The Interpublic Group of Companies - 10-Q quarterly report FY

For the quarterly period ended March 31, 2001

OR

Commission File Number: 1 -6686

Registrant's telephone number, including area code (212) 399 -8000

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 April 30, 2001: 317,130,155 shares.

The accompanying notes are an integral part of these consolidated financial statements.

Prior periods have been restated to reflect the aggregate effect of the acquisitions accounted for as poolings of interests. See Note (a).

The accompanying notes are an integral part of these consolidated financial statements.

Prior periods have been restated to reflect the aggregate effect of the acquisitions accounted for as poolings of interests. See Note (a).

The accompanying notes are an integral part of these consolidated financial statements.

Prior periods have been restated to reflect the aggregate effect of the acquisitions accounted for as poolings of interests. See Note (a).

The accompanying notes are an integral part of these consolidated financial statements.

     As discussed in Note (a), the Company's consolidated financial statements and other financial information for prior periods have been restated to reflect the effect of Deutsch, NFO and several other acquisitions accounted for as poolings of interests. The following discussion relates to the combined results of the Company after giving effect to all the pooled companies.

     For purposes of the following discussion, the investment impairment charge in 2001 and the restructuring and other merger related costs in 2000 will be referred to, collectively, as "non -recurring items". The non - -recurring items are described in a subsequent section of this discussion. All amounts discussed below are as reported unless otherwise noted.

     The Company reported a net loss of $38.4 million or $.12 diluted loss per share for the three months ended March 31, 2001. Excluding the impact of non -recurring items, which are discussed below, net income was $65.3 million or $.21 diluted earnings per share, compared to $63.7 million or $.21 diluted earnings per share for the three months ended March 31, 2000.

     The following table sets forth net income and earnings per share before and after non -recurring items:

(Dollars in thousands, except per share data)

     Worldwide revenue for the three months ended March 31, 2001 increased $77 million, or 6%, to $1.3 billion compared to the same period in 2000. Domestic revenue increased $38 million or 5.5% during the first quarter of 2001 compared to 2000. International revenue increased $39 million or 7.3% during the first quarter of 2001 compared to 2000. International revenue would have increased 18% excluding the effect of the strengthening of the U.S. dollar. The increase in worldwide revenue is a result of both new business growth and growth from acquisitions. Organic revenue growth, exclusive of acquisitions and currency effects, was 6% for the first quarter of 2001 compared to the prior year quarter.

     Revenue from specialized marketing and communications services, which include, market research, sales promotion, direct marketing, public relations, sports and event marketing, healthcare marketing and e -consultancy and services, comprised approximately 42% of the total worldwide revenue for the three months ended March 31, 2001, compared to 39% for the prior year quarter.

     Worldwide operating expenses for the first quarter 2001, excluding non -recurring items were $1,172 million, an increase of 5.8% over the prior year quarter. This increase is consistent with the 6% increase in revenue for the same period. Salaries and related expenses were $771 million or 59% of revenue for the first quarter of 2001 as compared to $709 million or 58% of revenue for the first quarter of 2000. Office and general expenses were $367 million for the first quarter of 2001 compared to $375 million for the first quarter of 2000.

     Income from operations, excluding non -recurring items, was $130 million for the first quarter of 2001, compared to $117 million for the first quarter of 2000, an increase of 11%. Exclusive of acquisitions, currency effects and amortization of intangible assets, income from operations increased 13% for the first quarter of 2001 compared to the first quarter of 2000.

     Interest expense was $34 million for the first quarter of 2001, compared to $20 million for the prior year quarter. The increase is a result of higher debt levels and higher interest rates.

     Other income, net, which consists of interest income, investment income and net gains from equity investments increased slightly to $18 million for the first quarter of 2001 compared to $17 million for the first quarter of 2000.

     The effective tax rate for the three months ended March 31, 2001 was 20.7%, which reflects the lower tax rate on the investment impairment charge. Excluding the impairment charge, the effective tax rate for the first quarter of 2001 was 41.0% compared to 40.2% in 2000. The difference between the effective and statutory rates is primarily due to state and local taxes and nondeductible goodwill expense.

Non -Recurring Items

     During the first quarter of 2001, the Company recorded a $160.1 million pre -tax charge ($103.7 million net of tax) to recognize the impairment of investments primarily in publicly traded companies, including marchFIRST, Inc. (an Internet professional services firm), which had filed for relief under Chapter 11 of the Federal Bankruptcy Code in April 2001. The impairment charge adjusts the carrying value of remaining investments to estimated market value where an "other than temporary" impairment has occurred.

     During the first quarter of 2000, the Company recognized pre -tax restructuring costs of $36.1 million ($20.7 million net of tax) associated with the restructuring of Lowe Lintas & Partners Worldwide ("Lowe Lintas"). The restructuring costs of $36.1 million include cash costs of $20.3 million. The total restructuring was completed by the third quarter of 2000.

     The ratio of current assets to current liabilities was slightly below 1 to 1 at March 31, 2001. Working capital at March 31, 2001 was negative $169 million, a decrease of $89 million from December 31, 2000. Total debt at March 31, 2001 was $2.5 billion, an increase of $526 million from December 31, 2000. Cash flow from operations and availability under existing credit facilities will be the Company's primary source of working capital.

     Net cash used in operating activities was $481 million for the first quarter of 2001 and $192 million for the first quarter of 2000. 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. Other uses of working capital include the payment of cash dividends, acquisitions and capital expenditures. In addition, during the first three months of 2001, the Company acquired 1.1 million shares of its own stock for the purpose of fulfilling the Company's obligations under its various compensation plans.

     Forward-looking statements involve inherent risks and uncertainties. Interpublic cautions that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those associated with the effect of national and regional economic conditions, the ability of Interpublic to attract new clients and retain existing clients, the financial success of the clients of Interpublic, and developments from changes in the regulatory and legal environment for advertising companies around the world, and the successful completion and integration of acquisitions which complement and expand Interpublic's business capabilities.

     Another important factor is Interpublic's acquisition strategy. One of Interpublic's business strategies is to acquire businesses that complement and expand its current business capabilities. Accordingly, Interpublic is usually engaged in evaluating potential acquisition candidates. Interpublic is currently engaged in a number of preliminary discussions that may result in one or more substantial acquisitions. These acquisition opportunities require confidentiality and from time to time give rise to bidding scenarios that require quick responses by Interpublic. Although there is uncertainty that any of these discussions will result in definitive agreements or the completion of any transactions, the announcement of any such transaction may lead to increased volatility in the trading price of the shares of Interpublic.

     Moreover, the success of recent or contemplated future acquisitions will depend on the effective integration of newly-acquired businesses into Interpublic's current activities. Important factors for integration include realization of anticipated synergies and the ability to retain new personnel and clients.

     Investors should evaluate any statements in light of these important factors.

     The Interpublic Group of Companies, Inc. and True North Communications Inc. have filed a proxy statement/prospectus with the Securities and Exchange Commission concerning the proposed merger pursuant to which True North would become a wholly owned subsidiary of Interpublic. INVESTORS AND SECURITYHOLDERS ARE URGED TO READ THE PROXY STATEMENT/PROSPECTUS AND ANY AMENDMENT TO THAT DOCUMENT BECAUSE THE PROXY STATEMENT/PROSPECTUS CONTAINS, AND ANY AMENDMENT TO THAT DOCUMENT WILL CONTAIN, IMPORTANT INFORMATION ON THE PROPOSED MERGER. Investors and securityholders are able to obtain the proxy statement/prospectus, and will be able to obtain any amendments to that document, free of charge at the SEC's website (ht tp://www.sec.gov/EDGAR), or at the SEC's public reference room located at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. In addition, documents filed with the SEC by Interpublic and True North may be obtained free of charge by contacting The Interpublic Group of Companies, Inc., 1271 Avenue of the Americas, New York, NY, 10020, Attn: Investor Relations (tel: 212-399-8057), or True North Communications Inc. at 101 East Erie Street, Chicago, IL, 60611, Attn: Corporate Communications (tel: 312-425-6500). INVESTORS SHOULD READ THE PROXY STATEMENT/PROSPECTUS, AND ANY AMENDMENTS THERETO, CAREFULLY BEFORE MAKING ANY VOTING OR INVESTMENT DECISION. True North and certain other persons referred to below may be deemed to be participants in the solicitation of proxies of True North's stockholders to approve and adopt the merger agreement with Interpublic. The participants in this solicitation may include the directors and executive officers of True North, who may have an interest in the transaction as a result of holding shares or options of True North. A detailed list of the names and interests of True North's directors and executive officers, and of their ownership interests in True North, is contained and incorporated by reference in the proxy statement/prospectus.

Conversion to the Euro

     On January 1, 1999, certain member countries of the European Union established fixed conversion rates between their existing currencies and the European Union's common currency (the "Euro"). The Company conducts business in member countries. The transition period for the introduction of the Euro is between January 1, 1999, and June 30, 2002. The Company is addressing the issues involved with the introduction of the Euro. The major important issues facing the Company include: converting information technology systems, reassessing currency risk, negotiating and amending contracts, and processing tax and accounting records.

     Based upon progress to date, the Company believes that use of the Euro will not have a significant impact on the manner in which it conducts its business affairs and processes its business and accounting records. Accordingly, conversion to the Euro has not, and is not expected to have a material effect on the Company's financial condition or results of operations.

     The Company's financial market risk arises from fluctuations in interest rates and foreign currencies. Most of the Company's debt obligations are at fixed interest rates. A 10% change in market interest rates would not have a material effect on the Company's pre -tax earnings, cash flows or fair value. At March 31, 2001, the Company had an insignificant amount of foreign currency derivative financial instruments in place. The Company does not hold any financial instrument for trading purposes.

             (1)  On January 2, 2001, a subsidiary of the Registrant acquired 51% of the capital stock of a company in consideration for which Registrant paid $1,603,509 in cash and issued without registration 26,073 shares of the Common Stock, $.10 par value of Registrant (the "Interpublic Stock") to the shareholders of the acquired company. The shares of Interpublic Stock were valued at $1,069,006 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in an "offshore transaction" and solely to "non-U.S. persons" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act of 1933, as amended (the "Securities Act").

           (2)  On January 12, 2001, the Registrant paid $2,488,000 and issued 59,027 shares of Interpublic Stock to the former shareholders of a company, the assets of which were acquired in the second quarter of 1995. This represented a deferred payment of purchase price. The shares of Interpublic Stock were valued at $2,487,000 on the date of issuance. The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (3)  On January 4, 2001, the Registrant issued 20,043 shares of Interpublic Stock and paid $2,005,000 in cash to a former shareholder of a company as part of a deferred payment for the remaining 51% of the shares of the company 49% of which was acquired in the first quarter of 1997. The shares of Interpublic Stock were valued at US$786,679 at the date of issuance. The shares of Interpublic Stock were issued by the Registrant without registration in an "off-shore transaction" and solely to "non-US persons" in reliance on Rule 903 (b)(3) of Regulation S under the Securities Act.

           (4)  On January 30, 2001, the Registrant issued 212,667 shares of Interpublic Stock to the former shareholders of a company as part of the initial payment for the remaining 25% of the shares of the company. The shares of Interpublic Stock were valued at US$9,500,000 at the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in an "off shore transaction" and solely to "non-US persons" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.

           (5)  On February 9, 2001, the Registrant issued 28,638 shares of Interpublic Stock and on February 27, 2001 paid $10,490,222 in cash to the former shareholders of five related companies which were acquired in the first quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $1,180,000 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in an "offshore transaction" and solely to "non-U.S. persons" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.

           (6)  On February 13, 2001, the Registrant issued 10,116 shares of Interpublic Stock to the former shareholders of a company that was acquired in the first quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $430,973 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (7)  On February 16, 2001, the Registrant paid $3,371,000 in cash and issued 53,783 shares of Interpublic Stock to the former shareholders of a company which was acquired in the first quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $2,247,599 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (8)  On February 20, 2001, the Registrant issued 15,830 shares of Interpublic Stock and on March 8, 2001 paid $645,703 in cash to the former shareholders of two related companies which were acquired in the fourth quarter of 1998. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $660,428 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in an "offshore transaction" and solely to "non-U.S. persons" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.

           (9)  On March 1, 2001, the Registrant issued a total of 41,893 shares of Interpublic Stock to the former equity holders of a company which was acquired in the fourth quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $1,696,928 on the date of issuance. The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former equity holders.

           (10)  On March 7, 2001, the Registrant issued 1,627 shares of Interpublic Stock to the former shareholders of a company which was acquired in the second quarter of 1999. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $66,461 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (11)  On March 15, 2001, the Registrant acquired the remaining 20% of the capital stock of a company in consideration for which the Registrant paid $4,671,985 in cash and issued a total of 80,109 shares of Interpublic Stock to the security holders of the company. The shares of Interpublic Stock had a market value of $3,114,657 on the date of issuance. The Registrant acquired 80% of this company in the second quarter of 1999.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's security holders.

           (12)  On March 15, 2001, the Registrant issued 23,106 shares of Interpublic Stock to the former shareholder of a company which was acquired in the fourth quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $860,000 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in an "offshore transaction" and solely to "non-U.S. persons" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.

           (13)  On March 19, 2001, the Registrant issued 33,785 shares of Interpublic Stock to a former shareholder of a company that was acquired in the fourth quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock had a market value of $1,258,166 as of the date of issuance. The shares of Interpublic Stock were issued by the Registrant without registration in an "offshore transaction" and solely to a "non-U.S. person" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.

            (14)  On March 27, 2001, the Registrant paid $806,000 in cash and issued 2,482 shares of Interpublic Stock to a company, the assets of which were acquired in the first quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $90,000.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholder.

           (15)  On March 29, 2001, the Registrant issued 50,794 shares of Interpublic Stock and paid $1,032,192 in cash for the acquisition from shareholders of the remaining minority interests of a company. Such acquisition was consummated in the third quarter of 2000. The shares of Interpublic Stock were valued at $2,242,873 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's minority stockholders.

           (16)  On March 29, 2001, the Registrant issued 31,340 shares of Interpublic Stock to the former shareholders of a company which was acquired in the second quarter of l999. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $1,104,101 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

            (17)  On March 30, 2001, the Registrant issued 54,258 shares of Interpublic Stock and paid $1,829,038 to the former shareholder of a company that was acquired in the first quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $1,829,038 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholder.

           (18)  On March 30, 2001, the Registrant paid $5,138,970 in cash, and effective March 31, 2001 issued an aggregate of 149,267 shares of Interpublic Stock to the former shareholders of a company which was acquired in the fourth quarter of 1999. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $5,138,970.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (19)  On March 30, 2001 the Registrant issued 4,427 shares of Interpublic Stock to the former shareholders of a company which was acquired in the first quarter of l998. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $148,436 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (20)  On March 30, 2001, the Registrant issued 6,594 shares of Interpublic Stock to the former shareholders of a company which was acquired in the second quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $238,926 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in an "offshore transaction" and solely to "non-U.S. persons" in reliance on Rule 903(b)(3) of Regulation S under the Securities Act.

           (21)  On March 30, 2001, the Registrant issued 10,953 shares of Interpublic Stock to the former shareholders of a company which was acquired in the last quarter of l998. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $395,191 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (22)  On March 30, 2001, the Registrant issued 1,472 shares of Interpublic Stock to the former shareholders of a company which was acquired in the third quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $50,000 on the date of issuance.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.

           (23)  On March 31, 2001, the Registrant issued an aggregate of 1,962 shares of Interpublic Stock to the former shareholders of a company which was acquired in the first quarter of 2000. This represented a deferred payment of the purchase price. The shares of Interpublic Stock were valued at $65,802.

The shares of Interpublic Stock were issued by the Registrant without registration in reliance on Section 4(2) under the Securities Act, based on the sophistication of the acquired company's former stockholders.