SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of September, 1998
--------------------
THE DIALOG CORPORATION PLC
(exact name of registrant as specified in its charter)
--------------------
THE COMMUNICATIONS BUILDING
48 LEICESTER SQUARE
LONDON WC2H 7DB, ENGLAND
(Address of Principal Executive Offices)
---------------------
Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F:
FORM 20-F |X| FORM 40-F|_|
Indicate by check mark whether the registrant by furnishing the
information contained in this form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934:
YES |_| NO |X|
THE DIALOG CORPORATION PLC
Form 6-K
TABLE OF CONTENTS
Part I
Page
1. Item 1 Financial statements
Consolidated Balance Sheets
at June 30, 1998 (unaudited) and December 31,1997 4
Consolidated Profit and Loss Accounts
for the three months ended June 30, 1998 and
1997 (unaudited) 5
Consolidated Statement of Total Recognized
Gains and Losses for the three months ended
June 30, 1998 and 1997 (unaudited) 6
Consolidated Profit and Loss Accounts
for the six months ended June 30, 1998 and
1997 (unaudited) 7
Consolidated Statement of Total Recognized
Gains and Losses for the six months ended
June 30, 1998 and 1997 (unaudited) 8
Consolidated Cash Flow Statements
for the six months ended June 30, 1998 and
1997 (unaudited) 9
Part II
1. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Part III
1. Legal Proceedings 20
INTRODUCTION
The Dialog Corporation plc (the "Registrant") is filing its
financial results for the second quarter ended June 30, 1998 with the
Securities and Exchange Commission on Form 6-K pursuant to the Rule 13a-6
or 15d-16 of the Securities Exchange Act of 1934. The documents contained
in this Report of Foreign Private Issuer on Form 6-K include: (i) the
Registrant's unaudited financial statements for the second quarter ended
June 30, 1998; (ii) "Management's Discussion and Analysis of Financial
Condition and Results of Operations"; and (iii) "Legal Proceedings."
Part I
1. FINANCIAL STATEMENTS FOR THE QUARTER ENDED JUNE 30, 1998
THE DIALOG CORPORATION PLC
CONSOLIDATED BALANCE SHEETS
30 June 31 December
1998 1997
(unaudited)
(pound)'000 (pound)'000
FIXED ASSETS
Intangible assets 22,084 21,624
Tangible assets 16,072 19,354
Investments 13,976 18,374
------------ --------------
52,132 59,352
------------ --------------
CURRENT ASSETS
Stocks 188 232
Debtors 46,753 43,820
Cash at bank and in hand 7,254 13,722
Assets held for resale 7,297 7,384
------------ --------------
61,492 65,158
CREDITORS (AMOUNTS FALLING
DUE WITHIN ONE YEAR) (45,650) (45,201)
------------ --------------
NET CURRENT ASSETS 15,842 19,957
------------ --------------
TOTAL ASSETS LESS CURRENT LIABILITIES 67,974 79,309
CREDITORS (AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR) (148,229) (162,681)
PROVISIONS FOR LIABILITIES AND CHARGES (3,535) (7,583)
------------ --------------
(83,790) (90,955)
============ ==============
CAPITAL AND RESERVES
Called up share capital 1,505 1,502
Share premium account 150,612 150,341
Profit and loss account (236,752) (243,524)
------------ --------------
ORDINARY SHAREHOLDERS' FUNDS (84,635) (91,681)
Minority interest 845 726
------------ --------------
TOTAL SHAREHOLDERS' FUNDS (83,790) (90,955)
============ ==============
THE DIALOG CORPORATION PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Business Business
performance performance
before after
exceptional Exceptional exceptional
restructuring restructuring restructuring
items items items
Three
months
ended
Three months ended June 30, 1998 June 30,
(unaudited) 1997
(unaudited)
(pound)000 (pound)000 (pound)000 (pound)000
Turnover 43,948 - 43,948 7,283
Cost of sales (18,782) - (18,782) (2,251)
---------------------------------- ----------
Gross profit 25,166 - 25,166 5,032
Distribution costs (5,503) 600 (4,903) (2,273)
Administrative expenses (10,193) 282 (9,911) (2,585)
Amortisation of development costs (2,997) - (2,997) (666)
---------------------------------- ----------
Operating profit/(loss) 6,473 882 7,355 (492)
Exceptional gain - gain on sale of
fixed asset investments/business 2,043 - 2,043 116
Net interest (payable)/receivable (4,257) - (4,257) 41
---------------------------------- ----------
Profit/(loss) on ordinary activities
before taxation 4,259 882 5,141 (335)
Taxation on profit/(loss) on
ordinary activities (556) - (556) (58)
---------------------------------- ----------
Profit/(loss) on ordinary activities
after taxation 3,703 882 4,585 (393)
Minority equity interests (11) - (11) (1)
---------------------------------- ----------
Retained profit/(loss) 3,692 882 4,574 (394)
================================== ==========
Earnings/(loss) per share (pence) 2.5 3.0 (0.4)
Earnings/(loss) per share excluding
exceptional gain (pence) 1.3 1.9 (0.3)
Shares used in computing
earnings/(loss) per
share (thousands) 150,396 150,396 93,112
THE DIALOG CORPORATION PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
Three Three
months months
ended ended
June 30, June 30,
1998 1997
(unaudited) (unaudited)
(pound)000 (pound)000
Retained profit/(loss) for the period 4,574 (394)
Consolidated translation differences on
foreign currency net investments (514) (159)
Total recognised gains and losses for the
period 4,060 (553)
=========== ===========
THE DIALOG CORPORATION PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Business Business
performance performance
before after
exceptional Exceptional exceptional
restructuring restructuring restructuring
items items items
Six months
ended
Six months ended June 30, 1998 June 30,
(unaudited) 1997
(unaudited)
(pound)000 (pound)000 (pound)000 (pound)000
Turnover 88,752 - 88,752 14,037
Cost of sales (38,262) - (38,262) (4,548)
--------------------------------- ----------
Gross profit 50,490 - 50,490 9,489
Distribution costs (10,706) 147 (10,559) (4,609)
Administrative expenses (22,038) 74 (21,964) (5,225)
Amortisation of development costs (4,440) - (4,440) (1,360)
---------------------------------- ----------
Operating profit/(loss) 13,306 221 13,527 (1,705)
Exceptional gain - gain on sale of
fixed asset investments/business 2,043 - 2,043 3,614
Net interest (payable)/receivable (8,581) - (8,581) 104
Profit/(loss) on ordinary activities
before taxation 6,768 221 6,989 2,013
Taxation on profit/(loss) on
ordinary activities (762) - (762) (1,179)
---------------------------------- ----------
Profit/(loss) on ordinary activities
after taxation 6,006 221 6,227 834
Minority equity interests (127) - (127) (12)
--------------------------------- ----------
Retained profit/(loss) 5,879 221 6,100 822
================================= ==========
Earnings/(loss) per share (pence) 3.9 4.1 0.9
Earnings/(loss) per share excluding
exceptional gain (pence) 2.7 2.9 (1.9)
Shares used in computing
earnings/(loss) per
share (thousands) 150,323 150,323 92,917
THE DIALOG CORPORATION PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
Six Six
months months
ended ended
June 30, June 30,
1998 1997
(unaudited) (unaudited)
(pound)000 (pound)000
Retained profit/(loss) for the period 6,100 822
Consolidated translation differences on
foreign currency net investments 672 (51)
Total recognised gains and losses for the
period 6,772 771
========= =======
THE DIALOG CORPORATION PLC
CONSOLIDATED CASH FLOW STATEMENTS
Six Six
months months
ended ended
30 June 30 June
1998 1997
(unaudited) (unaudited)
(pound)'000 (pound)'000
NET CASH INFLOW FROM OPERATING ACTIVITIES 8,295 583
--------- ----------
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Dividends paid to minority shareholders in
subsidiary undertaking - (18)
Interest received 302 145
Interest paid on bank loans and overdrafts (8,285) (1)
Interest paid on finance leases (29) (70)
-------- ----------
(8,012) 56
-------- ----------
TAXATION PAID (56) (44)
--------- ----------
CAPITAL EXPENDITURE
Payments to develop intangible assets (4,552) (1,319)
Payments to acquire tangible fixed assets (1,161) (1,211)
Receipts from sales of tangible fixed assets 23 132
(5,690) (2,398)
--------- ----------
ACQUISITIONS AND DISPOSALS
Purchase of share in joint venture (723) -
Expenses in connection with purchase of
subsidiary undertakings (407) -
Proceeds from sale of investments 7,228 -
-------- -----------
6,098 -
--------- ----------
CASH INFLOW/(OUTFLOW) BEFORE THE USE
OF LIQUID RESOURCES AND FINANCING 635 (1,803)
--------- ----------
MANAGEMENT OF LIQUID RESOURCES
Net receipts from sales of investments
with original maturity date of less
than one year 620 4,500
--------- ----------
FINANCING
Net proceeds on issue of Ordinary share capital 274 551
Repayment of loans (6,907) -
Repayment of capital element of finance leases (276) (901)
-------- ---------
(6,909) (350)
--------- ----------
(DECREASE)/INCREASE IN CASH (5,654) 2,347
========= ==========
RECONCILIATION OF NET CASH FLOW TO
MOVEMENT IN NET (DEBT)/FUNDS
(Decrease)/increase in cash in the period (5,654) 2,347
Cash used to decrease lease financing 276 901
Cash used to repay loans 6,907 -
Increase in liquid resources and
cash deposits with original maturity
date of less than one year (620) (4,500)
--------- ----------
Change in net debt from cash flows 909 (1,252)
Other non-cash changes 471 -
New finance leases - (107)
Effect of foreign exchange rate changes 652 (95)
--------- ----------
Movement in net (debt)/funds in period 2,032 (1,454)
Net (debt)/funds at beginning of period (145,904) 5,888
-------- ----------
Net (debt)/funds at end of period (143,872) 4,434
========= ==========
These results are unaudited and do not constitute statutory accounts within
the meaning of Section 240 of the Companies Act 1985.
The financial statements for the year ended December 31, 1997 have been
reported on by the Company's auditors, Price Waterhouse, and delivered to
the Registrar of Companies.The audit report was not qualified and neither
did it contain any statements under Section 237 (2) or (3) of the Companies
Act 1985.The unaudited results for the six months ended June 30, 1998 have
been prepared in accordance with the accounting policies stated in the 1997
Annual Report and Accounts.
Part II
2. 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. 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 elsewhere in this Form 6-K. The Company's Consolidated
Financial Statements have been prepared in accordance with U.K. GAAP, which
differs in certain significant respects from U.S. GAAP. 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 30 to the Consolidated
Financial Statements of the Company for the year ended 31 December 1997.
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 the
Company's acquisition of Knight-Ridder Information, Inc. and Knight-Ridder
Information AG (collectively, "KRII"). 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 will
be amortized over their ensuing life of three to 40 years.
The operating results for KRII have been included from the date of
acquisition, November 14, 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 February 20, 1998, on file with the Securities
and Exchange Commission.
SUMMARY
Group sales of (pound)43.9 million in the three months ended June
30, 1998, which includes (pound)36.6 million of revenues generated by
companies acquired, reflected an overall increase of 503% over the three
months ended June 30, 1997. Group sales of (pound)88.8 million in the six
months ended June 30, 1998, which includes (pound)74.9 million of revenues
generated by companies acquired, reflected an overall increase of 532% over
the six months ended June 30, 1997.
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
the "Liquidity and Capital Resources" section.
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 is the U.S. Dollar
and the Swiss Franc.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
TURNOVER. Turnover of (pound)43.9 million in the three months ended
June 30, 1998 reflected an overall increase of (pound)36.7 million when
compared to the same period in 1997. Turnover of (pound)88.8 million in the
six months ended June 30, 1998 reflected an overall increase of (pound)74.7
million when compared to the same period in 1997.
The mix of revenues has already been impacted by the addition of
the KRII revenue stream with effect from November 14, 1997. Usage revenues,
subscription revenues and other income amounted to 92%, 4% and 4%
respectively of total revenues during the three months ended June 30, 1998;
this compares with 39%, 46% and 15% respectively during the three months
ended June 30, 1997. Usage revenues, subscription revenues and other income
amounted to 92%, 5% and 3% respectively of total revenues during the six
months ended June 30, 1998; this compares with 40%, 49% and 11%
respectively during the six months ended June 30, 1997. The KRII revenue
stream is predominately usage-based, which means that for future periods
the Group's revenue mix will continue to be weighted towards usage.
As a result of the acquisition, the Group has approximately 20,000
corporate customers. The Company's key strategy is to promote its enlarged
content offering with differing pricing alternatives to provide greater
value to each customer and consequently earn greater average revenue per
customer. This should have the effect of increasing usage revenues as a
percentage of total revenues for future years. The consequence of this will
be to reduce the Group's gross margin, as usage revenues incur a smaller
margin than subscription revenues which have negligible associated costs.
Other revenues in the three months ended June 30, 1998 amounted to
(pound)1.7 million compared to (pound)1.1 million in the three months ended
June 30, 1997. Other revenues in the six months ended June 30, 1998
amounted to (pound)2.9 million compared to (pound)1.5 million in the six
months ended June 30, 1997. In the three months and six months ended June
30, 1998, other revenues were principally generated from Trade UK, Fourth
Communications Network, Inc. ("4th Network"), and Muscat Limited, further
details of which are given below. Other revenues in the three months and
six months ended June 30, 1997 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. In the second quarter of 1998 the
Company recognized (pound)0.7 million of fees arising from the operation of
Trade UK, the U.K. Department of Trade and Industry's online export sales
lead service; the Company also recognized (pound)0.4 million of guaranteed
minimum royalties from 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; and the acquisition of Muscat Ltd. added
(pound)0.3 million of predominantly royalty-related sales. In the first
half of 1998 the Company recognized (pound)0.8 million of fees arising from
the operation of Trade UK; the Company also recognized (pound)0.9 million
of guaranteed minimum royalties from 4th Network; and the acquisition of
Muscat Ltd. added (pound)0.6 million of predominantly royalty-related
sales. These revenues are derived from a strong customer base and typically
have a very high gross margin.
Under U.K. GAAP, subscription revenues are recognized when
contractually due and invoiced and the Company provides in full for the
cost of 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.
GEOGRAPHICAL ANALYSIS OF TURNOVER. Turnover from overseas
operations outside the United Kingdom increased by 761% from (pound)4.3
million in the three months ended June 30, 1997 to (pound)37.0 million in
the three months ended June 30, 1998. Overseas revenues represented 84% of
total revenues for the second quarter of 1998, compared with 60% for the
second quarter of 1997. Turnover from overseas operations outside the
United Kingdom increased by 751% from (pound)8.7 million in the six months
ended June 30, 1997 to (pound)74.0 million in the six months ended June 30,
1998. Overseas revenues represented 83% of total revenues for the first
half of 1998, compared with 62% for the first half of 1997.
The increase in revenues from overseas operations is mainly
attributable to North America, where revenues increased by 955% in the
second quarter of 1998 compared to the same period in 1997, and increased
by 963% in the first half of 1998 compared to the same period in 1997. This
resulted from the acquisition of KRII, whose North American revenues
constituted approximately 52% during the second quarter of 1998, and
approximately 51% during the first half of 1998.
The Company expects revenues from overseas operations to increase
as a percentage of total turnover in the future. As a result of the
acquisition of KRII, the Group is the largest online general reference
service in the US, the largest archival service in Europe and provides the
largest English-language service in Japan (source: Simba Information,
Inc.).
COST OF SALES. Costs of sales increased by 734% from (pound)2.3
million in the three months ended June 30, 1997 to (pound)18.8 million in
the three months ended June 30, 1998 and represented 31% and 43% of total
turnover respectively. Costs of sales increased by 730% from (pound)4.6
million in the six months ended June 30, 1997 to (pound)38.2 million in the
six months ended June 30, 1998 and represented 33% and 43% of total
turnover respectively. Cost of sales consists primarily of royalties paid
by the Group to content publishers whose information is downloaded by a
user through the Group's service, 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.
Subscription revenues have minimal cost of sales associated with
them. In contrast, the Group pays a significant percentage of usage
revenues to the content publishers. The gross margin decreased from 69% in
the three months ended June 30, 1997 to 57% in the three months ended June
30, 1998. The gross margin decreased from 67% in the six months ended June
30, 1997 to 57% in the six months ended June 30, 1998. These decreases are
due to the far smaller subscription and alliance component of the revenues
following the acquisition of KRII.
OPERATING COSTS (EXCLUDING AMORTIZATION OF DEVELOPMENT COSTS AND
RESTRUCTURING COSTS). One of the benefits to be derived from the Company's
acquisition of KRII was the opportunity to make significant savings in the
operating costs of the combined businesses. By reducing the scale of
duplicated functions and by aligning product offerings, management
anticipated an annualized reduction in operating costs of (pound)21 million
in the first full year. Following extensive pre-acquisition planning,
management effected a 24% reduction in the workforce on November 21, 1997,
a week after the date of acquisition. Furthermore, throughout the
acquisition process both companies experienced a higher than average
natural attrition of staff, which both companies accepted more readily as
the probability of a successful acquisition increased. As a result, the
combined operating costs of the two businesses was reduced by approximately
35% during the three months ended June 30, 1998 when compared to the three
months ended June 30, 1997. The combined operating costs of the two
businesses was similarly reduced, by approximately 38%, during the six
months ended June 30, 1998 when compared to the six months ended June 30,
1997. Management estimates that when compared to the combined cost base of
M.A.I.D and KRII before the acquisition process, the Group's cost base was
at least $35 million lower, on an annualized basis, from the start of 1998.
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. Due to the acquisition of KRII, distribution
costs increased from (pound)2.3 million for the three months ended June 30,
1997 to (pound)5.5 million for the three months ended June 30, 1998. Due to
the same reason, distribution costs increased from (pound)4.6 million for
the six months ended June 30, 1997 to (pound)10.7 million for the six
months ended June 30, 1998. The Group has approximately 470 sales personnel
and is currently represented in 37 countries.
ADMINISTRATIVE EXPENSES. Administrative expenses for the continuing
business (before restructuring costs), increased from (pound)2.6 million in
the three months ended June 30, 1997 to (pound)10.2 million in the three
months ended June 30, 1998. Administrative expenses for the continuing
business (before restructuring costs), increased from (pound)5.2 million in
the six months ended June 30, 1997 to (pound)22.0 million in the six months
ended June 30, 1998. Administrative expenses consist of all facilities
costs (including the Group's main offices in London, Mountain View,
California and Berne, Switzerland, which house the Group's management,
sales, administrative and editorial staff, and the Group'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 telecommunication and processing charges included
in cost of sales as described above).
The integration of KRII and M.A.I.D involved a reduction in
workforce 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. Such
reduction in staff levels and facilities has led to significant savings in
administration expenses.
AMORTIZATION OF PRODUCT DEVELOPMENT COSTS (EXCLUDING RESTRUCTURING
COSTS). The amortization of capitalized product development costs for the
Group increased from (pound)0.7 million in the three months ended June 30,
1997 to (pound)3.0 million in the three months ended June 30, 1998. The
amortization of capitalized product development costs for the Group
increased from (pound)1.4 million in the six months ended June 30, 1997 to
(pound)4.4 million in the six months ended June 30, 1998. The increases
reflect a charge for the capitalized costs relating to Profound LiveWire
and Profound Intranets, both made available for commercial release during
September 1997, and development costs associated with the KRII business
following the acquisition in November 1997. All product development costs
are amortized over 36 months with effect from the date of commercial
release in accordance with the Company's stated accounting policy.
OPERATING PROFIT. The Company's operations resulted in an operating
profit of (pound)7.4 million, including a net exceptional restructuring
credit associated with the integration of KRII totaling approximately
(pound)0.9 million, for the three months ended June 30, 1998 as compared
with an operating loss of (pound)0.5 million for the three months ended
June 30, 1997. The Company's operations resulted in an operating profit of
(pound)13.5 million, including a net exceptional restructuring credit
associated with the integration of KRII totaling approximately (pound)0.2
million, for the six months ended June 30, 1998 as compared with an
operating loss of (pound)1.7 million for the six months ended June 30,
1997.
During the second quarter of 1998, certain restructuring provisions
established at 31 December 1997 ((pound)1.0 million) have been released.
This has been offset by exceptional restructuring charges not specifically
provided for but incurred during the three months and six months ended June
30, 1998.
EXCEPTIONAL GAIN. The exceptional gain totaling (pound)2.0 million
recognized in the three months ended June 30, 1998 related to the sale of
the Company's investments in NewsEDGE, Inc. and Easynet plc in May 1998.
The exceptional gain totaling (pound)0.1 million recognized in the
three months ended June 30, 1997 related to the net gain on the
reassignment of M.A.I.D's Japanese agency. The exceptional gain totaling
(pound)3.6 million recognized in the six months ended June 30, 1997 also
included (pound)3.5 million relating to the transfer of M.A.I.D's "Interest
in Hotel" technology and distribution contracts to 4th Network.
INTEREST INCOME AND INTEREST EXPENSE. Net interest payable
increased to (pound)4.3 million in the three months ended June 30, 1998 as
compared to net interest receivable of (pound)0.1 million in the three
months ended June 30, 1997. Net interest payable increased to (pound)8.6
million in the six months ended June 30, 1998 as compared to net interest
payable of (pound)0.1 million in the six months ended June 30, 1997. These
increases reflect the costs of servicing the debt finance incurred to fund
the acquisition of KRII.
In order to finance the acquisition, the Company raised a total of
(pound)165.6 million of debt, together with a revolving credit facility of
(pound)14.9 million which remained undrawn on acquisition and has remained
undrawn through to the date of this report. The debt raised includes a
(pound)56.2 million senior secured facility, upon which interest is
calculated at the rate of 2.25 percentage points over U.S. LIBOR. In May
1998, the Company used the proceeds arising on the disposal of its
investments in NewsEDGE, Inc. and Easynet plc to repay (pound)6.9 million
of senior secured debt.
The balance of (pound)109.4 million relates to the subordinated
loan notes, which are traded on the London Stock Exchange, and carry a
fixed interest rate of 11%.
TAXATION. The Group's tax charge for the three months and six
months ended June 30, 1997 and 1998 related mainly to tax arising on the
profitable performance of its foreign sales subsidiaries as well as capital
gains taxes arising on the exceptional items. At December 1997, the Group
had total net operating tax losses carried forward of approximately
(pound)13 million in the U.K. and $6 million in the U.S.
The acquisition of KRII resulted in goodwill of (pound)209 million.
Although this amount has been written off to reserves in accordance with
U.K. GAAP, U.S. tax treatment allows a tax deduction to be taken for
goodwill over a 15-year period. As the acquisition was made through The
Dialog Corporation Inc., a wholly-owed 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations through
issuances of capital stock, capital equipment leases and cash generated
from operations. The Group had cash at bank and in hand of approximately
(pound)7.3 million and (pound)13.7 million at June 30, 1998 and December
31, 1997, respectively.
The Group's operating activities generated net cash of (pound)8.3
million and (pound)0.6 million during the six months ended June 30, 1998
and 1997 respectively. The cash generated in the first half of 1998 of
(pound)8.3 million resulted from a positive operating profit before
depreciation and amortization. The Group's working capital balances have
increased significantly due to the acquisition of KRII.
The Group incurred net capital expenditure of (pound)5.7 million
and (pound)2.4 million during the six months ended June 30, 1998 and 1997
respectively. The increase in capital expenditure largely arises due to the
acquisition of KRII.
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.
The net cash outflows from financing activities amounted to
(pound)6.9 million during the six months ended June 30, 1998. This outflow
arises from the senior debt repaid during the second quarter ahead of plan.
The net cash outflows from financing activities amounted to (pound)0.3
million during the six months ended June 30, 1997. On November 14, 1997,
the Company acquired KRII for a net consideration of (pound)261.3 million.
The purchase consideration and certain related expenses were financed by
means of a private placement of shares, a senior credit facility and an
issue of senior subordinated notes which raised net proceeds, after the
deduction of certain expenses, of (pound)110.7 million, (pound)52.8 million
and (pound)102.8 million respectively.
As a result of this acquisition, the Company now has substantial
indebtedness. At June 30, 1998, the Group had cash at bank and in hand of
approximately (pound)7.3 million, (pound)14.0 million available for
borrowing under a revolving credit facility and total indebtedness of
approximately (pound)150.6 million. The Group's future liquidity needs are
expected to be the service costs associated with this indebtedness,
expenses related to the reorganization of the enlarged group, future
working capital needs and the funding of capital expenditure and
investments.
In particular, the principal and interest payments under the senior
credit facility and the senior subordinated notes represent significant
liquidity requirements for the Company. The Company was initially required
to make principal payments totaling (pound)55.2 million over the five-year
life of the senior credit facility. On June 12, 1998, the Company repaid
(pound)6.9 million. As a result of this prepayment, the Company is now
committed to six-monthly principal repayments commencing in November 1998.
The Group's capital expenditure requirements are primarily for
computer equipment for the Group's data centers and other operations,
related software, leasehold improvement and office equipment. For 1998, the
Group estimates that its total capital expenditure requirements will range
between (pound)8.6 million and (pound)10.1 million. In addition, the group
has 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 Ltd. through to 2001 (approximately (pound)2.7
million at June 30, 1998); and (ii) to pay (pound)1.8 million in October
1998 for the final installment for the purchase price and other obligations
relating to the acquisition of CARL Corporation and The Uncover Company. In
connection with equity investments made by KRII, the Group has made
available lines of credit totaling $3.5 million ((pound)2.1 million) to
Frost & Sullivan and Teltech Resource Network Corporation. To date, there
have been no borrowings under these lines. In addition, under the terms of
a joint venture agreement with Frost & Sullivan, the Company is committed
to provide monthly funding of $200,000 ((pound)120,000) for a further
period of twelve months from June 30, 1998.
The Group's principal source of cash to fund its liquidity needs
will be net cash from operating activities and borrowing under its
revolving credit facility. The Company believes that these sources will be
adequate to meet its anticipated future requirements for working capital,
capital expenditure, reorganization expenses, and scheduled payments of
principal and interest on its existing indebtedness for the foreseeable
future.
INVESTMENTS. Following the acquisition of KRII, the Group had
(pound)14.0 million of investments as at 30 June 1998. These include
strategic investments in non-quoted companies including Frost & Sullivan, a
leading market research Company, a joint venture with Frost & Sullivan, and
Teltech Resources, a redistributor of DIALOG content. The Company also has
a non-quoted investment in 4th Network. The Group disposed of its quoted
investments in Easynet Group plc and NewsEDGE Corporation in May 1998 for
net proceeds, after associated expenses, of (pound)7.2 million. This
resulted in an aggregate book profit on disposal of (pound)2.0 million.
ASSETS HELD FOR RESALE. Included within current assets in the
Group's balance sheet is the estimated value of non-core businesses
comprising CARL library system and Uncover document delivery. These
companies were acquired with the KRII business but identified by management
as not being core to the enlarged Group's strategy or the provision of
professional online information. After considerable evaluation, the
companies were put up for sale at the end of February, 1998. The balance
sheet value of these companies reflects management's most recent estimate
of anticipated disposal proceeds, less a provision for anticipated disposal
costs. To the extent that a different disposal price is achieved, such
difference arising will be taken directly to reserves. In accordance with
U.K. GAAP, the results of the non-core businesses for the period beginning
November 14, 1997 have been excluded from the consolidated profit and loss
account. It is anticipated that the net proceeds arising on disposal, if
completed, will be used to accelerate the repayment of the Company's senior
debt.
PART III
3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to legal proceedings
that are considered to be ordinary routine litigation incidental to their
business and not material to the Company's consolidated group's (the
"Group") 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 many have had,
during the 12 months immediately preceding the date of this document, a
significant material adverse effect on the financial position of the Group
nor (so far as the Company is aware) are such proceedings pending or
threatened by or against any company in the Group.
On October 22, 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 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 certain equitable relief including a preliminary and
permanent injunction against Knight-Ridder Information in connection with
such document delivery activities, as well as restitution, statutory
damages and unspecified actual damages. The plaintiffs filed a motion for
preliminary injunction on January 9, 1998. On April 10, 1998 the Court
denied the plaintiff's motion for preliminary injunction. Management
intends to defend this matter vigorously in the event that an acceptable
settlement cannot be reached. However, due to the early state of the
proceeding, management is unable to assess the impact that the resolution
of the lawsuit will have on the Company's combined financial position or
combined results of operations.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: September 30, 1998 THE DIALOG CORPORATION PLC
By: /s/ David G. Mattey
_______________________
David G. Mattey
Finance Director