 May 1996, was
paid L50,000 during the year under a consultancy agreement which terminated on
31 December 1998. His fees were paid to NewMedia Investors Ltd.
F-13
69
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Directors who have served during the year and their interests in the
Ordinary share capital and options on shares of the Company were:
Interests in Ordinary shares
1 JANUARY 98* ACQUIRED DISPOSALS 31 DECEMBER 1998+
------------- -------- --------- -----------------
M Mander................................. 900,327 -- -- 900,327
D Wagner................................. 17,034,780 400,000 -- 17,434,780
P Sommers................................ 8,000 -- -- 8,000
D Mattey................................. 2,335,200 -- -- 2,335,200
J Molle.................................. 135,116 -- -- 135,116
S Maller................................. 25,441 -- -- 25,441
C Morton................................. 222,001 -- (20,000) 202,001
A Thomas................................. 100,000 -- -- 100,000
I Barton................................. 479,139 -- -- 479,139
M Hussey................................. 242,610 -- -- 242,610
D Smith.................................. 550,000 -- -- 550,000
J Galt................................... -- -- -- --
M Shipley................................ -- 2,000 -- 2,000
G Burrows................................ -- -- -- --
---------- ------- ------- ----------
Total.......................... 22,032,614 402,000 (20,000) 22,414,614
========== ======= ======= ==========
- ---------------
* or date of appointment if later
+ or date of resignation if earlier
Patrick Sommers holds 2,000 American Depositary Shares (ADSs) and the
Ordinary share equivalent is shown above.
On 14 January 1998, Marck Shipley purchased 2,000 Ordinary shares.
On 6 August 1998, Daniel Wagner acquired a beneficial interest in a further
400,000 Ordinary shares.
On 28 September 1998, Ciaran Morton disposed of 20,000 Ordinary shares.
With respect to those Directors in office at 31 December 1998, all of their
interests in the Ordinary shares of the Company are beneficial.
There have been no movements in the interests of the Directors in the
Ordinary share capital of the Company since 31 December 1998 through to the date
of the Annual Report.
F-14
70
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Options over Ordinary shares
DATE FROM
AT 1 JANUARY AT 31 DECEMBER EXERCISE WHICH EXPIRY
SCHEME 1998* GRANTED 1998+ PRICE EXERCISABLE DATE
------ ------------ --------- -------------- -------- ----------- --------
D Wagner..... Executive Scheme 163,636 -- 163,636 110p 24/03/97 24/03/04
Sharesave Scheme 19,602 -- 19,602 88p 01/05/99 31/10/99
Unapproved Scheme -- 30,000 30,000 173p 30/04/01 30/04/05
Unapproved Scheme -- 130,000 130,000 150p 08/10/01 08/10/05
P Sommers.... US Stock Option Plan** -- 200,000 200,000 150p 08/10/99 08/10/08
D Mattey..... Executive Scheme 122,727 -- 122,727 110p 24/03/97 24/03/04
Sharesave Scheme 19,602 -- 19,602 88p 01/05/99 31/10/99
Unapproved Scheme -- 30,000 30,000 173p 30/04/01 30/04/05
Unapproved Scheme -- 120,000 120,000 150p 08/10/01 08/10/05
J Molle...... Unapproved Scheme 54,545 -- 54,545 110p 24/03/97 24/03/01
Unapproved Scheme 17,500 -- 17,500 248p 04/10/98 04/10/02
Unapproved Scheme 30,000 -- 30,000 188.5p 14/03/00 14/03/04
US Stock Option Plan** -- 30,000 30,000 173p 30/04/99 30/04/08
US Stock Option Plan** -- 120,000 120,000 150p 08/10/99 08/10/08
Employee Stock Purchase Plan*** -- 2,196 2,196 130p 31/03/99 31/03/99
S Maller..... Executive Scheme 62,727 -- 62,727 110p 24/03/97 24/03/04
Executive Scheme 20,000 -- 20,000 80p 25/04/98 25/04/05
Executive Scheme 17,500 -- 17,500 248p 04/10/98 04/10/05
Sharesave Scheme 7,040 -- 7,040 49p 01/12/99 31/05/00
Sharesave Scheme 2,156 -- 2,156 64p 01/06/00 30/11/00
Sharesave Scheme 308 -- 308 224p 01/12/00 31/05/01
Sharesave Scheme 766 -- 766 180p 01/06/01 30/11/01
Sharesave Scheme -- 569 569 137p 01/07/01 31/12/01
Unapproved Scheme 30,000 -- 30,000 188.5p 14/03/00 14/03/04
Unapproved Scheme -- 30,000 30,000 173p 30/04/01 30/04/05
Unapproved Scheme -- 120,000 120,000 150p 08/10/01 08/10/05
C Morton..... Executive Scheme 61,364 -- 61,364 110p 24/03/97 24/03/04
Unapproved Scheme 17,500 -- 17,500 248p 04/10/98 04/10/02
Sharesave Scheme 35,204 -- 35,204 49p 01/12/99 31/05/00
Unapproved Scheme 30,000 -- 30,000 188.5p 14/03/00 14/03/04
Unapproved Scheme -- 30,000 30,000 173p 30/04/01 30/04/05
Unapproved Scheme -- 120,000 120,000 150p 08/10/01 08/10/05
D Smith...... Executive Scheme 15,900 -- 15,900 188.5p 14/03/00 14/03/07
Unapproved Scheme 84,100 -- 84,100 188.5p 14/03/00 14/03/04
Sharesave Scheme -- 7,116 7,116 137p 01/07/01 31/12/01
Unapproved Scheme -- 30,000 30,000 173p 30/04/01 30/04/05
Unapproved Scheme -- 120,000 120,000 150p 08/10/01 08/10/05
M Shipley.... US Stock Option Plan** 100,000 -- 100,000 220p 14/11/98 14/11/07
US Stock Option Plan** -- 30,000 30,000 151p 04/06/99 04/06/08
Employee Stock Purchase Plan*** -- 2,312 2,312 130p 31/03/99 31/03/99
G Burrows.... US Stock Option Plan** 50,000 -- 50,000 170p 08/09/99 08/09/08
US Stock Option Plan** -- 70,000 70,000 150p 08/10/99 08/10/08
Employee Stock Purchase Plan*** -- 3,812 3,812 158p 30/09/00 30/09/00
J Galt....... US Stock Option Plan** 100,000 -- 100,000 220p 14/11/98 14/11/07
--------- --------- ---------
Total 1,062,177 1,226,005 2,288,182
========= ========= =========
- ---------------
* or date of appointment if later
+ or date of retirement if earlier
** under the terms of the US Stock Option Plan, options are granted in the form
of ADSs at an exercise price expressed in US Dollars. Options granted under
the US Stock Option Plan become exercisable in cumulative increments as
determined by the Remuneration Committee of the Board of Directors. For the
purpose of uniformity, all options detailed above are expressed in Ordinary
shares and in Pounds Sterling.
*** under the terms of the Employee Stock Purchase Plan, rights are granted for
eligible US employees to acquire beneficial ownership of Ordinary shares of
the Company by purchasing ADSs. The purchase price may not be less than the
lower of 85% of the fair market value of the ADSs on the offering date or
85% of the fair market value of the ADSs on the purchase date. The purchase
price is accumulated by payroll deductions over the course of the offering.
There are two offerings a year. For the purpose of
F-15
71
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
uniformity, all rights to purchase ADSs under the Employee Stock Purchase Plan
detailed above are expressed in Ordinary shares and in Pounds Sterling.
During April 1999, options were granted to the following Directors:
DATE FROM
SCHEME DATE OF GRANT NUMBER EXERCISE PRICE WHICH EXERCISABLE EXPIRY DATE
------ ------------- ------ -------------- ----------------- -----------
D. Wagner..... Sharesave Scheme 28/04/99 17,045 99p 01/07/04 31/12/04
D. Mattey..... Sharesave Scheme 28/04/99 17,045 99p 01/07/04 31/12/04
S. Maller..... Sharesave Scheme 28/04/99 1,174 99p 01/07/02 31/12/02
The market price of the Company's Ordinary shares on 30 December 1998, the
last trading day in 1998, was 58.0p per share and the range during 1998 was
47.0p to 236.5p per share. Further details of the Company's share option schemes
are set out in note 18 to these financial statements.
None of the Directors has notified the Company of an interest in any other
shares, transactions or arrangements which require disclosure.
8. TAXATION ON PROFIT/(LOSS) ON ORDINARY ACTIVITIES
1998 1997 1996
---- ---- ----
L000 L000 L000
UK corporation tax at 31% (1997: 31.5%; 1996: 33%).......... -- -- --
Overseas tax................................................ 776 332 102
Deferred tax (credit)/charge................................ (7) (9) 62
--- --- ---
Tax charge.................................................. 769 323 164
=== === ===
The taxation on profit/(loss) on ordinary activities may be reconciled as
follows to the UK statutory rate:
1998 1997 1996
---- ---- ----
% % %
UK statutory rate of tax.................................... 31 (31) (33)
Disallowed expenditures..................................... 14 -- 1
Tax deduction in respect of goodwill written off to
reserves.................................................. (80) -- --
Unrecognised tax losses..................................... 49 32 34
--- --- ---
Effective rate of tax provided.............................. 14 1 2
=== === ===
F-16
72
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. EARNINGS/(LOSS) PER SHARE
TOTAL CONTINUING TOTAL CONTINUING TOTAL CONTINUING TOTAL CONTINUING
BUSINESS BEFORE BUSINESS AFTER BUSINESS BEFORE BUSINESS AFTER
RESTRUCTURING COSTS RESTRUCTURING COSTS RESTRUCTURING COSTS RESTRUCTURING COSTS
------------------- ------------------- ------------------- -------------------
1998 1997 1996
----------------------------------------- ----------------------------------------- ----------
Attributable
profit/(loss)(L)......... 7,253,000 4,439,000 (6,229,000) (20,744,000) (7,226,000)
Weighted average number of
Ordinary shares in
issue.................... 150,579,177 150,579,177 101,077,187 101,077,187 92,363,959
----------- ----------- ----------- ----------- ----------
Earnings/(loss) per share
(pence).................. 4.8 2.9 (6.2) (20.5) (7.8)
=========== =========== =========== =========== ==========
Attributable profit/(loss)
as above(L).............. 7,253,000 4,439,000 (6,229,000) (20,744,000) (7,226,000)
Weighted average number of
Ordinary shares in issue
as above................. 150,579,177 150,579,177 101,077,187 101,077,187 92,363,959
Add: shares issuable on
conversion of options.... 384,655 384,655 735,716 735,716 1,759,889
Add: shares issuable on
acquisition of
subsidiary............... 1,667,241 1,667,241 -- -- --
----------- ----------- ----------- ----------- ----------
Adjusted average number of
Ordinary shares.......... 152,631,073 152,631,073 101,812,903 101,812,903 94,123,848
----------- ----------- ----------- ----------- ----------
Fully diluted
earnings/(loss) per share
(pence).................. 4.8 2.9 (6.1) (20.4) (7.7)
=========== =========== =========== =========== ==========
In view of the significant impact of restructuring costs and other
exceptional items on earnings per share calculated in accordance with FRS14,
additional earnings per share figures have been provided.
F-17
73
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INTANGIBLE FIXED ASSETS
GROUP COMPANY
------ -------
L000 L000
COST
At 31 December 1996......................................... 11,653 10,707
On acquisition of subsidiary undertakings................... 20,308 --
Amounts written off......................................... (3,312) (2,737)
Exchange adjustments........................................ 591 --
Additions................................................... 3,964 3,329
------ ------
At 31 December 1997......................................... 33,204 11,299
------ ------
Transfer from subsidiary undertakings....................... -- 1,153
Revisions to fair values and other adjustments.............. (2,377) --
Exchange adjustments........................................ (231) --
Additions................................................... 11,762 2,396
------ ------
At 31 December 1998......................................... 42,358 14,848
====== ======
AMORTISATION
At 31 December 1996......................................... 3,342 2,799
Exchange adjustments........................................ 2 --
Amounts written off......................................... (599) (599)
Provision for year.......................................... 8,835 4,942
------ ------
At 31 December 1997......................................... 11,580 7,142
Transfer from subsidiary undertakings....................... -- 779
Exchange adjustments........................................ (75) --
Provision for year.......................................... 7,699 2,277
------ ------
At 31 December 1998......................................... 19,204 10,198
====== ======
NET BOOK AMOUNT
At 31 December 1998......................................... 23,154 4,650
====== ======
At 31 December 1997......................................... 21,624 4,157
====== ======
The net book amounts are analysed as follows:
1998 1998
GROUP COMPANY
------ -------
L000 L000
Systems development....................................... 5,370 237
Product development....................................... 17,784 4,413
------ -----
23,154 4,650
====== =====
1998 1998
GROUP COMPANY
------ -------
L000 L000
Systems development....................................... 279 --
Product development....................................... 21,345 4,157
------ -----
21,624 4,157
====== =====
Additions to intangible fixed assets in 1998 for the Group principally
comprised product development costs related to Dialog Web, Dialog Select and
Open System Alerts. The product development costs include salaries and related
overhead costs of L10,210,000 (1997: L1,798,000), consultancy costs, including
attributable overheads, of L526,000 (1997: L211,000) and hardware and software
costs of L896,000 (1997: L1,955,000)
F-18
74
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(including depreciation of Lnil (1997: L1,200,000)). Additions to systems
development costs in 1998 related to various database projects.
11. GOODWILL
GROUP
-----
L000
COST
At 31 December 1997.................................. --
Additions............................................ 7,743
Exchange adjustments................................. (6)
-----
At 31 December 1998.................................. 7,737
=====
AMORTISATION
At 31 December 1997.................................. --
Provision for year................................... 61
-----
At 31 December 1998.................................. 61
=====
NET BOOK AMOUNT
At 31 December 1998.................................. 7,676
=====
At 31 December 1997.................................. --
=====
Responsive Database Services, Inc.
On 6 October 1998, the Group exercised its option to acquire all of the
share capital of Responsive Database Services, Inc. ('RDS') for total cash
consideration of $2.85 million (L1.72 million). The Group has historically
provided all financing for RDS and, accordingly, has consolidated its results
within the Group financial statements. No fair value adjustments were required.
The total consideration paid has been treated as goodwill arising on the
acquisition of a minority interest.
Write Works
On 19 November 1998, the Company acquired all of the share capital of Write
Works Limited ('Write Works') for a maximum consideration of L6.0 million to be
paid over two years. The consideration has been satisfied through an initial
payment of L1.0 million in cash and approximately L1.2 million by the issue of
694,025 new Ordinary shares at a price of L1.66 per share. A further
consideration of up to a maximum of L3.8 million in cash and shares (cash of
L2.8 million and shares with a market value of L1.0 million at the dates the
deferred consideration is payable) will be paid on the achievement of certain
earnings targets over the next two years.
F-19
75
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets out the effect of the acquisition of Write Works
on the consolidated balance sheet:
FAIR VALUES
AT THE DATE OF
ACQUISITION
--------------
L000
Share of net liabilities acquired:
Tangible fixed assets....................................... 18
Current assets.............................................. 127
Creditors................................................... (153)
-----
Net liabilities acquired.................................... (8)
-----
Consideration:
Issue of new Ordinary shares................................ 1,150
Cash paid................................................... 965
Expenses.................................................... 100
New Ordinary shares to be issued (see note 20).............. 967
Cash to be paid............................................. 2,833
-----
6,015
-----
Goodwill on acquisition of Write Works...................... 6,023
Goodwill on acquisition of RDS.............................. 1,720
-----
Total goodwill.................................... 7,743
=====
No fair value adjustments were required.
Write Works' results from the start of its financial year (1 January 1998)
through to the date of acquisition and its audited results for the period from
20 January 1997 (date of incorporation) to 31 December 1997 are as follows:
(UNAUDITED) 20 JANUARY 1997
1 JANUARY TO (DATE OF INCORPORATION)
19 NOVEMBER 1998 TO 31 DECEMBER 1997
---------------- -----------------------
L000 L000
Turnover................................... 658 144
Cost of sales.............................. (503) (121)
Gross profit............................... 155 23
Net operating expenses..................... (196) (73)
Retained loss.............................. (41) (50)
There were no recognised gains or losses other than the loss for the period
presented.
F-20
76
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. TANGIBLE FIXED ASSETS
LEASEHOLD FIXTURES & MOTOR
GROUP IMPROVEMENTS EQUIPMENT FITTINGS VEHICLES TOTAL
----- ------------ --------- ---------- -------- ------
L000 L000 L000 L000 L000
COST
At 31 December 1996........................... 732 10,423 968 656 12,779
On acquisition of subsidiary undertakings..... 1,114 12,376 1,917 -- 15,407
Exchange adjustments.......................... 34 403 73 (5) 505
Additions..................................... 301 2,086 138 207 2,732
Disposals..................................... -- (33) (1) (263) (297)
----- ------ ----- ---- ------
At 31 December 1997........................... 2,181 25,255 3,095 595 31,126
----- ------ ----- ---- ------
Exchange adjustments.......................... (12) (97) (28) 3 (134)
Additions..................................... 408 5,969 150 14 6,541
Revisions to fair values...................... -- (43) -- -- (43)
Disposals..................................... (99) (83) (449) (82) (713)
----- ------ ----- ---- ------
At 31 December 1998........................... 2,478 31,001 2,768 530 36,777
----- ------ ----- ---- ------
DEPRECIATION
At 31 December 1996........................... 168 5,018 410 192 5,788
Exchange adjustments.......................... -- 12 16 (4) 24
Provided for the year......................... 1,216 4,058 654 166 6,094
Disposals..................................... -- (10) -- (124) (134)
----- ------ ----- ---- ------
At 31 December 1997........................... 1,384 9,078 1,080 230 11,772
----- ------ ----- ---- ------
Exchange adjustments.......................... (10) (55) (12) 2 (75)
Provided for the year......................... 436 6,855 532 139 7,962
Revisions to fair values...................... -- (267) -- -- (267)
Disposals..................................... (33) (190) (209) (53) (485)
----- ------ ----- ---- ------
At 31 December 1998........................... 1,777 15,421 1,391 318 18,907
----- ------ ----- ---- ------
NET BOOK AMOUNT
At 31 December 1998........................... 701 15,580 1,377 212 17,870
===== ====== ===== ==== ======
At 31 December 1997........................... 797 16,177 2,015 365 19,354
===== ====== ===== ==== ======
The net book amounts of assets held under finance leases at 31 December
1998 were L857,000 (1997: L1,710,000).
Equipment included assets under finance leases of L5,378,000 and L5,338,000
at 31 December 1998 and 1997 respectively. Accumulated depreciation relating to
equipment under finance leases totalled L4,521,000 and L3,628,000 at 31 December
1998 and 1997 respectively. Depreciation of equipment under finance leases is
included in the depreciation expense, unless capitalised in accordance with the
Group's system and product development cost policy (note 1).
F-21
77
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEASEHOLD FIXTURES & MOTOR
COMPANY IMPROVEMENTS EQUIPMENT FITTINGS VEHICLES TOTAL
------- ------------ --------- ---------- -------- ------
L000 L000 L000 L000 L000
COST
At 31 December 1996............................ 580 2,092 463 568 3,703
Additions...................................... 269 546 37 197 1,049
Disposals...................................... -- (5) -- (208) (213)
----- ------ --- ---- ------
At 31 December 1997............................ 849 2,633 500 557 4,539
----- ------ --- ---- ------
Transfer from subsidiary undertakings.......... -- 6,979 29 -- 7,008
Additions...................................... 174 653 11 -- 838
Disposals...................................... -- (25) (4) (82) (111)
----- ------ --- ---- ------
At 31 December 1998............................ 1,023 10,240 536 475 12,274
----- ------ --- ---- ------
DEPRECIATION
At 31 December 1996............................ 138 1,032 221 168 1,559
Provided for the year.......................... 166 665 84 143 1,058
Disposals...................................... -- (2) -- (106) (108)
----- ------ --- ---- ------
At 31 December 1997............................ 304 1,695 305 205 2,509
----- ------ --- ---- ------
Transfer from subsidiary undertakings.......... -- 4,638 20 -- 4,658
Provided for the year.......................... 183 1,914 93 129 2,319
Disposals...................................... -- (1) -- (53) (54)
----- ------ --- ---- ------
At 31 December 1998............................ 487 8,246 418 281 9,432
===== ====== === ==== ======
NET BOOK AMOUNT
At 31 December 1998............................ 536 1,994 118 194 2,842
===== ====== === ==== ======
At 31 December 1997............................ 545 938 195 352 2,030
===== ====== === ==== ======
The net book amounts of assets held under finance leases at 31 December
1998 were Lnil (1997: Lnil).
13. FIXED ASSET INVESTMENTS
GROUP L000
----- ------
Investments
At 31 December 1996......................................... 2,135
Additions................................................... 5,329
On acquisition of subsidiary undertakings................... 10,910
------
At 31 December 1997......................................... 18,374
Amounts written off (note 5)................................ (2,300)
Additions................................................... 1,446
Disposals................................................... (5,053)
Exchange movements.......................................... (113)
------
At 31 December 1998......................................... 12,354
======
The amounts written off during the year ended 31 December 1998 related to
the investment in 4th Network (note 5).
The additions during the year ended 31 December 1998 related to the
continued monthly funding of Frost & Sullivan Electronic Distribution LLC, a
50:50 joint venture with Frost & Sullivan which is registered in the
F-22
78
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
US. At 31 December 1998, the investment had a book value of L2,178,000. The
Company is committed to provide monthly funding of $200,000 per month for a
further period of six months.
On 6 May 1998, the Group disposed of its investment in NewsEdge
Corporation, an online service provider, for net proceeds, after associated
expenses, of L3.9 million. This resulted in a book profit on the disposal of
L1.0 million.
On 13 May 1998, the Company disposed of its investment in Easynet Group
plc, an Internet and telecommunications company, for net proceeds, after
associated expenses, of L3.2 million. This resulted in a book profit on the
disposal of L1.1 million.
LONG TERM
LOANS FROM
COMPANY INVESTMENTS GROUP COMPANIES TOTAL
------- ----------- --------------- -------
L000 L000 L000
At 31 December 1996........................................ 2,222 -- 2,222
Additions.................................................. 59,340 220,724 280,064
------ ------- -------
At 31 December 1997........................................ 61,562 220,724 282,286
Amounts written off (note 5)............................... (2,300) -- (2,300)
Additions.................................................. 6,015 1,325 7,340
Disposals.................................................. (2,135) -- (2,135)
Disposals to subsidiary undertakings....................... (355) -- (355)
------ ------- -------
At 31 December 1998........................................ 62,787 222,049 284,836
====== ======= =======
The amounts written off during the year ended 31 December 1998 related to
the investment in 4th Network (note 5).
On 19 November 1998, the Company acquired all of the share capital of Write
Works Limited ('Write Works') for a maximum of L6.0 million to be paid over two
years (note 11).
The disposals during the year ended 31 December 1998 related to the sale of
the investment in Easynet Group plc.
The following were principal subsidiary undertakings as at 31 December 1998
and have all been included in the consolidated accounts except where indicated.
Each subsidiary principally does business in the country of its
incorporation/registration and all equity is in the form of Ordinary shares or
their equivalent. Companies that are indented are not directly held by The
Dialog Corporation plc.
COUNTRY OF
INCORPORATION/ PROPORTION OF NATURE OF
COMPANY NAME REGISTRATION EQUITY HELD BUSINESS
------------ -------------- ------------- ---------
The Dialog Corporation Asia Pacific Limited................ Hong Kong 100% 1
InfoDynamics Limited....................................... England 100% 2
Dialog MultiMedia Limited.................................. England 100% 2
Dotcom Investments BV...................................... Netherlands 100% 3
The Dialog Corporation BV................................ Netherlands 100% 1
The Dialog Corporation SA................................ Belgium 100% 1
The Dialog Corporation (Ireland) Limited................. Ireland 100% 1
Virtual Business Information Limited....................... England 100% 4
Muscat Limited............................................. England 70% 5
Muscat Europe BV......................................... Netherlands 70% 5
F-23
79
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COUNTRY OF
INCORPORATION/ PROPORTION OF NATURE OF
COMPANY NAME REGISTRATION EQUITY HELD BUSINESS
------------ -------------- ------------- ---------
Dialog Holdings Limited.................................... England 100% 3
Dialog Information Services S.A.R.L...................... France 100% 1
The Dialog Corporation A/S............................... Denmark 100% 1
M.A.I.D Sweden AB..................................... Sweden 100% 1
The Dialog Corporation (Sweden) AB.................. Sweden 100% 1
The Dialog Corporation GmbH.............................. Switzerland 100% 1
Dialog Information Services Ltd.......................... England 100% 1
The Dialog Corporation Srl............................... Italy 100% 1
The Dialog Corporation GmbH.............................. Germany 100% 1
The Dialog Corporation 98 Sociedad Limitada.............. Spain 100% 1
Write Works Limited........................................ England 100% 6
The Dialog Corporation*.................................... USA 100% 1
CARL Corporation**....................................... USA 100% 7
CARL Systems Data Retrieval Inc.**....................... USA 100% 7
The UnCover Company**.................................... USA 100% 8
Responsive Database Services, Inc. ...................... USA 100% 9
Responsive Database Services Ltd......................... England 100% 9
Infomart/DIALOG Limited.................................. Canada 50% 1
Dialog Servicios de Informacion S.A. de C.V. ............ Mexico 100% 1
The Dialog Corporation S.A. de C.V. ..................... Mexico 100% 1
Dialog Nova KK........................................... Japan 100% 10
KMK DigiTex Company Ltd. ................................ Japan 52% 10
Dialog Information Services Asia Limited................. Hong Kong 100% 1
- ---------------
* Incorporated in the State of Delaware.
** These subsidiary undertakings were acquired with KRII as businesses held for
resale. Their operating results have been excluded from the Group's
consolidated profit and loss account.
Key
1 Provision of an indexed online business information service
2 Provision of a database system
3 Holding company
4 Preparation of publishing information
5 Provision of indexing and search technology
6 Provision of eCommerce procurement systems
7 Provision of library systems
8 Sales of reference systems
9 Development and provision of business
information
10 Document delivery services
F-24
80
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. DEBTORS
GROUP COMPANY
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
L000 L000 L000 L000
AMOUNTS DUE WITHIN ONE YEAR
Trade debtors............................................... 32,131 34,441 3,039 3,043
Other debtors............................................... 1,334 2,033 1,093 863
Prepayments and accrued income.............................. 9,316 6,731 3,807 2,046
Amounts owed by subsidiary undertakings..................... -- -- 32,795 23,187
------ ------ ------ ------
42,781 43,205 40,734 29,139
AMOUNTS DUE AFTER ONE YEAR
Other debtors............................................... -- 615 -- --
------ ------ ------ ------
42,781 43,820 40,734 29,139
====== ====== ====== ======
Trade debtors for the Group are stated net of the allowance for doubtful
trade debtor balances, which amounted to L2,974,000 and L1,872,000 at 31
December 1998 and 1997 respectively.
Included within 'Other debtors' are the deferred indexing costs for both
the Group and Company, which are deferred and amortised on a straight line basis
over two years. The deferred indexing costs for both the Group and Company
amounted to L541,000 and L853,000 at 31 December 1998 and 1997 respectively.
15. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
GROUP COMPANY
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
L000 L000 L000 L000
Bank overdrafts......................................... -- -- 161 --
Senior Credit Facility (see note 16).................... 13,158 3,039 13,158 3,039
Deferred consideration -- purchase of subsidiary (see
note 20).............................................. 1,437 -- 1,437 --
Trade creditors......................................... 8,987 14,430 2,447 1,187
Obligations under finance leases........................ 222 491 210 --
Other creditors......................................... 4,274 5,318 3,873 3,028
Taxation and social security............................ 1,030 1,396 416 282
Corporation tax......................................... 258 161 -- --
Accruals and deferred income............................ 29,479 20,366 4,651 1,997
Amounts owed to subsidiary undertakings................. -- -- 29,082 7,042
------ ------ ------ ------
58,845 45,201 55,435 16,575
====== ====== ====== ======
Included within 'Other creditors' for both Group and Company are subscriber
service cost provisions, which amounted to L542,000 and L662,000 at 31 December
1998 and 1997 respectively.
Accruals and deferred income for the Group, which individually represent in
excess of 5% of current liabilities, consist of the following:
1998 1997
------ ------
L000 L000
Information provider accruals.............. 10,867 7,934
Deferred revenue........................... 4,495 7,035
Other accrued expenses..................... 14,117 5,397
------ ------
29,479 20,366
====== ======
F-25
81
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
GROUP COMPANY
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
L000 L000 L000 L000
$180 million 11% Senior Subordinated Notes due
2007.............................................. 104,433 105,205 104,433 105,205
Senior Credit Facility.............................. 30,868 50,601 30,868 50,601
Accruals............................................ 2,256 6,585 -- --
Other creditors..................................... 776 -- -- --
Deferred consideration -- purchase of subsidiary
(see note 20)..................................... 1,396 -- 1,396 --
Obligations under finance leases.................... 12 290 12 --
------- ------- ------- -------
139,741 162,681 136,709 155,806
======= ======= ======= =======
The Senior Subordinated Notes are for a term of 10 years and interest is
fixed at 11% throughout the term.
The Senior Credit Facility is repayable over five years and interest is
fixed every three to six months at a rate of 2.25 percentage points over US
Dollar LIBOR. The Company has entered into an interest rate cap agreement that
limits the exposure of 75% of the balance of the Senior Credit Facility to a
maximum US Dollar LIBOR rate of 6.50%.
Repayments on the Senior Subordinated Notes and Senior Credit Facility fall
due as follows:
GROUP COMPANY
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
L000 L000 L000 L000
Within 1 year....................................... 13,158 3,039 13,158 3,039
Within 1 - 2 years.................................. 13,158 15,193 13,158 15,193
Within 2 - 5 years.................................. 19,736 37,985 19,736 37,985
After 5 years....................................... 108,186 109,396 108,186 109,396
------- ------- ------- -------
154,238 165,613 154,238 165,613
Less: Unamortised finance costs..................... (5,779) (6,768) (5,779) (6,768)
------- ------- ------- -------
148,459 158,845 148,459 158,845
======= ======= ======= =======
The Company's obligations with respect to the Senior Credit Facility and
finance leases are secured on the assets of the Company and certain of its
subsidiaries. The Senior Subordinated Notes are unsecured.
Obligations under finance leases are due as follows:
GROUP COMPANY
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
L000 L000 L000 L000
Within 1 year............................................... 222 491 210 --
Within 1 - 2 years.......................................... 12 278 12 --
Within 2 - 5 years.......................................... -- 12 -- --
--- --- --- --
234 781 222 --
=== === === ==
F-26
82
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
17. PROVISION FOR LIABILITIES AND CHARGES
RESTRUCTURING COSTS
-----------------------------------------
POST-
REMOVAL OF ACQUISITION
KNIGHT-RIDDER TERMINATION FUNDING OF RELOCATION
DEFERRED DATA CENTRE INFORMATION OF PROPERTY NON-CORE OF US
GROUP TAXATION SEVERANCE INTEGRATION NAME LEASES BUSINESSES LEGAL HEADQUARTERS
----- -------- --------- ----------- ------------- ----------- ----------- ----- -------------
L000 L000 L000 L000 L000 L000 L000 L000
At 31 December 1996....... 142 -- -- -- -- -- -- --
On acquisition of
subsidiary
undertaking............. -- -- -- -- -- 761 -- --
Transfer from/(to) profit
and loss account........ (9) 1,934 4,473 1,313 917 -- -- --
Amounts paid.............. -- (1,934) -- -- -- -- -- --
Exchange adjustments...... (14) -- -- -- -- -- -- --
--- ------ ------ ----- ------ ------ ----- -----
At 31 December 1997....... 119 -- 4,473 1,313 917 761 -- --
Reclassification from
creditors............... -- -- -- -- -- -- 547 --
Transfer from/(to) profit
and loss account........ (7) -- (1,197) (524) 1,589 -- -- 1,758
Amounts paid.............. -- -- (3,254) (418) (1,667) (1,483) (513) (947)
Revisions to fair
values.................. -- -- -- -- 378 728 2,172 --
Exchange adjustments...... 16 -- (22) (10) (10) (6) (13) (3)
--- ------ ------ ----- ------ ------ ----- -----
At 31 December 1998....... 128 -- -- 361 1,207 -- 2,193 808
=== ====== ====== ===== ====== ====== ===== =====
GROUP TOTAL
----- ------
L000
At 31 December 1996....... 142
On acquisition of
subsidiary
undertaking............. 761
Transfer from/(to) profit
and loss account........ 8,628
Amounts paid.............. (1,934)
Exchange adjustments...... (14)
------
At 31 December 1997....... 7,583
Reclassification from
creditors............... 547
Transfer from/(to) profit
and loss account........ 1,619
Amounts paid.............. (8,282)
Revisions to fair
values.................. 3,278
Exchange adjustments...... (48)
------
At 31 December 1998....... 4,697
======
DEFERRED TAXATION
1998 1997
------------------------ ------------------------
POTENTIAL PROVIDED IN POTENTIAL PROVIDED IN
LIABILITY ACCOUNTS LIABILITY ACCOUNTS
--------- ----------- --------- -----------
L000 L000 L000 L000
Intangible fixed asset related.................... 1,530 -- 2,389 --
Other timing differences.......................... 128 128 119 119
----- --- ----- ---
1,658 128 2,508 119
===== === ===== ===
At 31 December 1998, the Group had L25,300,000 of tax losses carried
forward (1997: L17,699,000), giving rise to an unprovided potential deferred tax
asset of L9,090,000 (1997: L5,575,000).
Company Deferred taxation
1998 1997
------------------------ ------------------------
POTENTIAL PROVIDED IN POTENTIAL PROVIDED IN
LIABILITY ACCOUNTS LIABILITY ACCOUNTS
--------- ----------- --------- -----------
L000 L000 L000 L000
Intangible fixed asset related................. 1,441 -- 2,283 --
Other timing differences....................... -- -- -- --
-------- -------- -------- --------
1,441 -- 2,283 --
======== ======== ======== ========
At 31 December 1998, the Company had L15,054,000 of tax losses carried
forward (1997: L12,829,000), giving rise to an unprovided potential deferred tax
asset of L4,667,000 (1997: L4,041,000).
F-27
83
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
18. SHARE CAPITAL
1998 1997
-------------------- --------------------
NUMBER L000 NUMBER L000
----------- ----- ----------- -----
Authorised:
Ordinary shares of 1p each....................... 199,827,000 1,998 199,827,000 1,998
Allotted, called up and fully paid:
Ordinary shares of 1p each....................... 151,467,107 1,514 150,191,853 1,502
During the three years ended 31 December 1998, the following movements
occurred in the Ordinary shares of the Company:
SHARES
DATE NUMBER SHARES NOTES
---- ----------- ------ -----
L000
31 December 1995............................................ 91,716,810 917
27 March 1996
Acquisition of shares in Easynet Group plc.................. 833,935 8 (i)
21 October 1996
Exercise of share options................................... 47,250 1 (ii)
----------- -----
31 December 1996............................................ 92,597,995 926
Between 17 January 1997 and 24 November 1997
Exercise of share options................................... 674,367 7 (iii)
13 August 1997
Acquisition of shares in Muscat Ltd......................... 2,105,855 21 (iv)
14 November 1997
UK Placing.................................................. 54,500,000 545 (v)
23 December 1997
Acquisition of remaining shares in M.A.I.D Denmark A/S...... 313,636 3 (vi)
----------- -----
31 December 1997............................................ 150,191,853 1,502
Between 8 February 1998 and 21 August 1998
Exercise of share options................................... 440,837 4 (vii)
Between 11 May 1998 and 17 December 1998
Allotment of shares under the 401(k) Plan................... 140,392 1 (viii)
18 November 1998
Acquisition of Write Works Ltd.............................. 694,025 7 (ix)
----------- -----
31 December 1998............................................ 151,467,107 1,514
=========== =====
- ---------------
(i) On 27 March 1996 the Company acquired 2,132,501 shares in Easynet Group
plc ('Easynet'), one of the UK's leading Internet service providers, at
a price of L1.00 per ordinary share. The consideration for the
acquisition of the shares in Easynet was satisfied by the issue of
833,935 new Ordinary shares of par value 1p in the Company which
represents an effective price of L2.56 for each new Ordinary share.
(ii) Exercise of share options. As a consequence of the Company's US
headquarters being relocated from New York to Cary, North Carolina,
certain staff were made redundant and, in accordance with the Company's
share option scheme rules, exercised their share options in 1996. The
options were exercised at prices of L0.81 and L2.48 per share for a
total consideration of L46,000.
F-28
84
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(iii) Exercise of share options. At various dates throughout 1997, in
accordance with the Company's share option schemes, a number of
full-time employees exercised their share options. The options were
exercised at prices between L0.64 and L1.80 per share for a total
consideration of L698,000.
(iv) On 14 August 1997, the Company announced that it had acquired 8,863
shares of the authorised and issued share capital of Muscat Ltd
('Muscat'), a leading UK information retrieval technology vendor. As a
result, the Company now owns approximately 70% of the share capital in
Muscat.
The total consideration for the acquisition of the shares in Muscat was
L5,557,101. This was satisfied by a L1,282,215 cash payment and the
balance of L4,274,886 by the issue on 13 August 1997 of 2,105,855 new
Ordinary shares (equivalent to an issue price of L2.03 per share).
(v) Under the terms of an agreement dated 1 October 1997, the Company agreed
to acquire all of the share capital of KRII, an online supplier of
business intelligence, for approximately L261 ($434) million. The
acquisition closed on 14 November 1997 and was partly financed by a
placement of 54.5 million new Ordinary shares at L2.20 per share.
(vi) On 23 December 1997, the Company announced that it had acquired the
remaining 23% minority interest in its Danish subsidiary from Lars Thejl
and Morten Nicholaisen, Directors of M.A.I.D Denmark A/S. As a result,
the Company now owns 100% of M.A.I.D Denmark A/S (subsequently renamed
Dialog Information Services A/S).
The L443,795 consideration was satisfied by the issue of 313,636 new
Ordinary shares at L1.415 per share.
(vii) Exercise of share options. At various dates throughout 1998, in
accordance with the Company's share option schemes, a number of eligible
employees exercised their share options. The options were exercised at
prices between L0.49 and L1.10 per share for a total consideration of
L457,729.
(viii) The Company operates a defined contribution pension scheme in the US
(the 401(k) Investment Savings Plan). At various dates throughout 1998,
the Company matched employee contributions to this Plan, partially with
the allotment of new Ordinary shares valued at market price at the time
of issue and subsequently converted into ADSs. A total of 140,392
Ordinary shares were issued during the year at prices between L0.56 and
L1.84 per share for a combined market value of L179,936.
(ix) On 19 November 1998, the Company announced that it had acquired 100% of
the share capital of Write Works Ltd. The consideration for the
acquisition was an initial payment of L1 million in cash and
approximately L1.2 million by the issue of 694,025 Dialog shares,
representing a value of L1.66 per share. A further consideration of up
to a maximum of L2.8 million in cash and L1 million in shares will be
paid on the achievement of Write Works' targets over the next two years.
F-29
85
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At 31 December 1998, options have been granted over the Company's Ordinary
shares as follows:
ORDINARY EXERCISABLE EARLIEST LATEST
SCHEME SHARES PRICE EXERCISABLE DATE EXERCISABLE DATE
------ --------- ----------- ----------------- ----------------
L
Executive Scheme................... 776,317 1.10 24 March 1997 24 March 2004
Executive Scheme................... 20,000 0.80 25 April 1998 25 April 2005
Executive Scheme................... 190,500 2.48 4 October 1998 4 October 2005
Executive Scheme................... 22,000 2.48 19 December 1996 4 October 1999
Executive Scheme................... 9,000 2.48 30 September 1997 4 October 1999
Executive Scheme................... 9,000 2.48 2 December 1997 4 October 1999
Executive Scheme................... 118,880 1.89 14 March 2000 14 March 2007
Executive Scheme................... 13,600 2.20 14 November 2000 14 November 2007
Executive Scheme................... 291,900 1.58 9 April 2001 9 April 2008
Executive Scheme................... 17,647 1.70 8 September 2001 8 September 2008
---------
Total.................... 1,468,844
=========
Unapproved Scheme.................. 128,863 1.10 24 March 1997 24 March 2001
Unapproved Scheme.................. 117,500 2.48 4 October 1998 4 October 2002
Unapproved Scheme.................. 9,000 2.48 30 November 1997 4 October 1999
Unapproved Scheme.................. 4,500 2.48 7 July 1997 4 October 1999
Unapproved Scheme.................. 9,000 2.48 10 January 1997 4 October 1999
Unapproved Scheme.................. 20,000 2.20 30 November 1997 22 December 1999
Unapproved Scheme.................. 21,834 2.29 2 January 1999 2 January 2003
Unapproved Scheme.................. 15,000 1.75 28 February 1999 28 February 2003
Unapproved Scheme.................. 105,000 2.87 16 August 1999 16 August 2003
Unapproved Scheme.................. 15,000 2.87 7 July 1997 16 August 2000
Unapproved Scheme.................. 468,620 1.89 14 March 2000 14 March 2004
Unapproved Scheme.................. 25,000 1.89 2 December 1997 14 March 2001
Unapproved Scheme.................. 10,000 1.89 30 September 1997 14 March 2001
Unapproved Scheme.................. 7,500 2.00 26 March 2000 26 March 2004
Unapproved Scheme.................. 1,400 2.20 14 November 2000 14 November 2004
Unapproved Scheme.................. 412,600 1.58 9 April 2001 9 April 2005
Unapproved Scheme.................. 150,000 1.73 30 April 2001 30 April 2005
Unapproved Scheme.................. 30,353 1.70 8 September 2001 8 September 2005
Unapproved Scheme.................. 820,000 1.50 8 October 2001 8 October 2005
---------
Total.................... 2,371,170
=========
Sharesave Scheme................... 43,124 0.88 1 May 1999 31 October 1999
Sharesave Scheme................... 246,424 0.49 1 December 1999 31 May 2000
Sharesave Scheme................... 99,183 0.64 1 June 2000 30 November 2000
Sharesave Scheme................... 2,464 2.24 1 December 2000 31 May 2001
Sharesave Scheme................... 42,928 1.80 1 June 2001 30 November 2001
Sharesave Scheme................... 10,307 1.74 1 May 2002 31 October 2002
Sharesave Scheme................... 112,143 1.37 1 July 2001 31 December 2001
Sharesave Scheme................... 94,276 1.37 1 July 2003 31 December 2003
---------
Total.................... 650,849
=========
F-30
86
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At 31 December 1998, options have been granted over the Company's American
Depositary Shares* as follows:
AMERICAN
DEPOSITARY EXERCISABLE EARLIEST LATEST
SCHEME SHARES PRICE EXERCISABLE DATE EXERCISABLE DATE
------ ---------- ----------- --------------------- ----------------
$
Employee Stock Purchase
Plan........................ 47,317 8.65 31 March 1999 31 March 1999
Employee Stock Purchase
Plan........................ 9,486 10.49 10 October 2000 10 October 2000
US Option Plan................ 190,625 11.00 9 April 1999** 9 April 2008
US Option Plan................ 7,500 11.88 30 April 1999** 30 April 2008
US Option Plan................ 42,250 11.81 8 September 1999** 8 September 2008
US Option Plan................ 127,500 9.90 8 October 1999** 8 October 2008
Individual US arrangement..... 6,250 10.63 12 December 1997*** 12 December 2007
Individual US arrangement..... 6,711 14.90 14 November 1998 14 November 2004
Individual US arrangement..... 4,232 11.81 8 September 1999 8 September 2005
---------
Total............... 441,871
=========
Total options granted over
Ordinary share
equivalents................. 6,258,347
=========
- ---------------
* One American Depositary Share is equivalent to four Ordinary shares.
** Options become exercisable in stages. After the first year up to one quarter
of the total number of options may be exercised. After every subsequent
month for the next three years an additional 1/48 of the total number of
options may be exercised.
*** Options become exercisable in cumulative monthly increments during the 12
month period following the date of grant.
F-31
87
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1994 Executive Share Option Scheme (the 'Executive Scheme'). In March 1994,
the Company adopted the 1994 Executive Share Option Scheme ('the Executive
Scheme'). Formal approval of the Executive Scheme was given by the Inland
Revenue in March 1994. Under the terms of the Executive Scheme, options to
acquire Ordinary shares may be granted at the discretion of the Remuneration
Committee of the Board of Directors to any employee, including full-time
employee Directors. The exercise price is determined at the date of grant of an
option and shall not be less than the higher of the par value of an Ordinary
share and the closing market price of an Ordinary share on the day preceding the
date of grant. Options under the Executive Scheme generally become exercisable
on the third anniversary of the date of grant and lapse on the tenth anniversary
of the date of grant. The number of options grantable under the Executive Scheme
and the aggregate exercise price of options grantable to any individual is now
limited to L30,000 following the passing of the Finance Act 1996. Transactions
under the Executive Scheme for the three years ended 31 December 1998 were as
follows:
OPTIONS OUTSTANDING NUMBER EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------ -------------- ----------------
(000S) L L
At 31 December 1995................................... 2,037 0.80 - 2.48 1.41
Granted............................................... 20 2.87 - 3.41 3.13
Cancelled............................................. (24) 2.48 2.48
----- ----------- ----
At 31 December 1996................................... 2,033 0.80 - 3.41 1.42
Granted............................................... 176 1.89 - 2.20 1.93
Cancelled............................................. (311) 0.80 - 3.41 2.12
Exercised............................................. (424) 0.81 - 1.10 1.00
----- ----------- ----
At 31 December 1997................................... 1,474 0.80 - 3.41 1.45
Granted............................................... 334 1.58 - 1.70 1.59
Cancelled............................................. (139) 1.10 - 2.87 1.89
Exercised............................................. (200) 1.10 1.10
----- ----------- ----
At 31 December 1998................................... 1,469 0.80 - 2.48 1.49
===== =========== ====
Exercisable at 31 December 1996....................... 306 0.81 - 2.48 1.05
Exercisable at 31 December 1997....................... 1,047 1.10 - 2.48 1.15
Exercisable at 31 December 1998....................... 1,027 0.80 - 2.48 1.40
1994 Unapproved Executive Share Option Scheme (the 'Unapproved Scheme'). In
March 1994, the Company adopted the 1994 Unapproved Executive Share Option
Scheme (the 'Unapproved Scheme'). Under the terms of the Unapproved Scheme,
options to subscribe for Ordinary shares may be granted at the discretion of the
Remuneration Committee of the Board of Directors to any employee, including
full-time employee Directors. The exercise price is determined at the date of
grant of an option and shall not be less than the higher of the par value of an
Ordinary share and the closing market price of an Ordinary share on the day
preceding the date of grant. Options under the Unapproved Scheme generally
become exercisable on the third anniversary of the date of grant and lapse on
the seventh anniversary of the date of grant. The number of shares over which
options may be granted under the Unapproved Scheme is consistent with
institutional investor guidelines in respect of overall limits applicable to
employee share schemes. The number grantable to any individual is also in line
with such limits. Transactions under the Unapproved Scheme for the three years
ended 31 December 1998 were as follows:
OPTIONS OUTSTANDING NUMBER EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------ -------------- ----------------
(000S) L L
At 31 December 1995................................... 985 0.81 - 2.48 1.45
Granted............................................... 216 1.75 - 2.87 2.73
Cancelled............................................. (163) 0.81 - 2.48 1.58
Exercised............................................. (47) 0.81 - 2.48 0.97
----- ----------- ----
F-32
88
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OPTIONS OUTSTANDING NUMBER EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------ -------------- ----------------
(000S) L L
At 31 December 1996................................... 991 1.10 - 2.87 1.74
Granted............................................... 741 1.89 - 2.20 1.93
Cancelled............................................. (150) 1.89 - 2.87 2.26
Exercised............................................. (242) 1.10 1.10
----- ----------- ----
At 31 December 1997................................... 1,340 1.10 - 2.87 1.90
Granted............................................... 1,436 1.50 - 1.73 1.55
Cancelled............................................. (209) 1.58 - 2.87 2.13
Exercised............................................. (196) 1.10 1.10
----- ----------- ----
At 31 December 1998................................... 2,371 1.10 - 2.87 1.73
===== =========== ====
Exercisable at 31 December 1996....................... 136 1.10 1.10
Exercisable at 31 December 1997....................... 418 1.10 - 2.87 1.36
Exercisable at 31 December 1998....................... 339 1.10 - 2.87 1.89
1994 Savings Related Share Option Scheme (the 'Sharesave Scheme'). In March
1994, the Company adopted the 1994 Savings Related Share Option Scheme (the
'Sharesave Scheme') which was subsequently approved by the Inland Revenue. Under
the rules of the scheme, participation is offered to all UK employees, including
full-time employee Directors. All options are linked to a contractual savings
scheme. Participants may save between L5 and L250 per month over a three or five
year period at the end of which they are granted a tax-free bonus. Participants
may withdraw from the savings contract at any time (although their option will
then lapse) and are not obliged to exercise their options at the date of
maturity. The exercise price is determined at the date of grant of an option and
shall not be less than the higher of the par value of an Ordinary share and 85%
(formerly 80% up until December 1995) of the market value of an Ordinary share
at the date of invitation. Options under the scheme become exercisable on the
bonus date and remain exercisable for a period of six months. The number of
shares over which options may be granted under the Sharesave Scheme are
consistent with institutional investor guidelines in respect of overall limits
applicable to employee share schemes. The number grantable to any individual is
also in line with such limits. Transactions under the Sharesave Scheme for the
three years ended 31 December 1998 were as follows:
OPTIONS OUTSTANDING NUMBER EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------ -------------- ----------------
(000S) L L
At 31 December 1995................................... 790 0.49 - 2.24 0.69
Granted............................................... 146 1.80 1.80
Cancelled............................................. (112) 0.64 - 2.24 1.64
---- ----------- ----
At 31 December 1996................................... 824 0.49 - 2.24 0.76
Granted............................................... 85 1.74 1.74
Cancelled............................................. (272) 0.49 - 2.24 0.79
Exercised............................................. (8) 0.64 - 1.80 0.70
---- ----------- ----
At 31 December 1997................................... 629 0.49 - 2.24 0.88
Granted............................................... 224 1.37 1.37
Cancelled............................................. (157) 0.49 - 1.80 1.49
Exercised............................................. (45) 0.49 - 0.64 0.49
---- ----------- ----
At 31 December 1998................................... 651 0.49 - 2.24 0.93
==== =========== ====
Exercisable at 31 December 1996....................... 8 0.64 - 1.80 0.70
Exercisable at 31 December 1997....................... 74 0.49 - 1.80 0.56
Exercisable at 31 December 1998....................... -- -- --
F-33
89
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997 US Stock Option Plan (the 'US Option Plan'). In November 1997, the
Company adopted the 1997 US Stock Option Plan (the 'US Option Plan') which
provides for the grant of both incentive and non-statutory stock options over
the Company's American Depositary Shares (ADSs). Incentive stock options granted
under the US Option Plan are intended to qualify as incentive stock options
within the meaning of Section 422 of the Internal Revenue code of 1986, as
amended (the 'Code'). Non-statutory stock options granted under the US Option
Plan are intended not to qualify as incentive stock options under the Code.
Under the terms of the US Option Plan, options to acquire ADSs may be granted by
the Remuneration Committee of the Board of Directors to any US resident
employee, including employee Directors.
The exercise price of incentive stock and non-statutory stock options under
the US Option Plan may not be less than the fair market value of the ADSs
subject to the option on the date of the option grant, and in some cases, may
not be less than 110% of such fair market value. Options granted under the US
Option Plan may become exercisable ('vest') in cumulative increments as
determined by the Remuneration Committee of the Board of Directors and lapse no
later than the tenth anniversary of the date of grant.
The number of shares over which options may be granted under the US Option
Plan is consistent with the institutional investor guidelines in respect of
overall limits applicable to employee share schemes. The number grantable to any
individual is also in line with such limits. Transactions under the US Option
Plan up to 31 December 1998 were as follows:
NUMBER
OPTIONS OUTSTANDING OF ADSS EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------- -------------- ----------------
(000S) $ $
At 31 December 1996................................. -- -- --
Granted............................................. 63 14.90 14.90
---- ------------ -----
At 31 December 1997................................. 63 14.90 14.90
Granted............................................. 427 9.88 - 11.88 10.75
Cancelled........................................... (122) 9.88 - 14.90 12.93
---- ------------ -----
At 31 December 1998................................. 368 9.90 - 11.88 10.73
==== ============ =====
Exercisable at 31 December 1996..................... -- -- --
Exercisable at 31 December 1997..................... -- -- --
Exercisable at 31 December 1998..................... -- -- --
1998 US Employee Stock Purchase Plan (the 'Purchase Plan'). In June 1998
the Company adopted the 1998 US Employee Stock Purchase Plan (the 'Purchase
Plan'), which provides for the grant of rights ('Rights') to purchase ADSs in
the Company. The Rights are intended to qualify as options issued under
'employee stock purchase plans' as defined in Section 423(b) of the United
States Internal Revenue Code of 1986, as amended (the 'Code'). Participation in
the Purchase Plan is offered to all US resident employees, including full-time
employee Directors. The initial offering began on 17 June 1998 (the 'Offering
Date') and will end on 31 March 1999 (the 'Purchase Date'). Thereafter, two year
offerings will begin approximately every six months following the announcement
of the interim and final results. All Rights under an offering are linked to
accumulated payroll deductions over the course of the offering, and participants
may withdraw from the plan at any time during an offering (although their Rights
will then lapse). The purchase price of the ADSs is not less than the lesser of
85% of the fair market value of the ADSs on either the Offering Date or the
Purchase Date. The purchase price may include any UK stamp duty reserve tax
payable with respect to the issue of the ADSs.
Under US law an individual may not purchase more than $25,000 worth of ADSs
(as determined by the fair market value on the Offering Date). The number of
shares over which the Rights may be granted under the Purchase Plan is
consistent with institutional investor guidelines in respect of overall limits
applicable to
F-34
90
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
employee share schemes. The number grantable to any individual is also in line
with such limits. Transactions under the Purchase Plan up to 31 December 1998
are as follows:
NUMBER
OPTIONS OUTSTANDING OF ADSS EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------- -------------- ----------------
(000S) $ $
At 31 December 1997................................. -- -- --
Granted............................................. 66 8.65 - 10.49 8.91
Cancelled........................................... (9) 8.65 8.65
----- ------------ ----
At 31 December 1998................................. 57 8.65 - 10.49 8.96
===== ============ ====
Exercisable at 31 December 1997..................... -- -- --
Exercisable at 31 December 1998..................... -- -- --
Individual US arrangements. Options over American Depositary Shares were
granted during the year at the prevailing market value to certain individuals
who are non-executive Directors of The Dialog Corporation, the Company's North
American subsidiary. Transactions under these individual US schemes up to 31
December 1998 were as follows:
NUMBER
OPTIONS OUTSTANDING OF ADSS EXERCISE PRICE WEIGHTED AVERAGE
------------------- ------- -------------- ----------------
(000S) $ $
At 31 December 1996................................ -- -- --
Granted............................................ 13 10.63 - 14.90 12.84
----- ------------- -----
At 31 December 1997................................ 13 10.63 - 14.90 12.84
Granted............................................ 4 11.81 11.81
----- ------------- -----
At 31 December 1998................................ 17 10.63 - 14.90 12.59
----- ------------- -----
Exercisable at 31 December 1996.................... -- -- --
Exercisable at 31 December 1997.................... 1 10.63 10.63
Exercisable at 31 December 1998.................... 13 10.63 - 14.90 12.84
19. SHARE PREMIUM
1998 1997 1996
------- ------- ------
L000 L000 L000
Balance at 1 January........................................ 150,341 35,672 33,517
Premium arising on shares issued on exercise of options..... 632 691 45
Premium arising on shares issued on placing/flotation and
acquisitions of fixed asset investments................... 1,155 124,038 2,127
Expenses of share issue..................................... -- (10,060) (17)
------- ------- ------
Balance at 31 December...................................... 152,128 150,341 35,672
======= ======= ======
20. SHARES TO BE ISSUED
On 19 November 1998, the Company acquired all of the share capital of Write
Works Limited ('Write Works') for a maximum of L6,015,000 to be paid over two
years (see note 11). The consideration has been satisfied through an initial
payment of L965,000 and L1,150,000 by the issue of 694,025 new Ordinary shares.
F-35
91
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A further consideration of up to a maximum of L3,800,000 in cash and shares
will be paid on the achievement of certain earnings targets over the next two
years.
L000
------
Total future consideration.................................. 3,800
Cash payable within one year (see note 15).................. (1,437)
Cash payable after more than one year (see note 16)......... (1,396)
------
Shares to be issued......................................... 967
======
21. PROFIT AND LOSS ACCOUNT
GROUP 1998 1997 1996
----- -------- -------- -------
L000 L000 L000
Balance at 1 January........................................ (243,524) (10,561) (2,775)
Profit/(loss) for the financial year........................ 4,439 (20,744) (7,226)
Effect of exchange rate movements on net investment in
foreign subsidiaries net of associated borrowings......... (1,586) (2,015) (477)
Goodwill written off........................................ (11,022) (209,120) (83)
Effect of exchange rate movements on goodwill written off... 2,266 (1,084) --
-------- -------- -------
Balance at 31 December...................................... (249,427) (243,524) (10,561)
======== ======== =======
Cumulative goodwill written off at 31 December 1998 amounted to
L219,361,000, comprising balances denominated in US Dollars of $355,429,000 and
balances denominated in Pounds Sterling of L5,737,000 (1997: L210,605,000,
comprising balances denominated in US Dollars of $337,091,000 and balances
denominated in Pounds Sterling of L5,737,000; 1996: L401,000 all denominated in
Pounds Sterling).
COMPANY 1998 1997 1996
------- ------- ------- -------
L000 L000 L000
Balance at 1 January........................................ (6,400) (10,520) (3,323)
(Loss)/profit for the financial year........................ (9,016) 4,120 (7,197)
Effect of exchange rate movements on net debt............... 1,752 -- --
------- ------- -------
Balance at 31 December...................................... (13,664) (6,400) (10,520)
======= ======= =======
22. RECONCILIATION OF MOVEMENT IN ORDINARY SHAREHOLDERS' FUNDS
GROUP 1998 1997 1996
----- ------- -------- ------
L000 L000 L000
Profit/(loss) for the financial year........................ 4,439 (20,744) (7,226)
Other recognised gains and losses relating to the year
(net)..................................................... 680 (3,099) (477)
New share capital subscribed for cash....................... 637 120,586 46
New share capital subscribed on acquisition of subsidiaries
and other fixed asset investments......................... 1,162 4,719 2,135
Expenses of share issue..................................... -- (10,060) (17)
Shares to be issued......................................... 967 -- --
Goodwill written off........................................ (11,022) (209,120) (83)
------- -------- ------
Net movement in Ordinary shareholders' funds................ (3,137) (117,718) (5,622)
------- -------- ------
Ordinary shareholders' funds at 1 January................... (91,681) 26,037 31,659
------- -------- ------
Ordinary shareholders' funds at 31 December................. (94,818) (91,681) 26,037
======= ======== ======
F-36
92
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended 31 December 1998, the Company made certain revisions
to the fair value of assets and liabilities consolidated upon the acquisition of
KRII. These revisions consisted primarily of the following:
L000
-------
Decrease in estimated sales proceeds of assets held for
resale.................................................... (6,392)
Write-off of capitalised product development costs.......... (2,042)
Release of provision for guaranteed funding commitments..... 3,133
Provision for litigation.................................... (2,172)
Additional funding of non-core business through to date of
disposal.................................................. (728)
Provision for onerous contracts............................. (902)
Write-off of obsolete fixed asset........................... (481)
Adjustment to deferred consideration........................ (382)
Other....................................................... (1,056)
-------
(11,022)
=======
COMPANY 1998 1997 1996
------- ------- ------- ------
L000 L000 L000
(Loss)/profit for the financial year........................ (9,016) 4,120 (7,197)
New share capital subscribed for cash....................... 637 120,586 46
New share capital subscribed on acquisition of subsidiaries
and other fixed asset investments......................... 1,162 4,719 2,135
Expenses of share issue..................................... -- (10,060) (17)
Effect of exchange rate movements on net debt............... 1,752 -- --
Shares to be issued......................................... 967 -- --
------- ------- ------
Net movement in Ordinary shareholders' funds................ (4,498) 119,365 (5,033)
------- ------- ------
Shareholders' funds at 1 January............................ 145,443 26,078 31,111
------- ------- ------
Shareholders' funds at 31 December.......................... 140,945 145,443 26,078
======= ======= ======
23. MINORITY EQUITY INTERESTS
1998 1997
----- ----
L000 L000
Balance at 1 January........................................ 726 43
Profit/(loss) attributed to the minorities.................. 356 (11)
Exchange adjustments........................................ (5) (32)
Arising from acquisitions during the year................... -- 726
----- ---
Balance at 31 December...................................... 1,077 726
===== ===
F-37
93
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
24. COMMITMENTS UNDER OPERATING LEASES AND FINANCE LEASES
As at 31 December 1998, the Group had annual commitments under
non-cancellable operating leases as set out below:
1998 1997
LAND LAND
AND BUILDINGS OTHER AND BUILDINGS OTHER
------------- ----- ------------- -----
L000 L000 L000 L000
Operating leases which expire:
Within 1 year...................................... 1,138 220 360 22
In 2 - 5 years..................................... 1,548 15 3,778 22
After 5 years...................................... 1,694 -- 1,640 --
----- --- ----- --
4,380 235 5,778 44
===== === ===== ==
The Group leases offices and operating facilities and certain equipment
under a variety of operating and finance leases that expire at various dates
through to 2008. Future minimum lease payments under operating and finance
leases with initial or remaining non-cancellable terms of one or more years are
as follows as at 31 December 1998:
OPERATING FINANCE
LEASES LEASES
--------- -------
L000 L000
YEAR ENDING 31 DECEMBER
1999........................................................ 4,615 230
2000........................................................ 4,808 12
2001........................................................ 4,767 --
2002........................................................ 4,094 --
2003........................................................ 3,976 --
2004 - 2008................................................. 6,932 --
------ ---
Total minimum lease payments................................ 29,192 242
Less: amount representing interest.......................... -- (8)
------ ---
Net minimum lease payments.................................. 29,192 234
====== ===
Rent expense under operating leases was L5,160,000 (see note 4),
L1,246,000, L1,048,000 for the years ended 31 December 1998, 1997 and 1996
respectively.
25. RECONCILIATION OF OPERATING PROFIT/(LOSS) TO NET CASH INFLOW/(OUTFLOW) FROM
OPERATING ACTIVITIES
1998 1997 1996
------ ------- ------
L000 L000 L000
Operating profit/(loss)..................................... 23,026 (22,307) (7,872)
Less: Restructuring costs (see note 5)...................... 2,583 18,550 --
------ ------- ------
Operating profit/(loss) before restructuring costs.......... 25,609 (3,757) (7,872)
Depreciation charges........................................ 7,962 2,877 1,807
Amortisation of development costs........................... 7,699 3,558 2,170
Amortisation of goodwill.................................... 61 -- --
Loss/(profit) on sale of tangible fixed assets.............. 17 (15) (2)
Decrease/(increase) in stocks............................... 11 1 (8)
Increase in debtors......................................... (1,077) (1,651) (3,580)
F-38
94
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1998 1997 1996
------ ------- ------
L000 L000 L000
(Decrease)/increase in creditors............................ (13) 4,156 1,618
Exchange variances.......................................... 786 (60) 26
Cash costs of restructuring................................. (6,904) (1,934) --
------ ------- ------
Net cash inflow/(outflow) from operating activities......... 34,151 3,175 (5,841)
====== ======= ======
26. MANAGEMENT OF LIQUID RESOURCES
1998 1997 1996
---- ----- ------
L000 L000 L000
Net withdrawals from/(payments into) short-term deposits
over three months not repayable on demand................. 620 6,000 (4,500)
Net (payments into)/withdrawals from short-term deposits
under three months not repayable on demand................ -- (620) 20,146
--- ----- ------
Net cash inflow from management of liquid resources......... 620 5,380 15,646
=== ===== ======
Movements in all short-term deposits not repayable on demand are reported
under the heading of management of liquid resources.
27. ANALYSIS OF CHANGES IN NET (DEBT)/FUNDS
BANK CASH AND DEBT DUE DEBT DUE FINANCE
CASH DEPOSITS BANK DEPOSITS WITHIN ONE YEAR AFTER ONE YEAR LEASE TOTAL
------ -------- ------------- --------------- -------------- ------- --------
L000 L000 L000 L000 L000 L000 L000
At 1 January 1996.................... 607 21,426 22,033 -- -- (2,698) 19,335
Cash flows........................... 1,566 (15,646) (14,080) -- -- 1,012 (13,068)
Exchange movements................... (135) 220 85 -- -- -- 85
Other non-cash changes............... -- -- -- -- -- (464) (464)
------ ------- ------- ------- -------- ------ --------
At 1 January 1997.................... 2,038 6,000 8,038 -- -- (2,150) 5,888
Cash flows........................... 10,832 (5,380) 5,452 (2,831) (151,241) 1,491 (147,129)
Exchange movements................... 232 -- 232 (89) (4,565) -- (4,422)
Other non-cash changes............... -- -- -- (119) -- (122) (241)
------ ------- ------- ------- -------- ------ --------
At 1 January 1998.................... 13,102 620 13,722 (3,039) (155,806) (781) (145,904)
Cash flows........................... (8,551) (620) (9,171) 2,770 6,812 547 958
Exchange movements................... (57) -- (57) 81 1,671 -- 1,695
Other non-cash changes............... -- -- -- (44) (902) -- (946)
Other movements...................... -- -- -- (14,446) 14,446 -- --
------ ------- ------- ------- -------- ------ --------
At 31 December 1998.................. 4,494 -- 4,494 (14,678) (133,779) (234) (144,197)
====== ======= ======= ======= ======== ====== ========
Bank deposits have a maturity period of more than 24 hours but are
repayable on demand subject, in some instances, to the payment of certain
expenses.
28. CAPITAL COMMITMENTS
Capital commitments as at 31 December 1998 were as follows:
1998 1997
---- ----
L000 L000
Authorised and contracted for............................... 139 --
--- --
Authorised but not contracted for........................... 344 --
=== ==
F-39
95
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
29. SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
Accounting principles
These consolidated financial statements have been prepared in accordance
with UK GAAP which differs in certain significant respects from US GAAP. A
description of the relevant accounting principles which differ materially is
given below.
Turnover
It is the Company's policy to recognise online subscriptions in full when
contractually due and invoiced and to provide in full for the cost of related
service obligations. Under US GAAP, online subscription revenues are recognised
rateably over the subscription term which is usually 12 months. No adjustment is
required under US GAAP for the 'modular pricing' subscriptions since these
subscriptions are recognised rateably over the subscription term.
Intangible fixed assets
It is the Company's policy to capitalise costs associated with the
development of the host computer system and product development and amortise
over a period of five and three years, respectively. Under US GAAP, costs
associated with the host computer are expensed as incurred, as are product
development costs incurred to establish technological feasibility. Statement of
Financial Accounting Standards No. 86 requires that product development costs
incurred subsequent to establishing technological feasibility up until the
product's general release are capitalised; however in the Company's case the
period between the establishment of technical feasibility, as evidenced by a
product design and the completion and testing of a working model, and the
product's release is short and the associated costs insignificant. Consequently,
under US GAAP, no product development costs have been capitalised. Product
development costs capitalised under UK GAAP include interest (note 6) which
would not be capitalisable under US GAAP. These amounts are included in this
adjustment.
Indexing costs
The Company's policy is to defer database indexing costs and amortise these
costs on a straight line basis over two years. Under US GAAP, database indexing
costs are expensed as incurred.
Deferred taxation
Under UK GAAP, deferred taxes are accounted for to the extent that it is
considered probable that a liability or asset will crystallise in the
foreseeable future. Under US GAAP, deferred taxes are accounted for on all
temporary differences and a valuation allowance is established to reduce
deferred tax assets to the amount which 'more likely than not' will be realised
in future tax returns. Deferred tax amounts also arise as a result of the other
US GAAP adjustments.
F-40
96
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The UK deferred tax liability can be reconciled as follows to the US GAAP
net deferred tax asset:
1998 1997
------------------ ------------------
L000 L000 L000 L000
UK liability............................................ (128) (119)
Liabilities not provided for under UK GAAP.............. (1,530) (2,389)
Full potential deferred tax liability under UK GAAP..... (1,658) (2,508)
-------- --------
Unprovided deferred tax asset on tax losses............. 9,090 5,575
Tax effects of US GAAP adjustments:
Acquisition accounting.................................. 17,745 4,041
Revenue recognition..................................... 1,045 1,272
System and product development costs.................... 8,804 6,812
Deferred indexing costs................................. 168 269
Investment in available-for-sale securities............. -- 215
Gross deferred tax asset in accordance with US GAAP..... 36,852 18,184
-------- --------
Total net deferred tax asset under US GAAP.... 35,194 15,676
Deferred tax asset valuation allowance.................. (35,194) (15,676)
-------- --------
Net deferred tax asset in accordance with US GAAP....... -- --
======== ========
Management believes that the available objective evidence creates
sufficient uncertainty regarding realisability of these items so that a full
valuation allowance has been recorded.
The US GAAP basis tax provision is comprised as follows:
1998 1997 1996
---- ---- ----
L000 L000 L000
Current:
UK corporation tax...................................... -- -- --
Non-UK tax.............................................. 776 332 102
--- --- ---
776 332 102
=== === ===
The US GAAP tax provision is reconciled to the benefit derived by applying
the UK statutory rate to the US GAAP loss before tax as follows:
1998 1997 1996
------- ------ ------
L000 L000 L000
US GAAP amounts at UK statutory rate of 31% (1997: 31.5%,
1996: 33%)................................................ (10,223) (7,877) (3,544)
Disallowed expenditure...................................... 1,306 304 8
Revision of prior year losses............................... -- -- (609)
Differential tax rates...................................... (3,277) -- --
Change in valuation allowance............................... 12,897 8,006 4,288
Other....................................................... 73 (101) (114)
------- ------ ------
US GAAP tax provision....................................... 776 332 102
======= ====== ======
Acquisition accounting
Under UK GAAP, the Company has written off purchased goodwill, defined as
the excess of the acquisition price over the fair value of the net assets
acquired, against reserves for all acquisitions made prior to 31 December 1997.
For US GAAP purposes, the acquisition price is allocated to all tangible and
intangible assets acquired based on their fair value, including in-process
research and development. Amounts allocated to in-process research and
development are then immediately expensed.
F-41
97
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Goodwill and other acquisition-related intangible assets are recognised on
the balance sheet and amortised by charges against income over its estimated
useful life, not to exceed 40 years.
Under UK GAAP, for all acquisitions made since 1 January 1998, goodwill is
capitalised and subsequently written off over its estimated useful life, which
currently ranges from 10 to 20 years.
The Group has accounted for its acquisition of KRII in accordance with
FRS7, 'Fair values in acquisition accounting'. This standard sets out rules for
accounting for acquisitions in consolidated financial statements and states that
the fair value balance sheet of an acquired company cannot include provisions
for integration and reorganisation costs set up by the acquiring company. Under
US GAAP, certain integration and reorganisation costs may be considered
liabilities assumed and included in the allocation of the acquisition cost.
Employee costs
During 1993, certain share allocations were made to certain of the
Company's employees at par value which were below deemed market value. Under UK
GAAP these share issues were recorded at their par value, whereas under US GAAP
the difference between the par value and the deemed market value is considered
to be employee compensation and expensed in total in the year.
In addition, prior to December 1995, options were granted under the
Company's Sharesave Scheme at a 20% discount (15% with effect from December 1995
onwards) from the fair market value of the stock at the date of grant. Under UK
GAAP, the share issues are recorded at their discounted price when the options
are exercised. Under US GAAP, the discount is considered to be employee
compensation and is expensed over the five year savings period of the scheme.
Under US GAAP, the Company applies Accounting Principle Board Opinion No.
25 'Accounting for Stock Issued to Employees' and related interpretations in
accounting for its schemes. Had compensation expense for the Company's share
option schemes been determined based upon the fair value at the grant date for
awards under these schemes consistent with the methodology prescribed under SFAS
No. 123 'Accounting for Stock-Based Compensation', the Company's US GAAP net
loss and loss per share would have been increased in 1998 by L995,000 and 0.7p
per share (1997: L369,000 and 0.2p per share; 1996: L622,000 and 1.0p per
share).
The fair value of the options granted during 1998 has been estimated using
the Black-Scholes option pricing model with the following assumptions: dividend
yield of 0% (1997 and 1996: 0%), volatility of 63% (1997: 59%; 1996: 72%),
risk-free investment rate of 5.5% (1997: 6.5%; 1996: 6.2%), assumed forfeiture
rate of 0% (1997 and 1996: 0%) and an expected life of six years (1997 and 1996:
six years). The average value of the options granted during 1998 is estimated as
being 113 pence (1997: 119 pence; 1996: 170 pence) for each Ordinary share.
Investments in debt and equity securities
Under UK GAAP, fixed asset investments are held at cost unless there is a
permanent diminution in value whereupon provision is made for such diminution
through the profit and loss account. Under US GAAP, debt and equity investments
that meet the definition of 'available-for-sale securities', as defined by
Statement of Financial Accounting Standards No. 115 ('SFAS 115'), are held at
their market value; unrealised holding gains and losses are excluded from
earnings and reported as a net amount as a component of shareholders' equity
until realised.
Consolidated statement of cash flows
The consolidated statement of cash flows prepared in accordance with FRS 1
(revised) presents substantially the same information as that required under US
GAAP. Under US GAAP, however, there are
F-42
98
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certain differences from UK GAAP with regard to the classification of items
within the cash flow statement and with regard to the definition of cash and
cash equivalents.
Under UK GAAP, cash flows are presented separately for trading activities,
returns in investments and servicing of finance, taxation, capital expenditure
and financial investment, acquisition and disposals, equity dividends paid,
management of liquid resources and financing activities.
Under US GAAP, however, only three categories of cash flow activity are
reported, being operating activities, investing activities and financing
activities. Cash flows from taxation and returns on investments and servicing of
finance would be included under operating activities under US GAAP.
Under US GAAP, cash and cash equivalents do not include overdrafts, but do
include investments repayable within three months of maturity when acquired.
Set out below, for illustrative purposes, is a summary consolidated
statement of cash flows under US GAAP:
YEAR ENDED 31 DECEMBER
-----------------------------
1998 1997 1996
------ -------- -------
L000 L000 L000
Net cash provided by/(used in) operating activities......... 5,240 (122) (8,413)
Net cash used in investing activities....................... (4,120) (256,054) (3,586)
Net cash (used in)/provided by financing activities......... (9,671) 263,128 (2,081)
------ -------- -------
Net (decrease)/increase in cash and cash equivalents........ (8,551) 6,952 (14,080)
Cash and cash equivalents at beginning of period............ 13,722 6,538 20,533
Effect of foreign exchange rate changes..................... (677) 232 85
------ -------- -------
Cash and cash equivalents at end of period.................. 4,494 13,722 6,538
====== ======== =======
Fair value of financial instruments
The carrying amounts and estimated fair values of the Group's financial
instruments at 31 December 1998 and 1997 are as follows:
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
1998 1998 1997 1997
-------- -------- -------- --------
L000 L000 L000 L000
Publicly quoted fixed asset investments......... -- -- 5,043 4,362
Cash and bank deposits.......................... 4,494 4,494 13,722 13,722
Senior Credit Facility.......................... (46,052) (46,052) (56,217) (56,217)
Senior Subordinated Notes....................... (108,186) (104,399) (109,396) (113,498)
Obligations under finance leases................ (234) (234) (781) (781)
Interest rate cap agreement..................... 148 34 185 147
The amounts in the table are stated gross of unamortised finance costs.
The carrying amounts of publicly quoted fixed asset investments and Senior
Subordinated Notes were based on the quoted market prices for these instruments.
The carrying amount of cash and bank deposits is a reasonable estimate of
fair value.
The Senior Credit Facility bears interest on a floating rate basis based on
the current value of US Dollar LIBOR. Therefore the fair value of this
instrument is considered to approximate its carrying amount.
In the opinion of the Directors, the market value of the finance lease
obligations approximates the carrying amount, having regard to the interest
rates available to the Group for similar borrowings at the balance sheet date.
F-43
99
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of the interest rate cap agreement has been estimated upon
the available market price for a similar instrument at 31 December 1998 and
1997.
Exceptional items
Under UK GAAP, certain exceptional items are shown separately on the face
of the profit and loss account after operating profit and before interest. Under
US GAAP, exceptional items should be included as a normal operating item so that
operating profit/(loss) includes these costs. The adjustments to operating
(loss)/profit under US GAAP can be reconciled as follows:
YEAR ENDED 31 DECEMBER
---------------------------
1998 1997 1996
------ ------- ------
L000 L000 L000
Operating profit/(loss) in accordance with UK GAAP.......... 20,726 (22,307) (7,872)
Reclassification of exceptional item........................ 2,069 4,035 --
------ ------- ------
Operating profit/(loss) in accordance with US GAAP.......... 22,795 (18,272) (7,872)
====== ======= ======
The adjustments to net loss and shareholders' equity under US GAAP can be
reconciled as follows:
YEAR ENDED 31 DECEMBER
-----------------------------
ADJUSTMENTS TO NET LOSS 1998 1997 1996
----------------------- ------- ------- -------
L000 L000 L000
Retained profit/(deficit) in accordance with UK GAAP........ 4,439 (20,744) (7,226)
US GAAP adjustments:
Acquisition accounting...................................... (36,037) (14,606) --
Fair value adjustments...................................... -- 3,029 --
System and product development costs:
- -- capitalised during the year.............................. (11,762) (3,964) (4,315)
- -- amortization............................................. 8,308 11,548 2,170
Revenue recognition......................................... 667 (405) (956)
Deferred indexing costs..................................... 312 (151) (583)
Employee costs.............................................. (28) (23) (20)
Income taxes................................................ (7) (9) 62
Net loss in accordance with US GAAP......................... (34,108) (25,325) (10,868)
------- ------- -------
Net loss per share in accordance with US GAAP (pence)....... (22.65) (25.06) (11.77)
======= ======= =======
ADJUSTMENTS TO SHAREHOLDERS' EQUITY 1998 1997 1996
----------------------------------- ------- ------- ------
L000 L000 L000
Ordinary shareholders' funds in accordance with UK GAAP..... (94,818) (91,681) 26,037
US GAAP adjustments:
Acquisition accounting...................................... 194,242 221,540 --
Capitalised system and product development costs net of
amortisation.............................................. (23,154) (21,624) (8,311)
Revenue recognition......................................... (3,370) (4,037) (3,632)
Deferred indexing costs..................................... (541) (853) (702)
Investment in available-for-sale securities................. -- (681) (930)
Income taxes................................................ 120 119 142
------- ------- ------
Shareholders' equity in accordance with US GAAP............. 72,479 102,783 12,604
======= ======= ======
F-44
100
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
30. SUBSEQUENT EVENTS
On 2 February 1999, the Group announced the disposal of its assets held for
resale, the CARL Corporation and The UnCover Company, to Ward Shaw, the senior
member of the management team of both companies, for a consideration of
$2,250,000 (L1,352,000). Of the consideration, $1 million is being satisfied in
cash, with the balance payable through a loan note, repayable by January 2001.
Costs associated with the disposal are estimated to be $600,000 (L360,000). The
businesses have been carried in the 31 December 1998 balance sheet at their net
estimated proceeds of $1,650,000 (L992,000). The difference between the net
estimated proceeds at 31 December 1998 and 1997 of L6,392,000 has been treated
as an adjustment to fair value and written off directly to reserves.
On 17 May 1999, the Company announced that it had secured an additional
facility from The Chase Manhattan Bank ('Chase') of $25 million. The facility is
repayable in October 2002 and carries interest at a rate of 3.25 percentage
points over US Dollar LIBOR through to 1 October 1999 and 4.25 percentage points
over US Dollar LIBOR thereafter. In connection with this incremental financing,
the Company has agreed to issue Chase with warrants to purchase an initial 1.5
million new Ordinary shares (representing approximately 1% of the current issued
share capital of the Company) exercisable between 17 May 1999 and 11 October
2002, together with additional warrants to purchase up to a maximum of a further
1.5 million new Ordinary shares between 1 August and 1 November 1999 if the term
facility is still outstanding on those dates, such warrants to be exercisable up
to 14 May 2004. The warrants are exercisable at a price of 120.5 pence per
Dialog Ordinary share (the closing mid-market price on 13 May 1999).
31. CONTINGENT LIABILITIES
In October 1997, immediately prior to the Company's acquisition of KRII,
KRII was sued in a class action for copyright violation. The case is currently
proceeding in a United States federal court. At issue is the article delivery
service operated by one of KRII's subsidiaries. The subsidiary would, upon
permission from publishers, provide copies of single articles from magazines and
journals. The plaintiffs, who are authors, contend that the publishers did not
have the authority to grant permission to the Company's subsidiary for such
copying. The trial court has agreed with the plaintiffs' interpretation of the
Copyright Act that the law does not grant publishers the authority to permit
copying of single articles absent other agreements with an author. This
interpretation of the Copyright Act is currently being reviewed by the United
States Court of Appeals for the Ninth Circuit. Further proceedings in the trial
court have been stayed while the appeal is pending. The Directors are confident
that the appeal will reverse the earlier decision of the trial court in favour
of the plaintiffs. Nevertheless, in the opinion of the Directors, adequate
provision has been made to cover the costs and damages that could accrue to the
Company in the eventuality of an adverse outcome.
The Company and its subsidiaries are also parties to legal proceedings that
are considered to be ordinary routine litigation incidental to their business
and not material to the Group's consolidated financial position.
F-45
101
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
32. SUPPLEMENTAL CONDENSED COMBINING FINANCIAL STATEMENTS
The following condensed consolidating financial statements present the
financial position, results of operations and cash flows of The Dialog
Corporation plc (carrying any investments in subsidiaries at equity), its
guarantor subsidiaries Dialog Holdings Limited, The Dialog Corporation, a
Delaware corporation, and The Dialog Corporation GmbH, and non-guarantor
subsidiaries of The Dialog Corporation plc, and the eliminations to arrive at
the information for the Company on a consolidated basis. Such guarantor
subsidiaries are wholly-owned subsidiaries of The Dialog Corporation plc. The
guarantees provided by such guarantor subsidiaries are full, unconditional and
joint and several. Each of the guarantees provides that it shall be governed
under New York law. The Company believes that separate financial statements of
each such guarantor subsidiary would not be material to investors. Accordingly,
such separate financial statements are not presented.
The financial information presented below has been prepared under U.K.
GAAP. Separate reconciliations of shareholders' equity and net income from U.K.
GAAP to U.S. GAAP, together with cashflows presented in accordance with FAS 95,
have also been presented.
AS AT 31 DECEMBER 1998
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
FIXED ASSETS
Intangible assets......................................... 4,650 15,644 2,915 (55) 23,154
Goodwill.................................................. -- -- -- 7,676 7,676
Tangible assets........................................... 2,842 13,941 1,087 -- 17,870
Investments............................................... (178,681) (3,961) (168) 195,164 12,354
-------- -------- ------- ------- --------
(171,189) 25,624 3,834 202,785 61,054
CURRENT ASSETS
Stocks.................................................... 27 187 7 -- 221
Debtors................................................... 40,733 37,062 13,660 (48,674) 42,781
Assets held for resale.................................... -- 992 -- -- 992
Cash at bank and in hand.................................. -- 305 4,350 (161) 4,494
-------- -------- ------- ------- --------
40,760 38,546 18,017 (48,835) 48,488
CREDITORS (amounts falling due within one year)........... (55,435) (256,672) (15,705) 268,967 (58,845)
-------- -------- ------- ------- --------
NET CURRENT (LIABILITIES)/ASSETS.......................... (14,675) (218,126) 2,312 220,132 (10,357)
-------- -------- ------- ------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES..................... (185,864) (192,502) 6,146 422,917 50,697
CREDITORS (amounts falling due after more than one
year)................................................... (136,709) (2,142) (890) -- (139,741)
Provisions for liabilities and charges.................... -- (4,569) (128) -- (4,697)
-------- -------- ------- ------- --------
NET (LIABILITIES)/ASSETS.................................. (322,573) (199,213) 5,128 422,917 (93,741)
======== ======== ======= ======= ========
CAPITAL AND RESERVES -- EQUITY/(DEFICIT)
Called up share capital................................... 1,514 48,211 923 (49,134) 1,514
Share premium account..................................... 152,128 83,862 789 (84,651) 152,128
Shares to be issued....................................... 967 -- -- -- 967
Profit and loss account................................... (477,182) (331,286) 3,416 555,625 (249,427)
-------- -------- ------- ------- --------
Ordinary shareholders' (deficit)/funds.................... (322,573) (199,213) 5,128 421,840 (94,818)
Minority interests........................................ -- -- -- 1,077 1,077
-------- -------- ------- ------- --------
Total shareholders' (deficit)/funds....................... (322,573) (199,213) 5,128 422,917 (93,741)
======== ======== ======= ======= ========
Ordinary shareholders' (deficit)/funds in accordance with
U.K. GAAP............................................... (322,573) (199,213) 5,128 421,840 (94,818)
U.S. GAAP adjustments:
Goodwill arising on consolidation......................... -- 192,462 1,780 -- 194,242
Capitalized system and development costs net of
amortization............................................ (4,650) (15,644) (2,915) 55 (23,154)
Revenue recognition....................................... (720) (1,057) (1,593) -- (3,370)
Income taxes.............................................. -- -- 120 -- 120
Deferred indexing costs................................... (541) -- -- -- (541)
-------- -------- ------- ------- --------
Shareholders' (deficit)/equity in accordance with U.S.
GAAP.................................................... (328,484) (23,452) 2,520 421,895 72,479
======== ======== ======= ======= ========
F-46
102
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS AT 31 DECEMBER 1997
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
FIXED ASSETS
Intangible assets........................ 4,157 17,103 375 (11) 21,624
Tangible assets.......................... 2,030 14,614 2,715 (5) 19,354
Investments.............................. 282,286 31,883 70 (295,865) 18,374
-------- ------- ------ -------- --------
288,473 63,600 3,160 (295,881) 59,352
CURRENT ASSETS
Stocks................................... 28 177 27 -- 232
Debtors: amounts due within one year..... 29,139 35,104 2,154 (23,192) 43,205
Debtors: amounts due after one year...... -- 615 -- -- 615
Cash at bank and in hand................. 184 10,950 2,588 -- 13,722
Assets held for resale................... -- 7,384 -- -- 7,384
-------- ------- ------ -------- --------
29,351 54,230 4,769 (23,192) 65,158
CREDITORS (amounts falling due within one
year).................................. (16,575) (55,201) (1,780) 28,355 (45,201)
-------- ------- ------ -------- --------
NET CURRENT ASSETS/(LIABILITIES)......... 12,776 (971) 2,989 5,163 19,957
-------- ------- ------ -------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES.... 301,249 62,629 6,149 (290,718) 79,309
CREDITORS (amounts falling due after more
than one year)......................... (155,806) (6,585) (290) -- (162,681)
Provisions for liabilities and charges... -- (7,164) (419) -- (7,583)
-------- ------- ------ -------- --------
NET ASSETS/(LIABILITIES)................. 145,443 48,880 5,440 (290,718) (90,955)
======== ======= ====== ======== ========
CAPITAL AND RESERVES -- EQUITY/(DEFICIT)
Called up share capital.................. 1,502 -- 94 (94) 1,502
Share premium account.................... 150,341 -- 788 (788) 150,341
Profit and loss account.................. (6,400) 48,880 4,558 (290,562) (243,524)
-------- ------- ------ -------- --------
Ordinary shareholders' funds/(deficit)... 145,443 48,880 5,440 (291,444) (91,681)
Minority interests....................... -- -- -- 726 726
-------- ------- ------ -------- --------
Total shareholders' funds/(deficit)...... 145,443 48,880 5,440 (290,718) (90,955)
======== ======= ====== ======== ========
Ordinary shareholders' funds/(deficit) in
accordance with U.K. GAAP.............. 145,443 48,880 5,440 (291,444) (91,681)
U.S. GAAP adjustments:
Goodwill arising on consolidation........ -- 217,982 3,558 -- 221,540
Capitalized system and development costs
net of amortization.................... (4,157) (17,103) (375) 11 (21,624)
Revenue recognition...................... (1,587) (1,073) (1,377) -- (4,037)
Income taxes............................. -- -- 119 -- 119
Deferred indexing costs.................. (853) -- -- -- (853)
Investment in available-for-sale
securities............................. (98) (583) -- -- (681)
-------- ------- ------ -------- --------
Shareholders' equity/(deficit) in
accordance with U.S. GAAP.............. 138,748 248,103 7,365 (291,433) 102,783
======== ======= ====== ======== ========
F-47
103
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AS AT 31 DECEMBER 1996
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
------ ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
FIXED ASSETS
Intangible assets....................... 7,908 -- 403 -- 8,311
Tangible assets......................... 2,144 1,262 3,585 -- 6,991
Investments............................. (870) -- -- 3,005 2,135
------ ------ ------- ------- -------
9,182 1,262 3,988 3,005 17,437
CURRENT ASSETS
Stocks.................................. 51 53 -- -- 104
Debtors................................. 14,248 2,726 8,867 (17,715) 8,126
Cash at bank and in hand................ 7,013 20 1,005 -- 8,038
------ ------ ------- ------- -------
21,312 2,799 9,872 (17,715) 16,268
CREDITORS (amounts falling due within
one year)............................. (3,508) (8,114) (11,874) 16,809 (6,687)
------ ------ ------- ------- -------
NET CURRENT ASSETS/ (LIABILITIES)....... 17,804 (5,315) (2,002) (906) 9,581
------ ------ ------- ------- -------
TOTAL ASSETS LESS CURRENT LIABILITIES... 26,986 (4,053) 1,986 2,099 27,018
CREDITORS (amounts falling due after
more than one year)................... -- -- (796) -- (796)
Provisions for liabilities and
charges............................... -- -- (142) -- (142)
------ ------ ------- ------- -------
NET ASSETS/(LIABILITIES)................ 26,986 (4,053) 1,048 2,099 26,080
====== ====== ======= ======= =======
CAPITAL AND RESERVES -- EQUITY/(DEFICIT)
Called up share capital................. 926 -- 71 (71) 926
Share premium account................... 35,672 -- 11 (11) 35,672
Profit and loss account................. (9,612) (4,053) 966 2,138 (10,561)
------ ------ ------- ------- -------
Ordinary shareholders'
funds/(deficit)....................... 26,986 (4,053) 1,048 2,056 26,037
Minority interests...................... -- -- -- 43 43
------ ------ ------- ------- -------
Total shareholders' funds/(deficit)..... 26,986 (4,053) 1,048 2,099 26,080
====== ====== ======= ======= =======
Ordinary shareholders' funds/(deficit)
in accordance with U.K. GAAP.......... 26,986 (4,053) 1,048 2,056 26,037
U.S. GAAP adjustments:
Capitalized system and development costs
net of amortization................... (7,908) -- (403) -- (8,311)
Revenue recognition..................... (1,446) (874) (1,312) -- (3,632)
Income taxes............................ -- -- 142 -- 142
Deferred indexing costs................. (702) -- -- -- (702)
Investment in available-for-sale
securities............................ (930) -- -- -- (930)
------ ------ ------- ------- -------
Shareholders' equity/(deficit) in
accordance with U.S. GAAP............. 16,000 (4,927) (525) 2,056 12,604
====== ====== ======= ======= =======
F-48
104
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 1998
--------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
Turnover............................... 17,944 140,703 37,049 (24,934) 170,762
Cost of sales.......................... (5,282) (63,472) (19,658) 16,794 (71,618)
------- ------- ------- ------- -------
Gross profit......................... 12,662 77,231 17,391 (8,140) 99,144
Distribution costs..................... (2,511) (16,430) (7,472) 4,853 (21,560)
Administration expenses................ (18,871) (28,971) (5,964) 7,008 (46,798)
Amortization of development
costs/goodwill....................... (2,276) (3,708) (1,715) (61) (7,760)
Amounts written off investments........ (2,300) -- -- -- (2,300)
------- ------- ------- ------- -------
Operating (loss)/profit.............. (13,296) 28,122 2,240 3,660 20,726
Gain on sale of fixed asset
investments.......................... 1,049 1,020 -- -- 2,069
------- ------- ------- ------- -------
(Loss)/profit on ordinary activities
before interest...................... (12,247) 29,142 2,240 3,660 22,795
Interest receivable and similar
income............................... 20,660 1,452 101 (22,008) 205
Interest payable and similar charges... (17,429) (21,903) (112) 22,008 (17,436)
------- ------- ------- ------- -------
(Loss)/profit on ordinary activities
before taxation................... (9,016) 8,691 2,229 3,660 5,564
Tax on (loss)/profit on ordinary
activities........................... -- (159) (610) -- (769)
------- ------- ------- ------- -------
(Loss)/profit on ordinary activities
after taxation.................... (9,016) 8,532 1,619 3,660 4,795
======= ======= ======= ======= =======
(Loss)/profit on ordinary activities
after taxation under U.K. GAAP....... (9,016) 8,532 1,619 3,660 4,795
Minority interest...................... -- -- -- (356) (356)
------- ------- ------- ------- -------
(Deficit)/retained profit in accordance
with U.K. GAAP....................... (9,016) 8,532 1,619 3,304 4,439
U.S. GAAP adjustments:
Goodwill amortization.................. -- (34,259) (1,778) -- (36,037)
System and product development costs:
-- capitalised during the period..... (2,396) (9,107) (303) 44 (11,762)
-- amortization...................... 2,276 4,317 1,715 -- 8,308
Revenue recognition.................... 867 16 (216) -- 667
Employee costs......................... (28) -- -- -- (28)
Income taxes........................... -- -- (7) -- (7)
Deferred indexing costs................ 312 -- -- -- 312
------- ------- ------- ------- -------
Net (loss)/income in accordance with
U.S. GAAP............................ (7,985) (30,501) 1,030 3,348 (34,108)
======= ======= ======= ======= =======
F-49
105
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 1997
-------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
------ ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
Turnover................................ 13,752 26,700 8,786 (3,156) 46,082
Cost of sales........................... (3,682) (10,364) (3,828) 708 (17,166)
------ ------- ------ ------ -------
Gross profit.......................... 10,070 16,336 4,958 (2,448) 28,916
Distribution costs...................... (3,031) (12,357) (1,642) 17 (17,013)
Administration expenses................. (4,999) (12,317) (3,572) (1,774) (22,662)
Amortization of development
costs/goodwill........................ (7,026) (4,382) (140) -- (11,548)
------ ------- ------ ------ -------
Operating (loss)...................... (4,986) (12,720) (396) (4,205) (22,307)
Exceptional item........................ 8,503 -- -- (4,468) 4,035
------ ------- ------ ------ -------
Profit/(loss) on ordinary activities
before interest....................... 3,517 (12,720) (396) (8,673) (18,272)
Interest receivable and similar
income................................ 2,975 80 38 (2,755) 338
Interest payable and similar charges.... (2,372) (2,767) (114) 2,755 (2,498)
------ ------- ------ ------ -------
Profit/(loss) on ordinary activities
before taxation.................... 4,120 (15,407) (472) (8,673) (20,432)
Tax on profit/(loss) on ordinary
activities............................ -- (220) (103) -- (323)
------ ------- ------ ------ -------
Profit/(loss) on ordinary activities
after taxation..................... 4,120 (15,627) (575) (8,673) (20,755)
====== ======= ====== ====== =======
Profit/(loss) on ordinary activities
after taxation under U.K. GAAP........ 4,120 (15,627) (575) (8,673) (20,755)
Minority interest....................... -- -- -- 11 11
------ ------- ------ ------ -------
Retained profit/(deficit) in accordance
with U.K. GAAP........................ 4,120 (15,627) (575) (8,662) (20,744)
U.S. GAAP adjustments:
Goodwill amortization................... -- (12,828) (1,778) -- (14,606)
Fair value adjustments.................. -- 3,029 -- -- 3,029
System and product development costs:
-- capitalised during the period...... (3,229) (579) (156) -- (3,964)
-- amortization....................... 7,026 4,382 140 -- 11,548
Revenue recognition..................... (142) (199) (64) -- (405)
Employee costs.......................... (23) -- -- -- (23)
Income taxes............................ -- -- (9) -- (9)
Deferred indexing costs................. (151) -- -- -- (151)
------ ------- ------ ------ -------
Net income/(loss) in accordance with
U.S. GAAP............................. 7,601 (21,822) (2,442) (8,662) (25,325)
====== ======= ====== ====== =======
F-50
106
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 1996
--------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
Turnover............................... 10,136 6,668 8,097 (3,458) 21,443
Cost of sales.......................... (3,594) (2,070) (2,714) 1,141 (7,237)
------- ------ ------ ------ -------
Gross profit......................... 6,542 4,598 5,383 (2,317) 14,206
Distribution costs..................... (3,112) (5,007) (1,814) -- (9,933)
Administration expenses................ (9,656) (3,817) (2,745) 6,243 (9,975)
Amortization of development
costs/goodwill....................... (1,982) -- (188) -- (2,170)
------- ------ ------ ------ -------
Operating (loss)/profit.............. (8,208) (4,226) 636 3,926 (7,872)
------- ------ ------ ------ -------
Interest receivable and similar
income............................... 1,014 5 8 -- 1,027
Interest payable and similar charges... (3) -- (186) -- (189)
------- ------ ------ ------ -------
(Loss)/profit on ordinary activities
before taxation................... (7,197) (4,221) 458 3,926 (7,034)
Tax on (loss)/profit on ordinary
activities........................... -- (3) (161) -- (164)
------- ------ ------ ------ -------
(Loss)/profit on ordinary activities
after taxation.................... (7,197) (4,224) 297 3,926 (7,198)
======= ====== ====== ====== =======
(Loss)/profit on ordinary activities
after taxation under U.K. GAAP....... (7,197) (4,224) 297 3,926 (7,198)
Minority interest...................... -- -- -- (28) (28)
------- ------ ------ ------ -------
(Deficit)/retained profit in accordance
with U.K. GAAP....................... (7,197) (4,224) 297 3,898 (7,226)
U.S. GAAP adjustments:
System and product development costs:
-- capitalised during the period..... (4,291) -- (24) -- (4,315)
-- amortization...................... 1,982 -- 188 -- 2,170
Revenue recognition.................... (251) (10) (695) -- (956)
Employee costs......................... (20) -- -- -- (20)
Income taxes........................... -- -- 62 -- 62
Deferred indexing costs................ (583) -- -- -- (583)
------- ------ ------ ------ -------
Net (loss)/income in accordance with
U.S. GAAP............................ (10,360) (4,234) (172) 3,898 (10,868)
======= ====== ====== ====== =======
F-51
107
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Trading transactions between the Parent, its Guarantor Subsidiaries and its
Non-Guarantor Subsidiaries have been treated as cash inflows and outflows from
operating activities. Movements in intercompany balances due to or from the
Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries have been treated
as cash inflows and outflows within "Financing -- Movement in net intercompany
receivables/payables."
FOR THE YEAR ENDED 31 DECEMBER 1998
--------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES......................................... (4,933) 30,983 4,337 3,764 34,151
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest received.................................. 49 103 53 -- 205
Interest paid on bank loans and overdrafts......... (15,245) (5) (1) -- (15,251)
Interest paid on finance leases.................... (45) -- (1) -- (46)
------- ------- ------ ------ -------
(15,241) 98 51 -- (15,092)
------- ------- ------ ------ -------
TAXATION
Taxation paid...................................... -- (164) (185) -- (349)
------- ------- ------ ------ -------
CAPITAL EXPENDITURE
Payments to develop intangible fixed assets........ (2,396) (6,546) (2,820) -- (11,762)
Payments to acquire tangible fixed assets.......... (836) (6,065) (322) -- (7,223)
Receipts from sale of tangible fixed assets........ 43 164 4 -- 211
------- ------- ------ ------ -------
(3,189) (12,447) (3,138) -- (18,774)
------- ------- ------ ------ -------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings................ (965) -- -- -- (965)
Cash impact of revisions to fair values............ -- (2,217) (67) -- (2,284)
Payment to acquire minority interests in a
subsidiary undertaking........................... -- (1,720) -- -- (1,720)
Net cash acquired with subsidiary undertakings..... -- -- (33) -- (33)
Purchase of share in joint venture................. (1,086) -- -- -- (1,086)
Expenses in connection with purchase of subsidiary
undertakings..................................... (471) -- -- -- (471)
Proceeds of sale of investments.................... 3,183 3,940 -- -- 7,123
------- ------- ------ ------ -------
661 3 (100) -- 564
------- ------- ------ ------ -------
CASH (OUTFLOW)/INFLOW BEFORE THE USE OF LIQUID
RESOURCES AND FINANCING............................ (22,702) 18,473 965 3,764 500
------- ------- ------ ------ -------
MANAGEMENT OF LIQUID RESOURCES
Cash withdrawn from deposit........................ -- -- 620 -- 620
------- ------- ------ ------ -------
FINANCING
Net proceeds on issue of Ordinary share capital.... 458 -- -- -- 458
Debt due within one year:
Repayment of loans............................... (9,551) -- -- -- (9,551)
Expenses on raising of Senior Credit Facility and
Senior Subordinated Notes........................ (29) -- -- -- (29)
Repayment of capital element of finance leases..... (545) -- (4) -- (549)
Movement in net intercompany
receivables/payables............................. 32,025 (29,087) 826 (3,764) --
------- ------- ------ ------ -------
22,358 (29,087) 822 (3,764) (9,671)
------- ------- ------ ------ -------
(DECREASE)/INCREASE IN CASH.......................... (344) (10,614) 2,407 -- (8,551)
======= ======= ====== ====== =======
Set out below is a summary statement of cashflows
under U.S. GAAP:
Net cash (used in)/provided by operating
activities....................................... (22,570) 24,371 1,383 3,764 6,948
Net cash used in investing activities.............. (132) (5,898) (418) -- (6,448)
Net cash provided by/(used in) financing
activities....................................... 22,358 (29,087) 822 (3,764) (9,671)
------- ------- ------ ------ -------
Net (decrease)/increase in cash and cash
equivalents...................................... (344) (10,614) 1,787 -- (9,171)
Cash and cash equivalents at beginning of period... 184 10,950 2,588 -- 13,722
Effect of foreign exchange rate changes............ (1) (31) (25) -- (57)
------- ------- ------ ------ -------
Cash and cash equivalents at end of period......... (161) 305 4,350 -- 4,494
------- ------- ------ ------ -------
F-52
108
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 1997
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
-------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
NET CASH INFLOW/(OUTFLOW) FROM OPERATING
ACTIVITIES........................................ 5,967 1,171 37 (4,000) 3,175
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Dividends received/(paid)......................... 69 -- (110) -- (41)
Interest received................................. 283 32 38 -- 353
Interest paid on bank loans and overdrafts........ (12) (573) -- -- (585)
Interest paid on finance leases................... -- -- (119) -- (119)
-------- ------ ------ ------- --------
340 (541) (191) -- (392)
-------- ------ ------ ------- --------
TAXATION
Taxation paid..................................... -- (111) (47) -- (158)
-------- ------ ------ ------- --------
CAPITAL EXPENDITURE
Payments to develop intangible fixed assets....... -- (566) (2,181) -- (2,747)
Payments to acquire tangible fixed assets......... (1,050) (344) (593) -- (1,987)
Receipts from sale of tangible fixed assets....... 112 16 50 -- 178
-------- ------ ------ ------- --------
(938) (894) (2,724) -- (4,556)
-------- ------ ------ ------- --------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings............... (262,623) -- -- -- (262,623)
Net cash acquired with subsidiary undertakings.... -- 11,215 692 -- 11,907
Purchase of share in joint venture................ (610) -- -- -- (610)
Expenses in connection with purchase of subsidiary
undertakings.................................... (3,857) -- -- -- (3,857)
Payments made in connection with transfer of
technology...................................... (562) -- -- -- (562)
-------- ------ ------ ------- --------
(267,652) 11,215 692 -- (255,745)
-------- ------ ------ ------- --------
CASH (OUTFLOW)/INFLOW BEFORE THE USE OF LIQUID
RESOURCES AND FINANCING........................... (262,283) 10,840 (2,233) (4,000) (257,676)
-------- ------ ------ ------- --------
MANAGEMENT OF LIQUID RESOURCES
Net receipts from sales of/(payments to acquire)
investments with original maturity of less than
one year........................................ 6,000 -- (620) -- 5,380
-------- ------ ------ ------- --------
FINANCING
Net proceeds on issue of Ordinary share capital... 111,302 -- -- -- 111,302
Net proceeds on issue of Senior Credit Facility... 52,836 -- -- -- 52,836
Net proceeds on issue of Senior Subordinated
Notes........................................... 102,844 -- -- -- 102,844
Expenses on issue of Ordinary share capital....... 736 -- (1,491) -- (755)
Expenses on raising of Senior Credit Facility and
Senior Subordinated Notes....................... (1,608) -- -- -- (1,608)
Repayment of capital element of finance leases.... (1,491) -- -- -- (1,491)
Movement in net intercompany
receivables/payables............................ (9,314) (118) 5,432 4,000 --
-------- ------ ------ ------- --------
255,305 (118) 3,941 4,000 263,128
-------- ------ ------ ------- --------
(DECREASE)/INCREASE IN CASH......................... (978) 10,722 1,088 -- 10,832
======== ====== ====== ======= ========
Set out below is a summary statement of cashflows
under U.S. GAAP:
Net cash provided by/(used in) operating
activities.................................... 6,307 (47) (2,382) (4,000) (122)
Net cash (used in)/provided by investing
activities.................................... (267,090) 10,887 149 -- (256,054)
Net cash provided by/(used in) financing
activities.................................... 255,305 (118) 3,941 4,000 263,128
-------- ------ ------ ------- --------
Net (decrease)/increase in cash and cash
equivalents................................... (5,478) 10,722 1,708 -- 6,952
Cash and cash equivalents at beginning of
period........................................ 5,513 20 1,005 -- 6,538
Effect of foreign exchange rate
changes....................................... 149 208 (125) -- 232
-------- ------ ------ ------- --------
Cash and cash equivalents at end of period...... 184 10,950 2,588 -- 13,722
-------- ------ ------ ------- --------
F-53
109
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 1996
--------------------------------------------------------------------
GUARANTOR NON-GUARANTOR CONSOLIDATED
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTALS
------- ------------ ------------- ------------ ------------
L'000 L'000 L'000 L'000 L'000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING
ACTIVITIES.............................. (6,053) (5,008) 1,220 4,000 (5,841)
RETURNS ON INVESTMENTS AND SERVICING OF
FINANCE
Interest received....................... 872 5 8 -- 885
Interest paid on bank loans and
overdrafts........................... (3) -- -- -- (3)
Interest paid on finance leases......... (12) -- (186) -- (198)
------- ------ ------ ------ -------
857 5 (178) -- 684
------- ------ ------ ------ -------
TAXATION
Taxation paid........................... -- -- (20) -- (20)
------- ------ ------ ------ -------
CAPITAL EXPENDITURE
Payments to develop intangible fixed
assets............................... (3,113) -- (124) -- (3,237)
Payments to acquire tangible fixed
assets............................... (1,429) (1,212) (913) -- (3,554)
Receipts from sale of tangible fixed
assets............................... 18 -- -- -- 18
------- ------ ------ ------ -------
(4,524) (1,212) (1,037) -- (6,773)
------- ------ ------ ------ -------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertakings..... (16) -- (34) -- (50)
------- ------ ------ ------ -------
CASH (OUTFLOW)/INFLOW BEFORE THE USE OF
LIQUID RESOURCES AND FINANCING.......... (9,736) (6,215) (49) 4,000 (12,000)
------- ------ ------ ------ -------
MANAGEMENT OF LIQUID RESOURCES
Net receipts from sales of investments
with original maturity of less than
one year............................. 15,646 -- -- -- 15,646
------- ------ ------ ------ -------
FINANCING
Net proceeds on issue of Ordinary share
capital.............................. (1,068) -- -- -- (1,068)
Repayment of capital element of finance
leases............................... -- -- (1,012) -- (1,012)
Movement in net intercompany
receivables/ payables................ (3,697) 6,002 1,695 (4,000) --
------- ------ ------ ------ -------
(4,765) 6,002 683 (4,000) (2,080)
------- ------ ------ ------ -------
INCREASE/(DECREASE) IN CASH............... 1,145 (213) 634 -- 1,566
======= ====== ====== ====== =======
Set out below is a summary statement of
cashflows under U.S. GAAP:
Net cash (used in)/provided by
operating activities............... (8,310) (5,003) 900 4,000 (8,413)
Net cash (used in)/provided by
investing activities............... (1,428) (1,212) (946) -- (3,586)
Net cash (used in)/provided by
financing activities............... (4,765) 6,002 682 (4,000) (2,081)
------- ------ ------ ------ -------
Net (decrease)/increase in cash and
cash equivalents................... (14,503) (213) 636 -- (14,080)
Cash and cash equivalents at
beginning of period................ 19,811 238 484 -- 20,533
Effect of foreign exchange rate
changes............................ 205 (5) (115) -- 85
------- ------ ------ ------ -------
Cash and cash equivalents at end of
period............................. 5,513 20 1,005 -- 6,538
------- ------ ------ ------ -------
F-54
110
ACCOUNTING GLOSSARY
Terms used in Annual Report US equivalent or brief description
Administration expenses General and administration expenses
Allotted Issued
Called up share capital Ordinary shares, issued and fully paid
Capital allowances Tax term equivalent to US tax depreciation
allowances
Cash at bank and in hand Cash
Class of business Industry segment
Creditors Accounts payable
Creditors: Amounts falling due after more Long-term liabilities
than one year
Creditors: Amounts falling due within one Current liabilities
year
Debtors Accounts receivable
(Deficit)/retained profit Net (loss)/income
Distribution costs Selling and marketing expenses
Destination (of revenue) The geographical area to which goods or
services are supplied
Finance lease Capital lease
Interest payable and other similar charges Interest expense
Interest receivable Interest income
Operating (loss)/profit (Loss)/income from operations
Profit Income
Profit and loss account Income statement
Profit and loss reserve (under 'capital and Retained earnings
reserves')
Share capital Ordinary shares, capital stock or common
stock issued and fully paid
Share premium account Additional paid-in capital or paid-in surplus
(not distributable)
Shares in issue Shares outstanding
Source (of revenue) The geographical area from which goods or
services are supplied to a third party or
another geographical area
Stocks Inventories
Tangible fixed assets Property and equipment
Taxation on (loss)/profit on ordinary (Provision)/benefit for income taxes
activities
Turnover Revenues
FINANCIAL DIARY FOR 1999
18 March Results for the year 1998 announced
28 May First quarter trading statement issued
7 June Annual Report posted to shareholders
1 July Annual General Meeting at The City Conference Centre,
The Institute of Marine Engineers' Memorial Building,
76 Mark Lane, London EC3R 7JN
Mid-August Results for the first six months of 1999 announced
Mid-November Third quarter trading statement issued
F-55
111
FIVE YEAR FINANCIAL SUMMARY
TOTAL TOTAL TOTAL TOTAL
CONTINUING RESTRUCTURING CONTINUING CONTINUING RESTRUCTURING CONTINUING
BUSINESS COSTS AND BUSINESS BUSINESS COSTS AND BUSINESS
BEFORE OTHER BEFORE BEFORE OTHER BEFORE
RESTRUCTURING EXCEPTIONAL RESTRUCTURING RESTRUCTURING EXCEPTIONAL RESTRUCTURING
COSTS ITEMS COSTS COSTS ITEMS COSTS
------------- ------------- ------------- ------------- ------------- -------------
1998 1997
--------------------------------------------- ---------------------------------------------
L000 L000 L000 L000 L000 L000
Turnover...................... 170,762 -- 170,762 46,082 -- 46,082
Cost of sales................. (71,618) -- (71,618) (17,166) -- (17,166)
--------- --------- --------- --------- --------- ---------
Gross Profit.................. 99,144 -- 99,144 28,916 -- 28,916
Distribution costs............ (21,605) 45 (21,560) (15,700) (1,313) (17,013)
Administrative expenses....... (44,170) (2,628) (46,798) (13,415) (9,247) (22,662)
Amortization of development
costs....................... (7,760) -- (7,760) (3,558) (7,990) (11,548)
Amounts written off
investments................. -- (2,300) (2,300) -- -- --
--------- --------- --------- --------- --------- ---------
Operating Profit/(Loss)....... 25,609 (4,883) 20,726 (3,757) (18,550) (22,307)
Gain on sale of fixed asset
investment.................. -- 2,069 2,069 -- 4,035 4,035
Interest receivable........... 205 -- 205 338 -- 338
Interest payable and similar
charges..................... (17,436) -- (17,436) (2,498) -- (2,498)
--------- --------- --------- --------- --------- ---------
Profit/(Loss) on Ordinary
Activities Before
Taxation.................... 8,378 (2,814) 5,564 (5,917) (14,515) (20,432)
Taxation on profit/(loss) on
ordinary activities......... (769) -- (769) (323) -- (323)
--------- --------- --------- --------- --------- ---------
Profit/(Loss) on Ordinary
Activities After Taxation... 7,609 (2,814) 4,795 (6,240) (14,515) (20,755)
Minority equity interests..... (356) -- (356) 11 -- 11
--------- --------- --------- --------- --------- ---------
Retained Profit/(Deficit)..... 7,253 (2,814) 4,439 (6,229) (14,515) (20,744)
--------- --------- --------- --------- --------- ---------
Earnings/(loss) per share
(pence)..................... 4.8 2.9 (6.2) (20.5)
--------- --------- --------- ---------
1996 1995 1994
------ ------ ------
L000 L000 L000
Turnover...................... 21,443 13,642 8,887
Cost of sales................. (7,237) (5,231) (3,628)
------ ------ ------
Gross Profit.................. 14,206 8,411 5,259
Distribution costs............ (9,933) (6,063) (1,443)
Administrative expenses....... (9,975) (5,742) (2,673)
Amortization of development
costs....................... (2,170) (744) (133)
Amounts written off
investments................. -- -- --
------ ------ ------
Operating Profit/(Loss)....... (7,872) (4,138) 1,010
Gain on sale of fixed asset
investment.................. -- -- --
Interest receivable........... 1,027 388 425
Interest payable and similar
charges..................... (189) (295) (150)
------ ------ ------
Profit/(Loss) on Ordinary
Activities Before
Taxation.................... (7,034) (4,045) 1,285
Taxation on profit/(loss) on
ordinary activities......... (164) 416 (406)
------ ------ ------
Profit/(Loss) on Ordinary
Activities After Taxation... (7,198) (3,629) 879
Minority equity interests..... (28) (5) 3
------ ------ ------
Retained Profit/(Deficit)..... (7,266) (3,634) 882
------ ------ ------
Earnings/(loss) per share
(pence)..................... (7.8) (4.4) 1.1
------ ------ ------
F-56