-----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, B7kQjxkYdYK6119193dQMY84hqVYp1hgQQVcSODW0lxPCcUlbvb7ZPbYjXL7tZRL +dQbmi1KNlP0Tt0vH3n+YA== 0000950142-98-000622.txt : 19980817 0000950142-98-000622.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950142-98-000622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 98687755 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 June 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 August 3, 1998, Registrant had outstanding 21,252,721 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 12 Part II OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 16 Signature 17 2 NFO WORLDWIDE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30 DECEMBER 31 1998 1997 ---- ---- (UNAUDITED) ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $ 3,822 $ 8,055 RECEIVABLES: TRADE 55,260 47,044 UNBILLED 17,694 8,698 PREPAID EXPENSES AND OTHER CURRENT ASSETS 10,198 7,035 ------------ ------------ TOTAL CURRENT ASSETS 86,974 70,832 PROPERTY AND EQUIPMENT, NET 27,721 19,917 CUSTOMER LIST, GOODWILL AND OTHER INTANGIBLE ASSETS 92,771 74,409 OTHER ASSETS 4,468 5,116 ------------ ------------ TOTAL ASSETS $ 211,934 $ 170,274 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: CURRENT MATURITIES OF LONG-TERM DEBT $ 374 $ 346 ACCOUNTS PAYABLE 8,740 9,139 ACCRUED EXPENSES 15,727 18,757 CUSTOMER BILLINGS IN EXCESS OF REVENUES EARNED 15,851 14,126 ------------ ------------ TOTAL CURRENT LIABILITIES 40,692 42,368 LONG-TERM DEBT 50,811 24,823 OTHER LONG-TERM LIABILITIES 4,611 4,123 ------------ ------------ TOTAL LIABILITIES 96,114 71,314 ============ ============ MINORITY INTERESTS 2,659 2,236 ------------ ------------ STOCKHOLDERS' EQUITY: COMMON STOCK, PAR VALUE $.01 PER SHARE; 60,000 SHARES AUTHORIZED, 21,249 AND 20,730 ISSUED AND OUTSTANDING IN 1998 AND 1997, RESPECTIVELY 212 208 ADDITIONAL PAID-IN CAPITAL 61,766 51,766 RETAINED EARNINGS 52,893 46,045 ACCUMULATED OTHER COMPREHENSIVE INCOME (1,710) (1,295) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 113,161 96,724 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,934 $ 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 SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES $ 65,003 $ 47,025 $ 115,246 $ 89,045 COST OF REVENUES 29,769 21,032 52,050 40,148 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 24,433 18,850 45,417 35,629 DEPRECIATION EXPENSE 1,172 678 2,120 1,306 AMORTIZATION EXPENSE 1,226 722 2,333 1,472 ------------ ------------ ------------ ------------ OPERATING INCOME 8,403 5,743 13,326 10,490 INTEREST EXPENSE, NET 645 63 1,072 72 EQUITY INTEREST IN NET LOSS OF AFFILIATED COMPANIES AND OTHER EXPENSES(INCOME) 104 (3) 277 64 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 7,654 5,683 11,977 10,354 PROVISION FOR INCOME TAXES 3,062 2,568 4,726 4,469 ------------ ------------ ------------ ------------ NET INCOME BEFORE MINORITY INTERESTS 4,592 3,115 7,251 5,885 MINORITY INTERESTS 226 393 403 812 ------------ ------------ ------------ ------------ NET INCOME $ 4,366 $ 2,722 $ 6,848 $ 5,073 ============ ============ ============ ============ EARNINGS PER WEIGHTED AVERAGE SHARE OUTSTANDING(a): BASIC $.21 $.13 $.33 $.25 ==== ==== ==== ==== DILUTED $.20 $.13 $.32 $.25 ==== ==== ==== ==== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING(a): BASIC 21,200 20,183 20,996 20,129 ====== ====== ====== ====== DILUTED 21,729 20,572 21,622 20,630 ====== ====== ====== ======
(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 SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------------- ----------------------- 1998 1997 1998 1997 ---- ---- ---- ---- CASH FLOW FROM OPERATING ACTIVITIES: NET INCOME $ 4,366 $ 2,722 $ 6,848 $ 5,073 ADJUSTMENTS TO RECONCILE TO NET CASH USED IN OPERATING ACTIVITIES: MINORITY INTERESTS 226 393 403 812 DEPRECIATION EXPENSE 1,172 678 2,120 1,306 AMORTIZATION EXPENSE 1,226 722 2,333 1,472 EQUITY INTEREST IN NET LOSS OF AFFILIATED COMPANIES 107 78 172 154 EXCHANGE GAIN (312) 0 (312) 0 DIVIDENDS PAID TO MINORITY INTEREST 0 (721) 0 (721) ------------ ------------ ------------ ------------ SUBTOTAL 6,785 3,872 11,564 8,096 ------------ ------------ ------------ ------------ CHANGE IN ASSETS AND LIABILITIES THAT PROVIDED (USED) CASH: TRADE RECEIVABLES 392 (4,231) (1,763) (2,738) UNBILLED RECEIVABLES (9,196) (3,038) (7,160) (3,462) PREPAID EXPENSES AND OTHER CURRENT ASSETS (1,726) (313) (2,678) (1,011) OTHER ASSETS 249 (8) 586 224 ACCOUNTS PAYABLE, ACCRUED AND OTHER LIABILITIES (4,424) (2,368) (3,556) (2,733) CUSTOMER BILLINGS IN EXCESS OF REVENUES EARNED (2,240) 2,779 (1,538) 926 ------------ ------------ ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (10,160) (3,307) (4,545) (698) ------------ ------------ ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES: CAPITAL EXPENDITURES (3,354) (1,793) (7,940) (2,952) ACQUISITIONS (NET OF CASH ACQUIRED) (6,669) (3,892) (17,158) (4,972) INVESTMENTS IN AFFILIATED COMPANIES 0 (69) 0 (251) PURCHASE OF LICENSE AGREEMENT AND OTHER INTANGIBLES (358) (138) (426) (469) ------------ ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (10,381) (5,892) (25,524) (8,644) ------------ ------------ ------------ ------------
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 SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- CASH FLOW FROM FINANCING ACTIVITIES: NET PROCEEDS FROM ISSUANCE OF STOCK 598 294 1,069 303 PAYMENTS ON LONG-TERM DEBT (19,177) (202) (57,755) (4,364) BORROWINGS ON LINE OF CREDIT 14,532 5,000 43,032 9,000 BORROWINGS ON SENIOR NOTES 20,000 0 40,000 0 DEBT ISSUANCE COSTS (88) 0 (391) 0 ------------ ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 15,865 5,092 25,955 4,939 ------------ ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 891 32 (119) (162) ------------ ------------ ------------ ------------ CHANGE IN CASH (3,785) (4,075) (4,233) (4,565) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,607 9,089 8,055 9,579 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,822 $ 5,014 $ 3,822 $ 5,014 ============ ============ ============ ============
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 SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: INTEREST $ 270 $ 126 $ 663 $ 204 INCOME TAXES $2,050 $2,558 $2,386 $3,118 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 connection with these purchases, the following liabilities were assumed. Fair value of assets acquired $ 33,292 Less: cash paid (17,937) Less: 224,549 Company shares issued (4,369) --------- Liabilities assumed $ 10,986 ========= 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 229 2 4,438 COMMON STOCK ISSUED IN CONJUNCTION WITH ACQUISTION EARNOUTS 147 1 3,012 EXERCISE OF STOCK OPTIONS 136 1 914 OTHER STOCK ISSUANCES 7 - 154 PAYMENT OF NON-RECOURSE NOTES 7 TAX BENEFIT ON EXERCISED OPTIONS 1,475 TRANSLATION ADJUSTMENTS (415) NET INCOME 6,848 ------ ------- -------- -------- ------- BALANCE AT JUNE 30, 1998 21,249 $ 212 $ 61,766 $ 52,893 $ (1,710) ====== ======= ======== ======== ========
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 June 30, 1998 and the results of its operations for the three and sixmonth periods ended June 30, 1998 and June 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 April 3, 1998 the Company acquired CF Group, Inc. ("CF Group"). Founded in 1932, CF Group is the largest 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 2 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 three 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 are not material to the three and six month periods ended June 30, 1998 and 1997, and therefore are not included in the table shown here. THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ---------------- ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- REVENUES $65,003 $55,300 $123,608 $104,896 NET INCOME 4,366 2,956 7,240 5,454 BASIC EARNINGS PER SHARE $ .21 $ .14 $ .34 $ .27 DILUTED EARNINGS PER SHARE $ .20 $ .14 $ .33 $ .26 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 June 30, 1998 and 1997 was approximately $3.9 million and approximately $2.7 million, respectively. The Company's total Comprehensive Income for the six months ended June 30, 1998 and 1997 was approximately $6.4 million and approximately $4.8 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 SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Income Used for Basic and Diluted Earnings Per Share $4,366 $2,722 $6,848 $5,073 ====== ====== ====== ====== Weighted Average Number of Shares Outstanding Used for Basic Earnings Per Share 21,200 20,183 20,996 20,129 Dilutive Stock Options 529 372 553 396 Continently Issuable Common Shares 0 17 73 105 ------ ------ ------ ------ Weighted Average Number of Shares Outstanding and Common Share Equivalents Used for Diluted Earnings Per Share 21,729 20,572 21,622 20,630 ====== ====== ====== ======
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 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 JUNE 30 SIX MONTHS ENDED JUNE 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% 38.2% 100.0% 100.0% 29.4% COST OF REVENUES 45.8 44.7 41.5 45.2 45.1 29.6 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 37.6 40.1 29.6 39.4 40.0 27.5 DEPRECIATION EXPENSE 1.8 1.4 72.9 1.8 1.5 62.3 AMORTIZATION EXPENSE 1.9 1.6 69.8 2.0 1.6 58.5 ------ ------ ------ ------ ------ ------ OPERATING INCOME 12.9 12.2 46.3 11.6 11.8 27.0 INTEREST EXPENSE, NET 1.0 0.1 NM 0.9 0.1 NM EQUITY INTEREST IN NET LOSS OF AFFILIATED COMPANIES AND OTHER EXPENSES 0.1 0.0 NM 0.3 0.1 NM ------ ------ ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 11.8 12.1 34.7 10.4 11.6 15.7 PROVISION FOR INCOME TAXES 4.7 5.5 19.2 4.1 5.0 5.8 ------ ------ ------ ------ ------ ------ NET INCOME BEFORE MINORITY INTERESTS 7.1 6.6 47.4 6.3 6.6 23.2 MINORITY INTERESTS 0.4 0.8 (42.5) 0.4 0.9 (50.4) ------ ------ ------ ------ ------ ------ NET INCOME 6.7% 5.8% 60.4% 5.9% 5.7% 35.0% ====== ====== ======= ====== ====== ======
12 NFO WORLDWIDE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONS The Company's revenues for the three months ended June 30, 1998 increased 38% to $65.0 million from $47.0 million for the same period last year. Strong performance in the Company's high tech/telecommunications, health care and international business units contributed to the revenue growth. For the six months ended June 30, 1998, revenues increased 29% to $115.2 million from $89.0 million in the same period last year, with these same business units driving the increase for the six month period. The inclusion of newly acquired companies (CM Research acquired in December 1997, RCL and MarketMind acquired in March 1998, and CF Group acquired in April 1998) contributed $14.8 million to the quarter's increase in revenues, and $18.7 to the six month increase. These increases were partially offset by lower revenues in the Company's financial services business unit, where recent mergers have slowed industry wide spending. The growth in overall revenues occurred despite the negative effects of currency exchange translations, which reduced reported revenue growth for the quarter and six month period by 3% during each period, amounting to $1.2 million and $2.7 million, respectively. Cost of revenues increased 42% in the second quarter to $29.8 million from $21.0 million a year ago primarily due to the inclusion of the Company's newly acquired companies which have higher cost of revenues as a percentage of revenue ($7.0 million), and increased business volume. For the six months ended June 30, 1998, cost of revenues increased 30% to $52.1 million from $40.1 million last year, primarily due to overall increased business volume, and the Company's newly acquired companies ($8.7 million). In addition, currency exchange translations reduced cost of revenues for the quarter and six month period by $.3 million and $.6 million, respectively, in comparison to the same period last year. Selling, general and administrative expenses increased 30% in the second quarter to $24.4 million from $18.9 million in the same period last year. The primary reasons for the increase was the inclusion of the Company's newly acquired companies ($4.4 million), increased business activity, and inflation. Negative currency exchange translations reduced expenses by $.5 million in the current quarter. In addition, the 1997 second quarter and six month results include $.4 million in transaction costs associated with the Company's acquisition of Prognostics. For the six month period ended June 30, 1998, selling, general and administrative expenses increased 28% to $45.4 million from $35.6 million last year. The primary reasons for the increase were the inclusion of the Company's newly acquired companies ($6.5 million), increased business activity, increased office lease expenses, and inflation. Offsetting these increases were the negative effects of currency exchange translations ($1.2 million) and the elimination of the transaction costs associated with the 1997 acquisition of Prognostics ($.4 million). As a result of the items above, operating income for the quarter ended June 30, 1998 increased 46% to $8.4 million from $5.7 million, and for the first six months of 1998 increased 27% to $13.3 million from $10.5 million, compared to the same periods a year ago. Excluding the transaction costs associated with the 1997 acquisition of Prognostics, the Company's operating income increased 36% and 22% for the three and six month periods ending June 30, 1998. Currency translations negatively impacted reported operating income results for the quarter and six month period by $.4 million and $.9 million, respectively. The Company's effective tax rate for the quarter ended June 30, 1998 was 40.0% compared to 45.2% for the same period last year. For the six month period ended June 30, 1998 the effective tax rate was 39.5% compared to 43.2% in the same period last year. The decreases were primarily the result of lower taxes associated with the Company's international business units. 13 Net income for the second quarter of 1998 increased 60% to $4.4 million. Diluted earnings per share were $.20 compared to last year's $.13 per share, an increase of 54%. The second quarter 1997 operating results included an after tax charge of $.4 million or $.02 per diluted share relating to transaction costs associated with the acquisition of Prognostics. Excluding this charge, the Company's net income and diluted earnings per share increased by 38% and 33%,respectively, during the second quarter. Net income for the six months ended June 30, 1998 increased 35% to $6.8 million from $5.1 million a year ago, while diluted earnings per share increased by 28%, from $.25 to $.32. Excluding the 1997 Prognostics transaction costs, net income for the six month period grew by 24%, while diluted earnings per share increased by 19%. Negative currency exchange translations reduced net income for the three month period by $.3 million, and for the six months ended June 30, 1998 by $.7 million. LIQUIDITY AND CAPITAL RESOURCES Working capital as of June 30, 1998 was $46.3 million compared to $28.5 million at December 31, 1997. The increase in working capital resulted primarily from the results of operations for the six months ended June 30, 1998 ($11.6 million), increase in long term debt ($7.4 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 ($1 million). Working capital uses during the period included capital expenditures of $7.9 million, and increases in the Company's accounts receivables of $17.2 million, of which $10.3 million was in connection with the newly acquired companies. As of June 30, 1998 the Company had $9.7 million outstanding on its $75.0 million credit facility, and $40 million outstanding in Senior Notes payable. Capital expenditures for the quarter ended June 30, 1998 were $3.4 million compared to $1.8 million for the same period last year. For the six months ended June 30, 1998 capital expenditures were $7.9 million compared to $3.0 million a year ago. Capital expenditures for 1998 are anticipated to be approximately $15 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" (SOP 98-5). 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. Initial application of this SOP will be reported as the cumulative effect of a change in accounting principle. The adoption of this SOP will have no effect on the Company's cash flow, financial condition, or long-term liquidity, but will impact reported results from operations due to the timing of expense recognition for costs covered by this SOP. The Company is currently quantifying the effect on the consolidated financial statements. 14 OTHER MATTERS The Company is currently working to resolve the year 2000 issue, which results from the fact that many existing computer programs were designed for optimal computer performance on slower computers during the 1980's, and they did not account for the impact of the upcoming new millennium. In early 1997 the Company completed an impact analysis across all proprietary custom software programs and systems, and has since been reviewing the results for any necessary year 2000 changes. As potential problems are identified, affected programs are being modified by the Company's programming department to ensure future compliance. 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. 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 is targeting January 1, 1999 to complete all mission critical systems, including third party and supply chain vendors, and June 30, 1999 for all other systems, for year 2000 compliancy. 15 PART II OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule 16 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: August 14, 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) 17 EX-27 2 ART.5 FDS FOR 2ND 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 June 30, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1998 JUN-30-1998 3,822 0 73,379 425 0 86,974 52,645 24,924 211,934 40,692 50,811 212 0 0 112,949 211,934 115,246 115,246 52,050 101,920 127 26 1,222 11,977 4,726 6,848 0 0 0 6,848 .33 .32 * 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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