<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarter ended September 30, 1995 Commission file no. 1-5029
True North Communications Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-1088161
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
101 East Erie Street, Chicago, Illinois 60611
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (312) 751-7000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
There were 23,328,002 shares of the Registrant's 33-1/3 cents per share
par value Common Stock outstanding as of November 10, 1995.
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TRUE NORTH COMMUNICATIONS INC.
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Exhibits
Consolidated Statements of Income for the
Three Months Ended September 30, 1994 and 1995 3
Consolidated Statements of Income for the
Nine Months Ended September 30, 1994 and 1995 4
Consolidated Balance Sheets as of September 30, 1994,
December 31, 1994, and September 30, 1995 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1994 and 1995 6
Notes to Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Operating Results 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 10
2
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TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
Three months ended September 30
1994 1995
-------- --------
Revenues $100,478 $108,654
-------- --------
Costs and Expenses:
Salaries and employee benefits $ 62,511 $ 68,969
Office and general expenses 29,587 32,417
Other (income) expense 366 1,132
-------- --------
Total Costs and Expenses $ 92,464 $102,518
-------- --------
Income Before Provision for Taxes on Income $ 8,014 $ 6,136
Provision for Federal, Foreign & State
Income Taxes 3,203 2,646
-------- --------
$ 4,811 $ 3,490
Minority Interest Credit (Expense) 98 (115)
Equity in Earnings (Losses) of Affiliated
Companies (802) 819
-------- --------
Net Income $ 4,107 $ 4,194
======== ========
Net Income Per Share $ .18 $ .19
======== ========
Average Number of Common and Common
Equivalent Shares Outstanding 22,814 22,655
======== ========
The accompanying notes are an integral part of these statements.
3
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TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
Nine months ended September 30
1994 1995
-------- --------
Revenues $290,918 $314,900
-------- --------
Costs and Expenses:
Salaries and employee benefits $180,348 $198,420
Office and general expenses 85,869 93,959
Unusual items -- 10,185
Other (income) expense 2,866 4,268
-------- --------
Total Costs and Expenses $269,083 $306,832
-------- --------
Income Before Provision for Taxes on Income $ 21,835 $ 8,068
Provision for Federal, Foreign & State
Income Taxes 9,560 4,353
-------- --------
$ 12,275 $ 3,715
Minority Interest Credit (Expense) 209 21
Equity in Earnings (Losses) of Affiliated
Companies 3,954 786
-------- --------
Net Income $ 16,438 $ 4,522
======== ========
Net Income Per Share $ .72 $ .20
======== ========
Average Number of Common and Common
Equivalent Shares Outstanding 22,750 22,484
======== ========
The accompanying notes are an integral part of these statements.
4
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TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
Sept. 30 Dec. 31 Sept. 30
1994 1994 1995
-------- -------- --------
ASSETS:
- -------
Cash and short-term investments $ 76,251 $ 77,063 $ 46,077
Accounts receivable, net 333,211 275,851 331,994
Other current assets 37,662 29,814 47,352
-------- -------- --------
Total current assets $447,124 $382,728 $425,423
Property and equipment, net 45,998 45,660 48,890
Goodwill 52,761 55,834 74,695
Investment in affiliated companies 173,000 177,948 184,599
Other noncurrent assets 9,662 11,574 6,392
-------- -------- --------
Total assets $728,545 $673,744 $739,999
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Accounts payable and accruals $409,487 $386,284 $389,499
Short-term bank borrowings 39,566 7,864 69,290
Current portion of long-term debt 614 5,389 5,323
-------- -------- --------
Total current liabilities $449,667 $399,537 $464,112
-------- -------- --------
Deferred taxes $ 5,268 $ 7,427 $ 1,855
-------- -------- --------
Long-term debt $ 10,701 $ 5,496 $ 5,259
-------- -------- --------
Accrued future compensation exp. $ 30,599 $ 32,508 $ 34,775
-------- -------- --------
Other noncurrent liabilities $ 22,494 $ 21,019 $ 25,394
-------- -------- --------
Common stock $ 3,914 $ 3,915 $ 7,830
Paid-in capital 121,873 121,708 116,520
Retained earnings 89,652 100,011 94,187
Less-Treasury stock (723) (13,653) (5,040)
Cumulative translation adjustment (4,900) (4,224) (4,893)
-------- -------- --------
Total stockholders' equity $209,816 $207,757 $208,604
-------- -------- --------
Total liabilities and
stockholders' equity $728,545 $673,744 $739,999
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
5
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TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine months ended Sept. 30
1994 1995
-------- --------
Cash Flows From Operating Activities:
- -------------------------------------
Net income $ 16,438 $ 4,522
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 11,421 12,770
Deferred compensation expense 937 2,191
Equity earnings of affiliates, net of dividends
received (3,436) 220
Accounts receivable (74,761) (52,622)
Accounts payable and accruals 62,830 (15,011)
Billable expenditures and other current assets (5,353) (17,538)
Other (2) (2,763)
-------- --------
$ 8,074 $(68,231)
-------- --------
Cash Provided By (Used For) Financing Activities:
- -------------------------------------------------
Short-term investments and marketable securities $ (8,253) $ 46,593
Additions to long-term debt 193 --
Payments of long-term debt (25,352) (93)
Cash dividends paid (10,515) (10,346)
Common stock issuances 3,676 7,340
Liability for cash overdrafts 11,671 12,654
Short-term borrowings 34,496 61,426
-------- --------
$ 5,916 $117,574
-------- --------
Cash Provided By (Used For) Investment Activities:
- --------------------------------------------------
Purchase of subsidiaries $ (4,876) $(14,606)
Purchase of interest in affiliated companies -- (8,476)
Capital expenditures, net of retirements (6,363) (10,654)
-------- --------
$(11,239) $(33,736)
-------- --------
Increase (Decrease) In Cash $ 2,751 $ 15,607
Balance at beginning of period 26,111 24,598
-------- --------
Balance at end of period $ 28,862 $ 40,205
======== ========
The accompanying notes are an integral part of these statements.
6
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TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995
(Unaudited)
(1) The condensed financial statements included herein have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and include all adjustments (which
comprise only normal recurring items) which the Company considers necessary
for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The consolidated condensed
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's latest Annual Report
on Form 10-K.
Revenues and net income for the first nine months of the year should not be
considered reliable indicators of revenues or net income for the entire
year.
(2) The number of shares outstanding reflects the potential dilution of shares
expected to be earned through profit performance contracts and outstanding
stock options. Per share income amounts are not materially different on a
fully diluted basis.
7
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TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Quarter Ended September 30, 1995
- --------------------------------
Net income for the third quarter ended September 30, 1995 totaled $4,194 or $.19
per share, compared to $4,107 or $.18 per share in 1994.
Revenues increased 8.1% to $108,654 in 1995 from $100,478 in 1994. North
American revenues increased 8.2% to $83,284 while international revenues
increased 7.8% to $25,370. Excluding the impact of acquisitions, revenues were
level between years.
Salaries and employee benefits increased 10.3% between years and office and
general expenses increased 9.6% between years, compared to the 8.1% increase in
revenues. The primary reasons these expense categories increased at a rate that
was higher than the rate of increase in revenues are that (1) the Company has
hired additional personnel to increase its competency in computer technologies
which impact the advertising business, (2) the Company has hired new management
for its Asia region, which is anticipated to have the greatest opportunity for
growth, compared to other regions over the next several years, and, (3) in the
third quarter of 1995, the Company acquired R/GA, a company which is on the
leading edge of applying new computer technology to the advertising business and
operated at break-even levels in this quarter. Excluding these investment costs
and related revenues, salaries and benefits expenses and office and general
expenses increased 5.1% and 3.4%, respectively, compared to a 4.7% growth in
revenues. Other expenses increased from $366 in 1994 to $1,132 in 1995 due
primarily to higher net interest costs.
Equity income, which consists primarily of True North's share of European
operations, was $819 in 1995, compared to a loss of $802 in 1994. European
operating results were favorably impacted by currency exchange rates and a
strengthening of the French economy.
Nine Months Ended September 30, 1995
- ------------------------------------
Results for the first nine months of 1995 include unusual items. As further
discussed below, these unusual items resulted in charges against after-tax
earnings totaling $13,376 or $.60 per share.
Revenues increased 8.2% to $314,900 in 1995 from $290,918 in 1994. North
American revenues increased 4.6% to $245,344 while international revenues
increased 23.2% to $69,556. Excluding the impact of acquisitions, revenues would
have increased 3.7%.
Salaries and employee benefits and office and general expenses increased at
rates higher than the rate of growth in revenues, due to the reasons mentioned
above.
8
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As previously mentioned, results for the first nine months of 1995 include
unusual items. The Company recorded a pretax charge of $10,185 in the first
quarter of 1995: $3,560 of this amount related to the closure of an FCB
operation in the Pacific region and $6,625 represented the accrual of the
expected costs to settle the Company's dispute with Publicis. Additionally,
included in the line item "Equity in earnings (losses) of affiliated companies"
is a one-time charge of $7,034 related to the previously disclosed restructuring
of the Italian operations of the Publicis . FCB European joint venture. The
after-tax impact of these unusual items is a loss of $13,376.
The tax rate for the first nine months of 1995 was impacted by unusual items.
Excluding unusual items, the 1995 tax rate was 44.9%, compared to 43.8% in 1994.
Liquidity and Capital Resources
- -------------------------------
As more fully explained below, the increases in "Accounts receivable, net",
"Other current assets", and "Accounts payable and accruals" from the beginning
of the year reflect the cyclical nature of the advertising business and are
inter-related.
The increase in "Other current assets" is primarily due to the production of
client commercials which will be shown during the fall and winter months. The
costs related to these commercials are billed to clients during the fourth
quarter when the commercials are completed. Commercial production activity
during the last month of the year is typically low.
The increase in "Accounts receivable, net" and "Accounts payable and accruals"
is due to the fact that media and production billings for the month of September
1995 were higher than those of December 1994. During 1995, the increase in
"Accounts receivable" was higher than the increase in "Accounts payable and
accruals". The primary reason for this is that the Company's accounts receivable
to accounts payable ratio was at optimal levels during the last quarter of 1994
and has shifted to levels that are typical of this period of the year. In
addition, during 1995, the Company has experienced a shift in client spending
from media to production work. Media costs are typically billed to and collected
from clients before payment is due to the media. In general, production work
requires that the agency incur and pay costs which it can bill to its clients
once the work is completed. This change in receivable and payable balances was
funded by the liquidation of short-term investments and additional short-term
debt.
9
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
27. Financial Data Schedule
(b) Reports on Form 8-K - None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRUE NORTH COMMUNICATIONS INC.
(Registrant)
/S/ John J. Rezich
------------------------------------------
(Signature)
John J. Rezich
Controller and Chief Accounting Officer
Date: November 14, 1995
11
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 337,608
<ALLOWANCES> (5,614)
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<PP&E> 131,090
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<TOTAL-ASSETS> 739,999
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<COMMON> 7,830
0
0
<OTHER-SE> 200,774
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<SALES> 314,900
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