<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 June 30, 1997 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 or organization) Identification No.)
101 East Erie Street, Chicago, Illinois 60611
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (312) 425-6500
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 25,148,234 shares of the Registrant's 33 1/3 cents per share par
value Common Stock outstanding as of August 12, 1997.
<PAGE>
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 June 30, 1996 and 1997 3
Consolidated Statements of Income for the
Six Months Ended June 30, 1996 and 1997 4
Consolidated Balance Sheets as of June 30, 1996,
December 31, 1996, and June 30, 1997 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1997 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 11
Item 6. Exhibits and Reports on Form 8-K 11
<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 June 30
1996 1997
---------- -----------
<S> <C> <C>
Revenues $118,429 $152,419
-------- --------
Costs and Expenses:
Salaries and employee benefits $ 78,833 $ 99,050
Office and general expenses 38,380 45,532
Other (income) expense 1,122 3,361
-------- --------
Total Costs and Expenses $118,335 $147,943
-------- --------
Income Before Provision for Taxes on Income $ 94 $ 4,476
Provision for Federal, Foreign & State
Income Taxes 47 2,130
-------- --------
$ 47 $ 2,346
Minority Interest Credit (Expense) 111 (235)
Equity in Earnings (Losses) of Affiliated
Companies 5,891 5,075
-------- --------
Net Income $ 6,049 $ 7,186
======== ========
Net Income Per Share $ .26 $ .30
======== ========
Average Number of Common and Common
Equivalent Shares Outstanding 23,525 24,248
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended June 30
1996 1997
-------- --------
<S> <C> <C>
Revenues $224,363 $283,020
-------- --------
Costs and Expenses:
Salaries and employee benefits $152,907 $186,597
Office and general expenses 73,008 86,977
Other (income) expense 1,128 4,641
-------- --------
Total Costs and Expenses $227,043 $278,215
-------- --------
Income Before Provision for Taxes on Income $ (2,680) $ 4,805
Provision for Federal, Foreign & State
Income Taxes (1,134) 2,298
-------- --------
$ (1,546) $ 2,507
Minority Interest Credit (Expense) 462 (458)
Equity in Earnings (Losses) of Affiliated
Companies 6,411 5,352
-------- --------
Net Income $ 5,327 $ 7,401
======== ========
Net Income Per Share $ .23 $ .31
======== ========
Average Number of Common and Common
Equivalent Shares Outstanding 23,316 24,264
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30 Dec. 31 June 30
1996 1996 1997
------------- ------------- ----------
ASSETS:
- -------
<S> <C> <C> <C>
Cash and short-term investments $ 53,652 $ 56,996 $ 60,847
Accounts receivable, net 397,016 402,786 456,941
Other current assets 60,621 44,464 63,017
-------- -------- ----------
Total current assets $511,289 $504,246 $ 580,805
Property and equipment, net 58,544 61,369 65,947
Goodwill 110,340 151,640 221,566
Investment in affiliated companies 192,733 202,397 173,211
Other noncurrent assets 6,456 13,008 21,602
-------- -------- ----------
Total assets $879,362 $932,660 $1,063,131
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Accounts payable and accruals $480,432 $470,911 $ 522,897
Short-term bank borrowings 78,689 79,698 104,829
Current portion of long-term debt 225 270 1,544
Liability for taxes on income 691 2,312 8,779
--------- -------- ----------
Total current liabilities $ 560,037 $553,191 $ 638,049
--------- -------- ----------
Long-term debt $ 30,873 $ 31,513 $ 65,959
--------- -------- ----------
Accrued future compensation exp. $ 38,246 $ 44,501 $ 41,200
--------- -------- ----------
Other noncurrent liabilities $ 21,808 $ 37,727 $ 49,359
--------- -------- ----------
Obligation to Modem Media Partners $ -- $ 24,387 $ --
--------- -------- ----------
Common stock $ 7,931 $ 7,957 $ 8,394
Paid-in capital 122,104 123,740 152,577
Retained earnings 104,031 119,399 119,328
Less-Treasury stock (206) (4,553) (5,155)
Cumulative translation adjustment (5,462) (5,202) (6,580)
--------- -------- ----------
Total stockholders' equity $ 228,398 $241,341 $ 268,564
--------- -------- ----------
Total liabilities and
stockholders' equity $ 879,362 $932,660 $1,063,131
========= ======== ==========
The accompanying notes are an integral part of these balance sheets.
</TABLE>
5
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six months ended June 30
1996 1997
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
- -------------------------------------
Net income $ 5,327 $ 7,401
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,797 10,891
Deferred compensation expense 1,736 (3,301)
Equity earnings of affiliates, net of dividends
received (5,223) (4,921)
Accounts receivable (62,836) (16,331)
Accounts payable and accruals 33,448 18,234
Other current assets (20,651) (9,374)
Noncurrent liabilities (3,768) (959)
Other 683 (2,986)
-------- --------
$(42,487) $ (1,346)
-------- --------
Cash Provided By (Used For) Financing Activities:
- -------------------------------------------------
Short-term investments and marketable securities $ (4,921) $ (3,953)
Increase in liability for cash overdrafts 21,364 2,935
Additions to long-term debt 25,026 40,000
Payments of long-term debt (143) (2,155)
Cash dividends paid (7,096) (7,472)
Common stock issuances 8,177 4,285
Short-term borrowings 28,707 15,452
-------- --------
$ 71,114 $ 49,092
-------- --------
Cash Provided By (Used For) Investment Activities:
- --------------------------------------------------
Purchase of subsidiaries $(26,702) $(39,494)
Purchase of interest in affiliated companies (723) --
Capital expenditures (9,452) (7,304)
-------- --------
$(36,877) $(46,798)
-------- --------
Increase (Decrease) In Cash $ (8,250) $ 948
Balance at beginning of period 48,408 45,946
-------- --------
Balance at end of period $ 40,158 $ 46,894
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(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 six 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
<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 of Operations - Quarter Ended June 30
- ---------------------------------------------
Revenues increased 28.7% to $152,419 in 1997 from $118,429 in 1996. North
American revenues increased 18.0% to $113,065 and International revenues
increased 74.3% to $39,354. Excluding the impact of acquisitions, consolidated
revenues increased 11.7% as a result of new business won during 1996 and 1997.
During the latter part of 1996 and in 1997, the Company purchased several
agencies in North America, Latin America, Europe and the Pacific Rim. These
acquisitions contributed $20,149 and $1,585 to the Company's revenues and pretax
income, respectively.
Salaries and benefits expenses increased 25.6% to $99,050 in 1997, compared to
the 28.7% increase in consolidated revenues. As a percent of revenues, this
category of expenses improved from 66.6% in 1996 to 65.0% in 1997. Excluding the
impact of acquisitions, salaries and benefits expenses increased 10.8%, compared
to the Company's organic revenue growth rate of 11.7%.
Office and general expenses increased 18.6% to $45,532 in 1997, compared to the
28.7% increase in consolidated revenues. As a percent of revenues this category
of expenses improved from 32.4% in 1996 to 29.9% in 1997. Excluding the impact
of acquisitions, office and general expenses increased 1.4% compared to the
Company's organic revenue growth rate of 11.7%.
The components of "Other Expense" in both years are as follows:
<TABLE>
<CAPTION>
1996 1997
----------------------------
<S> <C> <C>
Interest expense $2,578 $3,618
----------------------------
Interest (income) (1,141) (696)
----------------------------
Unrealized (gain) loss on Shandwick Investment (315) 439
----------------------------
$1,122 $3,361
----------------------------
</TABLE>
Net interest expense increased between years due to the fact that the Company is
carrying higher average debt levels in 1997 resulting from its acquisition
program.
Minority interests was income in 1996 of $111, compared to expense of $235 in
1997. During the six months of 1996, the Company's 60% owned operations in
Brazil recorded substantial operating losses. During 1997, the Company
effectively purchased the minority interests in this operation. In addition, the
Company purchased majority ownerships in agencies in India and Chile.
Equity income declined from $5,891 in 1996 to $5,075 in 1997. Approximately half
of the decline is due to the impact of currency on the Company's share of the
results of its European joint venture with Publicis. The remainder of
8
<PAGE>
the decline results from a deterioration in the results of the German and French
operations of the European joint venture.
Results of Operations - Six Months Ended June 30
- ------------------------------------------------
Revenues increased 26.1% to $283,020 in 1997 from $224,363 in 1996. North
American revenues increased 20.1% to $219,468 and International revenues
increased 52.9% to $63,552. Excluding the impact of acquisitions, consolidated
revenues increased 12.6% as a result of new business won during 1996 and 1997.
During the latter part of 1996 and in 1997, the Company purchased several
agencies in North America, Latin America, Europe and the Pacific Rim. These
acquisitions contributed $28,239 and $3,192 to the Company's revenues and pretax
income, respectively.
Salaries and benefits expenses increased 22.0% to $186,597 in 1997, compared to
the 26.1% increase in consolidated revenues. As a percent of revenues, this
category of expenses improved from 68.2% in 1996 to 65.9% in 1997. Excluding the
impact of acquisitions, salaries and benefits expenses increased 10.7%, compared
to the Company's organic revenue growth rate of 12.6%.
Office and general expenses increased 19.1% to $86,977 in 1997, compared to the
26.1% increase in consolidated revenues. As a percent of revenues this category
of expenses improved from 32.5% in 1996 to 30.7% in 1997. Excluding the impact
of acquisitions, office and general expenses increased 5.8% compared to the
Company's organic revenue growth rate of 12.6%.
The components of "Other Expense" in both years are as follows:
<TABLE>
<CAPTION>
1996 1997
-----------------------------
<S> <C> <C>
Interest expense $ 4,614 $ 6,805
-----------------------------
Interest (income) (2,009) (2,127)
-----------------------------
Unrealized (gain) loss on Shandwick Investment (1,477) (37)
-----------------------------
$ 1,128 $ 4,641
-----------------------------
</TABLE>
Net interest expense increased between years due to the fact that the Company is
carrying higher average debt levels in 1997 resulting from its acquisition
program.
Minority interests was income in 1996 of $462, compared to expense of $458 in
1997. During the six months of 1996, the Company's 60% owned operations in
Brazil recorded substantial operating losses. During 1997, the Company
effectively purchased the minority interests in this operation. In addition, the
Company purchased majority ownerships in agencies in India and Chile.
Equity income declined from $6,411 in 1996 to $5,352 in 1997. Approximately half
of the decline is due to the impact of currency on the Company's share of the
results of its European joint venture with Publicis. The remainder of the
decline results from a deterioration in the results of the German and French
operations of the European joint venture.
9
<PAGE>
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 summer and fall months. The
costs related to these commercials are billed to clients during the third
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 billings for the month of June 1997 were higher
than those of December 1996. During 1996, 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 had been at optimal levels during the last quarter of 1995 and had shifted
to levels that are typical of this period of the year. During 1997, the increase
in "Accounts receivable, net" and the increase in "Accounts payable and
accruals" more closely follow industry patterns.
As previously disclosed, on Form 8-K dated June 10, 1997, the Company
consummated certain transactions contemplated by the definitive agreement dated
May 19, 1996 between itself and Publicis Communication. These transactions were
recorded effective June 30, 1997 on an estimated basis using internally
developed valuations of the related operations. Definitive appraisals of these
operations are expected to be completed by independent valuation experts during
the third quarter. The impact of these transactions were not material to the
results of operations or financial condition of the Company.
As previously disclosed, the Company continues to contemplate strategic
acquisitions to enhance its worldwide network. During the first six months of
1997, the Company completed the acquisitions of agencies in India, Singapore,
Venezuela, and Europe. In addition, it made contingent payments related to
acquisitions made in prior years. These payments were financed by the issuance
of long-term debt under its Revolving Credit Agreement.
10
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 21, 1997, Registrant held its Annual Meeting. Holders of 20,880,930 of
Registrant's Common Shares were represented in person or by proxy at this
meeting. On May 21, Registrant had 24,757,710 Common Shares outstanding.
The following matters were submitted to a vote of security holders at this
meeting.
1. Annual Election of Directors - All Directors of Registrant stand for
election at each of Registrant's Annual Meetings. Following is the
tabulation of votes for each director:
<TABLE>
<CAPTION>
WITHHOLD
FOR AUTHORITY
------------- -------------
<S> <C> <C>
J. B. Ryan 20,765,187 115,743
Bruce Mason 20,764,453 116,477
Michael E. Murphy 20,761,171 119,759
Richard P. Mayer 20,761,162 119,768
Stephen T. Vehslage 20,547,592 333,338
Ali Wambold 20,761,171 119,759
Gregory W. Blaine 20,765,614 115,316
Laurel Cutler 20,539,408 341,522
Richard S. Braddock 20,547,592 333,338
</TABLE>
No other person received any votes for election as director.
2. Approval of Arthur Andersen LLP as Registrant's auditors for 1997:
FOR AGAINST ABSTAIN
--- ------- -------
20,589,554 188,853 102,523
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits -
27. Financial Data Schedule
(b) Reports on Form 8-K -
In a report dated May 19, 1997, Registrant announced that
Registrant and certain of its affiliates entered into a
definitive agreement with Publicis Communication and certain
of its affiliates as contemplated by the Memorandum of
Agreement dated February 19, 1997 among Publicis S.A.,
Publicis Communication and Publicis.FCB Europe B.V., on the
one hand, and Registrant and FCB International, Inc., on the
other hand.
11
<PAGE>
In a report on Form 8-K dated June 10, 1997, Registrant announced
that certain of the transactions contemplated by the definitive
agreement dated May 19, 1997 between Publicis Communication and
certain of its affiliates, on the one hand, and Registrant and
certain of its affiliates, on the other hand, were consummated.
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: August 14, 1997
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 46,894
<SECURITIES> 13,953
<RECEIVABLES> 463,280
<ALLOWANCES> 6,339
<INVENTORY> 0
<CURRENT-ASSETS> 580,805
<PP&E> 174,918
<DEPRECIATION> 108,971
<TOTAL-ASSETS> 1,063,131
<CURRENT-LIABILITIES> 638,049
<BONDS> 65,959
0
0
<COMMON> 155,816
<OTHER-SE> 112,748
<TOTAL-LIABILITY-AND-EQUITY> 1,063,131
<SALES> 0
<TOTAL-REVENUES> 283,020
<CGS> 0
<TOTAL-COSTS> 271,410
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,805
<INCOME-PRETAX> 4,805
<INCOME-TAX> 2,298
<INCOME-CONTINUING> 7,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,401
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.31
</TABLE>
