1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended September 30, 1997 or
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the transition period from to
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Commission File Number 0-19598
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AMERICAN BUSINESS INFORMATION, INC.
- --------------------------------------------------------------------------------
(exact name of registrant specified in its charter)
DELAWARE 47-0751545
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5711 SOUTH 86TH CIRCLE, OMAHA, NEBRASKA 68127
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (402) 593-4500
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
24,568,332 shares of Class A Common Stock and
24,568,332 shares of Class B Common Stock at October 9, 1997
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AMERICAN BUSINESS INFORMATION, INC.
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION 2
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the three months and nine
months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of Results of Operations 8 - 17
PART II - OTHER INFORMATION 18
Item 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
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AMERICAN BUSINESS INFORMATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
PART I
FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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4
AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
Current assets:
Cash and cash equivalents .......................................................... $ 10,171 $ 7,497
Marketable securities .............................................................. 20,726 22,810
Trade accounts receivable, net of allowances of $7,869 and $2,724, respectively .... 48,964 29,630
Income taxes receivable ............................................................ 6,916 1,105
Prepaid expenses ................................................................... 3,665 3,267
Deferred marketing costs ........................................................... 2,566 1,263
------------- -------------
Total current assets ........................................................... 93,008 65,572
Property and equipment, net ............................................................ 23,864 18,886
Intangible assets, net of accumulated amortization ..................................... 76,426 17,410
Deferred income taxes .................................................................. -- 5,388
Other assets ........................................................................... 2,737 621
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$ 196,035 $ 107,877
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................................. $ 531 $ 708
Payable to shareholders ............................................................ 4,746 7,925
Accounts payable ................................................................... 10,984 5,520
Accrued payroll expenses ........................................................... 3,618 2,352
Accrued expenses ................................................................... 6,832 711
Deferred revenue ................................................................... 2,550 2,117
Deferred income taxes .............................................................. 1,394 512
------------- -------------
Total current liabilities ...................................................... 30,655 19,845
Long-term debt, net of current portion ................................................. 81,636 427
Deferred income taxes .................................................................. 3,068 --
Other liabilities ...................................................................... 4,000 --
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0025 par value. Authorized 5,000,000 shares;
none issued or outstanding ..................................................... -- --
Common stock, $.0025 par value. Authorized 75,000,000 shares; 48,971,664 shares
issued and 48,806,664 shares outstanding at September 30, 1997 and 44,366,920
shares issued and 44,201,920 shares outstanding at December 31, 1996 ........... 61 55
Paid-in capital .................................................................... 68,270 37,268
Retained earnings .................................................................. 9,410 52,942
Treasury stock, at cost, 165,000 shares held ....................................... (2,281) (2,281)
Unrealized holding gain (loss), net of tax ........................................ 1,216 (379)
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Total stockholders' equity ..................................................... 76,676 87,605
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$ 196,035 $ 107,877
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
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AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------- -----------------
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales ................................... $ 50,555 $ 27,585 $ 139,511 $ 76,695
Costs and expenses:
Database and production costs ........... 14,148 7,745 38,674 20,673
Selling, general and administrative ..... 21,331 11,409 59,396 31,674
Depreciation and amortization ........... 8,985 962 24,397 3,291
Acquisition-related charges ............. 4,300 21,500 56,098 21,500
--------- --------- --------- ---------
48,764 41,616 178,565 77,138
--------- --------- --------- ---------
Operating income (loss) ..................... 1,791 (14,031) (39,054) (443)
Other income (expense):
Investment income ....................... 955 522 2,513 1,567
Interest expense ........................ (1,212) (20) (2,687) (53)
Other ................................... -- (740) -- (740)
--------- --------- --------- ---------
Income (loss) before income taxes
and discontinued operation .............. 1,534 (14,269) (39,228) 331
Income taxes ................................ 775 (5,389) 4,299 126
--------- --------- --------- ---------
Income (loss) from continuing operations .... 759 (8,880) (43,527) 205
Loss on discontinued operation .............. -- (355) -- (355)
Loss from abandonment of subsidiary ......... -- (1,373) -- (1,373)
--------- --------- --------- ---------
Net income (loss) ........................... $ 759 $ (10,608) $ (43,527) $ (1,523)
========= ========= ========= =========
EARNINGS PER SHARE DATA:
Income (loss) from continuing operations .... $ 0.02 $ (0.21) $ (0.91) $ 0.00
========= ========= ========= =========
Loss on discontinued operation and
abandonment of subsidiary ............... $ -- $ (0.04) $ -- $ (0.04)
========= ========= ========= =========
Net income (loss) ........................... $ 0.02 $ (0.25) $ (0.91) $ (0.04)
========= ========= ========= =========
Weighted average shares outstanding ......... 48,774 41,680 47,964 41,616
========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------
1997 1996
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Cash flows from operating activities:
Net income (loss) ...................................................... $(43,527) $ (1,523)
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization .............................. 24,397 2,505
Deferred income taxes ...................................... (2,431) (5,790)
Net realized (gain) loss on sale of marketable securities
and other investments ................................... (1,647) (83)
Acquisition-related charges ................................ 53,500 21,500
Loss on sale of discontinued operation ..................... -- 1,728
Impairment of other assets ................................. -- 740
Changes in assets and liabilities:
Trade accounts receivable ................................... (6,869) (3,813)
Prepaid expenses and other assets ........................... 1,261 (987)
Deferred marketing costs .................................... (1,303) (604)
Accounts payable ............................................ (985) 987
Income taxes payable and receivable ......................... 698 (335)
Accrued expenses and other liabilities ......................... (5,677) (3,776)
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Net cash provided by operating activities .............. 17,417 10,549
Cash flows from investing activities:
Proceeds from sale of marketable securities ...................... 18,589 8,274
Purchases of marketable securities ............................... (12,285) (8,634)
Purchases of property and equipment .............................. (6,392) (4,639)
Purchase of other investments .................................... (2,000) --
Acquisition of businesses ........................................ (79,462) (4,000)
Capitalization of consumer database costs ........................ (2,348) --
Capitalization of software development costs ..................... (2,235) (1,345)
Other ............................................................ (1,101) 258
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Net cash used in investing activities ....................... (87,234) (10,086)
Cash flows from financing activities:
Repayment of long-term debt ...................................... (2,026) (1,013)
Proceeds from long-term debt ..................................... 81,000 --
Deferred financing costs ......................................... (388) --
Payment of note payable to shareholders .......................... (7,925) --
Purchase of treasury stock ....................................... -- (2,281)
Proceeds from exercise of stock options .......................... 1,242 380
Tax benefit related to employee stock options .................... 588 128
-------- --------
Net cash provided by (used in) financing activities ......... 72,491 (2,786)
Net increase (decrease) in cash and cash equivalents ................... 2,674 (2,323)
Cash and cash equivalents, beginning ................................... 7,497 11,999
-------- --------
Cash and cash equivalents, ending ...................................... $ 10,171 $ 9,676
======== ========
Supplemental disclosure of cash flow information:
Interest paid ..................................................... $ 2,247 $ 53
======== ========
Income taxes paid ................................................. $ 7,389 $ 5,418
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
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AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
management, contain all adjustments, consisting of normal recurring adjustments,
necessary to fairly present the financial information included therein.
The Company suggests that this financial data be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 1996 included in the Company's 1996 Annual Report to the Securities
and Exchange Commission on Form 10-K, as amended, and its audited consolidated
financial statements and notes thereto for the six months ended June 30, 1997
included in the Company's Registration Statement on Form S-3 filed September 29,
1997 and any amendments thereto. Results for the interim period presented are
not necessarily indicative of results to be expected for the entire year.
2. ACQUISITIONS AND ACQUISITION-RELATED CHARGES
Effective February 1997, the Company acquired all issued and outstanding common
stock of DBA Holdings, Inc. and Subsidiaries (operating as Database America
Companies, or DBA), a provider of data processing and analytical services for
marketing applications, and compiler of information on consumers and businesses
in the United States. Total consideration for the acquisition was approximately
$103.5 million, consisting of $60 million in cash, funded using a revolving
credit facility (See Note 3), and approximately 4.6 million unregistered shares
of the Company's common stock. The acquisition has been accounted for under the
purchase method of accounting. As part of this acquisition, the Company recorded
acquisition-related charges totaling $51.8 million for write-offs including
$49.2 million for purchased in-process research and development costs which
related to projects that had not met technological feasibility as well as $2.6
million for other related integration and organizational restructuring costs.
Intangibles and goodwill recorded as part of the purchase included acquired
database costs of $19.0 million (to be amortized over 1 year), purchased data
processing software of $9.4 million (to be amortized over two years), noncompete
agreements of $1.7 million (to be amortized over 10 years) and goodwill of $18.6
million (to be amortized over 10 years).
Effective August 1997, the Company acquired certain assets and assumed certain
liabilities of Pro CD, Inc. (Pro CD) from Acxiom Corporation (Acxiom), a
provider of telephone directory and other business software products on CD ROM
to consumers. Total consideration for the acquisition was $18 million in cash,
funded using a revolving credit facility (See Note 3). The acquisition has been
accounted for under the purchase method of accounting. As part of the
acquisition, the Company recorded acquisition-related charges of $4.3 million
for write-offs of purchased in-process research and development costs which
related to projects that had not met technological feasibility. Intangibles and
goodwill recorded as part of the purchase included goodwill of $5.5 million (to
be amortized over 10 years), tradenames and noncompete agreements of $8.9
million (to be amortized over 10 years), and $2.2 million of other intangibles
(to be amortized over 3 years).
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AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REVOLVING CREDIT AGREEMENT
In February 1997, the Company entered into a $65 million Credit Facility with
First Union Bank of North Carolina. The purpose of this facility was to finance
a portion of the acquisition of Database America Companies (See Note 2). In
addition, the bank syndicate led by First Union Bank of North Carolina
subsequently approved an additional $35 million of availability under the Credit
Facility principally to finance the acquisition of Pro CD in August 1997. At
September 30, 1997, total borrowings under this facility were $78.0 million.
Interest expense on the facility, which is currently based on LIBOR plus 0.50%
based on the Company's funded debt ratio, was approximately $2.5 million for the
nine months ended September 30, 1997.
4. SUBSEQUENT STOCK SPLIT
On October 3, 1997, the Company reclassified its existing common stock as Class
B Common Stock and authorized 220 million shares of new Class A Common Stock.
The Class A Common Stock entitles the holder thereof to one vote per share and a
non-cumulative dividend of $0.02 per share per year, when and as declared by the
Board of Directors, in preference to any dividend on the Class B Common Stock.
The Class B Common Stock entitles the holder thereof to ten votes per share. In
all other respects, the Class A Common Stock and Class B Common Stock are
identical.
On October 3, 1997, the Board of Directors declared a dividend of one share of
Class A Common Stock for each share of Class B Common Stock then outstanding,
which was paid on October 9, 1997 and was accounted for as a two-for-one stock
split.
All share and per share information presented in these financial statements have
been restated to reflect the split.
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AMERICAN BUSINESS INFORMATION, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading provider of business and consumer marketing information
products and data processing services. The Company's products and services help
its clients generate new customers more effectively at lower cost. The Company's
key assets include a proprietary database of over 11 million businesses and a
consumer database of over 113 million households and 180 million individuals in
the United States and Canada, which the Company believes are among the most
comprehensive and accurate available. The Company leverages there key assets by
selling a broad range of marketing information products and data processing
services through targeted distribution channels primarily to small and medium
size businesses and also to consumers and large corporations.
This discussion and analysis contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933, which are subject to the "safe harbor" created by
those sections. The Company's actual future results could differ materially from
those projected in the forward-looking statements. Some factors which could
cause future actual results to differ materially from the company's recent
results or those projected in the forward-looking statements are described in
"Factors Affecting Operating Results" below. The Company assumes no obligation
to update the forward-looking statement or such factors.
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RESULTS OF OPERATIONS
The following table sets out for the three and nine month periods indicated,
certain items from the Company's statement of operations data expressed as a
percentage of net sales:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
------ ------ ------ ------
Statement of Operations Data:
Net sales 100% 100% 100% 100%
Costs and expenses:
Database and production costs 28 28 28 27
Selling, general and administrative 42 41 43 41
Depreciation and amortization 18 3 17 5
Acquisition-related charges 9 78 40 28
------ ------ ------ ------
Operating income (loss) 4 (51) (28) (1)
Other income (expense), net (1) (1) -- 1
------ ------ ------ ------
Income (loss) before income
taxes and discontinued operation 3 (52) (28) --
Income taxes 2 (20) 3 --
------ ------ ------ ------
Income from continuing operations 2 (32) (31) --
Loss on discontinued operation and
abandonment of subsidiary -- (6) -- (2)
------ ------ ------ ------
Net income (loss) 2% (38)% (31)% (2)%
====== ====== ====== ======
Net Sales
Net sales for the three months ended September 30, 1997 were $50.6 million, an
83% increase from $27.6 million in the comparable period in 1996. Net sales for
the nine months ended September 30, 1997 were $139.5 million, an 82% increase
from $76.7 million in the comparable period in 1996. Of these amounts,
approximately $15.4 million and approximately $38.3 million were attributable to
the net sales of Database America for the three month period and the period from
February 1, 1997, the date of acquisition, through September 30, 1997,
respectively.
Net sales of sales lead generation products for the three months ended September
30, 1997 were $29.5 million, a 27% increase from $23.3 million in the comparable
period in 1996. Excluding the effect of acquisitions completed after September
30, 1996, net sales of sales lead generation products for the three months ended
September 30, 1997 were $26.2 million, a 21% increase from the comparable period
in 1996. Net sales of sales lead generation products attributable to acquired
companies and included in the three months ended September 30, 1997 were
approximately $3.3 million, or 11% of net sales. Of this amount, $1.6 million
were attributable to the net sales of Database America for the three months
September 30, 1997. The remaining $1.7 million were primarily attributable to
the net sales of County Data Corporation and BJ Hunter for the three months
ended September 30, 1997.
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Net sales of sales lead generation products for the nine months ended September
30, 1997 were $94.5 million, a 45% increase from $65.3 million in the comparable
period in 1996. Excluding the effect of acquisitions completed after September
30, 1996, net sales of sales lead generation products for the nine months ended
September 30, 1997 were $79.0 million, a 21% increase from the comparable period
in 1996. Net sales of sales lead generation products attributable to acquired
companies and included in the nine months ended September 30, 1997 were
approximately $15.5 million, or 16% of net sales. Of this amount, approximately
$10.7 million were attributable to the net sales of Database America from
February 1, 1997 through September 30, 1997. The remaining $4.8 million were
primarily attributable to the net sales of County Data Corporation and BJ Hunter
for the nine months ended September 30, 1997.
Net sales of data processing services for the three months ended September 30,
1997 were $14.6 million, as compared to $1.2 million in the comparable period in
1996. This increase is directly attributable to the acquisitions of Database
America and Marketing Data Systems. Of the increase, $13.8 million were
attributable to the net sales of Database America and $554 thousand were
attributable to the net sales of Marketing Data Systems for the three months
ended September 30, 1997, respectively.
Net sales of data processing services for the nine months ended September 30,
1997 were $30.9 million, as compared to $3.1 million in the comparable period in
1996. This increase is primarily attributable to the acquisitions of Database
America and Marketing Data Systems. Of the increase, $27.6 million were
attributable to the net sales of Database America from February 1, 1997 through
September 30, 1997 and $1.5 million were attributable to the net sales of
Marketing Data Systems for the nine months ended September 30, 1997.
Net sales of consumer CD-ROM products for the three months ended September 30,
1997 were $6.5 million, an 111% increase from $3.1 million in the comparable
period in 1996. This increase was primarily attributable to the acquisition of
Digital Directory Assistance in August 1996 and Pro CD in August 1997.
Net sales of consumer CD-ROM products for the nine months ended September 30,
1997 were $14.1 million, a 71% increase from $8.3 million in the comparable
period in 1996. This increase was primarily attributable to the acquisition of
Digital Directory Assistance in August 1996 and Pro CD in August 1997.
Database and Production Costs
Database and production costs for the three months ended September 30, 1997 were
$14.1 million, an 83% increase from $7.8 million in the comparable period in
1996. These costs constituted 28% of net sales in each of the three months ended
September 30, 1997 and 1996.
Database and production costs for the nine months ended September 30, 1997 were
$38.7 million, an 87% increase from $20.7 in the comparable period in 1996.
These costs constituted 28% of net sales in the nine months ended September 30,
1997, and 27% of net sales in the comparable period in 1996. The increase as a
percentage of net sales was the result of higher database and production costs
for data processing services and CD-ROM production as compared to the costs for
maintaining and verifying the Company's databases.
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Selling, General, and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 1997 were $21.3 million, an 87% increase from $11.4 million in the
comparable period in 1996. These expenses constituted 42% of net sales in the
three months ended September 30, 1997 and 41% as a percentage of net sales in
the comparable period in 1996. The increase as a percentage of net sales was
primarily attributable to an increase in direct marketing activities for all of
the Company's products and services, continued investment in the Company's field
sales organization and promotional marketing of consumer CD-ROM products.
Selling, general and administrative expenses for the nine months ended September
30, 1997 were $59.4 million, an 88% increase from $31.7 million in the
comparable period in 1996. These expenses constituted 43% of net sales in the
nine months ended September 30, 1997 and 41% as a percentage of net sales in the
comparable period in 1996. This increase as a percentage of net sales was
primarily attributable to an increase in direct marketing activities for all of
the Company's products and services, continued investment in the Company's field
sales organization and promotional marketing of consumer CD-ROM products.
Depreciation and Amortization Expenses
Depreciation and amortization expenses for the three months ended September 30,
1997 were $9.0 million, as compared to $1.0 million in the comparable period in
1996. These expenses constituted 18% of net sales in the three months ended
September 30, 1997, and 3% of net sales in the comparable period of 1996. Of
such increases, $5.9 million represented amortization of acquired database costs
and purchased data processing costs related to the acquisition of Database
America, which are being amortized over lives of one to two years. The remaining
increase reflects additional depreciation on property and equipment additions
and amortization of intangibles for certain other acquisitions recorded since
September 30, 1996.
Depreciation and amortization expenses for the nine months ended September 30,
1997 were $24.4 million, as compared to $3.3 million in the comparable period in
1996. These expenses constituted 17% of net sales in the nine months ended
September 30, 1997, and 5% of net sales in the comparable period of 1996. Of
such increases, $15.8 million represented amortization of acquired database
costs and purchased data processing costs related to the acquisition of Database
America, which are being amortized over lives of one to two years. The remaining
increase reflects additional depreciation on property and equipment additions
and amortization of other intangibles for acquisitions recorded since
September 30, 1996.
Acquisition-Related Charges
As part of the acquisition of Digital Directory Assistance in August 1996, the
Company recorded charges of $10.0 million in the three months ended September
30, 1996 for acquired in-process research and development costs. Additionally in
September 1996, the Company recorded a charge of $11.5 million due to the change
in estimated useful lives based on management's evaluation of the remaining
lives of certain intangibles related to acquisitions made prior to 1995. These
charges totaling $21.5 million constituted 78% and 28% of net sales for the
three and nine month periods ended September 30, 1996, respectively.
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As part of the acquisition of Pro CD in August 1997, the Company recorded
charges of $4.3 million, or 9% of net sales, in the three months ended September
30, 1997 for acquired in-process research and development costs.
As part of the acquisition of Database America in February 1997 and Pro CD in
August 1997, the Company recorded charges totaling $56.1 million, or 40% of net
sales, in the nine months ended September 30, 1997 for acquired in-process
research and development costs as well as other related integration and
organizational restructuring costs.
Operating Income (Loss)
As a result of the factors described above, the Company had operating income of
$1.8 million, or 4% of net sales, in the three months ended September 30, 1997,
as compared to operating loss of $(14.0) million, or (51)% of net sales, in the
comparable period in 1996. Excluding the effect of the amortization and
acquisition-related charges described above, the Company would have had
operating income of $12.0 million, or 24% of net sales, in the three months
ended September 30, 1997, and operating income of $7.5 million, or 27% of net
sales, in the three months ended September 30, 1996.
As a result of the factors described above, the Company had an operating loss of
$(39.1) million, or (28)% of net sales, in the nine months ended September 30,
1997, as compared to an operating loss of $(443) thousand, or (1)% of net sales,
in the comparable period in 1996. Excluding the effect of the amortization and
acquisition related charges described above, the Company would have had
operating income of $32.8 million, or 24% of net sales, in the nine months ended
September 30, 1997, and operating income of $21.1 million, or 27% of net sales,
in the nine months ended September 30, 1996.
Other Income (Expense), Net
Other income (expense), net for three months ended September 30, 1997 was
$(257) thousand, as compared to $(238) in the comparable period in 1996.
Other income (expense), net for nine months ended September 30, 1997 was $(174)
thousand, as compared to $774 thousand in the comparable period in 1996. This
decrease was primarily attributable to interest expense incurred on the
Company's credit facility, of which $78.0 was outstanding at September 30, 1997
(See Note 3). The Company had no outstanding borrowings under a credit facility
at September 30, 1996.
Income Taxes
A provision for income taxes at a combined federal and state tax rate of 38% was
recorded with respect to the three and nine month periods ended September 30,
1997 and 1996, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company's principal sources of liquidity included
cash and cash equivalents of $10.2 million and marketable securities of $20.7
million. In February 1997, the Company entered into a $65.0 million credit
facility in connection with the acquisition of DBA. Subsequently, the Company
has increased this credit facility to $100.0 million. The primary reason for the
increase was to finance the acquisition of Pro CD. As of September 30, 1997,
$78.0 million of this facility had been drawn upon and the Company had working
capital of $62.4 million.
Net cash provided by operating activities for the nine months ended September
30, 1997 totaled $17.4 million as compared to $10.5 million in the comparable
period in 1996. During 1997, the Company has spent $4.0 million related to
acquisitions of furniture, fixtures and computer equipment and $2.4 million
related to building and improvements to its Omaha facility. The Company is
building a new facility for the consumer and business database compilation
division in Papillion, Nebraska, with an estimated cost of $8.0 million, which
is anticipated to be completed in mid-1998.
The Company has paid $87.4 million during the nine months ended September 30,
1997 related to the acquisition of certain businesses. This amount includes
$59.1 million, $18.3 million, and $8.1 million related to the acquisition of
Database America, Pro CD, and Digital Directory Assistance, respectively.
The Company believes that cash flows from operations, its cash and short term
investments, and its borrowing facilities (see Note 3 of the Notes to the
Consolidated Financial Statements for a description) will satisfy the Company's
projected working capital and other cash requirements for at least the next 12
months. To the extent the Company experiences growth in the future, the Company
anticipates that its operating and investing activities may use cash. Any such
future growth and any acquisitions of other technologies, products or companies
may require the Company to obtain additional equity or debt financing, which may
not be available or may be dilutive.
FACTORS THAT MAY AFFECT OPERATING RESULTS
Integration of Recent and Future Acquisitions. Since mid-1996, the Company has
completed six acquisitions, including the August 1996 acquisition of certain
assets and liabilities of Digital Directory Assistance, the November 1996 merger
with County Data Corporation and acquisition of certain assets and liabilities
of Marketing Data Systems, the December 1996 acquisition of certain assets and
liabilities of BJ Hunter, the February 1997 merger with Database America ("DBA")
and the August 1997 acquisition of certain assets and liabilities of Pro CD. The
Company also made a number of other acquisitions in prior periods. The Company's
strategy includes continued growth through acquisitions of complementary
products, technologies or businesses, which, if implemented, will result in the
diversion of management's attention from the day-to-day operations of the
Company's business and may include numerous other risks, including difficulties
in the integration of operations, databases, products and personnel, financial
and accounting issues set forth in "--Financial and Accounting Issues Related to
Acquisitions," difficulty in applying the Company's internal controls to
acquired businesses and particular problems, liabilities or contingencies
related to the businesses being acquired. To the extent that efforts to
integrate recent or future acquisitions fail, there will be a material adverse
effect on the Company's business, financial condition and results of operations.
While the Company has not made any binding commitments with respect to any
particular future acquisitions, the Company frequently evaluates the strategic
opportunities available to it and intends to aggressively pursue opportunities
that it believes fit its business strategy.
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Financial and Accounting Issues Related to Acquisitions. In connection with the
acquisitions completed since mid-1996, the Company issued approximately 3.7
million shares of Class A Common Stock and 3.7 million shares of Class B Common
Stock, and paid approximately $93.9 million in cash. The issuance of stock in
these or future transactions may be dilutive to existing stockholders to the
extent that earnings of the acquired companies do not offset the additional
number of shares outstanding. In connection with the acquisitions of DBA and Pro
CD, the Company incurred approximately $78.0 million in debt, of which
approximately $50.0 million will be repaid with the proceeds to the Company from
the current offering of Class A Common Stock. In connection with future
acquisitions, the Company may incur substantial amounts of debt. Servicing such
debt may result in decreases in earnings per share, and the inability on the
part of the Company to service such debt would result in a material adverse
effect on the Company's business, financial condition and results of operations.
Finally, the Company expects that future acquisitions will generally be required
to be accounted for using the purchase method. As a result of such accounting
treatment, the Company may be required to take charges to operations or to
amortize goodwill in connection with future acquisitions. As a result of
acquisitions completed since mid-1996, the Company was required to take
significant acquisition-related charges to operations and will be required to
amortize goodwill and other intangibles over periods of 1 to 15 years. The
acquisition-related charges and amortization of goodwill and other intangibles
have had and will continue to have an adverse effect on net income. To the
extent that future acquisitions result in substantial charges to operations,
incurrence of debt and amortization of goodwill and other intangibles, such
acquisitions could have an adverse effect on the Company's net income, earnings
per share and overall financial condition.
Recent Changes in Senior Management; Constraints on Management Resources. The
Company has experienced rapid growth, particularly as a result of its recent
acquisitions, and believes that as a result the hiring and retention of senior
management will be essential to the Company's ability to manage growth
successfully. In 1996 and the first nine months of 1997, the lack of senior
management resources resulted in a few key individuals taking on multiple roles
and responsibilities in the Company, which in turn placed a significant strain
on the Company's senior management. While the Company believes it has filled
many key management positions in the last several months, there can be no
assurance that the Company will be successful in attracting and retaining senior
management personnel in the future. The Company's founder and Chairman of the
Board, Vinod Gupta, expects to remain an active Chairman of the Board but to
reduce his role in the Company's day-to-day management over the next twelve
months due to the Company's employment of additional executive officers. Mr.
Gupta may be offered an appointed position with the Federal Government. If such
an appointment is offered to and accepted by Mr. Gupta, Mr. Gupta will be
required to resign as an employee and director of the Company, but he will not
be required to divest himself of his shares in the Company. The Company hired
Scott Dahnke as its Chief Executive Officer in October 1997, Steven Purcell as
its Chief Financial Officer in April 1997, Gregory Back as its Executive Vice
President of Corporate Planning and Business Development, Joseph Szczepaniak as
the President of the Company's Consumer CD-ROM division and Kevin Hall as Senior
Vice President of Special Projects in October 1997 and Rick Puckett as its
Corporate Controller in September 1997. Messrs. Purcell, Szczepaniak and Puckett
had no prior experience with the Company. Messrs. Dahnke, Back and Hall served
as consultants to the Company since May 1997, but did not have experience with
the day-to-day management of the Company. This new management team does not have
experience working together or working with the Company's other senior
management and personnel. Failure of the new management team to manage growth,
work together or work effectively with the Company's other senior management
could result in disruptions in operations or the departure of key personnel,
which in turn could have a material adverse effect on the Company's business,
financial condition or results of operations.
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Fluctuations in Operating Results; Failure to Achieve Anticipated Growth. The
Company believes that future operating results will be subject to quarterly and
annual fluctuations, and that long term growth will depend upon the Company's
ability to expand its present business and complete strategic acquisitions. The
Company's net sales on a quarterly basis can be affected by seasonal
characteristics and certain other factors. For example, the Company experiences
higher revenue from its sales leads products in the fall of each year due to
increases in direct marketing by the Company's clients in the fourth quarter of
each year. In addition, the Company typically experiences increases in revenue
in the two months following introduction of new editions of its consumer CD-ROM
products. Revenue from sales lead generation products is generally lower in the
summer due to decreased direct marketing activity of the Company's customers
during that time. The Company's operating expenses are determined in part based
on the Company's expectations of future revenue growth and are substantially
fixed. As a result, unexpected changes in revenue levels will have a
disproportionate effect on net income in any given period. Long term growth will
be adversely affected if the Company fails to broaden its existing product and
service offerings, increase sales of products and services, or expand into new
markets, or fails to complete acquisitions or successfully integrate acquired
operations into its existing operations. To the extent there are fluctuations in
operating results or the Company fails to achieve long-term internal growth or
growth through acquisitions, there could be an adverse affect on the Company's
business, financial condition, results of operations or stock price.
Risk of Product Returns. The Company has agreements that allow retailers certain
rights to return the Company's consumer CD-ROM products and consumers may also
seek to return such products to the Company. In the past the Company has offered
customers a money-back guarantee on its products. Accordingly, the Company is
exposed to the risk of product returns from retailers, distributors, and direct
purchasers, particularly in the case of products sold shortly before
introduction of the next year's edition of the same product. At the time of
product sales, the Company establishes reserves based on estimated future
returns of products, taking into account promotional activities, the timing of
new product introductions, seasonal variations in product returns, distributor
and retailer inventories of the Company's products and other factors. The
Company's product returns have historically been high in the fourth fiscal
quarter, immediately prior to and after the introduction of new editions of the
Company's products. Actual product returns could differ from estimates, and
product returns that exceed the Company's reserves could adversely affect the
Company's business, financial condition and results of operations.
Restatement of Financial Statements. The Company was required to restate its
financial statements twice in 1997. One restatement was required in connection
with the recognition of compensation expense associated with a former officer of
the Company and the other was required in connection with recognition and
amortization of goodwill associated with an acquisition. Because of these recent
restatements of financial statements, any future restatement of the Company's
financial statements, to the extent it is material, could have an adverse affect
on the Company's results of operations and stock price.
Risks Associated with Changes in Technology. Advances in information technology
may result in changing customer preferences for products and product delivery
formats in the business and consumer marketing information industry. The Company
believes it is presently the leading provider of marketing information on
CD-ROM. However, the Company believes that if customers increasingly look to the
Internet, DVD or other new technology for information resources, the market for
business and consumer information on CD-ROM may contract and prices for CD-ROM
products may have to decrease or CD-ROM products may become obsolete. Failure of
the Company to successfully shift its products to the Internet or DVD or to
successfully introduce products that take advantage of other technological
changes may thus have an adverse effect on the Company's business, results of
operations and financial condition.
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Volatility and Uncertainties With Respect to Stock Price. As with other
companies that have experienced rapid growth, the Company has experienced and is
likely to continue to experience substantial volatility in its stock price.
Factors such as announcements by either the Company or its competitors of new
products or services or of changes in product or service pricing policies,
quarterly fluctuations in the Company's operating results, announcements of
technical innovations, announcements relating to strategic relationships or
acquisitions, changes in earnings estimates, opinions or ratings by analysts,
and general market conditions or market conditions within the business and
consumer marketing information industry, among other factors, may have
significant impact on the Company's stock price. Should the Company fail to
introduce, enhance or integrate products or services on the schedules expected,
its stock price could be adversely affected. It is likely that in some future
quarter the Company will fail to achieve anticipated operating results, and this
failure will have a material adverse effect on the Company's stock price. In
addition, the Company's Class A Common Stock and Class B Common Stock have been
trading for a very short time. While the Company expects the Class A Common
Stock and Class B Common Stock prices to remain roughly equal in most market
conditions, the difference in rights of the two classes, coupled with the
general volatility of the Company's stock price described above, could cause the
Class A Common Stock and Class B Common Stock to trade at different prices. In
the event of a tender offer or other unsolicited attempt to acquire the Company,
shares of Class B Common Stock would likely trade at a substantial premium to
shares of Class A Common Stock as a result of the disparity of voting rights.
Future issuances of both Class A Common Stock and Class B Common Stock could
affect the price for either or both classes of Common Stock. For the foregoing
reasons, the price for the Company's Class A Common Stock may be subject to
substantial fluctuation.
Competition. The business and consumer marketing information industry is highly
competitive. In particular, the rapid expansion of the Internet creates a
substantial new channel for distributing business information to the market, and
a new avenue for future entrants to the business and consumer marketing
information industry. There is no guarantee that the Company will be successful
in this new market. Many of the Company's principal or potential future
competitors are much larger than the Company and have much larger capital bases
from which to develop and compete with the Company. In business sales lead
generation products, the Company faces competition from Dun's Marketing Services
("DMS"), a division of Dun & Bradstreet. DMS, which relies upon information
compiled from Dun & Bradstreet's credit database, tends to focus on marketing to
large companies. In business directory publishing, the Company competes
primarily with Regional Bell Operating Companies, Donnelley Marketing and many
smaller, regional directory publishers. In consumer sales lead generation
products, the Company competes with Metromail, Donnelley Marketing, R.L. Polk,
Trans Union, Equifax and Experian, both directly and through reseller networks.
In data processing services, the Company competes with Acxiom, May & Speh,
Harte-Hanks Data Technologies and Direct Marketing Technologies. In consumer
products, the Company competes with certain small producers of CD-ROM products.
In addition, the Company faces competition to the extent similar information is
available on the Internet.
Risks Associated with Computer Systems and Software Upgrades. Many of the
Company's currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, the
re-engineering of the Company's computer systems and software products to
achieve year 2000 compliance will need to be completed within approximately two
years. System wide computer upgrades and re-engineering can lead to
unanticipated system and software defects that could disrupt the Company's data
compilation, processing and packaging activities. In addition, the Company needs
to replace its accounting systems in order to accommodate recent growth. If the
Company is unsuccessful
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in upgrading its computer systems and software, or if successful completion of
such upgrades takes longer than anticipated, such failure or delay would have a
material adverse effect on the Company's business, competitive position, results
of operations and financial condition.
Loss of Data Centers. The Company's business depends on computer systems
contained in the Company's data centers located in Omaha, Nebraska, Carter Lake,
Iowa and Montvale, New Jersey. A fire or other disaster affecting any of the
Company's data centers could disable the Company's computer systems. Any
significant damage to any of the data centers could have a material adverse
effect on the Company's business, financial condition and results of operations.
Limited Protection of Intellectual Property and Proprietary Rights. The Company
regards its databases and software as proprietary. The Company's databases are
copyrighted, and the Company depends on trade secret and non-disclosure
safeguards for protection of its software. The Company distributes its products
under agreements that grant customers a license to use the Company's products in
the ordinary course of their businesses and contain terms and conditions
prohibiting the unauthorized reproduction of the Company's products. In
addition, the Company generally enters into confidentiality agreements with its
management and programming staff and limits access to and distribution of its
proprietary information. There can be no assurance that the foregoing measures
will be adequate to protect the Company's intellectual property.
Direct Marketing Regulation and Dependence Upon Mail Carriers. The Company and
many of its customers engage in direct marketing. Certain data and services
provided by the Company are subject to regulation by federal, state and local
authorities. In addition, growing concerns about individual privacy and the
collection, distribution and use of information about individuals have led to
self-regulation of such practices by the direct marketing industry through
guidelines suggested by the Direct Marketing Association (the "DMA") and to
increased federal and state regulation. Compliance with existing federal, state
and local laws and regulations and industry self-regulation has not to date had
a material adverse effect on the Company's business, financial condition or
results of operations. Nonetheless, federal, state and local laws and
regulations designed to protect the public from the misuse of personal
information in the marketplace and adverse publicity or potential litigation
concerning the commercial use of such information may increasingly affect the
operations of the Company, which could result in substantial regulatory
compliance or litigation expense or a loss of revenue. Certain proposed federal
legislation could also create proprietary rights in certain "white pages"
information that is presently in the public domain, which could in turn increase
the cost to the Company of acquiring data or disrupt its ability to do so. The
direct mail industry depends and will continue to depend upon the services of
the United States Postal Service and other private mail carriers. Any
modification by the United States Postal Service of its rate structure, any
increase in public or private postal rates generally or any disruption in the
availability of public or private postal services could have a negative impact
on the demand for business information, direct mail activities and the cost of
the Company's direct mail activities.
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AMERICAN BUSINESS INFORMATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
PART II
OTHER INFORMATION
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20
AMERICAN BUSINESS INFORMATION, INC.
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 1997
PART II
ITEM 2. CHANGES IN SECURITIES
On October 3, 1997, the Company reclassified its existing common stock as Class
B Common Stock and authorized 220 million shares of new Class A Common Stock.
The Class A Common Stock entitles the holder thereof to one vote per share and a
non-cumulative dividend of $0.02 per share per year, when and as declared by the
Board of Directors, in preference to any dividend on the Class B Common Stock.
The Class B Common Stock entitles the holder thereof to ten votes per share. In
all other respects, the Class A Common Stock and Class B Common Stock are
identical.
On October 3, 1997, the Board of Directors declared a dividend of one share of
Class A Common Stock for each share of Class B Common Stock then outstanding,
which was paid on October 9, 1997 and was accounted for as a two-for-one stock
split.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders of the Company held on October 3, 1997, the
stockholders voted and approved the following items:
1. Proposal to amend Article IV of the company's Certificate of
Incorporation, as amended, to (i) reclassify the existing common stock
of the Company as Class B Common Stock, which is identical to the
existing common stock except that each share will entitle its holder
to ten votes, (ii) authorize a new class of common stock, designated
as Class A Common Stock, with a preferential dividend right over the
Class B Common Stock and one vote per share, (iii) increase the number
of authorized shares of common stock from 75,000,000 to 295,000,000,
consisting of 220,000,000 shares of Class A Common Stock and
75,000,000 shares of Class B Common Stock, and (iv) establish the
rights, powers and limitations of the Class A Common Stock and the
Class B Common Stock.
For 17,205,524 Against 2,965,639 Abstain 16,860 Broker Non-vote 13,290
---------- --------- ------ ------
2. Proposal to approve the adoption of the Company's 1997 Class A Common
Stock Plan, including the reservation thereunder of 2,000,000 shares of
the Company's Class A Common Stock, contingent upon stockholder
approval of proposal No. 1.
For 14,791,156 Against 5,384,989 Abstain 17,210 Broker Non-vote 7,958
---------- --------- ------ -----
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ITEM 5. OTHER INFORMATION
Effective October 1, 1997, the Company hired Scott A. Dahnke as its
Chief Executive Officer. Under the terms of an employment agreement
dated the same date, Mr. Dahnke will receive a base salary of $375,000
per year. Additionally, Mr. Dahnke received a signing bonus of
$250,000, and is eligible to receive an annual bonus of $250,000
starting with the calendar year ending December 31, 1998, provided
that the Company meets certain financial objectives. Effective October
1, 1997, Mr. Dahnke was granted a stock option for 250,000 shares of
the Company's common stock, and is eligible to receive additional
grants of stock options for 150,000 shares each, effective as of
December 31, 1998, 1999, and 2000, provided that the Company meets
certain financial objectives. Under certain conditions, in the event
that Mr. Dahnke terminates employment with the Company, Mr. Dahnke may
be entitled to his base salary for a period of 24 months from the date
the employment is terminated. Under certain conditions, in the event
that a change in control of the Company is deemed to have occurred, if
Mr. Dahnke is terminated after such change of control he may be
entitled to direct severance pay equal to a minimum of an amount equal
to two times the sum of the base salary plus the highest annual bonus
in the 3 year period immediately preceding the change in control and
all of his stock options will become fully vested. The foregoing
summary is qualified in its entirety by Mr. Dahnke's employment
agreement, as a copy of which is attached hereto as Exhibit 10.1.
Effective October 1, 1997, the Company hired Gregory F. Back as
Executive Vice President of Corporate Planning and Business
Development. Under the terms of an employment agreement dated the same
date, Mr. Back will receive a base salary of $195,000 per year.
Additionally, Mr. Back received a signing bonus of $100,000, and is
eligible to receive an annual bonus of $150,000 starting with the
calendar year ending December 31, 1998, provided that the Company
meets certain financial objectives. Effective October 1, 1997, Mr.
Back was granted a stock option for 150,000 shares of the Company's
common stock, and is eligible to receive additional grants of stock
options for 50,000 shares each, effective as of December 31, 1998,
1999, and 2000, provided that the Company meets certain financial
objectives. Under certain conditions, in the event that Mr. Back
terminates employment with the Company, Mr. Back may be entitled to
his base salary for a period of 24 months from the date the employment
is terminated. Under certain conditions, in the event that a change in
control of the Company is deemed to have occurred, if Mr. Back is
terminated after such change of control he may be entitled to direct
severance pay equal to a minimum of an amount equal to two times the
sum of the base salary plus the highest annual bonus in the 3 year
period immediately preceding the change in control. The foregoing
summary is qualified in its entirety by Mr. Back's employment
agreement, a copy of which is attached hereto as Exhibit 10.2.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement of Sale of Certain Assets of Pro CD, Inc.,
a subsidiary of Acxiom Corporation, to CD-Rom
Technologies, Inc., a subsidiary of American Business
Information, Inc., dated July 24, 1997, is
incorporated herein by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K dated
September 8, 1997
10.1 Employment Agreement with Scott Dahnke dated
October 1, 1997
10.2 Employment Agreement with Gregory Back dated
October 1, 1997
10.3 Amended and Restated Credit Agreement between
American Business Information, Inc. and First Union
National Bank, dated August 29, 1997, including all
exhibits thereto, is incorporated herein by reference
to Exhibit 99.5 to the Company's Current Report on
Form 8-K dated September 8, 1997
11 Statement regarding computation of per share earnings
(b) Report on Form 8-K
Effective July 21, 1997, the Company filed a current report on
Form 8-K related to the creation of two classes of common
stock and adoption of a shareholder rights plan
Effective September 8, 1997, the Company filed a current
report on Form 8-K related to the acquisition of Pro CD, Inc.
On September 4, 1997, the Company filed a current report on
Form 8-K/A related to the acquisition of DBA Holdings, Inc.
and Subsidiaries, including consolidated financial statements
of DBA Holdings, Inc.
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S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN BUSINESS INFORMATION, INC.
Date: October 30, 1997 /s/ SCOTT DAHNKE
---------------------- ------------------------------------------
Scott Dahnke, Chief Executive Officer
(principal executive officer)
/s/ STEVEN PURCELL
------------------------------------------
Steven Purcell, Chief Financial Officer
(principal financial officer)
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INDEX TO EXHIBITS
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
2.1 Agreement of Sale of Certain Assets of Pro CD, Inc.,
a subsidiary of Acxiom Corporation, to CD-Rom
Technologies, Inc., a subsidiary of American Business
Information, Inc., dated July 24, 1997, incorporated
by reference to the Company's Current Report on Form
8-K effective September 8, 1997
10.1 Employment Agreement with Scott Dahnke dated
October 1, 1997
10.2 Employment Agreement with Gregory Back dated
October 1, 1997
10.3 Amended and Restated Credit Agreement between
American Business Information, Inc. and First Union
National Bank, dated August 29, 1997, including all
exhibits thereto, incorporated by reference to the
Company's Current Report on Form 8-K effective
September 8, 1997
11 Statement regarding computation of per share earnings