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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 001-12275
NIELSEN MEDIA RESEARCH, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 06-1450569
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(State of Incorporation) (I.R.S. Employer Identification No.)
299 PARK AVENUE, NEW YORK, NEW YORK 10171
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 708-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
SHARES OUTSTANDING
TITLE OF CLASS AT OCTOBER 27, 1999
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Common Stock, 1,000
par value $.01 per share
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NIELSEN MEDIA RESEARCH, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE(S)
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Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)
Three Months Ended September 30, 1999 and 1998 ................... 3
Nine Months Ended September 30, 1999 and 1998 .................... 4
Condensed Consolidated Statements of Financial Position (Unaudited)
September 30, 1999 and December 31, 1998 ......................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1999 and 1998 .................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited) ....... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................... 21
SIGNATURES ............................................................. 22
-2-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
NIELSEN MEDIA RESEARCH, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months
Ended
September 30,
--------------------------
1999 1998
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Operating Revenue ........................................ $ 112,704 $ 99,394
Operating Costs .......................................... 55,824 46,669
Selling and Administrative Expenses ...................... 17,302 18,745
Depreciation and Amortization ........................... 9,357 7,979
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Operating Income ......................................... 30,221 26,001
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Interest Expense -- Net .................................. (3,960) (4,353)
Gain on Sale of Marketable Securities .................... 0 1,170
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Non-Operating Income ..................................... (3,960) (3,183)
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Income Before Provision for Taxes ........................ 26,261 22,818
Provision for Income Taxes ............................... (11,003) (9,560)
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Net Income ............................................... $ 15,258 $ 13,258
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Earnings Per Share of Common Stock -- Basic .............. $ 0.26 $ 0.24
Earnings Per Share of Common Stock -- Diluted ............ $ 0.24 $ 0.23
Weighted Average Number of Shares Outstanding -- Basic ... 57,683,000 55,859.000
Dilutive Effect of Stock Option Plans .................... 5,384,000 2,147,000
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Weighted Average Number of Shares Outstanding -- Diluted . 63,067,000 58,006,000
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See accompanying notes to the condensed consolidated
financial statements (unaudited).
-3-
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
NIELSEN MEDIA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months
Ended
September 30,
--------------------------
1999 1998
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Operating Revenue ........................................ $ 332,622 $ 293,389
Operating Costs .......................................... 167,009 139,981
Selling and Administrative Expenses ...................... 55,940 60,185
Depreciation and Amortization ............................ 27,258 22,892
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Operating Income ......................................... 82,415 70,331
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Interest Expense -- Net .................................. (10,523) (4,353)
Gain on Sale of Marketable Securities .................... 0 6,770
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Non-Operating Income ..................................... (10,523) 2,417
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Income Before Provision for Taxes ........................ 71,892 72,748
Provision for Income Taxes ............................... (30,122) (30,481)
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Net Income ............................................... $ 41,770 $ 42,267
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Earnings Per Share of Common Stock -- Basic .............. $ 0.73 $ 0.77
Earnings Per Share of Common Stock -- Diluted ............ $ 0.67 $ 0.72
Weighted Average Number of Shares Outstanding -- Basic ... 57,258,000 54,848,000
Dilutive Effect of Stock Option Plans ................... 4,928,000 4,252,000
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Weighted Average Number of Shares Outstanding -- Diluted . 62,186,000 59,100,000
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See accompanying notes to the condensed consolidated
financial statements (unaudited).
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NIELSEN MEDIA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
September 30, December 31,
1999 1998
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ASSETS
Current Assets
Cash and Cash Equivalents ......................... $ 17,952 $ 7,799
Accounts Receivable-Net ........................... 53,331 54,392
Other Current Assets .............................. 5,981 6,092
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Total Current Assets .......................... 77,264 68,283
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Property, Plant and Equipment-Net .................... 73,858 68,286
Computer Software .................................... 51,534 50,575
Deferred Charges and Intangibles ..................... 13,947 22,234
Other Assets ......................................... 33,433 22,787
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Total Assets ......................................... $ 250,036 $ 232,165
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LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts Payable .................................. $ 8,203 $ 12,965
Accrued and Other Current Liabilities ............. 49,515 54,753
Accrued Income Taxes .............................. 3,069 2,822
Deferred Revenues ................................. 2,140 2,276
Short-term Debt ................................... 0 225,000
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Total Current Liabilities ..................... 62,927 297,816
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Other Liabilities .................................... 12,263 9,273
Deferred Income Taxes ................................ 59,788 47,938
Long-term Debt ....................................... 200,000 25,000
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Total Liabilities ............................. 334,978 380,027
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Shareholders' Equity (Deficit)
Common Stock ...................................... 577 570
Capital Surplus ................................... 8,893 0
Treasury Stock .................................... 0 (11,121)
Distribution in Excess of Net Book Value .......... (163,542) (163,542)
Retained Earnings ................................. 67,031 25,261
Cumulative Translation Adjustment ................. 1,066 970
Unrealized Gains on Investments ................... 1,033 0
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Total Shareholders' Equity (Deficit) ........... (84,942) (147,862)
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Total Liabilities and Shareholders' Equity (Deficit) . $ 250,036 $ 232,165
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See accompanying notes to the condensed consolidated
financial statements (unaudited).
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NIELSEN MEDIA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
Nine Months
Ended
September 30,
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ..................................................... $ 41,770 $ 42,267
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization .............................. 27,258 22,892
Provision for Deferred Income Taxes ........................ 12,251 8,266
Changes in Operating Assets and Liabilities:
Decrease in Accounts Receivable ............................ 1,089 2,264
Change In Deferred Charges and
Accrued and Other Current Liabilities ................... 3,316 30,610
Decrease in Accounts Payable ............................... (4,778) (5,531)
Increase/(Decrease) in Accrued Income Taxes ................ 215 (699)
Change in Other Operating Assets and Liabilities ........... 3,700 (12,955)
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Net Cash Provided by Operating Activities ...................... 84,821 87,114
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Cash Flows from Investing Activities:
Capital Expenditures ....................................... (20,536) (22,054)
Additions to Computer Software ............................. (13,496) (16,485)
Additions to Intangibles ................................... (2,832) (9,366)
Other ...................................................... (8,247) 4,152
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Net Cash Used in Investing Activities .......................... (45,111) (43,753)
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Cash Flows from Financing Activities:
Third Party Limited Partnership Investment ................. 25,000 25,000
Bank Borrowings ............................................ 0 275,000
Issuance of Long-term Notes ................................ 150,000 0
Repayment of Bank Borrowings ............................... (225,000) (31,000)
Proceeds from Stock Plans and Other Financing Activities ... 20,386 0
Transfers to Cognizant Corporation ......................... 0 (307,326)
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Net Cash Used in Financing Activities .......................... (29,614) (38,326)
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Effect of Exchange Rate Changes on Cash and Cash Equivalents ... 57 (26)
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Increase in Cash and Cash Equivalents .......................... 10,153 5,009
Cash and Cash Equivalents, Beginning of Year ................... 7,799 5,993
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Cash and Cash Equivalents, End of Period ....................... $ 17,952 $ 11,002
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See accompanying notes to the condensed consolidated financial statements (unaudited).
-6-
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and should be read in
conjunction with the consolidated financial statements and related notes of
Nielsen Media Research, Inc. (the "Company" or "Nielsen Media Research") in the
Report on Form 10-K filed March 29, 1999. In the opinion of management, all
adjustments considered necessary for a fair presentation of financial position,
results of operations and cash flows for the periods presented have been
included. Certain prior-period amounts have been reclassified to conform with
the 1999 presentation.
NOTE 2. BASIS OF PRESENTATION
Until June 30, 1998, Nielsen Media Research was operated as part of
Cognizant Corporation ("Cognizant"), which also included the business of IMS
Health Incorporated ("IMS Health"). On June 30, 1998, Cognizant (which is now
the Company) distributed to all holders of common stock the shares of IMS Health
(the "Distribution").
The consolidated financial statements generally reflect the financial
position, results of operations, and cash flows of the Company as if it were a
separate entity for all periods presented. The consolidated financial statements
exclude pro-forma interest income and expense for the six months ended June 30,
1998. The financial statements include allocations of Cognizant corporate and
other expenses relating to Nielsen Media Research's business for the six months
ended June 30, 1998. Management believes that these allocations are reasonable.
However, the financial information included herein may not necessarily reflect
the consolidated financial position, results of operations, and cash flows of
the Company if the Company had been a separate entity during the entire
nine-month periods ended September 30, 1998.
-7-
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3. EVENT SUBSEQUENT TO SEPTEMBER 30, 1999
CHANGE IN CONTROL OF COMPANY
On October 26, 1999, VNU N.V., a company organized under the laws of the
Netherlands ("VNU"), through Niner Acquisition, Inc., a Delaware corporation and
an indirect wholly owned subsidiary of VNU ("Purchaser"), accepted for purchase
54,733,956 shares of the common stock, par value $0.01 per share (the "Shares"),
of Nielsen Media Research, Inc., a Delaware corporation (the "Company"), that
had been validly tendered and not withdrawn (including shares tendered via
guaranteed delivery) pursuant to Purchaser's tender offer for all of the
outstanding Shares at $37.75 per Share, net to the seller in cash, without
interest (the "Offer"). The Offer was made pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"), dated as of August 15, 1999, as amended, by and
among the Company, Purchaser and VNU USA, Inc., a New York corporation and a
wholly owned subsidiary of VNU ("Parent"), which provides for, among other
things, the making of the Offer by Purchaser and, following the consummation of
the Offer, the merger of Purchaser with and into the Company (the "Merger"). The
Shares purchased pursuant to the Offer constituted approximately 94.8% of the
Shares then issued and outstanding. The aggregate purchase price for the Shares
purchased pursuant to the Offer was $2,066,207. Purchaser obtained all funds
needed for such purchase through VNU or its affiliates. VNU and its affiliates
obtained such funds from cash-on-hand and short-term and long-term borrowings at
market interest rates.
On October 27, 1999, the Merger provided for by the Merger Agreement
became effective. Pursuant to the Merger, Shares which were not validly tendered
pursuant to the Offer and accepted for purchase by Purchaser (and whose holders
have not sought appraisal of their Shares in accordance with applicable
provisions of Delaware law) were converted into the right to receive $37.75 per
Share, net to the seller in cash, upon delivery of appropriate documentation to
the Paying Agent for the Merger. As a result of the Merger, Parent owns 100% of
the outstanding Shares of the Company and the number of Shares of the Company
was reduced to 1,000.
In accordance with the Merger Agreement, on October 27, 1999, Gerald
S. Hobbs, Thomas A. Mastrelli, James Ross and Rob F. van den Bergh were named as
members of the Board of Directors of the Company.
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NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4: INVESTMENT IN NETRATINGS, INC.
During the third quarter of 1999, the Company invested a total of
$10,264 in exchange for preferred stock (that were convertible into a total
ownership interest of approximately 8.2% of fully diluted common shares
outstanding at the time of the investment) in NetRatings, Inc, ("NRI") a
privately held company in Milpitas, California. In addition, Nielsen Media
Research holds 553,000 warrants at an exercise price of $7.20 per share, or
$4,000. These warrants are exercisable at any time between January 1, 2000 and
January 1, 2002. The Company also holds 6.0 million warrants at an exercise
price of $12.0 per share, or an aggregate of $72,000. These warrants are
exercisable at any time between January 1, 2002 and January 1, 2005. In the
event of an Initial Public Offering ("IPO"), if the issuance price is less than
$20.00 per share, the Company's exercise price for any of the outstanding 6.0
million warrants will be adjusted to 60% of the IPO price. The Company retains
the right to exercise any or all outstanding warrants subsequent to the IPO in
accordance with the agreed timetable.
In September, 1999 NRI filed a registration statement with the
Securities and Exchange Commission ("SEC") for an Initial Public Offering
("IPO"). Upon receiving SEC approval, and depending upon economic conditions, it
is likely that the NRI IPO will occur prior to the end of 1999. In October 1999,
the Company informed NRI that in connection with the IPO, the company would
exercise its warrants and rights to obtain a 54% ownership in NRI. In November
1999, the Company and NRI agreed that in such event, NRI would cause a majority
of its Board of Directors to compromise nominees of the Company. Depending upon
the offering price of NRI shares at the time of the IPO, the Company's required
cash outlay needed to obtain a 54% ownership in NRI would be approximately
$175,000 to $225,000.
The two companies have signed an agreement that calls for the formation
of an operating committee to guide and coordinate development of the
Nielsen//NetRatings Internet measurement service, which was launched March 22,
1999. An agreement covering research panel recruitment under which NetRatings,
Inc. pays Nielsen Media Research for these services also has been signed.
-9-
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5. COMPREHENSIVE INCOME
Comprehensive income includes net income and changes in foreign currency
translation adjustments, and unrealized gains on investments. Total
comprehensive income and its components for the three and nine months ended
September 30, 1999 and 1998 are as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
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Net Income ........................ $15,258 $13,258 $41,770 $42,267
Change in Foreign Currency
Translation Adjustment .......... 17 (33) 96 185
Change in Unrealized Gains on
Investments ..................... 112 (965) 1,033 679
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Total Comprehensive Income ....... $15,387 $12,260 $42,899 $43,131
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NOTE 6. ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of an exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, or an unrecognized foreign-currency-denominated forecasted
transaction. The Company will be required to implement SFAS 133 beginning
January 1, 2001. The Company expects that the adoption of this pronouncement
will not have a material effect on the Company's financial position, results of
operations or cash flows.
-10-
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7. DEBT
During the second quarter of 1999, the Company completed a public
offering of $150,000 of 7.60% senior notes due 2009 (the "Notes"). Proceeds from
the offering were used to repay existing indebtedness under the Company's bank
credit facilities. The Notes contain certain restrictive covenants.
In connection with the Distribution in 1998, the Company borrowed
$275,000 under an unsecured revolving credit facility ("Revolving Credit
Facility") provided by a group of lenders led by The Chase Manhattan Bank. The
Revolving Credit Facility consisted of two tranches: a 364-Day $225,000 tranche
and a Three-Year $100,000 tranche. As of September 30, 1999, none of the
Three-Year tranche was outstanding. During the second quarter of 1999, the
outstanding balance under the 364-Day tranche of $150,000 was repaid using the
proceeds from the Notes and the 364-Day facility was terminated. Subsequent to
September 30, 1999, the Three-Year facility was terminated.
In 1998, the Company entered into an agreement to hedge against an
increase in interest rates in anticipation of the issuance of the Notes. The
hedge agreement had a notional amount of $125,000 and was settled in June 1999
when the Notes were issued. The Company has deferred a $1,966 realized gain on
the settlement of the hedge, which has been recorded as a deferred credit within
the caption "Other Liabilities" and is being recognized as an adjustment to
interest expense over the life of the Notes.
The Company and one of its subsidiaries participate in a limited
partnership, one of which serves as general partner. In June 1998, a third party
investor contributed $25,000 to the partnership in exchange for a limited
partnership interest. During the third quarter of 1999, the same investor
contributed an additional $25,000 to the partnership for additional limited
partnership interest. The partnership is obligated to make distributions to the
third party limited partner of approximately 6.8 % per annum. The third party
limited partner has the ability to retire it's limited interest that it obtained
in June 1998 on December 31, 2000; at that time, one or more of the other
partners may elect to purchase the retiring interest of the third party limited
partner. The partnership licenses computer software.
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NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8. LITIGATION AND CONTINGENCIES
The Company and its subsidiaries are involved in legal proceedings and
litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings and litigation, if
decided adversely, could have a material adverse effect on quarterly or annual
operating results or cash flows when resolved in a future period. However, in
the opinion of management, these matters will not materially affect the
Company's consolidated financial position.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint
in the United States District Court for the Southern District of New York,
naming as defendants The Dun & Bradstreet Corporation ("D&B"), A.C.Nielsen
Company and IMS, a unit of Cognizant (the "IRI Action"). The complaint alleges,
among other things, various violations of the antitrust laws and damages in
excess of $350,000, which amount IRI has asked to be trebled under the antitrust
laws. IRI also seeks punitive damages of an unspecified amount. In light of the
potential significant liabilities that could arise from the IRI Action and in
order to facilitate the D&B Spin-off (as defined below), D&B, ACNielsen
Corporation ("ACNielsen") (the parent of A.C.Nielsen Company) and Cognizant
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which ACNielsen agreed to be responsible for any
potential liabilities that may ultimately be incurred by D&B or Cognizant as a
result of such action, up to a maximum amount to be determined by an independent
investment bank if and when any such liabilities are incurred. The determination
of such maximum amount will be based on ACNielsen's ability to satisfy such
liabilities and remain financially viable, subject to certain assumptions and
limitations. However, Cognizant and D&B agreed that to the extent that ACNielsen
is unable to satisfy any such liabilities in full and remain financially viable,
Cognizant and D&B will each be responsible for 50% of the difference between the
amount, if any, that may be payable as a result of such litigation and the
maximum amount that ACNielsen is then able to pay as determined by such
investment bank. Under the terms of the D&B Distribution Agreement dated as of
October 28, 1996, among Cognizant, D&B and ACNielsen (the "1996 Distribution
Agreement"), pursuant to which shares of Cognizant and ACNielsen were
distributed to the stockholders of D&B (the "D&B Spin-off") and as a condition
to the Cognizant Distribution, the Company and IMS Health were required to
undertake to be jointly and severally liable to D&B and ACNielsen for
Cognizant's obligations under the 1996 Distribution Agreement.
However, pursuant to the Distribution Agreement dated as of June 30,
1998 between Cognizant and IMS Health, IMS Health and the Company agreed that,
as between themselves, IMS Health will assume 75%, and the Company will assume
25%, of any payments to be made in respect of the IRI Action under the Indemnity
and Joint Defense Agreement or otherwise, including any ongoing legal fees and
expenses related thereto incurred in 1999 or thereafter. IMS Health agreed to be
fully responsible for any legal fees and expenses incurred during 1998.
-12-
NIELSEN MEDIA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8. LITIGATION AND CONTINGENCIES (CONTINUED)
Under the terms of the 1996 Distribution Agreement, Nielsen Media
Research and IMS Health are also jointly and severally liable to D&B for taxes
and accrued interest arising from certain tax assessments that may be levied by
the Internal Revenue Service ("IRS") related to certain D&B tax planning
strategies. Pursuant to the Distribution Agreement, Nielsen Media Research is
liable to pay 25% of any payments made by D&B to the IRS, net of any related tax
benefits, in excess of the first $397,000 which is payable by D&B and/or IMS
Health.
The IRS is currently reviewing D&B's utilization of certain capital
losses during 1989 and 1990. D&B has stated that it intends to vigorously defend
its position against any assessment that may be made in the future regarding
this transaction. However, if an assessment is made and should the IRS prevail,
in the opinion of management the impact of this transaction would not have a
material effect on the results of operations, cash flows or financial position
of Nielsen Media Research.
In accordance with the Distribution Agreement, Nielsen Media
Research's aggregate liability to IMS Health for payments in respect of the IRI
Action and its share of any future D&B tax and interest payments relating to the
tax uncertainties referred to in the paragraphs above shall not exceed $125,000
and is not payable until 2001.
Management is unable to predict at this time the final outcome of the
IRI Action, the amount of any future D&B tax and interest payments and whether
the resolution of such matters could materially affect Nielsen Media Research's
results of operations, cash flows or financial position.
-13-
NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenue for the third quarter of 1999 increased by 13.4% to $112,704
from $99,394 for the third quarter of the prior year. National revenues were
fueled by the addition of two new cable networks and subscriber growth at other
cable networks, the addition of the Paxson broadcast network in the latter part
of 1998 and the continued penetration of data delivery and analysis products
into the customer base. Local revenues continued to be positively impacted by
the addition of six new metered markets in 1998 and by the addition of two new
metered markets in 1999.
Operating costs and selling and administrative expenses for the third
quarter of 1999 increased by 11.8% to $73,126 from $65,414 for the third quarter
of the prior year. Excluding Year 2000 compliance costs of $1,357 and $1,800 for
the third quarter of 1999 and 1998, respectively, operating costs and selling
and administrative expenses increased 12.8%, reflecting an increase in
investment spending, offset, in part, by a reduction in corporate overhead
expenses.
Operating income increased by 16.2% to $30,221 for the third quarter of
1999 compared with $26,001 for the third quarter of the prior year. Operating
income growth reflected a decline in spending for Year 2000 compliance costs of
$443. Excluding Year 2000 compliance costs in both periods, operating income for
the third quarter of 1999 increased by 13.6%.
Interest expense of $3,960 and 4,353 was incurred during the third
quarter of 1999 and 1998, respectively, in conjunction with funds borrowed in
connection with the Distribution.
Non-operating income for the third quarter of 1998 included a gain of
$1,170 from the sale of marketable securities.
The Company's effective tax rate was 41.9 % for the third quarter of
1999 and 1998.
The Company's net income for the third quarter increased by 15.1% to
$15,258 from $13,258 for the third quarter of the prior year, reflecting the
factors discussed above.
Basic earnings per share for the third quarter of 1999 increased 8.3% to
$0.26 from $0.24 for the third quarter of the prior year. Diluted earnings per
share for the third quarter of 1999 increased 4.3% to $0.24 from $0.23 for the
third quarter of 1998.
-14-
NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue for the first nine months of 1999 increased by 13.4% to $332,622
from $293,389 for the comparable period of the prior year. National revenues
were fueled by the addition of two new cable networks and subscriber growth at
other cable networks, the addition of the Paxson broadcast network in the latter
part of 1998 and the continued penetration of data delivery and analysis
products into the customer base. Local revenues continued to be positively
impacted by the addition of six new metered markets in 1998 and by the addition
of two new metered markets in 1999.
Operating costs and selling and administrative expenses for the first
nine months of 1999 increased by 11.4% to $222,949 from $200,166 for the
comparable period of the prior year. Excluding Year 2000 compliance costs of
$6,339 and $7,400 for the nine months of 1999 and 1998, respectively, operating
costs and selling and administrative expenses increased 12.4%, reflecting an
increase in investment spending, offset, in part, by a reduction in corporate
overhead expenses.
Operating income increased by 17.2% to $82,415 for the first nine months
of 1999 compared with $70,331 for the first nine months of the prior year.
Operating income growth reflected a decline in spending for Year 2000 compliance
costs of $1,061. Excluding Year 2000 compliance costs in both periods, operating
income for the first nine months of 1999 increased by 14.2%.
Interest expense of $10,523 and 4,353 was incurred during the first nine
months of 1999 and 1998, respectively, in conjunction with funds borrowed in
connection with the Distribution.
Non-operating income for the first nine months of 1998 included a gain
of $ 6,770 from the sale of marketable securities.
The Company's effective tax rate was 41.9 % for the first nine months of
1999 and 1998.
The Company's net income for the first nine months of 1999 decreased by
1.2% to $41,770 from $42,267 in the comparable period of the prior year,
reflecting the factors discussed above, particularly the incurrence of interest
expense in the first nine months of 1999 compared to only three months in 1998,
and the absence of the gain from the sale of marketable securities in the first
nine months of 1999.
Basic earnings per share for the first nine months of 1999 decreased
5.2% to $0.73 from $0.77 for the comparable period of the prior year. Diluted
earnings per share for the first nine months of 1999 decreased 6.9% to $0.67
from $0.72 for the first nine months of 1998.
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NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Cash and cash equivalents totaled $17,952 and $11,002 at September 30,
1999 and 1998, respectively.
Net cash provided by operating activities was $84,821 and $87,114 for
the nine months ended September 30, 1999 and 1998, respectively. The decrease of
$2,293 primarily reflects the absence of an increase in liabilities attributable
to the 1998 Distribution, offset in part by an increase in net operating
liabilities.
Net cash used in investing activities was $ 45,111 and $43,753 for the
nine months ended September 30, 1999 and 1998, respectively. The increase of
$1,358 primarily reflects lower expenditures for property, plant and equipment,
software, and intangibles, due to timing of such expenditures, offset, in part,
by the Company's investment in NetRatings, Inc..
Net cash used in financing activities was $29,614 and $38,326 for the
nine months ended September 30, 1999 and 1998, respectively. The decrease of
$8,712 was due primarily to a net repayment of debt, offset, in part, by
proceeds from stock option plans, and the absence of transfers to Cognizant
Corporation, which included $300,000 of bank borrowings and limited partnership
investment incurred in connection with the Distribution in 1998.
IMPACT OF THE YEAR 2000 ISSUE
Many existing computer systems, software applications and embedded
computer chips use two digits, rather than four, to record years, e.g., "98"
instead of "1998". Unless modified, such systems will not properly record or
interpret years after 1999, which could result in system failures or
miscalculations causing disruption of business operations, including, among
other things, an inability to process transactions, deliver reports, send
invoices, or engage in similar normal business activities. This is known as the
Year 2000 Issue.
The Company began to address the Year 2000 Issue in 1996. The Company
determined that most of its significant information technology ("IT") systems,
as well as production operations applications that interface with its core IT
systems, could be affected and significant portions of software needed to be
modified or replaced so that those systems and applications would properly
utilize dates beyond December 31, 1999. Affected systems and processes include
software applications and computer software and hardware that sample, collect,
process, report, and deliver television ratings and audience estimates to the
television marketplace in the U.S. and Canada.
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NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
IMPACT OF THE YEAR 2000 ISSUE (CONTINUED)
The Company's project to resolve the Year 2000 Issue involves four
phases: assessment, remediation, testing and implementation. Once each software
application, computer system, or process has completed all four phases, it is
returned to a production environment. After completing a series of
implementations, the Company's project calls for enterprise-wide system testing
of its business-critical systems and processes to validate that key applications
and systems will function in concert in a Year 2000 test environment producing
the same results as today.
As of September 30, 1999, for its business-critical IT exposures, the
Company has completed 100% of its assessments and was more than 96% complete in
the implementation phase. The Company has also completed 100% of its assessments
and more than 98% of the modifications and testing of the non-business-critical
software (which includes certain IT software as well as applications supported
and used by production operations departments that interface with the IT
systems), as well as completed customer notifications of discontinued and
replaced products. As of September 30, 1999, the Company has completed all four
planned enterprise-wide system tests, which confirmed that work done to date has
been accurate and effective.
Third parties, including data providers, users of the Company's data,
and application vendors, have been queried about their Year 2000 readiness. To
date, the Company is not aware of any anticipated Year 2000-related failures.
Failures by data providers to be Year 2000 ready could disrupt the flow of data
used in the Company's products. Failures by users could hinder their ability to
make use of the Company's products. Failures by application vendors could impact
certain product delivery schedules until corrected. While the Company believes
most companies it deals with are addressing the issue, it is unable to determine
the effect, if any, such failures might have on the Company's business or future
results of operations.
The Company also relies on local and long-distance telecommunications
companies throughout the U.S. and Canada to transmit viewing data from its
television meters to its computer systems for processing. Given the large number
of telephone companies serving the households where the Company's meters are
installed, the Company cannot assess the extent to which telecommunications
failures will occur. Scattered or short-lived telecommunications outages will be
unlikely to materially impair the Company's ability to deliver television
ratings. Widespread or lengthy telecommunications failures, however, could
significantly interrupt the Company's delivery of ratings data to its metered
ratings customers, and, if the failure were lengthy, data could be lost.
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NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
IMPACT OF THE YEAR 2000 ISSUE (CONTINUED)
The assessment of embedded computer chips relating to building
facilities, mailing, and print shop equipment is complete and the risk of
failure of such embedded chips was determined to be low. The items identified
for replacement are minor, have a manual workaround, and are not anticipated to
impact normal business operations.
The Company is utilizing both internal and external resources to
address the Year 2000 issue. This project is estimated to cost $20,325 and is
being funded through operating cash flows. The operating income impact of the
Year 2000 project was $9,944 and $2,681 in 1998 and 1997, respectively. Based on
current information, the operating income impact of the Year 2000 project for
the full year 1999 is expected to be approximately $7,700.
The Company has substantially completed contingency planning for
potential internal and external disruptions. Ongoing review and enhancement of
the plans will continue through the year-end rollover period. These plans focus
on the impact to customers, vendors and employees of disruptions in products,
supplies, or internal operations, and include, but are not limited to, the
development of emergency backup and recovery procedures, staffing to react to
unforeseen events, replacement of electronic applications with manual processing
in the event of system disruptions, the testing and addition of backup
generators as alternate power sources in some offices, and increases in supply
inventory.
The Company is also establishing an operational command center to
coordinate the year-end rollover from 1999 to 2000. For each area of the
business, employees have been identified as risk managers to be responsible for
developing and executing recovery plans, as necessary.
The Company believes the most likely worst case scenarios in the event
of a Year 2000 disruption would involve the temporary inability to collect
viewing or lineup data, resulting in late or incomplete data delivery, or the
inability of some customers to pay on a timely basis.
The Company believes that its mitigation and remediation efforts will
avoid major disruptions in its business activities; however, the Company remains
dependant on the ability of third parties, particularly data providers,
customers and utilities, to perform as required. Although the Company has
implemented the actions described above to address these issues, it is not able
to insure uninterrupted performance or that a contingency plan will adequately
address the immediate or long-term effects of a system failure or business
disruption.
The Company believes that with modifications and replacement of existing
software, the Year 2000 impact on systems and computer code controlled and
maintained by the Company can be mitigated. However, if such modifications and
replacements are not made, are not completed in a timely manner, or if third
party providers fail to provide timely, accurate and uninterrupted goods and
services, the Year 2000 Issue could materially and adversely affect the
Company's results of operations, liquidity and financial condition.
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NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NON-U.S. OPERATING RESULTS AND MONETARY ASSETS
The Company operates in the U.S. and Canada. Approximately 3% of the
Company's revenues during the three and nine months ended September 30, 1999 and
1998 were derived from its Canadian operations. As a result, fluctuations in the
value of the Canadian dollar relative to the U.S. dollar do not significantly
affect the Company's results of operations. Non-U.S. monetary assets are
maintained in Canadian dollars. Changes in the value of this currency relative
to the U.S. dollar are charged or credited to Shareholders' Equity. The effects
of exchange rate changes during the three and nine months ended September 30,
1999 and 1998 were not material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing balances of cash and cash equivalents, and cash
generated from operations, debt capacity, and it's ability to secure financing
from VNU, are expected to be sufficient to meet Nielsen Media Research's
long-term and short-term cash requirements including continued investment in the
business. In 1999, the Company has refinanced its short-term bank borrowing
facility and replaced $150,000 of such borrowings with fixed-rate long-term debt
securities.
In September, 1999 NRI filed a registration statement with the
Securities and Exchange Commission ("SEC") for an Initial Public Offering
("IPO"). Upon receiving SEC approval, and depending upon economic conditions, it
is likely that the NRI IPO will occur prior to the end of 1999. In October 1999,
the Company informed NRI that in connection with the IPO, the company would
exercise its warrants and rights to obtain a 54% ownership in NRI. In November
1999, the Company and NRI agreed that in such event, NRI would cause a majority
of its Board of Directors to compromise nominees of the Company. Depending upon
the offering price of NRI shares at the time of the IPO, the Company's required
cash outlay needed to obtain a 54% ownership in NRI would be approximately
$175,000 to $225,000.
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NIELSEN MEDIA RESEARCH, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORWARD LOOKING STATEMENTS
Certain statements under the caption "Impact of the Year 2000 Issue"
and "Liquidity and Capital Resources" are forward-looking. These may be
identified by the use of forward-looking words or phrases, such as "believe,"
"expect," "intend," "should," "could," "estimated," "target," "efforts" and
"scheduled," among others. The Private Securities Litigation Reform Act of 1995
provides a "safe harbor" for such forward-looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's assessment of the Year 2000 Issue to differ materially
from its actual impact. These risks and uncertainties include, but are not
limited to, the complexity involved in ascertaining all situations in which the
Year 2000 Issue may arise; the availability and cost of personnel trained in
this area of expertise; the receipt and the reliability of responses from users,
suppliers and others to whom compliance inquiries are being made; the success of
users and suppliers in addressing the Year 2000 Issue; and the possibility of
unforeseen events that could delay timely implementation of the Company's Year
2000 project. In addition, factors that could cause actual results to differ
materially from the forward-looking statements relating to liquidity and capital
resources include, but are not limited to, the results of litigation and other
contingencies affecting the Company, deterioration in economic conditions, and
the ability to obtain future financing on satisfactory terms.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of an exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, or an unrecognized foreign-currency-denominated forecasted
transaction. The Company will be required to implement SFAS 133 beginning
January 1, 2001. The Company expects that the adoption of this pronouncement
will not have a material effect on the Company's financial position, results of
operations or cash flows.
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NIELSEN MEDIA RESEARCH, INC.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(Filed Electronically)
(b) Reports on Form 8-K:
A report on Form 8-K was filed on October 26, 1999 to report under Item
1, Changes in Control of Registrant, the purchase of shares by Niner
Acquisition, Inc., a wholly-owned subsidiary of VNU USA, Inc.
A report on Form 8-K was filed on August 16, 1999 to report under Item
5. Other Events, the signing of an Agreement and Plan of Merger with VNU
USA, Inc. and its wholly-owned subsidiary, Niner Acquisition, Inc.
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NIELSEN MEDIA RESEARCH, INC.
SIGNATURES
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.
NIELSEN MEDIA RESEARCH, INC.
Date: November 15, 1999 By: /s/ THOMAS W. YOUNG
--------------------------------
Thomas W. Young
Executive Vice President &
Chief Financial Officer
By: /s/ STUART J. GOLDSHEIN
--------------------------------
Stuart J. Goldshein
Vice President and Controller
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