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 November 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 September 30, 1998 (unaudited) and
December 31,1997 4
Consolidated Profit and Loss Accounts
for the three months ended September 30, 1998
and 1997 (unaudited) 5
Consolidated Statement of Total Recognized Gains
and Losses for the three months ended
September 30, 1998 and 1997 (unaudited) 6
Consolidated Profit and Loss Accounts
for the nine months ended September 30, 1998
and 1997 (unaudited) 7
Consolidated Statement of Total Recognized Gains
and Losses for the nine months ended
September 30, 1998 and 1997 (unaudited) 8
Consolidated Cash Flow Statements for
the nine months ended September 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 third quarter ended September 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 third quarter ended September 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 SEPTEMBER 30, 1998
THE DIALOG CORPORATION PLC
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
(unaudited) (unaudited)
(pound)'000 (pound)'000
FIXED ASSETS
Intangible assets 22,473 21,624
Tangible assets 15,332 19,354
Investments 14,146 18,374
--------- ---------
51,951 59,352
--------- ---------
CURRENT ASSETS
Stocks 212 232
Debtors 44,530 43,820
Cash at bank and in hand 7,512 13,722
Assets held for resale 7,118 7,384
--------- ---------
59,372 65,158
CREDITORS (amounts falling due
within one year) (45,249) (45,201)
--------- ---------
NET CURRENT ASSETS 14,123 19,957
--------- ---------
TOTAL ASSETS LESS CURRENT LIABILITIES 66,074 79,309
CREDITORS (amounts falling due after
more than one year) (144,269) (162,681)
Provisions for liabilities and charges (3,149) (7,583)
--------- ---------
(81,344) (90,955)
========= =========
CAPITAL AND RESERVES
Called up share capital 1,507 1,502
Share premium account 150,928 150,341
Profit and loss account (234,628) (243,524)
--------- ---------
Ordinary shareholders' funds (82,193) (91,681)
Minority interest 849 726
--------- ---------
Total shareholders' funds (81,344) (90,955)
========= =========
THE DIALOG CORPORATION PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Business Business
performance performance
before after
exceptional Exceptional exceptional
restructuring restructuring restructuring Three months
items items items ended
---------------------------------------------- September 30,
| Three months ended September 30, 1998 | 1997
| (unaudited) | (unaudited)
---------------------------------------------- -------------
(pound)000 (pound)000 (pound)000 (pound)000
Turnover 42,435 - 42,435 7,373
Cost of sales (18,444) - (18,444) (2,244)
-------- ------- -------- -------
Gross profit 23,991 - 23,991 5,129
Distribution costs (5,922) - (5,922) (2,294)
Administrative expenses (9,786) (1,619) (11,405) (2,649)
Amortization of development costs (1,554) - (1,554) (799)
------- ------- -------- -------
Operating profit/(loss) 6,729 (1,619) 5,110 (613)
Exceptional gain - gain on sale
of fixed asset investments/business 26 - 26 26
Net interest (payable)/receivable (4,149) - (4,149) 21
------- ------- -------- -------
Profit/(loss) on ordinary
activities before taxation 2,606 (1,619) 987 (566)
Taxation on profit/(loss) on
ordinary activities (136) - (136) 286
------- ------- -------- -------
Profit/(loss) on ordinary
activities after taxation 2,470 (1,619) 851 (280)
Minority equity interests (18) - (18) (10)
------- ------- -------- -------
Retained profit/(loss) 2,452 (1,619) 833 (290)
======= ======= ======== =======
Earnings/(loss) per share (pence) 1.6 0.6 (0.3)
Earnings/(loss) per share
excluding exceptional gain (pence) 1.8 0.7 (0.7)
Shares used in computing
earnings/(loss) per share
(thousands) 150,606 150,606 94,370
THE DIALOG CORPORATION PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
Three months ended Three months ended
September 30, 1998 September 30, 1997
(unaudited) (unaudited)
(pound)000 (pound)000
Retained profit/(loss)
for the period 833 (290)
Consolidated translation
differences on foreign
currency net investments 1,291 361
------------ ------------
Total recognized gains and
losses for the period 2,124 71
============ ============
THE DIALOG CORPORATION PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
Business Business
performance performance
before after
exceptional Exceptional exceptional
restructuring restructuring restructuring Nine months
items items items ended
--------------------------------------------- September30,
| Nine months ended September 30, 1998 | 1997
| (unaudited) | (unaudited)
--------------------------------------------- ------------
(pound)000 (pound)000 (pound)000 (pound)000
Turnover 131,187 - 131,187 21,411
Cost of sales (56,706) - (56,706) (6,792)
-------- ------- ------- -------
Gross profit 74,481 - 74,481 14,619
Distribution costs (16,628) 147 (16,481) (6,903)
Administrative expenses (31,824) (1,545) (33,369) (7,874)
Amortization of development costs (5,994) - (5,994) (2,159)
-------- ------- ------- -------
Operating profit/(loss) 20,035 (1,398) 18,637 (2,317)
Exceptional gain - gain on sale
of fixed asset investments/business 2,069 - 2,069 3,614
Net interest (payable)/receivable (12,730) - (12,730) 125
-------- ------- -------- -------
Profit/(loss) on ordinary
activities before taxation 9,374 (1,398) 7,976 1,422
Taxation on profit/(loss) on
ordinary activities (898) - (898) (893)
-------- ------- -------- -------
Profit/(loss) on ordinary
activities after taxation 8,476 (1,398) 7,078 529
Minority equity interests (145) - (145) (23)
-------- ------- -------- -------
Retained profit/(loss) 8,331 (1,398) 6,933 506
======== ======= ======== =======
Earnings/(loss) per share (pence) 5.5 4.6 0.5
Earnings/(loss) per share
excluding exceptional gain (pence) 4.3 3.4 (2.5)
Shares used in computing
earnings/(loss) per share
(thousands) 150,418 150,418 94,370
THE DIALOG CORPORATION PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
(unaudited) (unaudited)
(pound)000 (pound)000
Retained profit/(loss) 6,933 506
for the period
Consolidated translation
differences on foreign
currency net investments 1,963 336
------------ ------------
Total recognized gains and
losses for the period 8,896 842
============ ============
THE DIALOG CORPORATION PLC
CONSOLIDATED CASH FLOW STATEMENTS
Nine months Nine months
ended ended
September September
30, 1998 30, 1997
(unaudited) (unaudited)
(pound)'000 (pound)'000
NET CASH INFLOW FROM OPERATING
ACTIVITIES 15,646 373
-------- --------
RETURNS ON INVESTMENTS AND SERVICING
OF FINANCE
Dividends paid to minority shareholders
in subsidiary undertaking -- (17)
Interest received 308 300
Interest paid on bank loans and
overdrafts (9,072) (1)
Interest paid on finance leases (39) (98)
-------- --------
(8,803) 184
-------- --------
TAXATION PAID (32) (54)
-------- --------
CAPITAL EXPENDITURE
Payments to develop intangible assets (9,165) (1,822)
Payments to acquire tangible fixed
assets (2,405) (1,581)
Receipts from sales of tangible
fixed assets 31 161
-------- --------
(11,539) (3,242)
-------- --------
ACQUISITIONS AND DISPOSALS
Purchase of subsidiary undertaking -- (1,319)
Net cash acquired with subsidiary
undertakings -- 690
Purchase of share in joint venture (1,086) (368)
Expenses in connection with purchase
of subsidiary undertakings (472) (203)
Proceeds from sale of investments 7,122 --
-------- --------
5,564 (1,200)
-------- --------
CASH INFLOW/(OUTFLOW) BEFORE THE USE
OF LIQUID RESOURCES AND FINANCING 836 (3,939)
-------- --------
MANAGEMENT OF LIQUID RESOURCES
Net receipts from sales of investments
with original maturity date of less
than one year 620 6,000
-------- --------
FINANCING
Net proceeds on issue of Ordinary
share capital 458 585
Repayment of loans (6,907) --
Repayment of capital element of
finance leases (321) (1,195)
-------- --------
(6,770) (610)
-------- --------
(DECREASE)/INCREASE IN CASH (5,314) 1,451
======== ========
RECONCILIATION OF NET CASH FLOW TO
MOVEMENT IN NET (DEBT)/FUNDS
(Decrease)/increase in cash in the
period (5,314) 1,451
Cash used to decrease lease financing 321 1,195
Cash used to repay loans 6,907 --
Increase in liquid resources and cash
deposits with original maturity
date of less than one year (620) (6,000)
-------- --------
Change in net debt from cash flows 1,294 (3,354)
Other non-cash changes (709) --
New finance leases -- (107)
Effect of foreign exchange rate changes 5,307 (34)
-------- --------
Movement in net (debt)/funds in period 5,892 (3,495)
Net (debt)/funds at beginning of period (145,904) 5,888
-------- --------
Net (debt)/funds at end of period (140,012) 2,393
======== ========
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 (now PricewaterhouseCoopers), 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 nine months ended
September 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 consolidated group's (the "Group")
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 December 31, 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)42.4 million in the three months ended
September 30, 1998, which includes (pound)35.0 million of revenues
generated by companies acquired, reflected an overall increase of 475% over
the three months ended September 30, 1997. Group sales of (pound)131.2
million in the nine months ended September 30, 1998, which includes
(pound)109.9 million of revenues generated by companies acquired, reflected
an overall increase of 513% over the nine months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
TURNOVER. Turnover of (pound)42.4 million in the three months ended
September 30, 1998 reflected an overall increase of (pound)35.0 million
when compared to the same period in 1997. Turnover of (pound)131.2 million
in the nine months ended September 30, 1998 reflected an overall increase
of (pound)109.8 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 91%, 5% and 4%
respectively of total revenues during the three months ended September 30,
1998; this compares with 37%, 46% and 17% respectively during the three
months ended September 30, 1997. Usage revenues, subscription revenues and
other income amounted to 92%, 4% and 4% respectively of total revenues
during the nine months ended September 30, 1998; this compares with 39%,
49% and 13% respectively during the nine months ended September 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 September 30, 1998
amounted to (pound)1.9 million compared to (pound)1.3 million in the three
months ended September 30, 1997. Other revenues in the nine months ended
September 30, 1998 amounted to (pound)4.8 million compared to (pound)2.8
million in the nine months ended September 30, 1997. In the three months
and nine months ended September 30, 1998, other revenues were principally
generated from the following: 1) fees arising from the operation of Trade
UK, the U.K. Department of Trade and Industry's online export sales lead
service; 2) 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; 3) fees arising from a five year contract to
provide an Electronic News Cutting Service to The British Broadcasting
Corporation; and 4) the acquisition of Muscat Ltd which added
predominantly royalty-related sales. These revenues are derived from a
strong customer base and typically have a very high gross margin. Other
revenues in the three months and nine months ended September 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.
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 705% from (pound)4.4 million in the
three months ended September 30, 1997 to (pound)35.8 million in the three
months ended September 30, 1998. Overseas revenues represented 84% of total
revenues for the third quarter of 1998, compared with 60% for the third
quarter of 1997. Turnover from overseas operations outside the United
Kingdom increased by 735% from (pound)13.2 million in the nine months ended
September 30, 1997 to (pound)110.3 million in the nine months ended
September 30, 1998. Overseas revenues represented 84% of total revenues for
the nine months to September 30, 1998, compared with 62% for the same
period in 1997.
The increase in revenues from overseas operations is mainly
attributable to North America, where revenues increased by 903% in the
third quarter of 1998 compared to the same period in 1997, and increased by
939% in the nine months to September 30, 1998 compared to the same period
in 1997. This resulted from the acquisition of KRII, whose North American
revenues constituted approximately 49% of total Group revenues during the
third quarter of 1998, and approximately 51% during the nine months to
September 30, 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 U.S., 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 722% from (pound)2.2 million in
the three months ended September 30, 1997 to (pound)18.4 million in the
three months ended September 30, 1998 and represented 30% and 43% of total
turnover respectively. Costs of sales increased by 735% from (pound)6.8
million in the nine months ended September 30, 1997 to (pound)56.7 million
in the nine months ended September 30, 1998 and represented 32% 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 70% in
the three months ended September 30, 1997 to 57% in the three months ended
September 30, 1998. The gross margin decreased from 68% in the nine months
ended September 30, 1997 to 57% in the nine months ended September 30,
1998. These decreases are due to the greater weight towards usage-based
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,
one 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
29% during the three months ended September 30, 1998 when compared to the
three months ended September 30, 1997. The combined operating costs of the
two businesses was similarly reduced, by approximately 31%, during the nine
months ended September 30, 1998 when compared to the nine months ended
September 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 $47 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
September 30, 1997 to (pound)5.9 million for the three months ended
September 30, 1998. Due to the same reason, distribution costs increased
from (pound)6.9 million for the nine months ended September 30, 1997 to
(pound)16.6 million for the nine months ended September 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 September 30, 1997 to (pound)9.8 million in the
three months ended September 30, 1998. Administrative expenses for the
continuing business (before restructuring costs), increased from (pound)7.9
million in the nine months ended September 30, 1997 to (pound)31.8 million
in the nine months ended September 30, 1998. Administrative expenses
consist of all facilities costs (including the Group's main offices in
London; Mountain View and Palo Alto, California; Cary, North Carolina 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
administrative expenses.
AMORTIZATION OF PRODUCT DEVELOPMENT COSTS (EXCLUDING RESTRUCTURING COSTS).
The amortization of capitalized product development costs for the Group
increased from (pound)0.8 million in the three months ended September 30,
1997 to (pound)1.6 million in the three months ended September 30, 1998.
The amortization of capitalized product development costs for the Group
increased from (pound)2.2 million in the nine months ended September 30,
1997 to (pound)6.0 million in the nine months ended September 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)5.1 million, including an exceptional restructuring charge
associated with the relocation of the Company's U.S. Headquarters totaling
approximately (pound)1.6 million, for the three months ended September 30,
1998 as compared with an operating loss of (pound)0.6 million for the three
months ended September 30, 1997. The Company's operations resulted in an
operating profit of (pound)18.6 million, including a net exceptional
restructuring charge totaling approximately (pound)1.4 million associated
with the integration of KRII and the relocation of the Company's US
Headquarters, for the nine months ended September 30, 1998 as compared with
an operating loss of (pound)2.3 million for the nine months ended September
30, 1997. The (pound)1.4 million exceptional restructuring charge for the
nine months ended September 30, 1998 includes a (pound)1.0 million credit
resulting from the release in the second quarter of 1998 of certain
restructuring provisions established at December 31, 1997.
EXCEPTIONAL GAIN. There was no movement in exceptional gains during the
third quarters of 1998 and 1997.
The exceptional gain totaling (pound)2.0 million recognized in
the nine months ended September 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)3.6 million recognized in the nine months
ended September 30, 1997 included (pound)3.5 million relating to the
transfer of M.A.I.D's "Internet in Hotel" technology and distribution
contracts to 4th Network, and (pound)0.1 million relating to the net gain
on the reassignment of M.A.I.D's Japanese agency.
INTEREST INCOME AND INTEREST EXPENSE. Net interest payable increased to
(pound)4.2 million in the three months ended September 30, 1998 as compared
to net interest receivable of (pound)0.1 million in the three months ended
September 30, 1997. Net interest payable increased to (pound)12.7 million
in the nine months ended September 30, 1998 as compared to net interest
receivable of (pound)0.1 million in the nine months ended September 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 $272.5 million ((pound)159.6 million) of debt, together with a revolving
credit facility of $25.0 million ((pound)14.7 million) which remained
undrawn on acquisition through to the end of the third quarter of 1998. The
Company has since drawn down $16.0 million ((pound)9.4 million) as at the
date of this report. The debt raised includes a $92.5 million ((pound)54.2
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 $11.5 million ((pound)6.7 million) of senior
secured debt. In November 1998, the Company made a scheduled repayment of
principal amounting to $4.4 million ((pound)2.6 million), thereby leaving
$256.6 million outstanding as at the date of this report.
The balance of $180.0 million ((pound)105.4 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 nine months ended
September 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 31, 1997, the Group had
total net operating tax losses carried forward of approximately (pound)13.9
million in the U.K. and $6.4 million ((pound)3.7 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-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.
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)7.5 million and (pound)13.7 million at September 30, 1998 and
December 31, 1997 respectively.
The Group's operating activities generated net cash of
(pound)15.7 million and (pound)0.4 million during the nine months ended
September 30, 1998 and 1997 respectively. The cash generated in the nine
months ended September 30, 1998 of (pound)15.7 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)11.6
million and (pound)3.4 million during the nine months ended September 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)6.8 million during the nine months ended September 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)0.6 million during the nine months ended September 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 September 30, 1998, the Group had cash at bank
and in hand of approximately (pound)7.5 million, (pound)14.6 million
available for borrowing under a revolving credit facility and total
indebtedness of approximately (pound)147.1 million. The Group has
subsequently drawn down $16.0 million ((pound)9.4 million) since the end of
the third quarter of 1998. 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 is 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 in advance of the first scheduled repayment. On November
13, 1998, the Company made its first scheduled repayment of $4.4 million
((pound)2.6 million).
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 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)2.2 million
at September 30, 1998). The Company paid (pound)1.8 million in October 1998
as 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 nine months from September 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)14.1
million of investments as at September 30, 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 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 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 court recently issued a ruling
finding that, unless expressly granted to the publishers, authors retain
the copyright to an individual work within a collective work. The court
also is currently considering defendants' motion to deny class
certification. 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: December 4, 1998 THE DIALOG CORPORATION PLC
By: /s/ David G. Mattey
-----------------------
David G. Mattey
Finance Director