<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 March 31, 1996 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) 751-7227
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 23,677,767 shares of the Registrant's 33 1/3 cents per share
par value Common Stock outstanding as of May 10, 1996.
<PAGE>
TRUE NORTH COMMUNICATIONS INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Exhibits
Consolidated Statements of Income for the
Three Months Ended March 31, 1995 and 1996 3
Consolidated Balance Sheets as of March 31, 1995,
December 31, 1995, and March 31, 1996 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1996 5
Note to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Operating Results 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 6. Exhibits and Reports on Form 8-K 8
</TABLE>
2
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended March 31
1995 1996
--------- ---------
<S> <C> <C>
Revenues $ 95,389 $105,934
-------- --------
Costs and Expenses:
Salaries and employee benefits $ 60,583 $ 74,074
Office and general expenses 29,126 34,628
Unusual items 10,185 --
Other (income) expense 1,680 6
-------- --------
Total Costs and Expenses $101,574 $108,708
-------- --------
Income (Loss) Before Provision for
Taxes on Income $ (6,185) $ (2,774)
Provision for Federal, Foreign &
State Income Taxes (2,134) (1,181)
-------- --------
$ (4,051) $ (1,593)
Minority Interest Credit (Expense) (51) 351
Equity in Earnings (Losses) of
Affiliated Companies (6,926) 520
-------- --------
Net Income $(11,028) $ (722)
======== ========
Net Income Per Share $ (.49) $ (.03)
======== ========
Average Number of Common and Common
Equivalent Shares Outstanding 22,324 22,904
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Mar. 31
1995 1995 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS:
- -------
Cash and short-term investments $ 27,069 $ 56,981 $ 34,147
Accounts receivable, net 292,689 333,038 373,597
Other current assets 43,687 39,970 53,780
-------- -------- --------
Total current assets $363,445 $429,989 $461,524
Property and equipment, net $ 46,346 $ 54,626 $ 56,467
Goodwill 55,322 84,934 108,046
Investment in affiliated companies 178,090 187,456 186,888
Other noncurrent assets 9,600 9,097 7,580
-------- -------- --------
Total assets $652,803 $766,102 $820,505
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Accounts payable and accruals $351,522 $424,501 $434,589
Short-term bank borrowings 35,785 49,982 93,062
Current portion of long-term debt 5,400 199 262
Liability for taxes on income 461 1,810 968
-------- -------- --------
Total current liabilities $393,168 $476,492 $528,881
-------- -------- --------
Deferred taxes $ 5,834 $ 1,608 $ 116
-------- -------- --------
Long-term debt $ 5,188 $ 5,402 $ 5,577
-------- -------- --------
Accrued future compensation exp. $ 34,845 $ 36,538 $ 37,632
-------- -------- --------
Other noncurrent liabilities $ 20,002 $ 23,968 $ 27,058
-------- -------- --------
Common stock $ 7,830 $ 7,830 $ 7,848
Paid-in capital 117,449 116,483 116,975
Retained earnings 85,591 105,800 101,549
Less-Treasury stock (11,911) (2,661) (57)
Cumulative translation adjustment (5,193) (5,358) (5,074)
-------- -------- --------
Total stockholders' equity $193,766 $222,094 $221,241
-------- -------- --------
Total liabilities and
stockholders' equity $652,803 $766,102 $820,505
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended Mar. 31
1995 1996
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
- -------------------------------------
Net income $(11,028) $ (722)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 4,136 4,342
Deferred compensation expense 2,269 1,101
Equity earnings of affiliates, net
of dividends received 7,014 84
Accounts receivable (16,838) (39,417)
Accounts payable and accruals (41,198) (18,140)
Other current assets (13,873) (13,810)
Other (972) (2,924)
-------- --------
$(70,490) $(69,486)
-------- --------
Cash Provided By (Used For) Financing
Activities:
- -------------------------------------
Short-term investments and
marketable securities $ 46,233 $ 267
Increase in liability for cash
overdrafts 6,897 27,386
Additions to long-term debt -- 63
Payments of long-term debt (17) (105)
Cash dividends paid (3,392) (3,529)
Common stock issuances 1,398 3,114
Short-term borrowings 27,921 43,080
-------- --------
$ 79,040 $ 70,276
-------- --------
Cash Provided By (Used For) Investment
Activities:
- --------------------------------------
Purchase of subsidiaries $ (1,101) $(19,014)
Purchase of interest in affiliated
companies (7,165) --
Capital expenditures (4,045) (4,343)
-------- --------
$(12,311) $(23,357)
-------- --------
Increase (Decrease) In Cash $ (3,761) $(22,567)
- ---------------------------
Balance at beginning of period 24,598 48,408
-------- --------
Balance at end of period $ 20,837 $ 25,841
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
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 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 three months of the year should not
be considered reliable indicators of revenues or net income for the entire
year because the Registrant's business is cyclical.
6
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Results for the first quarter of 1996 were a loss of $722 or $.03 per share
compared to a loss of $11,028 or $.49 per share in 1995. As further discussed
below, 1995 results include a charge against income for unusual items totaling
$13,376.
Revenues increased 11.1% to $105,934 in 1996 from $95,389 in 1995. North
American revenues increased 12.1% to $86,936 in 1996 while international
revenues increased 6.4% to $18,998. Excluding the impact of acquisitions,
consolidated revenues declined approximately 1%, due primarily to shifts in
client spending to the latter part of the year.
During the latter part of 1995 and in 1996, the Company purchased the R/GA
Digital Media Group and several agencies in North America, Latin America and the
Pacific Rim. These acquisitions contributed $11,479 and $423 to the Company's
revenues and pretax loss, respectively.
As previously disclosed, salaries and benefits expenses and office and general
expenses increased at a higher rate than the rate of growth of revenues, due
primarily to the Company's continuing investment in digital advertising
technology and the impact of acquisitions made in the latter part of 1995 and in
1996. Excluding investment spending and these acquisitions, salaries and
benefits expenses and office and general expenses increased approximately 8.7%
and 1.7% between years.
In the first quarter of 1995, the Company recorded a pretax charge of $10,185
under the caption "Unusual Items". Of this amount, $3,560 related to the
closure of a FCB operation in the Pacific region and $6,625 represented the
accrual of charges related to its dispute with Publicis. Additionally, included
in the line, "Equity in Earnings (Losses) of Affiliated Companies", is a charge
of $7,034 related to the 1995 restructuring of the Italian operations of the
Publicis(Yen)FCB European joint venture. The after-tax impact of all unusual
items in 1995 was a loss of $13,376.
The components of "Other Expense" in both years were as follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Interest expense $1,403 $ 2,036
Unrealized (gain) loss on Shandwick 412 (1,162)
investment
Unrealized loss on interest rate swap 796 --
Interest income (931) (868)
------ -------
$1,680 $ 6
====== =======
</TABLE>
The effective tax rate for 1996 was 42.6% in 1996 compared to 34.5% in 1995.
The 1995 effective tax rate was impacted by unusual items. Excluding unusual
items, the effective tax rate for 1995 was 42.7%.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As more fully explained below, the decline in "Cash and short-term investments"
and increases in "Accounts receivable, net", "Other current assets", and "Short-
term bank borrowings" 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 due to the production of client
commercials which will be shown during the summer months. The costs related to
these commercials are billed to clients during the second quarter when the
commercials are completed. Commercial production activity in the last month of
the year is typically low.
The increase in "Accounts receivable, net" is due, in part, to a slowing of
collections which also is typical of the middle portion of the calendar year.
The decrease in "Cash and short-term investments" and the increase in "Short-
term bank borrowings" reflect the higher level of commercial production
activity, as well as the slowing of accounts receivable collections during the
middle parts of the year.
As previously disclosed, the Company continues to contemplate strategic
acquisitions to enhance its worldwide network. During the first quarter of 1996,
the Company completed the acquisition of agencies in China and North America. In
addition, it made contingent payments related to acquisitions made in prior
years. These payments were financed by the issuance of additional short-term
borrowings.
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 - On February 29, 1996, Registrant filed a
Form 8-K in which it disclosed that it viewed the termination of
the alliance agreements between Publicis and itself as taking
effect and being final.
8
<PAGE>
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)
John J. Rezich
---------------------------------------
(Signature)
John J. Rezich
Controller and Chief Accounting Officer
Date: May 14, 1996
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 34,147
<SECURITIES> 0
<RECEIVABLES> 378,395
<ALLOWANCES> (4,798)
<INVENTORY> 0
<CURRENT-ASSETS> 461,524
<PP&E> 142,572
<DEPRECIATION> (86,105)
<TOTAL-ASSETS> 820,505
<CURRENT-LIABILITIES> 528,881
<BONDS> 0
<COMMON> 124,766
0
0
<OTHER-SE> 96,475
<TOTAL-LIABILITY-AND-EQUITY> 820,505
<SALES> 0
<TOTAL-REVENUES> 105,934
<CGS> 0
<TOTAL-COSTS> 108,702
<OTHER-EXPENSES> (2,030)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,036
<INCOME-PRETAX> (2,774)
<INCOME-TAX> (1,181)
<INCOME-CONTINUING> (722)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (722)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
