UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 0 - 21460
NFO WORLDWIDE, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1327424
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO PICKWICK PLAZA, GREENWICH, CT. 06830
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
(203) 629 - 8888
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At August 3, 1998, Registrant had outstanding 21,252,721 shares of Common Stock.
<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 12
Part II OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 16
Signature 17
2
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 3,822 $ 8,055
RECEIVABLES:
TRADE 55,260 47,044
UNBILLED 17,694 8,698
PREPAID EXPENSES AND OTHER CURRENT ASSETS 10,198 7,035
------------ ------------
TOTAL CURRENT ASSETS 86,974 70,832
PROPERTY AND EQUIPMENT, NET 27,721 19,917
CUSTOMER LIST, GOODWILL AND
OTHER INTANGIBLE ASSETS 92,771 74,409
OTHER ASSETS 4,468 5,116
------------ ------------
TOTAL ASSETS $ 211,934 $ 170,274
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT $ 374 $ 346
ACCOUNTS PAYABLE 8,740 9,139
ACCRUED EXPENSES 15,727 18,757
CUSTOMER BILLINGS IN EXCESS OF REVENUES EARNED 15,851 14,126
------------ ------------
TOTAL CURRENT LIABILITIES 40,692 42,368
LONG-TERM DEBT 50,811 24,823
OTHER LONG-TERM LIABILITIES 4,611 4,123
------------ ------------
TOTAL LIABILITIES 96,114 71,314
============ ============
MINORITY INTERESTS 2,659 2,236
------------ ------------
STOCKHOLDERS' EQUITY:
COMMON STOCK, PAR VALUE $.01 PER SHARE;
60,000 SHARES AUTHORIZED, 21,249 AND
20,730 ISSUED AND OUTSTANDING
IN 1998 AND 1997, RESPECTIVELY 212 208
ADDITIONAL PAID-IN CAPITAL 61,766 51,766
RETAINED EARNINGS 52,893 46,045
ACCUMULATED OTHER COMPREHENSIVE INCOME (1,710) (1,295)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 113,161 96,724
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,934 $ 170,274
============ ============
</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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $ 65,003 $ 47,025 $ 115,246 $ 89,045
COST OF REVENUES 29,769 21,032 52,050 40,148
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,433 18,850 45,417 35,629
DEPRECIATION EXPENSE 1,172 678 2,120 1,306
AMORTIZATION EXPENSE 1,226 722 2,333 1,472
------------ ------------ ------------ ------------
OPERATING INCOME 8,403 5,743 13,326 10,490
INTEREST EXPENSE, NET 645 63 1,072 72
EQUITY INTEREST IN NET LOSS
OF AFFILIATED COMPANIES AND
OTHER EXPENSES(INCOME) 104 (3) 277 64
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 7,654 5,683 11,977 10,354
PROVISION FOR INCOME TAXES 3,062 2,568 4,726 4,469
------------ ------------ ------------ ------------
NET INCOME BEFORE MINORITY INTERESTS 4,592 3,115 7,251 5,885
MINORITY INTERESTS 226 393 403 812
------------ ------------ ------------ ------------
NET INCOME $ 4,366 $ 2,722 $ 6,848 $ 5,073
============ ============ ============ ============
EARNINGS PER WEIGHTED AVERAGE
SHARE OUTSTANDING(a):
BASIC $.21 $.13 $.33 $.25
==== ==== ==== ====
DILUTED $.20 $.13 $.32 $.25
==== ==== ==== ====
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING(a):
BASIC 21,200 20,183 20,996 20,129
====== ====== ====== ======
DILUTED 21,729 20,572 21,622 20,630
====== ====== ====== ======
</TABLE>
(a) For comparability, the earnings per share and share data reflect the
three-for-two stock split effected on October 15, 1997.
The accompanying notes are an integral part of these statements.
4
<PAGE>
NFO WORLDWIDE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME $ 4,366 $ 2,722 $ 6,848 $ 5,073
ADJUSTMENTS TO RECONCILE TO NET CASH
USED IN OPERATING ACTIVITIES:
MINORITY INTERESTS 226 393 403 812
DEPRECIATION EXPENSE 1,172 678 2,120 1,306
AMORTIZATION EXPENSE 1,226 722 2,333 1,472
EQUITY INTEREST IN NET LOSS OF AFFILIATED
COMPANIES 107 78 172 154
EXCHANGE GAIN (312) 0 (312) 0
DIVIDENDS PAID TO MINORITY INTEREST 0 (721) 0 (721)
------------ ------------ ------------ ------------
SUBTOTAL 6,785 3,872 11,564 8,096
------------ ------------ ------------ ------------
CHANGE IN ASSETS AND LIABILITIES THAT
PROVIDED (USED) CASH:
TRADE RECEIVABLES 392 (4,231) (1,763) (2,738)
UNBILLED RECEIVABLES (9,196) (3,038) (7,160) (3,462)
PREPAID EXPENSES AND OTHER
CURRENT ASSETS (1,726) (313) (2,678) (1,011)
OTHER ASSETS 249 (8) 586 224
ACCOUNTS PAYABLE, ACCRUED AND
OTHER LIABILITIES (4,424) (2,368) (3,556) (2,733)
CUSTOMER BILLINGS IN EXCESS OF
REVENUES EARNED (2,240) 2,779 (1,538) 926
------------ ------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (10,160) (3,307) (4,545) (698)
------------ ------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (3,354) (1,793) (7,940) (2,952)
ACQUISITIONS (NET OF CASH ACQUIRED) (6,669) (3,892) (17,158) (4,972)
INVESTMENTS IN AFFILIATED COMPANIES 0 (69) 0 (251)
PURCHASE OF LICENSE AGREEMENT AND
OTHER INTANGIBLES (358) (138) (426) (469)
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (10,381) (5,892) (25,524) (8,644)
------------ ------------ ------------ ------------
</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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOW FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM ISSUANCE OF STOCK 598 294 1,069 303
PAYMENTS ON LONG-TERM DEBT (19,177) (202) (57,755) (4,364)
BORROWINGS ON LINE OF CREDIT 14,532 5,000 43,032 9,000
BORROWINGS ON SENIOR NOTES 20,000 0 40,000 0
DEBT ISSUANCE COSTS (88) 0 (391) 0
------------ ------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,865 5,092 25,955 4,939
------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 891 32 (119) (162)
------------ ------------ ------------ ------------
CHANGE IN CASH (3,785) (4,075) (4,233) (4,565)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,607 9,089 8,055 9,579
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,822 $ 5,014 $ 3,822 $ 5,014
============ ============ ============ ============
</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)
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 270 $ 126 $ 663 $ 204
INCOME TAXES $2,050 $2,558 $2,386 $3,118
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
In March 1998, the Company acquired MarketMind Technologies, and in a separate
transaction acquired Ross-Cooper-Lund, for an aggregate total of cash and
shares of NFO Common Stock of $12.45 million (see Note 2). In April 1998,
the Company acquired CF Group, Inc., for a total value of cash and shares
of NFO Common Stock of CDN $14 million (see Note 2). In connection with
these purchases, the following liabilities were assumed.
Fair value of assets acquired $ 33,292
Less: cash paid (17,937)
Less: 224,549 Company shares issued (4,369)
---------
Liabilities assumed $ 10,986
=========
The accompanying notes are an integral part of these statements.
7
<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 229 2 4,438
COMMON STOCK ISSUED IN
CONJUNCTION WITH
ACQUISTION EARNOUTS 147 1 3,012
EXERCISE OF STOCK OPTIONS 136 1 914
OTHER STOCK ISSUANCES 7 - 154
PAYMENT OF NON-RECOURSE NOTES 7
TAX BENEFIT ON EXERCISED OPTIONS 1,475
TRANSLATION ADJUSTMENTS (415)
NET INCOME 6,848
------ ------- -------- -------- -------
BALANCE AT JUNE 30, 1998 21,249 $ 212 $ 61,766 $ 52,893 $ (1,710)
====== ======= ======== ======== ========
</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 June 30, 1998 and
the results of its operations for the three and sixmonth periods ended
June 30, 1998 and June 30, 1997.
These financial statements are presented in accordance with the requirements
of Form 10-Q. Accordingly, the financial statements and related notes in the
Company's Audited Financial Statements for the fiscal year ended December 31,
1997, included in the Company's Form 10-K filed with the SEC on March 30, 1998,
should be read in conjunction with the accompanying condensed consolidated
financial statements. The information included herein may not be indicative
of the results to be expected for a full year.
Note 2. Acquisitions:
On April 3, 1998 the Company acquired CF Group, Inc. ("CF Group"). Founded in
1932, CF Group is the largest market research organization in Canada. CF
Group is headquartered in Toronto and has client service offices in Montreal,
Ottawa and Vancouver. The Company acquired 100 percent of the outstanding
stock of CF Group for a total purchase price of approximately CDN $20 million,
70 percent payable at closing, with 75 percent in cash and 25 percent in newly
issued shares of NFO common stock. The remaining 30 percent of the purchase
price will be payable over the next 2 years, based on CF Group achieving
certain earnings targets.
On March 4, 1998 the Company acquired MarketMind Technologies ("MarketMind") and
Ross-Cooper-Lund ("RCL"). MarketMind owns and licenses the MarketMind(TM)
system, which uses proprietary software that combines a set of key diagnostic
measures together with the integration, interactive analysis and display of
multiple streams of longitudinal data. RCL is a research-based consulting firm
focused on brand-building strategies and is the exclusive licensee of the
MarketMind system in the United States. In separate transactions, the Company
acquired substantially all the net assets of each company for the combined
consideration of $16.6 million. Of the total purchase price, $12.45 million or
75 percent was paid at closing, while the remaining 25 percent will be payable
based upon each company achieving certain earnings targets over the next two
years. Approximately 85 percent of the closing consideration was paid in cash,
and the remainder in newly issued shares of NFO common stock.
All three acquisitions have been accounted for as purchases and the
accompanying financial statements include the results of operations from the
effective date of acquisition. The purchase price allocations are based on
preliminary estimates of fair market value and are subject to revision.
9
<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 are not material to the three and six month periods
ended June 30, 1998 and 1997, and therefore are not included in the table shown
here.
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES $65,003 $55,300 $123,608 $104,896
NET INCOME 4,366 2,956 7,240 5,454
BASIC EARNINGS PER SHARE $ .21 $ .14 $ .34 $ .27
DILUTED EARNINGS PER SHARE $ .20 $ .14 $ .33 $ .26
Note 3. Comprehensive Income:
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
Comprehensive Income is the total of Net Income and all other nonowner changes
in equity ("Other Comprehensive Income"). Comprehensive Income includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. The adoption of SFAS 130 did not impact
results from operations, financial condition, or long-term liquidity, but did
require the Company to classify items of Other Comprehensive Income by their
nature in the financial statements and display the accumulated balance of Other
Comprehensive Income separately in the stockholders' equity section of the
Company's consolidated balance sheets.
The Company's total Comprehensive Income for the three months ended June 30,
1998 and 1997 was approximately $3.9 million and approximately $2.7 million,
respectively. The Company's total Comprehensive Income for the six months
ended June 30, 1998 and 1997 was approximately $6.4 million and approximately
$4.8 million, respectively. The Company's total Comprehensive Income includes
net income and Other Comprehensive Income. The Company's components of Other
Comprehensive Income are currency translation adjustments and minimum pension
liability adjustments.
10
<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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income Used for Basic and Diluted
Earnings Per Share $4,366 $2,722 $6,848 $5,073
====== ====== ====== ======
Weighted Average Number of Shares
Outstanding Used for Basic
Earnings Per Share 21,200 20,183 20,996 20,129
Dilutive Stock Options 529 372 553 396
Continently Issuable Common Shares 0 17 73 105
------ ------ ------ ------
Weighted Average Number of Shares
Outstanding and Common Share
Equivalents Used for Diluted Earnings
Per Share 21,729 20,572 21,622 20,630
====== ====== ====== ======
</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>
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 JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------- ----------------------------
PERCENTAGE OF PERCENTAGE PERCENTAGE OF PERCENTAGE
REVENUES CHANGE FROM REVENUES CHANGE FROM
1998 1997 PRIOR YEAR 1998 1997 PRIOR YEAR
---- ---- ---------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES 100.0% 100.0% 38.2% 100.0% 100.0% 29.4%
COST OF REVENUES 45.8 44.7 41.5 45.2 45.1 29.6
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 37.6 40.1 29.6 39.4 40.0 27.5
DEPRECIATION EXPENSE 1.8 1.4 72.9 1.8 1.5 62.3
AMORTIZATION EXPENSE 1.9 1.6 69.8 2.0 1.6 58.5
------ ------ ------ ------ ------ ------
OPERATING INCOME 12.9 12.2 46.3 11.6 11.8 27.0
INTEREST EXPENSE, NET 1.0 0.1 NM 0.9 0.1 NM
EQUITY INTEREST IN NET LOSS
OF AFFILIATED COMPANIES AND
OTHER EXPENSES 0.1 0.0 NM 0.3 0.1 NM
------ ------ ------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 11.8 12.1 34.7 10.4 11.6 15.7
PROVISION FOR INCOME TAXES 4.7 5.5 19.2 4.1 5.0 5.8
------ ------ ------ ------ ------ ------
NET INCOME BEFORE MINORITY
INTERESTS 7.1 6.6 47.4 6.3 6.6 23.2
MINORITY INTERESTS 0.4 0.8 (42.5) 0.4 0.9 (50.4)
------ ------ ------ ------ ------ ------
NET INCOME 6.7% 5.8% 60.4% 5.9% 5.7% 35.0%
====== ====== ======= ====== ====== ======
</TABLE>
12
<PAGE>
NFO WORLDWIDE, INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OPERATIONS
The Company's revenues for the three months ended June 30, 1998 increased 38% to
$65.0 million from $47.0 million for the same period last year. Strong
performance in the Company's high tech/telecommunications, health care and
international business units contributed to the revenue growth. For the six
months ended June 30, 1998, revenues increased 29% to $115.2 million from $89.0
million in the same period last year, with these same business units driving the
increase for the six month period. The inclusion of newly acquired companies (CM
Research acquired in December 1997, RCL and MarketMind acquired in March 1998,
and CF Group acquired in April 1998) contributed $14.8 million to the quarter's
increase in revenues, and $18.7 to the six month increase. These increases were
partially offset by lower revenues in the Company's financial services business
unit, where recent mergers have slowed industry wide spending. The growth in
overall revenues occurred despite the negative effects of currency exchange
translations, which reduced reported revenue growth for the quarter and six
month period by 3% during each period, amounting to $1.2 million and $2.7
million, respectively.
Cost of revenues increased 42% in the second quarter to $29.8 million from
$21.0 million a year ago primarily due to the inclusion of the Company's newly
acquired companies which have higher cost of revenues as a percentage of
revenue ($7.0 million), and increased business volume. For the six months
ended June 30, 1998, cost of revenues increased 30% to $52.1 million from $40.1
million last year, primarily due to overall increased business volume, and the
Company's newly acquired companies ($8.7 million). In addition, currency
exchange translations reduced cost of revenues for the quarter and six month
period by $.3 million and $.6 million, respectively, in comparison to the same
period last year.
Selling, general and administrative expenses increased 30% in the second quarter
to $24.4 million from $18.9 million in the same period last year. The primary
reasons for the increase was the inclusion of the Company's newly acquired
companies ($4.4 million), increased business activity, and inflation. Negative
currency exchange translations reduced expenses by $.5 million in the current
quarter. In addition, the 1997 second quarter and six month results include
$.4 million in transaction costs associated with the Company's acquisition of
Prognostics. For the six month period ended June 30, 1998, selling, general and
administrative expenses increased 28% to $45.4 million from $35.6 million last
year. The primary reasons for the increase were the inclusion of the Company's
newly acquired companies ($6.5 million), increased business activity, increased
office lease expenses, and inflation. Offsetting these increases were the
negative effects of currency exchange translations ($1.2 million) and the
elimination of the transaction costs associated with the 1997 acquisition of
Prognostics ($.4 million).
As a result of the items above, operating income for the quarter ended June 30,
1998 increased 46% to $8.4 million from $5.7 million, and for the first six
months of 1998 increased 27% to $13.3 million from $10.5 million, compared to
the same periods a year ago. Excluding the transaction costs associated with
the 1997 acquisition of Prognostics, the Company's operating income increased
36% and 22% for the three and six month periods ending June 30, 1998. Currency
translations negatively impacted reported operating income results for the
quarter and six month period by $.4 million and $.9 million, respectively.
The Company's effective tax rate for the quarter ended June 30, 1998 was 40.0%
compared to 45.2% for the same period last year. For the six month period ended
June 30, 1998 the effective tax rate was 39.5% compared to 43.2% in the same
period last year. The decreases were primarily the result of lower taxes
associated with the Company's international business units.
13
<PAGE>
Net income for the second quarter of 1998 increased 60% to $4.4 million. Diluted
earnings per share were $.20 compared to last year's $.13 per share, an increase
of 54%. The second quarter 1997 operating results included an after tax charge
of $.4 million or $.02 per diluted share relating to transaction costs
associated with the acquisition of Prognostics. Excluding this charge, the
Company's net income and diluted earnings per share increased by 38% and
33%,respectively, during the second quarter. Net income for the six months ended
June 30, 1998 increased 35% to $6.8 million from $5.1 million a year ago, while
diluted earnings per share increased by 28%, from $.25 to $.32. Excluding the
1997 Prognostics transaction costs, net income for the six month period grew by
24%, while diluted earnings per share increased by 19%. Negative currency
exchange translations reduced net income for the three month period by $.3
million, and for the six months ended June 30, 1998 by $.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 1998 was $46.3 million compared to $28.5 million
at December 31, 1997. The increase in working capital resulted primarily from
the results of operations for the six months ended June 30, 1998 ($11.6
million), increase in long term debt ($7.4 million), payments in cash (financed
by long term debt) and stock of previously accrued acquisition related
liabilities ($4.3 million), a reduction in accrued liabilities related to a tax
benefit on exercised options ($1.5 million), and working capital provided by the
Company's acquisitions ($1 million). Working capital uses during the period
included capital expenditures of $7.9 million, and increases in the Company's
accounts receivables of $17.2 million, of which $10.3 million was in connection
with the newly acquired companies.
As of June 30, 1998 the Company had $9.7 million outstanding on its $75.0
million credit facility, and $40 million outstanding in Senior Notes payable.
Capital expenditures for the quarter ended June 30, 1998 were $3.4 million
compared to $1.8 million for the same period last year. For the six months
ended June 30, 1998 capital expenditures were $7.9 million compared to $3.0
million a year ago. Capital expenditures for 1998 are anticipated to be
approximately $15 million, including approximately $10 million for the Company's
planned operations expansions.
The Company anticipates that existing cash, together with internally generated
funds and its credit and stock availabilities will provide the Company with the
resources that are needed to satisfy potential acquisitions, capital
expenditures and the Company's growing working capital requirements. The timing
and magnitude of future acquisitions will be the single most important factor in
determining the Company's long term capital needs.
FUTURE REQUIRED ACCOUNTING CHANGES
On April 3, 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (SOP 98-5). This Statement of Position (SOP) provides guidance on
the financial reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expensed as incurred.
This SOP is effective for financial statements for fiscal years beginning after
December 15, 1998. Initial application of this SOP will be reported as the
cumulative effect of a change in accounting principle. The adoption of this SOP
will have no effect on the Company's cash flow, financial condition, or
long-term liquidity, but will impact reported results from operations due to the
timing of expense recognition for costs covered by this SOP. The Company is
currently quantifying the effect on the consolidated financial statements.
14
<PAGE>
OTHER MATTERS
The Company is currently working to resolve the year 2000 issue, which results
from the fact that many existing computer programs were designed for optimal
computer performance on slower computers during the 1980's, and they did not
account for the impact of the upcoming new millennium. In early 1997 the Company
completed an impact analysis across all proprietary custom software programs and
systems, and has since been reviewing the results for any necessary year 2000
changes. As potential problems are identified, affected programs are being
modified by the Company's programming department to ensure future compliance.
The Company is also coordinating with clients, vendors, affiliates and other
outside parties who may affect, or be affected by, the Company's plans to
address the year 2000 issue. Any new programs being developed are being made
year 2000 compliant from the outset, while certain existing systems are being
made year 2000 compliant as they are reengineered. The Company is targeting
January 1, 1999 to complete all mission critical systems, including third party
and supply chain vendors, and June 30, 1999 for all other systems, for year 2000
compliancy.
15
<PAGE>
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
16
<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: August 14, 1998 /s/ Patrick G. Healy
-----------------------
Patrick G. Healy,
President - Corporate Products/Systems
Development and Chief Financial Officer
(Authorized Officer of
Registrant and
Principal Financial Officer)
17
<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 June 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,822
<SECURITIES> 0
<RECEIVABLES> 73,379
<ALLOWANCES> 425
<INVENTORY> 0
<CURRENT-ASSETS> 86,974
<PP&E> 52,645
<DEPRECIATION> 24,924
<TOTAL-ASSETS> 211,934
<CURRENT-LIABILITIES> 40,692
<BONDS> 50,811
<COMMON> 212
0
0
<OTHER-SE> 112,949
<TOTAL-LIABILITY-AND-EQUITY> 211,934
<SALES> 115,246
<TOTAL-REVENUES> 115,246
<CGS> 52,050
<TOTAL-COSTS> 101,920
<OTHER-EXPENSES> 127
<LOSS-PROVISION> 26
<INTEREST-EXPENSE> 1,222
<INCOME-PRETAX> 11,977
<INCOME-TAX> 4,726
<INCOME-CONTINUING> 6,848
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,848
<EPS-PRIMARY> .33 <F1>
<EPS-DILUTED> .32 <F1>
<FN>
* 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>
