-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VGVHzaTyMQhZYCew4zqe/gdOBIoAcx0l2C+nj3Q7BqSfUWINTXNVynY51NKL+HoA DOVHpsqu3o1GoxyrGAKjbw== 0000950142-98-000816.txt : 19981116 0000950142-98-000816.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950142-98-000816 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NFO WORLDWIDE INC CENTRAL INDEX KEY: 0000897940 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 061327424 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13707 FILM NUMBER: 98747700 BUSINESS ADDRESS: STREET 1: 2 PICKWICK PLAZA STREET 2: STE 400 CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036298888 MAIL ADDRESS: STREET 1: TWO PICKWICK PLAZA CITY: GREENWICH STATE: CT ZIP: 06830 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number: 0 - 21460 NFO WORLDWIDE, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 06-1327424 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) TWO PICKWICK PLAZA, GREENWICH, CT. 06830 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (203) 629-8888 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: At November 10, 1998, Registrant had outstanding 21,324,278 shares of Common Stock. NFO WORLDWIDE, INC. INDEX PAGE PART I FINANCIAL INFORMATION NUMBER FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Condensed Consolidated Statement of Stockholders' Equity 8 Notes to Condensed Consolidated Financial Statements 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Part II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 17 Signature 18 2 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30 DECEMBER 31 1998 1997 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 6,485 $ 8,055 RECEIVABLES: TRADE 52,487 47,044 UNBILLED 12,659 8,698 PREPAID EXPENSES AND OTHER CURRENT ASSETS 10,765 7,035 ------------ ------------ TOTAL CURRENT ASSETS 82,396 70,832 PROPERTY AND EQUIPMENT, NET 29,171 19,917 CUSTOMER LIST, GOODWILL AND OTHER INTANGIBLE ASSETS 93,991 74,409 OTHER ASSETS 5,873 5,116 ------------ ------------ TOTAL ASSETS $ 211,431 $ 170,274 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: CURRENT MATURITIES OF LONG-TERM DEBT $ 310 $ 346 ACCOUNTS PAYABLE 8,436 9,139 ACCRUED EXPENSES 18,178 18,757 CUSTOMER BILLINGS IN EXCESS OF REVENUES EARNED 11,712 14,126 ------------ ------------ TOTAL CURRENT LIABILITIES 38,636 42,368 LONG-TERM DEBT 49,869 24,823 OTHER LONG-TERM LIABILITIES 4,023 4,123 ------------ ------------ TOTAL LIABILITIES 92,528 71,314 ------------ ------------ MINORITY INTERESTS 2,709 2,236 ------------ ------------ STOCKHOLDERS' EQUITY: COMMON STOCK, PAR VALUE $.01 PER SHARE; 60,000 SHARES AUTHORIZED, 21,313 AND 20,730 ISSUED AND OUTSTANDING IN 1998 AND 1997, RESPECTIVELY 213 208 ADDITIONAL PAID-IN CAPITAL 62,744 51,766 RETAINED EARNINGS 55,453 46,045 ACCUMULATED OTHER COMPREHENSIVE INCOME (2,216) (1,295) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 116,194 96,724 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,431 $ 170,274 ============ ============
The accompanying notes are an integral part of these statements. 3 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES $ 65,486 $ 49,340 $ 180,732 $ 138,385 COST OF REVENUES 30,276 21,163 82,393 61,311 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 27,690 20,143 73,107 55,772 AMORTIZATION EXPENSE 1,052 876 3,318 2,348 DEPRECIATION EXPENSE 891 731 3,011 2,037 --------- --------- --------- --------- OPERATING INCOME 5,577 6,427 18,903 16,917 INTEREST EXPENSE, NET 716 274 1,788 346 EQUITY INTEREST IN NET LOSS OF AFFILIATED COMPANIES AND OTHER EXPENSES 117 173 394 237 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 4,744 5,980 16,721 16,334 PROVISION FOR INCOME TAXES 2,158 2,464 6,885 6,933 --------- --------- --------- --------- NET INCOME BEFORE MINORITY INTERESTS 2,586 3,516 9,836 9,401 MINORITY INTERESTS 25 315 428 1,127 --------- --------- --------- --------- NET INCOME $ 2,561 $ 3,201 $ 9,408 $ 8,274 ========= ========= ========= ========= EARNINGS PER WEIGHTED AVERAGE SHARE OUTSTANDING(a): BASIC $ .12 $ .16 $ .45 $ .41 ========= ========= ========= ========= DILUTED $ .12 $ .15 $ .44 $ .40 ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING(a): BASIC 21,273 20,193 21,093 20,150 ========= ========= ========= ========= DILUTED 21,605 20,768 21,621 20,676 ========= ========= ========= ========= (a) For comparability, the earnings per share and share data reflect the three-for-two stock split effected on October 15, 1997.
The accompanying notes are an integral part of these statements. 4 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: NET INCOME $ 2,561 $ 3,201 $ 9,408 $ 8,274 ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: MINORITY INTERESTS 25 315 428 1,127 AMORTIZATION EXPENSE 1,052 876 3,318 2,348 DEPRECIATION EXPENSE 891 731 3,011 2,037 EQUITY INTEREST IN NET LOSS OF AFFILIATED COMPANIES 79 86 251 240 DIVIDENDS PAID TO MINORITY INTERESTS 0 0 0 (721) CHANGE IN ASSETS AND LIABILITIES THAT PROVIDED (USED) CASH: TRADE RECEIVABLES 2,638 1,170 875 (1,568) UNBILLED RECEIVABLES 4,948 (4,150) (2,212) (7,612) PREPAID EXPENSES AND OTHER CURRENT ASSETS (915) 605 (3,593) (406) OTHER ASSETS (1,561) (119) (975) 105 ACCOUNTS PAYABLE, ACCRUED AND OTHER LIABILITIES 1,106 (29) (2,915) (2,762) CUSTOMER BILLINGS IN EXCESS OF REVENUES EARNED (4,108) (2,779) (5,646) (1,853) --------- --------- --------- --------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 6,716 (93) 1,950 (791) --------- --------- --------- --------- CASH FLOW FROM INVESTING ACTIVITIES: CAPITAL EXPENDITURES (2,372) (1,346) (10,312) (4,298) ACQUISITIONS (NET OF CASH ACQUIRED) (990) (9,358) (18,148) (14,330) INVESTMENTS IN AFFILIATED COMPANIES AND OTHER INTANGIBLES (14) (50) (207) (770) NET CASH USED BY INVESTING ACTIVITIES (3,376) (10,754) (28,667) (19,398) --------- --------- --------- ---------
The accompanying notes are an integral part of these statements. 5 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS) (Continued)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- CASH FLOW FROM FINANCING ACTIVITIES: NET PROCEEDS FROM ISSUANCE OF STOCK 0 224 1,057 527 PAYMENTS ON LONG-TERM DEBT (3,552) (76) (61,307) (4,440) BORROWINGS ON LINE OF CREDIT 3,000 10,500 46,032 19,500 BORROWINGS ON SENIOR NOTES 0 0 40,000 0 DEBT ISSUANCE COSTS 0 0 (391) 0 --------- --------- --------- --------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (552) 10,648 25,391 15,587 --------- --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (125) (62) (244) (224) --------- --------- --------- --------- CHANGE IN CASH 2,663 (261) (1,570) (4,826) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,822 5,014 8,055 9,579 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,485 $ 4,753 $ 6,485 $ 4,753 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 6 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED, IN THOUSANDS)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: INTEREST $ 1,385 $ 112 $ 2,048 $ 316 INCOME TAXES $ 1,756 $ 2,549 $ 4,142 $ 5,667
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: In March 1998, the Company acquired MarketMind Technologies, and in a separate transaction acquired Ross-Cooper-Lund, for an aggregate total of cash and shares of NFO Common Stock of $12.45 million (see Note 2). In April 1998, the Company acquired CF Group, Inc., for a total value of cash and shares of NFO Common Stock of CDN $14 million (see Note 2). In August 1998, the Company acquired Stochastic International Pty. Ltd., for a total value of cash and shares of NFO Common Stock of $1.98 million (see Note 2). In connection with these purchases, the following liabilities were assumed. Fair value of assets acquired $ 36,048 Less: cash paid (18,927) Less: 284,846 Company shares issued (5,359) -------- Liabilities assumed $ 11,762 ======== The accompanying notes are an integral part of these statements. 7 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED, IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE SHARES STOCK CAPITAL EARNINGS INCOME ------ ----- ------- -------- ------ BALANCE AT JANUARY 1, 1998 20,730 $ 208 $51,766 $46,045 $(1,295) COMMON STOCK ISSUED IN CONJUNCTION WITH ACQUISITIONS 293 3 5,428 COMMON STOCK ISSUED IN CONJUNCTION WITH ACQUISTION EARNOUTS 147 1 3,012 EXERCISE OF STOCK OPTIONS 136 1 914 OTHER STOCK ISSUANCES 7 142 PAYMENT OF NON-RECOURSE NOTES 7 TAX BENEFIT ON EXERCISED OPTIONS 1,475 TRANSLATION ADJUSTMENTS (921) NET INCOME 9,408 ------ ------- ------- ------- ------- BALANCE AT SEPTEMBER 30, 1998 21,313 $ 213 $62,744 $55,453 $(2,216) ====== ======= ======= ======= =======
The accompanying notes are an integral part of this statement. 8 NFO WORLDWIDE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Financial Statements: These condensed consolidated financial statements include the accounts of NFO Worldwide, Inc., and its subsidiaries (the Company). All significant intercompany amounts have been eliminated. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 1998, and the results of its operations for the three and nine month periods ended September 30, 1998, and September 30, 1997. These financial statements are presented in accordance with the requirements of Form 10-Q. Accordingly, the financial statements and related notes in the Company's Audited Financial Statements for the fiscal year ended December 31, 1997, included in the Company's Form 10-K filed with the SEC on March 30, 1998, should be read in conjunction with the accompanying condensed consolidated financial statements. The information included herein may not be indicative of the results to be expected for a full year. Note 2. Acquisitions: On August 31, 1998, the Company acquired Stochastic International Pty. Ltd. ("Stochastic"). Stochastic is the developer of the Stochastic Reaction Monitor continuous brand tracking system, which provides guidance on brand positioning to more than 60 companies in 33 countries. Stochastic was founded in 1981 and is headquartered in Australia. The Company acquired substantially all the net assets of Stochastic for a total purchase price of approximately $2.5 million, $2 million payable at closing in equal amounts of cash and newly issued shares of NFO common stock and the balance payable at the end of the next two years. A further amount is payable at the end of three years, providing that Stochastic achieves certain revenue targets during the third year. On April 3, 1998, the Company acquired CF Group, Inc. ("CF Group"). Founded in 1932, CF Group is the largest custom market research organization in Canada. CF Group is headquartered in Toronto and has client service offices in Montreal, Ottawa and Vancouver. The Company acquired 100 percent of the outstanding stock of CF Group for a total purchase price of approximately CDN $20 million, 70 percent payable at closing, with 75 percent in cash and 25 percent in newly issued shares of NFO common stock. The remaining 30 percent of the purchase price will be payable over the next two years based on CF Group achieving certain earnings targets. On March 4, 1998, the Company acquired MarketMind Technologies ("MarketMind") and Ross-Cooper-Lund ("RCL"). MarketMind owns and licenses the MarketMind(TM) system, which uses proprietary software that combines a set of key diagnostic measures together with the integration, interactive analysis and display of multiple streams of longitudinal data. RCL is a research-based consulting firm focused on brand-building strategies and is the exclusive licensee of the MarketMind system in the United States. In separate transactions, the Company acquired substantially all the net assets of each company for the combined consideration of $16.6 million. Of the total purchase price, $12.45 million or 75 percent was paid at closing, while the remaining 25 percent will be payable based upon each company achieving certain earnings targets over the next two years. Approximately 85 percent of the closing consideration was paid in cash, and the remainder in newly issued shares of NFO common stock. All four acquisitions have been accounted for as purchases and the accompanying financial statements include the results of operations from the effective date of acquisition. The purchase price allocations are based on preliminary estimates of fair market value and are subject to revision. 9 The following unaudited pro forma summary presents the condensed consolidated results of operations as if the acquisitions had occurred on January 1, 1997, and do not purport to be indicative of what would have occurred had the acquisitions been made at that date or of the results which may occur in the future. The pro forma effects of MarketMind and Stochastic are not material to the three and nine month periods ended September 30, 1998 and 1997, and therefore are not included in the table shown here.
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES $ 65,486 $ 57,636 $ 189,175 $ 162,532 NET INCOME 2,561 3,371 9,817 8,849 BASIC EARNINGS PER SHARE $ .12 $ .17 $ .46 $ .43 DILUTED EARNINGS PER SHARE $ .12 $ .16 $ .45 $ .42
Note 3. Comprehensive Income: During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Comprehensive Income is the total of Net Income and all other nonowner changes in equity ("Other Comprehensive Income"). Comprehensive Income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The adoption of SFAS 130 did not impact results from operations, financial condition, or long-term liquidity, but did require the Company to classify items of Other Comprehensive Income by their nature in the financial statements and display the accumulated balance of Other Comprehensive Income separately in the stockholders' equity section of the Company's consolidated balance sheets. The Company's total Comprehensive Income for the three months ended September 30, 1998 and 1997, was approximately $2.1 million and approximately $3.1 million, respectively. The Company's total Comprehensive Income for the nine months ended September 30, 1998 and 1997, was approximately $8.5 million and approximately $7.9 million, respectively. The Company's total Comprehensive Income includes net income and Other Comprehensive Income. The Company's components of Other Comprehensive Income are currency translation adjustments and minimum pension liability adjustments. 10 Note 4. Earnings Per Share: Earnings per share have been restated to give effect to the Company's three-for-two stock split effected on October 15, 1997. The following table reconciles the net income and weighted average number of shares included in the basic earnings per share calculation to the net income and weighted average number of shares used to compute diluted earnings per share (in thousands):
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net Income Used for Basic and Diluted Earnings Per Share $ 2,561 $ 3,201 $ 9,408 $ 8,274 ========= ========= ========= ========= Weighted Average Number of Shares Outstanding Used for Basic Earnings Per Share 21,273 20,193 21,093 20,150 Dilutive Stock Options 328 494 478 429 Contingently Issuable Common Shares 4 81 50 97 --------- --------- --------- --------- Weighted Average Number of Shares Outstanding and Common Share Equivalents Used for Diluted Earnings Per Share 21,605 20,768 21,621 20,676 ========= ========= ========= =========
Note 5. Credit Facilities: On March 9, 1998, the Company successfully concluded a private placement of $40 million fixed rate Senior Notes and entered into a $75 million revolving credit agreement. Borrowings under these combined $115 million credit facilities are unsecured, the proceeds of which were used to refinance the Company's previous debt of approximately $32 million and will be used to finance future acquisitions, capital expenditures, and working capital. The $75 million revolving credit facility, with an ultimate maturity date of March 2003, replaced the Company's bank line of $35 million and will enable the Company to borrow in multiple currencies at interest rates tied to LIBOR or the prime rate, at the Company's option. The $40 million Senior Notes are due March 1, 2008, bear interest at the fixed rate of 6.43 percent and are to be repaid in equal annual installments of approximately $5.7 million starting in the year 2002. 11 Note 6. Subsequent Events: On October 23, 1998, the Company acquired City Research Group Plc ("City Research"). City Research, founded in 1978 and headquartered in London, England, is a leading U.K. market research firm specializing in commercial banking. The Company acquired all the outstanding stock of City Research for total consideration of approximately $2.4 million, $1.5 million payable in cash at closing and the remainder payable over the next two years in cash and stock based on City Research achieving certain earnings targets. The purchase will be accounted for using the purchase method of accounting. On October 1, 1998, the Company acquired Donovan Research Pty. Ltd. ("Donovan"). Donovan, founded in 1974 and headquartered in Perth, Australia, is a full service custom research agency with a leading position in fast-moving consumer goods, public policy, tourism, customer satisfaction and continuous tracking research. In addition to its own branded products, AdTest and Packtest, Donovan is also the exclusive regional licensee of MarketMind, a global brand tracking system acquired by NFO in March 1998. The Company acquired substantially all the net assets of Donovan for cash consideration of approximately $2.5 million, $2 million payable at closing and the remainder payable over the next two years based on Donovan's achievement of certain earnings targets. The purchase will be accounted for using the purchase method of accounting. On October 5, 1998, the Company's Board of Directors adopted a Stockholder Rights Plan (the "SR Plan") by declaring a dividend distribution of one preferred share purchase right (a "Right") for each share of the Company's common stock. The SR Plan is intended to give the Company's Board of Directors sufficient time to respond to an unsolicited tender offer or other attempted acquisition. Under the SR Plan, Rights were issued to stockholders of record as of October 15, 1998, and will expire after ten years, unless earlier redeemed or exchanged by the Company. The Rights distribution is not taxable to stockholders. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer upon the consummation of which would result in 15% ownership. Each Right will entitle stockholders to buy one one-hundredth of a share of a new series of preferred stock at an exercise price of $50.00. If, however, a person or group acquires 15% or more of the Company's outstanding common stock, each Right will entitle its holder, other than such person or members of such group, to purchase, at the Right's then-current exercise price, a number of the Company's common shares having a market value of twice the Right's exercise price. If the Company is acquired in a merger or other business combination transaction after a person or group has acquired 15% or more of the Company's outstanding common stock, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value of twice such exercise price. Under certain circumstances, the Company's Board of Directors may exchange the Right, in whole or in part, at an exchange ratio of one share of common stock (or one-hundredth of a share of the new series of preferred stock) per Right. Prior to the acquisition by a person or group of beneficial owners of 15% or more of the Company's common stock, the Rights are redeemable for one cent per Right at the option of the Board of Directors. Prior to such time, the terms of the Rights may be amended by the Board. 12 NFO WORLDWIDE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operating statement data for the Company, expressed as a percentage of revenues, and the percentage change in such items compared to amounts for the prior year.
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30 ------------------------------- ------------------------------ PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE REVENUES CHANGE FROM REVENUES CHANGE FROM 1998 1997 PRIOR YEAR 1998 1997 PRIOR YEAR ---- ---- ----------- ---- ---- ----------- REVENUES 100.0% 100.0% 32.7% 100.0% 100.0% 30.6% COST OF REVENUES 46.2 42.9 43.1 45.6 44.3 34.4 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 42.3 40.8 37.5 40.5 40.3 31.1 AMORTIZATION EXPENSE 1.6 1.8 20.1 1.8 1.7 41.3 DEPRECIATION EXPENSE 1.4 1.5 21.9 1.6 1.5 47.8 ----- ----- ----- ----- ----- ----- OPERATING INCOME 8.5 13.0 (13.2) 10.5 12.2 11.7 INTEREST EXPENSE, NET 1.1 0.6 161.3 1.0 0.3 416.8 EQUITY INTEREST IN NET LOSS OF AFFILIATED COMPANIES AND OTHER EXPENSES 0.2 0.3 (32.4) 0.2 0.1 66.2 ----- ----- ----- ----- ----- ----- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 7.2 12.1 (20.7) 9.3 11.8 2.4 PROVISION FOR INCOME TAXES 3.3 5.0 (12.4) 3.9 5.0 (0.7) ----- ----- ----- ----- ----- ----- NET INCOME BEFORE MINORITY INTERESTS 3.9 7.1 (26.5) 5.4 6.8 4.6 MINORITY INTERESTS 0.0 0.6 (92.1) 0.2 0.8 (62.0) ----- ----- ----- ----- ----- ----- NET INCOME 3.9% 6.5% (20.0)% 5.2% 6.0% 13.7% ===== ===== ===== ===== ===== =====
13 OPERATIONS The Company's revenues for the three months ended September 30, 1998, increased 33% to $65.5 million from $49.3 million for the same period last year. Strong performance in the Company's high tech/telecommunications, packaged goods and health care business units contributed to the revenue growth. For the nine months ended September 30, 1998, revenues increased 31% to $180.7 million from $138.4 million in the same period last year, with the high tech/telecommunications, international and health care business units driving the increase. The inclusion of newly acquired companies (CM Research acquired in December 1997; RCL and MarketMind, March 1998; CF Group, April 1998; and Stochastic, August 1998), contributed $13.9 million to the quarter's increase in revenues, and $ 32.5 million to the nine month increase. These increases were somewhat offset by a reduction in revenues in the Company's financial services business unit, where client spending levels have been reduced by recent merger activity. The growth in overall revenues occurred despite the negative effects of currency exchange translations, which reduced reported revenue growth for the quarter and nine month periods by $.5 million (1%) and $3.2 million (2%), respectively. Excluding currency effects and PSI Global, the Company's lead financial services unit, the Company's consolidated revenues grew 14% and 16% over the same three and nine month periods last year, respectively, on a comparable basis. Cost of revenues increased 43% in the third quarter to $30.3 million from $21.2 million a year ago primarily due to the inclusion of the Company's newly acquired companies, which also have higher cost of revenues as a percentage of revenue, increased business volume and inflation. For the nine months ended September 30, 1998, cost of revenues increased 34% to $82.4 million from $61.3 million last year, primarily due to the Company's newly acquired companies ($15.9 million), overall increased business volume, and inflation. In addition, currency exchange translations reduced cost of revenues for the quarter and nine month period by $.5 million and $ 1.3 million, respectively, in comparison to the same period last year. Cost of revenues as a percentage of revenues increased in the current quarter and in the nine month period as a result of lower than expected revenues in syndicated products at PSI Global compared to the same periods in the prior year. Selling, general and administrative expenses increased 38% in the third quarter to $27.7 million from $20.1 million in the same period last year. The primary reasons for the increase were the inclusion of the Company's newly acquired companies ($4.9 million), increased business activity including increased staffing costs ($1.8 million), the costs of increased office space at three operating subsidiaries and inflation. Offsetting these increases were the negative effects of currency exchange translations ($.1 million) and the elimination of the transaction costs associated with the 1997 acquisition of The MBL Group plc ("MBL") ($.8 million). For the nine month period ended September 30, 1998, selling, general and administrative expenses increased 31% to $73.1 million from $55.8 million last year. The primary reasons for the increase were the inclusion of the Company's newly acquired companies ($12.2 million), increased business activity including staffing costs ($3.2 million), increased office lease expenses, and inflation. Offsetting these increases were the negative effects of currency exchange translations ($1.3 million) and the elimination of the transaction costs associated with the 1997 acquisitions of MBL and Prognostics ($1.3 million). As a result of the items above, operating income for the quarter ended September 30, 1998, decreased 13% to $5.6 million from $6.4 million, compared to the same period a year ago. The decrease is principally a result of the substantially lower operating results posted by PSI Global, the Company's lead financial services unit. Operating income for the first nine months of 1998 increased 12% to $18.9 million from $16.9 million, compared to the same period a year ago. Currency translations negatively impacted reported operating income results for the nine month period by $.8 million. The Company's effective tax rate for the quarter ended September 30, 1998, was 45.5% compared to 41.2% for the same period last year. This increase is principally the result of an increase in the proportion of the Company's income derived from companies located in higher tax jurisdictions. For the nine month period ended September 30, 1998, the effective tax rate was 41.2% compared to 42.4% in the same period last year. 14 Net income for the third quarter of 1998 decreased 20% to $2.6 million from $3.2 million for the same period in 1997. Diluted earnings per share were $.12 compared to last year's $.15 per share, a decrease of 20%. The third quarter 1997 operating results included an after tax charge of $.8 million or $.04 per diluted share relating to transaction costs associated with the Company's acquisition of MBL. Net income for the nine months ended September 30, 1998, increased 14% to $9.4 million from $8.3 million a year ago, while diluted earnings per share increased by 10%, from $.40 to $.44. Included in the 1997 nine month results are transaction costs of $1.3 million relating to the acquisitions of MBL and Prognostics. Currency exchange translations increased net income for the three month period by $.1 million, and decreased net income for the nine months ended September 30, 1998, by $.6 million. LIQUIDITY AND CAPITAL RESOURCES Working capital as of September 30, 1998, was $43.8 million compared to $28.5 million at December 31, 1997. The increase in working capital resulted primarily from the results of operations for the nine months ended September 30, 1998, ($15.7 million), increased long term debt ($4.0 million), payments in cash (financed by long term debt) and stock of previously accrued acquisition related liabilities ($4.3 million), a reduction in accrued liabilities related to a tax benefit on exercised options ($1.5 million), and working capital provided by the Company's acquisitions ($2.3 million). Working capital uses during the period included capital expenditures of $10.3 million, increases in other assets ($2.1 million), and increases in the Company's accounts receivables of $9.4 million, of which $9.8 million was in connection with the newly acquired companies. As of September 30, 1998, the Company had $8.9 million outstanding on its $75.0 million credit facility, and $40 million outstanding in Senior Notes payable. Capital expenditures for the quarter ended September 30, 1998, were $2.4 million compared to $1.3 million for the same period last year. For the nine months ended September 30, 1998, capital expenditures were $10.3 million compared to $4.3 million a year ago. Capital expenditures for 1998 are anticipated to be approximately $14 million, including approximately $10 million for the Company's planned operations expansions. The Company anticipates that existing cash, together with internally generated funds and its credit and stock availabilities will provide the Company with the resources that are needed to satisfy potential acquisitions, capital expenditures and the Company's growing working capital requirements. The timing and magnitude of future acquisitions will be the single most important factor in determining the Company's long term capital needs. FUTURE REQUIRED ACCOUNTING CHANGES On April 3, 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-up Activities". This Statement of Position (SOP) provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. This SOP is effective for financial statements for fiscal years beginning after December 15, 1998. The adoption of this SOP will reduce reported results from operations due to the timing of expense recognition for costs covered by this SOP by an immaterial amount arising from the establishment of certain European joint ventures. 15 OTHER MATTERS The Company is currently working to resolve the Year 2000 issue. In early 1997 the Company completed an impact analysis across all proprietary custom software programs and systems. As a result of this analysis, affected programs are being modified by the Company's programming departments to ensure future compliance. Any new programs being developed are being made Year 2000 compliant from the outset, while certain existing systems are being made Year 2000 compliant as they are reengineered. The Company operates subsidiaries and divisions worldwide. While many of these operations are already Year 2000 compliant in hardware, software and embedded systems, other operations are still in the process of upgrading their systems for Year 2000 compliance. The Company is in the process of testing its mission critical and non-critical systems and software for Year 2000 compliance by using a test date of January 1, 2000. In instances where the Year 2000 date is not properly processed, the systems and software are upgraded and re-tested as necessary for Year 2000 compliance. Mission critical applications and systems have been prioritized for Year 2000 compliance, and many of those systems are already compliant. The Company believes the most likely worst case scenario would be for a non-critical application or system to not be Year 2000 compliant on January 1, 2000. The Company's contingency plan includes manually addressing non-critical applications and systems compliance problems. Additionally, the Company has the ability to readily outsource many of its data collection and processing processes should the need arise. The Company is also coordinating with clients, vendors, affiliates and other outside parties who may affect, or be affected by, the Company's plans to address the Year 2000 issue. During 1998, the Company sent surveys to these outside parties inquiring as to their status in addressing the Year 2000 issue within their respective organizations. Although the results of those surveys are still being gathered and analyzed, the Company does not believe the effect of non-compliance with Year 2000 on the part of any individual or group of outside parties would have a material negative impact on the Company's day-to-day operations. The Company is targeting January 1, 1999, to complete mission critical systems, including third party and supply chain vendors, and June 30, 1999, for all other systems, for Year 2000 compliance. The Company estimates that total Year 2000 compliance costs incurred from 1997 through September 30, 1998, approximate $275,000, and the estimated future cost to complete Year 2000 compliance is approximately $600,000, including capital expenditures of approximately $200,000. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS As certain of the statements made in this Form 10-Q are "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995), they involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, clients' timing of new product introductions and reformulations, clients' marketing budgets, industry and economic conditions, changes in management or ownership of a client, the effect of the Company's competition on client purchasing decisions, the strategic decisions of the Company's management team, the extent to which the Company is successful in developing and marketing its interactive market research techniques and other factors referenced in this report. In addition, the success of the Company's worldwide expansion efforts is dependent in part on the successful application of NFO's methodologies to different business and consumer environments. To understand the additional risks which may affect the Company's future performance, refer to Part 1 of NFO's 1997 Annual Report on Form 10-K filed on March 30, 1998. 16 PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K The Company filed a report on Form 8-K with the Commission on October 6, 1998, in respect of the registration of the rights issuable pursuant to the terms and conditions of the Company's Stockholder Rights Plan and a press release announcing a downturn in expected third quarter earnings. 17 NFO WORLDWIDE, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NFO WORLDWIDE, INC. ------------------- (Registrant) Dated: November 13, 1998 /s/ Patrick G. Healy -------------------- Patrick G. Healy, President - Corporate Products/Systems Development and Chief Financial Officer (Authorized Officer of Registrant and Principal Financial Officer) 18 EX-27 2 ART.5 FDS FOR 3RD QUARTER 10-Q
5 This schedule contains summary financial information extracted from the financial statements contained in NFO Worldwide, Inc.'s report on Form 10-Q for the quarter ended September 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1998 SEP-30-1998 6,485 0 65,557 411 0 82,396 49,919 20,748 211,431 38,636 49,869 213 0 0 115,981 211,431 180,732 180,732 82,393 161,829 197 37 1,985 16,721 6,885 9,408 0 0 0 9,408 .45 .44 Information has been prepared in accordance with SFAS No. 128, basic and diluted EPS have been provided in place of primary and fully diluted, respectively.
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