<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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 0-4781
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MARKET FACTS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-2061602
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3040 WEST SALT CREEK LANE, ARLINGTON HEIGHTS, ILLINOIS 60005
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 590-7000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 10, 1999, there were issued and outstanding 8,943,501 shares of
common stock; the aggregate market value of the shares of such stock held by
nonaffiliates of the registrant, based upon a closing price of $24.50 per share,
was $153,306,717 as of the same date, assuming solely for purposes of this
calculation that all directors and executive officers of the registrant are
"affiliates." This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE:
1998 ANNUAL REPORT TO STOCKHOLDERS--PARTS I, II AND IV HEREOF. PROXY STATEMENT
FOR THE REGISTRANT'S 1999 ANNUAL MEETING TO BE FILED WITHIN 120 DAYS AFTER THE
END OF THE FISCAL YEAR--PART III HEREOF.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The predecessor to Market Facts, Inc. was incorporated in 1946 in Illinois.
Market Facts was incorporated in 1966 in Delaware and is a leading provider of
custom market research services. Except as otherwise noted, the term "Company"
refers to Market Facts and its subsidiaries. Custom market research involves the
measurement of consumer beliefs, attitudes and behavior toward particular
products, services, concepts or advertising. The Company has been successfully
supplying clients with accurate and objective marketing information about
consumers, products and competitors since its inception in 1946. It provides
quantitative and qualitative marketing research both domestically and
internationally. Excluding the impact of the businesses acquired in 1998,
approximately 92% of the Company's revenue in 1998 was from clients for whom the
Company had performed work in the previous year.
The Company believes it is uniquely qualified to offer clients a full range of
custom market research products and services that offer superior solutions for
their market research needs. Its professional research staff works with clients
to define the marketing project, select project-appropriate products and
services, develop effective questionnaires or other means of data collection,
collect the responses, process the data, analyze and interpret the results, and
present them in a meaningful and succinct package. The Company believes clients
will continue to increasingly demand this fully integrated approach to custom
market research services.
The Company has developed the Consumer Mail Panel-SM- ("CMP"), which is its own
broad-based panel of consumer households that have been "pre-screened" through
the collection of extensive demographic profiles to participate in a wide
variety of market research projects. The Company believes its CMP provides a
substantial competitive advantage over firms using only traditional random
research methods since the CMP delivers higher response rates and lower costs
than traditional methods. The Company's expertise in the collection and analysis
of consumer data from its CMP has a variety of marketing research applications,
such as tracking product performance and customer satisfaction, measuring the
effectiveness of advertising campaigns, assessing brand strength and competitive
position, determining price sensitivity, and evaluating new products, markets or
other business opportunities. The CMP, which was originally established in 1949,
presently consists of approximately 600,000 households throughout the United
States and Canada. The Company also maintains a Pan European consumer mail panel
of approximately 135,000 households through a joint venture with Taylor Nelson
AGB plc of England and Infratest Burke of Germany.
The Company's in-house staff conducts telephone interviews through its National
Telephone CenterSM, consisting of approximately 375 computer-assisted
interviewing terminals located in the United States and Canada. The Company has
also entered into relationships with selected telephone interviewing firms to
perform telephone marketing research. The Company uses IVR (Interactive Voice
Response) technology for brief telephone surveys where interaction between a
respondent and a live interviewer is not required. In-person interviews are
conducted primarily through more than 100 independent field agencies, at the
Company's Central Location Interviewing Panel facility in suburban Chicago and
at automobile clinics held at various locations throughout the United States.
An important component of the Company's business strategy is to grow through
acquisitions. It will continue to seek acquisition candidates that are
profitable, have stable management, are culturally compatible with the Company,
are able to sell branded market research products and services, are able to
utilize advanced technology, are positioned in targeted industries, and are
compatible with the Company's international expansion plans.
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In August 1998, the Company acquired the net assets of Product Intelligence,
Inc., a market research firm operating a national network of multimedia
computerized consumer interviewing stations in 35 separate markets that provide
clients with rapid turnaround of market research requiring consumer exposure to
marketing elements. The purchase price included $4.5 million in cash and shares
of Market Facts' common stock, and additional consideration contingent upon
future earnings.
In March 1998, the Company acquired the net assets of Tandem Research
Associates, Inc., a 16 year-old firm providing specialized custom and
multi-client research products and services to leading pharmaceutical companies
and emerging biotech firms. The purchase price included $14.4 million in cash
and additional consideration contingent upon future earnings.
In January 1998, the Company completed the acquisition of the outstanding stock
of Strategy Research Corporation, a full service market research company
specializing in Hispanic research in the U.S and Latin America. The purchase
price included $1.2 million in cash and additional consideration contingent upon
future earnings.
In July 1997, the Company acquired all of the outstanding stock of BAIGlobal,
Inc., a full service market research and information company offering a complete
range of research services--quantitative, qualitative and competitive
tracking--in the United States and internationally. The purchase price included
$3.7 million in cash and additional consideration contingent upon future
earnings.
Another important element of the Company's business strategy is the ability to
provide market research products and services to its clients globally. The
Company believes that its ability to serve clients on a global basis is key to
its ability to further strengthen client relationships. In addition to acquiring
Strategy Research Corporation, the Company has established joint venture
relationships in Europe, China and India that it believes will enable it to
serve the international custom market research needs of its U.S.-based clients
and intends to continue seeking other acquisitions, joint ventures and strategic
alliances globally. The Company also is the exclusive licensee in North America,
Central America, South America and the Caribbean of the Conversion Model, which
the Company believes to be the leading brand equity measurement method in use
worldwide. The Company has working relationships with twelve international
marketing research companies outside the U.S. that are also Conversion Model
licensees which provide the Company with research capabilities in over fifty
countries. These relationships provide the Company with resources it believes
are essential to compete effectively for multi-country strategic and tracking
research programs that are increasingly being conducted by North American-based
global marketers.
The Company's ongoing investment in technology is a key component of its growth
strategy and product development efforts. The Company's utilization of
technology focuses on the development of: (i) technologically sophisticated
market research products, (ii) new methods of collecting market research data,
and (iii) sophisticated ways of delivering data to clients and presenting
research results. In all three of these areas, the Company's information
technology staff works with its client service personnel to develop integrated
applications of technology tailored to its clients' evolving needs. The Company
considers most of its software, database management methods, modeling techniques
and other database information strategies to be proprietary trade secrets.
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The Company continually seeks to enhance its technological capabilities. The
Company's Interactive Solutions Group explores the opportunities provided by
the Internet. The Company currently uses the Internet as a tool for data
collection and as a means to deliver research results to clients, as well as
offers web site evaluation research. Additionally, it has developed a
proprietary product call Compete-Registered Trademark-, a PC-based software
system that allows clients instant access to a wide array of concept and
product testing data which can be configured in a variety of forms based on
client desires. The Company has built an online market research panel through
a variety of sources, including identifying households on the Consumer Mail
Panel who have Internet access, and subscribers to Juno Online Services
pursuant to a joint venture agreement. The entire online panel now consists
of approximately 100,000 households. This panel serves as a sample source for
online research conducted by the Company.
The Company believes that its ongoing investment in technology will continue to
provide it a significant competitive advantage over less technologically
sophisticated competitors.
MARKET RESEARCH PROCESS
The Company's professional research staff and, where appropriate, its
information technology personnel, work with clients to establish information
objectives, develop questionnaires or instruments to be used to elicit the
desired information and determine the types of consumers to be contacted. The
Company then submits a proposal that describes the sample to be surveyed, the
manner of data collection, analysis requirements, delivery schedules and
pricing. The Company has developed a computer program to estimate the cost of
each project and closely monitors actual costs versus the estimates in order to
continually update its computer model. Prices typically are quoted to clients
based upon a fixed fee.
The Company develops an appropriate consumer sample, either from its CMP or
another source (such as random telephone samples or samples of the client's own
customers), that matches the client's targeted consumers. If the sample is from
the CMP, it is either selected from the CMP based on households with precisely
matched demographic characteristics that are already on file, or the Company
will conduct a custom screening survey among its CMP members to locate
households with the specific product usage or other characteristics targeted by
the client. The sample selection process is performed to ensure that the CMP
members meet the desired characteristics and that the survey adheres to the
Company's policies limiting the number of contacts with CMP members and varying
the subject matter of the surveys to avoid inconveniencing or burdening
household members. Research projects involve studies with samples ranging from a
few hundred to over a million respondents.
The Company designs its questionnaires to be as simple and interesting as
possible to enable respondents to complete questionnaires accurately without
undue burden. Particularly complicated questionnaires may be pre-tested among a
small group of households to determine whether these requirements are met.
Experienced designers develop efficient, visually appealing and concisely
formatted questionnaires.
The Company also conducts telephone interviews with its CMP members and other
targeted groups. The Company's telephone interviewers operate through terminals
that are connected to the Company's computer assisted telephone interviewing
system (the "CATI system"), onto which the questions and possible responses have
been programmed. This allows the interviewers to record responses directly into
the computer, avoiding the need for subsequent data entry. Further, the CATI
system allows for complex survey question skip patterns and sampling plans to be
handled in a cost efficient manner.
Depending upon the type of survey, the Company frequently uses other methods of
data collection, such as mall interviewing, central location interviewing,
automotive clinics and in-home interviewing, both among CMP members and
consumers selected by other methods, including groups such as employees or
customers provided by the client.
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Returned questionnaire information is entered directly into the Company's
computer system through optical scanner and imaging systems or manually. The
Company customizes survey reports and presents survey data in accordance with
client specifications. The emphasis, however, is always on providing clients
with actionable findings that address marketing issues.
CLIENTS
In 1998, the Company's five largest clients accounted for 23% of its revenue. No
single client accounted for over 10% of such revenue.
The Company does not generally enter into long-term contracts with its clients,
but operates on a project-by-project basis. However, the Company focuses on
building systems and programs for clients wherein particular research
methodologies are systematized, refined and used repeatedly on a
project-by-project basis. As the Company completes additional projects for a
client, the Company's knowledge base of its client is expanded, the Company's
relationship is further solidified, and the client therefore has less incentive
to utilize another supplier in the future. The net result to the Company is a
more predictable recurring revenue stream. Although the Company is not the
exclusive provider of market research services for most of its clients, its
percentage of business from repeat clients has historically been high. Excluding
the impact of the businesses acquired in 1998, approximately 92% of the
Company's revenue in 1998 was from clients for whom the Company had performed
work in the previous year.
Many of the Company's clients have downsized their internal market research
staffs. As these clients have increasingly outsourced this function, they have
required an increased level of professional service throughout the market
research process, as well as a broader range of product offerings, and more
sophisticated data collection, analysis and interpretation capabilities. The
Company has also seen a significant increase in the amount of revenue from
clients in the healthcare, financial services, telecommunications and consumer
package goods industries.
BACKLOG
The Company recognizes revenue under the percentage of completion method of
accounting. Revenue is recognized as services are performed. The Company had
unrecognized revenue from contracts in process of approximately $35,829,000 and
$26,335,000 for the years ended December 31, 1998 and 1997, respectively.
COMPETITION
The custom market research industry is highly fragmented. The Company faces
direct competition from a large number of relatively small organizations that
serve niche markets but lack the capability to provide a full range of products
and services. Although the Company estimates that it is among the six largest
custom market research firms in the United States, as measured by 1997 revenue,
it faces direct competition from a small number of larger concerns with
resources greater than those of the Company. The Company believes that as the
industry continues to consolidate, it will face increasing competition from
these concerns not only for clients but also for acquisition candidates.
Furthermore, the Company is subject to competition from the marketing research
departments of clients and potential clients, advertising agencies and survey
research departments affiliated with universities and government agencies.
The Company believes that the principal methods of competition are quality
and speed of research results, the ability to provide customized data
collection, analysis and interpretation, geographic coverage, the ability to
guide clients through the entire marketing research process, the ability to
provide creative recommendations to clients and the ability to attractively
price its services. The Company believes that its ability to properly design
research projects and deliver quality research results quickly, and to
customize its projects and guide its clients through the entire marketing
research process are competitive strengths. The Company also believes that
the ability to service the international research needs of clients has become
an increasingly important competitive factor.
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The Company believes that its CMP provides a competitive advantage over firms
that rely solely on random research methods, since its CMP delivers higher
response rates and higher quality data at lower costs than traditional methods.
The Company is aware of only two other custom market research companies in the
United States that maintain a broad-based consumer mail panel.
SERVICE MARKS
The Company relies on a combination of copyright, trademark and trade secret
laws and employee and third-party non-disclosure agreements to protect its
proprietary systems, software and procedures. The Company's federally
registered service marks include Accutab-Registered Trademark-,
Autoquest-Registered Trademark-, BAIGlobal-Registered Trademark-,
BehaviorScope-Registered Trademark-, BrandVision-Registered Trademark-,
Compete-Registered Trademark-, InsideTrack-Registered Trademark-, Mail
Monitor-Registered Trademark-, Market Facts-Registered Trademark-,
Mediscope-Registered Trademark-, National ShowCase-Registered Trademark-,
PatientFacts-Registered Trademark-, PriceDynamics-Registered Trademark-,
ProductQuest-Registered Trademark- and TeleNation-Registered Trademark-. The
marks Auto Gage-SM-, BAIGlobal Qualitative Market View-SM-, Commitments-SM-,
Consumer Mail Panel-SM-, Data Gage-SM-, MarkeTest 2000-SM-, MiniScreen-SM-,
National Telephone Center-SM-, OmniMax-SM- and OnTarget-SM- are proprietary
marks of the Company. The Company's Canadian subsidiary is the registered
owner of the following additional service marks in Canada: ADPAC-Registered
Trademark-, ADPAC II-Registered Trademark- and NATIONAL FLEXIBUS-Registered
Trademark-. Many of the registered marks of the Company are used as
proprietary marks in various other countries.
The Company's success is partially dependent upon the proprietary software
technology, research methods and data analysis techniques that it has developed
to service its clients. However, there can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate to prevent the
misappropriation of such rights.
The Company vigorously defends against the unauthorized use of its service and
proprietary marks.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 900 full-time
employees and approximately 930 part-time employees. A substantial number of
employees are skilled personnel trained in the various facets of market
research.
The Company's employees are not represented by a union and the Company has never
experienced a work stoppage. The Company believes that its relationship with its
employees is excellent.
The Company offers employment contracts to the majority of its vice presidents
on the first anniversary of their election to office. These employment
agreements continue until terminated in accordance with their provisions and
contain confidentiality and noncompete restrictions during the term of
employment and for a period thereafter.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 3040 West Salt Creek Lane,
Arlington Heights, Illinois in an office building of approximately 120,000
square feet owned by the Company. This location also houses the Company's
largest client service office, mail panel and information technology
operations, corporate and administrative functions and a telephone
interviewing facility. The property is financed through a mortgage loan
discussed in Note 4 of the Notes to Consolidated Financial Statements
contained in the 1998 Annual Report to Stockholders and is incorporated
herein by reference. The Company also leases client service offices in the
United States in Atlanta, Georgia; Cincinnati, Ohio; Dallas, Texas; Encino,
California; Irvine, California; Mahwah, New Jersey; McLean, Virginia; Mercer
Island, Washington; Miami, Florida; Morristown, New Jersey; Natick,
Massachusetts; New York, New York; Rockville Centre, New York; Suffern, New
York and Tarrytown, New York. The Company has three leased telephone
interviewing facilities located in Evanston, Aurora, and Oak Park, Illinois
and additional leased administrative facilities in Arlington Heights and
Palatine, Illinois.
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The Company's Canadian operations are headquartered in Toronto, Ontario. This
location primarily houses mail panel, telephone interviewing, client service
offices, operations and administrative functions. In addition, four smaller
leased offices, located in Montreal, Quebec; New Westminster, B.C.; Mississauga,
Ontario; and Peterborough, Ontario, are used as client service, telephone or
mall interviewing facilities.
The Company expects that additional facilities may be necessary to support the
Company's recent and anticipated future growth in business and is continually
evaluating alternatives for satisfying these requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation or proceedings
and is not aware of any such proceedings threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
AGE OF OFFICES HELD AND BUSINESS
NAME OF OFFICER OFFICER EXPERIENCE FOR LAST FIVE YEARS
<S> <C> <C>
Verne B. Churchill 66 Chairman of the Board of Directors of the Company since 1996; prior
thereto Chairman and Chief Executive Officer of the Company.
Thomas H. Payne 53 President and Chief Executive Officer of the Company since 1996; prior
thereto President and Chief Operating Officer of the Company.
Mr. Payne is also a Director of the Company
Sanford M. Schwartz 47 Executive Vice President and Director of the Company.
Lawrence W. Labash 51 Executive Vice President of the Company since October 1998; prior
thereto Senior Vice President of the Company. Mr. Labash is also a
Director of the Company.
Timothy J. Sullivan 45 Chief Financial Officer and Director of the Company since August 1997
and Senior Vice President of the Company since 1996; prior thereto Vice
President of the Company. Mr. Sullivan is also Treasurer of the
Company.
</TABLE>
Officers are elected annually in April by the Board of Directors for a period of
one year or until successors are duly elected and qualified. The executive
officers listed above are as of March 10, 1999.
6
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following section of the Company's 1998 Annual Report to Stockholders is
hereby incorporated by reference:
Dividends and Market Price Statistics-page 1
This referenced section should be read in conjunction with the Consolidated
Financial Statements and related Notes (herein incorporated by reference) on
pages 9-21 of the 1998 Annual Report to Stockholders.
On July 31, 1997, the Company completed the acquisition of all the outstanding
stock of BAIGlobal, Inc. ("BAIGlobal"). The purchase price included up to
$5,000,000 of possible contingent payments in the form of cash and stock based
upon BAIGlobal exceeding certain earnings targets through December 1999. The
first $4,000,000 of contingent payments are payable in cash with the remaining
$1,000,000 payable in shares of the Company's Common Stock.
On March 31, 1998, TRA Acquisition Corp. ("TRA"), a wholly-owned subsidiary of
the Company, acquired certain assets and assumed certain liabilities of Tandem
Research Associates ("Tandem Research"). The purchase price included up to
$9,000,000 of possible contingent payments based upon Tandem Research exceeding
certain earnings target through March 2001 and additional contingent
consideration based on fifty percent of TRA's aggregate earnings before interest
and taxes during the three-year period after the closing in excess of
$9,931,000. At the election of Tandem Research, up to twenty-five percent of the
contingent payments may be payable in shares of the Company's Common Stock.
At the present time, the Company is unable to determine the amount, if any, of
the contingent payments related to the above transactions or whether any portion
thereof will be payable in shares of the Company's Common Stock. The Company
does not presently intend to register any shares issued as part of the
contingent payments.
ITEM 6. SELECTED FINANCIAL DATA
The following section of the Company's 1998 Annual Report to Stockholders is
hereby incorporated by reference:
Selected Financial Data-page 1
This referenced section should be read in conjunction with the Consolidated
Financial Statements and related Notes (herein incorporated by reference) on
pages 9-21 of the 1998 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following section of the Company's 1998 Annual Report to Stockholders is
hereby incorporated by reference:
Management's Discussion and Analysis of Financial Condition
and Results of Operations--pages 5-8
This referenced section should be read in conjunction with the Consolidated
Financial Statements and related Notes (herein incorporated by reference) on
pages 9-21 of the 1998 Annual Report to Stockholders.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents and long-term debt obligation. The
Company does not use derivative financial instruments. The Company places its
investments with high credit quality issuers and limits the amount of credit
exposure to any one issuer. As stated in its policy, the Company is averse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in high credit quality
securities. The portfolio includes only securities with active secondary or
resale markets to ensure portfolio liquidity. All cash equivalents held at
December 31, 1998 mature in 28 days or less.
The Company has no cash flow exposure due to rate changes for its long-term debt
obligation as the rate is fixed. The Company has primarily entered into
short-term debt obligations to support acquisition and general corporate
purposes including capital expenditures and working capital needs.
The Company is exposed to potential gains or losses from foreign currency
fluctuations affecting earnings denominated in Canadian dollars. The Company
also transacts business in various foreign countries and pays vendors in foreign
currencies. The Company currently does not hedge such foreign currency
transactions with forward contracts as any potential losses are not material and
are typically passed on to clients.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are listed below:
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE NUMBER
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Consolidated Balance Sheets as of December 31, 1998 and 1997 * For the years
ended December 31, 1998, 1997 and 1996:
<S> <C>
Consolidated Statements of Earnings *
Consolidated Statements of Comprehensive Income *
Consolidated Statements of Stockholders' Equity *
Consolidated Statements of Cash Flows *
Notes to Consolidated Financial Statements *
Independent Auditors' Report *
* Incorporated by reference to the 1998 Annual Report to Stockholders, filed
with the Commission pursuant to Rule 12b-23, portions of which are
attached.
Independent Auditors' Report on Schedule 9
Schedule:
II Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996 10
</TABLE>
All other schedules are not submitted because they are not applicable or not
required or because the required information is included in the Consolidated
Financial Statements and related Notes in the 1998 Annual Report to
Stockholders.
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INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Market Facts, Inc.:
Under date of February 9, 1999, we reported on the consolidated balance sheets
of Market Facts, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, as contained in the 1998 annual report to stockholders. These
consolidated financial statements and our report thereon are incorporated by
reference in the annual report on Form 10-K for the fiscal year ended December
31, 1998. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule as listed in the accompanying index. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
KPMG LLP
Chicago, Illinois
February 9, 1999
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MARKET FACTS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
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<S> <C> <C> <C>
Allowance For Doubtful Accounts:
Balance at beginning of year $ 1,101,551 $ 1,007,243 $ 838,203
Provision 129,118 107,299 197,602
Write-offs of uncollectible accounts (47,573) (9,772) (28,260)
Cumulative foreign currency translation (5,636) (3,219) (302)
------------------- ------------------ ------------------
------------------- ------------------ ------------------
Balance at end of year $ 1,177,460 $ 1,101,551 $ 1,007,243
------------------- ------------------ ------------------
------------------- ------------------ ------------------
</TABLE>
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors of the Company is included under the caption
"Election of Directors" in the Company's proxy statement for the Company's 1999
Annual Meeting* and is incorporated herein by reference. Information regarding
the executive officers of the Company is included under a separate caption at
the end of Part I hereof, and is incorporated herein by reference, in accordance
with General Instruction G(3) to Form 10-K and Instruction 3 to Item 401(b) of
Regulation S-K. Information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's proxy statement for
the Company's 1999 Annual Meeting* and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the above is included under the captions "Remuneration of
Named Executives" and "Employment Agreements" in the Company's proxy statement
for the Company's 1999 Annual Meeting* and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding the above is included in the following sections of the
Company's proxy statement for the Company's 1999 Annual Meeting*, which sections
are hereby incorporated by reference:
Security Ownership of Five Percent Beneficial Owners-page 3
Security Ownership of Directors and Executive Officers-pages
4 and 5
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding the above is included in the following sections of the
Company's proxy statement for the Company's 1999 Annual Meeting*, which sections
are hereby incorporated by reference:
Certain Transactions--pages 11 and 12
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* To be filed within 120 days after the end of the Company's fiscal year.
11
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) (1) Financial Statements as indexed on page 8.
(a) (2) Financial Statement Schedule as indexed on page 8.
The consolidated balance sheets as of December 31, 1998 and 1997, and the
consolidated statements of earnings, comprehensive income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1998, together with the report of the independent auditors, and management's
discussion and analysis of financial condition and results of operations are
contained in the Registrant's 1998 Annual Report to Stockholders, portions of
which are filed with this Form 10-K and are incorporated herein by reference.
(a) (3) See list of exhibits set forth in the Index on pages 14, 15
(b) and 16. None.
(c) See list of exhibits set forth in the Index on pages 14, 15
and 16.
(d) Financial Statement Schedule as indexed on page 8.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned thereunto duly authorized.
MARKET FACTS, INC.
(Registrant)
By: TIMOTHY J. SULLIVAN
--------------------
Timothy J. Sullivan
Chief Financial Officer, Senior Vice President,
Treasurer and Director
(Principal Financial Officer)
By: ANTHONY J. SOLARZ
-----------------
Anthony J. Solarz
Vice President and Controller
(Principal Accounting Officer)
Dated: March 24, 1999
12
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
VERNE B. CHURCHILL
- ------------------------------------ -----------------
Verne B. Churchill William W. Boyd
Chairman of the Board Director
THOMAS H. PAYNE JEFFERY A. OYSTER
- ------------------------------------ -----------------
Thomas H. Payne Jeffery A. Oyster
President, Chief Executive Officer Director
and Director
(Principal Executive Officer)
TIMOTHY J. SULLIVAN
- ------------------------------------ -----------------
Timothy J. Sullivan Karen E. Predow
Chief Financial Officer, Senior Vice President, Director
Treasurer and Director
(Principal Financial Officer)
LAWRENCE W. LABASH
- ------------------------------------ -----------------
Lawrence W. Labash Ned L. Sherwood
Executive Vice President Director
and Director
SANFORD M. SCHWARTZ
- ------------------------------------ -----------------
Sanford M. Schwartz Jack R. Wentworth
Executive Vice President Director
and Director
ANTHONY J. SOLARZ
- ------------------------------------
Anthony J. Solarz
Vice President and Controller
(Principal Accounting Officer)
March 24, 1999
13
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
(3)(a) Restated Certificate of Incorporation (5), as amended. (14)
(3)(b) By-laws as Amended and Currently in Effect. (11)
(4)(a) Article Fourth of the Company's Restated Certificate of Incorporation (5), as amended. (14)
(4)(b) Rights Agreement as Amended and Currently in Effect. (3)
(4)(c) Certificate of Designation, Preferences and Rights of Series B Preferred Stock. (10)
(10.1) Term Note dated February 23, 1995 between Market Facts, Inc. and Verne Churchill. (4)*
(10.2) Term Note dated February 23, 1995 between Market Facts, Inc. and Lawrence Labash. (4)*
(10.3) Term Note dated February 23, 1995 between Market Facts, Inc. and Thomas Payne. (4)*
(10.4) Term Note dated February 23, 1995 between Market Facts, Inc. and Glenn Schmidt. (4)*
(10.5) Term Note dated February 23, 1995 between Market Facts, Inc. and Timothy Sullivan. (16)*
(10.6) Demand Note and London Interbank Offered Rate Borrowing Agreement dated April 30, 1997, between
the Company and American National Bank and Trust Company of Chicago. (16)
(10.7) Mortgage and Security Agreement dated April 11, 1990 between American National Bank and Trust
Company as Trustee under Trust No. 110201-04 and The Manufacturers Life Insurance Company
together with Mortgage Note. (2)
(10.8) Credit Agreement dated June 7, 1996, between the Company and Harris Trust and Savings Bank
(6), as amended (19), and Revolving Credit Note dated September 4, 1997 relating thereto. (16)
(10.9) Employment Agreement with Thomas H. Payne. (13)*
(10.10) Employment Agreement with Lawrence W. Labash. (13)*
(10.11) Employment Agreement with Timothy J. Sullivan. (13)*
(10.12) Employment Agreement with Sanford M. Schwartz. (17)*
(10.13) Indemnity Agreement with Jack R. Wentworth dated July 15, 1994. (1)*
Substantially identical agreements were also entered into with the following individuals:
William W. Boyd Karen E. Predow
Verne B. Churchill Thomas H. Payne
Lawrence W. Labash Sanford M. Schwartz
(10.14) Term Note dated March 29, 1996 between Market Facts, Inc. and Verne Churchill. (5)*
(10.15) Term Note dated March 29, 1996 between Market Facts, Inc. and Thomas Payne. (5)*
(10.16) Term Note dated March 29, 1996 between Market Facts, Inc. and Lawrence Labash. (5)*
(10.17) Term Note dated March 29, 1996 between Market Facts, Inc. and Timothy Sullivan. (16)*
(10.18) Indemnity Agreement with Timothy Sullivan dated September 3, 1997. (16)*
Substantially identical agreements were also entered into
with Ned Sherwood and Jeffery Oyster.
(10.19) Investment Agreement dated June 6, 1996 among the Company, MFI Investors L.P. and MFI
Associates, Inc. (7)
(10.20) Financial Advisory Agreement dated June 6, 1996 between the Company and MFI Investors L.P. (8)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
(10.21) Convertible Note dated June 6, 1996 in the principal amount of $8,250,000 issued by the
Company to MFI Investors L.P. (9)
(10.22) Market Facts, Inc. 1996 Stock Plan, as amended. (12)*
(10.23) Stock Purchase Agreement by and among Market Facts, Inc., Kathleen Knight, Robert Skolnick,
Gunilla Broadbent and BAIGlobal, Inc. dated as of July 31 1997. (15)
(10.24) Employment Agreement with Kathleen Knight. (15)*
(10.25) Employment Agreement with Robert Skolnick. (15)*
(10.26) Employment Agreement with Gunilla Broadbent. (15)*
(10.27) Underwriting Agreement dated October 21, 1997 by and among Market Facts, Inc., MFI Investors
L.P. and the several underwriters named therein. (16)
(10.28) Promissory Note dated April 1, 1994 between Market Facts, Inc. and Timothy Sullivan. (16)*
(10.29) Term Note dated December 12, 1997 between Market Facts, Inc. and Sanford M. Schwartz. (17)*
(10.30) Asset Purchase Agreement by and among Market Facts, Inc. TRA Acquisition Corp., Donald E.
Rupnow, Daniel W. Fish and Tandem Research Associates, Inc. dated as of March 31, 1998. (18)
(10.31) Termination Agreement dated June 4, 1998 between ZS Fund L.P. and the Company. (19)
(10.32) Financial Advisory Agreement dated as of January 1, 1998 between ZS Fund L.P. and the Company. (19)
(10.33) Financial Advisory Agreement dated as of August 1, 1998 between ZS Fund L.P. and the Company.
(13) Portions of the 1998 Annual Report to Stockholders incorporated herein by reference.
(21) Subsidiaries of the Registrant.
(23) Consent of KPMG LLP.
(27) Financial Data Schedules.
</TABLE>
- -------------------
(1) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1994.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for
its fiscal year ended December 31, 1992.
(3) Incorporated by reference to Registrant's Form 8-A dated July 3, 1996,
commission file number 0-04781.
(4) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
(5) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1996.
(6) Incorporated by reference to Exhibit No. (b) of Registrant's Schedule
13E-4 dated June 11, 1996, commission file number 5-20859.
(7) Incorporated by reference to Exhibit No. (c)(1) of Registrant's Schedule
13E-4 dated June 11, 1996, commission file number 5-20859.
(8) Incorporated by reference to Exhibit No. (c)(2) of Registrant's Schedule
13E-4 dated June 11, 1996, commission file number 5-20859.
(9) Incorporated by reference to Exhibit No. (c)(3) of Registrant's Schedule
13E-4 dated June 11, 1996, commission file number 5-20859.
15
<PAGE>
(10) Incorporated by reference to Exhibit No. 99(c)(4) of Registrant's
Schedule 13E-4 dated June 11, 1996, commission file number 5-20859.
(11) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1996.
(12) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1996.
(13) Incorporated by reference to Registrant's Annual Report on Form 10-K for
its fiscal year ended December 31, 1996.
(14) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997.
(15) Incorporated by reference to Registrant's Form 8-K dated July 31, 1997.
(16) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1997.
(17) Incorporated by reference to Registrant's Annual Report on Form 10-K for
its fiscal year ended December 31, 1997.
(18) Incorporated by reference to Registrant's Form 8-K dated March 31, 1998.
(19) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998.
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Annual Report on Form 10-K pursuant to Item
14(c) of Form 10-K.
16
<PAGE>
Exhibit 10.33
FINANCIAL ADVISORY AGREEMENT
FINANCIAL ADVISORY AGREEMENT (the "Agreement") dated as of
August 1, 1998 by and between ZS FUND L.P., a Delaware partnership with offices
at 120 West 45th Street, Suite 2600, New York, New York 10036 (the "Advisor"),
and MARKET FACTS, INC., a Delaware corporation with offices at 3040 West Salt
Creek Lane, Arlington Heights, Illinois ("MFI").
WHEREAS, MFI proposes to enter into negotiations for the
acquisition of certain of the assets and assumption of certain of the
liabilities of Product Intelligence, Inc. ("PI) (the "PI Acquisition").
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein contained, the parties agree as follows:
1. RESPONSIBILITY OF THE ADVISOR
The Advisor shall provide to MFI and its affiliates on a
non-exclusive basis certain financial advisory services related to MFI's
acquisition program including, without limitation, evaluation and interpretation
of financial data and reports concerning structuring strategies and alternatives
related to such acquisition opportunities.
2. COMPENSATION
In consideration of the benefits and services MFI shall
receive hereunder, MFI shall pay to the Advisor a financial advisory success fee
(the "Fee") of $79,166.67 upon the consummation of the PII Transaction.
3. INDEMNIFICATION AND CONTRIBUTION
3.1 INDEMNIFICATION. MFI agrees to indemnify and
hold harmless each of the Advisor, and its officers, directors, employees,
shareholders and agents (each such person being referred to herein as an
"Indemnified Person") from and against any and all losses, claims, damages or
liabilities related in any way to, arising out of or in connection with the
services provided by the Advisor hereunder ("Indemnified Claims"), and will
reimburse each indemnified Person for all reasonable expenses (including
reasonable fees and expenses of counsel) as they are incurred in connection with
investigating, preparing, pursuing or defending any action, claim, suit,
investigation or proceeding related in any way to, arising out of or in
connection with the Indemnified Claims, whether or not pending or threatened and
whether or not any Indemnified Party is a party. MFI will not, however, be
responsible for any losses, claims, damages or liabilities (or expenses relating
thereto) that are finally judicially determined to have resulted from the bad
faith, willful misconduct or gross
-1-
<PAGE>
negligence of any Indemnified Person or to have been beyond the scope of such
person's authority under this Agreement. MFI also agrees that no Indemnified
Person shall have any liability (whether direct or indirect, in contract or tort
or otherwise) to MFI for or in connection with the Indemnified Claims except for
any such liability for losses, claims, damages or liabilities incurred by MFI
that are finally judicially determined to have resulted from the bad faith,
willful misconduct or gross negligence of such Indemnified Person.
MFI will not, without each Indemnified Person's prior written
consent, settle, compromise, consent to the entry of any judgment or in
otherwise seek to terminate any action, claim, suit or proceeding (whether or
not such Indemnified Person is a party thereto) in respect of which
indemnification may be sought hereunder unless such settlement, compromise,
consent or termination includes a full and unconditional release of such
Indemnified Person from any and all liabilities arising out of such action,
claim, suit or proceeding, except that a settlement, compromise, consent or
termination need not include a full and unconditional release of such
Indemnified Person if MFI has (i) given the Advisor reasonable prior notice of
such settlement, compromise, consent or termination, (ii) consulted in good
faith with the Advisor regarding the failure to include therein a full and
unconditional release of such Indemnified Person and (iii) confirmed in writing
that the indemnification provided for in this Section 3.1 shall continue to its
full extent with respect to the action, claim, suit or proceeding which has been
settled, compromised, consented to or terminated and any other actions, claims,
suits or proceeding arising out of the facts and circumstances which gave rise
to the action, claim, suit or proceeding which has been settled, compromised,
consented to or terminated to which such Indemnified Person would have otherwise
been entitled to indemnification under this Section 3.1. No Indemnified Person
seeking indemnification, reimbursement or contribution under this Agreement
will, without MFI's prior written consent, settle, compromise, consent to the
entry of any judgment in or otherwise seek to terminate any action, claim, suit,
investigation or proceeding referred to in the preceding paragraph.
3.2 CONTRIBUTION. If the indemnification
provided for in Section 3.1 is judicially determined to be unavailable (other
than in accordance with the second sentence of the first paragraph of Section
3.1) to an Indemnified Person in respect of any losses, claims, damages or
liabilities referred to herein, then, in lieu of indemnifying such Indemnified
Person hereunder, MFI shall contribute to the amount paid or payable by such
Indemnified Person as a result of such losses, claims, damages or liabilities
(and expenses relating thereto) in such proportion as is appropriate to reflect
not only the relative benefits to the Advisor and its affiliates, on the one
hand, and MFI, on the other hand, in connection with the services heretofore
provided to MFI by the Advisor but also the relative fault of each of the
Advisor and its affiliates and MFI, as well as any other relevant equitable
considerations.
3.3 SURVIVAL. All the provisions of this Section
3 shall remain in full force and effect with respect to actions taken by the
Advisor prior to any termination or completion of the Advisor's services under
this Agreement or the termination of this Agreement, regardless of such
termination or completion.
-2-
<PAGE>
4. MODIFICATION
This Agreement contains the entire agreement of the parties
with respect to the subject matter hereof. Any change, modification, amendment
or alteration to this Agreement shall be effected only in writing and signed by
the party or parties against whom enforcement of any such change, modification,
amendment or alteration is sought.
5. NONWAIVER
The failure of any party hereto, at any time to require
performance by any party hereto of any provision hereof, shall in no way affect
the right of such failing party hereafter to enforce such provision nor shall
any waiver by any part of any breach of any provisions hereof be taken or held
to be a waiver of any succeeding breach of such provisions or as a waiver of the
provision itself.
6. SEVERABILITY
If any provision or provisions of this Agreement is held to be
invalid or unenforceable, such provision shall be automatically reformed and
construed so as to be valid, operative and enforceable to the maximum extent
permitted by law or equity while most nearly preserving its original intent. The
invalidity of any party of this Agreement shall not render invalid the remaining
provisions of this Agreement and, to that extent, the provisions of this
Agreement shall be deemed to be severable.
7. HEADINGS
The headings of this Agreement are inserted for convenience
only and shall not be considered in construction of the provisions hereof.
8. ASSIGNMENT AND SUCCESSORS; BINDING EFFECT, ETC.
The rights and obligations of the Advisor and of MFI under
this Agreement shall inure to the benefit of and shall be binding upon the
successors of the Advisor and of MFI and may not be assigned without the written
consent of the other party hereto, and any such purported assignment shall be
null and void.
9. GOVERNING LAW
The terms of this Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois without regard to
principles of conflicts of law.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
ZS FUND L.P.
By: \S\ NED L. SHERWOOD
-------------------------------
Name:
Title:
MARKET FACTS, INC.
By: \S\ TIMOTHY J. SULLLIVAN
-------------------------------
Name: Timothy J. Sullivan
Title: Senior Vice President
-4-
<PAGE>
Exhibit 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 55,483,032 $ 64,608,724 $ 83,795,562 $ 100,064,294 $ 136,532,924
- ------------------------------------------------------------------------------------------------------------------------------------
Income from operations 3,294,736 5,194,779 8,397,948 10,281,163 14,559,481
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,434,167 2,226,119 4,277,656 5,822,098 9,009,949
Basic earnings per share .20 .29 .57 .80 1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share .19 .29 .55 .77 .98
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 911,209 $ 3,530,157 $ 129,428 $ 36,444,256 $ 28,475,066
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital 3,624,220 5,993,486 3,104,192 40,160,854 25,859,308
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets 31,681,983 34,376,637 38,385,227 86,891,747 105,454,474
Long-term obligations 11,453,019 10,955,870 10,742,988 10,409,088 11,197,130
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividends declared 7 1/4(cent) 9 1/2(cent) 10(cent) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET PRICE STATISTICS
- ---------------------------------------------------------------------------------
1997 1998
- ---------------------------------------------------------------------------------
High Low High Low
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4th Quarter $ 24 3/4 $ 16 3/4 $ 28 1/2 $ 17 5/8
3rd Quarter 31 5/8 10 1/4 28 1/2 18 1/2
2nd Quarter 14 9 1/8 24 1/4 19
1st Quarter 10 5/8 7 20 15/16 15 1/4
- ---------------------------------------------------------------------------------
</TABLE>
Market Facts, Inc. common stock trades on The Nasdaq Stock Marketsm under the
symbol MFAC.
All common share and per share amounts, unless indicated otherwise, have been
adjusted to give effect to a 2-for-1 stock split in December 1996 and an
additional 2-for-1 stock split in May 1997. The Company discontinued cash
dividends in 1997 to invest in its future growth. See Management's Discussion
and Analysis. The Company does not expect to pay dividends in the future. As of
February 26, 1999, there were approximately 710 holders of record of Market
Facts, Inc. common stock and the closing price of the common stock was $23.50.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
Market Facts is a leading provider of custom market research services.
Custom market research involves the measurement of customer beliefs, attitudes
and behavior toward particular products, services, concepts or advertising.
Founded in 1946, the Company provides quantitative and qualitative marketing
research both domestically and internationally through its network of twenty
offices and its global affiliations.
Acquisitions
In August 1998, the Company acquired the net assets of Product
Intelligence, Inc., a market research firm operating a national network of
multimedia computerized consumer interviewing stations in 35 separate markets
that provide clients with rapid turnaround of market research requiring consumer
exposure to marketing elements. The purchase price included $4.5 million in cash
and shares of Market Facts' common stock, and additional consideration
contingent upon future earnings.
In March 1998, the Company acquired the net assets of Tandem Research
Associates, Inc., a 16 year-old firm providing specialized custom and
multi-client research products and services to leading pharmaceutical companies
and emerging biotech firms. The purchase price included $14.4 million in cash
and additional consideration contingent upon future earnings.
In January 1998, the Company completed the acquisition of the outstanding
stock of Strategy Research Corporation, a full service market research company
specializing in Hispanic research in the U.S and Latin America. The purchase
price included $1.2 million in cash and additional consideration contingent upon
future earnings.
In July 1997, the Company acquired all of the outstanding stock of
BAIGlobal, Inc., a full service market research and information company offering
a complete range of research services--quantitative, qualitative and competitive
tracking--in the United States and internationally. The purchase price included
$3.7 million in cash and additional consideration contingent upon future
earnings.
Results of Operations: Comparison of 1998 to 1997
The Company had revenue of $136.5 million during 1998, an increase of 36.4%
over 1997. Approximately $20.4 million or 56% of the increase in revenue was due
to the growth of core business. Of the growth in core business, 60% was from
business with existing clients and the remainder from business with clients for
whom the Company did not perform any research services during the previous
fiscal year. Approximately $16.1 million or 44% of the increase in revenue was
due to the acquisitions of BAIGlobal, Strategy Research, Tandem Research and
Product Intelligence.
The Company experienced revenue growth across most of its major industry
groups as follows:
<TABLE>
<CAPTION>
1998 Change
Revenue % of from
INDUSTRY (000S) TOTAL 1997
- -----------------------------------------------------------------
<S> <C> <C> <C>
Consumer package goods $ 45,823 34% 26.9%
Financial services 19,641 14 94.1
Healthcare 19,254 14 140.7
Business services 15,861 12 13.8
Consumer durables 11,347 8 13.5
Retail and restaurants 9,227 7 (1.4)
Telecommunications 6,365 5 57.8
ALL OTHER 9,015 6 6.1
- ----------------------------------------------------------------
Total $ 136,533 100% 36.4%
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
2
<PAGE>
Gross margin for 1998 was $59.5 million, an increase of 36.1% over 1997.
The increase in gross margin was due to the growth in revenue. Gross margin as a
percentage of revenue was 43.5% in 1998 compared to 43.6% in 1997.
Operating expenses for 1998 rose by $11.5 million, an increase of 34.5%
compared to 1997. The increase was due primarily to higher operating expenses to
support the growth in core business, including higher personnel-related expenses
and investments in information technology, and the inclusion of the operating
expenses from the companies acquired in 1997 and 1998. Operating expenses as a
percentage of revenue decreased from 33.4% in 1997 to 32.9% in 1998.
The 1998 provision for income taxes reflected an effective tax rate of
38.9% in 1998, consistent with the 1997 effective tax rate.
Net income for 1998 rose 54.8% to a record $9.0 million or 6.6% of revenue
compared with $5.8 million and 5.8% of revenue in 1997. Diluted earnings per
share increased by 27.3% to $.98 in 1998 from $.77 in 1997.
Results of Operations: Comparison of 1997 to 1996
The Company had revenue of $100.1 million during 1997, an increase of 19.4%
over 1996. The increase in revenue was due primarily to the addition of clients
for whom the Company did not perform any research services during the previous
fiscal year, the impact of acquiring BAIGlobal and continued expansion of
marketing research services within the Company's existing client base.
The Company experienced revenue growth across most of its major industry
groups as follows:
<TABLE>
<CAPTION>
1997 Change
Revenue % of from
INDUSTRY (000S) TOTAL 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Consumer package goods $ 36,123 36% 15.8%
Business services 13,940 14 15.0
Financial services 10,121 10 24.3
Consumer durables 9,995 10 41.7
Retail and restaurants 9,358 9 33.4
Healthcare 7,998 8 57.8
Telecommunications 4,034 4 (11.6)
ALL OTHER 8,495 9 (1.6)
- -----------------------------------------------------------------
Total $ 100,064 100% 19.4%
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
Gross margin for 1997 was $43.7 million, an increase of 22.6% over 1996.
The increase in gross margin was due to the growth in revenue. Gross margin as a
percentage of revenue was 43.6% in 1997 compared to 42.5% in 1996. The
improvement in the gross margin percentage was primarily attributable to higher
gross margins on telephone business.
Operating expenses for 1997 rose by $6.2 million, an increase of 22.7%
compared to 1996. The increase was due primarily to higher personnel-related
expenses to support the growth in business, the impact of acquiring BAIGlobal
and continued investments in new products and technologies.Operating expenses as
a percentage of revenue increased from 32.5% in 1996 to 33.4% in 1997.
The 1997 provision for income taxes reflected an effective tax rate of
38.9% versus 42.1% in 1996. The decrease in the effective tax rate was primarily
due to a reduction in foreign, state and local income taxes.
Net income for 1997 rose 36.1% to $5.8 million or 5.8% of revenue compared
with $4.3 million and 5.1% of revenue in 1996. Diluted earnings per share
increased by 40.0% to $.77 in 1997 from $.55 in 1996.
3
<PAGE>
Liquidity and Capital Resources
The Company's liquidity depends primarily upon its net income and
management of its working capital, principally accounts receivable, accounts
payable and accrued expenses. Historically, the Company has financed its
operations through cash generated from operating activities and bank lines of
credit.
In October 1997, the Company generated $36.9 million in net proceeds from a
public offering of its common stock. At December 31, 1998, the Company had cash
and cash equivalents of $28.5 million. The Company intends to utilize this cash
for working capital and other general corporate purposes, including
acquisitions, investments in technology, new product development and joint
ventures.
During 1998, cash and cash equivalents decreased by $8.0 million. The
decrease was due primarily to the acquisitions of Strategy Research, Tandem
Research and Product Intelligence, partially offset by cash provided by
operating activities. During 1997, cash and cash equivalents increased by $36.3
million. The increase was due primarily to the net proceeds from the Company's
public offering. During 1996, cash and cash equivalents decreased by $3.4
million. The decrease was due primarily to the purchase of the Company's common
stock pursuant to a self-tender offer partially offset by the net proceeds from
the issuance of a convertible note and short-term borrowings.
Net cash flow provided by operating activities was $16.1 million in 1998
compared to $10.4 million in 1997 and $4.5 million in 1996. The increase in 1998
was due primarily to higher net income and higher non-cash expenses for
depreciation and amortization. The increase in 1997 as compared to 1996 was due
primarily to improved billing and collection of client accounts receivable and
increased net income.
Cash used in investing activities was $23.9 million in 1998 compared to
$6.5 million in 1997 and $3.9 million in 1996. The increase in 1998 was due
primarily to the acquisitions made during 1998 and higher purchases of property
and equipment. The increase in 1997 as compared to 1996 was due to the
acquisition of BAIGlobal, net of acquired cash, partially offset by lower
purchases of property and equipment.
Cash used in financing activities was $.2 million in 1998 compared to cash
provided of $32.4 million in 1997 and cash used in financing activities of $4.0
million in 1996. Cash provided in 1997 was due primarily to the proceeds from
the public offering.
The Company expects that additional investments in equipment and facilities
will continue to be necessary to support the anticipated growth in business and
that capital expenditures in 1999 will be equal to or higher than 1998.
The Company's available borrowings under established bank credit facilities
were $13.7 million during 1998 and 1997. There were no borrowings outstanding at
December 31, 1998 and 1997.
At its October 1996 meeting, the Board of Directors established a policy to
omit future cash dividends in order to fund the continued development and growth
of the Company's business.
The Company believes that its cash on hand, cash flow from operations and
borrowings available from its bank credit facilities will be sufficient to meet
its working capital expenditure requirements for the foreseeable future. It is
the Company's intention to continue to pursue acquisi-tion opportunities as a
means to grow, and these acquisi-tions may require an amount of capital that
exceeds its cash on hand, cash expected to be provided from operations and cash
available from existing bank arrangements.
Year 2000
The Company recognizes the need to identify and correct problems associated
with its existing computer systems and certain non-information technology
systems as the Year 2000 approaches. Both internal and external resources are
being used to identify, to correct, and to test these financial, information and
operational systems for Year 2000 compliance. The Company has assessed its
internal systems for Year 2000 compliance and has made inquiries of its
suppliers to assess the potential impact on the Company's operations if key
third parties are not successful in converting their systems in a timely manner.
The Company's assessment of its internal systems has been completed. All
inquiries of third parties have been made, however, the Company is awaiting some
responses. The Company expects
4
<PAGE>
its full review of Year 2000 issues, including its review of third party
compliance, to be completed by March 31, 1999.
Costs and expenses incurred through December 31, 1998 in addressing the
Year 2000 issue have not been material. Based on its assessment efforts to date,
the Company does not believe that its operations will be materially impacted by
a failure of its internal systems to be Year 2000 compliant and has identified
approximately $600,000 in costs to be incurred in 1999 in order to replace
certain of its telephone systems and computer equipment and its human
resource/payroll information system that are not Year 2000 compliant. The
Company expects most of these costs will be capitalized.
Although the Company does not at this time believe that its business
operations or financial condition will be materially impacted by a failure of
its suppliers to be Year 2000 compliant, it is difficult for the Company to
assess the likelihood, or the impact on its business, of such entities' failure
until its assessment is completed. The Company currently anticipates that
additional expense and capital expenditures associated with its Year 2000
compliance plan will be necessary, although the Company does not expect such
costs to have a material adverse effect on its financial position or results of
operations. The actual amount of these costs will not be known, however, until
the Company's review of the Year 2000 issue has been completed and tested.
The Company anticipates that its remediation efforts and necessary testing
related to the Year 2000 issue will be completed by September 1999. The Company
is in the process of developing contingency plans in the event of Year 2000
failures, and anticipates that these contingency plans will be in place by
September 1999.
The Company's expectations about future costs necessary to achieve Year
2000 compliance, the impact on its operations and its ability to bring each of
its systems into Year 2000 compliance are subject to a number of uncertainties
that could cause actual results to differ materially. Such factors include the
following: (i) The Company may not be successful in properly identifying all
systems and programs that contain two-digit year codes; (ii) The nature and
number of systems which require reprogramming, upgrading or replacement may
exceed the Company's expectations in terms of complexity and scope; (iii) The
Company may not be able to complete all remediation and testing necessary in a
timely matter; (iv) The Company has no control over the ability of its key
suppliers and customers to achieve Year 2000 compliance; and (v) The impact of
the Year 2000 problem on key customers may be of such magnitude that it may
adversely affect their demand for the Company's products and services.
Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents and long-term debt obligation. The
Company does not use derivative financial instruments. The Company places its
investments with high credit quality issuers and limits the amount of credit
exposure to any one issuer. As stated in its policy, the Company is averse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in high credit quality
securities. The portfolio includes only securities with active secondary or
resale markets to ensure portfolio liquidity. All cash equivalents held at
December 31, 1998 mature in 28 days or less.
The Company has no cash flow exposure due to rate changes for its long-term
debt obligation as the rate is fixed. The Company has primarily entered into
short-term debt obligations to support acquisition and general corporate
purposes including capital expenditures and working capital needs.
The Company is exposed to potential gains or losses from foreign currency
fluctuations affecting earnings denominated in Canadian dollars. The Company
also transacts business in various foreign countries and pays vendors in foreign
currencies. The Company currently does not hedge such foreign currency
transactions with forward contracts as any potential losses are not material and
are typically passed on to clients.
5
<PAGE>
Inflation
Inflation has historically had only a minor effect on the Company's results
of operations and its internal and external sources of liquidity and working
capital because the Company has generally been able to increase prices to
reflect cost increases due to inflation.
Forward-Looking Statements
Certain statements contained in the Message to Shareholders and in this
Management's Discussion and Analysis section constitute "forward-looking
statements" made in reliance upon the safe harbor contained in Section 21E of
the Securities Exchange Act of 1934, as amended. Such forward-looking statements
include those relating to anticipated growth, levels of capital expenditures,
acquisition opportunities, the addition of staff, the development of new
products and services, and the need to acquire additional real estate. The
Company's prospects for growth are subject to significant economic and other
uncertainties, some of which are beyond the Company's control. Factors which
could adversely impact the Company's revenues include: (i) a downturn in general
economic conditions which could cause a decrease in spending on market research
projects, (ii) a change in client management personnel which could cause the
client to lower its purchases from the Company, and (iii) the impact of
competitive pricing and products which could cause a reduction or loss in client
business. In addition, should the technology used by the industry change so as
to differ materially from the type of technology relied upon by the Company, the
Company's business could be adversely affected. Further, the Company's ability
to grow through acquisitions will be dependent upon, among other things, the
availability of suitable acquisition candidates and related financing on terms
deemed reasonable by the Company, and the Company's ability to successfully
integrate future acquisitions into its existing business.
Finally, expansion into global markets is subject to the ability to fully
understand cultural differences, the availability of suitable joint venture or
acquisition candidates, risks of foreign currency fluctuations and other
uncertainties. Any of these factors could cause the Company's actual results to
differ materially from those described in the forward-looking statements.
Recently Issued Financial Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
released Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
capitalization of certain costs of computer software developed or obtained for
internal use, provided that those costs are not research and development. SOP
98-1 is effective for fiscal years beginning after December 15, 1998. The
Company is currently evaluating the requirements of SOP 98-1 and the effects, if
any, on our current policy of accounting for software costs.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("Statement 133"). Implementation of Statement 133 is
required for periods beginning after June 15, 1999. Statement 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that derivatives be recognized in the balance sheet at
fair value and specifies the accounting for changes in fair value. The Company
currently does not hold derivative instruments or engage in hedging activities.
6
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE $ 136,532,924 $ 100,064,294 $ 83,795,562
DIRECT COSTS:
Payroll 24,715,160 18,071,133 16,167,308
Other expenses 52,358,850 38,321,485 32,015,577
- ------------------------------------------------------------------------------------------------------------------------------------
Total 77,074,010 56,392,618 48,182,885
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Margin 59,458,914 43,671,676 35,612,677
OPERATING EXPENSES:
Selling 4,725,959 3,324,273 2,600,727
General and administrative 40,173,474 30,066,240 24,614,002
- ------------------------------------------------------------------------------------------------------------------------------------
Total 44,899,433 33,390,513 27,214,729
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations 14,559,481 10,281,163 8,397,948
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest expense (1,100,515) (1,131,920) (1,214,445)
Interest income 924,778 298,141 126,008
Other income, net 354,205 87,714 75,145
- ------------------------------------------------------------------------------------------------------------------------------------
Total 178,468 (746,065) (1,013,292)
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Provision For Income Taxes 14,737,949 9,535,098 7,384,656
Provision For Income Taxes 5,728,000 3,713,000 3,107,000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,009,949 $ 5,822,098 $ 4,277,656
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.02 $ .80 $ .57
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .98 $ .77 $ .55
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME $ 9,009,949 $ 5,822,098 $ 4,277,656
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustments (100,430) (58,313) (6,175)
- ------------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 8,909,519 $ 5,763,785 $ 4,271,481
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 28,475,066 $ 36,444,256
Bank certificate of deposit 50,000 50,000
Accounts receivable:
Trade, less allowance for doubtful accounts of
$1,177,460 and $1,101,551 in 1998 and 1997, respectively 20,287,698 20,085,658
Other 49,269 60,189
Revenue earned on contracts in progress in excess of billings 5,724,794 4,618,736
Deferred income taxes 675,499 1,136,254
Prepaid expenses and other assets 540,359 703,167
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 55,802,685 63,098,260
- ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Land 1,221,459 1,221,459
Building and building improvements 13,260,298 13,242,699
Computer and office equipment 14,986,398 10,108,298
Furniture and fixtures 4,427,862 3,910,442
Leasehold improvements 1,982,387 1,735,739
Vehicles 240,283 137,572
- ------------------------------------------------------------------------------------------------------------------------------------
36,118,687 30,356,209
Less accumulated depreciation and amortization (15,636,212) (13,274,711)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Property and Equipment 20,482,475 17,081,498
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Goodwill and other intangibles, net of accumulated amortization
of $1,036,545 and $229,772 in 1998 and 1997, respectively 27,818,619 4,959,752
Deferred income taxes, noncurrent 789,881 1,063,833
Investment in affiliated companies 560,814 688,404
- ------------------------------------------------------------------------------------------------------------------------------------
Total Other Assets 29,169,314 6,711,989
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 105,454,474 $ 86,891,747
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Accrued expenses $ 14,074,491 $ 10,052,639
Billings in excess of revenues earned on contracts in progress 9,760,679 9,267,185
Accounts payable 4,988,039 2,380,596
Income taxes 673,879 945,449
Current portion of obligations under capital leases 295,893 154,991
Current portion of long-term debt 150,396 136,546
- ------------------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 29,943,377 22,937,406
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 10,008,714 10,159,110
Obligations under capital leases, noncurrent portion 1,188,416 249,978
- ------------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Liabilities 11,197,130 10,409,088
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 41,140,507 33,346,494
STOCKHOLDERS' EQUITY:
Preferred stock, no par value; 500,000 shares authorized;
Series A-none issued; Series B-100 shares issued -- --
Common stock, $1 par value; 15,000,000 shares authorized;
10,910,058 and 10,875,258 shares issued in 1998 and 1997, respectively 10,910,058 10,875,258
Capital in excess of par value 46,172,329 44,707,038
Accumulated other comprehensive loss--foreign currency translation adjustments (234,062) (133,632)
Retained earnings 21,682,109 12,672,160
- ------------------------------------------------------------------------------------------------------------------------------------
78,530,434 68,120,824
Less treasury common stock at cost; 1,970,557 and 2,042,550 shares
in 1998 and 1997, respectively (13,612,265) (13,891,966)
Less other transactions involving common stock (604,202) (683,605)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 64,313,967 53,545,253
- ------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 105,454,474 $ 86,891,747
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
PREFERRED STOCK:
<S> <C> <C> <C>
Balance at beginning and end of year $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at beginning of year $ 10,875,258 $ 8,966,258 $ 8,090,012
Common stock issued 34,800 1,909,000 2,583,860
Impact of stock splits -- -- (1,707,614)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 10,910,058 $ 10,875,258 $ 8,966,258
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year $ 44,707,038 $ 9,497,671 $ 2,328,137
Common and treasury stock issued 813,852 35,024,396 7,169,434
Tax benefit from stock related awards 651,439 184,971 --
Preferred stock issued -- -- 100
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 46,172,329 $ 44,707,038 $ 9,497,671
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Balance at beginning of year $ (133,632) $ (75,319) $ (69,144)
Foreign currency translation adjustments (100,430) (58,313) (6,175)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (234,062) $ (133,632) $ (75,319)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year $ 12,672,160 $ 6,850,062 $ 3,541,626
Net income 9,009,949 5,822,098 4,277,656
Dividends declared on common stock:
Cash--10(cent)per share in 1996 -- -- (738,939)
Impact of stock splits -- -- (230,281)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 21,682,109 $ 12,672,160 $ 6,850,062
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TREASURY COMMON STOCK:
Balance at beginning of year $ (13,891,966) $ (13,891,966) $ (1,189,029)
Treasury stock issued 279,701 -- --
Treasury stock purchased -- -- (12,702,937)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (13,612,265) $ (13,891,966) $ (13,891,966)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER TRANSACTIONS INVOLVING COMMON STOCK:
Balance at beginning of year $ (683,605) $ (821,496) $ (651,795)
Payments received on demand notes receivable 23,971 82,459 19,867
Vesting of restricted stock and demand notes receivable 55,432 55,432 55,432
Issuance of demand notes receivable -- -- (245,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (604,202) $ (683,605) $ (821,496)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 64,313,967 $ 53,545,253 $ 10,525,210
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 9,009,949 $ 5,822,098 $ 4,277,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,065,792 2,882,935 2,495,354
Deferred income taxes 390,564 (79,970) (374,049)
Vesting of restricted stock and demand notes receivable 55,432 55,432 55,432
Net gain on disposal of property and equipment (85,141) (17,336) (27,715)
Income from affiliated companies (123,066) -- --
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable 777,289 (3,126,707) (5,176,560)
Prepaid expenses and other assets (264,808) (189,607) (30,386)
Billings in excess of (less than) revenues earned on
contracts in progress (1,201,106) 3,658,353 242,447
Accounts payable and accrued expenses 2,760,038 1,062,386 2,552,391
Income taxes 721,975 360,188 496,878
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 16,106,918 10,427,772 4,511,448
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of acquired cash (19,971,065) (3,918,677) --
Purchases of property and equipment (4,144,833) (2,068,536) (3,234,009)
Proceeds from notes receivable 212,315 106,652 52,244
Investment in affiliated companies 36,561 (478,404) (210,000)
Investment in notes receivable -- (165,000) (246,200)
Proceeds from the sale of property -- 24,798 38,297
Payment for acquisition of MFCL -- -- (339,126)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,867,022) (6,499,167) (3,938,794)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term borrowings (6,653,936) (14,237,672) (12,100,000)
Proceeds from short-term borrowings 6,503,936 12,487,672 13,850,000
Reduction of obligations under capital leases and long-term debt (334,098) (543,689) (96,628)
Proceeds from exercise of stock options 304,588 39,555 386,250
Proceeds from issuance of common stock, net -- 36,893,841 --
Repayment of notes payable to BAIGlobal's selling shareholders -- (2,250,000) --
Purchase of treasury stock -- -- (12,702,937)
Proceeds from issuance of convertible note -- -- 8,250,000
Payment of stock issuance costs -- -- (820,851)
Dividends paid -- -- (738,939)
Proceeds from issuance of preferred stock -- -- 100
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (179,510) 32,389,707 (3,973,005)
- ------------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (29,576) (3,484) (378)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,969,190) 36,314,828 (3,400,729)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36,444,256 129,428 3,530,157
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $28,475,066 $ 36,444,256 $ 129,428
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR FOR:
Interest $ 1,100,515 $ 1,142,265 $ 1,237,504
Income taxes, net of refunds 4,615,750 3,452,164 2,982,379
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON CASH ACTIVITIES:
Capital lease obligations incurred on lease of equipment $ 1,257,313 $ -- $ 109,463
Treasury stock issued for acquisition 823,765 -- --
Conversion of convertible note into common stock -- -- 8,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
a. Principles of Consolidation and Line of Business:
The accompanying consolidated financial statements include the accounts of
Market Facts, Inc. and its subsidiaries (Company). All significant intercompany
transactions have been eliminated.
The Company operates in a single business segment that designs, executes and
interprets market research conducted on behalf of its clients, which include a
majority of the largest 100 multinational consumer products and service
companies, as well as many government agencies. In 1998, no single client
accounted for over 10% of revenue. One client, Procter & Gamble, accounted for
11% and 10% of total 1997 and 1996 revenue, respectively. Revenue from clients
located in foreign countries, primarily Canada, amounted to $7,000,236,
$5,686,580 and $6,425,279 in 1998, 1997 and 1996, respectively.
b. Revenue Recognition:
The Company recognizes revenue under the percentage of completion method of
accounting. Revenue on client projects is recognized as services are performed.
Losses expected to be incurred on jobs in progress are charged to income as soon
as such losses are known. Revenue earned on contracts in progress in excess of
billings is classified as a current asset. Amounts billed in excess of revenue
earned are classified as a current liability. Client projects are expected to be
completed within a twelve month period.
c. Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
d. Property and Equipment:
Maintenance and repairs are expensed and renewals and betterments are
capitalized. Upon retirement or disposition of property and equipment, the
applicable cost and accumulated depreciation and amortization are removed from
the accounts and the resulting gains or losses are included in income.
Depreciation is provided on the straight-line method at rates considered
adequate to depreciate the costs of property and equipment over their estimated
useful lives. The useful life of the building is 31 1/2 years, while all other
owned assets have estimated useful lives of three to ten years.
Equipment under capital leases is recorded at the lower of the fair market value
of the leased property or the present value of the minimum lease payments.
Amortization of the leased equipment is computed using the straight-line method
over the lease term.
Property and equipment are reviewed for impairment whenever events or
circumstances indicate that the asset's undiscounted expected cash flows are not
sufficient to recover its carrying value. The Company measures an impairment
loss by comparing the fair value of the asset to its carrying amount.
e. Income Taxes:
The Company applies an asset and liability approach to account for income taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
11
<PAGE>
f. Earnings Per Share:
Effective December 15, 1997, the Company adopted State-ment of Financial
Accounting Standards No. 128, "Earnings Per Share." Basic earnings per share
were computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share were
determined giving effect to all dilutive potential common shares that were
outstanding during the year.
g. Foreign Currency Translation:
Non-U.S. subsidiaries' assets and liabilities have been translated using the
exchange rate in effect at the balance sheet date. Results of operations are
translated using the average exchange rate prevailing throughout the period.
Resulting translation gains and losses are reported as a component of
stockholders' equity.
h. Disclosure of Certain Significant Risks and Uncertainties:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
i. Financial Instruments:
The carrying amounts of the Company's financial instruments approximate their
fair values with the exception of long-term debt which has a fair value of
approximately $8,689,895 and $8,771,351 at December 31, 1998 and 1997,
respectively.
j. Goodwill and Other Intangibles:
Goodwill represents the unamortized cost in excess of the fair value of net
assets acquired and is amortized on a straight-line basis over the period of
expected benefit ranging from 15 to 25 years. Other intangibles are recorded at
cost and amortized using the straight-line method over their estimated economic
lives. The Company periodically evaluates the recoverability of goodwill and
other intangibles by assessing whether the carrying values can be recovered from
undiscounted future cash flows expected to be generated by the assets.
k. Comprehensive Income:
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which established Standards
to report and display comprehensive income and its compo-nents in a full set of
general purpose financial standards.
2. Bank Borrowings:
The Company has established a revolving and term credit facility ("Credit
Facility") with a bank in the amount of $10,000,000. The Credit Facility bears
interest at either the lender's prime lending rate or a reserve adjusted LIBOR
rate, plus between .75% and 1.5% per annum, and expires on June 30, 1999. The
Company maintains other established bank lines of credit totaling $3,650,000
which are renewed annually and bear interest at various lending rates. No
borrowings were outstanding under the above arrangements at December 31, 1998
and 1997.
12
<PAGE>
3. Accrued Expenses:
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Compensation $ 5,572,668 $ 4,292,279
Acquisition related payables 2,145,725 110,000
OTHER 6,356,098 5,650,360
- ---------------------------------------------------------------
Total $14,074,491 $10,052,639
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
4. Long-Term Debt:
Long-term debt relates to the mortgage loan on the office building used by the
Company as its corporate and operations headquarters. The loan bears interest at
a fixed rate of 9.7% per annum. Principal payments due under the terms of the
mortgage with the final principal amount due May 1, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
In 1999..$ 150,396
In 2000..$ 10,008,714
</TABLE>
5. Stockholders' Equity:
On August 31, 1998, the Company issued 42,793 shares of its common stock,
previously held in treasury, as partial consideration for its acquisition of
Product Intelligence, Inc. The shares were valued at $823,765 based on a price
of $19.25 per share.
On October 27, 1997, the Company completed a public offering of its common stock
in which 1,900,000 shares were sold by the Company, resulting in proceeds of
approximately $37,411,000. The Company incurred $517,159 of stock issuance costs
associated with the public offering.
On April 29, 1997, the Company amended its Restated Certificate of Incorporation
effecting an increase in the number of authorized shares of common stock to
15,000,000.
On April 28, 1997, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a common stock dividend which was paid on May 27, 1997. All
common and per share amounts have been adjusted to give effect to the stock
split.
On October 28, 1996, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a common stock dividend which was paid on December 13,
1996. The stock dividend was not paid on treasury common stock. All common share
and per share amounts, unless indicated otherwise, have been adjusted to give
effect to the stock split.
Pursuant to a self-tender offer commenced in June 1996, the Company purchased
1,677,614 shares of its common stock from its stockholders at an aggregate
purchase price of $12,162,701. The Company incurred $354,610 in related
transaction costs.
The self-tender offer was made pursuant to an Investment Agreement dated June 6,
1996 among MFI Investors L.P., MFI Associates, Inc. and the Company ("Investment
Agreement"), whereby MFI Investors L.P. purchased from the Company a ten-year,
7% convertible subordinated note in the principal amount of $8,250,000
("Convertible Note"). Immediately prior to the purchase of the shares in the
self-tender offer, the Convertible Note automatically converted at a rate of
$3.625 per share into 2,275,860 shares of the
13
<PAGE>
Company's common stock. The Company incurred $820,851 in stock issuance costs
associated with the Investment Agreement. A new class of Series B preferred
shares was issued to MFI Investors L.P., granting it the right to elect 3
directors, subject to decrease as its ownership interest decreases.
In 1996, independent of the self-tender offer, the Company purchased 60,000
shares of its common stock at a cost of $185,626.
Other transactions involving common stock consist of demand notes receivable due
from officers and employees and unearned restricted stock. Monies received by
officers and employees under the demand notes receivable were used to purchase
Company common stock. These demand notes receivable, which bear interest at
rates from 7.75% to 8.25%, are classified as a reduction of stockholders' equity
and amounted to $461,702, $493,606 and $583,996 as of December 31, 1998, 1997
and 1996, respectively. Some of the notes, which are due in ten equal annual
installments through 2004, provide for the forgiveness of every other principal
payment, contingent upon the borrower's employ- ment with the Company on the
date such payment is due. The Company recognized $7,932 of compensation expense
relating to the forgiveness of debt in 1998, 1997 and 1996. All other notes are
due in varying installments through 2001.
Unearned restricted stock amounted to $142,500, $190,000 and $237,500 as of
December 31, 1998, 1997 and 1996, respectively, and relates to a 1992 restricted
stock grant of 400,000 shares of common stock to a Company executive which vests
at a rate of 10% per year, subject to his continued employment with the Company.
The aggregate fair market value of the shares at date of grant is unearned
compensation and the amount is amortized to compensation expense over the
periods the restrictions lapse. Amortization of this compensation expense
amounted to $47,500 in 1998, 1997 and 1996.
In 1986, the stockholders approved an amendment to the Certificate of
Incorporation creating a new class of 500,000 shares of preferred stock, without
par value. In 1989, 25,000 shares were designated as Series A preferred stock;
no Series A shares have been issued to date. In 1996, 100 shares were designated
as Series B preferred stock and issued to MFI Investors L.P.
In 1989, the Board of Directors of the Company approved a stockholder rights
agreement which provides for a dividend distribution of one preferred share
purchase right for each outstanding share of common stock. Each right initially
entitled stockholders, upon occurrence of certain events, to purchase one
one-hundredth of a share of Series A preferred stock, at an exercise price of
$20 per one one-hundredth of a preferred share, subject to adjustment.
Giving effect to the December 1996 and May 1997 stock splits, each share of
common stock is entitled to purchase one four-hundredth of a Series A preferred
share at $5 per one four-hundredth of a preferred share.
The rights become exercisable ten days after a person, group or company acquires
20% or more of Company common stock or announces a tender offer which would
result in ownership of 20% or more of the common stock. The Company is entitled
to redeem the rights at one-fourth cent per right at any time before a 20% or
greater position has been acquired.
If the Company is acquired in a merger or other business combination transaction
or 50% or more of its consolidated assets or earning power are sold, 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 at that
time of twice the right's exercise price. In addition, in the event a person or
group acquires 20% or more of the Company's common stock, each right (other than
those held by the acquiring person or
14
<PAGE>
group) will entitle its holder to purchase a number of shares of the acquiring
company's common stock having a market value of two times the exercise price of
the right.
At any time after a person or group acquires 20% or more (but less than 50%) of
the Company's outstanding common stock, the Board of Directors may exchange the
rights at an exchange ratio of one share of common stock for one four-hundredth
of a share of Series A preferred stock per right. The rights will expire on
August 7, 1999.
Pursuant to the Investment Agreement, MFI Investors L.P. agreed not to allow its
holdings of Company voting securities to exceed 37.5% (the "Standstill
Percentage") of the Company's total voting securities outstanding at any time.
The Standstill Percentage will be reduced to 20% if at any time MFI Investors
L.P. holds less than 15% of the Company's total outstanding voting securities.
The stockholders rights agreement was amended in June 1996 to provide that the
rights would not become exercisable by reason of MFI Investors L.P. acquiring
more than 20% of the Company's voting securities, unless and until its holdings
exceed the Standstill Percentage then in effect.
6. Employee Stock Option Plans:
Under terms of the 1982 Incentive Stock Option Plan (1982 Plan) which expired as
of May 1, 1992, options to purchase shares of the Company's common stock had
been granted at a price equal to the market price at the date of grant. Options
from the 1982 Plan were exercisable on or after the first anniversary of the
date of the grant and expired four years after the date of the grant.
Under terms of the 1996 Stock Plan (1996 Plan), the Company may issue to select
officers, directors and key employees any or all of the following: incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, non-qualified stock options, stock appreciation rights and restricted
stock. The Company has reserved 1,800,000 shares of common stock for issuance
under the 1996 Plan. Except as otherwise provided, awards are granted at a price
equal to the market price at the date of the grant, expire ten years after the
date of the grant and vest 20% per year over a five year period.
Stock option activity during the years ended December 31, 1998, 1997 and 1996
was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------------------- ------ -----
Outstanding at
beginning
<S> <C> <C> <C> <C> <C> <C>
of year 771,500 $ 5.82 664,000 $ 4.40 328,000 $1.27
Granted 158,750 19.26 132,500 12.68 664,000 4.40
Exercised (64,000) 4.76 (9,000) 4.40 (308,000) 1.25
Canceled (1,500) 17.00 (16,000) 4.41 (20,000) 1.53
------- -------- -------
------- -------- -------
Outstanding at
end of year 864,750 $ 8.35 771,500 $ 5.82 664,000 $4.40
------- -------- -------
------- -------- -------
Options
exercisable
at year-end 212,700 120,600 --
------- -------- -------
------- -------- -------
Weighted average
fair value of
options granted
during the year $8.47 $4.98 $1.72
------- -------- -------
------- -------- -------
</TABLE>
15
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------
Number Weighted-Average Number Weighted-
----------------------
Range of Outstanding Remaining Exercisable Average
Exercise at Contractual Exercise at Exercise
Prices 12/31/98 Life Price 12/31/98 Price
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4.40- 4.42 577,800 7.8 years $ 4.40 189,000 $ 4.40
$10.69-12.88 129,200 8.4 12.65 23,600 12.64
$15.94-19.58 111,750 9.1 17.59 100 19.58
$21.48-25.13 46,000 9.6 23.39 -- --
------ --
864,750 8.1 $ 8.35 212,700 $ 5.32
------- -------
------- -------
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for the 1996 Plan. Accordingly, no compensation expense has been recognized. Had
compensation cost for the Company's stock-based compensation plan been
determined consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Income
As Reported $9,009,949 $5,822,098 $4,277,656
Pro Forma $8,480,568 $5,437,548 $4,244,528
Basic Earnings
Per Share
As Reported $1.02 $ .80 $ .57
Pro Forma $ .96 $ .75 $ .57
Diluted Earnings
Per Share
As Reported $ .98 $ .77 $ .55
Pro Forma $ .92 $ .72 $ .55
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: expected
volatility of 50%, 40% and 40%, risk-free interest rates of 5.4%, 6.4% and 6.3%
and expected lives of four years for all periods. The Company does not expect to
pay dividends in the future.
16
<PAGE>
7. Earnings Per Share:
Reconciliations of the numerators and denominators of the basic and diluted
earnings per share computations for the years ended December 31, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------
Per Share
Income Shares Amount
----------- ----------- -----------
Basic Earnings Per Share
<S> <C> <C> <C>
Net Income $9,009,949 8,870,064 $1.02
-----------
-----------
Effect of Dilutive
Securities
Stock Options -- 334,666
----------- -----------
----------- -----------
Diluted Earnings Per Share
Income available to
common stockholders
plus assumed
conversions $9,009,949 9,204,730 $0.98
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------
Per Share
Income Shares Amount
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Share
Net Income $5,822,098 7,294,537 $.80
-----------
-----------
Effect of Dilutive
Securities
Stock Options -- 265,961
----------- -----------
Diluted Earnings Per Share
Income available to
common stockholders
plus assumed
conversions $5,822,098 7,560,498 $.77
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
Per Share
Income Shares Amount
----------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Share
Net Income $4,277,656 7,447,700 $.57
----------- ----------- -----------
----------- ----------- -----------
Effect of Dilutive
Securities
Stock Options -- 63,122
7% Convertible
subordinated note ---------- ----------
40,029 286,037
Diluted Earnings Per Share
Income available to
common stockholders
plus assumed
conversions $4,317,685 7,796,859 $.55
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
8. Employee Benefit Plans:
The Company maintains separate defined-contribution profit sharing plans for its
U.S. and Canadian operations which cover substantially all employees.
Contributions to the plans, subject to certain limitations, are at the
discretion of the Company and were $1,363,427, $1,163,259 and $951,192 in 1998,
1997 and 1996, respectively.
The Company also maintains an Employee Stock Ownership Plan (ESOP), which covers
substantially all U.S. employees. Under the ESOP, the Company may make
contributions at its discretion, within defined limits, in the form of cash or
common
17
<PAGE>
stock of the Company. Cash contributions must be used to purchase shares of
common stock of the Company. The Company made cash contributions of $275,000,
$200,000 and $100,000 in 1998, 1997 and 1996, respectively.
9. Commitments and Contingent Liabilities:
The Company leases office facilities, along with some of its computer and office
equipment, under operating lease agreements. Total rental expense was
approximately $2,787,000, $1,631,000 and $1,496,000 in 1998, 1997 and 1996,
respectively. Some of the Company's leases provide for escalations based on
increases in the lessors' taxes, maintenance and other operating expenses.
Computer and office equipment include $1,993,731 and $1,141,403 in 1998 and
1997, respectively, of computer and other equipment acquired under capital
leases. Accumulated depreciation and amortization include $510,154 and $757,555
in 1998 and 1997, respectively, of accumulated amortization on capital leases.
The leases provide for the payment of certain insurance and maintenance expenses
and contain renewal options. The leases also provide for upgrading the equipment
under lease and the purchase of equipment. The amortization expense for these
capital leases was $222,403, $199,397 and $236,019 in 1998, 1997 and 1996,
respectively.
The minimum future rentals under capital and operating leases with an initial
term of one year or more as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Leases
-------------------------
Capital Office Equipment
Year Leases Facilities & Vehicles
- ---------------------------------- ------------- -----------
<S> <C> <C> <C>
1999 $417,492 $2,212,794 $ 524,983
2000 417,492 1,928,360 406,842
2001 417,492 1,651,999 133,484
2002 376,088 1,395,259 61,734
2003 257,697 1,050,430 32,052
2004 AND THEREAFTER 79,671 1,419,662 --
- ---------------------------------------------------------------
Total minimum
lease payments $1,965,932 $9,658,504 $ 1,159,095
-------------------------
-------------------------
Less amounts
representing
interest 481,623
------------
Present value
of minimum
lease payments 1,484,309
Current portion 295,893
------------
Long-term portion $1,188,416
- ----------------------------------
- ----------------------------------
</TABLE>
18
<PAGE>
10. Provision for Income Taxes:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Currently payable:
Federal $ 4,142,000 $ 3,073,000 $ 2,676,000
State and local 968,000 680,000 649,000
Foreign 228,000 41,000 157,000
Deferred:
Federal 272,000 80,000 (181,000)
State and local 101,000 (138,000) (173,000)
FOREIGN 17,000 (23,000) (21,000)
- ---------------------------------------------------------------
Total $ 5,728,000 $ 3,713,000 $ 3,107,000
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
The following is a reconciliation between the statutory Federal income tax rate
and the Company's effective income tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State and local income taxes, net
of Federal income tax benefits 4.7 3.8 4.3
Tax-exempt interest income (1.6) (.7) --
Foreign income taxes .5 .1 .6
Amortization of intangibles .6 1.0 .2
OTHER .7 .7 3.0
Effective income tax rate 38.9% 38.9% 42.1%
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
<TABLE>
<CAPTION>
Significant deferred
tax assets (liabilities): 1998 1997
-----------------------------
<S> <C> <C>
Net operating loss carryforwards $1,266,491 $ 1,324,731
Vacation accrual 230,267 198,708
Rent abatement 74,649 87,474
Doubtful accounts 9,851 405,385
Other 168,356 329,844
Depreciation (147,222) (146,055)
INTANGIBLES (137,012) --
Net deferred tax asset $1,465,380 $ 2,200,087
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
The Company has net operating loss carryforwards at December 31, 1998 of
approximately $4,933,000 which are available to offset certain future Federal
and state income through 2012. Utilization of approximately $2,523,000 of the
net operating loss carryforwards is limited to approximately $408,000 per year
due to the change in ownership resulting from the acquisitions of BAIGlobal,
Inc. and Strategy Research Corporation. At December 31, 1998, all deferred tax
assets are considered realizable in view of past, current and the expectation of
future taxable income.
19
<PAGE>
Federal income taxes and foreign withholding taxes have not been provided on the
Company's share of the undistributed earnings of Market Facts of Canada, Ltd.
($1,680,617 at December 31, 1998) since these earnings are considered to be
permanently reinvested. The net Federal income taxes and foreign withholding
taxes which would be payable if these earnings were distributed would be
insignificant to the financial position and results of operations of the
Company.
11. Acquisitions:
On January 1, 1998, the Company acquired the remaining 90% of the outstanding
stock of Strategy Research Corporation ("Strategy Research"). Prior to 1998, the
Company held a 10% interest in Strategy Research, a full service market research
company specializing in the Latin American and U.S. Hispanic markets. The
purchase price was an amount equal to (i) $1,192,000 in cash paid at closing,
(ii) the assumption of $150,000 of bank debt, and (iii) up to $1,950,000 of
possible contingent payments based on Strategy Research exceeding certain
earnings targets for 1998 and 1999. As of December 31, 1998, contingent payments
of $750,000 have been recorded as accrued expenses based on 1998 earnings. The
excess of the purchase price over the fair values of the assets acquired and
liabilities assumed of $2,166,012 has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years.
On March 31, 1998, TRA Acquisition Corp. ("TRA"), a wholly-owned subsidiary of
the Company, acquired certain assets and assumed certain liabilities of Tandem
Research Associates, Inc. ("Tandem Research"), a 16 year-old firm providing
specialized custom and multi-client research products and services to leading
pharmaceutical companies and emerging biotech firms. The purchase price was an
amount equal to (i) $14,424,000 in cash paid at closing, (ii) the assumption of
approximately $590,000 of customer deposit liabilities, (iii) up to $9,000,000
of possible contingent payments based on TRA exceeding certain earnings targets
through March 2001, and (iv) additional contingent payments based on fifty
percent of TRA's aggregate earnings before interest and income taxes ("EBIT")
during the three-year period after the closing in excess of $9,931,000. At the
election of Tandem Research, up to twenty-five percent of the contingent
payments may be payable in shares of the Company's common stock.
The excess of the purchase price over the fair values of the assets acquired and
liabilities assumed of $15,397,167 has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years.
On August 31, 1998, PI Acquisition Corp. ("PI"), a wholly-owned subsidiary of
the Company, acquired substantially all of the assets and assumed certain
liabilities of Product Intelligence, Inc. ("Product Intelligence"). Product
Intelligence operates a national network of multimedia computerized consumer
interviewing stations in 35 separate markets that provides clients with rapid
turnaround of market research requiring consumer exposure to marketing elements.
The purchase price was an amount equal to (i) $3,675,000 in net cash at closing,
(ii) 42,793 shares of Market Facts' common stock, (iii) the assumption of
approximately $438,534 of operating liabilities, (iv) up to $6,640,000 of
possible contingent payments based on PI exceeding certain earnings targets
through December 2003, and (v) additional contingent payments based on fifty
percent of PI's aggregate EBIT through December 31, 2003 in excess of
$8,600,000. As of December 31, 1998, contingent payments of $1,395,725 have been
recorded as accrued expenses based on 1998 earnings.
The excess of the purchase price over the fair values of the assets acquired and
liabilities assumed of $5,763,890 has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years.
On July 31, 1997, the Company completed the acquisition of all the outstanding
stock of BAIGlobal, Inc., an international market research and information
company. The purchase price was an amount equal to (i)
20
<PAGE>
$3,700,000 in cash, (ii) the assumption of $2,250,000 in debt payable to two of
BAIGlobal's selling shareholders, and (iii) up to $5,000,000 of possible
contingent payments in the form of cash and stock based on BAIGlobal exceeding
certain earnings targets through December 1999.
The excess of the purchase price over the fair values of the assets acquired and
liabilities assumed of $4,336,360 has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years.
All of the acquisitions described above were accounted for under the purchase
method of accounting and their operating results have been included in the
consolidated statements of earnings and cash flows since their respective dates
of acquisition. The remaining contingent payments for each of the above
acquisitions is considered additional purchase price and will be recorded as
goodwill at the time the Company has determined beyond a reasonable doubt that
such contingent consideration will be paid.
The following unaudited pro forma financial information is provided for 1998 and
1997 as though the Company had acquired Tandem Research and BAIGlobal at the
beginning of the year being reported on:
<TABLE>
<CAPTION>
Unaudited
---------------------------
---------------------------
1998 1997
------------ ---------
------------ ---------
<S> <C> <C>
Revenue $ 137,872,870 $ 112,359,393
Net Income $ 9,361,719 $ 7,468,353
Basic Earnings Per Share $ 1.06 $ 1.02
Diluted Earnings Per Share $ 1.02 $ .99
</TABLE>
The pro forma financial results do not necessarily reflect actual results which
may have occurred if the acquisitions had taken place at the beginning of the
year being reported on, nor are they necessarily indicative of the results of
future combined operations. The pro forma effects of Strategy Research and
Product Intelligence are not material, and therefore, are not included.
12. Quarterly Results of Operations (Unaudited):
The following is a summary of the unaudited quarterly results of operations for
1998 and 1997 (in thousands, except for earnings per share):
<TABLE>
<CAPTION>
1998 First Second Third Fourth
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 29,245 $34,166 $34,859 $38,263
Gross margin $ 12,649 $15,095 $14,498 $17,217
Net income $ 1,391 $ 2,021 $ 2,178 $ 3,420
Basic earnings
per share $ .16 $ .23 $ .25 $ .38
Diluted earnings
per share $ .15 $ .22 $ .24 $ .37
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997 First Second Third Fourth
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 21,581 $25,253 $24,859 $28,371
Gross margin $ 9,731 $11,168 $10,555 $12,218
Net income $ 835 $ 1,081 $ 1,280 $ 2,626
Basic earnings
per share $ .12 $ .16 $ .18 $ .31
Diluted earnings
per share $ .12 $ .15 $ .18 $ .30
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
21
<PAGE>
The increase in the Company's operating results in the fourth quarter of 1998
was due largely to the impact of acquisitions made in 1998. The increase in the
fourth quarter of 1997 was due primarily to the acquisition of BAIGlobal, Inc.
22
<PAGE>
Exhibit No. 21
SUBSIDIARIES OF MARKET FACTS, INC.
<TABLE>
<CAPTION>
State of
NAME INCORPORATION
- ---- -------------
<S> <C>
Market Facts - New York, Inc. New York
Market Facts of Canada, Ltd. Ontario, Canada
BAIGlobal, Inc. New York
Strategy Research Corporation Florida
Tandem Research Associates, Inc. New York
Product Intelligence, Inc. New York
</TABLE>
<PAGE>
Exhibit No. 23
CONSENT OF KPMG LLP
Board of Directors
Market Facts, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-61726 and 333-37333) on Form S-8 of Market Facts, Inc. of our reports dated
February 9, 1999, relating to the consolidated balance sheets of Market Facts,
Inc. and subsidiaries as of December 31, 1998 and 1997, the related consolidated
statements of earnings, comprehensive income, stockholders' equity, and cash
flows and the related financial statement schedule for each of the years in the
three year period ended December 31, 1998, which reports appear in or are
incorporated by reference in the December 31, 1998 annual report on Form 10-K of
Market Facts, Inc.
KPMG LLP
Chicago, Illinois
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet as of December 31, 1998 and the statement of earnings for
the year ended December 31, 1998 and is qualified in its entirety be
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,475,066
<SECURITIES> 50,000
<RECEIVABLES> 21,465,158
<ALLOWANCES> 1,177,460
<INVENTORY> 0
<CURRENT-ASSETS> 55,802,685
<PP&E> 36,118,687
<DEPRECIATION> 15,636,212
<TOTAL-ASSETS> 105,454,474
<CURRENT-LIABILITIES> 29,943,377
<BONDS> 11,197,130
0
0
<COMMON> 10,910,058
<OTHER-SE> 53,403,909
<TOTAL-LIABILITY-AND-EQUITY> 105,454,474
<SALES> 0
<TOTAL-REVENUES> 136,532,924
<CGS> 0
<TOTAL-COSTS> 77,074,010
<OTHER-EXPENSES> 44,899,433
<LOSS-PROVISION> 137,017
<INTEREST-EXPENSE> 1,100,515
<INCOME-PRETAX> 14,737,949
<INCOME-TAX> 5,728,000
<INCOME-CONTINUING> 9,009,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,009,949
<EPS-PRIMARY> 1.02
<EPS-DILUTED> .98
</TABLE>
