FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ending June 30, 1997 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 1-6686 THE INTERPUBLIC GROUP OF COMPANIES, INC. (Exact name of registrant as specified in its charter) Delaware 13-1024020 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1271 Avenue of the Americas, New York, New York 10020 (Address of principal executive offices) (Zip Code) (212) 399-8000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock outstanding at July 31,1997: 124,546,711 shares.PAGE
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES I N D E X Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet June 30, 1997 and December 31, 1996 3-4 Consolidated Income Statement Three months ended June 30, 1997 and 1996 5 Consolidated Income Statement Six months ended June 30, 1997 and 1996 6 Consolidated Statement of Cash Flows Six months ended June 30, 1997 and 1996 7 Notes to Consolidated Financial Statements 8 Computation of Earnings Per Share 9 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 13 PART II. OTHER INFORMATION Item 2. Changes in Securities Item 4. Submission of matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES INDEX TO EXHIBITS 2
PART I - FINANCIAL INFORMATION THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands) ASSETS JUNE 30, DECEMBER 31, 1997 1996 Current Assets: Cash and cash equivalents (includes certificates of deposit: 1997-$86,468; 1996-$83,680) $ 405,677 $ 468,526 Marketable securities, at cost which approximates market 41,734 35,408 Receivables (less allowance for doubtful accounts: 1997-$22,468; 1996-$33,301) 2,910,799 2,646,259 Expenditures billable to clients 207,636 130,185 Prepaid expenses and other current assets 92,990 73,081 Total current assets 3,658,836 3,353,459 Other Assets: Investment in unconsolidated affiliates 92,274 102,711 Deferred taxes on income 72,033 79,371 Other investments and miscellaneous assets 192,168 173,308 Total other assets 356,475 355,390 Fixed Assets, at cost: Land and buildings 87,063 82,332 Furniture and equipment 436,902 413,029 523,965 495,361 Less accumulated depreciation 292,488 276,448 231,477 218,913 Unamortized leasehold improvements 88,524 88,045 Total fixed assets 320,001 306,958 Intangible Assets (less accumulated amortization: 1997-$202,134; 1996-$186,189) 868,796 749,323 Total assets $5,204,108 $4,765,130 See accompanying notes to consolidated financial statements. 3 PAGE
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands Except Per Share Data) LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30, DECEMBER 31, 1997 1996* Current Liabilities: Payable to banks $ 304,328 $ 121,655 Accounts payable 2,876,331 2,626,695 Accrued expenses 279,361 317,157 Accrued income taxes 143,725 133,522 Total current liabilities 3,603,745 3,199,029 Noncurrent Liabilities: Long-term debt 234,080 231,760 Convertible subordinated debentures 116,626 115,192 Deferred compensation and reserve for termination liabilities 208,975 210,670 Accrued postretirement benefits 47,146 46,726 Other noncurrent liabilities 56,023 66,457 Minority interests in consolidated subsidiaries 27,087 23,281 Total noncurrent liabilities 689,937 694,086 Stockholders' Equity: Preferred Stock, no par value shares authorized:20,000,000 shares issued:none Common Stock, $.10 par value shares authorized: 225,000,000 shares issued: 1997 - 138,206,192 1996 - 136,410,542 13,820 13,641 Additional paid-in capital 483,772 465,945 Retained earnings 940,865 855,113 Adjustment for minimum pension liability (12,979) (12,979) Cumulative translation adjustments (124,211) (82,978) 1,301,267 1,238,742 Less: Treasury stock, at cost: 1997 - 13,767,768 shares 1996 - 14,712,143 shares 330,365 319,377 Unamortized expense of restricted stock grants 60,476 47,350 Total stockholders' equity 910,426 872,015 Total liabilities and stockholders' equity $5,204,108 $4,765,130 See accompanying notes to consolidated financial statements. * Restated to reflect three-for-two stock split payable July 15,1997.
4 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED JUNE 30 (Dollars in Thousands Except Per Share Data) 1997 1996* Revenue $ 788,621 $ 631,585 Other income 23,692 43,760 Gross income 812,313 675,345 Costs and expenses: Operating expenses 634,105 521,568 Interest 11,216 9,665 Total costs and expenses 645,321 531,233 Income before provision for income taxes 166,992 144,112 Provision for income taxes: United States - federal 29,667 25,971 - state and local 8,906 5,714 Foreign 31,207 29,563 Total provision for income taxes 69,780 61,248 Income of consolidated companies 97,212 82,864 Loss applicable to minority interests (7,218) (3,017) Equity in net income of unconsolidated affiliates (230) 3,081 Net income $ 89,764 $ 82,928 Weighted average number of common shares 123,758,720 119,659,136 Earnings per common and common equivalent share $ .73 $ .69 Cash dividends per common share $ .13 $ .11 See accompanying notes to consolidated financial statements. * Restated to reflect three-for-two stock split payable July 15,1997. 5 PAGE
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED INCOME STATEMENT SIX MONTHS ENDED JUNE 30 (Dollars in Thousands Except Per Share Data) 1997 1996* Revenue $ 1,372,018 $ 1,123,793 Other income 37,533 57,711 Gross income 1,409,551 1,181,504 Costs and expenses: Operating expenses 1,182,117 987,677 Interest 21,483 19,190 Total costs and expenses 1,203,600 1,006,867 Income before provision for income taxes 205,951 174,637 Provision for income taxes: United States - federal 39,610 34,389 - state and local 11,145 7,798 Foreign 35,788 32,187 Total provision for income taxes 86,543 74,374 Income of consolidated companies 119,408 100,263 Loss applicable to minority interests (10,573) (4,845) Equity in net income of unconsolidated affiliates 2,964 5,341 Net income $ 111,799 $ 100,759 Weighted average number of common shares 122,849,766 119,306,021 Earnings per common and common equivalent share $ .91 $ .84 Cash dividends per common share $ .24 $ .22 See accompanying notes to consolidated financial statements. * Restated to reflect three-for-two stock split payable July 15,1997. 6 PAGE
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30 (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 Net income $111,799 $100,759 Adjustments to reconcile net income to cash provided by/(used in) operating activities: Depreciation and amortization of fixed assets 36,534 28,311 Amortization of intangible assets 15,944 13,366 Amortization of restricted stock awards 7,537 7,188 Equity in net income of unconsolidated affiliates (2,964) (5,341) Income applicable to minority interests 10,573 4,845 Translation losses 483 1,100 Net gain from sale of investments 0 (8,100) Other (7,150) (2,827) Changes in assets and liabilities, net of acquisitions: Receivables (170,393) (95,395) Expenditures billable to clients (54,172) (31,598) Prepaid expenses and other assets (13,819) (11,067) Accounts payable and other liabilities 20,014 68,929 Accrued income taxes (6,953) 25,737 Deferred income taxes 1,229 (5,856) Deferred compensation and reserve for termination allowances (11,495) (4,347) Net cash (used in)/provided by operating activities (62,833) 85,704 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (38,089) (41,603) Proceeds from sale of investments 199 37,578 Capital expenditures (41,825) (33,494) Net purchases of marketable securities (9,899) (4,844) Other investments and miscellaneous assets (9,094) (19,893) Investments in unconsolidated affiliates (4,473) (6,278) Net cash used in investing activities (103,181) (68,534) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings 185,352 33,061 Proceeds from long-term debt 3,024 25,000 Payments of long-term debt (3,007) (13,618) Treasury stock acquired (58,700) (41,433) Issuance of common stock 22,092 10,763 Cash dividends (29,015) (24,995) Net cash provided by/(used in)financing activities 119,746 (11,222) Effect of exchange rates on cash and cash equivalents (16,581) (8,498) Decrease in cash and cash equivalents (62,849) (2,550) Cash and cash equivalents at beginning of year 468,526 418,448 Cash and cash equivalents at end of period $405,677 $415,898 See accompanying notes to consolidated financial statements. 7 PAGE
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Consolidated Financial Statements (a) In the opinion of management, the consolidated balance sheet as of June 30, 1997, the consolidated statements of income for the three months and six months ended June 30, 1997 and 1996 and the consolidated statement of cash flows for the six months ended June 30, 1997 and 1996, contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at June 30, 1997 and for all periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in The Interpublic Group of Companies, Inc.'s (the "Company") December 31, 1996 annual report to stockholders. (b) Statement of Financial Accounting Standards (SFAS) No. 95 "Statement of Cash Flows" requires disclosures of specific cash payments and noncash investing and financing activities. The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Income tax cash payments were approximately $38.1 million and $37.9 million in the first six months of 1997 and 1996, respectively. Interest payments during the first six months of 1997 were approximately $12.6 million. Interest payments during the comparable period of 1996 were approximately $9.9 million. (c) In July 1997, a three-for-two stock split was effected by payment of a stock dividend. This split has been reflected retroactively in the accompanying consolidated financial statements. 8 PAGE
Exhibit 11 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Dollars in Thousands Except Per Share Data) Three Months Ended June 30 Primary 1997 1996* Net income $ 89,764 $ 82,928 Add: Dividends paid net of related income tax applicable to restricted stock 102 95 Net income, as adjusted $ 89,866 $ 83,023 Weighted average number of common shares outstanding 119,724,822 115,905,189 Weighted average number of incremental shares in connection with restricted stock and assumed exercise of stock options 4,033,898 3,753,947 Total 123,758,720 119,659,136 Earnings per common and common equivalent share $ .73 $ .69 Three Months Ended June 30 Fully Diluted 1997 1996* Net income $ 89,764 $ 82,928 Add: After tax interest savings on assumed conversion of subordinated debentures 1,643 1,602 Dividends paid net of related income tax applicable to restricted stock 113 98 Net income, as adjusted $ 91,520 $ 84,628 Weighted average number of common shares outstanding 119,724,822 115,905,189 Weighted average number of incremental shares in connection with restricted stock and assumed exercise of stock options 4,420,272 3,801,155 Assumed conversion of subordinated debentures 4,463,003 4,503,195 Total 128,608,097 124,209,539 Earnings per common and common equivalent share $ .71 $ .68 * Restated to reflect three-for-two stock split payable July 15,1997. 9 PAGE
Exhibit 11 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Dollars in Thousands Except Per Share Data) Six Months Ended June 30 Primary 1997 1996* Net income before effect of accounting change $ 111,799 $ 100,759 Add: Dividends paid net of related income tax applicable to restricted stock 182 175 Net income, as adjusted $ 111,981 $ 100,934 Weighted average number of common shares outstanding 119,065,151 115,698,875 Weighted average number of incremental shares in connection with restricted stock and assumed exercise of stock options 3,784,615 3,607,146 Total 122,849,766 119,306,021 Earnings per common and common equivalent share $ .91 $ .84 Six Months Ended June 30 Fully Diluted 1997 1996* Net income before effect of accounting change $ 111,799 $ 100,759 Add: After tax interest savings on assumed conversion of subordinated debentures 3,245 3,165 Dividends paid net of related income tax applicable to restricted stock 206 192 Net income, as adjusted $ 115,250 $ 104,116 Weighted average number of common shares outstanding 119,065,151 115,698,875 Weighted average number of incremental shares in connection with restricted stock and assumed exercise of stock options 4,202,596 3,906,334 Assumed conversion of subordinated debentures 4,464,753 4,503,195 Total 127,732,500 124,108,404 Earnings per common and common equivalent share $ .90 $ .84 * Restated to reflect three-for-two stock split payable July 15,1997. 10 PAGE
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Working capital at June 30, 1997 was $55.1 million, a decrease of $99.3 million from December 31, 1996. The ratio of current assets to current liabilities remained relatively unchanged from December 31, 1996 at approximately 1.0 to 1. Historically, cash flow from operations has been the primary source of working capital and management believes that it will continue to be in the future. The principal use of the Company's working capital is to provide for the operating needs of its advertising agencies, which include payments for space or time purchased from various media on behalf of its clients. The Company's practice is to bill and collect from its clients in sufficient time to pay the amounts due media. Other uses of working capital include the payment of cash dividends, acquisitions, capital expenditures and the reduction of long-term debt. In addition, during the first six months of 1997, the Company acquired 1,270,975 shares of its own stock for approximately $58.7 million for the purposes of fulfilling the Company's obligations under its various compensation plans. 11 PAGE
RESULTS OF OPERATIONS Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 Total revenue for the three months ended June 30, 1997 increased $157.0 million, or 24.9%, to $788.6 million compared to the same period in 1996. Domestic revenue increased $110.9 million or 42.2% from 1996 levels. Foreign revenue increased $46.1 million or 12.5% during the second quarter of 1997 compared to 1996. Other income decreased by $20.1 million during the second quarter of 1997 compared to the same period in 1996 primarily due to the proceeds resulting from the sale of a portion of the Company's interest in the CKS Group, Inc. in 1996. The net gain was approximately $8.1 million or $.10 per share. Operating expenses increased $112.5 million or 21.6% during the three months ended June 30, 1997 compared to the same period in 1996. Interest expense increased 16.0% as compared to the same period in 1996. Pretax income increased $22.9 million or 15.9% during the three months ended June 30, 1997 compared to the same period in 1996. The increase in total revenue, operating expenses, and pretax income is primarily due to acquired companies' results of operations and contributions from new business gains. Net income for the three months ended June 30, 1997 had an unfavorable currency impact of $2.9 million versus $1.6 million for the same period in 1996. The effective tax rate for the three months ended June 30, 1997 was 41.8%, as compared to 42.5% in 1996. The difference between the effective and statutory rates is primarily due to foreign losses with no tax benefit, losses from translation of foreign currencies which provided no tax benefit, state and local taxes, foreign withholding taxes on dividends and nondeductible goodwill expense. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Total revenue for the six months ended June 30, 1997 increased $248.2 million, or 22.1%, to $1,372 million compared to the same period in 1996. Domestic revenue increased $178.9 million or 39.1% from 1996 levels. Foreign revenue increased $69.4 million or 10.4% during the first six months of 1997 compared to 1996. Other income decreased by $20.2 million in the first six months of 1997 compared to the same period in 1996 primarily due to the proceeds resulting from the sale of a portion of the Company's interest in the CKS Group, Inc. in 1996. The net gain was approximately $8.1 million or $.10 per share. Operating expenses increased $194.4 million or 19.7% during the six months ended June 30, 1997 compared to the same period in 1996. Interest expense increased 11.9% during the six months ended June 30, 1997 as compared to the same six month period in 1996. Pretax income increased $31.3 million or 17.9% during the six months ended June 30, 1997 compared to the same period in 1996. 12 PAGE
The increase in total revenue, operating expenses, and pretax income is primarily due to acquired companies' results of operations and contributions from new business gains. Net income for the six months ended June 30, 1997 had an unfavorable currency impact of $4.0 million versus $1.9 million for the same period in 1996. The effective tax rate for the six months ended June 30, 1997 was 42.0%, as compared to 42.6% in 1996. 13
PART II - OTHER INFORMATION Item 2. Changes In Securities Recent Sales In Unregistered Securities (1) On April 14, 1997, the Registrant acquired three small companies in consideration for which it issued a total of 201,558 shares of Common Stock, par value $.10 per share, to the former shareholders of the companies. The shares of Common Stock had a market value of $11,000,000 on the date of issuance. The shares of Common Stock were issued by the Registrant without registration in reliance on Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"), based on the accredited investor status or sophistication of the former shareholders. (2) On June 5, 1997, the Registrant acquired a company in consideration for which it issued a total of 386,137 shares of Common Stock, par value $.10 per share, to the company's former shareholders. The shares of Common Stock had a market value of $21,339,089 on the date of issuance. The shares of Common Stock were issued by the Registrant without registration in reliance on Rule 506 of Regulation D under the Securities Act of 1933, as amended, based on the accredited investor status or sophistication of the company's former stockholders and their purchase representative. Also, as part of the acquisition, existing stock options in the acquired company were converted into options to acquire 47,720 shares of the Registrant. (3) On June 12, 1997, the Registrant acquired a company in consideration for which it issued a total of 390,036 shares of Common Stock to the company's former shareholders. The shares of Common Stock had a market value of $23,100,000 on the date of issuance.
The shares of Common Stock were issued by the Registrant without registration in reliance on Rule 506 of Regulation D under the Securities Act, based on the accredited investor status of the company's former stockholders. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) This item is answered in respect of the Annual Meeting of Stockholders held on May 19, 1997. (b) No response is required to Paragraph (b) because (i) proxies for the meeting were solicited pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended; (ii) there was no solicitation in opposition to Management's nominees as listed in the proxy statement; and (iii) all such nominees were elected. (c) At the Annual Meeting, the following number of shares were cast with respect to each matter voted upon: -- Proposal to approve Management's nominees for director as follows: BROKER NOMINEE FOR WITHHELD NONVOTES Eugene P. Beard 63,008,573 640,995 0 Frank J. Borelli 63,003,548 646,020 0 Reginald K. Brack 63,004,082 645,486 0 Jill M. Considine 62,999,987 649,581 0 John J. Dooner, Jr. 63,008,654 640,914 0 Philip H. Geier, Jr. 62,759,816 889,752 0 Frank B. Lowe 62,751,556 898,012 0 Leif H. Olsen 63,000,457 649,111 0 Martin F. Puris 62,743,806 905,762 0 Allen Questrom 63,008,304 641,264 0 J. Phillip Samper 62,750,808 898,760 0 -- Proposal to increase the Company's authorized Common Stock to 225 million shares. BROKER FOR AGAINST ABSTAIN NONVOTES 59,084,070 4,139,029 426,469 0
-- Proposal to approve the Company's 1997 Performance Incentive Plan. BROKER FOR AGAINST ABSTAIN NONVOTES 45,381,853 12,588,752 545,335 5,133,628 -- Proposal to approve confirmation of independent accountants. BROKER FOR AGAINST ABSTAIN NONVOTES 63,186,957 64,595 398,016 0 -- Stockholder proposed resolution regarding implementation of the Mac Bride Principles with respect to the Company's subsidiary in Northern Ireland. BROKER FOR AGAINST ABSTAIN NONVOTES 5,835,590 45,817,940 4,517,948 7,478,090 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 3(i) The Registrant's Restated Certificate of Incorporation, as amended. Exhibit 10(a) 1997 Performance Incentive Plan. Exhibit 10(b) Supplemental Agreement made as of March 12, 1997 between Interpublic and Eugene P. Beard. PAGE
Exhibit 10(c) Note, dated June 16, 1997 and executed by Registrant in the principal amount of $15,000,000 to the order of Wachovia Bank of Georgia, N.A. Exhibit 11 Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K The following reports on Form 8-K were filed without financial statements during the quarter ended June 30, 1997: (1) Item 9 - Sale of Equity Securities Pursuant to Regulation S, dated April 3, 1997. (2) Item 9 - Sale of Equity Securities Pursuant to Regulation S, dated June 16, 1997.
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. THE INTERPUBLIC GROUP OF COMPANIES, INC. (Registrant) Date: August 14, 1997 By /S/ Philip H. Geier, Jr. Philip H. Geier, Jr. Chairman of the Board President and Chief Executive Officer Date: August 14, 1997 By /S/ Eugene P. Beard Eugene P. Beard Vice Chairman - Finance and Operations
INDEX TO EXHIBITS Exhibit No. Description Exhibit 3(i) The Registrant's Restated Certificate of Incorporation, as amended. Exhibit 10(a) 1997 Performance Incentive Plan. Exhibit 10(b) Supplemental Agreement made as of March 12, 1997 between Interpublic and Eugene P. Beard. Exhibit 10(c) Note, dated June 16, 1997 and executed by Registrant in the principal amount of $15,000,000 to the order of Wachovia Bank of Georgia, N.A. Exhibit 11 Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule.