UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0 - 21460
NFO WORLDWIDE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1327424
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO PICKWICK PLAZA, GREENWICH, CT. 06830
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(203) 629-8888
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At November 10, 1998, Registrant had outstanding 21,324,278 shares of Common
Stock.
<PAGE>
NFO WORLDWIDE, INC.
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Condensed Consolidated Statement of
Stockholders' Equity 8
Notes to Condensed Consolidated Financial Statements 9
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
Part II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
Signature 18
2
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 6,485 $ 8,055
RECEIVABLES:
TRADE 52,487 47,044
UNBILLED 12,659 8,698
PREPAID EXPENSES AND OTHER CURRENT ASSETS 10,765 7,035
------------ ------------
TOTAL CURRENT ASSETS 82,396 70,832
PROPERTY AND EQUIPMENT, NET 29,171 19,917
CUSTOMER LIST, GOODWILL AND
OTHER INTANGIBLE ASSETS 93,991 74,409
OTHER ASSETS 5,873 5,116
------------ ------------
TOTAL ASSETS $ 211,431 $ 170,274
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT $ 310 $ 346
ACCOUNTS PAYABLE 8,436 9,139
ACCRUED EXPENSES 18,178 18,757
CUSTOMER BILLINGS IN EXCESS OF REVENUES EARNED 11,712 14,126
------------ ------------
TOTAL CURRENT LIABILITIES 38,636 42,368
LONG-TERM DEBT 49,869 24,823
OTHER LONG-TERM LIABILITIES 4,023 4,123
------------ ------------
TOTAL LIABILITIES 92,528 71,314
------------ ------------
MINORITY INTERESTS 2,709 2,236
------------ ------------
STOCKHOLDERS' EQUITY:
COMMON STOCK, PAR VALUE $.01 PER SHARE;
60,000 SHARES AUTHORIZED, 21,313 AND
20,730 ISSUED AND OUTSTANDING
IN 1998 AND 1997, RESPECTIVELY 213 208
ADDITIONAL PAID-IN CAPITAL 62,744 51,766
RETAINED EARNINGS 55,453 46,045
ACCUMULATED OTHER COMPREHENSIVE INCOME (2,216) (1,295)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 116,194 96,724
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,431 $ 170,274
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 65,486 $ 49,340 $ 180,732 $ 138,385
COST OF REVENUES 30,276 21,163 82,393 61,311
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 27,690 20,143 73,107 55,772
AMORTIZATION EXPENSE 1,052 876 3,318 2,348
DEPRECIATION EXPENSE 891 731 3,011 2,037
--------- --------- --------- ---------
OPERATING INCOME 5,577 6,427 18,903 16,917
INTEREST EXPENSE, NET 716 274 1,788 346
EQUITY INTEREST IN NET LOSS
OF AFFILIATED COMPANIES AND
OTHER EXPENSES 117 173 394 237
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 4,744 5,980 16,721 16,334
PROVISION FOR INCOME TAXES 2,158 2,464 6,885 6,933
--------- --------- --------- ---------
NET INCOME BEFORE MINORITY INTERESTS 2,586 3,516 9,836 9,401
MINORITY INTERESTS 25 315 428 1,127
--------- --------- --------- ---------
NET INCOME $ 2,561 $ 3,201 $ 9,408 $ 8,274
========= ========= ========= =========
EARNINGS PER WEIGHTED AVERAGE
SHARE OUTSTANDING(a):
BASIC $ .12 $ .16 $ .45 $ .41
========= ========= ========= =========
DILUTED $ .12 $ .15 $ .44 $ .40
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING(a):
BASIC 21,273 20,193 21,093 20,150
========= ========= ========= =========
DILUTED 21,605 20,768 21,621 20,676
========= ========= ========= =========
(a) For comparability, the earnings per share and share data reflect the
three-for-two stock split effected on October 15, 1997.
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME $ 2,561 $ 3,201 $ 9,408 $ 8,274
ADJUSTMENTS TO RECONCILE TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES:
MINORITY INTERESTS 25 315 428 1,127
AMORTIZATION EXPENSE 1,052 876 3,318 2,348
DEPRECIATION EXPENSE 891 731 3,011 2,037
EQUITY INTEREST IN NET LOSS OF
AFFILIATED COMPANIES 79 86 251 240
DIVIDENDS PAID TO MINORITY INTERESTS 0 0 0 (721)
CHANGE IN ASSETS AND LIABILITIES THAT
PROVIDED (USED) CASH:
TRADE RECEIVABLES 2,638 1,170 875 (1,568)
UNBILLED RECEIVABLES 4,948 (4,150) (2,212) (7,612)
PREPAID EXPENSES AND OTHER
CURRENT ASSETS (915) 605 (3,593) (406)
OTHER ASSETS (1,561) (119) (975) 105
ACCOUNTS PAYABLE, ACCRUED AND
OTHER LIABILITIES 1,106 (29) (2,915) (2,762)
CUSTOMER BILLINGS IN EXCESS OF
REVENUES EARNED (4,108) (2,779) (5,646) (1,853)
--------- --------- --------- ---------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 6,716 (93) 1,950 (791)
--------- --------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (2,372) (1,346) (10,312) (4,298)
ACQUISITIONS (NET OF CASH ACQUIRED) (990) (9,358) (18,148) (14,330)
INVESTMENTS IN AFFILIATED COMPANIES AND
OTHER INTANGIBLES (14) (50) (207) (770)
NET CASH USED BY INVESTING ACTIVITIES (3,376) (10,754) (28,667) (19,398)
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
(Continued)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM ISSUANCE OF STOCK 0 224 1,057 527
PAYMENTS ON LONG-TERM DEBT (3,552) (76) (61,307) (4,440)
BORROWINGS ON LINE OF CREDIT 3,000 10,500 46,032 19,500
BORROWINGS ON SENIOR NOTES 0 0 40,000 0
DEBT ISSUANCE COSTS 0 0 (391) 0
--------- --------- --------- ---------
NET CASH (USED) PROVIDED
BY FINANCING ACTIVITIES (552) 10,648 25,391 15,587
--------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (125) (62) (244) (224)
--------- --------- --------- ---------
CHANGE IN CASH 2,663 (261) (1,570) (4,826)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,822 5,014 8,055 9,579
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,485 $ 4,753 $ 6,485 $ 4,753
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 1,385 $ 112 $ 2,048 $ 316
INCOME TAXES $ 1,756 $ 2,549 $ 4,142 $ 5,667
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
In March 1998, the Company acquired MarketMind Technologies, and in a separate
transaction acquired Ross-Cooper-Lund, for an aggregate total of cash and shares
of NFO Common Stock of $12.45 million (see Note 2). In April 1998, the Company
acquired CF Group, Inc., for a total value of cash and shares of NFO Common
Stock of CDN $14 million (see Note 2). In August 1998, the Company acquired
Stochastic International Pty. Ltd., for a total value of cash and shares of NFO
Common Stock of $1.98 million (see Note 2). In connection with these purchases,
the following liabilities were assumed.
Fair value of assets acquired $ 36,048
Less: cash paid (18,927)
Less: 284,846 Company shares issued (5,359)
--------
Liabilities assumed $ 11,762
========
The accompanying notes are an integral part of these statements.
7
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
SHARES STOCK CAPITAL EARNINGS INCOME
------ ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 20,730 $ 208 $51,766 $46,045 $(1,295)
COMMON STOCK ISSUED IN
CONJUNCTION WITH
ACQUISITIONS 293 3 5,428
COMMON STOCK ISSUED IN
CONJUNCTION WITH
ACQUISTION EARNOUTS 147 1 3,012
EXERCISE OF STOCK OPTIONS 136 1 914
OTHER STOCK ISSUANCES 7 142
PAYMENT OF NON-RECOURSE NOTES 7
TAX BENEFIT ON EXERCISED OPTIONS 1,475
TRANSLATION ADJUSTMENTS (921)
NET INCOME 9,408
------ ------- ------- ------- -------
BALANCE AT SEPTEMBER 30, 1998 21,313 $ 213 $62,744 $55,453 $(2,216)
====== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
8
<PAGE>
NFO WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Financial Statements:
These condensed consolidated financial statements include the accounts of NFO
Worldwide, Inc., and its subsidiaries (the Company). All significant
intercompany amounts have been eliminated. In the opinion of the Company, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30, 1998,
and the results of its operations for the three and nine month periods ended
September 30, 1998, and September 30, 1997.
These financial statements are presented in accordance with the requirements of
Form 10-Q. Accordingly, the financial statements and related notes in the
Company's Audited Financial Statements for the fiscal year ended December 31,
1997, included in the Company's Form 10-K filed with the SEC on March 30, 1998,
should be read in conjunction with the accompanying condensed consolidated
financial statements. The information included herein may not be indicative of
the results to be expected for a full year.
Note 2. Acquisitions:
On August 31, 1998, the Company acquired Stochastic International Pty. Ltd.
("Stochastic"). Stochastic is the developer of the Stochastic Reaction Monitor
continuous brand tracking system, which provides guidance on brand positioning
to more than 60 companies in 33 countries. Stochastic was founded in 1981 and is
headquartered in Australia. The Company acquired substantially all the net
assets of Stochastic for a total purchase price of approximately $2.5 million,
$2 million payable at closing in equal amounts of cash and newly issued shares
of NFO common stock and the balance payable at the end of the next two years. A
further amount is payable at the end of three years, providing that Stochastic
achieves certain revenue targets during the third year.
On April 3, 1998, the Company acquired CF Group, Inc. ("CF Group"). Founded in
1932, CF Group is the largest custom market research organization in Canada. CF
Group is headquartered in Toronto and has client service offices in Montreal,
Ottawa and Vancouver. The Company acquired 100 percent of the outstanding stock
of CF Group for a total purchase price of approximately CDN $20 million, 70
percent payable at closing, with 75 percent in cash and 25 percent in newly
issued shares of NFO common stock. The remaining 30 percent of the purchase
price will be payable over the next two years based on CF Group achieving
certain earnings targets.
On March 4, 1998, the Company acquired MarketMind Technologies ("MarketMind")
and Ross-Cooper-Lund ("RCL"). MarketMind owns and licenses the MarketMind(TM)
system, which uses proprietary software that combines a set of key diagnostic
measures together with the integration, interactive analysis and display of
multiple streams of longitudinal data. RCL is a research-based consulting firm
focused on brand-building strategies and is the exclusive licensee of the
MarketMind system in the United States. In separate transactions, the Company
acquired substantially all the net assets of each company for the combined
consideration of $16.6 million. Of the total purchase price, $12.45 million or
75 percent was paid at closing, while the remaining 25 percent will be payable
based upon each company achieving certain earnings targets over the next two
years. Approximately 85 percent of the closing consideration was paid in cash,
and the remainder in newly issued shares of NFO common stock.
All four acquisitions have been accounted for as purchases and the accompanying
financial statements include the results of operations from the effective date
of acquisition. The purchase price allocations are based on preliminary
estimates of fair market value and are subject to revision.
9
<PAGE>
The following unaudited pro forma summary presents the condensed consolidated
results of operations as if the acquisitions had occurred on January 1, 1997,
and do not purport to be indicative of what would have occurred had the
acquisitions been made at that date or of the results which may occur in the
future. The pro forma effects of MarketMind and Stochastic are not material to
the three and nine month periods ended September 30, 1998 and 1997, and
therefore are not included in the table shown here.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 65,486 $ 57,636 $ 189,175 $ 162,532
NET INCOME 2,561 3,371 9,817 8,849
BASIC EARNINGS PER SHARE $ .12 $ .17 $ .46 $ .43
DILUTED EARNINGS PER SHARE $ .12 $ .16 $ .45 $ .42
</TABLE>
Note 3. Comprehensive Income:
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
Comprehensive Income is the total of Net Income and all other nonowner changes
in equity ("Other Comprehensive Income"). Comprehensive Income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. The adoption of SFAS 130 did not impact
results from operations, financial condition, or long-term liquidity, but did
require the Company to classify items of Other Comprehensive Income by their
nature in the financial statements and display the accumulated balance of Other
Comprehensive Income separately in the stockholders' equity section of the
Company's consolidated balance sheets.
The Company's total Comprehensive Income for the three months ended September
30, 1998 and 1997, was approximately $2.1 million and approximately $3.1
million, respectively. The Company's total Comprehensive Income for the nine
months ended September 30, 1998 and 1997, was approximately $8.5 million and
approximately $7.9 million, respectively. The Company's total Comprehensive
Income includes net income and Other Comprehensive Income. The Company's
components of Other Comprehensive Income are currency translation adjustments
and minimum pension liability adjustments.
10
<PAGE>
Note 4. Earnings Per Share:
Earnings per share have been restated to give effect to the Company's
three-for-two stock split effected on October 15, 1997. The following table
reconciles the net income and weighted average number of shares included in the
basic earnings per share calculation to the net income and weighted average
number of shares used to compute diluted earnings per share (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income Used for Basic and Diluted
Earnings Per Share $ 2,561 $ 3,201 $ 9,408 $ 8,274
========= ========= ========= =========
Weighted Average Number of Shares
Outstanding Used for Basic
Earnings Per Share 21,273 20,193 21,093 20,150
Dilutive Stock Options 328 494 478 429
Contingently Issuable Common Shares 4 81 50 97
--------- --------- --------- ---------
Weighted Average Number of Shares
Outstanding and Common Share
Equivalents Used for Diluted Earnings
Per Share 21,605 20,768 21,621 20,676
========= ========= ========= =========
</TABLE>
Note 5. Credit Facilities:
On March 9, 1998, the Company successfully concluded a private placement of $40
million fixed rate Senior Notes and entered into a $75 million revolving credit
agreement. Borrowings under these combined $115 million credit facilities are
unsecured, the proceeds of which were used to refinance the Company's previous
debt of approximately $32 million and will be used to finance future
acquisitions, capital expenditures, and working capital. The $75 million
revolving credit facility, with an ultimate maturity date of March 2003,
replaced the Company's bank line of $35 million and will enable the Company to
borrow in multiple currencies at interest rates tied to LIBOR or the prime rate,
at the Company's option. The $40 million Senior Notes are due March 1, 2008,
bear interest at the fixed rate of 6.43 percent and are to be repaid in equal
annual installments of approximately $5.7 million starting in the year 2002.
11
<PAGE>
Note 6. Subsequent Events:
On October 23, 1998, the Company acquired City Research Group Plc ("City
Research"). City Research, founded in 1978 and headquartered in London, England,
is a leading U.K. market research firm specializing in commercial banking. The
Company acquired all the outstanding stock of City Research for total
consideration of approximately $2.4 million, $1.5 million payable in cash at
closing and the remainder payable over the next two years in cash and stock
based on City Research achieving certain earnings targets. The purchase will be
accounted for using the purchase method of accounting.
On October 1, 1998, the Company acquired Donovan Research Pty. Ltd. ("Donovan").
Donovan, founded in 1974 and headquartered in Perth, Australia, is a full
service custom research agency with a leading position in fast-moving consumer
goods, public policy, tourism, customer satisfaction and continuous tracking
research. In addition to its own branded products, AdTest and Packtest, Donovan
is also the exclusive regional licensee of MarketMind, a global brand tracking
system acquired by NFO in March 1998. The Company acquired substantially all the
net assets of Donovan for cash consideration of approximately $2.5 million, $2
million payable at closing and the remainder payable over the next two years
based on Donovan's achievement of certain earnings targets. The purchase will be
accounted for using the purchase method of accounting.
On October 5, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan (the "SR Plan") by declaring a dividend distribution of one
preferred share purchase right (a "Right") for each share of the Company's
common stock. The SR Plan is intended to give the Company's Board of Directors
sufficient time to respond to an unsolicited tender offer or other attempted
acquisition. Under the SR Plan, Rights were issued to stockholders of record as
of October 15, 1998, and will expire after ten years, unless earlier redeemed or
exchanged by the Company. The Rights distribution is not taxable to
stockholders.
The Rights will be exercisable only if a person or group acquires 15% or more of
the Company's common stock or announces a tender offer upon the consummation of
which would result in 15% ownership. Each Right will entitle stockholders to buy
one one-hundredth of a share of a new series of preferred stock at an exercise
price of $50.00. If, however, a person or group acquires 15% or more of the
Company's outstanding common stock, each Right will entitle its holder, other
than such person or members of such group, to purchase, at the Right's
then-current exercise price, a number of the Company's common shares having a
market value of twice the Right's exercise price. If the Company is acquired in
a merger or other business combination transaction after a person or group has
acquired 15% or more of the Company's outstanding common stock, each Right will
entitle its holder to purchase, at the Right's then-current exercise price, a
number of the acquiring company's common shares having a market value of twice
such exercise price.
Under certain circumstances, the Company's Board of Directors may exchange the
Right, in whole or in part, at an exchange ratio of one share of common stock
(or one-hundredth of a share of the new series of preferred stock) per Right.
Prior to the acquisition by a person or group of beneficial owners of 15% or
more of the Company's common stock, the Rights are redeemable for one cent per
Right at the option of the Board of Directors. Prior to such time, the terms of
the Rights may be amended by the Board.
12
<PAGE>
NFO WORLDWIDE, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
this Quarterly Report.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
statement data for the Company, expressed as a percentage of revenues, and the
percentage change in such items compared to amounts for the prior year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE
REVENUES CHANGE FROM REVENUES CHANGE FROM
1998 1997 PRIOR YEAR 1998 1997 PRIOR YEAR
---- ---- ----------- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES 100.0% 100.0% 32.7% 100.0% 100.0% 30.6%
COST OF REVENUES 46.2 42.9 43.1 45.6 44.3 34.4
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 42.3 40.8 37.5 40.5 40.3 31.1
AMORTIZATION EXPENSE 1.6 1.8 20.1 1.8 1.7 41.3
DEPRECIATION EXPENSE 1.4 1.5 21.9 1.6 1.5 47.8
----- ----- ----- ----- ----- -----
OPERATING INCOME 8.5 13.0 (13.2) 10.5 12.2 11.7
INTEREST EXPENSE, NET 1.1 0.6 161.3 1.0 0.3 416.8
EQUITY INTEREST IN NET LOSS
OF AFFILIATED COMPANIES AND
OTHER EXPENSES 0.2 0.3 (32.4) 0.2 0.1 66.2
----- ----- ----- ----- ----- -----
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 7.2 12.1 (20.7) 9.3 11.8 2.4
PROVISION FOR INCOME TAXES 3.3 5.0 (12.4) 3.9 5.0 (0.7)
----- ----- ----- ----- ----- -----
NET INCOME BEFORE MINORITY
INTERESTS 3.9 7.1 (26.5) 5.4 6.8 4.6
MINORITY INTERESTS 0.0 0.6 (92.1) 0.2 0.8 (62.0)
----- ----- ----- ----- ----- -----
NET INCOME 3.9% 6.5% (20.0)% 5.2% 6.0% 13.7%
===== ===== ===== ===== ===== =====
</TABLE>
13
<PAGE>
OPERATIONS
The Company's revenues for the three months ended September 30, 1998, increased
33% to $65.5 million from $49.3 million for the same period last year. Strong
performance in the Company's high tech/telecommunications, packaged goods and
health care business units contributed to the revenue growth. For the nine
months ended September 30, 1998, revenues increased 31% to $180.7 million from
$138.4 million in the same period last year, with the high
tech/telecommunications, international and health care business units driving
the increase. The inclusion of newly acquired companies (CM Research acquired in
December 1997; RCL and MarketMind, March 1998; CF Group, April 1998; and
Stochastic, August 1998), contributed $13.9 million to the quarter's increase in
revenues, and $ 32.5 million to the nine month increase. These increases were
somewhat offset by a reduction in revenues in the Company's financial services
business unit, where client spending levels have been reduced by recent merger
activity. The growth in overall revenues occurred despite the negative effects
of currency exchange translations, which reduced reported revenue growth for the
quarter and nine month periods by $.5 million (1%) and $3.2 million (2%),
respectively. Excluding currency effects and PSI Global, the Company's lead
financial services unit, the Company's consolidated revenues grew 14% and 16%
over the same three and nine month periods last year, respectively, on a
comparable basis.
Cost of revenues increased 43% in the third quarter to $30.3 million from $21.2
million a year ago primarily due to the inclusion of the Company's newly
acquired companies, which also have higher cost of revenues as a percentage of
revenue, increased business volume and inflation. For the nine months ended
September 30, 1998, cost of revenues increased 34% to $82.4 million from $61.3
million last year, primarily due to the Company's newly acquired companies
($15.9 million), overall increased business volume, and inflation. In addition,
currency exchange translations reduced cost of revenues for the quarter and nine
month period by $.5 million and $ 1.3 million, respectively, in comparison to
the same period last year. Cost of revenues as a percentage of revenues
increased in the current quarter and in the nine month period as a result of
lower than expected revenues in syndicated products at PSI Global compared to
the same periods in the prior year.
Selling, general and administrative expenses increased 38% in the third quarter
to $27.7 million from $20.1 million in the same period last year. The primary
reasons for the increase were the inclusion of the Company's newly acquired
companies ($4.9 million), increased business activity including increased
staffing costs ($1.8 million), the costs of increased office space at three
operating subsidiaries and inflation. Offsetting these increases were the
negative effects of currency exchange translations ($.1 million) and the
elimination of the transaction costs associated with the 1997 acquisition of The
MBL Group plc ("MBL") ($.8 million). For the nine month period ended September
30, 1998, selling, general and administrative expenses increased 31% to $73.1
million from $55.8 million last year. The primary reasons for the increase were
the inclusion of the Company's newly acquired companies ($12.2 million),
increased business activity including staffing costs ($3.2 million), increased
office lease expenses, and inflation. Offsetting these increases were the
negative effects of currency exchange translations ($1.3 million) and the
elimination of the transaction costs associated with the 1997 acquisitions of
MBL and Prognostics ($1.3 million).
As a result of the items above, operating income for the quarter ended September
30, 1998, decreased 13% to $5.6 million from $6.4 million, compared to the same
period a year ago. The decrease is principally a result of the substantially
lower operating results posted by PSI Global, the Company's lead financial
services unit. Operating income for the first nine months of 1998 increased 12%
to $18.9 million from $16.9 million, compared to the same period a year ago.
Currency translations negatively impacted reported operating income results for
the nine month period by $.8 million.
The Company's effective tax rate for the quarter ended September 30, 1998, was
45.5% compared to 41.2% for the same period last year. This increase is
principally the result of an increase in the proportion of the Company's income
derived from companies located in higher tax jurisdictions. For the nine month
period ended September 30, 1998, the effective tax rate was 41.2% compared to
42.4% in the same period last year.
14
<PAGE>
Net income for the third quarter of 1998 decreased 20% to $2.6 million from $3.2
million for the same period in 1997. Diluted earnings per share were $.12
compared to last year's $.15 per share, a decrease of 20%. The third quarter
1997 operating results included an after tax charge of $.8 million or $.04 per
diluted share relating to transaction costs associated with the Company's
acquisition of MBL. Net income for the nine months ended September 30, 1998,
increased 14% to $9.4 million from $8.3 million a year ago, while diluted
earnings per share increased by 10%, from $.40 to $.44. Included in the 1997
nine month results are transaction costs of $1.3 million relating to the
acquisitions of MBL and Prognostics. Currency exchange translations increased
net income for the three month period by $.1 million, and decreased net income
for the nine months ended September 30, 1998, by $.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of September 30, 1998, was $43.8 million compared to $28.5
million at December 31, 1997. The increase in working capital resulted primarily
from the results of operations for the nine months ended September 30, 1998,
($15.7 million), increased long term debt ($4.0 million), payments in cash
(financed by long term debt) and stock of previously accrued acquisition related
liabilities ($4.3 million), a reduction in accrued liabilities related to a tax
benefit on exercised options ($1.5 million), and working capital provided by the
Company's acquisitions ($2.3 million). Working capital uses during the period
included capital expenditures of $10.3 million, increases in other assets ($2.1
million), and increases in the Company's accounts receivables of $9.4 million,
of which $9.8 million was in connection with the newly acquired companies.
As of September 30, 1998, the Company had $8.9 million outstanding on its $75.0
million credit facility, and $40 million outstanding in Senior Notes payable.
Capital expenditures for the quarter ended September 30, 1998, were $2.4 million
compared to $1.3 million for the same period last year. For the nine months
ended September 30, 1998, capital expenditures were $10.3 million compared to
$4.3 million a year ago. Capital expenditures for 1998 are anticipated to be
approximately $14 million, including approximately $10 million for the Company's
planned operations expansions.
The Company anticipates that existing cash, together with internally generated
funds and its credit and stock availabilities will provide the Company with the
resources that are needed to satisfy potential acquisitions, capital
expenditures and the Company's growing working capital requirements. The timing
and magnitude of future acquisitions will be the single most important factor in
determining the Company's long term capital needs.
FUTURE REQUIRED ACCOUNTING CHANGES
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities". This Statement of Position (SOP) provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. This SOP
is effective for financial statements for fiscal years beginning after December
15, 1998. The adoption of this SOP will reduce reported results from operations
due to the timing of expense recognition for costs covered by this SOP by an
immaterial amount arising from the establishment of certain European joint
ventures.
15
<PAGE>
OTHER MATTERS
The Company is currently working to resolve the Year 2000 issue. In early 1997
the Company completed an impact analysis across all proprietary custom software
programs and systems. As a result of this analysis, affected programs are being
modified by the Company's programming departments to ensure future compliance.
Any new programs being developed are being made Year 2000 compliant from the
outset, while certain existing systems are being made Year 2000 compliant as
they are reengineered.
The Company operates subsidiaries and divisions worldwide. While many of these
operations are already Year 2000 compliant in hardware, software and embedded
systems, other operations are still in the process of upgrading their systems
for Year 2000 compliance. The Company is in the process of testing its mission
critical and non-critical systems and software for Year 2000 compliance by using
a test date of January 1, 2000. In instances where the Year 2000 date is not
properly processed, the systems and software are upgraded and re-tested as
necessary for Year 2000 compliance. Mission critical applications and systems
have been prioritized for Year 2000 compliance, and many of those systems are
already compliant.
The Company believes the most likely worst case scenario would be for a
non-critical application or system to not be Year 2000 compliant on January 1,
2000. The Company's contingency plan includes manually addressing non-critical
applications and systems compliance problems. Additionally, the Company has the
ability to readily outsource many of its data collection and processing
processes should the need arise.
The Company is also coordinating with clients, vendors, affiliates and other
outside parties who may affect, or be affected by, the Company's plans to
address the Year 2000 issue. During 1998, the Company sent surveys to these
outside parties inquiring as to their status in addressing the Year 2000 issue
within their respective organizations. Although the results of those surveys are
still being gathered and analyzed, the Company does not believe the effect of
non-compliance with Year 2000 on the part of any individual or group of outside
parties would have a material negative impact on the Company's day-to-day
operations.
The Company is targeting January 1, 1999, to complete mission critical systems,
including third party and supply chain vendors, and June 30, 1999, for all other
systems, for Year 2000 compliance. The Company estimates that total Year 2000
compliance costs incurred from 1997 through September 30, 1998, approximate
$275,000, and the estimated future cost to complete Year 2000 compliance is
approximately $600,000, including capital expenditures of approximately
$200,000.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
As certain of the statements made in this Form 10-Q are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995), they involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, clients' timing of new product introductions and reformulations,
clients' marketing budgets, industry and economic conditions, changes in
management or ownership of a client, the effect of the Company's competition on
client purchasing decisions, the strategic decisions of the Company's management
team, the extent to which the Company is successful in developing and marketing
its interactive market research techniques and other factors referenced in this
report. In addition, the success of the Company's worldwide expansion efforts is
dependent in part on the successful application of NFO's methodologies to
different business and consumer environments. To understand the additional risks
which may affect the Company's future performance, refer to Part 1 of NFO's 1997
Annual Report on Form 10-K filed on March 30, 1998.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Commission on
October 6, 1998, in respect of the registration of the rights
issuable pursuant to the terms and conditions of the Company's
Stockholder Rights Plan and a press release announcing a downturn
in expected third quarter earnings.
17
<PAGE>
NFO WORLDWIDE, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NFO WORLDWIDE, INC.
-------------------
(Registrant)
Dated: November 13, 1998 /s/ Patrick G. Healy
--------------------
Patrick G. Healy,
President - Corporate Products/Systems
Development and Chief Financial Officer
(Authorized Officer of Registrant and
Principal Financial Officer)
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in NFO Worldwide, Inc.'s report on Form 10-Q
for the quarter ended September 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,485
<SECURITIES> 0
<RECEIVABLES> 65,557
<ALLOWANCES> 411
<INVENTORY> 0
<CURRENT-ASSETS> 82,396
<PP&E> 49,919
<DEPRECIATION> 20,748
<TOTAL-ASSETS> 211,431
<CURRENT-LIABILITIES> 38,636
<BONDS> 49,869
<COMMON> 213
0
0
<OTHER-SE> 115,981
<TOTAL-LIABILITY-AND-EQUITY> 211,431
<SALES> 180,732
<TOTAL-REVENUES> 180,732
<CGS> 82,393
<TOTAL-COSTS> 161,829
<OTHER-EXPENSES> 197
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 1,985
<INCOME-PRETAX> 16,721
<INCOME-TAX> 6,885
<INCOME-CONTINUING> 9,408
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,408
<EPS-PRIMARY> .45 <F1>
<EPS-DILUTED> .44 <F1>
<FN>
<F1> Information has been prepared in accordance with SFAS No. 128, basic
and diluted EPS have been provided in place of primary and fully diluted,
respectively.
</FN>
</TABLE>
