SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
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CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): June 22, 2001
The Interpublic Group of Companies, Inc.
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(Exact Name of Registrant as Specified in Charter)
Delaware 1-6686 13-1024020
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(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
1271 Avenue of the Americas, New York, New York 10020
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 212-399-8000
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(Former Name or Former Address, if Changed Since Last Report)
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
a. Financial Statements of Business Acquired
On June 22, 2001, The Interpublic Group of Companies, Inc.
("Registrant") acquired True North Communications Inc. ("True North").
Registrant hereby amends its Current Report on Form 8-K for June 22, 2001 in
accordance with Rule 12b-15 under the Securities Exchange Act of 1934 and sets
forth below the audited Consolidated Balance Sheets of True North as of December
31, 2000 and December 31, 1999, and the Consolidated Statements of Income,
Consolidated Statements of Cash Flows, and Consolidated Statements of
Stockholders' Equity of True North for the years ended December 31, 2000, 1999
and 1998.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------
AS RESTATED
-----------------------
2000 1999 1998
---------- ---------- ----------
COMMISSIONS AND FEES..................................... $1,556,843 $1,439,414 $1,274,284
---------- ---------- ----------
OPERATING EXPENSES:
Salaries and benefits.................................. 914,889 871,433 806,602
Office and general..................................... 448,661 421,733 364,524
Restructuring and other charges........................ 16,910 75,354 3,278
---------- ---------- ----------
Total operating expenses............................. 1,380,460 1,368,520 1,174,404
---------- ---------- ----------
OPERATING INCOME......................................... 176,383 70,894 99,880
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income........................................ 5,910 7,300 6,118
Interest expense....................................... (17,211) (18,128) (22,242)
Loss on involuntary conversion of affiliate
investment........................................... -- -- (12,616)
Gains on sales of marketable securities and other...... 3,454 11,172 17,810
---------- ---------- ----------
Total other income (expense)......................... (7,847) 344 (10,930)
---------- ---------- ----------
INCOME BEFORE TAXES, MINORITY INTEREST AND EQUITY
INCOME................................................. 168,536 71,238 88,950
Provision for income taxes............................. 75,755 41,289 56,066
---------- ---------- ----------
INCOME BEFORE MINORITY INTEREST AND EQUITY INCOME........ 92,781 29,949 32,884
Minority interest expense.............................. (2,986) (4,161) (4,044)
Equity in earnings (loss) of affiliated companies...... (28,192) 2,434 5,427
---------- ---------- ----------
NET INCOME............................................... $ 61,603 $ 28,222 $ 34,267
========== ========== ==========
PER SHARE INFORMATION:
Basic earnings per share............................... $ 1.24 $ 0.60 $ 0.75
Diluted earnings per share............................. $ 1.21 $ 0.59 $ 0.72
Average common shares outstanding...................... 49,494 47,346 45,748
Average common shares outstanding--assuming dilution... 51,066 48,142 47,595
Cash dividends per common share........................ $ 0.60 $ 0.60 $ 0.60
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
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(IN 000'S)
AT DECEMBER 31,
---------------------------
AS RESTATED
-----------
2000 1999
---------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 136,322 $ 118,265
Short-term investments.................................... -- 16,858
Marketable securities..................................... 180 2,076
Accounts receivable, net of allowance for doubtful
accounts of $20,795 in 2000 and $15,292 in 1999......... 1,048,793 1,020,701
Expenditures billable to clients.......................... 58,422 69,512
Other current assets...................................... 39,877 19,529
---------- ----------
Total current assets.................................... 1,283,594 1,246,941
---------- ----------
PROPERTY AND EQUIPMENT:
Land and buildings........................................ 917 1,009
Leasehold improvements.................................... 103,070 90,132
Furniture and equipment................................... 241,698 246,635
---------- ----------
345,685 337,776
Less--Accumulated depreciation and amortization........... (179,609) (180,977)
---------- ----------
Total property and equipment............................ 166,076 156,799
---------- ----------
OTHER ASSETS:
Intangible assets, net of accumulated amortization of
$141,592 in 2000 and $117,373 in 1999................... 458,747 443,956
Investment in affiliated companies........................ 92,803 33,312
Other assets.............................................. 62,070 83,145
---------- ----------
Total other assets...................................... 613,620 560,413
---------- ----------
Total assets.......................................... $2,063,290 $1,964,153
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $1,160,974 $1,034,980
Short-term bank borrowings................................ 45,540 117,847
Income taxes payable...................................... 39,117 22,642
Current portion of long-term debt......................... 11,736 9,036
Accrued expenses.......................................... 229,143 210,283
---------- ----------
Total current liabilities............................... 1,486,510 1,394,788
---------- ----------
NONCURRENT LIABILITIES:
Long-term debt............................................ 26,730 36,632
Liability for deferred compensation....................... 75,459 67,723
Other noncurrent liabilities.............................. 69,608 139,761
---------- ----------
Total noncurrent liabilities............................ 171,797 244,116
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value, authorized 100 shares,
none issued............................................. -- --
Common stock, 33 1/3 CENTS par value, authorized 90,000
shares, 50,120 issued in 2000 and 48,881 in 1999........ 16,656 16,295
Paid-in capital........................................... 342,404 293,435
Retained earnings......................................... 69,704 37,970
Unrealized gain on marketable securities.................. 89 1,179
Cumulative translation adjustment......................... (21,017) (20,786)
Less--treasury stock, at cost: 1 in 2000; 24 in 1999...... (35) (983)
Less--deferred compensation............................... (2,818) (1,861)
---------- ----------
Total stockholders' equity.............................. 404,983 325,249
---------- ----------
Total liabilities and stockholders' equity............ $2,063,290 $1,964,153
========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
YEAR ENDED DECEMBER 31,
---------------------------------
AS RESTATED
---------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income................................................ $ 61,603 $ 28,222 $ 34,267
Adjustments to reconcile net income to net cash provided
by operating activities:
Restructuring and other charges, net of tax............. 9,723 49,487 --
Involuntary conversion of Publicis investment........... -- -- 12,616
Depreciation and amortization........................... 74,003 68,837 55,724
Provision for doubtful accounts......................... 19,700 7,511 3,684
Provision for deferred compensation..................... 6,779 8,515 9,906
Equity in (earnings) loss of affiliated companies....... 28,192 (2,434) (5,427)
Dividends received from affiliated companies............ 889 1,011 328
Income tax benefit related to employee stock options.... 7,526 6,529 2,989
Other non-cash items.................................... 313 (5,251) (17,371)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable................................... 709 (115,484) (65,058)
Other current assets.................................. 4,916 (13,728) 7,072
Accounts payable...................................... 67,109 (14,177) 58,827
Accrued expenses...................................... 6,740 10,583 (41,698)
Deferred income taxes................................. 23,469 1,030 15,531
--------- --------- ---------
Net cash provided by operating activities........... 311,671 30,651 71,390
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment....................... (57,618) (63,056) (41,261)
Acquisitions and investments in businesses................ (111,006) (82,372) (83,508)
Maturities of short-term investments...................... 16,502 -- --
Purchases of short-term investments....................... -- (16,858) --
Proceeds from sales of marketable securities.............. -- 147,313 16,893
Other transactions........................................ -- 1,163 (3,092)
--------- --------- ---------
Net cash used in investing activities............... (152,122) (13,810) (110,968)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Increase (decrease) in short-term bank borrowings......... (74,295) 2,395 22,690
Proceeds from issuance of common stock.................... 20,592 25,333 15,893
Proceeds from issuance of long-term debt.................. -- 28,022 28,780
Payments of long-term debt................................ (8,035) (41,005) (14,281)
Proceeds from initial public offering of subsidiary....... -- 42,048 --
Cash dividends paid....................................... (29,869) (28,671) (26,771)
Payments from purchase of common stock.................... (17,189) (12,888) (7,158)
--------- --------- ---------
Net cash provided by (used for) financing
activities........................................ (108,796) 15,234 19,153
--------- --------- ---------
Effect of exchange rate changes on cash..................... (3,553) (2,495) (175)
--------- --------- ---------
Deconsolidation of subsidiary............................... (29,143) -- --
--------- --------- ---------
Net increase (decrease) in cash............................. 18,057 29,580 (20,600)
CASH, AND CASH EQUIVALENTS, AT BEGINNING OF YEAR............ 118,265 88,685 109,285
--------- --------- ---------
CASH, AND CASH EQUIVALENTS, AT END OF YEAR.................. $ 136,322 $ 118,265 $ 88,685
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION (IN MILLIONS):
Cash paid during the year for:
Interest................................................ $ 12.6 $ 15.0 $ 17.4
Taxes................................................... $ 33.2 $ 53.2 $ 31.5
========= ========= =========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
(IN 000'S)
UNREALIZED
CUMULATIVE GAIN ON TOTAL
COMMON PAID-IN RETAINED TREASURY DEFERRED TRANSLATION MARKETABLE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK COMP. ADJUSTMENT SECURITIES EQUITY
-------- -------- -------- -------- -------- ----------- ---------- -------------
BALANCE AT DECEMBER 31, 1997 AS
PREVIOUSLY REPORTED............ $15,132 $207,645 $70,006 $(5,155) $ (150) $(14,621) $ -- $272,857
Cumulative effect of change in
accounting.................. -- -- (39,083) -- -- 992 -- (38,091)
-------- -------- -------- ------- ------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997, AS
RESTATED....................... 15,132 207,645 30,923 (5,155) (150) (13,629) -- 234,766
-------- -------- -------- ------- ------- -------- -------- --------
Comprehensive Income:
Net income................ -- -- 34,267 -- -- -- -- 34,267
Currency translation...... -- -- -- -- -- 668 -- 668
Change in unrealized gain
on marketable
securities.............. -- -- -- -- -- -- 5,102 5,102
--------
Total comprehensive
income................ 40,037
Dividends................... -- -- (26,771) -- -- -- -- (26,771)
Common stock issuances...... 347 24,254 -- 7,163 -- -- -- 31,764
Common stock purchases...... -- -- -- (7,158) -- -- -- (7,158)
Other....................... -- -- -- -- 150 -- -- 150
-------- -------- -------- ------- ------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998, AS
RESTATED....................... 15,479 231,899 38,419 (5,150) -- (12,961) 5,102 272,788
-------- -------- -------- ------- ------- -------- -------- --------
Comprehensive Income:
Net income................ -- -- 28,222 -- -- -- -- 28,222
Currency translation...... -- -- -- -- -- (7,825) -- (7,825)
Change in unrealized gain
on marketable
securities.............. -- -- -- -- -- -- (3,923) (3,923)
--------
Total comprehensive
income................ 16,474
Dividends................... -- -- (28,671) -- -- -- -- (28,671)
Common stock issuances...... 816 58,898 -- 17,055 -- -- -- 76,769
Common stock purchases...... -- -- -- (12,888) -- -- -- (12,888)
Gain on issuance of
subsidiary stock.......... -- 2,638 -- -- -- -- -- 2,638
Other....................... -- -- -- -- (1,861) -- -- (1,861)
-------- -------- -------- ------- ------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999, AS
RESTATED....................... 16,295 293,435 37,970 (983) (1,861) (20,786) 1,179 325,249
-------- -------- -------- ------- ------- -------- -------- --------
Comprehensive Income:
Net income................ -- -- 61,603 -- -- -- -- 61,603
Currency translation...... -- -- -- -- -- (231) -- (231)
Change in unrealized gain
on marketable
securities.............. -- -- -- -- -- -- (1,090) (1,090)
--------
Total comprehensive
income................ 60,282
Dividends................... -- -- (29,869) -- -- -- -- (29,869)
Common stock issuances...... 361 42,831 -- 18,137 -- -- -- 61,329
Common stock purchases...... -- -- -- (17,189) -- -- -- (17,189)
Gain on issuance of
subsidiary stock.......... -- 6,138 -- -- -- -- -- 6,138
Other....................... -- -- -- -- (957) -- -- (957)
-------- -------- -------- ------- ------- -------- -------- --------
BALANCE AT DECEMBER 31, 2000.... $16,656 $342,404 $69,704 $ (35) $(2,818) $(21,017) $ 89 $404,983
======== ======== ======== ======= ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS--True North has three major global brands: FCB
Worldwide L.L.C., (advertising), BSMG Worldwide, Inc. (public relations), and
Marketing Drive Worldwide, Inc. (marketing services). In addition, True North
has other brands including Bozell Group L.L.C. (advertising), Temerlin McClain
LP (advertising), R/GA Media Group, Inc. (interactive design and development),
Tierney & Partners, Inc. (advertising and public relations), TN Media, Inc.
(media placement), and New America Strategies Group L.L.C. (multicultural
marketing). True North also holds an approximately 44% interest in Modem
Media, Inc., an internet services company, and a 35.5% stake in Springer &
Jacoby, a German-based advertising agency.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of True North and its wholly owned and majority-owned subsidiaries.
All significant intercompany transactions and balances have been eliminated.
True North uses the equity method of accounting to record its investments in 20
percent to 49 percent owned affiliated companies.
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
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION--Revenues are generally derived from commissions and
fees for the production of advertising, placement of such advertisements in
various media and the performance of services. Commission revenues are generated
primarily from media and production expenditures and are recognized when the
media placements appear and services related to production costs have been
performed. Fee arrangements for advertising services, public relations, sales
promotion and other services are recognized when the services are provided in
accordance with the terms of the specific contractual arrangements.
CASH EQUIVALENTS AND INVESTMENTS--Cash equivalents are highly liquid
investments, including certificates of deposit, government securities and time
deposits, with maturities of three months or less at the time of purchase and
are stated at estimated fair value or cost. Short-term investments are similar
investments with maturities of more than three months but less than one year
from the date of purchase.
True North has classified all its marketable equity securities as available
for sale and they are carried at fair value with unrealized gains and losses
reported as a separate component of comprehensive income.
FOREIGN CURRENCY TRANSLATION--The financial statements of True North's
foreign operations, where the local currency is the functional currency, are
translated into U.S. dollars at the exchange rates in effect at each year-end
for assets and liabilities and at the average exchange rates during the year for
the results of operations. The related unrealized gains or losses resulting from
translation are reported as a separate component of comprehensive income.
PROPERTY AND DEPRECIATION--The cost of property and equipment is depreciated
generally using the straight-line method over the estimated useful lives of the
related assets, which range from 3 to 10 years for furniture and equipment.
Leasehold improvements are capitalized and amortized over the shorter of the
life of the asset or the lease term.
INTANGIBLE ASSETS--Intangible assets resulting from acquisitions,
principally goodwill, are amortized using the straight-line method over periods
not exceeding 20 years. Amortization of intangible assets included in operating
expenses amounted to $31.8 million, $29.1 million and $22.9 million for the
years ended December 31, 2000, 1999, and 1998, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRMENT OF LONG-LIVED ASSETS--Long-lived assets, consisting primarily of
property and equipment and intangible assets arising from business purchase
combinations, are reviewed for impairment whenever events or circumstances
indicate their carrying value may not be recoverable. When such events or
circumstances arise, an estimate of the future undiscounted cash flows produced
by the asset, or the appropriate grouping of assets, is compared to the asset's
carrying value to determine if an impairment exists pursuant to the requirements
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." If the asset(s) is determined to be
impaired, the impairment loss is measured based on the excess of its carrying
value over its fair value. Assets to be disposed of are reported at the lower of
its carrying value or net realizable value.
INCOME TAXES--Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences of temporary differences between the financial statement
carrying amounts and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the year in which the temporary differences are expected to be
recovered or settled.
Income taxes are generally not provided on undistributed earnings of foreign
subsidiaries because these earnings are considered to be permanently invested or
will not be repatriated unless any additional federal income taxes would be
substantially offset by foreign tax credits.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
short-term bank borrowings, and accrued expenses approximate fair value because
of the short maturity of those instruments. True North estimates that as of
December 31, 2000, the fair value of its long-term debt is not materially
different from its financial statement carrying value. The fair value of
long-term debt was estimated using quoted market prices or discounted future
cash flows.
EARNINGS PER SHARE--Basic earnings per share are computed using the weighted
average number of common shares outstanding during the year. Diluted earnings
per share are also computed using the weighted average number of common shares
outstanding during the year but also include the dilutive effect of outstanding
option grants under True North's stock option plans.
DERIVATIVE INSTRUMENTS--In June 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or a liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No. 133 was to be
effective for fiscal years beginning after June 15, 1999. In June 1999, the FASB
issued SFAS No. 137, which delayed the effective date of SFAS No. 133 by one
year. In June 2000, the FASB issued SFAS No. 138, which amends the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments and
hedging activities. Management currently believes that the implementation of
SFAS No. 138 and 133, effective January 1, 2001, will not have a material impact
on True North's results of operations or financial condition.
True North infrequently enters into foreign exchange forward contracts to
manage market risk associated with foreign exchange volatility relating
primarily to certain intercompany transactions. The notional value and fair
value of all outstanding contracts at the end of each year and the estimated
cost to settle these contracts during each year were not significant.
PRESENTATION--Certain prior-period amounts have been reclassified to conform
with the current year presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. RESTATEMENT OF FINANCIAL STATEMENTS
Prior to 2000, True North had generally used a 40-year life for the
amortization of all intangible assets arising from purchase business
combinations. This was consistent with True North's view that intangible assets
relating to True North's acquisitions had useful lives of at least 40 years.
Based on discussions with the Securities and Exchange Commission, True North
concluded that it would adopt amortization periods not exceeding 20 years for
intangible assets arising from prior acquisitions and equity method investments
and that the appropriate accounting for intangibles arising from acquisitions
subsequent to December 31, 2000 would be determined on a case-by-case basis
based upon appraised values and lives. Accordingly, True North's financial
statements for all periods prior to December 31, 2000, have been restated from
those previously issued to give retroactive effect to this accounting change.
The restatement reduced net income by $12.1 million ($0.24 per diluted share) in
2000, reduced net income by $10.6 million ($0.22 per diluted share) in 1999 and
increased net income by $7.0 million ($0.15 per diluted share) in 1998.
A summary of the effects of this change in accounting on the consolidated
statements of income for the years ended December 31, 1999 and 1998 is as
follows (in thousands, except per share amounts):
1999
---------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Commissions and Fees........................................ $1,439,414 $1,439,414
---------- ----------
Operating Expenses:
Salaries and benefits..................................... 871,433 871,433
Office and general........................................ 409,238 421,733
Restructuring and other charges........................... 76,400 75,354
---------- ----------
Total operating expenses................................ 1,357,071 1,368,520
---------- ----------
Operating Income............................................ 82,343 70,894
---------- ----------
Operating Income (Expense):
Interest income........................................... 7,300 7,300
Interest expense.......................................... (18,128) (18,128)
Gains on sale of marketable securities and other.......... 11,172 11,172
---------- ----------
Total other income (expense)............................ 344 344
---------- ----------
Income Before Taxes, Minority Interest and Equity Income.... 82,687 71,238
Provision for income taxes................................ 42,206 41,289
---------- ----------
Income Before Minority Interest and Equity Income........... 40,481 29,949
Minority interest expense................................. (4,161) (4,161)
Equity in earnings of affiliated companies................ 2,470 2,434
---------- ----------
Net Income.................................................. $ 38,790 $ 28,222
========== ==========
Per Share Information:
Basic earnings per share.................................. $ 0.82 $ 0.60
Diluted earnings per share................................ $ 0.81 $ 0.59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998
---------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Commissions and Fees........................................ $1,274,284 $1,274,284
---------- ----------
Operating Expenses:
Salaries and benefits..................................... 806,602 806,602
Office and general........................................ 354,345 364,524
Restructuring and other charges........................... 3,278 3,278
---------- ----------
Total operating expenses................................ 1,164,225 1,174,404
---------- ----------
Operating Income............................................ 110,059 99,880
---------- ----------
Operating Income (Expense):
Interest income........................................... 6,118 6,118
Interest expense.......................................... (22,242) (22,242)
Loss on involuntary conversion of affiliate investment.... (30,532) (12,616)
Gains on sale of marketable securities and other.......... 17,532 17,810
---------- ----------
Total other income (expense)............................ (29,124) (10,930)
---------- ----------
Income Before Taxes, Minority Interest and Equity Income.... 80,935 88,950
Provision for income taxes................................ 56,788 56,066
---------- ----------
Income Before Minority Interest and Equity Income........... 24,147 32,884
Minority interest expense................................. (4,044) (4,044)
Equity in earnings of affiliated companies................ 7,158 5,427
---------- ----------
Net Income.................................................. $ 27,261 $ 34,267
========== ==========
Per Share Information:
Basic earnings per share.................................. $ 0.60 $ 0.75
Diluted earnings per share................................ $ 0.57 $ 0.72
A summary of the effects of this change in accounting on the consolidated
balance sheet at December 31, 1999 is as follows (in thousands):
DECEMBER 31, 1999
---------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Goodwill, net........................... $ 487,787 $ 443,956
Other assets............................ 80,882 83,145
Total assets............................ 2,005,280 1,964,153
Retained earnings....................... 80,615 37,970
Cumulative translation adjustment....... (22,304) (20,786)
Total stockholders' equity.............. 366,376 325,249
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS
The cost of businesses acquired by True North in transactions accounted for
as purchases aggregated $121.4 million in 2000, including 0.4 million shares of
common stock, and $86.5 million in 1999, including 0.5 million shares of common
stock. The excess of the purchase price over the fair value of net identifiable
assets acquired was approximately $110.1 million and $84.2 million,
respectively, and is being amortized over periods not exceeding 20 years.
Unaudited pro forma financial information, assuming the 2000 acquisitions had
been completed on January 1, 1999, is as follows: revenues of approximately
$1,628.7 million and net income of approximately $66.6 million in 2000 and
revenues of approximately $1,541.6 million and net income of approximately $33.2
million in 1999.
In February 1999, True North issued approximately 1.2 million shares of its
common stock for all the outstanding capital stock of FRB, a Chicago-based
investor relations firm. This acquisition has been accounted for as a pooling of
interests and, accordingly, the consolidated financial statements were restated
for all periods prior to the acquisition. Included in the 1998 results of FRB
are approximately $7.5 million of merger-related costs and other expense
adjustments, consisting primarily of employee compensation-related expenses and
pension costs.
4. RESTRUCTURING AND OTHER CHARGES
In September 2000, Chrysler, True North's largest account, announced that it
was undertaking a review of its two advertising agencies to reduce the costs of
its global advertising and media. Chrysler represented approximately $136
million, or approximately 9%, of True North's consolidated revenues. On November
3, 2000, True North was informed that it was not selected as the agency of
record. In December 2000, True North terminated its existing contract with
Chrysler and entered into a transition agreement effective January 1, 2001.
As a result of the loss of the Chrysler account, True North recorded a $17.5
million pre-tax charge ($10.0 million after-tax or $0.20 per diluted share) in
the fourth quarter of 2000. The charge covers primarily severance, lease
termination and other exit costs associated with the decision to close the
Detroit office. The severance portion of the charge amounts to $5.8 million and
reflects the elimination of approximately 250 positions. The charge also
includes $11.4 million associated primarily with the lease termination of the
Detroit office, as well as other exit costs. In addition, an impairment loss of
$5.5 million was recorded for intangible assets that are no longer recoverable.
Offsetting these charges was a $5.2 million payment from Chrysler to compensate
True North for severance and other exit costs. At December 31, 2000, 5 people
had been terminated and $0.3 million of severance and other exit costs had been
paid.
In September 1999, management of True North committed to a formal plan to
restructure its operations and recorded a $75.4 million pre-tax charge ($49.5
million after-tax, or $1.03 per diluted share) in the third quarter of 1999. The
charge covered primarily severance, lease termination and other exit costs in
connection with the combination and integration of True North's two independent
worldwide advertising agency networks. Bozell Worldwide's international
operations, along with Bozell Detroit and Bozell Costa Mesa, were merged with
FCB Worldwide and now operate under the FCB Worldwide name. The restructuring
initiatives also included the sale or closing of certain underperforming
business units.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The restructuring program was completed during the third quarter of 2000. A
summary of components of the restructuring charge is as follows (in millions):
SEVERANCE AND LEASE
TERMINATION TERMINATION AND IMPAIRMENT
BENEFITS OTHER EXIT COSTS LOSS TOTAL
------------- ---------------- ---------- --------
Restructuring reserve, September 30, 1999...... $ 41.4 $24.2 $ 9.8 $ 75.4
1999 Write-downs........................... -- (0.9) (9.8) (10.7)
1999 Cash payments......................... (9.7) (3.2) -- (12.9)
------ ----- ----- ------
Balance, December 31, 1999..................... 31.7 20.1 -- 51.8
2000 Write-downs........................... -- (4.3) -- (4.3)
2000 Cash payments......................... (22.5) (9.5) -- (32.0)
Long-term obligations secured.............. (9.6) (5.3) -- (14.9)
Excess reserve (net)....................... 0.4 (1.0) -- (0.6)
------ ----- ----- ------
Balance, December 31, 2000..................... $ -- $ -- $ -- $ --
------ ----- ----- ------
The involuntary severance and termination benefits portion of the charge
amounted to $41.4 million and reflected the elimination of approximately 640
positions worldwide, primarily in international locations. The employee groups
affected primarily included executive and regional management and administrative
personnel. As of September 30, 2000, such positions were eliminated at a cost of
$41.8 million, which was $0.4 million higher than the original estimate.
The charge of $24.2 million associated with lease terminations and other
exit costs represented primarily the closure, abandonment and downsizing of
office space globally, including approximately 30 international locations. The
costs included $13.5 million of remaining lease obligations net of estimated
sublease income, as well as $5.9 million of impairment charges pertaining to
leasehold improvements and fixed assets that were no longer used in the combined
operation. As of September 30, 2000, these facilities were abandoned or
downsized at a cost of $23.2 million, which was $1.0 million lower than the
original estimate.
Accordingly, the net excess restructuring reserve of $0.6 million was
reversed into income on the restructuring and other charges line in the third
quarter of 2000. The remaining severance liabilities of $9.6 million pertain to
terminated individuals and will be paid over the next four years in accordance
with contractually defined severance agreements. The remaining lease liabilities
and other exit costs of $5.3 million pertain to non-cancelable lease commitments
in excess of sublease income for exited facilities that will be paid out over
the remaining lease periods, which range from one to five years.
The impairment loss on the sale or closing of certain business units amounts
to $9.8 million and resulted from the decision to sell two business units, one
in the U.S. and one in the United Kingdom, and to close four other business
units and joint ventures, including the R/GA Digital Studios, which specialized
in digital production for advertising and film companies. The impairment loss
was computed based upon the difference between the estimated sales proceeds (if
any) and the carrying value of the related assets and investments and primarily
represents the impairment of goodwill associated with such units. These sales or
closures were completed by September 30, 2000.
During the third quarter of 1998, True North reorganized its Poppe Tyson
subsidiary prior to its merger with Modem Media into Modem Media. Poppe Tyson,
Inc. The impact of the reorganization was a charge of $4.3 million. These costs
included severance, the write-down of computer equipment that was not being used
in the ongoing operations to net realizable value, and the costs to buy out
minority shareholders.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. SHORT-TERM BANK BORROWINGS AND LONG-TERM DEBT
Short-term bank borrowings consist principally of amounts borrowed under
domestic and international bank overdraft facilities, lines of credit and
multicurrency credit arrangements. Average aggregate short-term borrowings were
$130.2 million in 2000 and $186.1 million in 1999, and the maximum amounts
outstanding at month-end were $179.5 million in 2000 and $332.0 million in 1999.
The weighted average interest rates for short-term borrowings were 6.5%, 5.5%
and 6.1% in 2000, 1999 and 1998, respectively.
On May 29, 1998, True North established a revolving credit facility,
totaling $250.0 million, with eight banks. This facility has two parts: a $175.0
million five-year revolving-credit agreement and a $75.0 million 364-day
revolving-credit facility. True North may borrow under these agreements at a
Eurodollar rate plus a spread, a base reference rate, or a competitive bid. In
addition, True North is required to pay a facility fee ranging from 0.1% to
0.2%, depending upon True North's financial performance. While True North
borrowed under the $175.0 million five-year revolving-credit agreement during
2000, there was no outstanding balance as of December 31, 2000.
On May 26, 2000, True North extended its 364-day credit agreement for up to
$75.0 million of borrowings as part of its $250.0 million revolving credit
facility. The terms of the extension include the payment of a commitment fee to
the bank of 0.04%. As of December 31, 2000, there was no outstanding balance
under the 364-day credit agreement.
As of December 31, 2000 and 1999, long-term debt consisted of (in millions):
2000 1999
-------- --------
Three-year term loan.......................... $25.0 $25.0
Obligations under capitalized leases.......... 0.5 2.3
Demand notes payable.......................... 2.8 5.0
Three-year Deutsche Mark term loan............ 8.6 10.4
Other notes and obligations................... 1.5 2.9
----- -----
38.4 45.6
Less: Current portions........................ (11.7) (9.0)
----- -----
Total long-term debt.......................... $26.7 $36.6
===== =====
Scheduled maturities of long-term debt are $11.7 million, $25.2 million and
$1.5 million in 2001, 2002 and 2003, respectively.
In May 1999, True North obtained two three-year term loans totaling $25.0
million, which refinanced similar loans expiring on May 24, 1999. A $15.0
million loan carries a fixed interest rate of 6.52%, and a $10.0 million loan
carries a fixed rate of 6.785%.
The terms of the obligations under capitalized leases provide for payment of
principal and interest in annual installments, with the final purchase payments
due on various dates through December 2004. The leases were for the acquisition
of equipment.
The demand notes payable were issued during 1999 and 1998 to the former
owners of foreign businesses that True North had acquired. These notes, which
are payable on demand, have final maturity dates in 2009 and carry interest
rates of 5.5% to 6%.
During 1998 True North entered into a three-year term loan with a bank
totaling 21.5 million Deutsche Marks to finance an acquisition. The loan calls
for six semi-annual payments through October 2001. The interest rate is fixed at
5.03%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to these agreements, True North had available at various banks
uncommitted lines of credit aggregating approximately $203.6 million as of
December 31, 2000, of which $158.1 million was unused. These other lines of
credit are subject to annual renewal and may be withdrawn at the option of the
various banks. There are no commitment fees or compensating balance requirements
under these arrangements. Interest rates are negotiated at the time of each
borrowing.
The revolving credit facility and certain other debt agreements contain
various restrictive covenants and conditions which include, but are not limited
to, the following: True North must maintain a minimum net worth of $175.0
million, a debt leverage ratio of no greater than 3.5:1, and a fixed-charge
coverage ratio of at least 1.5:1.
As of December 31, 2000, True North was in compliance with all covenants and
conditions related to these agreements.
6. CONTINGENCIES
As previously disclosed, on December 2, 1997, Mazda Motor of America, Inc.
(Mazda), a former client of True North's subsidiary, Foote, Cone & Belding
Advertising, Inc. (FCB), initiated an arbitration against FCB before the
American Arbitration Association in Los Angeles, California. Mazda sought
indemnity and reimbursement for liabilities it incurred or expected to incur in
connection with automobile lease advertising that aired in 1996 and 1997.
Mazda's sought to recover from FCB approximately $9.0 million in damages,
exclusive of interest, costs and attorneys' fees. FCB denied liability for these
claims, and filed a counterclaim in the arbitration seeking approximately $5.5
million from Mazda in unpaid commissions for planning and placing advertising
during the final months of FCB's relationship with Mazda. On March 14, 2001,
Mazda and FCB entered into a settlement agreement resolving all claims and
counterclaims asserted in the arbitration; the liability associated with the
settlement agreement did not have a material impact on True North's consolidated
results of operations or financial position.
True North is a party to several other lawsuits incidental to its business.
It is not possible at the present time to estimate the ultimate liability, if
any, of True North with respect to such litigation; however, management believes
that any ultimate liability will not be material in relation to True North's
consolidated results of operations or financial position.
7. INVESTMENT IN AFFILIATED COMPANIES
In September 2000, True North acquired a 35.5% interest in Springer &
Jacoby, a German-based advertising group, for total consideration of $25.9
million. The consideration consisted of an initial cash payment of $16.9 million
and a put option valued at $9.0 million. Pursuant to the purchase agreement, the
two largest shareholders of Springer & Jacoby have the right to sell all of
their shares (put option) to True North in January 2003 at a fixed price of 53.0
million Deutsche marks. The additional shares to be purchased in January 2003
pursuant to the put option represent 15.5% of the outstanding shares of Springer
& Jacoby. True North has recorded the fair value of this put option as a $10.6
million liability at December 31, 2000. True North has entered into forward
exchange contracts to purchase 53.0 million Deutsche Marks in January 2003 at a
value of $23.2 million. The fair value of the forward exchange contract was
recorded as an asset of $2.3 million at December 31, 2000. Changes in the fair
value of the put option liability and the forward exchange contracts are
reflected as components of pre-tax earnings.
Effective February 10, 1999, a majority-owned subsidiary of True North,
Modem Media. Poppe Tyson, Inc. (now known as Modem Media, Inc.), completed an
initial public offering (IPO) of its common stock. The number of shares issued
was 3.0 million, at a price of $16 per share, with net proceeds totaling $42.0
million. As a result of the IPO, True North owned approximately 48% of Modem
Media, down from its previous 70% ownership, but controlled approximately 80% of
the related stockholder votes due to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
super-majority voting rights on its Class B shares. Modem Media used the
proceeds from the IPO for working capital, capital expenditures, and
acquisitions. As a result of this transaction, True North recorded a $2.6
million gain, net of $2.0 million of deferred income taxes, as a credit to
stockholders' equity.
In April 2000, True North converted all of its shares of Modem Media Class B
common stock into Class A common stock pursuant to a Stockholders' Agreement
with Modem Media. As a result, True North's voting power was reduced from
approximately 80% to approximately 46%. Accordingly, effective with the second
quarter of 2000, Modem Media is no longer consolidated in True North's financial
statements and is accounted for on the equity method.
In February 2000, Modem Media acquired 100% of the outstanding capital stock
of Vivid Holdings, Inc. and its majority-owned subsidiary, Vivid Publishing,
Inc. (Vivid) for approximately $63.6 million. The consideration was comprised of
approximately $10.2 million in cash, approximately $14.4 million in Modem Media
common stock and approximately $39.0 million in value related to employee stock
options that were converted to Modem Media stock options. The acquisition has
been accounted for under the purchase method of accounting. The allocation of
the excess of purchase price over the fair value of net assets acquired of
approximately $63.8 million is being amortized over a five-year period. As a
result of this transaction, True North recorded a $6.1 million gain, net of $4.6
million of deferred income taxes, as a credit to stockholders' equity.
Modem Media concluded that, as of December 31, 2000, the goodwill remaining
from the Vivid acquisition, totaling $52.8 million, was fully impaired and could
not be recovered from expected future cash flows. As a result, True North
recorded its equity share of the charge ($23.2 million) in the fourth quarter of
2000.
At December 31, 2000, True North's carrying value of its investment in Modem
Media was $32.8 million and the market value was $36.8 million. Summarized
financial information for Modem Media at December 31, 2000, includes current
assets of $81.7 million, noncurrent assets of $79.8 million, current liabilities
of $50.3 million, noncurrent liabilities of $6.9 million, stockholders' equity
of $104.3 million, total revenues of $134.3 million, pre-tax loss of $72.0
million and net loss of $74.2 million.
On November 6, 1998, Publicis S.A. announced its intention to convert True
North's 26.5% investment in Publicis Communication to approximately 0.8 million
of its publicly traded shares. Despite True North's objections, this transaction
was approved by the shareholders of Publicis S.A. and Publicis Communication in
special shareholders' meetings held in December 1998 and closed shortly
thereafter. As a result, True North owned approximately 8.8% of Publicis S.A.,
which was recorded as an "available-for-sale security" in marketable securities.
The book value of True North's 26.5% investment in Publicis Communication at
the date of conversion was $146.6 million. The fair value of the Publicis S.A.
shares (based on a December 14, 1998, closing price of $169.15 per share) was
$134.0 million. Accordingly, True North recorded a pre-tax loss of $12.6 million
in the fourth quarter of 1998 as a result of the involuntary conversion of its
investment in Publicis Communication to shares of Publicis S.A. In addition,
True North recorded a deferred tax obligation of approximately $3.2 million upon
the exchange. As a result, the after-tax impact of this transaction was a loss
of approximately $15.8 million.
On June 14, 1999, True North sold its entire investment in Publicis S.A. for
net cash proceeds of $135.3 million and realized a pre-tax gain of $1.3 million
($0.8 million after taxes or $0.02 per share).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK-BASED COMPENSATION PLANS
True North has established various stock option plans for directors,
officers and other key employees. These plans provide for the issuance of
options to purchase common shares at fair market value on the date of grant.
Options vest generally over three or five years and expire after ten years. As
of December 31, 2000, a total of approximately 2.6 million shares had been
reserved for future grants under these plans.
True North accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for stock options
awarded under these plans been determined consistent with the election under
FASB Statement No. 123, True North's net income and earnings per share would
have been reduced to the following pro forma amounts (in millions, except per
share amounts):
2000 1999 1998
-------- -------- --------
Net income
As reported..................... $61.6 $28.2 $34.3
Pro forma....................... 55.0 21.6 29.7
----- ----- -----
Basic EPS:
As reported..................... 1.24 0.60 0.75
Pro forma....................... 1.11 0.46 0.65
----- ----- -----
Diluted EPS:
As reported..................... 1.21 0.59 0.72
Pro forma....................... 1.08 0.45 0.62
----- ----- -----
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
A summary of the status of True North's stock option plans as of December
31, 2000, 1999 and 1998, and changes made during the years then ended is
presented in the following table and narrative (shares in thousands):
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year.............. 6,173.8 $21.92 6,926.2 $20.47 4,334.9 $15.08
Granted....................................... 1,827.5 37.81 1,781.6 24.62 3,180.0 26.93
Exercised..................................... (1,035.7) 21.63 (1,743.8) 18.43 (472.9) 14.41
Forfeited..................................... (454.2) 28.50 (790.2) 23.04 (115.8) 21.65
-------- ------ -------- ------ ------- ------
Outstanding at end of year.................... 6,511.4 $25.95 6,173.8 $21.92 6,926.2 $20.47
-------- ------ -------- ------ ------- ------
Exercisable at end of year.................... 3,359.6 $20.62 3,238.5 $19.65 2,835.5 $13.77
-------- ------ -------- ------ ------- ------
Weighted average fair value of options
granted..................................... $16.81 $ 8.86 $ 9.92
------ ------ ------
Of the 6,511.4 options outstanding as of December 31, 2000: 627 have
exercise prices between $3.78 and $5.05, with a weighted average exercise price
of $4.45 and a weighted average remaining contract life of 2.72 years, 653 of
these options are exercisable; 510.9 options have exercise prices between $10.19
and $19.31, with a weighted average price of $17.85 and a weighted average
remaining contract life of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.04 years, 454 of these options are exercisable; 1,864.2 options have exercise
prices between $20.00 and $24.99, with a weighted average price of $23.16 and a
weighted average remaining contract life of 7.42 years, 873 of these options are
exercisable; 1,803.8 options have exercise prices between $25.31 and $36.38,
with a weighted average price of $27.36 and a weighted average remaining
contract life of 7.26 years, 1,299.4 of these options are exercisable; 1,478
options have exercise prices between $37.00 and $42.16, with a weighted average
price of $37.12 and a weighted average remaining contract life of 9.00 years,
73.6 of these options are exercisable; the remaining 200.5 options have exercise
prices between $42.88 and $46.38, with a weighted average exercise price of
$44.46 and a weighted average contract life of 9.18 years, 6.7 of these options
are exercisable.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for 2000, 1999, and 1998, respectively: risk-free interest
rates of 6.38%, 5.39%, and 5.92%; expected dividend yields of 1.59%, 2.46%, and
2.21%; expected life of 10 years; and expected volatility of 30.8%, 29.7%, and
27.1%.
Effective in 1998, True North initiated a Restricted Stock Program for
certain key employees whereby participants of the program can elect or are
required to exchange 30% of their executive cash incentive compensation for 115%
of such cash compensation payable in restricted stock of True North. One-third
of the shares vest upon grant and the remaining shares vest equally over the
next two years.
For the year ended December 31, 2000, 0.2 million shares of restricted stock
were issued. The shares issued under this plan were recorded at their market
value on date of grant with a corresponding charge to stockholder's equity for
the unearned portion. The unearned portion is being amortized as compensation
expense on a straight-line basis over the vesting period.
9. SHAREHOLDERS' RIGHTS PLAN
True North adopted a Shareholders' Rights Plan in November 1998 to replace
its former plan which expired by its terms. The rights plan, which was amended
in 1999, is designed to protect shareholders from unfair or coercive takeover
practices. Under this plan, one preferred stock purchase right exists for each
outstanding share of common stock. The rights, which expire in November 2008,
are exercisable only if a person or group (excluding True North) acquires 15% or
more of True North's common stock or announces a tender offer which would result
in ownership of 15% or more of True North's common stock. Each right entitles
the holder to purchase 1/2000 of a share of Series B Junior Participating
Preferred Stock ("preferred stock") of True North at a purchase price of
$100.00, subject to adjustment under certain conditions. As of December 31,
2000, 45,000 shares of True North's unissued preferred stock were reserved for
issuance upon exercise of these rights.
Subject to certain conditions and limitations, in the event that True North
is acquired by a person or group, these rights (which have not otherwise been
exercised to acquire True North's preferred stock) entitle the holder to acquire
the common stock of the surviving entity at approximately 50% of fair market
value. The Shareholders' Rights Plan has been amended so that the execution and
delivery of (i) the Agreement and Plan of Merger among The Interpublic Group of
Companies, Inc., Veritas Acquisition Corp. and True North dated as of March 18,
2001 (Merger Agreement), (ii) the proposed merger and (iii) any other
transactions contemplated by the Merger Agreement will not cause the rights to
become exercisable under the plan. In the merger, each right along with the
share of common stock with which it is associated will be converted into common
stock of The Interpublic Group of Companies, Inc. and, when so converted, shall
no longer be outstanding and shall be automatically cancelled and retired.
The Board of Directors has the flexibility to (i) redeem outstanding rights
at a rate of $.01 per right and (ii) adjust the thresholds at which these rights
become exercisable. However, True North has agreed not to redeem the rights or
amend or grant any waiver or release or approve any transaction under the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rights plan, except as otherwise contemplated by the Merger Agreement with
respect to the proposed merger.
10. SEGMENT REPORTING
True North's businesses provide advertising and related communications
services to clients throughout the world on a collaborative basis. Typically,
True North's multiple agency networks service a particular client's needs, and a
significant percentage of costs incurred by the agencies are attributable to
other business units, particularly media placement. Financial resources are
allocated based upon need rather than financial performance of a particular
agency brand, and the businesses share similar economic characteristics,
clients, services and methods of delivering those services. As a result, True
North operates in one business segment. Information about True North's
operations in different geographic areas for 2000, 1999 and 1998 is as follows
(in millions):
2000 1999 1998
-------- -------- --------
Revenues:
U.S.......................................... $1,170.3 $1,064.0 $ 931.6
International................................ 386.5 375.4 342.7
-------- -------- --------
$1,556.8 $1,439.4 $1,274.3
-------- -------- --------
Long-Lived Assets:
U.S.......................................... $ 401.9 $ 366.2 $ 261.3
International................................ 315.3 267.4 270.1
-------- -------- --------
$ 717.2 $ 633.6 $ 531.4
-------- -------- --------
11. RETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
True North and participating U.S. subsidiaries have a 401(k) and profit
sharing plan covering certain eligible employees. The plan allows participants
to make pre-tax contributions and True North matches up to 4% of the employee's
covered compensation, subject to the limits deductible under the Internal
Revenue Code. The profit sharing portion of the plan is discretionary and
noncontributory. The combined 401(k) and profit sharing plan expenses were $18.9
million in 2000, $15.4 million in 1999, and $15.6 million in 1998.
True North has entered into agreements whereby certain employee directors
and other employees are or will be eligible for part-time employment, consulting
and/or deferred compensation upon retirement from full-time employment. The
provisions for these agreements, which are charged to income over the employment
period of these individuals, were $5.9 million in 2000, $13.3 million in 1999,
and $12.9 million in 1998.
True North provides limited post-retirement medical and life insurance
benefits to employees who retire after age 55 with at least ten years of
service. Prior to January 1, 1993, True North accounted for such benefits on the
cash basis. In 1993, the company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions," on a
prospective basis. Under this method, True North is amortizing the actuarial
present value of the accumulated post-retirement benefit obligation as of
January 1, 1993, over a twenty-year period. In addition, True North provides for
current-year service costs, interest costs and actuarially determined plan gains
and losses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of expense for these post-retirement benefits for 2000, 1999,
and 1998 are as follows (in millions):
2000 1999 1998
-------- -------- --------
Service cost-benefits earned during the year...... $0.4 $0.6 $0.6
Interest cost on accumulated
post-retirement benefit obligation............. 0.6 0.6 0.6
Net amortization and deferral..................... 0.1 0.2 0.3
---- ---- ----
$1.1 $1.4 $1.5
==== ==== ====
The following table sets forth the funded status and amounts recognized for
True North's post-retirement benefit plans in its consolidated balance sheet as
of December 31, 2000 and 1999 (in millions):
2000 1999
-------- --------
Accumulated post-retirement benefit obligation
Retirees.................................................. $3.5 $3.0
Fully eligible active participants........................ 1.4 1.0
Other active plan participants............................ 3.0 3.0
---- ----
Total accumulated post-retirement benefit obligation........ 7.9 7.0
Plan assets at fair value................................... -- --
---- ----
Accumulated post-retirement benefit obligation in excess of
plan assets................................................ 7.9 7.0
Unrecognized net transition obligation...................... (1.8) (2.0)
Unrecognized prior service costs............................ -- --
Unrecognized net gain....................................... 0.8 1.2
---- ----
Accrued post-retirement benefit cost........................ $6.9 $6.2
==== ====
Discount rates of 7.8%, 6.8%, and 7.3% were used in 2000, 1999 and 1998,
respectively. The rates of increase in covered medical benefits used to
determine accumulated post-retirement benefits were 7.5% in 2000, 8.0% in 1999,
and 8.5% in 1998. This rate is assumed to decrease by 0.5% per annum to 6% in
2003 and remain constant thereafter. The medical benefits cost trend rate
assumption does not have a significant effect on the amounts reported. For
example, a 1% change in the medical benefits cost trend rate would change the
accumulated post-retirement benefit obligation as of December 31, 2000, by $0.1
million and the 2000 cost would change an immaterial amount.
True North has deferred compensation plans which permit certain of its key
officers and employees to defer a portion of their salary and incentive
compensation and receive corresponding True North matching and discretionary
profit sharing contributions. True North has purchased whole life insurance
policies on participants' lives to assist in the funding of the deferred
compensation liability. As of December 31, 2000, the cash surrender value of
these policies was $23.0 million. True North's obligation under the plans,
including accumulated interest, was $30.0 million as of December 31, 2000, and
is included in Other Noncurrent Liabilities in the Consolidated Balance Sheets.
12. LEASE OBLIGATIONS
True North leases substantially all of its office facilities under operating
leases. Net rental expense on these leases was $87.7 million in 2000, $84.3
million in 1999 and $80.0 million in 1998, after deducting sublease income of
$20.1 million, $16.3 million, and $19.0 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2000, the future minimum rental obligations for these
leases (net of sublease income of approximately $90.4 million) is as follows (in
millions):
YEAR AMOUNT
---- --------
2001........................................................ $ 83.9
2002........................................................ 82.2
2003........................................................ 76.3
2004........................................................ 72.8
2005........................................................ 54.0
Thereafter.................................................. 326.1
13. INCOME TAXES
The components of income before income taxes are as follows (in millions):
2000 1999 1998
-------- -------- --------
Domestic................................. $133.6 $75.8 $65.4
Foreign.................................. 34.9 (4.6) 23.6
------ ----- -----
Total.................................. $168.5 $71.2 $89.0
====== ===== =====
The components of the provision for income taxes consist of the following
(in millions):
2000 1999 1998
-------- -------- --------
Domestic--current................... $40.4 $25.9 $17.5
--deferred.................. 11.3 5.2 15.6
Foreign............................. 12.5 1.1 11.9
State............................... 11.6 9.1 11.1
----- ----- -----
Total............................. $75.8 $41.3 $56.1
===== ===== =====
Deferred and prepaid tax expense results from temporary differences in the
recognition of revenue and expense for tax and financial reporting purposes.
Deferred tax benefits (liabilities) as of December 31, 2000 and 1999, are as
follows (in millions):
2000 1999
-------- --------
Restructuring and other charges............................. $12.7 $32.8
Deferred compensation....................................... 21.6 17.6
Lease reserves.............................................. 4.9 7.6
Accrued revenues............................................ -- (5.4)
Depreciation and amortization............................... (6.5) (7.1)
Safe harbor leases.......................................... (3.0) (3.3)
Reserve for doubtful accounts............................... 4.1 1.4
Foreign net operating losses, net of valuation allowance.... 2.6 3.0
Other, net.................................................. 0.3 0.9
----- -----
Total....................................................... $36.7 $47.5
===== =====
Net current deferred taxes as of December 31, 2000 and 1999, were
$13.6 million and $3.0 million, respectively. Net noncurrent deferred taxes were
$23.1 and $44.5 million, respectively. At December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000, True North had $21.0 million of foreign net operating losses, of which
$8.1 million expire in varying amounts between 2001 and 2010 and $12.9 million
which may be carried forward indefinitely. Valuation allowances of $2.4 million
and $1.0 million were established for certain of these foreign net operating
losses at December 31, 2000 and 1999, respectively.
The reconciliation of the U.S. statutory rate to the effective income tax
rate is as follows:
2000 1999 1998
-------- -------- --------
At statutory rate..................................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit............... 4.5 8.4 7.4
Higher (lower) aggregate effective
tax rate on foreign operations...................... 0.2 3.8 2.6
Tax effect of nondeductible amortization.............. 4.9 11.2 7.0
Involuntary conversion of Publicis equity investment.. -- -- 4.8
Impact of change in valuation allowance............... 0.8 0.1 (1.0)
Intangible write-offs................................. 0.4 1.9 --
S Corporation losses not tax-benefited................ -- -- 5.7
Other................................................. (0.8) (2.4) 1.5
---- ---- ----
45.0% 58.0% 63.0%
==== ==== ====
Federal income taxes have not been provided on undistributed earnings of
foreign subsidiaries that had aggregated approximately $81.4 million as of
December 31, 2000, because such earnings are permanently invested or will not be
repatriated unless any additional income taxes would be substantially offset by
foreign tax credits.
14. RESERVE FOR BAD DEBTS
An analysis of True North's reserve for bad debts is as follows (in
millions):
IMPACT OF
CURRENCY
BALANCE AT PROVISION FOR WRITE-OFFS, TRANSLATION BALANCE
BEGINNING OF DOUBTFUL NET OF ACQUISITIONS AT END OF
YEAR-ENDED DECEMBER 31, YEAR ACCOUNTS RECOVERIES AND OTHER YEAR
----------------------- ------------ ------------- ----------- ------------ ---------
2000.................... $15.3 $19.7 $(11.9) $(2.3) $20.8
----- ----- ------ ----- -----
1999.................... 12.7 7.5 (5.3) 0.4 15.3
----- ----- ------ ----- -----
1998.................... 11.5 3.7 (3.6) 1.1 12.7
----- ----- ------ ----- -----
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
As described in Note 2 of Notes to Consolidated Financial Statements, True
North's financial statements for all periods prior to December 31, 2000, have
been restated from those previously reported to reflect the adoption of
intangible asset amortization periods not exceeding 20 years from 40 years
previously used.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarterly operating results for 2000 and 1999 are summarized below (in
millions, except per share amounts):
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------------- --------------------- --------------------- --------
AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
2000 REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---- ---------- -------- ---------- -------- ---------- --------
Revenues..................... $359.6 $359.6 $375.1 $375.1 $381.2 $381.2 $ 441.0
------ ------ ------ ------ ------ ------ -------
Pre-tax income............... 14.2 10.6 52.9 49.4 45.2 41.3 67.2
------ ------ ------ ------ ------ ------ -------
Net income................... 10.2 7.0 27.1 23.9 24.2 20.8 9.9
------ ------ ------ ------ ------ ------ -------
Net income per share:
Basic...................... 0.21 0.14 0.55 0.48 0.48 0.42 0.20
Diluted.................... 0.20 0.14 0.54 0.47 0.47 0.41 0.19
------ ------ ------ ------ ------ ------ -------
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------------------- --------------------- --------------------- ---------------------
AS AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
1999 REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---- ---------- -------- ---------- -------- ---------- -------- ---------- --------
Revenues..................... $303.4 $303.4 $355.7 $355.7 $356.7 $356.7 $423.6 $423.6
------ ------ ------ ------ ------ ------ ------ ------
Pre-tax income (loss)........ 12.4 9.4 37.7 34.4 (42.1) (44.6) 74.7 72.0
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)............ 7.2 4.5 21.0 18.1 (31.6) (34.1) 42.2 39.7
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) per share:
Basic...................... 0.16 0.10 0.45 0.38 (0.66) (0.71) 0.87 0.82
Diluted.................... 0.15 0.10 0.43 0.37 (0.66) (0.71) 0.85 0.80
====== ====== ====== ====== ====== ====== ====== ======
------------------------
Note: The full-year net income (loss) per share may not equal the sum of the
quarterly amounts.
The following table shows the high and low sale price of True North's common
stock and dividends paid each quarter since January 1, 1999:
PRICE RANGE
------------------- DIVIDENDS
HIGH LOW DECLARED
-------- -------- ---------
2000
1st quarter...................... $47 3/8 $34 7/8 $0.15
2nd quarter...................... 46 13/16 34 7/8 0.15
3rd quarter...................... 52 7/8 35 1/4 0.15
4th quarter...................... 44 1/16 32 9/16 0.15
1999
1st quarter...................... $34 1/8 $22 1/2 $0.15
2nd quarter...................... 30 23 1/16 0.15
3rd quarter...................... 36 7/8 28 1/8 0.15
4th quarter...................... 47 35 3/16 0.15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENT
On March 19, 2001, True North and The Interpublic Group of Companies, Inc.
(Interpublic) announced that they had reached a definitive agreement whereby it
is contemplated that a subsidiary of Interpublic will merge with and into True
North in a pooling of interests transaction that will result in True North
becoming a wholly-owned subsidiary of Interpublic. Under the terms of the
agreement, Interpublic will exchange 1.14 shares of its common stock for each
outstanding share of True North common stock. The transaction is subject to,
among other conditions, the approval of True North shareholders and regulatory
approvals in various jurisdictions. True North anticipates the completion of the
transaction in the summer of 2001.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of True North Communications Inc.:
We have audited the accompanying consolidated balance sheets of True North
Communications Inc. (a Delaware corporation) and Subsidiaries (the "Company") as
of December 31, 2000 and 1999, and the related consolidated statements of
income, stockholders' equity and cash flows for each of three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Publicis Communication for the year ended December 31,
1998. The Company's equity in its net earnings was $3.7 million for the year
ended December 31, 1998. The financial statements of Publicis Communication were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to the amounts included for Publicis Communication, is
based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of True North Communications Inc. and Subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States.
As explained in Note 2 to the consolidated financial statements, the Company
has given retroactive effect to the change in accounting for amortization of
intangible assets.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 20, 2001
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31,
2001 AND 2000 (Amounts in thousands,
except per share amounts)
Three Months Ended March 31,
2001 2000
Commissions and Fees $ 356,058 $ 359,588
Operating Expenses:
Salaries and employee benefits 227,834 229,355
Office and general 105,544 117,117
Total operating expenses 333,378 346,472
Operating Income 22,680 13,116
Other Income (Expense):
Interest income 1,406 1,673
Interest expense (3,582) (3,858)
Gains on sales of operations and other 1,677 (280)
Total other income (expense) (499) (2,465)
Income Before Taxes, Minority
Interest and Equity Income 22,181 10,651
Provision for income taxes 9,761 5,693
Income Before Minority
Interest and Equity Income 12,420 4,958
Minority interest income (expense) (2,000) 1,524
Equity income (loss) of affiliates (734) 517
Net Income $ 9,686 $ 6,999
Per Share Information:
Basic earnings per share $ 0.19 $ 0.14
Diluted earnings per share $ 0.19 $ 0.14
Average common shares outstanding 50,187 48,941
Average common shares outstanding,
assuming dilution 51,431 50,447
Cash dividends per common share $ 0.15 $ 0.15
See accompanying notes to consolidated financial statements.
-------------------------------------------------------------------------------
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(Amounts in thousands)
March 31, December 31,
2001 2000
CURRENT ASSETS:
Cash and cash equivalents $ 66,883 $ 136,322
Marketable securities 190 180
Accounts receivable, net 880,751 1,048,793
Expenditures billable to clients 62,127 58,422
Other current assets 43,779 39,877
Total current assets 1,053,730 1,283,594
NONCURRENT ASSETS:
Property and equipment, net 163,172 166,076
Goodwill, net 467,885 458,747
Investment in affiliated companies 90,067 92,803
Other noncurrent assets 79,766 62,070
Total noncurrent assets 800,890 779,696
Total assets $ 1,854,620 $ 2,063,290
CURRENT LIABILITIES:
Accounts payable $ 871,889 $ 1,160,974
Short-term bank borrowings 149,931 45,540
Income taxes payable 31,450 39,117
Current portion of long-term debt 10,928 11,736
Accrued expenses 196,835 229,143
Total current liabilities 1,261,033 1,486,510
NONCURRENT LIABILITIES:
Long-term debt 26,738 26,730
Liability for deferred compensation 82,315 75,459
Other noncurrent liabilities 70,918 69,608
Total noncurrent liabilities 179,971 171,797
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 16,754 16,656
Paid-in capital 352,236 342,404
Retained earnings 71,851 69,704
Unrealized gain on marketable securities 91 89
Cumulative translation adjustment (25,553) (21,017)
Less--treasury stock (35) (35)
Less--deferred compensation (1,728) (2,818)
Total stockholders' equity 413,616 404,983
Total liabilities and
stockholders' equity $ 1,854,620 $ 2,063,290
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Amounts in thousands)
Three Months Ended
March 31,
2001 2000
Cash flows used by operating activities:
Net income $ 9,686 $ 6,999
Adjustments to reconcile net income
to net cash used by operating activities:
Depreciation and amortization 17,643 20,480
Equity income 734 (517)
Other 3,025 4,584
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable 180,941 (518)
Other assets (31,155) (22,565)
Accounts payable and accrued expenses (316,537) (11,112)
Net cash used by operating activities: (135,663) (2,649)
Cash flows used by investing activities:
Purchases of property and equipment (13,550) (10,730)
Acquisitions and investments in businesses (18,068) (34,253)
Maturities of short-term investments -- 16,502
Net cash used by investing activities (31,618) (28,481)
Cash flows provided by financing activities:
Increase in short-term bank borrowings 104,015 37,525
Proceeds from issuance of common stock 4,623 8,098
Payments of long-term debt (800) (1,322)
Cash dividends paid (7,539) (7,369)
Payments for purchases of common stock -- (3,046)
Net cash provided by financing activities 100,299 33,886
Effects of exchange rates on cash (2,457) (1,325)
Net increase (decrease) in cash and cash equivalents (69,439) 1,431
Cash and cash equivalents at beginning of year 136,322 118,265
Cash and cash equivalents at end of period $ 66,883 $ 119,696
See accompanying notes to consolidated financial statements.
--------------------------------------------------------------------------------
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(Amounts in millions, except per share amounts)
1. Basis of Presentation
The condensed consolidated financial statements included herein have been
prepared by True North without audit, and include all adjustments, consisting
only of normal recurring accruals, which True North considers necessary for a
fair presentation. The condensed consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
True North's 2000 Annual Report on Form 10-K.
The operating results for the first three months of the year are not
necessarily indicative of the results for the year or other interim periods.
2. Acquisitions
In the first three months of 2001, the cost of advertising and communication
agencies acquired by True North in transactions accounted for as purchases, as
well as earnout payments associated with prior acquisitions, was $21.6 million.
The excess of the purchase price over the fair value of net tangible assets
acquired was $21.6 million and is being amortized over periods not exceeding 20
years.
3. Restructuring and Other Charges
As a result of the loss of the Chrysler account, True North recorded a $17.5
million pre-tax charge ($10.0 million after-tax or $0.20 per diluted share) in
the fourth quarter of 2000. The charge covered primarily severance, lease
termination and other exit costs associated with the decision to close the
Detroit office. The severance portion of the charge amounted to $5.8 million and
reflected the elimination of approximately 250 positions. The charge also
included $11.4 million associated primarily with the lease termination of the
Detroit office, as well as other exit costs. In addition, an impairment loss of
$5.5 million was recorded for intangible assets that are no longer recoverable.
Offsetting these charges was a $5.2 million payment from Chrysler to compensate
True North for severance and other exit costs. As of March 31, 2001, 176 people
had been terminated at a cost of $3.7 million and $2.8 million of lease
termination costs and other exit costs had been charged against the liability,
of which $1.2 million represented cash payments.
4. Comprehensive Income
True North classifies its comprehensive income, which includes foreign
currency translation adjustments and unrealized gains and losses on marketable
securities available for sale, as a separate component of stockholders' equity.
Total comprehensive income for the three months ended March 31, 2001 and 2000
was as follows:
Three Months Ended
March 31,
2001 2000
Net income $ 9.7 $ 7.0
Foreign currency translation (4.5) (2.5)
Unrealized gains (losses) on marketable
securities, net of
deferred income taxes of $0.0 and $(0.2),
respectively -- (0.3)
Total comprehensive income $ 5.2 $ 4.2
5. Contingencies
True North is a party to several lawsuits incidental to its business. It is
not possible at the present time to estimate the ultimate liability, if any, of
True North with respect to such litigation; however, management believes that
any ultimate liability will not be material in relation to True North's
consolidated results of operations or financial position.
--------------------------------------------------------------------------------
6. Merger with Interpublic Group
On March 19, 2001, True North and The Interpublic Group of Companies, Inc.
(Interpublic) announced that they had reached a definitive agreement whereby it
is contemplated that a subsidiary of Interpublic will merge with and into True
North in a pooling of interests transaction that will result in True North
becoming a wholly-owned subsidiary of Interpublic. Under the terms of the
agreement, Interpublic will exchange 1.14 shares of its common stock for each
outstanding share of True North common stock. The transaction is subject to,
among other conditions, the approval of True North shareholders and regulatory
approvals in various jurisdictions.
On May 9, 2001, Interpublic filed a Form S-4 registration statement with the
Securities and Exchange Commission. In addition, True North has scheduled a
shareholders' meeting for June 19, 2001 to vote on the proposed merger. True
North anticipates the completion of the transaction in the summer of 2001.
--------------------------------------------------------------------------------
(b) Pro forma financial information. Not applicable.
(c) Exhibit 23.1: Consent of Independent Public Accountants.
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 hereunto duly authorized.
THE INTERPUBLIC GROUP OF
COMPANIES, INC.
Date: August 23, 2001 By: /s/ Nicholas J. Camera
------------------------------
Nicholas J. Camera
SENIOR VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
EXHIBIT INDEX
Exhibits.
23.1 Consent of Independent Public Accountants