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 March 31, 1998 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 April 30, 1998: 136,372,692 shares. 1 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 March 31, 1998 and December 31, 1997 3-4 Consolidated Income Statement Three months ended March 31, 1998 and 1997 5 Statement of Comprehensive Income 6 Three months ended March 31, 1998 and 1997 Consolidated Statement of Cash Flows Three months ended March 31, 1998 and 1997 7 Notes to Consolidated Financial Statements 8 Computation of Earnings Per Share 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-11 PART II. OTHER INFORMATION Item 2. Changes in Securities 12 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 INDEX TO EXHIBITS 15 2 PART I - FINANCIAL INFORMATION THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands) ASSETS MARCH 31, DECEMBER 31, 1998 1997 Current Assets: Cash and cash equivalents (includes certificates of deposit: 1998-$80,777; 1997-$256,934) $ 485,667 $ 715,206 Marketable securities, at cost which approximates market 35,040 30,739 Receivables (less allowance for doubtful accounts: 1998-$38,859; 1997-$39,439) 2,894,992 2,987,688 Expenditures billable to clients 206,152 188,402 Prepaid expenses and other current assets 114,296 103,620 Total current assets 3,736,147 4,025,655 Other Assets: Investment in unconsolidated affiliates 46,015 46,665 Deferred taxes on income 46,078 48,752 Other investments and miscellaneous assets 218,884 208,497 Total other assets 310,977 303,914 Fixed Assets, at cost: Land and buildings 83,227 83,621 Furniture and equipment 490,093 476,955 573,320 560,576 Less accumulated depreciation 321,168 312,089 252,152 248,487 Unamortized leasehold improvements 101,450 100,323 Total fixed assets 353,602 348,810 Intangible Assets (less accumulated amortization: 1998-$238,356; 1997-$225,830) 1,110,182 1,024,142 Total assets $5,510,908 $5,702,521 See accompanying notes to consolidated financial statements. 3 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands Except Per Share Data) LIABILITIES AND STOCKHOLDERS' EQUITY MARCH 31, DECEMBER 31, 1998 1997 Current Liabilities: Payable to banks $ 217,069 $ 157,555 Accounts payable 2,742,598 3,013,559 Accrued expenses 410,534 429,451 Accrued income taxes 137,956 151,076 Total current liabilities 3,508,157 3,751,641 Noncurrent Liabilities: Long-term debt 253,653 250,947 Convertible subordinated notes 201,018 201,768 Deferred compensation and reserve for termination liabilities 256,341 247,747 Accrued postretirement benefits 47,404 47,404 Other noncurrent liabilities 60,190 63,942 Minority interests in consolidated subsidiaries 31,967 31,917 Total noncurrent liabilities 850,573 843,725 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: 1998 - 144,322,587 1997 - 143,567,843 14,432 14,357 Additional paid-in capital 685,014 631,757 Retained earnings 1,046,925 1,036,306 Adjustment for minimum pension liability (13,207) (13,207) Net unrealized gain on equity securities 16,566 12,405 Cumulative translation adjustments (161,600) (154,093) 1,588,130 1,527,525 Less: Treasury stock, at cost: 1998 - 12,471,120 shares 1997 - 12,749,317 shares 377,630 363,736 Unamortized expense of restricted stock grants 58,322 56,634 Total stockholders' equity 1,152,178 1,107,155 Total liabilities and stockholders' equity $5,510,908 $5,702,521 See accompanying notes to consolidated financial statements. 4 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED INCOME STATEMENT THREE MONTHS ENDED MARCH 31 (Dollars in Thousands Except Per Share Data) 1998 1997* Revenue $ 719,436 $ 583,398 Other income 14,019 13,840 Gross income 733,455 597,238 Costs and expenses: Operating expenses 670,728 548,013 Interest 10,682 10,266 Total costs and expenses 681,410 558,279 Income before provision for income taxes 52,045 38,959 Provision for income taxes 22,222 16,763 Income of consolidated companies 29,823 22,196 Income applicable to minority interests (2,840) (3,356) Equity in net income of unconsolidated affiliates 651 3,195 Net income $ 27,634 $ 22,035 Weighted average shares: Basic 127,721,325 118,405,479 Diluted 132,773,265 122,340,229 Earnings per share: Basic EPS $ .22 $ .19 Diluted EPS $ .21 $ .18 Dividend per share $ .13 $ .11 * 1997 first quarter results restated for the three-for-two stock split effected July 1997. See accompanying notes to consolidated financial statements. 5 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES STATEMENT OF COMPREHENSIVE INCOME THREE MONTHS ENDED MARCH 31 (Dollars in Thousands) 1998 1997 Net Income $ 27,634 $ 22,035 Other Comprehensive Income, net of tax: Foreign Currency Translation Adjustments (7,507) (34,818) Net Unrealized Gains on Securities 4,161 - Other Comprehensive Income (3,346) (34,818) Comprehensive Income $ 24,288 $(12,783) 6 THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31 (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 Net income $ 27,634 $ 22,035 Adjustments to reconcile net income to cash used in operating activities: Depreciation and amortization of fixed assets 20,207 17,406 Amortization of intangible assets 12,526 7,942 Amortization of restricted stock awards 5,052 3,733 Equity in net income of unconsolidated affiliates (651) (3,195) Income applicable to minority interests 2,840 3,356 Translation losses 276 873 Other (5,384) (6,256) Changes in assets and liabilities, net of acquisitions: Receivables 78,864 24,942 Expenditures billable to clients (18,686) (17,231) Prepaid expenses and other assets (11,505) (11,878) Accounts payable and accrued expenses (273,042) (175,686) Accrued income taxes (11,787) (21,975) Deferred income taxes 2,907 (242) Deferred compensation and reserve for termination liabilities 7,564 (7,644) Net cash used in operating activities (163,185) (163,820) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions (48,051) (12,605) Proceeds from sale of investments 607 101 Capital expenditures (26,220) (16,609) Net (purchases) of marketable securities (4,935) (1,467) Other investments and miscellaneous assets (5,022) (2,236) Unconsolidated affiliates (612) 2,000 Net cash used in investing activities (84,233) (30,816) CASH FLOWS FROM FINANCING ACTIVITIES: Increase in short-term borrowings 60,474 185,924 Proceeds from long-term debt 1,408 1,047 Payments of debt (140) (245) Treasury stock acquired (32,917) (34,061) Issuance of common stock 9,832 11,048 Cash dividends (17,015) (13,464) Net cash provided by financing activities 21,642 150,249 Effect of exchange rates on cash and cash equivalents (3,763) (12,525) Decrease in cash and cash equivalents (229,539) (56,912) Cash and cash equivalents at beginning of year 715,206 468,526 Cash and cash equivalents at end of period $485,667 $411,614 See accompanying notes to consolidated financial statements. 7 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 March 31, 1998, the consolidated income statements for the three months ended March 31, 1998 and 1997, the statement of comprehensive income for the three months ended March 31, 1998 and 1997 and the consolidated statement of cash flows for the three months ended March 31, 1998 and 1997, contain all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at March 31, 1998 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's") December 31, 1997 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 $49.1 million and $33.0 million in the first three months of 1998 and 1997, respectively. Interest payments during the first three months of 1998 and 1997 were approximately $7.4 million and $4.4 million, respectively. (c) In July 1997, a three-for-two stock split was effected by payment of a stock dividend. This split has been reflected in the accompanying consolidated financial statements. (d) Subsequent event In April 1998, the Company issued approximately 4.7 million shares of its common stock to acquire several advertising and communications companies. 8 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 March 31 Basic 1998 1997 <F2> Net income $ 27,634 $ 22,035 Weighted average number of common shares outstanding 127,721,325 118,405,479 Earnings per common and common equivalent share $ .22 $ .19 Three Months Ended March 31 Diluted <F1> 1998 1997 Net income $ 27,634 $ 22,035 Add: Dividends paid net of related income tax applicable to restricted stock 123 91 Net income, as adjusted $ 27,757 $ 22,126 Weighted average number of common shares outstanding 127,721,325 118,405,479 Weighted average number of incremental shares in connection with restricted stock and assumed exercise of stock options 5,051,940 3,934,750 Total 132,773,265 122,340,229 Earnings per common and common equivalent share $ .21 $ .18 <F1> The computation of diluted EPS for 1998 excludes the assumed conversion of the 1.80% Convertible Subordinated Notes because they were anti-dilutive. Similarly, the computation of diluted EPS for 1997 excludes the assumed conversion of the 3 3/4% Convertible Subordinated Debentures as they were anti-dilutive. <F2> Restated to reflect a three-for-two stock split effected July 1997. 9 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 March 31, 1998 was $228.0 million, a decrease of $46.0 million from December 31, 1997. The ratio of current assets to current liabilities was approximately 1.1 to 1 at March 31, 1998. 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 three months of 1998, the Company acquired 649,915 shares of its own stock for approximately $32.9 million for the purpose of fulfilling the Company's obligations under its various compensation plans. 10 RESULTS OF OPERATIONS Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Total revenue for the three months ended March 31, 1998 increased $136.0 million, or 23.3%, to $719.4 million compared to the same period in 1997. Domestic revenue increased $101 million or 38.4% from 1997 levels. Foreign revenue increased $35.1 million or 10.9% during the first quarter of 1998 compared to 1997. Other income increased by $.2 million during the first quarter of 1998 compared to the same period in 1997. Operating expenses increased $122.7 million or 22.4% during the three months ended March 31, 1998 compared to the same period in 1997. Interest expense increased 4.1% as compared to the same period in 1997. Pretax income increased $13.1 million or 33.6% during the three months ended March 31, 1998 compared to the same period in 1997. The increase in total revenue, operating expenses, and pretax income is primarily due to acquisitions and the effect of new business gains. Net losses from exchange and translation of foreign currencies for the three months ended March 31, 1998 were approximately $.6 million versus $2.0 million for the same period in 1997. The effective tax rate for the three months ended March 31, 1998 was 42.7%, as compared to 43.0% in 1997. 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. 11 PART II - OTHER INFORMATION Item 2. CHANGES IN SECURITIES (c) RECENT SALES OF UNREGISTERED SECURITIES (1) On January 9, 1998, the Registrant acquired a small company, in consideration for which the Registrant issued a total of 19,990 shares of its common stock, par value $.10 per share ("Interpublic Stock") to the former shareholder of the acquired company. The shares of Interpublic Stock had a market value of $1,000,000 on the date of issuance. The shares of Interpublic 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 shareholder of the acquired company. (2) On February 13, 1998, the Registrant acquired a company in consideration for which it issued a total of 113,331 shares of Interpublic Stock, to the acquired company's former shareholders. The shares of Interpublic Stock had a market value of $6,500,000 on the date of issuance. The shares of Interpublic 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 or sophistication of the acquired company's former stockholders. (3) On February 24, 1998, the Registrant acquired a company in consideration for which it issued a total of 43,716 shares of Interpublic Stock to the acquired company's former shareholders. The shares of Interpublic Stock had a market value of $2,200,000 on the date of issuance. The shares of Interpublic 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 or sophistication of the acquired company's former stockholders. (4) On March 23, 1998, the Registrant acquired a company in consideration for which it issued a total of 136,148 shares of Interpublic Stock to the acquired company's former shareholders. The shares of Interpublic Stock had a market value of $7,500,000 on the date of issuance. The shares of Interpublic 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 or sophistication of the company's former stockholders. 12 Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Exhibit 10(a) Executive Severance Agreement dated January 1, 1998, between The Interpublic Group of Companies, Inc. ("Interpublic") and Eugene P. Beard. Exhibit 10(b) Executive Severance Agreement dated January 1, 1998, by and between Interpublic and John J. Dooner, Jr. Exhibit 10(c) Executive Severance Agreement dated January 1, 1998, by and between Interpublic and Philip H. Geier, Jr. Exhibit 10(d) Supplemental Agreement made as of March 1, 1998, by and between Interpublic and Philip H. Geier, Jr. Exhibit 10(e) Supplemental Agreement dated as of March 1, 1998, by and between Interpublic and Frank B. Lowe. Exhibit 11 Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K The following report on Form 8-K was filed without financial statements during the quarter ended March 31, 1998: Item 9 - Sale of Equity Securities Pursuant to Regulation S, dated January 6, 1998. 13 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: May 15, 1998 BY /S/ EUGENE P. BEARD Eugene P. Beard Vice Chairman - Finance and Operations Date: May 15, 1998 BY /S/ JOSEPH M. STUDLEY Joseph M. Studley Chief Accounting Officer 14 INDEX TO EXHIBITS Exhibit No. Description Exhibit 10(a) Executive Severance Agreement dated January 1, 1998, between The Interpublic Group of Companies, Inc. ("Interpublic") and Eugene P. Beard. Exhibit 10(b) Executive Severance Agreement dated January 1, 1998, by and between Interpublic and John J. Dooner, Jr. Exhibit 10(c) Executive Severance Agreement dated January 1, 1998, by and between Interpublic and Philip H. Geier, Jr. Exhibit 10(d) Supplemental Agreement made as of March 1, 1998, by and between Interpublic and Philip H. Geier, Jr. Exhibit 10(e) Supplemental Agreement dated as of March 1, 1998, by and between Interpublic and Frank B. Lowe. Exhibit 11 Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. 15