FINANCIAL HIGHLIGHTS
(Amounts in Thousands Except Per Share Data)
- --------------------------------------------------------------------------------
December 31
Percent
1999 1998 Increase
- --------------------------------------------------------------------------------
Operating Data
Gross Income $ 4,561,518 $ 3,968,728 14.9%
Net Income $ 321,921 $ 309,905 3.9%
Net Income Excluding
Restructuring(1) $ 373,358 $ 309,905 20.5%
Per Share Data(2)
Diluted EPS $ 1.11 $ 1.10 0.9%
Diluted EPS Excluding
Restructuring (1) $ 1.29 $ 1.10 17.3%
Cash Dividends $ .33 $ .29 13.8%
Share Price at December 31 $ 57 11/16 $ 39 7/8 44.7%
Weighted-average shares
Diluted 289,548 281,051 3.0%
Diluted Excluding
Restructuring(1) 296,241 281,051 5.4%
Financial Position
Cash and Cash Equivalents $ 981,448 $ 760,508 29.1%
Total Assets $ 8,727,255 $ 6,942,823 25.7%
Book Value Per Share(2) $ 5.66 $ 4.53 24.9%
Return on Average
Stockholders' Equity:
As Reported 22.3% 27.1%
Excluding Restructuring(1) 25.4% 27.1%
Gross Income
1999 $4,561,518
1998 $3,968,728
1997 $3,482,384
Diluted Earnings Per Share(2)
1999 As Reported $ 1.11
1999 Excluding Restructuring(1) $ 1.29
1998 $ 1.10
1997 $ .74
Cash Dividends Per Share(2)
1999 $ .33
1998 $ .29
1997 $ .25
Return On Average Stockholders' Equity
1999 As Reported 22.3%
1999 Excluding Restructuring(1) 25.4%
1998 27.1%
1997 21.8%
- ----------
[FN]
(1) Excludes the impact of restructuring and other merger related costs.
(2) All share data for 1998 and 1997 has been adjusted to reflect the
two-for-one stock split effective July 15, 1999.
</FN>
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported net income of $321.9 million or $1.11 diluted earnings per
share for the year ended December 31, 1999. Excluding the impact of
restructuring and other merger related costs, which are described in a
subsequent section of this discussion, net income would have been $373.4 million
or $1.29 diluted earnings per share, compared to $309.9 million or $1.10 diluted
earnings per share for the year ended December 31, 1998 and $200.4 million or
$.74 diluted earnings per share for the year ended December 31, 1997.
The following table sets forth net income and earnings per share before and
after the restructuring and other merger related costs:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Net income as reported $ 321,921 $ 309,905 $ 200,378
Earnings per share
Basic $ 1.15 $ 1.14 $ .77
Diluted $ 1.11 $ 1.10 $ .74
Net income before restructuring
and other merger related costs $ 373,358 $ 309,905 $ 200,378
Earnings per share
Basic $ 1.34 $ 1.14 $ .77
Diluted $ 1.29 $ 1.10 $ .74
Revenue
- -------
Worldwide revenue from commissions and fees for 1999 was $4.4 billion, an
increase of $583 million or 15.2% over 1998. Domestic revenue, which represented
52% of worldwide revenue in 1999, increased $359 million or 18.7% over 1998.
International revenue, which represented 48% of worldwide revenue in 1999,
increased $224 million or 11.7% over 1998. International revenue would have
increased 16% excluding the effect of the strengthening of the U.S. dollar
against major currencies. Revenue from other marketing communication services,
which include sales promotion, internet services, independent media buying,
healthcare marketing, market research, brand equity and corporate identity
services, sports and event marketing, relationship (direct) marketing, public
relations, and other related services, comprised approximately 40% of total
worldwide revenue in 1999, compared to 33% in 1998. The increase in worldwide
revenue is a result of both growth from new business gains and growth from
acquisitions. Exclusive of acquisitions, worldwide revenue on a constant dollar
basis increased 9% over 1998.
Worldwide revenue from commissions and fees for 1998 was $3.8 billion, an
increase of $492 million or 14.7% over 1997. Domestic revenue, which represented
50% of worldwide revenue, increased $254 million or 15.2% over 1997.
International revenue increased $237 million or $14.1% over 1997. International
revenue would have increased about 19% excluding the effect of the strengthening
of the U.S. dollar against major currencies.
Other Income, Net
- -----------------
Other income, net primarily consists of interest income, net gains from equity
investments, cash discounts from media suppliers, and other miscellaneous items.
Other income, net included gains from the Company's investments in various
interactive based companies, including Nicholson NY, Inc., Lycos and USWEB in
1999, gains related to investments in USWEB, CKS Group, Inc. and Lycos in 1998,
and gains on the sale of investments, including All American Communications,
Inc. and CKS Group, Inc. in 1997. In the aggregate, annual net equity gains
remained relatively constant during the three year period.
Operating Expenses
- ------------------
Worldwide operating expenses for 1999, excluding restructuring and other merger
related costs, were $3.8 billion, an increase of 14% over 1998. Operating
expenses outside the United States increased 10.2%, while domestic operating
expenses increased 18.6%. These increases were commensurate with the increases
in revenue. Worldwide operating expenses for 1998 were $3.3 billion, an increase
of 12% over 1997, comprised of a 14.8% increase in international expenses and a
9.2% increase in domestic expenses.
Significant portions of the Company's expenses relate to employee compensation
and various employee incentive and benefit programs, which are based primarily
upon operating results. Salaries and related expenses were $2.5 billion in 1999
or 56.5% of revenue as compared to $2.2 billion in 1998 or 56.4% of revenue and
$1.9 billion in 1997 or 57.1% of revenue. The year over year increase is a
result of growth from acquisitions and new business gains.
In 1997, as part of its continuing cost containment efforts, the Company
announced that it was curtailing its domestic pension plan effective April 1,
1998, and recorded pre-tax charges of approximately $16.7 million. The Company
continues to sponsor a domestic defined contribution plan.
Office and general expenses were $1.3 billion in 1999, $1.2 billion in 1998, and
$1.1 billion in 1997. The year over year increase is a result of the continued
growth of the Company, which reflects in part an increase in the level of
goodwill amortization related to acquisitions.
Interest Expense
- ----------------
Interest expense was $66 million in 1999, an increase of $8 million over 1998.
The increase in 1999 was primarily attributable to the issuance of the 1.87%
Convertible Subordinated Notes due 2006, issued in June 1999.
Special Compensation Charges
- ----------------------------
During 1997, Hill, Holliday, Connors, Cosmopolous, Inc. ("Hill Holliday"), a
company acquired in a pooling of interests transaction in the second quarter of
1998, recorded special compensation charges of approximately $32 million.
Restructuring and Other Merger Related Costs
- --------------------------------------------
In October 1999, the Company announced the merger of two of its advertising
networks. The networks affected, Lowe & Partners Worldwide and Ammirati Puris
Lintas were combined to form a new agency network called Lowe Lintas & Partners
Worldwide. The merger involves the consolidation of operations in Lowe Lintas
agencies in approximately 24 cities in 22 countries around the world. Once
complete, the newly merged agency network will have offices in over 80 countries
around the world.
During the fourth quarter of 1999, the Company began execution of a
comprehensive restructuring plan in connection with the merger. The plan
includes headcount reductions, consolidation of real estate and the sale or
disposition of certain investments, and is expected to be completed by June 30,
2000. The Company is pleased with the progress of the merger to date and expects
the total costs to be in line with its original estimate.
The total pre-tax cost of the restructuring plan is expected to be between $170
and $190 million, ($100 to $115 million, net of tax). In the fourth quarter of
1999, the Company recognized pre-tax costs of $84.2 million ($51.4 million, net
of tax or $.18 per diluted share), with the remainder expected to be recognized
in the first two quarters of 2000.
A summary of the components of the total restructuring and other merger related
costs, together with an analysis of the cash and non-cash elements, is as
follows:
(Dollars in millions)
1999 Cash Non-Cash
---- ---- --------
TOTAL BY TYPE
- -------------
Severance and termination costs $44.9 $27.0 $17.9
Fixed asset write-offs 11.1 -- 11.1
Lease termination costs 3.8 3.8 --
Investment write-offs and other 24.4 1.1 23.3
--------------------------------
Total $84.2 $31.9 $52.3
================================
The severance and termination costs recorded in 1999 relate to approximately 230
employees who have been terminated or notified that they will be terminated. The
employee groups affected include executive and regional management,
administrative, account management, creative and media production personnel,
principally in the U.S. and U.K. The charge related to these individuals
includes the cost of voluntary programs in certain locations and includes
substantially all senior executives that will be terminated. As of December 31,
1999, the amount accrued related to severance and termination was approximately
$42.6 million. During the fourth quarter of 1999, cash payments of $2.3 million
were made.
The fixed assets write-off relates largely to the abandonment of leasehold
improvements as part of the merger. The amount recognized in 1999 relates to
fixed asset write-offs in 6 offices principally in the United States.
Lease termination costs relate to the offices vacated as part of the merger. The
lease terminations are expected to be completed by mid-to-late 2000, with the
cash portion to be paid out over a period of up to five years. As of December
31, 1999, the amount accrued related to these termination costs was $3.8
million.
The investment write-offs relate to the loss on sale or closing of certain
business units. In 1999, $23 million has been recorded as a result of the
decision to sell or abandon 4 European businesses. In the aggregate, the
businesses being sold or abandoned represent an immaterial portion of the
revenue and operations of Lowe Lintas & Partners. The write-off amount was
computed based upon the difference between the estimated sales proceeds (if any)
and the carrying value of the related assets. These sales or closures are
expected to be completed by mid 2000.
The Company expects to benefit from the resulting reduction in employee related
costs, compensation, benefits and space occupancy. These benefits will begin to
be realized in the second half of 2000. It is anticipated that a significant
portion of the savings will be offset by investments in creative talent,
technology and other capabilities to support the acceleration of growth in the
future. The Company anticipates that beginning 2001 its after-tax results of
operations will benefit by between $20 to $25 million.
Other Items
- -----------
Income applicable to minority interests increased by $5.3 million in 1999 and by
$4.4 million in 1998. The 1999 and 1998 increase was primarily due to the strong
performance of companies that were not wholly owned, as well as the acquisition
of additional such entities during 1999 and 1998.
The Company's effective income tax rate was 40.4% in 1999, 41.2% in 1998 and
46.1% in 1997. The higher rate in 1997 was largely attributable to the special
compensation charges recorded by Hill Holliday.
Cash Based Earnings
- -------------------
Management believes that cash based earnings are a relevant measure of financial
performance as it better illustrates the Company's performance and ability to
support growth. The Company defines cash based earnings as net income, adjusted
to exclude goodwill amortization, net of tax where applicable. Cash based
earnings are not calculated in the same manner by all companies and are intended
to supplement, not replace, the other measures calculated in accordance with
generally accepted accounting principles. Cash based earnings for the three
years ending December 31, 1999, 1998, and 1997 were as follows:
(Amounts in thousands except per share data)
1999 1998 1997
---- ---- ----
Net income as reported $321,921 $309,905 $200,378
Restructuring and other
merger related costs, net of tax 51,437 -- --
-------- -------- --------
Net income, as adjusted 373,358 309,905 200,378
Add back goodwill amortization 74,280 55,835 41,110
Less related tax effect (6,026) (4,614) (4,156)
-------- -------- --------
Cash based earnings (as
defined above) $441,612 $361,126 $237,332
======== ======== ========
Per share amounts (diluted) $1.52 $1.29 $.88
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position remained strong during 1999, with cash and cash
equivalents at December 31, 1999, of $981.4 million, an increase of $220.9
million over the 1998 year-end balance. Working capital at December 31, 1999,
was $130.9 million, which was $60.6 million higher than the level at the end of
1998. The increase in working capital was largely attributable to proceeds of
approximately $300 million from the 1.87% Convertible Subordinated Notes due
2006 issued in June, 1999.
Historically, cash flow from operations has been the primary source of working
capital and management believes that it will continue to be so in the future.
Net cash provided by operating activities was $562 million, $498 million and
$264 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company's working capital is used primarily to provide for the
operating needs of its subsidiaries, which includes payments for space or time
purchased from various media on behalf of clients. The Company's practice is to
bill and collect from its clients in sufficient time to pay the amounts due for
media on a timely basis. Other uses of working capital include the repurchase of
the Company's common stock, payment of cash dividends, capital expenditures and
acquisitions.
The Company acquires shares of its stock on an ongoing basis. During 1999, the
Company purchased approximately 6.5 million shares of its common stock, compared
to 4.9 million shares in 1998. The Company repurchases its stock for the purpose
of fulfilling its obligations under various compensation plans.
The Company paid $90.4 million ($.33 per share) in dividends to stockholders in
1999, as compared to $76.9 million ($.29 per share) paid during 1998.
The Company's capital expenditures in 1999 were $149.7 million compared to
$136.7 million in 1998 and $107.1 million in 1997. The primary purposes of these
expenditures were to upgrade computer and telecommunications systems to better
serve clients and to modernize offices.
During 1999, the Company paid approximately $550 million in cash and stock for
new acquisitions, including a number of marketing communications companies to
complement its existing agency systems and to optimally position itself in the
ever-broadening communications marketplace. This amount includes the value of
stock issued for pooled companies.
The Company and its subsidiaries maintain credit facilities in the United States
and in countries where they conduct business to manage their future liquidity
requirements. The Company's available short-term credit facilities were $510
million, of which $80 million were utilized at December 31, 1999, and $576
million, of which $118 million were utilized at December 31, 1998.
Return on average stockholders' equity was 22.3% in 1999 and 27.1% in 1998.
Excluding restructuring and other merger related costs, return on average
stockholders' equity was 25.4% in 1999. The decline in 1999 was primarily
attributable to a $159 million increase in net unrealized holding gains on
equity investments, which are included in stockholders' equity.
As discussed in Note 12, revenue from international operations was 48% of total
revenue in 1999 and 50% of total revenue in both 1998 and 1997. The Company
continuously evaluates and attempts to mitigate its exposure to foreign
exchange, economic and political risks. The notional value and fair value of all
outstanding forwards and options contracts at the end of the year were not
significant. In addition, the economic developments in Brazil, which did not
have a significant negative impact on the Company, were partially offset by the
favorable impact due to the economic recovery in Japan.
The Company is not aware of any significant occurrences that could negatively
impact its liquidity. However, should such a trend develop, the Company believes
that there are sufficient funds available under its existing lines of credit and
from internal cash-generating capabilities to meet future needs.
OTHER MATTERS
Internet-Services Companies
- ---------------------------
During 1999, the Company expanded its investment in internet-service and related
companies. In December 1999, the Company announced the establishment of Zentropy
Partners, a new global internet-services company that integrates the building
and marketing of digital businesses. At its formation, Zentropy Partners had
annualized revenue exceeding $50 million and was positioned to serve clients out
of 11 offices in Europe and North America.
In April 1999, the Company invested $20 million for a minority interest in Icon
Medialab International AB ("Icon"), a Swedish based internet consultancy. Later
in the year, the Company increased its investment in Icon through the
contribution of other investments and through additional cash purchases. At
December 31, 1999, the fair market value of the Company's investment in Icon was
$322 million.
In addition to the above, the Company maintains internet-service and related
divisions at several of its major operating divisions and has made strategic
investments in fourteen companies whose objectives revolve around consulting on
the use of technology to benefit customers.
NFO Worldwide, Inc.
- -------------------
As more fully discussed in Note 15, on December 22, 1999 the Company entered
into an agreement to acquire NFO Worldwide, Inc., a leading provider of research
based marketing information and counsel to the business community. The
acquisition, which will add one of the top three worldwide custom marketing
research organizations and the single largest provider of internet-based
marketing research to the Company's diverse group of advertising and
communications-services companies, is expected to close in April 2000.
Year 2000 Issue
- ---------------
Pursuant to the Year 2000 issue, the Company had developed programs to address
the possible exposures related to the impact of computer systems incorrectly
recognizing the year 2000 or "00" as 1900. As a result of implementation of its
programs, the Company did not experience any significant Year 2000 disruptions
during the transition from 1999 to 2000, and since entering 2000, the Company
has not experienced any significant Year 2000 disruptions to its business. In
addition, the Company is not aware of any significant disruptions impacting its
customers or suppliers. The Company will continue to monitor its computer
systems over the next several months. However, the Company does not anticipate
any significant impact related to Year 2000 problems that may affect its
internal computer systems. The Company will also continue to monitor the
activities of its business partners and critical suppliers and has developed
contingency plans should business partners or critical suppliers experience any
Year 2000 disruptions in the coming months.
Costs incurred to achieve Year 2000 readiness, which included modification to
existing systems, replacement of non-compliant systems and consulting resources
totaled $72 million. A total of $47 million was capitalized (related primarily
to hardware and software that provided both Year 2000 readiness and increased
the functionality of certain systems), and $25 million was expensed.
Cautionary Statement
- --------------------
Statements by the Company in this document are forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated in the
forward-looking statements.
New Accounting Guidance
- -----------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which had an initial adoption date by the
Company of January 1, 2000. In June 1999, the FASB postponed the adoption date
of SFAS 133 until January 1, 2001. The Company does not believe the effect of
adopting SFAS 133 will be material to its financial condition.
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 will be
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.
REPORT OF INDEPENDENT ACCOUNTANTS
1301 Avenue of the Americas
New York, New York 10019
To the Board of Directors and Stockholders of
The Interpublic Group of Companies, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of income, of cash flows, and of stockholders' equity and comprehensive income
present fairly, in all material respects, the financial position of The
Interpublic Group of Companies, Inc. and its subsidiaries (the "Company") at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 International Public
Relations plc ("IPR"), a wholly-owned subsidiary, which statements reflect
revenues constituting approximately 6% of the related 1997 consolidated
financial statement total. Additionally, we did not audit the financial
statements of Hill, Holliday, Connors, Cosmopulos, Inc. ("Hill Holliday"), a
wholly-owned subsidiary, which statements reflect total net loss constituting
approximately 17% of the related 1997 consolidated financial statement total.
Those statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for IPR and Hill Holliday, is based solely on the reports of
the other auditors. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
INTERNATIONAL PUBLIC RELATIONS PLC
We have audited the consolidated statements of income, shareholders' equity and
cash flows of International Public Relations plc and subsidiaries for the
fourteen-month period ended 31 December 1997, all expressed in pounds sterling.
These financial statements, which are not separately presented herein, are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with United Kingdom auditing standards,
which do not differ in any significant respect from United States generally
accepted auditing standards. Those standards require that we plan and perform
the audit 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 provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the operations and
the consolidated cash flows of International Public Relations plc and
subsidiaries for the fourteen-month period ended 31 December 1997 in conformity
with United States generally accepted accounting principles.
Ernst & Young
London
3 February 1999
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Hill, Holliday, Connors, Cosmopulos, Inc.
We have audited the consolidated statements of operations, stockholders' equity
(deficit) and cash flows of Hill, Holliday, Connors, Cosmopulos, Inc. and
Subsidiaries (the Company) for the twelve months ended December 31, 1997, not
separately presented herein. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Hill, Holliday, Connors, Cosmopulos, Inc. and Subsidiaries for the
twelve-month period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
March 13, 1998
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31
(Dollars in Thousands Except Per Share Data)
ASSETS 1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents (includes
certificates of deposit: 1999-$150,343;
1998-$152,064) $ 981,448 $ 760,508
Marketable securities 36,765 31,733
Receivables (net of allowance for doubtful
accounts: 1999-$57,841; 1998-$53,093) 4,309,589 3,522,616
Expenditures billable to clients 309,059 276,610
Prepaid expenses and other current assets 130,983 137,183
--------------------------
Total current assets 5,767,844 4,728,650
--------------------------
OTHER ASSETS:
Investment in unconsolidated affiliates 50,079 47,561
Deferred taxes on income -- 97,350
Other investments and miscellaneous assets 717,521 348,262
--------------------------
Total other assets 767,600 493,173
--------------------------
FIXED ASSETS, AT COST:
Land and buildings 143,079 95,228
Furniture and equipment 732,115 650,037
--------------------------
875,194 745,265
Less: accumulated depreciation 480,648 420,864
--------------------------
394,546 324,401
Unamortized leasehold improvements 139,777 115,200
--------------------------
Total fixed assets 534,323 439,601
--------------------------
Intangible assets (net of accumulated
amortization: 1999-$579,067; 1998-$504,787) 1,657,488 1,281,399
--------------------------
TOTAL ASSETS $8,727,255 $6,942,823
==========================
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31
(Dollars in Thousands Except Per Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
CURRENT LIABILITIES:
Payable to banks $ 261,951 $ 214,464
Accounts payable 4,541,669 3,613,699
Accrued expenses 675,596 624,517
Accrued income taxes 157,713 205,672
--------------------------
Total current liabilities 5,636,929 4,658,352
--------------------------
NONCURRENT LIABILITIES:
Long-term debt 348,772 298,691
Convertible subordinated debentures
and notes 518,490 207,927
Deferred compensation and reserve
for termination allowances 343,606 319,526
Deferred taxes on income 41,429 --
Accrued postretirement benefits 48,730 48,616
Other noncurrent liabilities 82,585 88,691
Minority interests in consolidated
subsidiaries 78,643 55,928
--------------------------
Total noncurrent liabilities 1,462,255 1,019,379
--------------------------
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value
shares authorized: 20,000,000
shares issued: none
Common Stock, $.10 par value
shares authorized: 550,000,000
shares issued:
1999 - 297,137,345;
1998 - 291,445,158 29,714 29,145
Additional paid-in capital 738,953 652,692
Retained earnings 1,325,306 1,101,792
Accumulated other comprehensive
loss, net of tax (76,404) (160,476)
--------------------------
2,017,569 1,623,153
Less:
Treasury stock, at cost:
1999 - 9,479,772 shares;
1998 - 12,374,344 shares 312,463 286,713
Unamortized expense of restricted
stock grants 77,035 71,348
--------------------------
Total stockholders' equity 1,628,071 1,265,092
--------------------------
Commitments and contingencies
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,727,255 $6,942,823
==========================
All share data for 1998 has been adjusted to reflect the two-for-one stock split
effective July 15, 1999.
The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
(Amounts in Thousands Except Per Share Data)
1999 1998 1997
----------- ----------- -----------
Commissions and fees $ 4,427,303 $ 3,844,340 $ 3,352,776
Other income, net 134,215 124,388 129,608
-----------------------------------------
Gross income 4,561,518 3,968,728 3,482,384
-----------------------------------------
Salaries and related expenses 2,503,273 2,167,931 1,913,356
Office and general expenses 1,322,583 1,179,227 1,075,176
Interest expense 66,422 58,699 57,793
Special compensation charges -- -- 32,229
Restructuring and other merger
related costs 84,183 -- --
-----------------------------------------
Total costs and expenses 3,976,461 3,405,857 3,078,554
-----------------------------------------
Income before provision for
income taxes 585,057 562,871 403,830
Provision for income taxes 236,339 232,005 186,246
-----------------------------------------
Income of consolidated companies 348,718 330,866 217,584
Income applicable to minority
interests (33,426) (28,125) (23,754)
Equity in net income of
unconsolidated affiliates 6,629 7,164 6,548
-----------------------------------------
Net Income $ 321,921 $ 309,905 $ 200,378
-----------------------------------------
Per Share Data:
Basic EPS $ 1.15 $ 1.14 $ .77
Diluted EPS $ 1.11 $ 1.10 $ .74
Weighted average shares:
Basic 278,923 270,971 260,500
Diluted 289,548 281,051 277,619
-----------------------------------------
All share data for 1998 and 1997 has been adjusted to reflect the two-for-one
stock split effective July 15, 1999.
The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
(Dollars in Thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 321,921 $ 309,905 $ 200,378
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization of fixed assets 115,733 103,029 84,371
Amortization of intangible assets 74,280 55,835 41,110
Amortization of restricted stock awards 25,926 20,272 16,222
Stock bonus plans/ESOP -- -- 1,389
Provision for (benefit of) deferred income taxes 10,714 (12,941) 7,743
Noncash pension plan charges -- -- 16,700
Equity in net income of unconsolidated affiliates (6,629) (7,164) (6,548)
Income applicable to minority interests 33,426 28,125 23,754
Translation losses/(gains) 2,768 1,847 (319)
Special compensation charges -- -- 31,553
Net gain on investments (43,390) (40,465) (44,626)
Restructuring costs, non-cash 52,264 -- --
Other (8,533) 9,519 (11,092)
Change in assets and liabilities,
net of acquisitions:
Receivables (813,416) (243,966) (340,804)
Expenditures billable to clients (22,838) (25,988) (46,512)
Prepaid expenses and other assets (119,520) (40,079) (26,967)
Accounts payable and accrued expenses 975,370 305,076 296,849
Accrued income taxes (55,952) 20,108 2,311
Deferred compensation and reserve for
termination allowances 20,184 14,398 18,397
-----------------------------------
Net cash provided by operating activities 562,308 497,511 263,909
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net (250,404) (121,751) (90,297)
Capital expenditures (149,716) (136,738) (107,065)
Proceeds from sales of assets 70,454 27,483 114,023
Net (purchases of) proceeds from
marketable securities (9,114) 3,934 324
Investment in unconsolidated affiliates (12,567) (16,660) (8,371)
-----------------------------------
Net cash used in investing activities (351,347) (243,732) (91,386)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 47,592 15,304 31,188
Proceeds from long-term debt 363,792 12,253 256,337
Payments of long-term debt (31,118) (25,882) (31,223)
Proceeds from ESOP -- 7,420 --
Treasury stock acquired (300,524) (164,928) (144,094)
Issuance of common stock 62,892 33,688 37,750
Cash dividends - Interpublic (90,424) (76,894) (61,242)
Cash dividends - pooled companies -- (2,847) (10,770)
-----------------------------------
Net cash provided by (used in) financing activities 52,210 (201,886) 77,946
-----------------------------------
Effect of exchange rates on cash and cash equivalents (42,231) 11,604 (41,892)
-----------------------------------
Increase in cash and cash equivalents 220,940 63,497 208,577
Cash and cash equivalents at beginning of year 760,508 697,011 488,434
-----------------------------------
Cash and cash equivalents at end of year $ 981,448 $ 760,508 $ 697,011
===================================
The accompanying notes are an integral part of these financial statements.
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(Dollars in Thousands)
Accumulated Unamortized
Common Additional Other Expense Unearned
Stock Paid-In Retained Comprehensive Treasury of Restricted ESOP
(par value $.10) Capital Earnings Income (loss) Stock Stock Grants Plan Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 $29,145 $652,692 $1,101,792 $(160,476) $(286,713) $(71,348) $ -- $1,265,092
Comprehensive income:
Net income $ 321,921 $ 321,921
Adjustment for minimum pension
liability 17,965 17,965
Change in market value of
securities available-for-sale 158,607 158,607
Foreign currency translation
adjustment (92,500) (92,500)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $405,993
Cash dividends - IPG (90,424) (90,424)
Equity adjustments-
pooled companies (7,796) (7,796)
Awards of stock under
Company plans:
Achievement stock and
incentive awards 198 333 531
Restricted stock,
net of forfeitures 66 36,902 (7,927) (5,687) 23,354
Employee stock purchases 40 19,068 19,108
Exercise of stock options,
including tax benefit 276 81,539 81,815
Purchase of Company's own stock (300,524) (300,524)
Issuance of shares
for acquisitions (51,446) 282,368 230,922
Par value of shares issued
for two-for-one stock split 187 (187) --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1999 $29,714 $738,953 $1,325,306 $ (76,404) $(312,463) $(77,035) $ -- $1,628,071
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(Dollars in Thousands)
Accumulated Unamortized
Common Additional Other Expense Unearned
Stock Paid-In Retained Comprehensive Treasury of Restricted ESOP
(par value $.10) Capital Earnings Income (loss) Stock Stock Grants Plan Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 $28,715 $515,892 $871,843 $(159,771) $(171,088) $(56,634) $(7,420) $1,021,537
Comprehensive income:
Net income $309,905 $ 309,905
Adjustment for minimum pension
liability (23,405) (23,405)
Change in market value of
securities available-for-sale (2,516) (2,516)
Foreign currency translation
adjustment 25,216 25,216
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $ 309,200
Cash dividends - IPG (76,894) (76,894)
Equity adjustments-
pooled companies (2,847) (2,847)
Awards of stock under
Company plans:
Achievement stock and
incentive awards 274 110 384
Restricted stock,
net of forfeitures 63 36,619 (2,406) (14,714) 19,562
Employee stock purchases 26 13,325 13,351
Exercise of stock options,
including tax benefit 123 42,518 42,641
Purchase of Company's own stock (164,928) (164,928)
Issuance of shares
for acquisitions 43,062 51,599 94,661
Conversion of convertible
debentures 3 1,002 1,005
Payments from ESOP 7,420 7,420
Par value of shares issued
for two-for-one stock split 215 (215) --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 $29,145 $ 652,692 $1,101,792 $(160,476) $(286,713) $(71,348) $ -- $1,265,092
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(Dollars in Thousands)
Accumulated Unamortized
Common Additional Other Expense Unearned
Stock Paid-In Retained Comprehensive Treasury of Restricted ESOP
(par value $.10) Capital Earnings Income (loss) Stock Stock Grants Plan Total
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 $13,641 $246,063 $759,987 $ (96,972) $ (49,082) $(47,350) $(7,800) $ 818,487
Comprehensive income:
Net income $200,378 $ 200,378
Adjustment for minimum pension
liability (228) (228)
Change in market value of
securities available-for-sale 12,405 12,405
Foreign currency translation
adjustment (74,976) (74,976)
- -----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $137,579
Cash dividends - IPG (61,242) (61,242)
Equity adjustments-
pooled companies (12,922) (12,922)
Awards of stock under
Company plans:
Achievement stock and
incentive awards 787 175 962
Restricted stock,
net of forfeitures 53 27,821 (3,664) (9,284) 14,926
Employee stock purchases 23 9,684 9,707
Exercise of stock options,
including tax benefit 138 40,855 40,993
Purchase of Company's own stock (144,094) (144,094)
Issuance of shares
for acquisitions 49,877 25,577 75,454
Conversion of convertible
debentures 443 118,357 118,800
Par value of shares issued
for three-for-two stock split 59 59
Payments from ESOP 380 380
Special compensation charges 27,324 27,324
Deferred stock bonus charges (4,876) (4,876)
Par value of shares issued for
two-for-one stock split 14,358 (14,358) --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 $28,715 $515,892 $871,843 $(159,771) $(171,088) $(56,634) $(7,420) $1,021,537
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
All share data for 1999, 1998 and 1997 has been adjusted to reflect the two-for-one stock split effective July 15, 1999.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company is a worldwide provider of advertising agency and related services.
The Company conducts business through the following subsidiaries:
McCann-Erickson WorldGroup, The Lowe Group, DraftWorldwide, Initiative Media
Worldwide, International Public Relations, Octagon, Zentropy Partners, Allied
Communications Group, and other related companies. The Company also has
arrangements through association with local agencies in various parts of the
world. Other "marketing communications" activities conducted by the Company
include sales promotion, internet services, independent media buying, healthcare
marketing, market research, brand equity and corporate identity services, sports
and event marketing, relationship (direct) marketing, public relations and other
related services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, most of which are wholly owned. The Company also has certain
investments in unconsolidated affiliates that are carried on the equity basis.
The Company acquired five companies in 1998 which were accounted for as poolings
of interests. The Company's consolidated financial statements, including the
related notes, have been restated as of the earliest period presented to include
the results of operations, financial position and cash flows of the 1998 pooled
entities in addition to all prior pooled entities.
Short-term and Long-term Investments
The Company's investments in marketable and equity securities are categorized as
available-for-sale securities, as defined by Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and
Equity Securities". Unrealized holding gains and losses are reflected as a net
amount within stockholders' equity until realized. The cost of securities sold
is based on the average cost of securities when computing realized gains and
losses.
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 disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Translation of Foreign Currencies
Balance sheet accounts are translated principally at rates of exchange
prevailing at the end of the year except for fixed assets and related
depreciation in countries with highly inflationary economies which are
translated at rates in effect on dates of acquisition. Revenue and expense
accounts are translated at average rates of exchange in effect during each year.
Translation adjustments are included within stockholders' equity except for
countries with highly inflationary economies, in which case they are included in
current operations.
Commissions, Fees and Costs
Commissions and fees are generally recognized when media placements appear and
production costs are incurred. Salaries and other agency costs are generally
expensed as incurred.
Depreciation and Amortization
Depreciation is computed principally using the straight-line method over
estimated useful lives of the related assets, ranging generally from 3 to 20
years for furniture and equipment and from 10 to 45 years for various component
parts of buildings.
Leasehold improvements and rights are amortized over the terms of related
leases. Company policy provides for the capitalization of all major expenditures
for renewal and improvements and for current charges to income for repairs and
maintenance.
Long-lived Assets
The excess of purchase price over the fair value of net tangible assets acquired
is amortized on a straight-line basis over periods not exceeding 40 years.
The Company evaluates the recoverability of the carrying value of long-lived
assets whenever events or changes in circumstances indicate that the net book
value of an operation may not be recoverable. If the sum of projected future
undiscounted cash flows of an operation is less than its carrying value, an
impairment loss is recognized. The impairment loss is measured by the excess of
the carrying value over fair value based on estimated discounted future cash
flows or other valuation measures.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities recognized for financial reporting purposes and
such amounts recognized for income tax purposes.
Earnings per Common and Common Equivalent Share
The Company applies the principles of Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share". Basic earnings per share is
based on the weighted-average number of common shares outstanding during each
year. Diluted earnings per share also includes common equivalent shares
applicable to grants under the stock incentive and stock option plans and the
assumed conversion of convertible subordinated debentures and notes, if they are
determined to be dilutive.
Treasury Stock
Treasury stock is acquired at market value and is recorded at cost. Issuances
are accounted for on a first-in, first-out basis.
Concentrations of Credit Risk
The Company's clients are in various businesses, located primarily in North
America, Latin America, Europe and the Asia Pacific Region. The Company performs
ongoing credit evaluations of its clients. Reserves for credit losses are
maintained at levels considered adequate by management. The Company invests its
excess cash in deposits with major banks and in money market securities. These
securities typically mature within 90 days and bear minimal risk.
Segment Reporting
The Company provides advertising and many other closely related marketing
communications services. All of these services fall within one reportable
segment as defined in Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information."
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133),
which had an initial adoption date by the Company of January 1, 2000. In June
1999, the FASB postponed the adoption date of SFAS 133 until January 1, 2001.
SFAS 133 will require the Company to record all derivatives on the balance sheet
at fair value. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or for forecasted transactions, deferred and
later recognized in earnings at the same time as the related hedged
transactions. The impact of SFAS 133 on the Company's financial statements will
depend on a variety of factors, including the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the type of hedging instruments used and the effectiveness of such
instruments. However, the Company does not believe the effect of adopting SFAS
133 will be material to its financial condition or results of operations.
Reclassifications
Certain amounts for prior years have been reclassified to conform to current
year presentation.
NOTE 2: STOCKHOLDERS' EQUITY
On July 15, 1999, the stockholders approved a two-for-one stock split, effected
in the form of a payment of a 100 percent stock dividend to stockholders of
record on June 29, 1999. The number of shares of common stock reserved for
issuance pursuant to various plans under which stock is issued was increased by
100 percent. The two-for-one stock split has been reflected retroactively in the
consolidated financial statements and all per share data, shares, and market
prices of the Company's common stock included in the consolidated financial
statements and notes thereto have been adjusted to give effect to the stock
split.
Comprehensive Income
Accumulated other comprehensive income (loss) amounts are reflected net of tax
in the consolidated financial statements as follows:
(Dollars in thousands)
Total
Accumulated
Foreign Unrealized Minimum Other
Currency Holding Pension Comprehensive
Translation Gains/ Liability Income/
Adjustment (Losses) Adjustment (Loss)
---------- -------- ---------- ------
Balances, December 31, 1996 $ (83,993) $ -- $(12,979) $ (96,972)
Current-period change (74,976) 12,405 (228) (62,799)
-----------------------------------------------
Balances, December 31, 1997 $(158,969) $ 12,405 $(13,207) $(159,771)
Current-period change 25,216 (2,516) (23,405) (705)
-----------------------------------------------
Balances, December 31, 1998 $(133,753) $ 9,889 $(36,612) $(160,476)
Current-period change (92,500) 158,607 17,965 84,072
-----------------------------------------------
Balances, December 31, 1999 $(226,253) $168,496 $(18,647) $ (76,404)
===============================================
The foreign currency translation adjustments are not tax-effected. See Note 13
for additional discussion of unrealized holding gains on investments.
NOTE 3: EARNINGS PER SHARE
In accordance with SFAS 128, the following is a reconciliation of the components of the basic and diluted EPS computations for
income available to common stockholders for the year ended December 31:
(Dollars in Thousands Except Per Share Data)
1999 1998 1997
------------------------------- ------------------------------ -------------------------------
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
BASIC EPS
Income available
to common stockholders $321,921 278,923,346 $1.15 $309,905 270,970,652 $1.14 $200,378 260,499,892 $.77
Effect of Dilutive Securities:
Options 7,087,791 6,620,734 5,821,296
Restricted stock 631 3,536,805 541 3,453,838 447 3,277,294
3 3/4% Convertible
subordinated debentures -- -- -- 5,320 5,929 8,020,582
DILUTED EPS $322,552 289,547,942 $1.11 $310,446 281,050,544 $1.10 $206,754 277,619,064 $.74
---------------------------------------------------------------------------------------------------
The computation of diluted EPS for 1999, 1998, and 1997 excludes the assumed conversion of the 1.80% Convertible Subordinated Notes
and the 1999 computation also excludes the 1.87% Convertible Subordinated Notes (See Note 10) because they were antidilutive. In the
fourth quarter of 1997, the Company redeemed substantially all its 3 3/4% Convertible Subordinated Debentures due 2002.
All share data for 1999, 1998 and 1997 has been adjusted to reflect the two-for-one stock split effective July 15, 1999.
NOTE 4: ACQUISITIONS
The Company acquired a number of advertising and communications companies during
the three-year period ended December 31, 1999. The aggregate purchase price,
including cash and stock payments for new acquisitions, was $550 million, $660
million and $302 million in 1999, 1998 and 1997, respectively. The aggregate
purchase price for new acquisitions accounted for as purchases and equity
investments was $284 million, $245 million, and $131 million in 1999, 1998, and
1997, respectively.
1999
In 1999, the Company paid $180 million in cash and issued 8,393,893 shares of
its common stock to acquire 55 companies. Of the acquisitions, 51 were accounted
for under the purchase method of accounting and 4 were accounted for under the
pooling of interests method. The Company also recorded a liability for
acquisition related deferred payments of $28 million, for cases where
contingencies related to acquisitions have been resolved.
For those entities accounted for as purchase transactions, the purchase price of
the acquisitions has been allocated to assets acquired and liabilities assumed
based on estimated fair values. The results of operations of the acquired
companies were included in the consolidated results of the Company from their
respective acquisition dates which occurred throughout the year. The companies
acquired in transactions accounted for as purchases included The Cassidy
Companies, Inc., Spedic France S.A., Mullen Advertising, Inc., and PDP
Promotions UK Ltd. None of the acquisitions was significant on an individual
basis.
In connection with the 1999 purchase transactions, goodwill of approximately
$245 million was recorded. The purchase price allocations made in 1999 are
preliminary and subject to adjustment. Goodwill related to the acquisitions is
being amortized on a straight-line basis over their estimated useful lives.
On December 1, 1999, the Company acquired Brands Hatch Leisure Plc. for
5,158,122 shares of stock. The acquisition has been accounted for as a pooling
of interests. Additionally, during 1999 the Company issued 641,596 shares to
acquire 3 other companies which have been accounted for as poolings of
interests. Given that the pooling acquisitions are individually and in aggregate
not material in prior periods, financial statements have not been restated.
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if the 1999 acquisitions had been completed as of
January 1, 1998. The pro forma data give effect to actual operating results
prior to the acquisition, adjusted to include the estimated pro forma effect of
interest expense, amortization of intangibles and income taxes. These pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisitions occurred as of the beginning of the periods
presented or that may be obtained in the future.
For the year ended December 31, 1999
(Amounts in thousands except per share data)
Pre- Pro forma IPG
acquisition with 1999
IPG results acquisitions
(as reported) (unaudited) (unaudited)
------------- ----------- -------------
Revenues $4,427,303 $104,528 $4,531,831
Net income 321,921 7,101 329,022
Earnings per share:
Basic 1.15 1.17
Diluted 1.11 1.13
Net income amounts shown in the table above include restructuring and other
merger related costs of $51.4 million, net of tax.
For the year ended December 31, 1998
(Amounts in thousands except per share data)
Results Pro forma IPG
of 1999 with 1999
IPG acquisitions acquisitions
(as reported) (unaudited) (unaudited)
------------- ----------- -----------
Revenues $3,844,340 $277,593 $4,121,933
Net income 309,905 19,404 329,309
Earnings per share:
Basic 1.14 1.18
Diluted 1.10 1.14
Unaudited pro forma consolidated results after giving effect to businesses
acquired in purchase transactions during 1998 would not have been materially
different from the reported amounts for 1998.
1998
In 1998, 14,956,534 shares of the Company's common stock were issued for
acquisitions accounted for as poolings of interests. The companies pooled and
the respective shares of the Company's common stock issued were: International
Public Relations Plc. - 5,280,346 shares, Hill Holliday - 4,124,868 shares, The
Jack Morton Company - 4,271,992 shares, Carmichael Lynch, Inc. - 973,808 shares
and KBA Marketing - 305,520 shares.
The Company's consolidated financial statements, including the related notes,
have been restated as of the earliest period presented to include the results of
operations, financial position and cash flows of the above 1998 pooled entities
in addition to all prior pooled entities. A gross income and net income
reconciliation for the year ended December 31, 1997 is summarized below:
Gross Income Net Income/(Loss)
------------ -----------------
(Dollars in thousands)
As Reported $3,264,120 $205,033
Pooled Companies 218,264 (4,655)
As Restated $3,482,384 $200,378
In 1998, the Company paid $140 million in cash and issued 2,718,504 shares of
its common stock to acquire 70 companies, all of which have been accounted for
as purchases. These acquisitions included Gillespie, Ryan McGinn, CSI, Flammini,
Gingko and Defederico and Herrero Y Ochoa. The Company also recorded a liability
for acquisition related deferred payments of $24 million.
1997
In 1997, the Company issued 8,118,510 shares of its common stock for
acquisitions accounted for as poolings of interests. Some of the companies
pooled and the respective shares of the Company's common stock issued were:
Complete Medical Group - 1,417,578 shares, Integrated Communications
Corporation- 1,170,108 shares, Advantage International - 1,158,412 shares and
Ludgate - 1,078,918 shares. Additional companies accounted for as poolings of
interests include Adler Boschetto Peebles, Barnett Fletcher, Davies Baron,
Diefenbach Elkins, D.L. Blair, Rubin Barney & Birger, Inc. and Technology
Solutions Inc.
In 1997, the Company also paid $81 million in cash and issued 2,400,118 shares
of its common stock for acquisitions accounted for as purchases and equity
investments. These acquisitions included Marketing Corporation of America,
Medialog, The Sponsorship Group, Kaleidoscope and Addis Wechsler (51% interest).
The Company increased its interest in Campbell Mithun Esty by 25%. The Company
also recorded a liability for acquisition related deferred payments of $38
million.
Deferred Payments
Certain of the Company's acquisition agreements provide for deferred payments by
the Company, contingent upon future revenues or profits of the companies
acquired. Deferred payments of both cash and shares of the Company's common
stock for prior years' acquisitions were $205 million, $75 million, and $43
million in 1999, 1998 and 1997, respectively. Such payments are capitalized and
recorded as goodwill.
Investments
During 1999, the Company sold a portion of its investments in Lycos and USWEB
for combined proceeds of approximately $56 million. Additionally, the Company
sold its minority investment in Nicholson NY, Inc. to Icon for $19 million in
shares of Icon's common stock.
During 1998, the Company sold a portion of its investments in USWEB, CKS Group,
Inc. and Lycos with combined proceeds of approximately $20 million. These
investments are being accounted for as available-for-sale securities, pursuant
to the requirements of SFAS 115.
During 1997, the Company sold its investment in All American Communications,
Inc. for approximately $77 million.
NOTE 5: PROVISION FOR INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 applies an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities with respect to the expected future tax consequences of
events that have been recognized in the consolidated financial statements and
tax returns.
The components of income before provision for income taxes are as follows:
(Dollars in thousands) 1999 1998 1997
-------- -------- --------
Domestic $351,257 $292,931 $174,177
Foreign 233,800 269,940 229,653
-------- -------- --------
Total $585,057 $562,871 $403,830
The provision for income taxes consisted of:
Federal Income Taxes (Including
Foreign Withholding Taxes):
Current $ 87,599 $105,049 $ 68,920
Deferred 22,149 3,669 4,312
-------- -------- --------
109,748 108,718 73,232
-------- -------- --------
State and Local Income Taxes:
Current 20,721 21,285 22,350
Deferred 4,340 725 393
-------- -------- --------
25,061 22,010 22,743
-------- -------- --------
Foreign Income Taxes:
Current 117,305 118,612 87,233
Deferred (15,775) (17,335) 3,038
-------- -------- --------
101,530 101,277 90,271
-------- -------- --------
Total $236,339 $232,005 $186,246
======== ======== ========
At December 31, 1999 and 1998 the deferred tax assets/(liabilities) consisted of
the following items:
(Dollars in thousands) 1999 1998
---- ----
Postretirement/postemployment benefits $ 52,308 $ 46,394
Deferred compensation 4,940 34,285
Pension costs 10,036 13,715
Depreciation (2,532) (6,102)
Rent (8,674) (6,424)
Interest 4,100 4,598
Accrued reserves 8,063 8,569
Investments in equity securities (140,320) (10,677)
Tax loss/tax credit carryforwards 47,334 46,682
Restructuring and other merger related costs 9,497 --
Other 52 (2,279)
-------- --------
Total deferred tax assets / (liabilities) (15,196) 128,761
Deferred tax valuation allowance 26,233 31,411
-------- --------
Net deferred tax assets / (liabilities) $(41,429) $ 97,350
======== ========
The valuation allowance of $26.2 million and $31.4 million at December 31, 1999
and 1998, respectively, represents a provision for uncertainty as to the
realization of certain deferred tax assets, including U.S. tax credits and net
operating loss carryforwards in certain jurisdictions. The change during 1999 in
the deferred tax valuation allowance primarily relates to changes in the
deferred compensation tax item, net operating loss carryforwards and tax
credits. At December 31, 1999, there were $9.7 million of tax credit
carryforwards with expiration periods through 2004 and net operating loss
carryforwards with a tax effect of $37.6 million with various expiration
periods.
A reconciliation of the effective income tax rate as shown in the consolidated
statement of income to the federal statutory rate is as follows:
1999 1998 1997
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefit 2.8 3.7 4.1
Impact of foreign operations, including
withholding taxes 0.8 0.4 0.3
Goodwill and intangible assets 3.6 2.8 2.7
Effect of pooled companies 0.1 (0.1) 3.9
Other (1.9) (0.6) 0.1
-------------------------
Effective tax rate 40.4% 41.2% 46.1%
-------------------------
The total amount of undistributed earnings of foreign subsidiaries for income
tax purposes was approximately $572 million at December 31, 1999. It is the
Company's intention to reinvest undistributed earnings of its foreign
subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no
provision has been made for foreign withholding taxes or United States income
taxes which may become payable if undistributed earnings of foreign subsidiaries
were paid as dividends to the Company. The additional taxes on that portion of
undistributed earnings which is available for dividends are not practicably
determinable.
NOTE 6: SUPPLEMENTAL CASH FLOW INFORMATION
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company considers
all highly liquid investments with a maturity of three months or less to be cash
equivalents.
Income Tax and Interest Payments
Cash paid for income taxes was approximately $173.1 million, $193.9 million and
$126.9 million in 1999, 1998 and 1997, respectively. Interest payments were
approximately $43.1 million, $37.2 million and $31.2 million in 1999, 1998, and
1997, respectively.
Noncash Financing Activity
During 1997, the Company redeemed all outstanding issues under the 3 3/4%
Convertible Subordinated Debentures due 2002. Substantially all of the
outstanding debentures were converted into approximately 8.6 million shares of
the Company's common stock.
Acquisitions
As more fully described in Note 4, the Company issued 8,393,893 shares,
17,675,038 shares, and 10,518,628 shares of the Company's common stock in
connection with acquisitions during 1999, 1998 and 1997, respectively. Details
of businesses acquired in transactions accounted for as purchases were as
follows:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Fair value of assets acquired $623,682 $452,237 $263,312
Liabilities assumed 148,637 184,187 89,686
-----------------------------------
Net assets acquired 475,045 268,050 173,626
Less: noncash consideration 180,889 86,446 76,794
Less: cash acquired 43,752 59,853 6,535
-----------------------------------
Net cash paid for acquisitions $250,404 $121,751 $ 90,297
===================================
The amounts shown above exclude future deferred payments due in subsequent
years, but include cash deferred payments of $120 million, $55 million and $30
million made during 1999, 1998 and 1997, respectively.
NOTE 7: INCENTIVE PLANS
The 1997 Performance Incentive Plan ("1997 PIP Plan") was approved by the
Company's stockholders in May 1997 and includes both stock and cash based
incentive awards. The maximum number of shares of the Company's common stock
which may be granted in any year under the 1997 PIP Plan is equal to 1.85% of
the total number of shares of the Company's common stock outstanding on the
first day of the year adjusted for additional shares as defined in the 1997 PIP
Plan document (excluding management incentive compensation performance awards).
The 1997 PIP Plan also limits the number of shares available with respect to
awards made to any one participant as well as limiting the number of shares
available under certain awards. Awards made prior to the 1997 PIP Plan remain
subject to the respective terms and conditions of the predecessor plans. Except
as otherwise noted, awards under the 1997 PIP Plan have terms similar to awards
made under the respective predecessor plans.
Stock Options
Outstanding options are generally granted at the fair market value of the
Company's common stock on the date of grant and are exercisable as determined by
the Compensation Committee of the Board of Directors (the "Committee").
Generally, options become exercisable between two and five years after the date
of grant and expire ten years from the grant date.
Following is a summary of stock option transactions during the three-year period
ended December 31:
1999 1998 1997
-----------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Shares under option,
beginning of year 27,715 $ 19 24,044 $ 13 24,132 $ 11
Options granted 4,026 42 7,898 32 4,422 19
Options exercised (4,271) 11 (2,990) 8 (3,467) 8
Options cancelled (2,078) 25 (1,237) 15 (1,043) 12
------ ------ ------
Shares under option,
end of year 25,392 $ 23 27,715 $ 19 24,044 $ 13
====== ====== ======
Options exercisable
at year-end 6,825 $ 12 5,977 $ 9 8,402 $ 9
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1999:
(Shares in thousands)
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/99 Life Price at 12/31/99 Price
- -------------------------------------------------------------------------------
$ 4.33 to $9.99 2,700 2.29 $ 8 2,700 $ 8
10.00 to 14.99 3,288 5.02 11 2,979 11
15.00 to 24.99 9,026 6.77 17 1,146 19
25.00 to 56.28 10,378 9.05 36 -- --
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (ESPP), employees may purchase common
stock of the Company through payroll deductions not exceeding 10% of their
compensation. The price an employee pays for a share of stock is 85% of the
market price on the last business day of the month. The Company issued
approximately .5 million shares in 1999, 1998, and 1997, respectively, under the
ESPP. An additional 15.5 million shares were reserved for issuance at December
31, 1999.
SFAS 123 Disclosures
The Company applies the disclosure principles of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". As permitted by the provisions of SFAS 123, the Company applies
APB Opinion 25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its stock-based employee compensation plans.
If compensation cost for the Company's stock option plans and its ESPP had been
determined based on the fair value at the grant dates as defined by SFAS 123,
the Company's pro forma net income and earnings per share would have been as
follows:
(Dollars in Thousands Except Per Share Data)
1999 1998 1997
---- ---- ----
Net Income As reported $321,921 $309,905 $200,378
Pro forma $298,680 $295,059 $190,542
Earnings Per Share
Basic As reported $ 1.15 $ 1.14 $ .77
Pro forma $ 1.07 $ 1.09 $ .73
Diluted As reported $ 1.11 $ 1.10 $ .74
Pro forma $ 1.03 $ 1.05 $ .71
For purposes of this pro forma information, the fair value of shares issued
under the ESPP was based on the 15% discount received by employees. The
weighted-average fair value (discount) on the date of purchase for stock
purchased under this plan was $5.28, $3.82, and $2.68 in 1999, 1998, and 1997,
respectively.
The weighted average fair value of options granted during 1999, 1998, and 1997
was $12.94, $8.85, and $5.91, respectively. The fair value of each option grant
has been estimated on the date of grant using the Black-Sholes option-pricing
model with the following assumptions:
1999 1998 1997
---- ---- ----
Expected option lives 6 years 6 years 6 years
Risk free interest rate 5.72% 4.87% 6.51%
Expected volatility 19.73% 19.17% 19.17%
Dividend yield .81% .95% 1.3%
As required by SFAS 123, this pro forma information is based on stock awards
beginning in 1995 and accordingly is not likely to be representative of the pro
forma effects in future years because options vest over several years and
additional awards generally are made each year.
Restricted Stock
Restricted stock issuances are subject to certain restrictions and vesting
requirements as determined by the Committee. The vesting period is generally
five to seven years. No monetary consideration is paid by a recipient for a
restricted stock award and the grant date fair value of these shares is
amortized over the restriction periods. At December 31, 1999, there was a total
of 7.0 million shares of restricted stock outstanding. During 1999, 1998 and
1997, the Company awarded .9 million shares, 1.3 million shares and 1.4 million
shares of restricted stock with a weighted-average grant date fair value of
$40.03, $28.99 and $19.48, respectively. The cost recorded for restricted stock
awards in 1999, 1998 and 1997 was $25.9 million, $20.3 million, and $16.2
million, respectively.
Performance Units
Performance units have been awarded to certain key employees of the Company and
its subsidiaries. The ultimate value of these performance units is contingent
upon the annual growth in profits (as defined) of the Company, its operating
components or both, over the performance periods. The awards are generally paid
in cash. The projected value of these units is accrued by the Company and
charged to expense over the performance period. The Company expensed
approximately $27 million, $20 million and $20 million in 1999, 1998, and 1997,
respectively.
Hill Holliday
Due to the merger of Hill Holliday and the Company, Hill Holliday recognized a
one-time compensation charge of approximately $32 million in 1997. Hill Holliday
had an Equity Participation Plan and certain other agreements for various
members of management, which provided for participants to receive a portion of
the proceeds in the event of the sale or merger of Hill Holliday. Also included
in the charge were costs primarily relating to consulting and supplemental
retirement agreements.
NOTE 8: RETIREMENT PLANS
Defined Benefit Pension Plans
Through March 31, 1998 the Company and certain of its domestic subsidiaries had
a defined benefit plan ("Domestic Plan") which covered substantially all regular
domestic employees. Effective April 1, 1998 this Plan was curtailed, and
participants with five or less years of service became fully vested in the
Domestic Plan. Participants with five or more years of service as of March 31,
1998 retain their vested balances and participate in a new compensation plan.
Under the new plan, each participant's account is credited with an annual
allocation, equal to the projected discounted pension benefit accrual plus
interest, while they continue to work for the Company. Participants in active
service are eligible to receive up to ten years of allocations coinciding with
the number of years of service with the Company after March 31, 1998. As a
result of the change in the Domestic Plan, the Company recorded charges of
approximately $16.7 million in the fourth quarter of 1997.
Net periodic pension costs for the Domestic Plan for 1999, 1998 and 1997 were
$1.3 million, $.9 million and $15.0 million, respectively. The 1997 net periodic
pension cost included a $10 million curtailment charge and $4 million of service
costs.
The Company's stockholders' equity balance includes a minimum pension liability
of $18.6 million, $36.6 million and $13.2 million at December 31, 1999, 1998 and
1997, respectively.
The Company also has several foreign pension plans in which benefits are based
primarily on years of service and employee compensation. It is the Company's
policy to fund these plans in accordance with local laws and income tax
regulations.
Net periodic pension costs for foreign pension plans for 1999, 1998 and 1997
included the following components:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Service cost $ 9,619 $ 6,847 $ 5,460
Interest cost 11,759 10,908 10,633
Expected return on plan assets (9,380) (9,437) (10,537)
Amortization of unrecognized
transition obligation 390 373 324
Amortization of
prior service cost 833 482 552
Recognized actuarial loss / (gain) 508 (70) (1,440)
Other (9) -- --
--------------------------------
Net periodic pension cost $ 13,720 $ 9,103 $ 4,992
--------------------------------
The following table sets forth the change in the benefit obligation, the change
in plan assets, the funded status and amounts recognized for the pension plans
in the Company's consolidated balance sheet at December 31, 1999, and 1998:
(Dollars in thousands)
Domestic Foreign
Pension Plan Pension Plans
------------ -------------
1999 1998 1999 1998
---- ---- ---- ----
Change in benefit obligation
Beginning obligation $ 158,323 $ 134,347 $ 220,964 $ 179,016
Service cost 10 16 9,619 6,847
Interest cost 9,262 9,841 11,759 10,908
Benefits paid (12,073) (12,244) (12,777) (9,447)
Participant contributions - - 2,410 1,606
Actuarial (gains) / losses (11,823) 26,363 (7,264) 29,882
Currency effect -- -- 1,440 5,245
Other -- -- 352 (3,093)
------------------------------------------------
Ending obligation 143,699 158,323 226,503 220,964
------------------------------------------------
Change in plan assets
Beginning fair value 123,269 115,943 161,975 145,942
Actual return on plan assets 14,084 11,932 30,651 17,363
Employer contributions 2,740 7,638 7,887 2,473
Participant contributions -- -- 2,410 1,606
Benefits paid (12,073) (12,244) (12,777) (9,447)
Currency effect -- -- 156 1,300
Other -- -- 2,437 2,738
------------------------------------------------
Ending fair value 128,020 123,269 192,739 161,975
------------------------------------------------
Funded status of the plans (15,679) (35,054) (33,764) (58,989)
Unrecognized net actuarial
loss/(gain) 18,647 36,612 (18,163) 11,536
Unrecognized prior service cost -- -- 3,704 2,921
Unrecognized transition cost -- -- 1,838 3,796
------------------------------------------------
Net asset / (liability)
recognized $ 2,968 $ 1,558 $ (46,385) $ (40,736)
------------------------------------------------
At December 31, 1999 and 1998, the assets of the Domestic Plan and the foreign
pension plans were primarily invested in fixed income and equity securities.
For the Domestic Plan, a discount rate of 7.75% in 1999, 6.75% in 1998 and 7.25%
in 1997 and a salary increase assumption of 6% in 1998 and 1997 were used in
determining the actuarial present value of the projected benefit obligation. A
salary increase assumption was not applicable for 1999 as the Domestic Plan was
curtailed. The expected return on Domestic Plan assets was 9% in 1999, and 10%
in each of 1998 and 1997. For the foreign pension plans, discount rates ranging
from 3.75% to 14% in 1999, 4% to 14% in 1998, and 3.5% to 14% in 1997 and salary
increase assumptions ranging from 3% to 10% in 1999 and 2% to 10% in both 1998
and 1997 were used in determining the actuarial present value of the projected
benefit obligation. The expected rates of return on the assets of the foreign
pension plans ranged from 2% to 14% in 1999, 2% to 14% in 1998 and 3.5% to 14%
in 1997.
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the Domestic Plan were $144 million, $144 million and $128
million, respectively, as of December 31, 1999, and $158 million, $158 million,
and $123 million, respectively, as of December 31, 1998. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
the foreign pension plans with accumulated benefit obligations in excess of plan
assets were $90 million, $72 million and $9 million respectively, as of December
31, 1999, and $81 million, $74 million and $3 million respectively, as of
December 31, 1998.
Other Benefit Arrangements
The Company also has special unqualified deferred benefit arrangements with
certain key employees. Vesting is based upon the age of the employee and the
terms of the employee's contract. Life insurance contracts have been purchased
in amounts which may be used to fund these arrangements.
In addition to the defined benefit plans described above, the Company also
sponsors a defined contribution plan ("Savings Plan") that covers substantially
all domestic employees of the Company and participating subsidiaries. The
Savings Plan permits participants to make contributions on a pre-tax and/or
after-tax basis. The Savings Plan allows participants to choose among several
investment alternatives. The Company matches a portion of participants'
contributions based upon the number of years of service. The Company contributed
$10.6 million, $8.1 million and $6.3 million to the Savings Plan in 1999, 1998
and 1997, respectively.
Postretirement Benefit Plans
The Company and its subsidiaries provide certain postretirement health care
benefits for employees who were in the employ of the Company as of January 1,
1988, and life insurance benefits for employees who were in the employ of the
Company as of December 1, 1961. The plans cover certain domestic employees and
certain key employees in foreign countries. Effective January 1, 1993, the
Company's plan covering postretirement medical benefits was amended to place a
cap on annual benefits payable to retirees.
The coverage is self-insured, but is administered by an insurance company.
The Company accrues the expected cost of postretirement benefits other than
pensions over the period in which the active employees become eligible for such
postretirement benefits.
The net periodic expense for these postretirement benefits for 1999, 1998 and
1997 was $2 million, $2.8 million and $2.6 million, respectively.
The following table sets forth the change in benefit obligation, change in plan
assets, funded status and amounts recognized for the Company's postretirement
benefit plans in the consolidated balance sheet at December 31, 1999 and 1998:
(Dollars in thousands)
1999 1998
---- ----
Change in benefit obligation
Beginning obligation $ 40,593 $ 41,637
Service cost 345 682
Interest cost 2,700 3,082
Participant contributions 90 77
Benefits paid (1,987) (1,695)
Actuarial gain (4,339) (3,190)
--------------------
Ending obligation 37,402 40,593
--------------------
Change in plan assets
Beginning fair value -- --
Actual return on plan assets -- --
Employer contributions 1,897 1,618
Participant contributions 90 77
Benefits paid (1,987) (1,695)
--------------------
Ending fair value -- --
--------------------
Funded status of the plans (37,402) (40,593)
Unrecognized net actuarial gain (9,434) (5,195)
Unrecognized prior service cost (1,895) (2,829)
--------------------
Net amount recognized $(48,731) $(48,617)
--------------------
A discount rate of 7.75% in 1999, 6.75% in 1998 and 7.25% in 1997 and a salary
increase assumption of 6.0% in 1999, 1998 and 1997 were used in determining the
accumulated postretirement benefit obligation. A 7.4% and an 8.0% increase in
the cost of covered health care benefits were assumed for 1999 and 1998,
respectively. This rate is assumed to decrease incrementally to 5.5% in the year
2002 and remain at that level thereafter. The health care cost trend rate
assumption does not have a significant effect on the amounts reported.
Postemployment Benefits
In accordance with SFAS 112 "Employers' Accounting for Postemployment Benefits",
the Company accrues costs relating to certain benefits including severance,
worker's compensation and health care coverage over an employee's service life.
The Company's liability for postemployment benefits totaled approximately $64
million and $50 million at December 31, 1999 and 1998, respectively, and is
included in deferred compensation and reserve for termination allowances. The
net periodic expense recognized in 1999, 1998 and 1997 was approximately $34
million, $32 million and $31 million, respectively.
NOTE 9: SHORT-TERM BORROWINGS
The Company and its domestic subsidiaries have lines of credit with various
banks. These credit lines permit borrowings at fluctuating interest rates
determined by the banks. Short-term borrowings by subsidiaries outside the
United States principally consist of drawings against bank overdraft facilities
and lines of credit. These borrowings bear interest at the prevailing local
rates. Where required, the Company has guaranteed the repayment of these
borrowings. Unused lines of credit by the Company and its subsidiaries at
December 31, 1999 and 1998 aggregated $430 million and $458 million,
respectively. The weighted-average interest rate on outstanding balances at
December 31, 1999 was approximately 5.8%. Current maturities of long-term debt
are included in the payable to banks balance.
NOTE 10: LONG-TERM DEBT
Long-term debt at December 31 consisted of the following:
(Dollars in thousands)
1999 1998
---- ----
Convertible Subordinated Notes - 1.87% $304,076 $ --
Convertible Subordinated Notes - 1.80% 214,414 207,927
Term loans - 5.64% to 7.91% (6.45% to 7.91% in 1998) 285,000 255,000
Germany mortgage note payable - 7.64% 26,779 31,680
Other mortgage notes payable and
long-term loans - 2.80% to 8.72% 60,459 34,513
-------- --------
890,728 529,120
Less: current portion 23,466 22,502
-------- --------
Long-term debt $867,262 $506,618
======== ========
On June 1, 1999, the Company issued $361 million face amount of Convertible
Subordinated Notes due 2006. The 2006 notes were issued at an original price of
83% of the face amount, generating proceeds of approximately $300 million. The
notes are convertible into 6.4 million shares of the Company's common stock at a
conversion rate of 17.616 shares per $1,000 face amount. The fair value of the
2006 notes as of December 31, 1999, was approximately $416 million and was
determined by obtaining quotes from brokers.
On September 16, 1997, the Company issued $250 million face amount of
Convertible Subordinated Notes due 2004 ("2004 Notes") with a coupon rate of
1.80%. The 2004 Notes were issued at an original price of 80% of the face
amount, generating proceeds of approximately $200 million. The notes are
convertible into 6.7 million shares of the Company's common stock at a
conversion rate of 26.772 shares per $1,000 face amount. The fair value of the
2004 Notes as of December 31, 1999 was approximately $392 million and was
determined by obtaining quotes from brokers.
Under various loan agreements, the Company must maintain specified levels of net
worth and meet certain cash flow requirements and is limited in the level of
indebtedness. The Company has complied with the limitations under the terms of
these loan agreements.
Long-term debt maturing over the next five years and thereafter is as follows:
2000-$23.5 million; 2001-$41.0 million; 2002-$87.9 million; 2003-$32.0 million;
2004-$256.3 million, and $450.0 million thereafter.
All material long-term debt is carried in the consolidated balance sheet at
amounts which approximate fair values based upon current borrowing rates
available to the Company as disclosed above and in Note 13.
NOTE 11: RESTRUCTURING AND OTHER MERGER RELATED COSTS
In October 1999, the Company announced the merger of two of its advertising
networks. The networks affected, Lowe & Partners Worldwide and Ammirati Puris
Lintas were combined to form a new agency network called Lowe Lintas & Partners
Worldwide. The merger involves the consolidation of operations in Lowe Lintas
agencies in approximately 24 cities in 22 countries around the world. Once
complete, the newly merged agency network will have offices in over 80 countries
around the world.
During the fourth quarter of 1999, the Company began execution of a
comprehensive restructuring plan in connection with the merger. The plan
includes headcount reductions, consolidation of real estate and the sale or
disposition of certain investments, and is expected to be completed by June 30,
2000. The Company is pleased with the progress of the merger to date and expects
the total costs to be in line with its original estimate.
The total pre-tax cost of the restructuring plan is expected to be between $170
and $190 million, ($100 to $115 million, net of tax). In the fourth quarter of
1999, the Company recognized pre-tax costs of $84.2 million ($51.4 million, net
of tax or $.18 per diluted share), with the remainder expected to be recognized
in the first two quarters of 2000.
A summary of the components of the total restructuring and other merger related
costs, together with an analysis of the cash and non-cash elements, is as
follows:
(Dollars in millions)
1999 Cash Non-Cash
---- ---- --------
TOTAL BY TYPE
- -------------
Severance and termination costs $44.9 $27.0 $17.9
Fixed asset write-offs 11.1 -- 11.1
Lease termination costs 3.8 3.8 --
Investment write-offs and other 24.4 1.1 23.3
--------------------------------
Total $84.2 $31.9 $52.3
================================
The severance and termination costs recorded in 1999 relate to approximately 230
employees who have been terminated or notified that they will be terminated. The
employee groups affected include executive and regional management,
administrative, account management, creative and media production personnel,
principally in the U.S. and U.K. The charge related to these individuals
includes the cost of voluntary programs in certain locations and includes
substantially all senior executives that will be terminated. As of December 31,
1999, the amount accrued related to severance and termination was approximately
$42.6 million. During the fourth quarter of 1999, cash payments of $2.3 million
were made.
The fixed assets write-off relates largely to the abandonment of leasehold
improvements as part of the merger. The amount recognized in 1999 relates to
fixed asset write-offs in 6 offices principally in the United States.
Lease termination costs relate to the offices vacated as part of the merger. The
lease terminations are expected to be completed by mid-to-late 2000, with the
cash portion to be paid out over a period of up to five years. As of December
31, 1999, the amount accrued related to these termination costs was $3.8
million.
The investment write-offs relate to the loss on sale or closing of certain
business units. In 1999, $23 million has been recorded as a result of the
decision to sell or abandon 4 European businesses. In the aggregate, the
businesses being sold or abandoned represent an immaterial portion of the
revenue and operations of Lowe Lintas & Partners. The write-off amount was
computed based upon the difference between the estimated sales proceeds (if any)
and the carrying value of the related assets. These sales or closures are
expected to be completed by mid 2000.
NOTE 12: GEOGRAPHIC AREAS
Long-lived assets and income from commissions and fees are presented below by
major geographic area:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Long-Lived Assets:
United States $1,635,666 $1,041,882 $ 866,896
-----------------------------------
International
United Kingdom 468,558 334,611 161,962
All other Europe 592,302 538,762 472,710
Asia Pacific 107,215 92,581 78,862
Latin America 79,401 58,134 51,790
Other 76,269 50,853 42,041
-----------------------------------
Total International 1,323,745 1,074,941 807,365
-----------------------------------
Total Consolidated $2,959,411 $2,116,823 $1,674,261
-----------------------------------
Income From Commissions and Fees:
United States $2,284,173 $1,925,030 $1,670,555
-----------------------------------
International
United Kingdom 464,050 387,618 301,883
All other Europe 989,430 880,919 748,720
Asia Pacific 346,205 325,758 348,707
Latin America 213,260 232,940 204,894
Other 130,185 92,075 78,017
-----------------------------------
Total International 2,143,130 1,919,310 1,682,221
-----------------------------------
Total Consolidated $4,427,303 $3,844,340 $3,352,776
-----------------------------------
Commissions and fees are attributed to geographic areas based on where the
services are performed. Property and equipment is allocated based upon physical
location. Intangible assets, other assets, and investments are allocated based
on the location of the related operation.
The largest client of the Company contributed approximately 8% in 1999, 7% in
1998 and 9% in 1997 to income from commissions and fees. The Company's second
largest client contributed approximately 4% in 1999, 5% in 1998 and 4% in 1997
to income from commissions and fees.
Dividends received from foreign subsidiaries were approximately $47 million in
1999, $51 million in 1998 and $41 million in 1997.
Consolidated net income includes losses from exchange and translation of foreign
currencies of $5.6 million, $3.2 million and $5.6 million in 1999, 1998 and
1997, respectively.
NOTE 13: FINANCIAL INSTRUMENTS
Financial assets, which include cash and cash equivalents, marketable securities
and receivables, have carrying values which approximate fair value. Long-term
equity securities, included in other investments and miscellaneous assets in the
Consolidated Balance Sheet, are deemed to be available-for-sale as defined by
SFAS 115 and accordingly are reported at fair value, with net unrealized gains
and losses reported within stockholders' equity.
The following table summarizes net unrealized gains and losses before taxes at
December 31:
(Dollars in millions)
1999 1998 1997
---- ---- ----
Cost $172.3 $121.3 $61.1
Unrealized gains / (losses)
- gains 302.3 20.2 22.0
- losses (12.2) (1.5) --
---------------------------
Net unrealized gains 290.1 18.7 22.0
---------------------------
Fair market value $462.4 $140.0 $83.1
===========================
Net of tax, net unrealized holding gains were $168 million, $10 million and $12
million at December 31, 1999, 1998 and 1997, respectively.
The above pre-tax gain amounts are net of reclassifications of $13.1 million and
$6.5 million in 1999 and 1998, which represent amounts previously recorded in
other comprehensive income.
During 1999, the Company expanded its investment in internet-service and related
companies. In April 1999, the Company invested $20 million for a minority
interest in Icon, a Swedish based internet consultancy. Subsequently, the
Company increased its investment through the contribution of other investments
and through additional cash purchases. At December 31, 1999, the fair market
value of the Company's investment in Icon was $322 million.
Financial liabilities with carrying values approximating fair value include
accounts payable and accrued expenses, as well as payable to banks and long-term
debt. As of December 31, 1999, the 1.87% Convertible Subordinated Notes due 2006
had a cost basis of $304 million with a market value of $416 million. As of
December 31, 1999, the 1.80% Convertible Subordinated Notes due 2004 had a cost
basis of $214 million with a market value of $392 million. As of December 31,
1998, the cost basis of the 1.80% Convertible Subordinated Notes were $208
million with a market value of $283 million. The fair values were determined by
obtaining quotes from brokers (refer to Note 10 for additional information on
long-term debt).
The Company occasionally uses forwards and options to hedge a portion of its net
investment in foreign subsidiaries and certain intercompany transactions in
order to mitigate the impact of changes in foreign exchange rates on working
capital. The notional value and fair value of all outstanding forwards and
options contracts at the end of the year as well as the net cost of all settled
contracts during the year were not significant.
The Company's management continuously evaluates and attempts to mitigate its
exposure to foreign exchange, economic and political risks. The economic
developments in Brazil did not have a significant negative impact on the
Company, and were partially offset by a favorable impact due to the economic
recovery in Japan.
NOTE 14: COMMITMENTS AND CONTINGENCIES
At December 31, 1999 the Company's subsidiaries operating primarily outside the
United States were contingently liable for discounted notes receivable of $7.4
million.
The Company and its subsidiaries lease certain facilities and equipment. Gross
rental expense amounted to approximately $274 million for 1999, $244 million for
1998 and $217 million for 1997, which was reduced by sublease income of $17.2
million in 1999, $16 million in 1998 and $30.5 million in 1997.
Minimum rental commitments for the rental of office premises and equipment under
noncancellable leases, some of which provide for rental adjustments due to
increased property taxes and operating costs for 2000 and thereafter, are as
follows:
(Dollars in thousands)
Gross Rental Sublease
Period Commitment Income
----------------------------
2000 $179,915 $17,206
2001 157,727 15,180
2002 131,288 10,224
2003 103,137 6,335
2004 87,839 1,390
2005 and thereafter 355,393 2,014
Certain of the Company's acquisition agreements provide for deferred payments by
the Company, contingent upon future revenues or profits of the companies
acquired. Such contingent amounts would not be material taking into account the
future revenues or profits of the companies acquired.
The Company and certain of its subsidiaries are party to various tax
examinations, some of which have resulted in assessments. The Company intends to
vigorously defend any and all assessments and believes that additional taxes (if
any) that may ultimately result from the settlement of such assessments or open
examinations would not have a material adverse effect on the consolidated
financial statements.
The Company is involved in legal and administrative proceedings of various
types. While any litigation contains an element of uncertainty, the Company
believes that the outcome of such proceedings or claims will not have a material
adverse effect on the Company.
NOTE 15: RECENT EVENT
On December 22, 1999, the Company entered into an agreement to acquire NFO
Worldwide, Inc.("NFO"), a leading provider of research based marketing
information and counsel to the worldwide business community. Under the terms of
the agreement, NFO shareholders will receive $26 worth of Interpublic stock for
each share of NFO stock, based on the market price of Interpublic stock at the
time the transaction is closed subject to a collar which, if exceeded, provides
certain rights to each of the parties. The transaction is subject to certain
conditions, including the receipt of approval from NFO's stockholders and
applicable regulatory approval. NFO is obligated to pay Interpublic a fee of $25
million if the agreement is terminated under certain circumstances. Interpublic
has been granted an option to purchase approximately 4.5 million NFO shares for
$26 per share exercisable in certain circumstances in lieu of the transaction
fee.
The acquisition, which is expected to close in April 2000, will be accounted for
as a pooling of interests.
SELECTED FINANCIAL DATA FOR FIVE YEARS
(Amounts in Thousands Except Per Share Data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATING DATA
Gross income $ 4,561,518 $ 3,968,728 $ 3,482,384 $ 2,983,899 $ 2,606,467
Operating expenses 3,825,856 3,347,158 2,988,532 2,558,336 2,257,138
Restructuring and other merger
related costs 84,183 -- -- -- --
Write-down of goodwill and other
related assets -- -- -- -- 38,687
Special compensation charge -- -- 32,229 -- --
Interest expense 66,422 58,699 57,793 51,695 47,940
Provision for income taxes 236,339 232,005 186,246 156,783 126,537
Net Income $ 321,921 $ 309,905 $ 200,378 $ 214,619 $ 134,311
PER SHARE DATA
Basic
Net Income $ 1.15 $ 1.14 $ .77 $ .82 $ .53
Weighted-average shares 278,923 270,971 260,500 260,595 255,605
Diluted
Net Income $ 1.11 $ 1.10 $ .74 $ .80 $ .51
Weighted-average shares 289,548 281,051 277,619 277,178 263,609
FINANCIAL POSITION
Working capital $ 130,915 $ 70,298 $ 175,266 $ 101,191 $ 79,380
Total assets $ 8,727,255 $ 6,942,823 $ 5,983,443 $ 5,119,927 $ 4,631,912
Long-term debt $ 867,262 $ 506,618 $ 519,036 $ 418,618 $ 361,945
Book value per share $ 5.66 $ 4.53 $ 3.69 $ 3.07 $ 2.60
OTHER DATA
Cash dividends $ 90,424 $ 76,894 $ 61,242 $ 51,786 $ 46,124
Cash dividends per share $ .33 $ .29 $ .25 $ .22 $ .20
Number of employees 38,600 34,200 31,100 25,500 23,700
----------------------------------------------------------------
All share data for prior periods have been adjusted to reflect the two-for-one stock split effective
July 15, 1999.
RESULTS BY QUARTER (UNAUDITED)
(Amounts in Thousands Except Per Share Data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1999 1998 1999 1998 1999 1998 1999 1998
------------------------------------------------------------------------------------------------------------
Gross income $ 925,080 $ 831,183 $1,134,433 $1,032,242 $1,044,003 $ 910,530 $1,458,002 $1,194,773
Operating expenses 830,131 752,956 873,170 807,560 914,821 804,912 1,207,734 981,730
Restructuring and other
merger related charges -- -- -- -- -- -- 84,183 --
Interest expense 13,945 12,801 16,497 14,564 17,478 16,029 18,502 15,305
Income before provision
for income taxes 81,004 65,426 244,766 210,118 111,704 89,589 147,583 197,738
Provision for
income taxes 33,618 25,498 98,878 86,665 47,698 38,604 56,145 81,238
Net equity interests (2,601) (2,189) (6,479) (4,942) (4,962) (3,997) (12,755) (9,833)
------------------------------------------------------------------------------------------------------------
Net income $ 44,785 $ 37,739 $ 139,409 $ 118,511 $ 59,044 $ 46,988 $ 78,683 $ 106,667
============================================================================================================
Per share data:
Basic EPS $ .16 $ .14 $ .51 $ .44 $ .22 $ .17 $ .28 $ .39
Diluted EPS $ .16 $ .13 $ .49 $ .42 $ .21 $ .17 $ .27 $ .38
Cash dividends
per share $ .075 $ .065 $ .085 $ .075 $ .085 $ .075 $ .085 $ .075
Weighted-Average Shares:
Basic 272,534 270,374 273,863 271,437 274,301 270,915 279,499 271,156
Diluted 283,350 280,478 292,978 288,956 284,744 280,464 290,436 287,690
Stock price:
High $40 $31 5/16 $43 5/16 $32 1/4 $44 1/16 $32 7/16 $58 1/16 $39 7/8
Low $34 7/8 $23 27/32 $34 19/32 $ 27 21/32 $36 1/2 $26 3/32 $35 3/4 $23 1/2
------------------------------------------------------------------------------------------------------------
All share data has been adjusted to reflect the two-for-one stock split effective July 15, 1999.
VICE CHAIRMAN'S REPORT OF MANAGEMENT
The financial statements, including the financial analysis and all other
information in this Annual Report, were prepared by management, who is
responsible for their integrity and objectivity. Management believes the
financial statements, which require the use of certain estimates and judgments,
reflect the Company's financial position and operating results in conformity
with generally accepted accounting principles. All financial information in this
Annual Report is consistent with the financial statements.
Management maintains a system of internal accounting controls which provides
reasonable assurance that, in all material respects, assets are maintained and
accounted for in accordance with management's authorization, and transactions
are recorded accurately in the books and records. To assure the effectiveness of
the internal control system, the organizational structure provides for defined
lines of responsibility and delegation of authority.
The Finance Committee of the Board of Directors, which is comprised of the
Company's Chairman and Vice Chairman and three outside Directors, is responsible
for defining these lines of responsibility and delegating the authority to
management to conduct the day-to-day financial affairs of the Company. In
carrying out its duties, the Finance Committee primarily focuses on monitoring
financial and operational goals and guidelines; approving and monitoring
specific proposals for acquisitions; approving capital expenditures; working
capital, cash and balance sheet management; and overseeing the hedging of
foreign exchange, interest-rate and other financial risks. The Committee meets
regularly to review presentations and reports on these and other financial
matters to the Board. It also works closely with, but is separate from, the
Audit Committee of the Board of Directors.
The Company has formally stated and communicated policies requiring of employees
high ethical standards in their conduct of its business. As a further
enhancement of the above, the Company's comprehensive internal audit program is
designed for continual evaluation of the adequacy and effectiveness of its
internal controls and measures adherence to established policies and procedures.
The Audit Committee of the Board of Directors is comprised of four directors who
are not employees of the Company. The Committee reviews audit plans, internal
controls, financial reports and related matters, and meets regularly with
management, internal auditors and independent accountants. The independent
accountants and the internal auditors have free access to the Audit Committee,
without management being present, to discuss the results of their audits or any
other matters. The Audit Committee also monitors the Company's timely
implementation and completion of the Year 2000 Compliance Project.
The independent accountants, PricewaterhouseCoopers LLP, were recommended by the
Audit Committee of the Board of Directors and selected by the Board of
Directors, and their appointment was ratified by the stockholders. The
independent accountants have examined the financial statements of the Company
and their opinion is included as part of the financial statements.