SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Filed Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): OCTOBER 22, 1997
NFO WORLDWIDE, INC.
-------------------
(On October 14, 1997, the registrant changed its name
from NFO Research, Inc. to NFO Worldwide, Inc.)
(Exact name of registrant as specified in its charter)
Delaware 0-21460 06-1327424
- ---------------------------- ----------- ----------------------------
(State or other jurisdiction (Commission (IRS Employer Identification
of Incorporation) File Number) Number)
2 Pickwick Plaza
Greenwich, CT 06830
-------------------
Registrant's telephone number, including area code: (203) 629-8888
<PAGE>
NFO WORLDWIDE, INC.
INDEX
Page
Number
------
ITEM 5 - OTHER EVENTS..........................................................3
ITEM 7 - FINANCIAL STATEMENTS
Restated Selected Financial Data..........................................4
Restated Management's Discussion and
Analysis of Financial Condition and
Results of Operations..................................................5
Report of Independent Public Accountants..................................9
Restated Consolidated Balance Sheets.....................................10
Restated Consolidated Income Statements..................................11
Restated Consolidated Statements
Of Stockholders' Equity...............................................12
Restated Consolidated Statements of Cash Flows...........................13
Notes to Restated Consolidated Financial Statements......................14
EXHIBITS
Exhibit 23 - Consent of Arthur Andersen LLP..............................27
SIGNATURE.....................................................................28
<PAGE>
NFO WORLDWIDE, INC.
ITEM 5. OTHER EVENTS
------------
On April 1, 1997, NFO Worldwide, Inc. (the "Company" or "NFO") issued
2,589,720 shares (adjusted for 3 for 2 stock split effective October 15, 1997)
of NFO Common Stock in conjunction with the acquisition of 100% of the stock of
Prognostics, a leading provider of survey-based quantitative customer
satisfaction research to information technology companies worldwide. This
transaction has been accounted for as a pooling of interests.
In Item 7 attached herein, the Company has restated its 1996 Form 10-K
financial information (5 year Income Summary, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Consolidated Balance
Sheets, Income Statements, Statements of Stockholders' Equity and Cash Flows and
Notes to Consolidated Financial Statements) combining NFO and Prognostics.
3
<PAGE>
NFO WORLDWIDE, INC.
ITEM 7. FINANCIAL STATEMENTS
--------------------
Restated Selected Financial Data
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(3)
Revenues $116,901 $ 78,171 $ 65,403 $ 54,994 $ 49,259
Operating Income 17,627 11,841 9,932 8,006 6,188
Net Income 9,470 6,781 5,965 3,925 2,016
Earnings per Share(1) $ 0.50 $ 0.39 $ 0.35
Pro Forma Earnings per Share(2) $ 0.26 $ 0.16
BALANCE SHEET DATA(3)
Working Capital (Deficiency) $ 12,849 $ 8,891 $ 3,094 $ 4,211 $ (401)
Total Assets 106,133 70,523 62,548 50,698 50,747
Total Debt 5,280 2,052 3,315 4,963 23,723
</TABLE>
(1) Adjusted to reflect 3 for 2 stock splits effected on April 5, 1994,
February 5, 1996, and October 15, 1997.
(2) Adjusted to reflect the above stock splits, and assumes the common stock
issued in connection with the Company's initial public offering in April
1993 was outstanding for the entire period.
(3) For discussion of acquisitions, see Footnote 18 to the Consolidated
Financial Statements.
4
<PAGE>
NFO WORLDWIDE, INC.
RESTATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
NFO Worldwide, Inc. and its subsidiaries (the "Company") is a leading provider
of custom and syndicated marketing information to America's largest companies as
well as the international business community. Through its pre-recruited consumer
panel and other specialized databases, NFO offers access to more than 525,000
households and over 1.3 million people.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
statement data for the Company.
<TABLE>
<CAPTION>
Percentage Increase
(Decrease)
Income Statements 1996 1995
Years Ended December 31, Over Over
1996 1995 1994 1995 1994
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 116,901 $ 78,171 $ 65,403 49.5% 19.5%
Cost of Revenues 51,853 34,868 28,662 48.7 21.7
Selling, General & Administrative Expenses 42,775 28,034 23,720 52.6 18.2
Amortization Expense 2,891 2,157 2,031 34.0 6.2
Depreciation Expense 1,755 1,271 1,058 38.1 20.1
--------- --------- --------- --------- ---------
Operating Income 17,627 11,841 9,932 48.9 19.2
Interest Expense, Net 170 (12) 45 1,516.7 (126.7)
Other Expenses 342 -- 258 -- --
--------- --------- --------- --------- ---------
Income Before Income Taxes 17,115 11,853 9,629 44.4 23.1
Income Tax Provision 7,645 5,072 3,664 50.7 38.4
--------- --------- --------- --------- ---------
Net Income $ 9,470 $ 6,781 $ 5,965 39.7% 13.7%
--------- --------- --------- --------- ---------
Weighted Average Shares Outstanding(1) 18,816 17,133 16,814 9.8% 1.9%
========= ========= ========= ========= =========
Earnings per Share(1) $ .50 $ .39 $ .35 28.2% 11.4%
========= ========= ========= ========= =========
</TABLE>
(1) Adjusted to reflect 3 for 2 stock splits effected on April 5, 1994, February
5, 1996, and October 15, 1997.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
As certain of the statements made in this report are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995), they involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, clients' timing of new product introductions and reformulations,
clients' marketing budgets, industry and economic conditions, changes in
management or ownership of a client, the effect of the Company's competition on
client purchasing decisions, the strategic decisions of the Company's management
team, the extent to which the Company is successful in developing and marketing
its interactive market research techniques and other factors referenced in this
report. In addition, the success of the Company's European expansion efforts is
dependent in part upon a productive joint venture relationship and upon the
successful application of NFO's methodologies to different business and consumer
environments.
5
<PAGE>
NFO WORLDWIDE, INC.
RESTATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ACQUISITIONS
On January 3, 1996, the Company acquired Migliara/Kaplan & Associates, Inc.
("M/K"), Chesapeake Surveys, Inc. ("CSI"), and Plog Research, Inc. ("Plog"). M/K
is one of the nation's leading full-service health care marketing information
companies with offices in Baltimore, MD and Princeton, NJ. CSI provides data
collection and survey services, such as focus groups and random telephone
interviews. Plog is the nation's leading travel industry marketing research
organization. On August 15, 1996, the Company acquired The SPECTREM Group, Inc.
("Spectrem"). Spectrem provides niche consulting and acquisition and divestiture
advisory services in the trust and investment products sectors. These
acquisitions were accounted for using the purchase method.
On April 1, 1997, the Company issued 2,589,720 shares of NFO Common Stock to
acquire 100% of the stock of Prognostics, a leading provider of survey-based
quantitative customer satisfaction research to information technology companies
worldwide. Founded in 1981, Prognostics is headquartered in Palo Alto,
California and has additional offices in Boston and London, as well as in Japan.
The acquisition was accounted for as a pooling of interests. The accompanying
financial statements have been restated to reflect the combined results of NFO
and Prognostics for all periods presented.
1996 COMPARED TO 1995
The Company's revenues increased 50 percent to $116.9 million from $78.2
million the previous year. The acquisitions of M/K, CSI, and Plog in January
1996 and Spectrem in August 1996 contributed $28 million to this increase.
Revenues in the Company's remaining business increased by 14 percent, led by
strong showings in its financial services, packaged goods, and the
telecommunications/hi-tech sectors.
Costs of revenues increased 49 percent to $51.9 million from $34.9 million a
year ago. The increase was primarily the result of the first time inclusion of
M/K, CSI, Plog and Spectrem ($12.5 million), while remaining costs of revenues
increased $4.5 million, or 12.9 percent which was in line with revenue
increases.
Selling, general and administrative expenses increased 53 percent to $42.8
million from $28.0 million in the previous year. The first time inclusion of
M/K, CSI, Plog and Spectrem accounted for $9.6 million, while other principal
contributing factors included increased staffing caused by increased business
activity in both the U.S. and Europe, development of the Company's new online
interactive research capabilities, and inflationary increases.
Operating income in 1996 increased 49 percent to $17.6 million from $11.8
million in the prior year. This increase is primarily the result of the items
discussed above. Operating margins remained the same at 15.1 percent for 1996
and 1995. Excluding the Company's investments related to Interactive Business
Development, operating margins were actually higher in 1996 compared to 1995.
Income tax expense reflects the Company's combined Federal and State
statutory tax rate of approximately 39 percent, plus the effects of
non-deductible expenses, primarily goodwill. The increase in the effective tax
rate from 42.8 percent to 44.7 percent was largely due to the effect of the
acquisitions mentioned above.
The result of the items discussed above is that net income increased 40
percent to $9.5 million from $6.8 million in the previous year. Earnings per
share increased to $.50 from $.39 a year ago. The increase in earnings per share
was primarily due to increased earnings and occurred in spite of a greater
number of outstanding shares caused primarily by the issuance of additional
shares in connection with the recent acquisitions. The earnings per share have
been adjusted for the stock splits effected on February 5, 1996 and October 15,
1997.
1995 COMPARED TO 1994
The Company's revenues increased 19.5 percent to $78.2 million from $65.4
million the previous year. All of the Company's business units grew at
double-digit rates for the year. The Company's telecommunications business unit,
as well as its financial services, HealthMed, and packaged goods businesses had
strong growth in 1995.
Costs of revenues increased 21.7 percent to $34.9 million from $28.7 million
a year ago. The increase was primarily due to the overall increase in business
volume, a slight change in product mix, and an increase in postal rates. Postal
rates increased January 1, 1995 and the Company passed through, without its
normal markup, any incremental postage charges on projects performed in the
first quarter of 1995 that were sold prior to January 1, 1995.
Selling, general and administrative expenses for 1995 increased 18.2 percent
to $28.0 million from $23.7 million in 1994. The principal contributing factors
were the first-time inclusion of Advanced Marketing Solutions Corp. ("AMS"),
acquired in December 1994 ($.7 million), increases at PSI related to the opening
of a new office in London, England and the expansion of its existing offices in
Tampa, Florida, and new product development ($.5 million), increases in
marketing expenses and product development costs of $.7 million and general
inflationary increases.
6
<PAGE>
NFO WORLDWIDE, INC.
RESTATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Operating income in 1995 increased 19.2 percent to $11.8 million from $9.9
million in the prior year. This increase was primarily the result of the items
discussed above. Operating margins were 15.1 percent for 1995 and 15.2 percent
for 1994.
The result of the items discussed above is that net income increased 13.7
percent to $6.8 million from $6.0 million in the prior year. Earnings per share
increased 11.4 percent to $.39 from $.35 a year ago. The earnings per share
amounts have been adjusted for the stock splits effected on April 5, 1994,
February 5, 1996, and October 15, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of December 31, 1996 was $12.8 million, an increase of
$3.9 million from December 31, 1995. The primary reason for the change in
working capital was an increase in accounts receivable partially offset by an
increase in accrued expenses and customer billings in excess of revenues earned.
The Company has a credit facility (the "Credit Facility") with three major
U.S. banks. The Credit Facility provides NFO with a credit availability of $45
million which declines to $35 million and $25 million on December 29, 1997 and
1998, respectively. The Company may borrow under this facility at rates based on
specific margins above the Eurodollar base rate, the Federal Fund Rate or the
Prime Rate, at the Company's option. At December 31, 1996, the Company had loans
outstanding of $4 million under the Credit Facility.
The Credit Facility includes covenants which require the Company to maintain
certain ratios and net worth levels and place certain restrictions on
investments, sales of assets, issuance of new debt, payment of dividends,
incurring of liens and the guarantee of obligations of third parties. The
Company believes that none of these restrictions will have a significant impact
on its business or operations as presently contemplated.
During the year, the Company made capital expenditures of approximately $3.4
million. Capital expenditures in 1997 are expected to be substantially higher
than this level due to the planned expansion of the Company's operations
capacity.
The Company anticipates that existing cash, together with internally
generated funds and its credit availability, will provide the Company with the
resources that are needed to satisfy potential acquisitions, capital
expenditures, and the Company's growing working capital requirements in fiscal
1997 and subsequent years. The timing and magnitude of future acquisitions will
be the single most important factor in determining the Company's long-term
capital needs.
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 resulting from inflation.
SEASONALITY
The Company's business activity has traditionally reflected a modest
seasonality factor with slightly higher revenues in the Company's fourth
quarter. This seasonality reflects increased research spending in the fourth
quarter by clients seeking to complete research studies prior to the holiday
season and the close of their fiscal year. Also, the Company generally initiates
several large-scale annual projects and tracking programs during the fourth
quarter of each year.
Over the past two years, the fourth quarter has represented between 28
percent and 30 percent of the Company's annual revenues. Each of the remaining
three quarters ranged between 22 percent and 25 percent of the annual total.
FUTURE REQUIRED ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Account Standards No. 128, Earnings per Share (SFAS No. 128). This
statement introduces new methods for calculating earnings per share. The
adoption of this standard will not impact results from operations, financial
condition, or long-term liquidity, but will require the Company to restate
earnings per share reported in prior periods to conform with this statement. The
Company is required to adopt the new standard for periods ending after December
15, 1997. The Company believes that the adoption of this standard will result in
higher earnings per share when comparing the current primary and fully diluted
earnings per share calculations to the calculations of basic and diluted
earnings per share required by SFAS No. 128.
On June 10, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
No. 130). This statement establishes standards for reporting and display of
comprehensive income and its components in financial statements. The adoption of
this standard will not impact results from operations, financial condition, or
long-term liquidity, but will require the Company to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately in the equity
section of the balance sheet. The Company is required to adopt the new standard
for periods beginning after December 15, 1997.
7
<PAGE>
NFO WORLDWIDE, INC.
STOCK INFORMATION
The Company's common stock has traded on the Nasdaq National Market tier of
the Nasdaq Stock Market since its initial public offering was completed in
April, 1993. The Company's stock symbol is "NFOR."
The Company did not declare or pay any cash dividends during 1996, 1995 or
1994. The following table sets forth, for the periods indicated, its high and
low sales prices per share as reported on the Nasdaq.
The stock prices have been adjusted to give retroactive effect to 3 for 2
stock splits effected on February 5, 1996 and October 15, 1997.
Sales Price
High Low
------ ------
CALENDAR YEAR 1996
First Quarter $17.00 $11.67
Second Quarter 16.83 13.17
Third Quarter 16.17 14.17
Fourth Quarter 16.17 14.33
CALENDAR YEAR 1995
First Quarter $ 8.67 $ 6.33
Second Quarter 9.22 7.78
Third Quarter 10.45 8.67
Fourth Quarter 11.78 9.55
8
<PAGE>
NFO WORLDWIDE, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of NFO Worldwide, Inc.:
We have audited the accompanying restated consolidated balance sheets of NFO
Worldwide, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1995, and the related restated consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NFO Worldwide, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, all in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
New York, New York
August 4, 1997.
9
<PAGE>
NFO WORLDWIDE, INC.
RESTATED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents $ 4,980 $ 6,365
Receivables:
Trade, Less Allowance for Doubtful Accounts
of $224 and $247 in 1996 and 1995, respectively 28,742 16,944
Unbilled Receivables 3,963 3,188
Prepaid Expenses and Other Current Assets (Note 8) 3,412 2,769
--------- ---------
Total Current Assets 41,097 29,266
--------- ---------
Property and Equipment, Net (Note 3) 11,122 8,892
--------- ---------
Customer Lists, Goodwill and Other Intangible Assets, Net (Notes 2 and 4) 49,412 26,501
--------- ---------
Other Assets
Deferred Income Taxes (Note 8) 1,498 4,137
Other (Note 19) 3,004 1,727
--------- ---------
Total other assets 4,502 5,864
--------- ---------
Total Assets (Note 5) $ 106,133 $ 70,523
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current Maturities of Long-Term Debt (Note 5) $ 459 $ 643
Accounts Payable 2,332 1,700
Accrued Liabilities (Note 6) 14,111 9,416
Customer Billings in Excess of Revenues Earned 11,346 8,616
--------- ---------
Total Current Liabilities 28,248 20,375
--------- ---------
Long-Term Liabilities
Long-Term Debt, Less Current Portion (Note 5) 4,821 1,409
Accrued Pension, Postretirement Benefits and Other (Notes 9 and 10) 4,579 3,429
--------- ---------
Total Long-Term Liabilities 9,400 4,838
--------- ---------
Total Liabilities 37,648 25,213
--------- ---------
Commitments and Contingencies (Notes 7, 16, 18, and 19)
Stockholders' Equity (Note 11)
Serial Preferred Stock, Par Value $.01 per Share;
5,000 Shares Authorized; None Issued
Common Stock, Par Value $.01 per Share; 60,000 shares
authorized; 18,009 and 16,731 shares issued and
outstanding at December 31, 1996 and 1995, respectively 120 80
Additional Paid-In Capital 40,525 27,206
Retained Earnings 28,163 18,693
Additional Minimum Liability, Net of Income Taxes (Note 9) (323) (669)
--------- ---------
Total Stockholders' Equity 68,485 45,310
--------- ---------
Total Liabilities and Stockholders' Equity $ 106,133 $ 70,523
========= =========
</TABLE>
See notes to restated consolidated financial statements.
10
<PAGE>
NFO WORLDWIDE, INC.
RESTATED CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
-------- -------- --------
Revenues (Notes 2 and 15) $116,901 $ 78,171 $ 65,403
Costs and Expenses
Cost of Revenues 51,853 34,868 28,662
Selling, General and Administrative 42,775 28,034 23,720
Amortization of Intangible Assets 2,891 2,157 2,031
Depreciation 1,755 1,271 1,058
-------- -------- --------
Operating Income 17,627 11,841 9,932
Interest Expense, Net (Note 12) 170 (12) 45
Other Expenses (Notes 4 and 19) 342 -- 258
-------- -------- --------
Income Before Income Taxes 17,115 11,853 9,629
Provision for Income Taxes (Note 8) 7,645 5,072 3,664
-------- -------- --------
Net Income $ 9,470 $ 6,781 $ 5,965
======== ======== ========
Earnings per Share (Note 13) $ .50 $ .39 $ .35
======== ======== ========
See notes to restated consolidated financial statements.
11
<PAGE>
NFO WORLDWIDE, INC.
RESTATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Additional Total
Common Common Paid-In Retained Minimum Stockholders'
Shares Stock Capital Earnings Liability Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993,
as previously reported 13,500 $ 40 $ 23,242 $ 5,103 $ (511) $ 27,874
Acquisition of Prognostics, Accounted
for as a Pooling of Interests 1,455 10 (9) 844 845
-------- -------- -------- -------- -------- --------
Balance at December 31, 1993, as restated 14,955 $ 50 $ 23,233 $ 5,947 $ (511) $ 28,719
Acquisition (Note 18) 402 1 2,400 2,401
Stock Split (Note 11) 21 (21)
Other Issuances 69 324 324
Issuance of Prognostics Shares in
Exchange for Non-Recourse Notes (Note 11) 900 6 (6)
Reduction of Additional Minimum Liability,
Net of Income Taxes (Note 9) 178 178
Net Income 5,965 5,965
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 16,326 $ 78 $ 25,930 $ 11,912 $ (333) $ 37,587
Acquisition (Note 18) 40 361 361
Other Issuances 131 1 916 917
Issuance of Prognostics Shares in
Exchange for Non-Recourse Notes (Note 11) 234 1 (1)
Accrual of Additional Minimum Liability,
Net of Income Taxes (Note 9) (336) (336)
Net Income 6,781 6,781
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 16,731 $ 80 $ 27,206 $ 18,693 $ (669) $ 45,310
Acquisitions (Note 18) 1,128 8 12,077 12,085
Stock Split (Note 11) 31 (31)
Other Issuances 117 1 1,132 1,133
Reduction of Additional Minimum Liability,
Net of Income Taxes (Note 9) 346 346
Conversion of Note Payable (Notes 5 and 18) 33 141 141
Net Income 9,470 9,470
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 18,009 $ 120 $ 40,525 $ 28,163 $ (323) $ 68,485
======== ======== ======== ======== ======== ========
</TABLE>
The shares presented reflect 3 for 2 stock splits effected on April 5, 1994,
February 5, 1996, and October 15, 1997 (Note 11).
See notes to restated consolidated financial statements.
12
<PAGE>
NFO WORLDWIDE, INC.
RESTATED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 9,470 $ 6,781 $ 5,965
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Amortization of Intangible Assets 2,891 2,157 2,031
Depreciation 1,755 1,271 1,058
Write-off of Debt Issuance Costs 258
Deferred Income Taxes 302 (188) 418
Equity Interest in Net Loss of Affiliates 453
-------- -------- --------
Subtotal 14,871 10,021 9,730
Change in Assets and Liabilities that Provided (Used) Cash,
Net of Effects of Acquisitions:
Trade Receivables (7,285) (3,985) (3,222)
Unbilled Receivables (478) (2,834) (18)
Prepaid Expenses and Other Current Assets (355) (856) (169)
Accounts Payable and Accrued Liabilities 1,782 2,222 (253)
Customer Billings in Excess of Revenues Earned (813) (56) 1,464
Other, Net (514) (151) (274)
-------- -------- --------
Net Cash Provided by Operating Activities 7,208 4,361 7,258
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions (Net of Cash Acquired) (7,258) (361) (1,999)
Capital Expenditures, (Net of Minor Disposals) (3,386) (2,171) (1,408)
Purchase of Intangible Assets (70) (255)
Investments in Affiliates (999) (1,290)
-------- -------- --------
Net Cash Used in Investing Activities (11,713) (4,077) (3,407)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock, Net of Expenses 769 687 324
Payments on Long-Term Debt (11,522) (1,085) (2,978)
Principal Payments on Capital Lease Obligations (127) (191) (183)
Proceeds from Line of Credit 14,000
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities 3,120 (589) (2,837)
-------- -------- --------
Increase (Decrease) In Cash And Cash Equivalents (1,385) (305) 1,014
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,365 6,670 5,656
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,980 $ 6,365 $ 6,670
======== ======== ========
</TABLE>
See notes to restated consolidated financial statements.
13
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. BUSINESS
NFO Worldwide, Inc. together with its subsidiaries (the "Company") is a leading
provider of custom and syndicated marketing information to America's largest
companies, as well as the international business community. The company gathers
information primarily using a proprietary panel of pre-recruited consumer
households (the "Panel").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The restated consolidated financial statements of
the Company have been prepared to give retroactive effect to the merger with
Prognostics on April 1, 1997 (see Note 18), accounted for as a pooling of
interests.
CONSOLIDATION -- The consolidated financial statements include the accounts
of the Company and all subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION -- The Company recognizes revenue on projects, which are
substantially all short-term, by generally applying recent historical
contribution margins to project costs as incurred. A provision for anticipated
losses is recorded in the period in which they first become determinable.
CASH AND CASH EQUIVALENTS -- The Company considers all investments with a
maturity of three months or less when purchased to be cash equivalents.
DEPRECIATION -- The Company provides depreciation over the estimated useful
lives of the depreciable assets using the straight-line method.
INTANGIBLE ASSETS -- The Company provides amortization of these assets using
the straight-line method over their estimated period of benefit or contractual
life, principally as follows:
Years
-----
Customer Lists 15-20
Customized Software 5
Debt 5
Goodwill 5-30
The Company periodically evaluates the recoverability of goodwill and other
intangible assets by assessing whether the unamortized intangible assets can be
recovered from undiscounted future cash flows from operations.
PANEL -- The Company enhances and rebuilds its Panel on a continuous basis,
and the related costs are charged to expense as incurred. The Company expensed
$1,347,000, $933,000, and $1,061,000 on Panel enhancing and rebuilding in 1996,
1995 and 1994, respectively.
INCOME TAXES -- Deferred income taxes are recorded to reflect the tax
consequences of differences between the tax bases of the Company's assets and
liabilities and their financial reporting amounts at each balance sheet date.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The following methods and assumptions
were used to estimate the fair value of each category of the Company's financial
instruments:
CASH AND SHORT-TERM FINANCIAL INSTRUMENTS -- The carrying amount
approximates fair value due to the short maturity of these instruments.
LONG-TERM FINANCIAL INSTRUMENTS -- The fair value has been estimated using
the expected future cash flows discounted at market interest rates as
adjusted for conversion privileges. Fair value of long-term debt exceeded
the carrying amounts by approximately $170,000 and $400,000 at December 31,
1996 and 1995, respectively.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent 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.
14
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
3. PROPERTY AND EQUIPMENT
Property and equipment, including equipment held under capital leases (Note 5),
consists of the following at December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
Estimated
Useful Lives 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Land $ 1,663 $ 933
Buildings and Leasehold Improvements 10-40 years 5,183 5,024
Data Processing and Communications Equipment 3-5 years 6,241 4,683
Furniture and Other Equipment 4-8 years 4,226 2,604
------------- -------- --------
Total $ 17,313 $ 13,244
Less Accumulated Depreciation and Amortization (6,191) (4,352)
-------- --------
Total $ 11,122 $ 8,892
======== ========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Customer Lists, Net of Amortization of $6,548 and $5,299 in 1996 and 1995, respectively $14,789 $10,440
Customized Software, Net of Amortization of $1,635 and $1,406 in 1996 and 1995, respectively -- 229
Debt Issuance and Other costs, Net of Amortization of $338 and $224 in 1996 and 1995, respectively 332 386
Goodwill, Net of Amortization of $3,665 and $2,366 in 1996 and 1995, respectively 34,291 15,446
------- -------
Total $49,412 $26,501
======= =======
</TABLE>
The Company wrote off unamortized debt issuance costs of $258,000 in 1994 in
conjunction with the replacement of an existing debt agreement with a new one.
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Industrial Development Revenue Bonds Due in Monthly Installments of $37
Including Interest at 70 Percent of the Prime Rate (effective rate of 5.8
Percent at December 31, 1996 and 6.0 Percent at December 31, 1995) through
September 1997. The Bonds Are Collateralized by Real Estate with a Net Book
Value of $1,064 at December 31, 1996. $ 281 $ 672
Industrial Development Revenue Bonds Due in Monthly Installments of $10, Plus
Interest at 80 Percent of the Prime Rate (effective rate of 6.6 Percent at
December 31, 1996 and 6.8 Percent at December 31, 1995) through January 2004.
The Bonds Are Collateralized by Real Estate with a Net Book Value of $1,349 at
December 31, 1996. 876 1,001
Note Payable to Banks under a Revolving Credit Agreement Due December 31, 1999,
with Interest Ranging Between 6.3 Percent and 6.4 Percent. 4,000 --
Note Payable (Face Amount of $125 in 1996 and $375 in 1995) Due November 2004,
with Interest Imputed at 7.0 Percent. Holder Has Option to Convert All or Part
of Note to Common Stock of the Company. 69 198
Obligations Under Long-Term Capital Leases, Due in Monthly Installments of $13
through January 1997, and $6 through October 1997, Interest Ranging Between 9.6
Percent and 9.7 Percent. 54 181
------ ------
Total 5,280 2,052
Less Current Maturities (459) (643)
------ ------
Total $4,821 $1,409
====== ======
</TABLE>
15
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The Company has a revolving line of credit agreement with three major banks
which provides for borrowings up to $45 million. The agreement expires on
December 31, 1999, and is secured by substantially all assets of the Company. At
December 31, 1996, there was $4 million outstanding under this agreement. There
were no borrowings outstanding under this agreement at December 31, 1995.
The available line of credit under the revolving credit agreement was reduced
by $5,000,000 in December 1996, and will be reduced by $10,000,000 on December
29, 1997 and 1998. The credit agreement also has certain mandatory reductions
due to excess cash flow (as defined), asset sales in excess of specified amounts
and a portion of the net proceeds received from any public issuances of
securities of the Company.
Interest is payable quarterly on the outstanding balance at variable rates
depending on the Company's leverage ratio as defined in the agreement. The rates
are based on specified margins above the Eurodollar Rate, the Federal Funds Rate
or the Prime Rate, at the Company's option. Commitment fees are payable
quarterly at varying rates depending on the Company's leverage ratio (as defined
in the agreement).
The revolving credit agreement includes covenants which require the Company
to maintain certain financial ratios and net worth levels and place certain
restrictions on investments, sales of assets, issuance of new debt, payment of
dividends, incurring of liens and the guarantee of obligations of third parties.
Required principal payments on long-term debt and capital lease obligations
are as follows at December 31, 1996 (in thousands):
Capital
Debt Leases
------ ------
1997 $ 405 $56
1998 125
1999 4,125
2000 125
2001 125
Thereafter 377
------ ------
Total 5,282 56
Less Amount Representing Interest (56) (2)
------ ------
Present Value of Minimum Payments $5,226 $54
====== ======
6.ACCRUED LIABILITIES
Accrued liabilities consist of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
------- -------
Accrued Compensation and Payroll Taxes $ 3,909 $ 2,314
Income Taxes Payable (Note 8) 1,444 1,359
Accrued Vacation 1,044 849
Purchase Price Payable (Note 18) 3,733 1,047
Accrued Pension (Note 9) 350 667
Accrued Profit Sharing (Note 9) 719 626
Other Accrued Liabilities 2,912 2,554
------- -------
Total $14,111 $ 9,416
======= =======
7. OPERATING LEASES
The Company leases office space and equipment under noncancelable operating
leases that expire at various dates through 2002. Certain of these leases are
subject to rent review and contain escalation clauses. Future minimum annual
payments required under the noncancelable leases as of December 31, 1996, are as
follows (in thousands):
1997 $2,659
1998 2,677
1999 1,994
2000 1,581
2001 1,269
Thereafter 133
-------
Total $10,313
=======
Rental expense for the years ended December 31, 1996, 1995 and 1994,
including leases on a month-to-month basis, was approximately $2,885,000,
$1,954,000, and $1,577,000, respectively.
Certain of the Company's subsidiaries rent space in office buildings owned or
partially owned by officers of the subsidiaries. Such rents, which are
approximately $.5 million in 1996, are believed to be consistent with arms
length transactions.
16
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
8. INCOME TAXES
The provision for income taxes is as follows for the years ended December 31,
1996, 1995, and 1994 (in thousands):
1996 1995 1994
------- ------- -------
Current Provision:
Federal $ 6,193 $ 4,120 $ 2,493
State and Local 1,150 1,140 753
------- ------- -------
Total 7,343 5,260 3,246
------- ------- -------
Deferred Provision (Credit):
Federal 256 (160) 323
State and Local 46 (28) 95
------- ------- -------
Total 302 (188) 418
------- ------- -------
Total Provision $ 7,645 $ 5,072 $ 3,664
======= ======= =======
Temporary differences giving rise to the recorded deferred income tax asset
at December 31, 1996 and 1995, are as follows (in thousands):
1996 1995
------- -------
Depreciation and Amortization $ 610 $ 2,997
Pension, Postretirement Benefits and
Deferred Compensation 907 1,047
Vacation 341 305
State and Local Taxes 364 282
Other 76 (28)
------- -------
Total $ 2,298 $ 4,603
======= =======
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate at December 31, 1996, 1995 and 1994, is as follows:
1996 1995 1994
------ ------ ------
Statutory Rate 34.8% 34.2% 34.0%
Nondeductible Expenses 2.8 1.6 3.6
State and Local Income Taxes,
Net of Federal Benefit 4.6 6.1 5.9
Section 197 Election (see below) (4.1)
Other 2.5 0.9 (1.3)
------ ------ ------
Effective Tax Rate 44.7% 42.8% 38.1%
====== ====== ======
In July 1994, the Company elected to adopt Section 197 of the Internal
Revenue Code, which relates to the amortization of intangible assets. This
election allows the Company to deduct some previously nondeductible
amortization, including some goodwill, for tax purposes. As a result, the
Company's effective tax rate for 1994 was reduced by 4.1 percent. Also as a
result of the election, the Company recorded a $2.7 million reduction of
goodwill and a reduction of tax expense of approximately $.5 million in 1994,
relating principally to the deductibility of previously nondeductible intangible
amortization for prior periods. In connection with the election, the Company
made tax payments related to changes in intangible asset tax lives for prior
periods of approximately $1 million during 1994. Those payments were provided
for in prior periods, and therefore had no impact on 1994 earnings.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all its
employees. Benefits provided by the plan are based on salary and years of
service. The Company's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
17
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The following table sets forth the plan's funded status and amounts
recognized in the Company's balance sheets at December 31, 1996 and 1995 (in
thousands):
1996 1995
------- -------
Actuarial Present Value of Benefit
Obligations:
Accumulated Benefit Obligation
Including Vested Benefits of
$5,087 and $4,588 at December 31,
1996 and 1995, respectively $ 5,680 $ 5,135
------- -------
Projected Benefit Obligation for
Service Rendered to Date $ 5,908 $ 5,248
Plan Assets at Fair Value (Principally
Invested in Equity Securities and
Guaranteed Fixed Income
Insurance Contracts) 5,113 3,554
------- -------
Projected Benefit Obligation
in Excess of Plan Assets 795 1,694
Unrecognized Net Experience Differences (809) (1,286)
Prior Service Cost 34 40
Adjustment Required to Recognize
Minimum Liability before Income Taxes 547 1,133
------- -------
Accrued Pension Cost $ 567 $ 1,581
======= =======
The Company's required minimum funding amounts of $350,000 and $667,000,
which are included in the above accrued pension cost, are included in current
liabilities as of December 31, 1996 and 1995, respectively.
Pension expense for the years ended December 31, 1996, 1995, and 1994
consists of the following (in thousands):
1996 1995 1994
----- ----- -----
Service Cost $ 502 $ 405 $ 410
Interest Cost on Projected
Benefit Obligation 411 347 303
Actual (Gain)/Loss on Assets (740) (488) 16
Net Amortization and Deferral 485 315 (180)
----- ----- -----
Net Periodic Pension Cost $ 658 $ 579 $ 549
===== ===== =====
18
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Assumptions used in determining pension plan amounts were as follows:
1996 1995 1994
------ ------ ------
Discount Rate 7.75% 7.75% 8.5%
Rate of Increase in
Compensation Levels 4.75 4.75 5.0
Expected Long-Term Rate
of Return on Assets 9.0 9.0 9.0
The Company maintains a profit sharing plan, established under Section 401(k)
of the Internal Revenue Code, which covers substantially all full-time
employees. Profit sharing contributions to the plan are at the discretion of the
Company's Board of Directors and are generally tied to annual profit
performance. The plan also contains a 401(k) feature whereby all eligible
employees may contribute up to 15 percent of their basic compensation. The
Company makes a matching contribution equal to 25 percent of the first 6 percent
of each participant's voluntary contribution. The Company's total contributions
related to the plan amounted to approximately $931,000, $801,000, and $700,000
for the years ended December 31, 1996, 1995, and 1994, respectively.
The Company has an unfunded, nonqualified deferred compensation plan for
certain key executives. The plan provides, among other things, for certain
deferred compensation to take effect on the employee's retirement, disability,
death or other termination of employment. Long-term liabilities include
approximately $692,000 and $314,000 at December 31, 1996 and 1995, respectively,
representing the present value of the benefits expected to be provided based on
the employees' service to that date.
10. POSTRETIREMENT BENEFIT PROGRAMS
The Company sponsors two defined benefit postretirement programs that cover
salaried and nonsalaried employees. One program provides medical benefits, and
the other provides life insurance benefits. The postretirement healthcare
program is contributory, with retiree contributions adjusted annually; the life
insurance program is noncontributory.
The health care program currently requires the retiree to pay 50 percent of
the cost of coverage for the retiree and dependents both before and after
attaining age 65. For those retiring on or after January 1, 1994, the co-pay
increases at age 65 to 75 percent of the cost of coverage for the retiree and
100 percent of the cost of coverage for dependents. In addition, an employee
must complete 10 years of service after age 45 to be eligible for postretirement
medical coverage. The Company does not fund its postretirement health care or
life insurance programs.
19
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The following sets forth the programs' status reconciled with the amount
shown in the Company's balance sheets at December 31, 1996 and 1995 (in
thousands):
1996 1995
------- -------
Accumulated Postretirement
Benefit Obligation:
Retired Participants and Beneficiaries $ 392 $ 367
Fully Eligible Active Program Participants 417 324
Other Active Program Participants 309 228
------- -------
Accumulated Postretirement Benefit
Obligation in Excess of
Plan Assets 1,118 919
Unrecognized Net Loss (125) (21)
------- -------
Unfunded Accumulated Postretirement
Benefit Obligation, Included in
Long-Term Liabilities in the Accompanying
Balance Sheet $ 993 $ 898
======= =======
Net periodic postretirement benefit cost for 1996, 1995, and 1994 includes
the following components (in thousands):
1996 1995 1994
----- ----- -----
Benefits Attributed to Service
During the Period $ 72 $ 46 $ 48
Interest Cost on Accumulated
Postretirement Benefit Obligation 76 61 50
Net Amortization and Deferral 4 (2)
----- ----- -----
Net Periodic Postretirement
Benefit Cost $ 152 $ 105 $ 98
===== ===== =====
20
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The assumed discount rate used to measure the postretirement benefit
obligation is 7.5 percent, 7.5 percent, and 8.25 percent, in 1996, 1995, and
1994, respectively.
The health care trend rates assumed in the above estimates include an initial
assumed rate of 10 percent, grading down to a level 5 percent over 8 years.
The effect of a 1 percent increase in the assumed healthcare trend rates
would be to increase the obligation at December 31, 1996, by approximately
$145,000, and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by approximately
$23,000.
11. CAPITAL STOCK
COMMON STOCK -- In September 1996, the Company's Certificate of Incorporation
was amended to increase the number of authorized shares of Common Stock to 60
million shares from 15 million shares.
STOCK SPLITS -- On February 28, 1994, the Company's Board of Directors
authorized a 3 for 2 stock split of the Company's common stock effected on April
5, 1994, for stockholders of record on March 15, 1994. As a result,
approximately 2,063,000 additional shares were issued in 1994. Additionally, a 3
for 2 stock split was authorized on January 5, 1996, and effected on February 5,
1996, for stockholders of record on January 22, 1996. As a result, approximately
3,375,000 additional shares of NFO Common Stock were issued. Additionally, a 3
for 2 stock split was authorized on September 17, 1997, and effected on October
15, 1997, for stockholders of record on September 30, 1997. As a result,
approximately 6,850,000 additional shares of NFO Common Stock were issued. All
per share and share amounts in the accompanying financial statements have been
restated to reflect the above stock splits.
PREFERRED STOCK -- In connection with the initial public offering, the
Company authorized 5,000,000 shares of Serial Preferred Stock to be issued in
one or more series, with the Board of Directors to have the authority to fix
designations, preferences, powers and relative participating, optional or other
rights and restrictions thereof.
STOCK ISSUED IN EXCHANGE FOR NON-RECOURSE NOTES -- In December 1994,
Prognostics issued 10,000 shares of Non-Voting Common Stock (899,922 common
shares of NFO post-combination, see footnote 18) to an employee. The Shares were
issued in exchange for a non-recourse promissory note in the amount of $40,000
secured by the issued shares. The note bears interest at 8 percent per annum
payable quarterly. The outstanding principal is due in December 1998.
In August 1995, Prognostics issued 2,595 shares of Non-Voting Common Stock
(233,529 common shares of NFO post-combination) to certain employees. The shares
were issued in exchange for non-recourse promissory notes totaling $10,000
secured by the issued shares. The notes bear interest at 8 percent per annum
payable quarterly. The outstanding principal is due in August 1999.
The Company has reflected the notes receivable as an offset to paid in
capital. The fair value of the stock on the date of sale, issued in exchange for
the non-recourse notes, was assumed to be equal to the face amount of the notes
and, accordingly, the Company has not recognized any compensation expense under
Accounting Principles Board Opinion No. 25 and related Interpretations.
STOCK OPTIONS -- The Company has adopted the NFO Worldwide, Inc. Stock Option
Plan (the "Stock Option Plan"), the Directors' Stock Option Plan (the
"Directors' Stock Option Plan"), and a Consultant's Plan. The Plans provide for
the grant of "nonqualified" options to purchase shares of common stock. The
exercise price of the options is the market value of the Company's common stock
on the date of the grant. The number of shares of common stock reserved for
issuance under the Stock Option Plan, the Directors' Stock Option Plan, and the
Consultant's Plan is 2,812,500, 540,000, and 56,250 shares, respectively. If, as
to any number of shares, any option granted pursuant to the Plans shall expire
or terminate for any reason, such number of shares shall again be available for
grant under the Plans.
Under the Stock Option Plan, options become exercisable at such time or times
as determined at the date of grant and expire not more than 10 years from the
date of grant. Options granted under the Stock Option Plan generally become
exercisable over a three-year period at the rate of one-third of the shares
awarded each year.
21
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The Directors' Stock Option Plan provides that options on 22,500 shares be
automatically granted to each nonemployee director upon initial election and
that options on 11,250 shares be granted upon each occasion thereafter that the
director is elected or reelected to such position. Under the Directors' Stock
Option Plan, options become exercisable at any time after the six-month
anniversary of the date the option was awarded and expire not more than five
years from the date of grant.Under the Consultant's Plan the options are
exercisable any time after the six-month anniversary of the date the option was
awarded and expire five years from the date of grant.
The Company applies Financial Accounting Standards Board Statement No. 123
(SFAS 123) in accounting for its stock-based compensation plans. In accordance
with SFAS 123, the Company applies Accounting Principles Board Opinion No. 25
and related Interpretations for expense recognition. All stock options issued by
the Company are exercisable at a price equal to the market price at the date of
grant. Accordingly, no compensation cost has been recognized for any of the
options granted under the Plans.
A summary of the status of the Company's plans that issue options as of
December 31, 1996 and 1995, and changes during the years ending on those dates,
is presented below:
<TABLE>
<CAPTION>
Number Weighted
of Shares Average Price
--------- ---------
<S> <C> <C>
Outstanding at December 31, 1994 1,168,425 $ 5.34
Granted 425,250 9.80
Exercised (114,300) 4.75
Cancelled/Expired (31,500) 5.05
--------- ---------
Outstanding at December 31, 1995 1,447,875 6.71
Granted 663,758 14.19
Exercised (99,825) 5.03
Cancelled/Expired (15,375) 7.57
--------- ---------
Outstanding at December 31, 1996 1,996,433 $ 9.27
========= =========
Exercisable at December 31, 1995 622,875 $ 5.75
Exercisable at December 31, 1996 1,014,671 $ 6.67
Weighted-average fair-value of options granted during 1995 $ 5.45
Weighted-average fair-value of options granted during 1996 $ 8.03
Available for Grant at December 31, 1996 1,138,118
</TABLE>
22
<PAGE>
NFO WORLDWIDE, INC.
Notes to Restated Consolidated Financial Statements (continued)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------------
Weighted-Average
Number ---------------------------- Number Weighted-
Range of Outstanding Remaining Exercise Exerciseable Average
Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Exercise Prices
- --------------- ----------- ---------------- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
4.45 - 7.43 830,925 3.7 $ 5.26 700,425 $ 5.19
7.44 - 10.55 504,000 7.3 9.43 250,503 8.93
10.56 - 15.17 661,508 9.3 14.19 63,743 14.08
</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 by year:
1996 1995
--------- ---------
Risk-Free Interest Rate 6.1% 6.0%
Expected Life 6.8 years 6.6 years
Expected Volatility 46% 46%
Had compensation cost for the Plans been determined based on the fair value
at the grant dates for awards and issuances under those Plans consistent with
the method described in SFAS 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share, would have been reduced to the pro
forma amounts indicated below:
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1996 1995
--------- ---------
Net Income
As Reported $ 9,470 $ 6,781
Pro Forma $ 7,791 $ 6,296
Earnings Per Share
As Reported $ .50 $ .39
Pro Forma $ .41 $ .37
The Company cautions that the pro forma net income and per share results in
the initial years of adoption are overstated due to the recognition of pro forma
compensation cost over the vesting period.
12. INTEREST EXPENSE, NET
Interest expense, net, consists of the following for the years ended December
31, 1996, 1995, and 1994 (in thousands):
1996 1995 1994
----- ----- -----
Interest Income $(288) $(330) $(209)
Interest Expense 458 318 254
----- ----- -----
Total $ 170 $ (12) $ 45
===== ===== =====
13. EARNINGS PER SHARE
Earnings per share has been computed using the weighted average number of
shares outstanding during each year including common stock equivalents, when
dilutive, using the treasury stock method. Common stock equivalents include
stock options, contingent acquisition consideration and convertible debt.
Earnings per share have been restated to give effect to the Company's stock
splits.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 1996,
1995, and 1994 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash Paid During the Period for:
Interest $ 462 $ 307 $ 269
------ ------ ------
Income Taxes $6,686 $4,524 $4,224
------ ------ ------
Noncash Investing and Financing Information:
Increase in Goodwill Resulting from Contingent Purchase
Price Earned (Note 18) $3,733 $1,047 $ 722
------ ------ ------
Notes Payable Assumed in Acquisitions (Note 18) $1,018 -- $ 795
------ ------ ------
Capital Lease Obligation Incurred on Leases for New Equipment $ 173
------ ------ ------
</TABLE>
23
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
15. MAJOR CUSTOMERS
The Company's operations are conducted within one business segment, and
revenues attributable to international customers are approximately 7% of total
revenues.
Net revenues from one major long-standing customer were approximately
$12,843,000, $12,200,000, and $10,873,000 for the years ended December 31, 1996,
1995, and 1994, respectively.
16. COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with its principal executives and
certain other key employees. These agreements generally do not extend more than
three years and contain renewal options. The Company has an agreement with a
stockholder requiring the Company to reimburse that stockholder $10,000 per
month as a non-allocable expense reimbursement.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results were as follows (in thousands, except per share data):
First Second Third Fourth
------- ------- ------- -------
1996:
Revenues $25,599 $27,827 $29,223 $34,252
Earnings before Taxes 3,145 4,647 4,830 4,493
Net Income 1,689 2,516 2,683 2,582
Earnings per Share $ .09 $ .13 $ .14 $ .14
1995:
Revenues $17,317 $18,592 $19,891 $22,371
Earnings before Taxes 2,197 3,061 3,194 3,401
Net Income 1,224 1,780 1,803 1,974
Earnings per Share $ .07 $ .10 $ .11 $ .10
Earnings per share were computed giving effect to 3 for 2 stock splits
effected on February 5, 1996 and October 15, 1997 (Note 11).
18. ACQUISITIONS
On January 3, 1996, the Company acquired Migliara/Kaplan Associates, Inc.
("M/K") and substantially all the net assets of Chesapeake Surveys, Inc.
("CSI"). M/K is a full-service health care marketing information company with
offices in Baltimore, Maryland and Princeton, New Jersey. CSI, a sister company
of M/K, provides data collection and survey services such as focus groups and
random telephone interviews. Of the total purchase price, approximately $11.45
million was paid at closing, approximately 31 percent of which was paid in cash
and 69 percent in newly issued shares of NFO common stock. Additional portions
of the purchase price are due based on M/K earnings, as defined, during the
three years following the date of acquisition and payable approximately 30
percent in cash and 70 percent in NFO common stock. For the year ended December
31, 1996, the amount of additional purchase price actually earned was
approximately $3.6 million.
On January 3, 1996, the Company acquired Plog Research, Inc. ("Plog"). Plog
supplies syndicated market research products, as well as marketing and
forecasting services to the travel and tourism industries. Of the total purchase
price, approximately $5 million was paid at closing, 50 percent in cash and 50
percent in newly issued shares of NFO common stock. Additional portions of the
purchase price are due based on Plog's earnings, as defined, during the three
years following the date of acquisition and payable equally in cash and the
Company's common stock. For the year ended December 31, 1996, the amount of
additional purchase price actually earned was approximately $.1 million.
On August 15, 1996, the Company acquired The SPECTREM Group, Inc.
("Spectrem"). Spectrem provides niche consulting and acquisition and divesture
advisory services in the trust and investment areas to U.S. banks. Of the total
purchase price, approximately $2.4 million was paid at closing, 50 percent in
cash and 50 percent in newly issued shares of NFO common stock. The remaining
purchase price is due based on Spectrem's earnings, as defined, during the three
years following the date of acquisition.
The 1996 acquisitions include allocations to goodwill and customer lists of
$20.1 and $5.6 million, respectively.
24
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
The unaudited consolidated results of operations on a pro forma basis as if M/K,
CSI, and Plog had been acquired as of the beginning of the Company's fiscal year
1995 are as follows (in thousands, except per share amounts):
1995
-------
Revenue $95,247
Net Income 6,831
Earnings per Share $ .37
The pro forma effects of Spectrem are not material, and therefore, are not
included.
Effective January 1, 1994, the Company acquired Payment Systems, Inc.
("PSI"), a syndicated market research provider to the financial services
industry. Of the total purchase price for PSI, $4.8 million was paid at closing
in equal proportions of cash and NFO common stock (402,239 post-split shares).
Additional portions of the purchase price were due based on PSI's earnings, as
defined, during the two years following the date of acquisition and payable
equally in cash and the Company's common stock. For the years ended December 31,
1995 and 1994, the amount of additional purchase price actually earned was
$1,047,000 and $722,000, respectively. The excess of the purchase price over the
fair market value of the net assets acquired resulted in allocations to goodwill
and other intangibles of approximately $5.8 million.
Effective November 30, 1994, the Company acquired Advanced Marketing
Solutions, Inc. ("AMS"), a provider of custom "expert" computer software systems
to the market research industry. Of the total purchase price for AMS, the
Company paid $875,000 in cash and issued a non-interest bearing convertible
subordinated note with a face value of $375,000 at closing. The note was
converted in 1996 into 33,186 shares of the Company's common stock and a new
non-interest bearing convertible subordinated note was issued with an eight-year
life and a face value of $125,000. The note has been discounted to a net present
value of $69,000 in the accompanying financial statements. In September 1997,
this note was converted into 16,593 shares of the Company's Common Stock. The
remainder of the purchase price is payable over the first three years after the
acquisition, approximately 57 percent in cash and 43 percent in non-interest
bearing convertible subordinated notes, subject to annual adjustments based on
AMS's actual earnings, as defined, each year. During 1996 and 1995, no
additional consideration was earned or payable. Substantially all of the
purchase price was allocated to goodwill based on the fair value of the net
assets acquired.
All of the acquisitions described above were accounted for as purchases and
their results of operations have been included in the accompanying financial
statements from their respective dates of acquisition.
On April 1, 1997, the Company issued 2,589,720 shares of NFO Common Stock to
acquire 100% of the stock of Prognostics, a leading provider of survey-based
quantitative customer satisfaction research to information technology companies
worldwide. Founded in 1981, Prognostics is headquartered in Palo Alto,
California and has additional offices in Boston and London, as well as in Japan.
The acquisition was accounted for as a pooling of interests. The accompanying
financial statements have been restated to reflect the combined results of NFO
and Prognostics for all periods presented.
Separate results of operations for the periods prior to the merger with
Prognostics are as follows:
1996 1995 1994
-------- -------- --------
Revenues
NFO $109,162 $ 73,098 $ 61,545
Prognostics 7,739 5,073 3,858
-------- -------- --------
Combined $116,901 $ 78,171 $ 65,403
-------- -------- --------
Net Income
NFO $ 9,016 $ 6,721 $ 5,581
Prognostics 454 60 384
-------- -------- --------
Combined $ 9,470 $ 6,781 $ 5,965
======== ======== ========
25
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
19. INVESTMENTS IN AFFILIATES
The Company entered into agreements in 1995 with IPSOS, S.A. ("IPSOS"), a
major European marketing research firm, and LT Participants ("LT"), an IPSOS
affiliate, to launch access panel activities in Europe. Under the terms of the
agreements, the Company, IPSOS, and LT have agreed to launch joint venture
companies in five western European countries of which three are currently
operational. The Company initially will have approximately an 18 percent
interest in each joint venture but has the option, at its own discretion, to
increase its ownership interest to 50 percent during the next seven years by
purchasing LT's interest. LT has the right to sell its joint venture interests
to the Company anytime after three years. As part of these agreements, the
Company has purchased a comparable portion of IPSOS' existing access panel
businesses in Germany and France.
During 1996 and 1995, the Company invested approximately $999,000 and
$1,290,000 respectively, in these joint ventures, which is included in other
assets in the accompanying balance sheets. This investment has been accounted
for using the equity method of accounting. NFO's portion of the joint ventures'
1996 activities resulted in a loss of $453,000, which is reflected in other
expenses on the consolidated income statement.
20. SUBSEQUENT EVENTS
On July 11, 1997, the Company acquired 100 percent of the outstanding stock
of The MBL Group plc ("MBL"), a company incorporated under the laws of England
and Wales, from John and Mary Goodyear. MBL is a leading international market
research firm with 27 offices in 15 countries throughout Europe, the Middle
East, and Asia. The acquisition was effected through the issuance of 2,046,363
shares of NFO Common Stock and will be accounted for as a pooling of interests.
In accordance with generally accepted accounting principles, the accompanying
financial statements have not been restated to reflect this acquisition, since
combined results of operations of the merged Company, subsequent to the
acquisition, have not yet been publically issued.
The Company has or will shortly enter into agreements with the minority
shareholders of the various MBL subsidiaries to repurchase a portion of such
shareholders' minority shares during 1997. The consideration for this initial
purchase of the minority interests is expected to be $14.5 million, of which
$11.1 million is payable in cash and $3.4 million is payable via the issuance of
216,850 newly issued shares of NFO Common Stock. The remaining minority
interests will then be repurchased in three years based on the higher of (a) a
multiple of average profiles for three years ending December 31, 1999 or (b) the
original valuation. The purchase of the minority interests in MBL's subsidiaries
will be accounted for using purchase accounting.
26
<PAGE>
NFO WORLDWIDE, INC.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report dated August 4, 1997, on the restated consolidated
financial statements of NFO Worldwide, Inc. and subsidiaries as of December 31,
1996 and 1995, and for each of the years in the three year period ended December
31, 1996, included in NFO Worldwide, Inc.'s current report on Form 8-K dated
October 22, 1997, into NFO Worldwide, Inc.'s previously filed Registration
Statements, File Nos. 33-73516, 33-83002, 33-91936, 333-24297 and 333-24299.
ARTHUR ANDERSEN LLP
New York, New York
October 20, 1997
27
<PAGE>
NFO WORLDWIDE, INC.
NFO Worldwide, Inc. Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NFO WORLDWIDE, INC.
-------------------
(Registrant)
Dated: October 22, 1997 /s/ Patrick G. Healy
--------------------
Patrick G. Healy,
Executive Vice President and
Chief Financial Officer
(Authorized Officer of
Registrant and Principal
Financial Officer)
28
