ITEM 1. BUSINESS
Recent Developments
During 1997 Audits & Surveys Worldwide, Inc. ("ASW" or the "Company") continued to implement its strategy of expanding its services globally through the growth of its international consumer tracking studies and syndicated sales measurement services. In addition, the Company opened an office in Manila, The Philippines, to serve the rapidly growing Asia Pacific market and increased the staff and facilities of its London-based subsidiary to provide expanded services in Europe, the Middle East and Africa.
In September, 1997 the Company joined with two other leading market research firms, NPD Marketing Services L.P. and GfK AG, to form a joint venture to track the information technologies, consumer electronics, imaging and home appliances markets. The new venture, INTELECT ASW Marketing Services, L.L.C., provides retail point-of-sale tracking through a comprehensive panel of retailers and dealers in the U.S. and around the world.
During the year the Company completed the development of its Primary and Total Audience Surveys ("PTAS"), a syndicated print measurement service for publishers and advertising agencies which measures magazine readership and monitors household demographics, product usage and lifestyles of U.S. magazine readers. PTAS is unique in that it targets, by mail, magazine subscribers among many magazines through a standard quantitative questionnaire as well as providing traditional audience and pass-along readership levels. The service is able to cover more than twice as many magazine titles as other existing products and do so on a cost-effective basis. In January 1998, the Company formed ASW-KMR Magazine Metrics, L.L.C., a joint venture with Kantar Media Research, to substantially expand the size and scope of the services of the Primary and Total Audience Surveys.
The Company also formed a strategic alliance with CyberGold, Inc. as one step in positioning itself to provide Internet advertisers and businesses with state-of-the-art marketing research. Both CyberGold's client and membership bases offer new avenues of research for the Company. Internet advertisers seeking independent verification of their CyberGold advertising/communications efforts, profiling of viewers or visitors, evaluation of their website and website image, or other related research, will be able to meet their needs by working with the Company. Moreover, using CyberGold's membership base, the Company will be able to target more precisely the Internet audience characteristics of any of the Company's clients or prospects for research services --saving time and costs associated with traditional screening.
Business. GENERAL. ASW, founded in 1953, is an international marketing research firm providing clients with a broad selection of services to assist in the development of marketing, advertising and investment strategies. The Company's marketing research services, conducted in over 80 countries, are provided to major commercial, industrial, institutional and academic organizations. The Company's most significant clients in terms of 1997 revenue include AT&T, Amerada Hess, The Coca-Cola Company, IBM, MasterCard International, Shell Oil Company, Sunstar Inc., Volvo Corporation of North America, United Parcel Service and Xerox.
ASW provides its services on a custom, continuous tracking or syndicated basis. Custom research measures awareness, knowledge, attitudes and behavior toward specific products, services, advertising or public policies among consumers with particular demographics or a defined profile. Continuous tracking allows companies to track consumer attitudes and behavior on an ongoing basis in order to determine changes in the market toward its products or services. Syndicated research is made available on a nonexclusive basis and provides economies of scale to ASW and cost savings to client companies. Syndicated research may include audits of product inventory and distribution and consumer survey research.
The Company's varied services include monitoring of market share trends, measuring the impact of new product advertising or service introductions, conducting surveys for media and advertisers who require the measurement of the size and demographics of target audiences and providing clients with data on customer satisfaction, mystery shopping studies at client product or service outlets and litigation research.
The percentages of the Company's revenues by type of research service for the last three years have been as follows:
1997 1996 1995 ---- ---- ----
Custom Research Projects 27% 31% 36%
Continuous Tracking Studies 52% 49% 49%
Syndicated Studies 21% 20% 15% --- --- ---
100% 100% 100%
The Company believes that it has earned an impressive reputation for providing quality research with state-of-the-art statistical and sampling techniques and analysis. ASW utilizes a proprietary Computer-Assisted Telephone Interviewing system (A&S/CATI), special analytic software, multimedia software for client presentations and a system for digitizing respondents' answers to telephone surveys (A&S/Voice CATI(R)). The services and products offered by ASW are supported by a large in-house computer capacity and a full staff of programmers, statisticians, psychologists, sociologists and marketing professionals.
ASW believes that its ability to provide both consumer and retail data nationally and internationally yields marketing insights to its clients which are unavailable from any other industry source. The Company also believes that its marketing research services and technological and professional capabilities provide significant advantages over other marketing research firms and serve as a platform for the development of new services and products to domestic and multinational corporations, whatever their country of origin.
INDUSTRY OVERVIEW. The marketing research industry is highly fragmented, comprising several large firms, including ASW, and a large number of smaller firms. Many firms specialize in
specific industries, products, services or methodologies. The bulk of the smaller firms offer limited services and conduct their research primarily in the consumer market while larger firms generally provide services in the retail, consumer and industrial markets.
SERVICES OF ASW The Company offers a wide array of services to assist clients in developing and refining the marketing, advertising and investment strategies for their products. These services include continuous retail sales measurement, test marketing, tests of in-store promotions and measurement of product distribution on a local, regional, national and international basis. ASW complements these "audit" efforts for its clients through surveys of consumers, retailers and industrial establishments.
The Company's client services are provided by six primary internal organizations.
AUDIT DIVISION. The Audit Division provides clients with a wide variety of services that track retail sales, product inventory and factors relating to distribution. Most of the Division's services are syndicated or continuous tracking programs, with the remainder being customized research, often to provide clients of syndicated services with marketing insights more tailored to their needs than syndicated programs can provide.
Major syndicated multi-client tracking services include:
SERVICE DESCRIPTION
PETS A continuous tracking of the sales of pet products through veterinarians, pet supply stores and farm/feed dealers.
Hispanic Food Store Sales Index In-person audits and point-of-sale information to measure sales and distribution in small food stores located in predominantly hispanic neighborhoods of major cities.
VENDtrack The only national on-site continuous tracking service of vending machine distribution.
Automotive Aftermarket Sales Index Measurement of sales of specific product categories in the retail automotive chain store market.
The National Golf Audit A continuous measurement of the sales of golf balls, clubs and related products through pro shops, sporting goods stores and mass merchandisers.
National Retail Census The largest in-person measurement of product and services availability in the U.S., consisting of personal visits to over 35,000 retail and service outlets.
The Audit Division also offers continuous sales tracking for a broad array of other products including jewelry, optical products, photographic products and home health care.
Other principal services offered by the Audit Division are: Location and in-store planning measurements, The Beauty Salon Index, National Jewelry Index, Custom Retail Measurements, including test markets, controlled in-store variable tests and interviews of store customers and management; Brand Name Store Search which assists clients in avoiding problems arising from the choice of a brand name that may be confusingly similar to existing brand names; and Product Pickup Service providing retrieval for product recalls, age-dating analysis, packaging integrity examination and competitive new product introductions.
AUDIT DIVISION: JOINT VENTURE AND STRATEGIC ALLIANCE In 1997 the Company's Global Computer Products Sales Index was moved into a joint venture to facilitate worldwide expansion and its National Home Improvement Products Sales Index became the basis for a strategic alliance that increased domestic coverage significantly:
SERVICE DESCRIPTION
Global Computer Products A monthly measurement of sales of personal Sales Index computers and related products through all major retail and commercial channels throughout the world. In 1997 this became part of a joint venture, INTELECT ASW Marketing Services, L.L.C., with NPD Marketing Services L.P. and GfK AG as the other two partners.
National Home Improvement A monthly measurement of sales of Products Sales Index do-it-yourself products through the rapidly growing home center channel. In 1997 this served as the basis for a strategic alliance with ICI Triad, a major provider of computer services to the hardware store market.
SURVEY DIVISION. The Survey Division provides custom and syndicated research services which help clients increase market share, focus media advertising and promotion, identify areas for enhancement of consumer goodwill and generally assist in the development of marketing, advertising and investment strategies for their products and services.
The Survey Division's telephone interviewing is conducted at A&S/CATI facilities in Chicago, Philadelphia and Portland (OR). The A&S/Voice CATI(R) system digitally captures the respondent's own voice, allowing researchers to overcome the limitations of interviewer and coder interpretation and facilitate the transfer of voice data to clients through a variety of digital media.
One of the Survey Division's syndicated services is TECH/TRACK, a comprehensive syndicated study of sales, incidence and usage of personal computers, software, peripherals, online services and other technology products in the home. This study provides PC manufacturers with information on ownership and product awareness, customer loyalty and computer service membership. Because the survey includes both owner and nonowner households, Tech/Track also provides market research on prime potential customer markets.
INTERNATIONAL DIVISION - The International Division helps clients identify growth opportunities and develop marketing strategies for their products and services on six continents. The International Division offers a broad range of services from problem definition to research analysis in new product development testing, market share data, attitude and usage profiles, brand and corporate imagery, and retail product availability measurement. The International Division specializes in conducting major, continuous research programs with quality standards that permit truly comparable results to be obtained across and within all researched countries over time. ASW's international research is coordinated at its corporate headquarters in New York and is supervised regionally by offices in London, Manila and Buenos Aires.
CUSTOMER SATISFACTION DIVISION - The Company pioneered the measurement of customer satisfaction in the 1950's. Today its services go beyond traditional customer satisfaction studies to examine the many individual components that create customer satisfaction. The Customer Satisfaction Division uses qualitative focus group studies, customer satisfaction studies, mystery shopper programs, benchmarking/comparison research, employee satisfaction studies, feedback management systems, motivational/incentive programs and communications and training to implement the results of the research objectives.
THE MEDIA DIVISION has developed the first pan-regional syndicated study of media and consumer markets encompassing nineteen Latin American countries. This study, funded by a consortium of more than 30 of the largest multinational cable TV networks, advertising agencies, advertisers and magazines, provides a standardized method of evaluating multinational, multimedia advertising plans in Latin America. The Company is also the only company authorized to sell and service the IBOPE Latin American Television Ratings Service, the first pan-regional television ratings service in Latin America. The Media Division has also developed the unique Primary and Total Audience Surveys ("PTAS"), a syndicated print measurement service for publishers and advertising agencies, which measures magazine readership and monitors household demographics, product usage and lifestyles of U.S. magazine readers. In January 1998, the Company announced that it had formed a joint venture partnership with Kantar Media Research, another leading international research company, to expand PTAS. The joint venture, ASW-KMR Magazine Metrics, L.L.C., will be able to cover more than twice as many titles as other existing products.
PUBLIC AFFAIRS DIVISION - The Public Affairs Division assists corporations, advertising and public relations firms, universities and foundations, associations, government agencies and law firms in understanding the perceptions and concerns of their varied constituencies in order to develop and deliver more effective communications. The Public Affairs Division conducts research in all areas of public relations and public policy including corporate image and reputation, crisis communications, publicity research, communications audits, public affairs/public policy
research, issue tracking and management, investor relations research, media effectiveness, communications program effectiveness, political research and government research.
CLIENTS. The Company's 10 largest clients, based on revenue for the year ended December 31, 1997, were AT&T, Amerada Hess, The Coca-Cola Company, IBM, MasterCard International, Shell Oil Company, Sunstar Inc., Volvo Corporation of North America, United Parcel Service and Xerox. The Coca-Cola Company has been a client of ASW for over 30 years and represented approximately 33% of the Company's 1997 revenues. No other client accounted for more than 5% of ASW's revenues during such fiscal year. Six of the other 9 clients listed above have been clients of the Company for 10 years or more.
The Company has conducted numerous domestic and international custom and consumer tracking studies for The Coca-Cola Company. Its Audit Division has also conducted an annual International Availability Study, as well as a domestic retail sample census and numerous test market studies for this client. These studies were commissioned by different divisions of The Coca-Cola Company, including the Fountain Division and The Minute Maid Company.
MARKETING AND SALES. New business development has centered on continuous nurturing of existing client relationships by the researchers and professionals directly involved with the client. The Company believes excellent provider/client relationships create the best opportunities for future business with existing clients, and assist significantly in the generation of new business through client referrals and recommendations.
The Company's marketing staff is responsible for the overall monitoring of client relationships and for the development of domestic and international opportunities in addition to those market entries generated by the research staff. The marketing staff determines the feasibility of new market penetration through analyses of industry trends, consumer buying patterns and potential client needs. The Company owns several registered trademarks and service marks, and has applied for registration of certain other trademarks and service marks. The Company does not believe that the loss of any such mark would have a material adverse effect on its business and operations.
OPERATIONS. The Company is headquartered in New York City and operates regionally through offices in Chicago, Minneapolis, Philadelphia, Portland (OR) and San Francisco. International research studies are coordinated in New York and are conducted in Europe through the Company's 51% owned subsidiary, Audits & Surveys Europe, Ltd., located in London. Early in 1997 the Company opened an office in Manila, The Philippines, to provide on-site regional supervision of U.S.-sourced research conducted in the Asia Pacific region and to provide research services to that rapidly growing market. In Latin America the Company has entered into a strategic business relationship with the marketing research firm ASECOM, S.A. of Buenos Aires to provide research services throughout Latin America.
The Company's offices in Chicago, Philadelphia and Portland (OR) contain approximately 180 A&S/CATI terminals which enable the Company to conduct telephone interviews in three time zones across the United States. The multiple locations of A&S/CATI operations provide the Company with a competitive advantage by increasing interviewer scheduling flexibility, expanding
the number of daily interviews that can be conducted and allowing for alternative interviewing facilities in the event that extreme weather conditions or an area-wide power failure temporarily incapacitates any given location.
COMPETITION. The market research industry is highly competitive and is characterized by a large number of competitors, ranging from relatively small organizations to companies with substantial resources. These competitors also include in-house marketing research departments, advertising agencies and business consulting firms. Although the Company believes that no single competitor offers a comparable combination of services, there can be no assurance that other companies, some with greater financial resources, will not attempt to offer a broader range of services than those offered by the Company. The Company believes that it competes primarily on the basis of the quality of the design of its market research proposals and on its ability to perform, analyze and provide the results of its research projects on a timely basis, consistently.
The Company believes that its ability to offer a wide variety of statistically valid marketing services to a broad base of clients in both domestic and international markets is critical to its competitive advantage and believes that providing a combination of custom, continuous tracking and syndicated research services for the consumer and industrial markets further enhances its competitive position in the industry. The Company also believes that its ability to design and develop research services and technologies in response to changing clients' needs, as well as in anticipation of marketing trends, has enabled the Company to achieve and sustain a leadership position in the market research industry.
Employees. The Company has 576 employees, 286 of whom are part-time hourly support employees and 290 are full-time staff. The full-time staff includes 105 professional employees, 90 support employees and 95 individuals in administrative and management functions. The part-time employees are primarily engaged in A&S/CATI operations and other data gathering and processing functions.
The Company conducts regular training sessions for professional staff and enrolls selected staff members in the training programs sponsored by CASRO, a marketing research industry association. In addition, the Company monitors the performance of its staff on a regular basis and conducts special training sessions for all its telephone interviewing staff in order to maintain high quality standards.
Many of the Company's professional staff have advanced degrees in fields such as marketing, economics, computer science, management, finance, business, statistics, mathematics and psychology. None of its employees are subject to a collective bargaining agreement, nor has the Company experienced any work stoppages. The Company believes that its relations with employees are excellent.
Compliance with Environmental Laws. Based on the nature of its marketing research operations, the Company believes that its compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, should have no material effect upon its capital expenditures, earnings or competitive position.
Backlog. A majority of the Company's revenues are recorded utilizing the percentage of completion method of accounting, which recognizes revenues as services are performed. In addition, revenues are recognized on syndicated research studies on a pro rata basis over the terms of the individual contracts. At December 31, 1997, the Company had total unrecognized revenues of approximately $14,000,000 compared with approximately $16,300,000 at December 31, 1996. Substantially all of such unrecognized revenues at December 31, 1997 are expected to be recognized in 1998.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal office is located in New York, New York where it leases approximately 107,000 square feet under a lease that expires on February 28, 2003. It currently subleases approximately 33,000 square feet at this location to unaffiliated parties through the date on which the primary lease expires.
The Company also leases an aggregate of approximately 35,000 square feet of office space in San Francisco, Chicago, Philadelphia, Minneapolis, Portland (OR), Livonia (MI), Manila and London.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have a material effect on its results of operations or financial condition
On March 24, 1995, Audits and Surveys, Inc. ("A&S") and The Triangle Corporation ("Triangle") consummated a merger pursuant to which A&S was merged with and into Triangle. Triangle was the surviving corporation and the separate existence of A&S ceased. The name of the merged corporation was changed to Audits & Surveys Worldwide, Inc. ("ASW").
Triangle's inactive subsidiary, Diamond Tool and Horseshoe Co., now known as Tri-North, Inc., was one of a large number of third-party defendants in an action brought by the U.S. Environmental Protection Agency (the "EPA Action"). In prior years, Triangle had expensed $100,000, excluding legal costs, relating to this action. Any further liability with respect to this action constituted an Assumed Liability (as defined) under the terms of an agreement with Cooper Industries, Inc. ("Cooper") dated August 4, 1993 pursuant to which Triangle sold to Cooper substantially all of the assets constituting Triangle's mechanics hand tool, horseshoe and farrier tool business. Cooper was obligated to indemnify the Company against any such liability (including the cost of obtaining a settlement or consent order releasing the Company from further liability). The final conditional payment due from Cooper of $500,000 (plus interest thereon) was due when the Company obtained a satisfactory settlement or consent order releasing it from further liability with respect to this action. During 1997, the Company obtained a consent order in the EPA Action, and Cooper remitted to the Company an aggregate of $545,000 in final settlement of the conditional payment. This matter is now closed.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the American Stock Exchange ("AMEX"). The following table shows the range of closing prices for the common stock for the calendar quarters indicated, as reported by AMEX:
1996 HIGH LOW
First Quarter $ 2 - 3/4 $ 1 - 3/4 Second Quarter 2 - 3/4 2 Third Quarter 3 2 - 3/8 Fourth Quarter 3 2 - 1/8
First Quarter $ 4 - 7/16 $ 2 - 13/16 Second Quarter 3 - 1/16 2 - 7/16 Third Quarter 3 - 3/4 2 - 1/2 Fourth Quarter 3 - 5/8 2 - 1/2
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
The number of record holders of the Company's common stock as of March 17, 1998 was 597.
(c) DIVIDENDS
No cash dividends were declared for the year ended December 31, 1997. For the year ended December 31, 1996 the Company declared a special cash dividend of $.05 per share which was paid on January 15, 1997 to stockholders of record as of December 31,1996. No dividends were declared or paid for the year ended December 31, 1995.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA (Dollar amounts in thousands except per share data)
(a) In connection with the termination of the Company's S Corporation tax status as of December 1, 1993, a cumulative Federal and New York State deferred tax asset of $759,000 was recognized with an offsetting credit to the provision for income taxes for the one month period ended December 31, 1993.
(b) For the year ended November 28, 1993 the Company was an S Corporation for tax purposes and its historical results provided limited state and local income taxes and no Federal income taxes. Pro forma net income shown above for this year has been adjusted to reflect an estimate of the actual taxes that would have been paid had the Company been a C Corporation.
(c) No cash dividends were declared for the year ended December 31, 1997. For the year ended December 31, 1996 the Company declared a cash dividend of $.05 per share which was paid on January 15, 1997 to stockholders of record as of December 31,1996. No dividends were declared or paid for the year ended December 31, 1995. During the year ended December 31, 1994 the Company declared and paid $2,049,000 of distributions to shareholders which were the final distributions related to periods during which the Company was an S Corporation for income tax purposes and distributed substantially all its earnings in the form of S Corporation distributions.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1997 Compared with 1996 - ----------------------- Revenues for 1997 increased 14.1% to $68.9 million compared with $60.4 million in 1996. The increase in revenues was principally attributable to higher revenues from international and domestic consumer tracking studies as well as from new or expanded custom and syndicated media and audit research services.
Direct costs were $5.8 million (20.0%) higher in 1997 compared with 1996, primarily as a result of the increase in revenues. As a percentage of revenues, direct costs were 49.5% in 1997 compared with 47.0% in 1996. The change in direct costs, as a percentage of revenues, reflects changes in the mix of research revenues. In addition, direct costs in 1997 included higher costs incurred in the development of expanded syndicated research services. Such syndicated services include a program which tracks personal computer sales in seven Western European countries and a program to provide primary audience database research to monitor household demographics, product usage and lifestyles of subscribers and newsstand buyers of U.S. magazines.
Selling, general and administrative (SG&A) expenses increased $4.2 million (16.7%) in 1997 compared with 1996. Approximately 75% of the SG&A increase was in payroll and related costs and resulted from the addition of personnel as well as normal salary adjustments. The costs associated with additional personnel include the staffing of the Asia Pacific office in Manila, which opened in early 1997, expansion of the research staffs in the U.S. as well as at Audits & Surveys Europe, Ltd. in London and additions to technical support staff, particularly in information services. The remainder of the increase in SG&A expenses was spread over various expenses such as rent, utilities, depreciation, computer costs and sales and promotion expenses.
The provision for incentive bonuses was approximately 9% lower in 1997 compared with 1996. The lower provision resulted from the decrease in operating income on which the incentive bonuses are calculated.
Other expense (income) increased in 1997 principally as a result of the termination of a sublease between the Company and a sub-tenant for a portion of the space at the Company's New York headquarters. A significant portion of the space previously occupied by the sub-tenant was occupied by the Company in 1997 to accommodate additional personnel.
Income taxes for 1997 and 1996 have been provided at approximately 41% of reported pretax income. See Note 7 of the Notes to Consolidated Financial Statements for a detailed analysis of the provisions for income taxes.
1996 Compared with 1995 - -----------------------
Revenues for 1996 increased $5.7 million (10.5%) to $60.4 million compared with $54.6 million in 1995. The increase was principally attributable to higher revenues from international consumer tracking studies and several custom and syndicated audit research services.
Direct costs were $1.7 million (6.4%) higher in 1996 compared with 1995, primarily as a result of
the increase in revenues. As a percentage of revenues, direct costs were 47.0% in 1996 compared with 48.9% in 1995. The decrease in direct costs as a percentage of revenues represented an improvement in the profitability of the overall mix of revenues in 1996 compared with 1995. Direct costs also included expenses related to the development of new research services and such development expenses were lower in 1996 than in 1995.
SG&A expenses increased $1 million (4.0%) in 1996 compared with 1995. Approximately 70% of the SG&A increase was in payroll and related costs and resulted from the addition of personnel as well as normal salary adjustments. The remainder of the increase in SG&A expenses was spread over various expenses such as rent and utilities, depreciation and computer costs.
The provision for incentive bonuses was $.6 million higher in 1996 compared with 1995 and resulted from the increase in operating income on which the incentive bonuses are calculated.
Income taxes for 1996 have been provided at approximately 41% of pretax income compared with 46% in 1995. See Note 7 of the Notes to Consolidated Financial Statements for a detailed analysis of the provisions for income taxes.
Financial Condition, Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $4.7 million and a current ratio of 1.32 to 1 compared with working capital of $3.9 million and a current ratio of 1.28 to 1 at December 31, 1996.
Cash flow from operations and borrowings under its credit facilities with its bank are the Company's principal sources of funds. The Company's cash flow and borrowings have historically been sufficient to provide funds for working capital, capital expenditures and payment of indebtedness. In June 1997 the Company's secured line of credit was renewed and increased to $4,000,000. The Company's term loan with its bank and the line of credit contain customary affirmative and negative covenants including those requiring the Company to maintain certain financial ratios and restricting the annual payment of cash dividends to an amount not in excess of 50% of the preceding year's net income.
Net cash used by operating activities was $800,000, consisting primarily of net income of $1,418,000 plus non-cash expenses of $1,723,000 and increases in accounts payable and accrued expenses of $1,665,000 offset primarily by increases in accounts receivable of $3,585,000 and other current assets of $379,000 and decreases in customer billings in excess of revenues earned of $1,337,000 and income taxes payable of $284,000.
Net cash used in investing activities was $1,575,000 from purchases of property and equipment of $1,087,000 and an investment in a joint venture of $488,000.
Net cash provided by financing activities was $195,000 consisting primarily of proceeds from bank borrowings of $1,500,000 offset by repayments of bank borrowings and other debt of $1,349,000.
The Company believes that its credit arrangements with its bank, combined with funds generated by its operations, will be adequate to fund its planned capital expenditures, meet its debt obligations and finance its operations for at least the next twelve months.
Year 2000 Compliance
The Year 2000 issue arises because much of the computer software currently in operation uses only the last two digits, rather than all four, to define the applicable year. As a result, the "00" that would be used to denote the year 2000 may be incorrectly recognized as the year 1900. This could result in major errors in date sensitive applications.
The Company has initiated a comprehensive program to identify internally used software that may require reprogramming or replacement and the related additional hardware requirements which may result. The program encompasses software used to provide client service and software used by the Company's financial and operational support systems. In addition to addressing internally used software, discussions with the Company's significant suppliers and clients have commenced in order to ensure that their software and the resultant data exchanged will be in Year 2000 compliant format.
Internal and external resources will be used to identify, reprogram, replace and test all of the Company's software for Year 2000 compliance. The Company expects to complete the project by the latter part of 1999 and estimates the cost could range from $500,000 to $750,000. The cost is currently being funded through operating cash flows, however, it is possible that additional financing may be required. Failure by the Company, its suppliers and clients to complete the Year 2000 compliance requirements in a timely manner could have a material adverse effect on the Company's future operations.
Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. As such, final results could differ from estimates or expectations due to factors such as incomplete or preliminary information or changes in government regulation and policies. For any of these factors, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of the report. (See Item 14).
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item with respect to Directors is contained in the Company's 1998 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year and, accordingly, is omitted pursuant to General Instruction G(3).
The following sets forth the names and ages of the Company's Executive Officers, together with all positions and offices held with the Company by such Executive Officers. Officers are appointed to serve until the meeting of the Board of Directors following the next Annual Meeting of Stockholders and until their successors have been elected and have qualified:
Solomon Dutka (74) has served as a director, Chairman and Chief Executive Officer of the Company since March 1995. A founder of A&S in 1953, he served A&S in various capacities, including as its Chairman and President, prior to the merger with Triangle in March 1995.
H. Arthur Bellows, Jr. (60) has served as a director, President and Chief Operating Officer of the Company since March 1995. He served as a director and Chairman of Triangle from August 1967 until the merger with A&S in March 1995 and as Triangle's President from October 1971 until March 1995.
Carl Ravitch (56) has served as a director and Executive Vice President of the Company since March 1995. He joined A&S in 1967 and served as its Executive Vice President - Chief Marketing Officer from 1992 until the merger with Triangle in March 1995.
Joel S. Klein (59) has served as Executive Vice President- Operations of the Company since January 1996 and as the Company's Secretary since August 1996. He has been with the Company for over 35 years and has served in various research, operational and management positions.
Alan J. Ritter (57) has served as Senior Vice President and Chief Financial Officer of the Company since August 1996 and as Corporate Controller from September 1995 until July 1996. He served as Vice President - Finance of Triangle from October 1993 until the merger with A&S in March 1995 and as Triangle's Corporate Controller from December 1978 until September 1993.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is contained in the Company's 1998 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year and, accordingly, is omitted pursuant to General Instruction G(3).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is contained in the Company's 1998 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year and, accordingly, is omitted pursuant to General Instruction G(3).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is contained in the Company's 1998 Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the Company's fiscal year and, accordingly, is omitted pursuant to General Instruction G(3).
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report.
1. FINANCIAL STATEMENTS Page Number -----------
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 to and December 31, 1996
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended to December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements to
2. FINANCIAL STATEMENT SCHEDULES
Schedule Number Description --------------- -----------
II Valuation and Qualifying Accounts S-1
All other financial statement schedules not listed have been omitted since the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
Exhibit Numbers Description - ------- -----------
3.01 Restated and Amended Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 4.1 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995.
3.02 Amended and Restated By-laws of the Company. Incorporated by reference to Exhibit 2(b) to the Company's Registration Statement on Form 8-A/A (Amendment No. 1) filed February 26, 1997.
4.01 Registration Rights Agreement among the Company, H. Arthur Bellows, Jr., Carl Ravitch and the Estate of Irving I. Roshwalb, dated March 24, 1995. Incorporated by reference to Exhibit 4.3 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995.
4.02 Shareholders Agreement among the Company, H. Arthur Bellows, Jr., Solomon Dutka, Solomon Dutka Trust for James Dutka, Solomon Dutka Trust for Michael Dutka, Solomon Dutka Trust for Joyce Dutka, Carl Ravitch, Anthony Timiraos, Dexter Neadle, Lawrence Karp, George Fabian, Fred Winkel, Joel S. Klein, William Liebman, Nagesh Gupta, Thomas Ryan, Joel Dorfman, Josh Libresco, Donald Pace, Paul Donato, Fred Nicholson and Joel J. Klein, dated March 24, 1995. Incorporated by reference to Exhibit 4.4 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995.
4.03 Shareholders Agreement between The Triangle Corporation and the Estate of Irving I. Roshwalb, dated February 9, 1995. Incorporated by reference to Exhibit 4.5 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995.
10.01+ 1994 Stock Option Plan of Audits & Surveys Worldwide, Inc. Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-8 (File No. 333-22875).
10.02+ Employment agreement between the Company and Solomon Dutka, dated March 24, 1995. Incorporated by reference to Exhibit 10.2 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995.
10.03+ Employment agreement between the Company and H. Arthur Bellows, Jr., dated March 24, 1995. Incorporated by reference to Exhibit 10.3 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995.
10.04+ Employment agreement between the Company and Carl Ravitch, dated March 24, 1995. Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q/A for the quarter ended March 31, 1995
10.05+ Employment agreement between the Company and Alan J. Ritter, dated September 13, 1995. Incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the quarter ended September 30, 1995.
10.06+* Employment Agreement between the Company and Joel S. Klein, dated October 1, 1997.
10.07 Lease between Tobias Associates and Audits & Surveys, Inc., dated February 13, 1987. Incorporated by reference to Exhibit 10.12 to the Company's Report on Form 10-K for the year ending December 31, 1995.
10.08 Lease between Tobias Associates and Audits & Surveys, Inc., dated October 26, 1990. Incorporated by reference to Exhibit 10.13 to the Company's Report on Form 10-K for the year ending December 31, 1995.
10.09 Term Loan Agreement between the Company and Chemical Bank, dated as of June 5, 1996. Incorporated by reference to Exhibit 10.17 to the Company's Report on Form 10-Q for the quarter ended June 30, 1996.
10.10+ Amendment dated March 25, 1997 to Employment Agreement between the Company and Solomon Dutka dated March 24, 1995. Incorporated by reference to Exhibit 10.14 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.11+ Amendment dated March 25, 1997 to Employment Agreement between the Company and H. Arthur Bellows, Jr. dated March 24, 1995. Incorporated by reference to Exhibit 10.15 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.12+ Amendment dated March 25, 1997 to Employment Agreement between the Company and Carl Ravitch dated March 24, 1995. Incorporated by reference to Exhibit 10.16 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.13+ Amendment dated June 30, 1997 to Employment Agreement between the Company and H. Arthur Bellows, Jr. dated March 24, 1995. Incorporated by reference to Exhibit 10.17 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.14+ Amendment dated June 30, 1997 to Employment Agreement between the Company and Carl Ravitch dated March 24, 1995. Incorporated by reference to Exhibit 10.18 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.15+ Amendment dated June 30, 1997 to Employment Agreement between the Company and Alan Ritter dated September 13, 1995. Incorporated by reference to Exhibit 10.19 to the Company's Report on Form 10-Q for the quarter ended June 30, 1997.
10.16+* Amendment dated October 1, 1997 to Employment Agreement between the Company and Carl Ravitch dated March 24, 1995
10.17+ 1997 Stock Option Plan of Audits & Surveys Worldwide, Inc. Incorporated by reference to the Company's Proxy Statement dated May 6, 1997.
21.01* List of subsidiaries of the Company.
23.01* Consent of Independent Auditors.
27.01* Financial Data Schedule.
- ------------------------ * Filed herewith.
+ Management contracts or compensatory plan or arrangement required to be noted pursuant to Item 14.(a)3 of Form 10-K.
(b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Audits & Surveys Worldwide, Inc.
By: /S/ H. ARTHUR BELLOWS, JR. MARCH 27, 1997 -------------------------- -------------- H. Arthur Bellows, Jr. Date President, Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on its behalf by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /S/ SOLOMON DUTKA MARCH 27, 1997 -------------------------- -------------- Solomon Dutka Date Chairman, Chief Executive Officer and Director
By: /S/ H. ARTHUR BELLOWS, JR. MARCH 27, 1997 -------------------------- -------------- H. Arthur Bellows, Jr. Date President and Chief Operating Officer and Director
By: /S/ CARL RAVITCH MARCH 27, 1997 -------------------------- -------------- Carl Ravitch Date Executive Vice President and Director
By: /S/ ALAN J. RITTER MARCH 27, 1997 ------------------ -------------- Alan J. Ritter Date Senior Vice President (Principal Financial and Accounting Officer)
By: /S/ CHARLES E. BRADLEY MARCH 27, 1997 -------------------------- -------------- Charles E. Bradley Date Director
By: /S/ BRIAN G. DYSON MARCH 27, 1997 -------------------------- -------------- Brian G. Dyson Date Director
By: /S/ MATTHEW GOLDSTEIN MARCH 27, 1997 -------------------------- -------------- Matthew Goldstein Date Director
By: /S/ ROBERT C. MILLER MARCH 27, 1997 -------------------------- -------------- Robert C. Miller Date Director
By: /S/ WILLIAM NEWMAN MARCH 27, 1997 -------------------------- -------------- William Newman Date Director
By: /S/ JOSEPH T. PLUMMER MARCH 27, 1997 -------------------------- -------------- Joseph T. Plummer Date Director
By: /S/ SOL YOUNG MARCH 27, 1997 -------------------------- -------------- Sol Young Date Director
By: /S/ WILLIAM A. ZEBEDEE MARCH 27, 1997 -------------------------- -------------- William A. Zebedee Date Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Audits & Surveys Worldwide, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Audits & Surveys Worldwide, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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, such consolidated financial statements present fairly, in all material respects, the financial position of Audits & Surveys Worldwide, Inc. and Subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP New York, New York March 12, 1998
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) - --------------------------------------------------------------------------------
See notes to consolidated financial statements. (Continued)
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) - --------------------------------------------------------------------------------
DECEMBER 31, ------------ LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 -------- -------- CURRENT LIABILITIES: Notes payable bank $ 1,500 $ -- Accounts payable and accrued expenses 6,148 4,483 Accrued payroll and bonuses 2,197 2,505 Dividends payable -- 655 Customer blllings in excess of revenues earned 3,897 5,234 Income taxes payable 133 417 Current portion of long-term debt 617 555 Current portion of capital lease obligations 80 88 -------- --------
Total current liabilities 14,572 13,937
LONG-TERM DEBT - Net of current portion 1,702 1,943
CAPITAL LEASE OBLIGATIONS - Net of current portion 230 153
OTHER LIABILITIES 2,043 2,009 -------- -------- Total liabilities 18,547 18,042
MINORITY INTEREST 102 --
STOCKHOLDERS'EQUITY: Preferred stock, $ 1. 00 par value, 1,000,000 shares authorized and unissued -- -- Common stock, $.Ol par value, 30,000,000 shares authorized; 13,111,135 shares and 13,099,103 shares issued at December 31, 1997 and 1996 respectively 131 131 Additional paid-in capital 4,413 4,369 Retained earnings 5,366 3,948 Cumulative foreign currency translation adjustment (104) 19 -------- -------- Total stockholders' equity 9,806 8,467 -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,455 $ 26,509 ======== ========
See notes to consolidated financial statements. (Concluded)
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) - --------------------------------------------------------------------------------
See notes to consolidated financial statements.
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) - -------------------------------------------------------------------------------- [PART 1 OF 2]
[PART 2 OF 2]
See notes to consolidated financial statements.
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) - --------------------------------------------------------------------------------
See notes to consolidated financial statements. (Continued)
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT FOR PER SHARE DATA) - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ------- ------- -------
EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH (123) 23 -- ------- ------- -------
NET (DECREASE) INCREASE IN CASH (2,303) 2,891 182
CASH, BEGINNING OF YEAR 3,827 936 754 ------- ------- -------
CASH, END OF YEAR $ 1,524 $ 3,827 $ 936 ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 340 $ 430 $ 334 ======= ======= =======
Income taxes $ 1,327 $ 784 $ 1,335 ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTWUIES:
Employee stock bonuses $ 7 =======
Capital lease obligation incurred for purchase of equipment $ 154 $ 250 ======= =======
Debt related to the acquisition of capital improvements $ 430 $ 333 ======= =======
The Company issued common stock in order to effect the merger with Triangle. Such stock aggregated $4,488 (net of $1,323 of related merger costs). In conjunction with the acquisition, liabilities were assumed as follows:
Fair value of assets acquired (includes $1,090 of cash acquired) $ 5,267 Value of common stock issued (net of $1,323 of related merger costs) 4,488 --------
Liabilities assumed $ 779 ========
See notes to consolidated financial statements. (Concluded)
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION - The consolidated financial statements include the accounts of Audits & Surveys Worldwide, Inc. (the "Company"), its majority owned subsidiary, Audits & Surveys Europe Ltd. ("A&SE") and certain other currently inactive entities. Prior to 1997, A&SE's results were consolidated based on A&SE's year ended September 30. In 1997, consolidated results of operations include A&SE for 15 months in order to conform both companies' reporting periods. The impact of including A&SE's operations for 15 months in 1997 was immaterial. All significant intercompany transactions and balances have been eliminated.
BUSINESS ACTIVITY - The Company is an international marketing research firm providing its clients with a broad selection of services and information used to assist in the development of marketing, advertising and investment strategies for their products and services. These services are provided to a wide variety of commercial, industrial and academic organizations on a custom, continuous tracking or syndicated basis.
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.
INVESTMENTS IN AFFILIATES - The equity method of accounting is used by the Company in connection with investments in its joint ventures. Under the equity method, original investments are recorded at cost and adjusted for the Company's share of earnings or losses and distributions.
INVENTORIES - Inventories, which consist primarily of components and finished goods, are stated at the lower of cost (principally on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and fixtures and equipment is provided using accelerated methods over five to ten years. Amortization of leasehold improvements and assets held under capital leases is provided using the straight-line method over the lease term.
LONG-LIVED ASSETS - The carrying value of long-lived assets is periodically reviewed to determine whether impairment exists. The review is based on comparing the carrying amount of assets to the undiscounted estimated cash flows over the remaining useful lives. No impairment is indicated as of December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS - For financial instruments including cash, accounts receivable, accounts payable and accrued expenses, it was assumed that the carrying amount approximated fair value because of their short maturities. The carrying amount of long-term debt, including capitalized lease obligations, approximates fair value because such debt is subject to floating interest rates or, with respect to capitalized leases, contain current market rates.
INCOME TAXES - Deferred income taxes are recognized for the tax consequences of differences between the bases of assets and liabilities for income tax and financial statement reporting, based on enacted tax laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
REVENUE RECOGNITION - The accompanying consolidated financial statements have been prepared using the percentage-of-completion method of accounting for certain contracts and, therefore, take into account the revenue, cost and estimated earnings on contracts not yet completed. Income is recognized on the excess of contract price over direct costs in the percentage that actual costs to date relate to total estimated costs to be incurred. At the time a loss on a contract becomes known, the entire amount of the estimated loss is recognized in the financial statements. In some instances, billing arrangements allow for amounts billed to exceed the revenue recognized, thus resulting in a liability. In those cases where revenue recognized exceeds billings to customers, an unbilled receivable is recorded. Revenue from the distribution of certain marketing research information is recognized pro rata over the life of the contract.
STOCK OPTIONS AND WARRANTS - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123," Accounting for Stock-Based Compensation." The standard requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board (APB) Opinion No. 25, which recognized compensation cost based on the intrinsic value of the equity instrument awarded. The Company has elected to follow the provisions of APB Opinion No. 25 for stock-based compensation to employees.
TRANSLATION OF FOREIGN CURRENCIES - Financial statements of the Company are reported in U.S. dollars based on the determination that the U.S. dollar is the Company's functional currency. A&SE, using the pound as its functional currency, translates its financial statements into U.S. dollars. Assets and liabilities are translated at the rates of exchange in effect at year end; common stock and additional paid-in capital are translated using historical rates and revenue and expense accounts are translated at the average rates of exchange in effect during the period. Translation adjustments are reflected as a separate component of stockholders' equity.
BASIC AND DILUTED EARNINGS PER COMMON SHARE - The Company has adopted the provisions of SFAS No. 128 "Earnings Per Share." SFAS No.128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock such as employee stock options. SFAS No.128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share and also requires, among other things, dual presentation of basic and diluted earnings per share for all entities with complex capital structures. Basic earnings per share excludes dilution and is computed by dividing net earnings by the weighted average number of shares outstanding for each period presented. Diluted earning per share is computed by dividing net earnings by the weighted average number of shares outstanding plus dilutive potential common shares which will result from the exercise of stock options. Prior periods have been restated to reflect the requirements of the new statement .
The following is a reconciliation of the weighted average shares used in the computations of basic and dilutive earnings per common share:
2. MERGER
On March 24, 1995, Audits and Surveys, Inc. ("A&S") and The Triangle Corporation ("Triangle") consummated a merger pursuant to which A&S was merged with and into Triangle. Triangle was the surviving corporation and the separate existence of A&S ceased. The name of the merged corporation was changed to "Audits & Surveys Worldwide, Inc." Upon consummation of the Merger, the holders of Triangle's common stock immediately prior to the Merger owned 20% of the Company's common stock and the holders of A&S' common stock immediately prior to the Merger owned 80% of the Company's common stock.
For accounting and financial reporting purposes, the Merger has been treated as a reverse acquisition. Accordingly, A&S was deemed to have acquired Triangle's net assets in return for a 20% equity interest in the Company. Inasmuch as Triangle's operations were limited, the purchase price was recorded at the fair value of Triangle's net assets acquired plus approximately $1,323,000 of merger related expenses. Any excess purchase price was charged to paid-in capital. No goodwill has been recorded in connection with this transaction.
At the date of Merger, Triangle had net operating loss carry forwards of approximately $7,600,000. No deferred tax assets were initially recognized by the Company due to the limitations in the tax laws relating to the change in Triangle's stock ownership and the planned disposition of Triangle's only two operating entities subsequent to the Merger. In the fourth quarter of 1995, management reevaluated its tax planning alternatives with respect to the disposition of one of Triangle's operating entities, thereby permitting the limited utilization of Triangle's operating loss carryforwards. Accordingly, in December 1995, the Company recognized approximately $2,600,000 of deferred tax assets with a corresponding increase in paid-in capital.
The accompanying consolidated financial statements include the accounts of Triangle subsequent to the Merger. Triangle's operations for the period March 24, 1995 to March 31, 1995 were not significant. For convenience, the acquisition has been recorded as of March 31, 1995 for accounting purposes.
The following unaudited pro forma condensed consolidated operating information is presented to illustrate the effects of certain adjustments to the historical statement of operations of the Company for 1995 that would result from the merger and is presented as if the merger occurred on January 1, 1995.
YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) ($000)
Revenues $ 54,766 ===========
Net income $ 753 ===========
Net income per share $ .06 ===========
Weighted average shares outstanding 13,094,755 ===========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31, ------------ 1997 1996 ------ ------ ($000)
Furniture and fixtures $ 552 $ 437 Equipment 2,319 1,936 Leasehold improvements 3,836 3,263 Assets held under capital leases (Note 6) 404 386 ------ ------ 7,111 6,022 Less accumulated depreciation and amortization 3,532 3,060 ------ ------ $3,579 $2,962 ====== ======
Depreciation and amortization expense for the years ended December 31, 1997, 1996 and 1995 were $1,054,000, $748,000 and $581,000, respectively.
4. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31, ------------ 1997 1996 ------ ------ ($000)
Cash surrender value of officers' life insurance $ 273 $ 265 Property held for sale 300 -- Deferred charges 838 1,296 Security deposits 158 164 Investment in joint venture 488 -- ------ ------
$2,057 $1,725 ====== ======
Deferred charges at December 31, 1997 and 1996 principally include approximately $686,000 and $986,000, respectively, representing the unamortized portion of costs related to an agreement with a supplier for retail sales data (see Note 15).
Deferred charges also include commission payments made in connection with the sublease of portions of the Company's premises. Such amounts have been deferred and are being amortized over the lease terms of the related subleases.
5. DEBT
DECEMBER 31, ------------------------- 1997 1996 ($000)
NOTES PAYABLE BANK
Notes payable bank pursuant to a $4,000,000 credit facility; interest is payable at the bank's prime rate (8.5 % at December 31, 1997) or LIBOR plus 25 0 basis points. The line of credit expires in June 1998 and outstanding borrowings are collateralized by accounts receivable (a). $ 1,500 $ -- ======= =======
LONG-TERM DEBT
Term loan payable to a bank with interest at 1/2% over the bank's prime rate or LIBOR plus 300 basis points. The loan is repayable in twenty quarterly 'installments of $130,500 which began 'in June 1996 and is collateralized by accounts receivable (a). $ 1,697 $ 2,218
Note payable to a former sub-tenant for leasehold improvements, due in quarterly installments of $15,000, including interest at the rate of 1 1.02% through January 2003. 246 280
Note payable to a former sub-tenant for leaschold improvements, due in quarterly installments of $23,000, including interest at the rate of 9.925/o through January 2003. 376 -- ------- -------
2,319 2,498
Less current portion 617 555 ------- -------
Long Term portion $ 1,702 $ 1,943 ======= =======
a. On June 5, 1996 the Company refinanced its existing term loan and $5,000,000 credit facility into a $2,610,000 term loan and a $2,500,000 secured line of credit. The secured line of credit was renewed and increased to $4,000,000 in June 1997. The term loan and line of credit contain customary affirmative and negative covenants including those requiring the Company to maintain certain financial ratios and restricting the annual payment of dividends to an amount not in excess of 50% of the previous year's net income.. The weighted average interest rate in effect for the year ended December 31, 1997 under the short-term credit facility was 8.63%.
Long-term debt matures in each of the years subsequent to December 31, 1997, as follows:
YEAR ENDING DECEMBER 31, ($000)
1998 $ 617 1999 627 2000 638 2001 259 2002 141 Thereafter 37 --------
$ 2,319 ======== 6. CAPITAL LEASE OBLIGATIONS
The Company has entered into lease agreements for computer and office equipment that have been accounted for as capital leases due to the provisions of the lease agreements. The equipment has been recorded in the accompanying consolidated financial statements at the present value of the future minimum lease payments.
At December 31, 1997, future minimum lease payments are as follows:
YEAR ENDING DECEMBER 31, ($000)
1998 $ 110 1999 95 2000 95 2001 41 2002 30 -------- Total future minimum lease payments 371
Less amounts representing interest 61 --------
Present value of future minimum payments (including $80,000 payable currently) $ 310 ========
Accumulated depreciation related to assets held under capital leases at December 31, 1997 was $127,000.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ------- ------- ------- ($000)
Federal $ 648 $ 861 $ 237 State and local 412 579 200 Foreign 32 6 30 Deferred (115) 373 240 ------- ------- -------
$ 977 $ 1,819 $ 707 ======= ======= =======
The following reconciles Federal taxes at the statutory rate to the tax expense recorded in the financial statements:
YEAR ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 ------- ------- ------- ($000)
Federal taxes at statutory rate $ 814 $ 1,499 $ 528 State taxes, net of federal benefit 272 382 132 Other (109) (62) 47 ------- ------- ------- $ 977 1,819 $ 707 ======= ======= =======
The tax effects of temporary differences which give rise to deferred tax assets and liabilities are as follows:
DECEMBER 31, ----------------------- 1997 1996 ------- ------- ($000)
Deferred income tax assets: Net operating loss carryforwards $ 1,905 $ 2,141 Accrued vacation pay 117 97 Inventory valuation 84 -- Accrued rent 618 507 Basis of leaschold improvements 423 330 Deferred compensation 177 164 Other 42 13 ------- ------- 3,366 3,252 ------- ------- Defeffed income tax liability: Prepaid pension costs (481) (464) ------- -------
Net deferred tax assets $ 2,885 $ 2,788 ======= =======
8. DEFERRED COMPENSATION
The Company is a party to deferred compensation agreements with certain key employees. Amounts due under such agreements amounted to $397,000 and $358,000 at December 31, 1997 and 1996, respectively. The costs related to these agreements for the years ended December 31, 1997, 1996 and 1995 were $39,000, $34,000, and $31,000, respectively.
9. ACCRUED RENT
The Company has entered into various lease agreements which provide for scheduled rent increases and free rent periods. Rent expense has been recorded on the straight-line basis over the life of the leases. At December 31, 1997 and 1996, accrued rent of $1,391,000 and $1,181,000, respectively, represents that portion of rent expense (net of sublease income) which has not yet been paid.
10. STOCKHOLDERS' EQUITY
For the year ended December 31, 1996, the Company declared a dividend of $.05 per share ($655,000) which was paid on January 15, 1997 to stockholders of record as of December 31, 1996. There were no dividends declared or paid for the years ended December 31, 1997 and 1995.
11. RELATED PARTY TRANSACTIONS
The Company has a 25% interest in INTELECT ASW Marketing Services, L.L.C., ("INTELECT ASW"), a joint venture which provides retail point-of-sale tracking through a comprehensive panel of retailers and dealers in the U.S. and around the world. INTELECT ASW provides data to the information technologies, consumer electronics and home appliance industries. The Company's investment in the joint venture approximated $194,000 of which $13,000 was in cash and the balance consisted of related customer receivables. The joint venture began operations on October 1, 1997 and is provided with various management and other services by each of the partners pursuant to management service agreements ("Service Agreements"). During the fourth quarter of 1997, the Company billed $521,000 to INTELECT ASW, consisting principally of pass-through costs pursuant to the Service Agreements. At December 31, 1997, accounts receivable from the joint venture were $521,000 of which $176,000 was billed and $345,000 was unbilled. The Company's interest in this joint venture is recorded on the equity method.
In January 1998, the Company acquired a 50.1% interest in ASW-KMR Magazine Metrics, L.L.C., a joint venture partnership created to expand the Primary and Total Audience Surveys, a magazine research service developed by the Company. The Company contributed certain intangibles and agreed to make a $100,000 capital contribution. This entity will be consolidated beginning January 1, 1998.
12. STOCK OPTION PLANS
The Company has two stock option plans covering an aggregate of 1,650,000 shares of the Company's common stock which have been reserved for option grants to officers, directors, employees and consultants. The 1994 Stock Option Plan covers 650,000 shares of common stock and the 1997 Stock Option Plan covers 1,000,000 shares of common stock. The Plans are administered by a committee designated by the Board of Directors. Options are granted at fair market value at date of grant and generally have a term of 10 years. Options granted to employees are generally exercisable over three years beginning one year after date of grant.
Prior to 1996 there were no options granted under the 1994 Plan. The following table summarizes stock option activity in both plans for 1996 and 1997:
WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE -------- -------- 1996 Activity: Granted 637,550 $ 2.19 Forfeited (46,500) $ 2.02 Options outstanding December 31, 1996 591,050 $ 2.20 (O exercisable) 1997 Activity: Granted 334,800 $ 2.75 Exercised (12,032) $ 2.01 Forfeited (36,184) $ 2.25 -------- Options outstanding December 31, 1997 (189,611 exercisable at an average price per share of $2.23) 877,634 $ 2.41 ========
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for the options granted to employees. Had compensation cost for the employee options been determined using the Black-Scholes option-pricing model, the Company would have recorded aggregate compensation of approximately $485,000 in 1997 and $695,000 in 1996 which would be expensed over the options' vesting periods.
Principal assumptions used in applying the Black-Scholes model were as follows:
1997 1996 ------ ------ Risk-free weighted average interest rate 5.5% 6.0% Expected life 5.0 4.8 Volatility 55.2% 56.1%
The pro forma impact for the years ended December 31, 1997 and 1996 of following the provisions of SFAS No. 123 for employee options on the Company's net income and earnings per share would be as follows:
1997 1996 ---------- ---------- Net income As reported $1,418,000 $2,589,000
Pro forma $1,155,000 2,434,000
Basic earnings per share
As reported $ 0.11 $ 0.20
Pro forma $ 0.09 $ 0.19
Diluted earnings per share As reported $ 0.11 $ 0.20
Pro forma $ 0.09 $ 0.18
13. ECONOMIC DEPENDENCY AND CONCENTRATION OF CREDIT RISK
Approximately 33 percent, 28 percent, and 23 percent of the Company's revenues for the years ended December 31, 1997, 1996 and 1995, respectively, were derived from one client. No other client accounted for more than 10% of the Company's revenues.
14. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN - The Company sponsors a defined contribution (401(k)) plan covering substantially all of its employees. Contributions to the plan amounted to $179,000, $151,000 and $173,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Prior to 1997, the Company's contributions were determined annually by management. Beginning in 1997, the Company provided matching contributions to the plan at a rate of 50% of an employee's monthly contribution on a maximum of 3% of the employee's salary.
. DEFINED BENEFIT PLAN - Until December 31, 1996 the Company maintained a retirement plan covering only the former employees of Triangle (the "Triangle Salaried Pension Guarantee Plan"). Effective January 1, 1997, the Triangle Salaried Pension Guarantee Plan was amended to, among other things, ( i ) change the name of the plan to the Audits & Surveys Worldwide, Inc. Account Balance Retirement Plan (the "ASW Retirement Plan"), ( ii ) include all employees of the Company completing one year of service and ( iii ) establish participant accounts which will be credited each year with an amount equal to one and one half percent of the participant's plan compensation ( as defined ) and interest on the account balance at the rate applicable to 30 year U.S. Treasury securities.
Pension costs are based on the provisions of SFAS No. 87, "Employers' Accounting for Pensions." The net periodic pension credits for the years ended December 31, 1997 and 1996 and the period from March 31, 1995 (the date of the merger) to December 31, 1995 included the following components:
MARCH 31, YEAR ENDED DECEMBER 31, 1995 TO --------------------- DECEMBER 31, 1997 1996 1995 ------- ------- ------- ($000)
Service cost benefits $ 114 $ 14 $ 24 Interest cost on projected benefit obligation 381 353 273
Return on plan assets (1,091) (514) (361) Deferral 544 -- -- ------- ------- -------
Net periodic pension credit $ (52) $ (147) $ (64) ======= ======= =======
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 1997, 7.5% for 1996 and 7.0% for 1995. The rate of increase in future compensation levels was 4% and the weighted average long-term rate of return on assets was 8.5% for 1997, 1996 and 1995.
The following table indicates the funded status of the ASW Retirement Plan and the amount recognized as prepaid pension costs in the consolidated balance sheet at December 31, 1997 and 1996:
DECEMBER 31, ------------------ 1997 1996 ------- ------- ($000) Actuarial present value of benefit obligations: Accumulated benefits obligation including vested benefits of $5,436,000 and $5,073,000, respectively $(5,543) $(5,073) ======= =======
Projected benefit obligation $(5,543) $(5,073) Plan assets at fair value, primarily listed stocks and corporate obligations 7,309 6,657 ------- -------
Plan assets in excess of projected benefit obligation 1,766 1,584 Unrecognized net gain (624) (494) ------- -------
Prepaid pension costs $ 1,142 $ 1,090 ======= =======
15. COMMITMENTS AND CONTINGENCIES
INCENTIVE AGREEMENTS - The Company is obligated under various incentive compensation agreements with certain key employees. Such agreements provide for incentive bonuses based on the financial performance of their respective divisions. Total incentive bonuses amounted to approximately $2,185,000, $2,394,000 and $1,765,000 in the years ended December 31, 1997, 1996 and 1995, respectively.
OPERATING LEASES - The Company is obligated under lease agreements for office space which expire at various dates through February 28, 2003. Under the terms of the leases the Company is obligated to pay its portion of operating costs and real estate tax increases. Rent expense for the years ended December 31, 1997, 1996 and 1995 was approximately $1,799,000, $1,624,000 and $1,676,000, respectively. Sublease rental income for the years ended December 31, 1997, 1996 and 1995 was approximately $393,000, $748,000 and $667,000, respectively.
Future minimum lease commitments and sublease income at December 31, 1997 are as follows:
YEAR ENDING LEASE SUBLEASE DECEMBER 31, COMMITMENT INCOME ---------- ------ ($000)
1998 $ 2,036 $ 738 1999 1,987 775 2000 1,929 783 2001 1,830 791 2002 1,833 799 Thereafter 391 369 ------- -------
$10,006 $ 4,255 ======= =======
EMPLOYMENT AGREEMENTS - The Company is obligated under employment compensation agreements with five key executives which require annual aggregate minimum base compensation payments of $1,435,000. These agreements expire at various dates through March 24, 2002. All of these agreements provide for discretionary and/or performance based bonuses in addition to the base compensation.
SUPPLIER AGREEMENT - On February 6, 1995, the Company entered into a five-year agreement with a supplier whereby the Company will pay $1,500,000 for retail sales data and other rights as specified in the agreement. In the event of termination, the amounts owed to the supplier would be prorated based on the proportion of sales data received during the period prior to termination. As of December 31, 1997, the Company has paid the supplier $1,200,000. The balance of $300,000 is payable over a three-year period.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited summary results of operations for 1997 and 1996 (in thousands, except for per share data) were as follows:
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ITEM 14. FINANCIAL STATEMENT SCHEDULE
AUDITS & SURVEYS WORLDWIDE, INC. AND SUBSIDIARY SCHEDULE 11 - VALUATION AND QUALIFYING ACCOUNTS (000'S) - --------------------------------------------------------------------------------
ADDITIONS DEDUCTIONS --------- ---------- BALANCE AT CHARGED BALANCE BEGINNING TO PROFIT AT END DESCRIPTION OF PERIOD AND LOSS (A) OF PERIOD
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended December 31, 1995 $129 $ 92 $ 71 $150
Year ended December 31, 1996 $150 $108 $228 $ 30
Year ended December 31, 1997 $ 30 $ 72 $ 2 $ l00
(A) Represents writeoffs of uncollectible accounts receivable
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