THE INTERPUBLIC GROUP OF COMPANIES, INC.
Look behind Mankind's greatest achievements and - even when they bear a
single name - you are likely to find that they are the result of a team of
people working for a common goal. The theme of this annual report,
Partners in Global Communications, reflects our conviction at The
Interpublic Group of Companies, Inc. ("Interpublic") that partnerships are
the building blocks that create success in the world of business, just as
they do in the world at large. As one of the largest advertising and
marketing communications companies in the world, our contributors to these
partnerships include the parent company, Interpublic; McCann-Erickson
WorldGroup; Ammirati Puris Lintas; The Lowe Group; Western Initiative
Media Worldwide; DraftWorldwide; International Public Relations; Octagon
and many other related companies. Our more than 34,000 employees in more
than 120 countries work continually to create, build and help maintain
strong partnerships with their Clients and in partnership between Clients
and Consumers through their Brands and services. It was the spirit of
partnership that sparked some of history's most innovative thinking and
resulted in the historic achievements of such people as the Wright
Brothers, Marie and Pierre Curie and the New York Yankees, to name but a
few. It is our ambition at Interpublic to follow, in our own way, in that
great tradition.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands Except Per Share Data)
______________________________________________________________________
December 31
Percent
1998 1997 Increase
______________________________________________________________________
Operating Data
Gross Income $ 3,968,728 $ 3,482,384 14.0%
Net Income $ 309,905 $ 200,378 54.7%
Per Share Data
Basic EPS $ 2.29 $ 1.54 48.7%
Diluted EPS $ 2.21 $ 1.49 48.3%
Cash Dividends $ .58 $ .50 16.0%
Share Price at December 31 $ 79 3/4 $ 49 13/16 60.1%
Weighted-average shares:
Basic 135,485,326 130,249,946 4.0%
Diluted 140,525,272 138,809,532 1.2%
Financial Position
Cash and Cash Equivalents $ 808,803 $ 738,112 9.6%
Total Assets $ 6,942,823 $ 5,983,443 16.0%
Book Value Per Share $ 9.07 $ 7.39 22.7%
Return on AverAge
Stockholders' Equity 27.1% 21.8% 24.3%
Gross Income
1998 $3,968,728
1997 $3,482,384<F2>
1996 $2,983,899<F2>
Diluted Earnings Per Share
1998 $ 2.21
1997 $ 1.49<F2>
1996 $ 1.60<F2><F1>
Cash Dividends Per Share
1998 $ .58
1997 $ .50
1996 $ .44<F1>
Return On Average Stockholders' Equity
1998 27.1%
1997 21.8%<F2>
1996 28.3%<F2>
________________________________________________________________________
<F1> Restated to reflect a three-for-two stock split effected July 1997.
<F2> Restated to reflect the aggregate effect of poolings of interests
transactions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
During the second quarter of 1998, the Company acquired three companies
which were accounted for as poolings of interests. At that time, the
Company's financial statements, including the related notes, were restated
to include the results of operations, financial position and cash flows of
those pooled entities, in addition to all prior pooled entities. The
periods restated included all periods presented in the Company's 1997
annual report, as well as the first quarter results for 1998.
During the second half of 1998, two additional companies were acquired
which were accounted for as poolings of interests. As a result of those
acquisitions, the Company's financial statements have been restated for a
second time this year. The results for the first three quarters of 1998,
as well as all prior periods presented, have been restated in this report
to give effect to all of the 1998 pooled entities.
A noteworthy item is that one of the pooled companies acquired in the
second quarter of 1998 recorded after-tax special compensation charges in
the fourth quarter of 1997 totaling $29.7 million, as further explained in
Note 7. The following discussion relates to the combined results of the
Company after giving effect to all pooled companies.
RESULTS OF OPERATIONS
Worldwide income from commissions and fees increased 14.7% in 1998, to
more than $3.8 billion. This follows an increase of 16.6% in 1997. The
continued growth in revenue was mainly due to the expansion of the
business and new business gains.
International revenue, which represented 50% of worldwide revenue in 1998,
increased $237.1 million or 14.1% over 1997. International revenue would
have increased an additional $78.4 million, or 4.7% except for the
strengthening of the U.S. dollar against major currencies. During 1997,
revenue from international operations increased $133.0 million, or 8.6%
compared to 1996. During 1998, commissions and fees from domestic
operations increased 15.2%, primarily due to the effect of new business
gains and acquisitions. Commissions and fees from domestic operations
increased 26.1% in 1997.
Other income, net includes interest and other finance income, gains and
losses from investments, and other nonoperating and miscellaneous items.
During 1998, other income, net decreased 4% compared to 1997 and included
net gains recorded in connection with the Company's investment in CKS
Group, Inc., as well as other equity gains. In 1997 other income, net
increased 18.4% over the 1996 level. The 1997 increase was primarily due
to the gain on the sale of investments, including All American
Communications, Inc. and CKS Group, Inc.
Worldwide operating expenses increased 12% in 1998. Operating expenses
outside the United States increased 14.7%, while domestic operating
expenses increased 9.2%. These increases were commensurate with the
increases in revenue, as continuing cost containment efforts kept costs at
appropriate levels. During 1997, worldwide operating expenses increased
16.8%, comprised of a 13.9% increase in international expenses and a 20%
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. 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.
Interest expense increased only 1.6% in 1998 after increasing 11.8% in
1997. The increase in 1997 was primarily attributable to the issuance of
the 1.80% Convertible Subordinated Notes due 2004 and additional financing
of acquisitions.
Equity in net income of unconsolidated affiliates increased slightly in
1998, due primarily to the acquisition of several unconsolidated
affiliates in 1998. Equity income decreased by $5.9 million in 1997
compared to 1996, due to the consolidation of a company previously
accounted for on the equity basis.
Income applicable to minority interests increased by $4.4 million in 1998
and by $8.8 million in 1997. The 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 1998. The 1997 increase was
also impacted by the consolidation of a company with a significant
minority interest, which was previously accounted for on the equity basis.
The Company's effective income tax rate was 41.2% in 1998, 46.1% in 1997
and 41.9% in 1996. The higher rate in 1997 was largely attributable to the
special compensation charges recorded by one of the pooled companies, as
described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position continued to be strong during 1998, with
cash and cash equivalents of $808.8 million, an increase of $70.7 million
over the 1997 year-end balance. Working capital was $118.6 million, which
was $97.8 million below the unusually high level at the end of 1997. The
high level of working capital in 1997 was a result of growing operations
and the payment of short-term borrowings with some of the proceeds from
the 1.80% Convertible Subordinated Notes due 2004 issued during the latter
part of 1997. The current ratio was slightly above 1 to 1 for 1998 and
1997. The Company utilized its strong financial position to obtain short-
term and long-term financing on competitive terms.
The principal use of the Company's working capital is 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 1998,
the Company purchased approximately 2.7 million shares of its common
stock, compared to 3.5 million shares in 1997. The Company repurchases its
stock to meet its obligations under various compensation plans.
The Company, excluding pooled entities, paid $76.9 million ($.58 per
share) in dividends to stockholders in 1998, a 26% increase over the $61.2
million ($.50 per share) paid during 1997.
The Company's capital expenditures in 1998 were $136.7 million. The
primary purpose of these expenditures was to modernize the offices and
upgrade the computer and communications systems to better serve clients.
During 1997, the Company spent $107 million for capital expenditures. The
increase in capital expenditures resulted from the continuing growth of
operations.
During 1998, the Company paid approximately $660 million in cash and stock
to acquire 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 maintained credit facilities in the
United States and in countries where they conduct business to manage their
future liquidity requirements.
Summary of
Short-term Credit Facilities at December 31
(Dollars in millions)
Domestic International
Available Utilized Available Utilized
1998 $319 $12 $257 $106
1997 $327 $20 $211 $ 86
In the fourth quarter of 1997, the Company redeemed its 3 3/4% Convertible
Subordinated Debentures due 2002. Substantially all of the outstanding
debentures were converted into approximately 4.3 million shares of the
Company's common stock.
Approximately 49% and 46% of the Company's assets at December 31, 1998 and
1997, respectively, were outside the United States. The Company actively
hedges to minimize the impact of foreign exchange exposure. However, the
notional value and fair value of all outstanding forwards and options
contracts at the end of the year were not significant.
The Company's management continuously evaluates and manages its exposure
to foreign exchange, economic and political risks. The foreign exchange
crisis in Asia had a minimal impact on the Company partly due to the
agency systems' contingency plans that included active hedging,
repatriation of cash, cost-cutting and limiting capital expenditures.
Additionally, the Company believes that the more recent economic
developments in Brazil will not have a significant impact.
Return on average stockholders' equity was 27.1% in 1998 and 21.8% in
1997.
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
Year 2000 Issue
The Year 2000 (or "Y2K") Issue refers to the problem caused by computer
programs that have been written to reflect two-digit years, with the
century being assumed as "19". This practice was widely accepted by the
applications development community in the 1960's through the early 1980's,
with many of these programs remaining in use today. As a result, programs
that are date sensitive may recognize the year "00" as 1900, rather than
the year 2000. This may cause programs to fail or cause them to
incorrectly report and accumulate data.
The Company and its operating subsidiaries are in the final phases of
executing a Year 2000 readiness program with the goal of having all
"mission critical" systems functioning properly prior to January 1, 2000.
Many of the subsidiaries in the Company's larger markets are dependent
upon third party systems providers, while subsidiaries in the secondary
markets rely primarily on off-the-shelf applications or home-grown
applications. Considerable progress has been made with third party
systems providers in larger markets with respect to remediating their Year
2000 issues. Although the secondary markets present a greater challenge,
they typically involve smaller offices that are less dependent upon
automated solutions.
In 1997, the Company established a Y2K Project Management Office and
shortly thereafter created a Y2K Task Force, comprised of representatives
from the operating companies. Through the Y2K Task Force, the Company in
conjunction with outside consultants, is working to address the impact of
the Year 2000 Issue on the Company. The Company has inventoried and
assessed date sensitive computer software applications, and approximately
35% of systems were identified as requiring some degree of remediation. In
addition, the Company has reviewed all of its hardware believed to contain
embedded chips, including personal computers, file servers, mid-range and
mainframe computers, telephone switches and routers. The Company has also
investigated its security systems, life safety systems, HVAC systems and
elevators in the majority of its facilities. As part of this effort, the
Company has identified those systems and applications that are deemed
"mission critical", which are being handled on a priority basis and has
developed a detailed project and remediation plan that includes system
testing schedules and contingency planning. To date the Company has
completed approximately 90% of its remediation and compliance testing for
"mission critical" applications, with the remaining 10% scheduled for
completion by April 30, 1999. The Company's Board of Directors, through
the Audit Committee, has been monitoring the progress of this project.
Project progress reports are given to the Audit Committee at each
regularly scheduled Audit Committee meeting.
The Company estimates that the modification and testing of its hardware
and software will cost approximately $20 million, of which 50% has been
spent to date. In addition, the Company has accelerated the implementation
of a number of business process re-engineering projects over the past few
years that have provided both Year 2000 readiness and increased
functionality of certain systems. The Company estimates that the hardware
and software costs incurred in connection with these projects are
approximately $60 million, which are being capitalized. Included in the
above-mentioned Y2K costs are internal costs incurred for the Y2K project
which are primarily payroll related costs for the information systems
groups. A substantial portion of these estimated costs relates to systems
and applications that were anticipated and budgeted. All of the above
amounts have been updated to include companies acquired during 1998.
The Company is also in the process of developing contingency plans for
affected areas of its operations. The Y2K Project Management Office has
drafted a Contingency Plan Guideline. This guideline requires the
development of contingency plans for applications, vendors, facilities,
business partners and clients. The contingency plans are being developed
to cover those elements of the business that have been deemed "mission
critical" and extend beyond software applications. The contingency plans
will include procedures for workforce mobilization, crisis management,
facilities management, disaster recovery and damage control, and are
scheduled for completion by April 30, 1999. The Company recognizes that
contingency plans may need to be adjusted during 1999 and therefore
considers them working documents.
The Company is assessing the Year 2000 readiness of material third parties
by asking all critical vendors, business partners and facility managers to
provide letters of compliance. In addition to sending out over 70,000
vendor compliance letters, the Company is conducting detailed tests and
face to face Y2K working sessions with those identified as key vendors
with respect to "mission critical" systems. Furthermore, the Company is
working with the American Association of Advertising Agencies and other
trade associations to form Year 2000 working groups that are addressing
the issues on an industry level.
The Company's efforts to address the Year 2000 Issue are designed to avoid
any material adverse effect on its operations or financial condition.
Notwithstanding these efforts, however, there is no assurance that the
Company will not encounter difficulties due to the Year 2000 Issue. The
"most reasonably likely worst case scenario" would be a significant
limitation on the Company's ability to continue to provide business
services for an undetermined duration. The Company also recognizes that
it is dependent upon infrastructure services and third parties, including
suppliers, broadcasters, utility providers and business partners, whose
failure may also significantly impact its ability to provide business
services.
Cautionary Statement
Statements by the Company in this document and in other contexts
concerning its Year 2000 compliance efforts that are not historical fact
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, including, but not limited to, the following: (i)
uncertainties relating to the ability of the Company to identify and
address Year 2000 issues successfully and in a timely manner and at costs
that are reasonably in line with the Company's estimates; and (ii) the
ability of the Company's vendors, suppliers, other service providers and
customers to identify and address successfully their own Year 2000 issues
in a timely manner.
New Accounting Guidance
As more fully described in Note 13, 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 the Company is required to adopt effective January 1, 2000.
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 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 February 19,1999
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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% and 7% of the related 1997 and 1996
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
generally accepted auditing standards 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.
/s/ By: PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
New York, New York
February 19, 1999
REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
OF INTERNATIONAL PUBLIC RELATIONS PLC
We have audited the consolidated balance sheets of International Public
Relations plc and subsidiaries as of 31 December 1997 and 31 October 1996,
and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the two years in the periods ended 31 December
1997 and 31 October 1996, 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom, which are similar to those generally
accepted in the United States. 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
International Public Relations plc and subsidiaries at 31 December 1997
and 31 October 1996, and the consolidated results of their operations and
their cash flows for each of the two years in the periods ended 31
December 1997 and 31 October 1996 in conformity with generally accepted
accounting principles in the United States.
Ernst & Young
London
3 February 1999
Report of Independent Auditors
Board of Directors
Hill, Holliday, Connors, Cosmopulos, Inc.
We have audited the consolidated balance sheet of Hill, Holliday, Connors,
Cosmopulos, Inc. and Subsidiaries (the Company) as of December 31, 1997,
and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the twelve-month period then ended
(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 financial
position of Hill, Holliday, Connors, Cosmopulos, Inc. and Subsidiaries at
December 31, 1997, and the consolidated results of their operations and
their cash flows for the twelve-month period then ended, in conformity
with generally accepted accounting principles.
/s/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 1998 1997
CURRENT ASSETS:
Cash and cash equivalents (includes
certificates of deposit: 1998-$152,064;
1997-$256,934) $ 808,803 $ 738,112
Marketable securities 31,733 31,944
Receivables (net of allowance for doubtful
accounts: 1998-$53,093; 1997-$44,110) 3,522,616 3,104,606
Expenditures billable to clients 276,610 242,965
Prepaid expenses and other current assets 137,183 115,895
Total current assets 4,776,945 4,233,522
OTHER ASSETS:
Investment in unconsolidated affiliates 47,561 46,665
Deferred taxes on income 97,350 75,661
Other investments and miscellaneous
assets 299,967 223,832
Total other assets 444,878 346,158
FIXED ASSETS, AT COST:
Land and buildings 95,228 83,621
Furniture and equipment 650,037 554,608
745,265 638,229
Less: accumulated depreciation 420,864 365,877
324,401 272,352
Unamortized leasehold improvements 115,200 103,494
Total fixed assets 439,601 375,846
Intangible assets (net of accumulated
amortization: 1998-$504,787;
1997-$448,952) 1,281,399 1,027,917
TOTAL ASSETS $6,942,823 $5,983,443
The accompanying notes are an integral part of these financial statements.
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 1998 1997
CURRENT LIABILITIES:
Payable to banks $ 214,464 $ 187,820
Accounts payable 3,613,699 3,189,137
Accrued expenses 624,517 478,962
Accrued income taxes 205,672 161,236
Total current liabilities 4,658,352 4,017,155
NONCURRENT LIABILITIES:
Long-term debt 298,691 317,268
Convertible subordinated debentures
and notes 207,927 201,768
Deferred compensation and reserve
for termination allowances 319,526 273,408
Accrued postretirement benefits 48,616 47,404
Other noncurrent liabilities 88,691 72,986
Minority interests in consolidated
subsidiaries 55,928 31,917
Total noncurrent liabilities 1,019,379 944,751
STOCKHOLDERS' EQUITY:
Preferred Stock, no par value
shares authorized: 20,000,000
shares issued: none
Common Stock, $.10 par value
shares authorized: 225,000,000
shares issued:
1998 - 145,722,579;
1997 - 143,567,843 14,572 14,357
Additional paid-in capital 652,692 515,892
Retained earnings 1,116,365 886,201
Adjustment for minimum pension liability (36,612) (13,207)
Net unrealized gain on equity securities 9,889 12,405
Cumulative translation adjustment (133,753) (158,969)
1,623,153 1,256,679
Less:
Treasury stock, at cost:
1998 - 6,187,172 shares;
1997 - 5,271,046 shares 286,713 171,088
Unearned ESOP compensation - 7,420
Unamortized expense of restricted
stock grants 71,348 56,634
Total stockholders' equity 1,265,092 1,021,537
Commitments and contingencies (See Note 14)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,942,823 $5,983,443
Information for 1997 has been restated to reflect the aggregate effect of
the acquisitions accounted for as poolings of interests.
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
(Dollars in thousands except per share data)
1998 1997 1996
Commissions and fees $3,844,340 $3,352,776 $2,874,417
Other income, net 124,388 129,608 109,482
Gross income 3,968,728 3,482,384 2,983,899
Salaries and related expenses 2,167,931 1,913,356 1,619,619
Office and general expenses 1,179,227 1,075,176 938,717
Interest expense 58,699 57,793 51,695
Special compensation
charges - 32,229 -
Total costs and expenses 3,405,857 3,078,554 2,610,031
Income before provision for
income taxes 562,871 403,830 373,868
Provision for income taxes 232,005 186,246 156,783
Income of consolidated
companies 330,866 217,584 217,085
Income applicable to minority
interests (28,125) (23,754) (14,914)
Equity in net income of
unconsolidated affiliates 7,164 6,548 12,448
Net Income $ 309,905 $ 200,378 $ 214,619
Per Share Data:
Basic EPS $2.29 $1.54 $1.65
Diluted EPS $2.21 $1.49 $1.60
The accompanying notes are an integral part of these financial statements.
Information for 1996 and 1997 has been restated to reflect the aggregate
effect of the acquisitions accounted for as poolings of interests.
FINANCIAL STATEMENTS
(Dollars in thousands) THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
Net Income $309,905 $200,378 $214,619
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization of fixed assets 103,029 84,371 69,997
Amortization of intangible assets 55,835 41,110 36,858
Amortization of restricted stock awards 20,272 16,222 14,451
Stock bonus plans/ESOP - 1,389 4,067
Provision for deferred income taxes (12,941) 7,743 3,661
Noncash pension plan charges - 16,700 -
Equity in net income of unconsolidated affiliates (7,164) (6,548) (12,448)
Income applicable to minority interests 28,125 23,754 14,914
Translation losses/(gains) 1,847 (319) 3,262
Special compensation charges - 31,553 -
Net gain on investments (34,737) (44,626) (35,211)
Other 9,519 (11,092) 4,091
Change in assets and liabilities, net of acquisitions:
Receivables (243,966) (340,804) (291,351)
Expenditures billable to clients (25,988) (46,512) (26,809)
Prepaid expenses and other assets (38,613) (13,483) (39,188)
Accounts payable and accrued expenses 305,076 296,849 302,676
Accrued income taxes 20,108 2,311 27,015
Deferred compensation and reserve for
termination allowances 14,398 18,397 (13,503)
Net cash provided by operating activities 504,705 277,393 277,101
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net (121,751) (90,297) (55,833)
Capital expenditures (136,738) (107,065) (91,904)
Proceeds from sales of assets 27,483 114,023 40,146
Net proceeds from marketable securities 3,934 324 476
Investment in unconsolidated affiliates (16,660) (8,371) 17,210
Net cash used in investing activities (243,732) (91,386) (89,905)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings 15,304 31,188 (28,450)
Proceeds from long-term debt 12,253 256,337 152,058
Payments of long-term debt (25,882) (31,223) (128,717)
Proceeds from ESOP 7,420 - -
Treasury stock acquired (164,928) (144,094) (86,949)
Issuance of common stock 33,688 37,750 20,091
Cash dividends - Interpublic (76,894) (61,242) (51,786)
Cash dividends - pooled companies (2,847) (10,770) (6,933)
Net cash (used in) provided by financing activities (201,886) 77,946 (130,686)
Effect of exchange rates on cash and cash equivalents 11,604 (41,892) (2,554)
Increase in cash and cash equivalents 70,691 222,061 53,956
Cash and cash equivalents at beginning of year 738,112 516,051 462,095
Cash and cash equivalents at end of year $808,803 $738,112 $516,051
The accompanying notes are an integral part of these financial statements.
Information for 1996 and 1997 has been restated to reflect the aggregate effect of the acquisitions accounted for as
poolings of interests.
</TABLE
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands) FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
Accumulated Unamortized
Additional Other Expense Unearned
Common Paid-In Retained Comprehensive Treasury of Restricted ESOP
Stock Capital Earnings Income (loss) Stock Stock Grants Plan Total
BALANCES, DECEMBER 31, 1997 $14,357 $515,892 $886,201 $(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
_______________________________________________________________________________________________________________________________
BALANCES, DECEMBER 31, 1998 $14,572 $ 652,692 $1,116,365 $(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
(Dollars in thousands) FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
Accumulated Unamortized
Additional Other Expense Unearned
Common Paid-In Retained Comprehensive Treasury of Restricted ESOP
Stock 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)
BALANCES, DECEMBER 31, 1997 $14,357 $ 515,892 $ 886,201 $(159,771) $(171,088) $(56,634) $(7,420) $1,021,537
FINANCIAL STATEMENTS
THE INTERPUBLIC GROUP OF COMPANIES, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands) FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
Accumulated Unamortized
Additional Other Expense Unearned
Common Paid-In Retained Comprehensive Treasury of Restricted ESOP
Stock Capital Earnings Income (loss) Stock Stock Grants Plan Total
BALANCES, DECEMBER 31, 1995 $ 8,963 $234,007 $609,683 $(106,280) $ - $(39,664) $(9,900) $696,809
Comprehensive income:
Net income $214,619 $214,619
Adjustment for minimum pension
Liability (3,891) (3,891)
Foreign currency translation
adjustment 13,199 13,199
Total comprehensive income $223,927
Cash dividends - IPG (51,786) (51,786)
Equity adjustments-
pooled companies (40,874) (7,982) 40,874 (7,982)
Awards of stock under
Company plans:
Achievement stock and
incentive awards 331 103 434
Restricted stock,
net of forfeitures 49 22,831 (1,244) (7,686) 13,950
Employee stock purchases 19 7,273 7,292
Exercise of stock options,
including tax benefit 61 17,119 17,180
Purchase of Company's own stock (86,949) (86,949)
Issuance of shares
for acquisitions 4,453 (1,866) 2,587
Conversion of convertible
debentures 2 923 925
Par value of shares issued
for three-for-two stock split 4,547 (4,547) -
Payments from ESOP 2,100 2,100
BALANCES, DECEMBER 31, 1996 $13,641 $246,063 $759,987 $ (96,972) $(49,082) $(47,350) $(7,800) $818,487
The accompanying notes are an integral part of these financial statements.
Information for 1995, 1996 and 1997 has been restated to reflect the aggregate effect of the acquisitions accounted for as
poolings of interests.
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, Ammirati Puris Lintas, The Lowe Group, Western
Initiative Media Worldwide, DraftWorldwide, Allied Communications Group,
Octagon, International Public Relations 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 are market research, sales promotion, product
development, direct marketing, telemarketing, 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 as a separate component of
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 as a separate component of
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
As further discussed in Note 3, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings Per Share", in the
fourth quarter of 1997. 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 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
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
"Disclosures about Segments of an Enterprise and Related Information,"
which changes the way public companies report financial and descriptive
information about their operating segments. The Company provides
advertising and many other closely related marketing communications
services. All of these services fall within one reportable segment as
defined in SFAS 131.
Retirement Plans
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosures about Pensions and
Other Postretirement Benefits." SFAS 132 does not change the measurement or
recognition of such plans, but does standardize the disclosure requirements
for pensions and other postretirement benefits to the extent practicable.
SFAS 132 also requires disclosures of additional information about changes
in benefit obligations and fair values of plan assets, and eliminates
certain other disclosures that were previously required. The Company has
adopted SFAS 132 for its 1998 financial statements (See Note 8).
Reclassifications
Certain amounts for prior years have been reclassified to conform with
current year presentation.
NOTE 2: STOCKHOLDERS' EQUITY
On May 19, 1997, the stockholders approved an increase in the number of
authorized common shares from 150,000,000 shares to 225,000,000 shares. The
stockholders also approved a three-for-two stock split, effected in the
form of a 50% stock dividend paid on July 15, 1997 to stockholders of
record as of June 27, 1997. The number of shares reserved for issuance
pursuant to various plans under which stock is issued was increased by 50%.
The three-for-two 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.
The Company has a Preferred Share Rights Plan designed to deter coercive
takeover tactics. Pursuant to this plan, common stockholders are entitled
to purchase 1/100 of a share of preferred stock at an exercise price of
$100 if a person or group acquires or commences a tender offer for 15% or
more of Interpublic's common stock. Rights holders (other than the 15%
stockholder) will also be entitled to buy, for the $100 exercise price,
shares of Interpublic's common stock with a market value of $200 in the
event a person or group actually acquires 15% or more of Interpublic's
common stock. Rights may be redeemed at $.01 per right under certain
circumstances.
NOTE 3: EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted SFAS 128, which specifies the
method of computation, presentation and disclosure for earnings per share
(EPS). SFAS 128 replaces the presentation of primary EPS with basic EPS and
requires dual presentation of basic and diluted EPS. All prior period EPS
data has been restated to comply with SFAS 128.
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)
1998 1997 1996
Per Per Per
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
BASIC EPS
Income available
to common stockholders $309,905 135,485,326 $2.29 $200,378 130,249,946 $1.54 $214,619 130,297,369 $1.65
Effect of Dilutive Securities:
Options 3,310,367 2,910,648 2,219,373
Restricted stock 541 1,726,919 447 1,638,647 384 1,605,564
3/4% Convertible
subordinated debentures 2,660 5,929 4,010,291 6,410 4,466,502
DILUTED EPS $310,446 140,525,272 $2.21 $206,754 138,809,532 $1.49 $221,413 138,588,808 $1.60
The computation of diluted EPS for 1998 and 1997 excludes the assumed conversion of the 1.80% Convertible Subordinated Notes (See
Note 10), because they were antidilutive.
NOTE 4: ACQUISITIONS
The Company acquired a number of advertising and communications companies
during the three-year period ended December 31, 1998. The aggregate
purchase price, including cash and stock payments, was $660 million, $302
million and $173 million in 1998, 1997 and 1996, respectively. The
aggregate purchase price includes the value of stock issued for pooled
companies.
In 1998, 7,478,267 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 - 2,640,173 shares, Hill, Holliday, Connors,
Cosmopulos, Inc. ("Hill Holliday") - 2,062,434 shares, The Jack Morton
Company - 2,135,996 shares, Carmichael Lynch, Inc. - 486,904 shares and KBA
Marketing - 152,760 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 years ending December 31, 1997
and 1996 is summarized below:
Gross Income Net Income/(Loss)
(Dollars in thousands)
For the Year 1997:
As Reported $3,264,120 $205,033
Pooled Companies 218,264 (4,655)
As Restated $3,482,384 $200,378
For the Year 1996:
As Reported $2,786,655 $211,113
Pooled Companies 197,244 3,506
As Restated $2,983,899 $214,619
The "As Reported" balances shown above reflect amounts previously reported,
which were restated to incorporate the results of three companies acquired
in April 1998 as well as all prior pooled entities. The "As Restated"
balances reflect the restatement for two companies pooled in the second
half of 1998.
In 1998, the Company also paid $140 million in cash and issued 1,359,252
shares of its common stock for acquisitions accounted for as purchases and
equity investments. 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.
In 1997, the Company issued 4,059,255 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 - 708,789 shares, Integrated Communications
Corporation - 585,054 shares, Advantage International - 579,206 shares and
Ludgate - 539,459 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 1,200,059
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.
In 1996, the Company issued 3,519,847 shares of its stock for acquisitions
accounted for as poolings of interests. Pooled companies included
DraftDirect- 2,736,914 shares, The Weber Group- 495,996 shares and Torre
Renta Lazur- 286,937 shares.
During 1996, the Company paid $57 million in cash and issued 190,653 shares
of its common stock for acquisitions accounted for as purchases and equity
investments. These acquisitions included Angotti Thomas Hedge, Jay
Advertising, Media Inc., McAdams Healthcare, GGK (49% interest) and
Goldberg Moser O'Neill (49% interest).
Deferred payments of both cash and shares of the Company's common stock for
prior years' acquisitions were $75 million, $43 million, and $20 million in
1998, 1997 and 1996, respectively.
During 1998, the Company sold a portion of its investments in Applied
Graphics Technologies, Inc., 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. During
1996, the Company sold its 50% investment in Mark Goodson Productions for
approximately $29 million, a portion of its investment in CKS Group, Inc.
for $37.6 million and its investment in Spotlink for $11.7 million in
shares of the purchaser's common stock.
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) 1998 1997 1996
Domestic $292,931 $174,177 $178,717
Foreign 269,940 229,653 195,151
Total $562,871 $403,830 $373,868
The provision for income taxes consisted of:
(Dollars in thousands) 1998 1997 1996
Federal Income Taxes (Including Foreign
Withholding Taxes):
Current $105,049 $ 68,920 $ 59,414
Deferred 3,669 4,312 (78)
108,718 73,232 59,336
State and Local Income Taxes:
Current 21,285 22,350 20,759
Deferred 725 393 2,581
22,010 22,743 23,340
Foreign Income Taxes:
Current 118,612 87,233 72,949
Deferred (17,335) 3,038 1,158
101,277 90,271 74,107
Total $232,005 $186,246 $156,783
At December 31, 1998 and 1997 the deferred tax assets/(liabilities)
consisted of the following items:
(Dollars in thousands) 1998 1997
Postretirement/postemployment benefits $ 46,394 $ 40,978
Deferred compensation 34,285 25,468
Pension costs 13,715 12,094
Depreciation (6,102) (8,824)
Rent (6,424) (842)
Interest 4,598 2,056
Accrued reserves 8,569 11,708
Investments in equity securities (10,677) (1,375)
Tax loss/tax credit carryforwards 46,682 35,000
Other (2,279) (2,904)
Total deferred tax assets 128,761 113,359
Deferred tax valuation allowance 31,411 37,698
Net deferred tax assets $ 97,350 $ 75,661
The valuation allowance of $31.4 million and $37.7 million at December 31,
1998 and 1997, respectively, represents a provision for uncertainty as to
the realization of certain deferred tax assets, including U.S. tax credit
and net operating loss carryforwards in certain jurisdictions. The change
during 1998 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, 1998, there was $6.9 million
of tax credit carryforwards with expiration periods through 2003 and net
operating loss carryforwards with a tax effect of $39.8 million with
various expiration periods. The Company has concluded that based upon
expected future results, it is more likely than not that the net deferred
tax asset balance will be realized.
A reconciliation of the effective income tax rate as shown in the
consolidated statement of income to the federal statutory rate is as
follows:
1998 1997 1996
Statutory federal income tax rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefit 3.7 4.1 3.0
Impact of foreign operations, including
withholding taxes 0.4 0.3 1.0
Goodwill and intangible assets 2.8 2.7 2.4
Effect of pooled companies (0.1) 3.9 1.1
Other (0.6) 0.1 (0.6)
Effective tax rate 41.2% 46.1% 41.9%
The total amount of undistributed earnings of foreign subsidiaries for
income tax purposes was approximately $497.6 million at December 31, 1998.
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, since a major portion
of these earnings has been reinvested in working capital and other business
needs. The additional taxes on that portion of undistributed earnings which
is available for dividends are not practicably determinable.
NOTE 6: SUPPLEMENTAL CASH FLOW INFORMATION
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 $193.9 million, $126.9 million
and $106.9 million in 1998, 1997 and 1996, respectively. Interest payments
were approximately $37.2 million in 1998, $31.2 million in 1997 and $35.9
million in 1996.
Noncash Financing Activity
As more fully described in Note 10, 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 4.3 million shares of the Company's common stock.
Acquisitions
As more fully described in Note 4, the Company issued 8,837,519 shares,
5,259,314 shares, and 3,710,500 shares of the Company's common stock in
connection with acquisitions during 1998, 1997 and 1996, respectively.
Details of businesses acquired in transactions accounted for as purchases
were as follows:
1998 1997 1996
(Dollars in thousands)
Fair value of assets acquired $452,237 $263,312 $186,557
Liabilities assumed 184,187 89,686 106,289
Net assets acquired 268,050 173,626 80,268
Less: noncash consideration 86,446 76,794 7,568
Less: cash acquired 59,853 6,535 16,867
Net cash paid for acquisitions $121,751 $ 90,297 $ 55,833
The amounts shown above exclude acquisition related deferred payments due
in subsequent years, but include cash deferred payments of $55 million, $30
million and $18 million made during 1998, 1997 and 1996, respectively.
NOTE 7: INCENTIVE PLANS
The 1997 Performance Incentive Plan ("1997 PIP Plan"), approved by the
Company's stockholders in May 1997, replaced the Company's Management
Incentive Compensation Plan, Long-Term Performance Incentive Plan, 1996
Stock Incentive Plan and the 1986 Stock Incentive Plan ("Predecessor
Plans"). Awards made under the Predecessor Plans remain subject to their
terms and conditions. The 1997 PIP Plan includes the following types of
awards: (1) stock options, (2) stock appreciation rights, (3) restricted
stock, (4) phantom shares, (5) performance units and (6) management
incentive compensation performance awards.
The maximum number of shares of the Company's common stock which may be
granted in any year under the 1997 PIP Plan, excluding management incentive
compensation performance awards, is equal to a base amount (1.85% of the
total number of shares of the Company's common stock outstanding on the
first day of the year) supplemented by additional shares as defined in the
1997 PIP Plan document. The 1997 PIP Plan also limits the number of shares
available with respect to stock option and stock appreciation rights awards
made each year to any one participant as well as the number of shares
available under certain types of awards.
The following discussion relates to transactions under the 1997 PIP Plan,
the Predecessor Plans and other incentive plans. Except as otherwise noted,
awards under the 1997 PIP Plan have terms similar to awards made under the
respective Predecessor Plans.
Stock Options
The 1997 PIP Plan provides for the granting of either incentive stock
options (ISO's) or nonstatutory options to purchase shares at the fair
value of the Company's common stock on the date of grant. The Compensation
Committee of the Board of Directors ( the "Committee"), is responsible for
determining the vesting terms and the exercise period of each grant within
the limitations set forth in the 1997 PIP Plan document.
Outstanding options are generally granted at the fair market value of the
Company's common stock on the date of grant and are exercisable based on a
schedule determined by the Committee. Generally, options become exercisable
between two and five years after the date of grant and expire ten years
from the date of grant.
The Company also maintains a stock plan for outside directors. Under this
plan, 300,000 shares of common stock of the Company are reserved for
issuance. Stock options under this plan are awarded at the fair market
value of the Company's common stock on the date the option is granted.
Options generally become exercisable three years after the date of grant
and expire ten years from the date of grant.
Following is a summary of stock option transactions during the three-year
period ended December 31, 1998:
Number of Weighted-
Shares Average
Under Option Exercise Price
Balance, December 31, 1995 9,937,152 $18
Exercisable, December 31, 1995 4,538,483 11
New Awards 3,503,580 31
Exercised (907,866) 14
Cancelled (466,923) 22
Balance, December 31, 1996 12,065,943 22
Exercisable, December 31, 1996 3,846,002 14
New Awards 2,210,980 38
Exercised (1,733,559) 16
Cancelled (521,160) 24
Balance, December 31, 1997 12,022,204 26
Exercisable, December 31, 1997 4,201,219 17
New Awards 3,949,191 64
Exercised (1,495,003) 16
Cancelled (618,748) 29
Balance, December 31, 1998 13,857,644 37
Exercisable, December 31, 1998 2,988,719 18
The following table summarizes information about stock options outstanding
at December 31, 1998:
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
$8.66 to $19.99 2,349,972 3.25 $16 2,343,222 $16
20.00 to 29.99 2,675,726 6.04 22 624,047 22
30.00 to 34.99 3,235,123 7.44 32 21,450 32
35.00 to 69.19 5,596,823 9.34 56 - -
Stock Appreciation Rights
The 1997 PIP Plan permits the Company to grant stock appreciation rights.
A stock appreciation right entitles the holder to receive an amount equal
to the fair market value of a share of common stock of the Company on the
date of exercise over a base price. No such awards have been made to date.
Restricted Stock
Various incentive plans, including the 1997 PIP Plan, incorporate the
issuance of restricted stock subject to certain restrictions and vesting
requirements 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. The Committee is authorized to
direct that discretionary tax assistance payments may be made to recipients
when the restrictions lapse. Such payments are expensed as awarded. At
December 31, 1998, there were a total of 3,571,097 shares of restricted
stock outstanding. During 1998, 1997 and 1996, the Company awarded 629,978
shares, 699,257 shares and 720,903 shares of restricted stock with a
weighted-average grant date fair value of $57.97, $38.96 and $31.14,
respectively.
Restricted shares under the Outside Directors' Plan generally vest after
five years. At December 31, 1998, there were 18,000 shares of restricted
stock outstanding. During 1998, no shares were awarded under this Plan.
Phantom Shares
The 1997 PIP Plan permits the Company to grant phantom shares. A phantom
share represents the right of the holder to receive an amount determined by
the Committee based on the achievement of performance goals. No such grants
have been made under the 1997 PIP Plan.
Performance Units
The 1997 PIP Plan and its predecessor, the Long-Term Performance Incentive
Plan, permit the Company to grant performance units. Performance units
represent the contractual right of the holder to receive a payment that
becomes vested upon the attainment of performance objectives determined by
the Committee.
Grants consisting of 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 1995-
1998 and 1997-2000 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 four-year performance period.
The Company expensed $19.9 million in each of 1998 and 1997 and $13.6
million in 1996 relating to performance units. As of December 31, 1998,
the Company's liability for the 1995-1998 and 1997-2000 performance periods
was $54.7 million, which represents a proportionate part of the total
estimated amounts payable for the two performance periods. The Company's
liability to participants for the 1995-1998 performance period as of
December 31, 1998 was approximately $34.6 million.
Management Incentive Compensation Plan
Under the management incentive compensation component of the 1997 PIP Plan
management incentive compensation awards are made to selected employees of
the Company in the form of cash or stock, subject to the limitation that no
individual may receive in excess of $2 million and certain limitations on
common shares issued.
Other Incentive Arrangements
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 262,153 shares, 281,852 shares and 279,879 shares during 1998, 1997
and 1996, respectively, under the ESPP. An additional 8,043,225 shares were
reserved for issuance at December 31, 1998.
Under the Company's Achievement Stock Award Plan, awards may be made up to
an aggregate of 1,872,000 shares of common stock together with cash awards
to cover any applicable withholding taxes. The Company issued 4,305 shares,
10,130 shares and 8,505 shares during 1998, 1997 and 1996, respectively,
under this Plan. The weighted-average fair value on the dates of grant in
1998, 1997 and 1996 was $56.69, $42.25 and $30.86, respectively.
SFAS 123 Disclosures
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation" in the fourth quarter
of 1996. 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. Accordingly, no compensation cost has been recognized for the
Company's stock options or for shares purchased under the ESPP. The cost
recorded for restricted stock and achievement stock awards in 1998, 1997
and 1996 was $20.5 million, $16.7 million and $14.5 million, respectively.
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:
1998 1997 1996
(Dollars in thousands except per share data)
Net Income As reported $309,905 $200,378 $214,619
Pro forma $295,059 $190,542 $207,633
Earnings Per Share
Basic As reported $2.29 $1.54 $1.65
Pro forma $2.18 $1.46 $1.59
Diluted As reported $2.21 $1.49 $1.60
Pro forma $2.10 $1.42 $1.55
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 $7.64, $5.36 and $4.60 in 1998, 1997 and
1996, respectively.
For purposes of this pro forma information, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for
grants in 1998, 1997 and 1996, respectively: dividend yield of 0.95%, 1.3%
and 1.41%; expected volatility of 19.17%, 19.17% and 20.71%; risk-free
interest rate of 4.87%, 6.51% and 6.43%; and expected life of six years for
each of the three years.
The weighted-average fair value on the dates of grant for options granted
in 1998, 1997 and 1996 was $17.70, $11.83 and $9.63, respectively. 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.
Hill Holliday Compensation Plans
Hill Holliday had an Equity Participation Plan (the "EPP") for various
members of management and certain agreements (the "Awards") with three key
members of their management, which provided for participants to receive a
portion of the proceeds in the event of the sale or merger of Hill
Holliday. As a result of the merger discussions initiated in November 1997
and the subsequent agreement entered into on February 19, 1998, Hill
Holliday recognized $26.0 million of compensation expense based on
management's assessment that as of December 31, 1997, it was probable that
the obligations under the EPP and the Awards would become payable. Also
included in the special compensation charge was $.9 million related to the
value of certain compensatory stock options and $.5 million related to
other stock grants. The remaining balance of the special charge consisted
of $4.2 million of payments on a consulting and supplemental retirement
agreement under which no future services are expected, $1.0 million payable
under an employment agreement in the event of the sale of Hill Holliday and
$1.0 million of other expenses.
Carmichael Lynch, Inc. Compensation Plans
Carmichael Lynch maintained an Employee Stock Ownership Program ("ESOP")
which was funded by a loan in the original amount of $10.5 million and
contributions from Carmichael Lynch which were approximately $.7 million in
1997 and $2.4 million in 1996. At December 31, 1997, the loan had a balance
of $7.4 million, which was repaid from proceeds from the sale of Company
stock received in the merger, and the Plan was terminated. Carmichael Lynch
also had a deferred stock equivalent plan payable in cash or stock. In
1997, it was determined that the units would be paid in cash and
accordingly the balance of $4.9 million was reclassified from "Additional
Paid in Capital" to "Deferred Compensation". At December 31, 1998, the
outstanding units had been paid.
International Public Relations Compensation Plans
International Public Relations maintained several stock option plans, which
will expire in early 1999, and a maximum of 60,000 shares of the Company's
common stock may be issued on exercise of the options.
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 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 will be
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 will be 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.
The Company's policy was to fund pension costs as permitted by applicable
tax regulations. Pension costs were determined by the projected unit credit
method based upon career average pay. Funding requirements for the Domestic
Plan were determined using the accrued benefit unit credit method. Under
the "cash balance" formula, the participant's account balance was credited
each year with an amount equal to the percentage of the year's annual
compensation, plus interest credits.
The Company recorded a reduction to stockholders' equity for minimum
pension liability of $36.6 million, $13.2 million and $13.0 million in
1998, 1997 and 1996, 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 the Domestic Plan for 1998, 1997 and 1996
included the following components:
(Dollars in thousands) 1998 1997 1996
Service cost $ 16 $ 4,179 $ 4,057
Interest cost 9,841 10,567 10,248
Expected return on plan assets (11,575) (11,011) (10,854)
Amortization of unrecognized
transition obligation - 1,887 1,887
(Dollars in thousands) 1998 1997 1996
Amortization of prior
service cost - (1,276) (1,769)
Recognized actuarial loss 2,601 943 1,005
Curtailment charge - 9,727 -
Net periodic pension cost $ 883 $ 15,016 $ 4,574
Net periodic pension costs for foreign pension plans for 1998, 1997 and
1996 included the following components:
(Dollars in thousands) 1998 1997 1996
Service cost $ 6,847 $ 5,460 $ 5,130
Interest cost 10,908 10,633 10,150
Expected return on plan assets (9,437) (10,537) (9,112)
Amortization of unrecognized
transition obligation 373 324 544
Amortization of
prior service cost 482 552 732
Recognized actuarial (gain) (70) (1,440) (2,026)
Other - - (50)
Net periodic pension cost $ 9,103 $ 4,992 $ 5,368
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,
1998, and 1997:
(Dollars in thousands)
Domestic Foreign
Pension Plan Pension Plans
1998 1997 1998 1997
Change in benefit obligation
Beginning obligation $134,347 $139,142 $179,016 $165,654
Service cost 16 4,179 6,847 5,460
Interest cost 9,841 10,567 10,908 10,633
Benefits paid (12,244) (17,016) (9,447) (11,677)
Participant contributions - - 1,606 1,311
Actuarial losses 26,363 6,070 29,882 18,022
Curtailment - (8,595) - -
Currency effect - - 5,245 (10,387)
Other - - (3,093) -
Ending obligation 158,323 134,347 220,964 179,016
Change in plan assets
Beginning fair value 115,943 112,284 145,942 136,575
Actual return on plan assets 11,932 14,346 17,363 18,309
Employer contributions 7,638 6,329 2,473 3,592
Participant contributions - - 1,606 1,311
Benefits paid (12,244) (17,016) (9,447) (11,677)
Currency effect - - 1,300 (4,427)
Other - - 2,738 2,259
Ending fair value 123,269 115,943 161,975 145,942
Funded status of the plans (35,054) (18,404) (58,989) (33,074)
Unrecognized net actuarial
loss/(gain) 36,612 13,207 11,536 (12,711)
Unrecognized prior service cost - - 2,921 3,524
Unrecognized transition cost - - 3,796 2,980
Net amount recognized $ 1,558 $(5,197) $(40,736) $(39,281)
At December 31, 1998 and 1997, 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 6.75% in 1998, 7.25% in 1997 and
7.5% in 1996 and a salary increase assumption of 6% in 1998, 1997 and 1996
were used in determining the actuarial present value of the projected
benefit obligation. The expected return on Domestic Plan assets was 10% in
1998, 1997 and 1996. For the foreign pension plans, discount rates ranging
from 4.0% to 14% in 1998, 3.5% to 14% in 1997, and 5.5% to 12% in 1996 and
salary increase assumptions ranging from 2.0% to 10% in 1998, 1997, and
1996, 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 2.0% to 14% in 1998, 3.5% to 14% in 1997,
and 4.0% to 12% in 1996.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the Domestic Plan were $158 million, $158 million
and $123 million, respectively, as of December 31, 1998, and $134 million,
$134 million, and $116 million, respectively, as of December 31, 1997. 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 $81.4 million, $74 million, and
$3.3 million respectively, as of December 31, 1998, and $74 million, $66
million, and $4.7 million respectively, as of December 31, 1997.
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 plan 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 $8.1 million, $6.3 million and $5.4
million to the Savings Plan in 1998, 1997 and 1996, respectively. One of
the 1998 pooled companies also had a defined contribution plan in which a
percentage of the participants' contributions were matched. Contributions
were $.7 million, $2.2 million and $2.4 million in 1998, 1997 and 1996,
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 employees in
the United States 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 components of periodic expense for these postretirement benefits for
1998, 1997 and 1996 were as follows:
(Dollars in thousands) 1998 1997 1996
Service cost $ 682 $ 612 $ 610
Interest cost 3,082 2,958 2,824
Amortization of prior service cost (934) (934) (934)
Total periodic expense $2,830 $2,636 $2,500
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, 1998 and 1997:
1998 1997
Change in benefit obligation
Beginning obligation $41,637 $38,757
Service cost 682 612
Interest cost 3,082 2,958
Participant contributions 77 89
Benefits paid (1,695) (1,958)
Actuarial (gain)/loss (3,190) 1,179
Ending obligation 40,593 41,637
Change in plan assets
Beginning fair value - -
Actual return on plan assets - -
Employer contributions 1,618 1,869
Participant contributions 77 89
Benefits paid (1,695) (1,958)
Ending fair value - -
Funded status of the plans (40,593) (41,637)
Unrecognized net actuarial gain (5,195) (2,004)
Unrecognized prior service cost (2,829) (3,763)
Net amount recognized $(48,617) $(47,404)
A discount rate of 6.75% in 1998, 7.25% in 1997 and 7.50% in 1996 and a
salary increase assumption of 6.0% in 1998, 1997 and 1996 were used in
determining the accumulated postretirement benefit obligation. An 8.0% and
a 9.0% increase in the cost of covered health care benefits was assumed for
1998 and 1997, 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. For example, a 1% increase in the health care cost trend
rate would increase the accumulated postretirement benefit obligation at
December 31, 1998 by approximately $2.8 million, and the combination of the
service cost and the interest cost for 1998 by approximately $.2 million. A
1% decrease in the health care cost trend rate would decrease the
accumulated postretirement benefit obligation at December 31, 1998 by
approximately $3.2 million, and the combination of the service cost and the
interest cost for 1998 by approximately $.3 million.
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 $50.3 million
and $56.7 million at December 31, 1998 and 1997, respectively, and is
included in deferred compensation and reserve for termination allowances.
The net periodic expense recognized in 1998, 1997 and 1996 was $32.2
million, $31.3 million and $23.4 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, 1998 and 1997 aggregated $458 million and
$432 million, respectively. The weighted-average interest rate on
outstanding balances at December 31, 1998 was approximately 7.3%. 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) 1998 1997
Convertible Subordinated Notes - 1.80% $207,927 $201,768
Term loans - 6.45% to 7.91%
(6.45% to 14.0% in 1997) 255,000 276,833
Germany mortgage note payable - 7.6% 31,680 29,846
Other mortgage notes payable and
long-term loans - generally 2% to 10% 34,513 40,845
529,120 549,292
Less: current portion 22,502 30,256
Long-term debt $506,618 $519,036
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 3.3 million shares of the Company's common stock at a
conversion rate of 13.386 shares per $1,000 face amount. These shares have
been reserved for the conversion of the notes. The fair value of the 2004
Notes as of December 31, 1998 was approximately $283 million and was
determined by obtaining quotes from brokers.
In the fourth quarter of 1997, the Company redeemed its 3 3/4% Convertible
Subordinated Debentures due 2002. Substantially all of the outstanding
debentures were converted into approximately 4.3 million shares of the
Company's common stock.
The decrease in term loans during 1998 was primarily due to the payment of
various loans with Prudential.
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 is as follows: 1999-$22.5
million; 2000-$24.0 million; 2001-$25.5 million; 2002-$61.5 million; 2003-
$30.4 million and $365.2 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 unless otherwise disclosed.
NOTE 11: RESULTS BY QUARTER (UNAUDITED)
___________________________________________________________________________________________________________________
(Dollars in thousands 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
except per share data)
1998 Restated As Reported Restated As Reported Restated As Reported_____________
Gross income $831,183 $775,300 $1,032,242 $972,363 $910,530 $861,448 $1,194,773
Operating expenses 752,956 700,567 807,560 751,522 804,912 759,869 981,730
Interest expense 12,801 10,936 14,564 12,672 16,029 14,210 15,305
Income before provision
for income taxes 65,426 63,797 210,118 208,169 89,589 87,369 197,738
Provision for income taxes 25,498 25,768 86,665 86,871 38,604 38,207 81,238
Net equity interests (2,189) (2,189) (4,942) (4,945) (3,997) (4,000) (9,833)
Net income $ 37,739 $ 35,840 $ 118,511 $116,353 $ 46,988 $ 45,162 $ 106,667
Per share data:
Basic EPS $ .28 $ .27 $ .87 $ .88 $ .35 $ .34 $ .79
Diluted EPS $ .27 $ .26 $ .84 $ .84 $ .34 $ .33 $ .76
Cash dividends per share (IPG) $.130 $.130 $.150 $.150 $.150 $.150 $.150
Weighted-Average Shares:
Basic 135,187,048 132,394,115 135,718,669 132,925,736 135,457,584 132,792,504 135,578,003
Diluted 140,238,988 137,446,055 144,477,785 141,684,852 140,232,121 137,567,041 143,845,195
Stock price:
High $62 5/8 $62 5/8 $64 1/2 $64 1/2 $64 7/8 $64 7/8 $79 3/4
Low $47 11/16 $47 11/16 $55 5/16 $55 5/16 $52 3/16 $52 3/16 $47
___________________________________________________________________________________________________________________
NOTE 11: RESULTS BY QUARTER (UNAUDITED)
_____________________________________________________________________________________________________________________________
(Dollars in thousands 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
except per share data)
1997 Restated As Reported Restated As Reported Restated As Reported Restated As Reported
Gross income $730,068 $679,297 $881,316 $825,358 $787,151 $732,959 $1,083,849 $1,026,506
Operating expenses 660,541 614,874 701,278 649,291 713,034 660,465 913,679 850,181
Special compensation charges - - - - - - 32,229 32,229
Interest expense 12,406 10,698 13,113 11,306 15,967 14,343 16,307 14,227
Income before provision
for income taxes 57,121 53,725 166,925 164,761 58,150 58,151 121,634 129,869
Provision for income taxes 22,524 21,590 66,901 66,428 27,246 26,124 69,575 70,085
Net equity interests (2,698) (2,704) (5,100) (5,113) (935) (942) (8,473) (8,487)
Net income $ 31,899 $ 29,431 $ 94,924 $ 93,220 $ 29,969 $ 31,085 $43,586 $ 51,297
Per share data:
Basic EPS $ .25 $ .23 $ .73 $ .73 $ .23 $ .24 $ .33 $ .40
Diluted EPS $ .24 $ .23 $ .70 $ .70 $ .22 $ .24 $ .32 $ .38
Cash dividends per share (IPG) $.113 $.113 $ .130 $.130 $.130 $.130 $ .130 $.130
Weighted-Average Shares:
Basic 129,527,439 126,734,506 129,954,447 127,161,514 129,871,194 127,078,261 131,646,705 128,853,772
Diluted 133,462,189 130,669,256 138,837,723 136,044,790 134,974,614 132,181,681 136,385,441 133,592,508
Stock price:
High $36 5/8 $36 5/8 $41 3/8 $41 3/8 $51 3/8 $51 3/8 $52 1/2 $52 1/2
Low $32 1/4 $32 1/4 $35 $35 $41 1/2 $41 1/2 $45 1/4 $45 1/4
_____________________________________________________________________________________________________________________________
The "As Reported" balances reflect amounts previously reported, which incorporated the results of three companies acquired
in April 1998 as well as all prior pooled entities. The "Restated" balances reflect the restatement for two companies pooled in
the second half of 1998.
NOTE 12: GEOGRAPHIC AREAS
Total assets, income from commissions and fees and income before provision
for income taxes are presented below by major geographic area:
(Dollars in thousands) 1998 1997 1996
Total Assets:
United States $3,506,826 $3,229,797 $2,500,938
International
United Kingdom 676,664 664,698 556,485
All other Europe 1,760,551 1,107,774 1,139,166
Asia Pacific 558,532 583,975 558,504
Latin America 313,615 257,730 224,683
Other 126,635 139,469 140,151
Total International 3,435,997 2,753,646 2,618,989
Total Consolidated $6,942,823 $5,983,443 $5,119,927
Income From Commissions and Fees:
United States $1,925,030 $1,670,555 $1,325,167
International
United Kingdom 387,618 301,883 244,066
All other Europe 880,919 748,720 723,329
Asia Pacific 325,758 348,707 338,416
Latin America 232,940 204,894 170,024
Other 92,075 78,017 73,415
Total International 1,919,310 1,682,221 1,549,250
Total Consolidated $3,844,340 $3,352,776 $2,874,417
Income Before Provision for Income Taxes:
United States $ 330,268 $ 216,057 $ 216,428
International
United Kingdom 47,788 23,102 19,006
All other Europe 140,749 110,376 85,910
Asia Pacific 53,658 53,414 57,617
Latin America 50,473 48,067 35,578
Other (1,366) 10,607 11,024
Total International 291,302 245,566 209,135
Items not allocated to operations,
principally interest expense:
United States (37,337) (41,880) (37,711)
International (21,362) (15,913) (13,984)
Total Consolidated $ 562,871 $ 403,830 $ 373,868
Commissions and fees are attributed to geographic areas based on where the
services are performed.
The largest client of the Company contributed approximately 7% in 1998,
10% in 1997 and 9% in 1996 to income from commissions and fees. The
Company's second largest client contributed approximately 5% in 1998, 6% in
1997 and 7% in 1996 to income from commissions and fees.
Dividends received from foreign subsidiaries were approximately $51.1
million in 1998, $40.8 million in 1997 and $35.2 million in 1996.
Consolidated net income includes losses from exchange and translation of
foreign currencies of $3.2 million, $5.6 million and $4.1 million in 1998,
1997 and 1996, 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. At December 31, 1998, long-term equity securities had
a cost basis of $73 million with a market value of $91 million, and an
unrealized pre-tax gain of $18 million. At December 31, 1997, the cost
basis was $20 million with a market value of $42 million, and an unrealized
pre-tax gain of $22 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, 1998, the 1.80% Convertible Subordinated
Notes due 2004 had a cost basis of $208 million with a market value of $283
million. As of December 31, 1997, the cost basis was $202 million with a
market value of $208 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 manages its exposure to
foreign exchange, economic and political risks. The foreign exchange crisis
in Asia had a minimal impact on the Company partly due to the agency
systems' contingency plans that included active hedging, repatriation of
cash, cost-cutting and limiting capital expenditures. Additionally, the
Company believes that the more recent economic developments in Brazil will
not have a significant impact.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133), which the
Company is required to adopt effective January 1, 2000. 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. The impact of SFAS 133 on the Company's
financial statements will depend on a variety of factors, including future
interpretative guidance from the FASB, the future level of forecasted and
actual foreign currency transactions, the extent of the Company's hedging
activities, the types 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.
NOTE 14: COMMITMENTS AND CONTINGENCIES
At December 31, 1998 the Company's subsidiaries operating primarily outside
the United States were contingently liable for discounted notes receivable
of $10.8 million.
The Company and its subsidiaries lease certain facilities and equipment.
Gross rental expense amounted to approximately $208 million for 1998, $217
million for 1997 and $208 million for 1996, which was reduced by sublease
income of $16 million in 1998, $30.5 million in 1997 and $29.1 million in
1996.
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 1999 and
thereafter, are as follows:
(Dollars in thousands) Gross Rental Sublease
Period Commitment Income
1999 $187,472 $16,969
2000 167,548 14,357
2001 149,724 12,030
2002 126,489 9,366
2003 108,302 4,948
2004 and thereafter 445,604 6,844
Certain of the Company's acquisition agreements provide for deferred
payments by the Company, contingent upon 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.
SELECTED FINANCIAL DATA FOR FIVE YEARS
(Dollars in thousands except per share data)
1998 1997 1996 1995 1994
Operating Data
Gross income $ 3,968,728 $ 3,482,384 $ 2,983,899 $ 2,606,467 $ 2,350,809
Operating expenses 3,347,158 2,988,532 2,558,336 2,257,138 2,059,233
Restructuring charge - - - - 48,715
Write-down of goodwill and other
related assets - - - 38,687 -
Special compensation charge - 32,229 - - -
Interest expense 58,699 57,793 51,695 47,940 41,500
Provision for income taxes 232,005 186,246 156,783 126,537 92,311
Income before effect of accounting
change 309,905 200,378 214,619 134,311 108,767
Effect of accounting change<F1> - - - - (34,325)
Net Income $ 309,905 $ 200,378 $ 214,619 $ 134,311 $ 74,442
Per Share Data
Basic
Income before effect of accounting
change $ 2.29 $ 1.54 $ 1.65 $ 1.05 $ .87
Effect of accounting change<F1> - - - - (.27)
Net Income $ 2.29 $ 1.54 $ 1.65 $ 1.05 $ .60
Weighted-average shares 135,485,326 130,249,946 130,297,369 127,802,633 125,563,727
Diluted
Income before effect of accounting
Change $ 2.21 $ 1.49 $ 1.60 $ 1.02 $ 84
Effect of accounting change<F1> - - - - (.27)
Net Income $ 2.21 $ 1.49 $ 1.60 $ 1.02 $ .57
Weighted-average shares 140,525,272 138,809,532 138,588,808 131,804,623 128,958,829
Financial Position
Working capital $ 118,593 $ 216,367 $ 128,808 $ 101,833 $ 56,748
Total assets 6,942,823 5,983,443 5,119,927 4,631,912 4,090,906
Long-term debt 506,618 519,036 418,618 361,945 320,902
Book value per share $ 9.07 $ 7.39 $ 6.14 $ 5.19 $ 4.47
Other Data
Cash dividends (Interpublic) $ 76,894 $ 61,242 $ 51,786 $ 46,124 $ 40,360
Cash dividends per share
(Interpublic) $ .58 $ .50 $ .44 $ .40 $ .36
Number of employees 34,200 31,100 25,500 23,700 21,400
All periods prior to 1998 have been restated to reflect the aggregate effect of acquisitions accounted
for as poolings of interests.
<F1> Reflects the cumulative effect of adopting SFAS 112, "Employers' Accounting for Postemployment Benefits."
<PAGE
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 Company is addressing the Year 2000 Compliance Project with
the mobilization of required resources at the Corporate offices
and all operating units. Project plans have been developed to
assess and prioritize the operational applications, supplier and
network compliance and required remediation. The Audit Committee
is overseeing the timely implementation and completion of this
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 presented on page 53.
54