<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A AMENDMENT NO. 2
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
COMMISSION FILE NO. 1-5029
TRUE NORTHCOMMUNICATIONS 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 60611-2897
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER: (312) 425-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
Common stock, par value New York Stock Exchange
33 1/3 cents per share
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference or included in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of Common Stock, 33 1/3 cents par value, held by
non-affiliates of the Registrant, as of March 24, 1997 was $366,955,418.
There were 24,757,710 shares of Registrant's 33 1/3 cents per share par
value Common Stock outstanding as of March 24, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to shareholders for the year
ended December 31, 1996 are incorporated by reference into Parts I and II of
this report.
Portions of the Registrant's Proxy Statement relating to its annual meeting
of shareholders scheduled to be held on May 21, 1997 are incorporated by
reference into Part III.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Registrant hereby amends Item 14 and Exhibit 13 of its 1996 Annual Report on
Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 14(a)--List of Financial Statements.................................. 5
Report of Independent Public Accountants on Supplemental Notes.......... 6
Item 14(a)(1)--Supplemental Note to Consolidated Financial Statements:
A.Valuation Accounts.................................................... 7
Item 14(a)(2)--Schedules
Are not submitted because they are not required or because the required
information is included in the financial statements or notes thereto.
Item 14(a)(3)--Index of Exhibits
The index of exhibits immediately precedes the exhibits filed with the
Securities and Exchange Commission.
Exhibits 10.1 through 10.16 included in this index are the management
contracts and compensatory plans or arrangements required to be filed
as exhibits hereto pursuant to the requirements of Item 601 of
Regulation S-X.
Item 14(b)--Reports on Form 8-K
</TABLE>
Registrant filed the following reports on Form 8-K during the fourth quarter
of 1996 and the first quarter of 1997:
<TABLE>
<CAPTION>
DATE OF REPORT DESCRIPTION OF REPORTABLE EVENT
-------------- -------------------------------
<C> <S>
February 14, 1997 Under Item 5, Registrant reported that the Compensation
Committee of its Board of Directors, comprised solely of
outside Board members, negotiated and executed severance
agreements with John B. Balousek and Craig R. Wiggins,
former officers and members of Registrant's Board of
Directors.
</TABLE>
4
<PAGE>
FORM 10-K--ITEM 14(A)
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of the Registrant and the
Independent Public Accountant's Report covering these financial statements,
appearing in the Registrant's 1996 Annual Report on pages 8 through 23 are
incorporated herein by reference in Item 8:
Consolidated Balance Sheets--December 31, 1995 and 1996
Consolidated Statements of Income--Years ended December 31, 1994, 1995 and
1996
Consolidated Statements of Stockholders' Equity--Years ended December 31,
1994, 1995 and 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1994, 1995
and 1996
Notes to Consolidated Financial Statements--December 31, 1996
Report of Independent Public Accountants
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions, or are inapplicable, or the information called for
therein is included elsewhere in the financial statements or related notes
thereto contained in or incorporated by reference into this Report.
Accordingly, such schedules have been omitted.
PUBLICIS FINANCIAL INFORMATION
Publicis Communication owns 51% of Publicis.FCB BV and 80% of Publicis
Conseil. Accordingly, the consolidated financial statements of Publicis
Communication and Subsidiaries include the results of operations and financial
position of Publicis.FCB BV and Publicis Conseil.
On pages 36-38 of this Form 10/K-A, Registrant has provided an unaudited
translated version of the list of subsidiaries appearing in the 1996 Publicis
Communication consolidated financial statements located on pages 17-19 of this
Form 10-K/A.
These financial statements have been prepared and audited based upon
accounting and auditing standards and practices acceptable for external
financial reporting purposes in France. These practices and standards can vary
from U.S. accounting practice.
SUPPLEMENTAL NOTE B
Following is a reconciliation prepared by Registrant of reported net income to
net income which would be reported under U.S. generally accepted accounting
principles (amounts in thousands):
<TABLE>
<CAPTION>
--------------------------------
1994 1995 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income as shown in financial statements (1) $12,782 $32,070 $37,044
- ------------------------------------------------------------------------------------------------------
Amortization of goodwill (2) (5,623) (6,803) (7,330)
- ------------------------------------------------------------------------------------------------------
Cumulative Impact of Change in Estimate-
French Retirement Indemnities -- -- (4,450)
- ------------------------------------------------------------------------------------------------------
Italian restructuring reserves not acceptable under U.S. GAAP (3) 5,756 (6,017) 4,987
- ------------------------------------------------------------------------------------------------------
Tax credit included in income not acceptable under U.S. GAAP (4) (2,445) (2,540) (3,115)
- ------------------------------------------------------------------------------------------------------
$10,470 $16,710 $27,136
--------------------------------
</TABLE>
Notes:
1. Net income as reported was computed using the average exchange rates for the
year.
2. Certain elements of goodwill are charged directly to equity or income in the
year it arises, or are not otherwise amortized for French financial reporting
purposes. The goodwill amortization expense adjustment was computed using
forty years as the estimated useful life for each of the related goodwill
components.
3. Under French generally accepted accounting principles, general and specific
restructuring actions taken in 1995 up to the date of the audit opinion must
be recorded in the 1994 financial statements. Application of EITF 94-3 to
these financial statements result in this adjustment which under U.S.
generally accepted accounting principles, results in a 1995 charge to
earnings of an equivalent amount (allowing for currency exchange
fluctuations). Of the total amount of this adjustment, $1,273 relates to
management and staff severance actions taken in 1995, $1,637 relates to the
1995 abandonment of excess lease space, $472 relates to the 1995 closure of a
sale promotion agency, and $2,374 relates to legal and other associated
restructuring costs incurred in 1995. During 1996, the restructuring actions
commenced in 1995 were completed. Because the company was able to negotiate
more favorable settlement terms on leases and other actions than previously
anticipated, the final true-up of these restructuring reserves resulted in a
one-time increase in 1996 earnings of $4,987.
4. Under French generally accepted accounting principles, the utilization of tax
credit carryforwards of acquired companies are reflected in earnings. Under
U.S. generally accepted accounting principles, this amount is accounted for
as a reduction of the initial purchase price and related goodwill.
SUPPLEMENTAL NOTE C - RECONCILIATION OF SHAREHOLDERS EQUITY
Following is a reconciliation prepared by Registrant of reported
shareholders' equity to shareholders' equity which would be reported under U.S.
generally accepted accounting principles (amounts in thousands):
<TABLE>
<CAPTION>
At Dec. 31, At Dec. 31,
1995 1996
---------------------------
<S> <C> <C>
Shareholders' equity as shown in financial statements (1) $210,487 $223,683
- ---------------------------------------------------------------------------------------------
Goodwill charged to shareholders' equity (2) 82,292 77,836
- ---------------------------------------------------------------------------------------------
Amortization of goodwill (3) (32,759) (38,499)
- ---------------------------------------------------------------------------------------------
Italian restructuring reserves not acceptable under U.S. GAAP (4) -- 4,913
- ---------------------------------------------------------------------------------------------
Tax credit included in income not acceptable under U.S. GAAP (5) (6,111) (8,850)
- ---------------------------------------------------------------------------------------------
$253,909 $259,083
---------------------------
</TABLE>
Notes:
1. Shareholders' equity as reported was computed using the actual year-end
exchange rates.
2. Certain elements of goodwill are charged directly to equity or income in the
year it arises. Under U.S. GAAP, these amounts are reflected as goodwill and
amortized over periods up to forty years.
3. Certain elements of goodwill are charged directly to equity or income in the
year it arises, or are not otherwise amortized for French financial reporting
purposes. The goodwill amortization expense adjustment was computed using forty
years as the estimated useful life for each of the related goodwill components.
4. Under French generally accepted accounting principles, general and specific
restructuring actions taken in 1995 up to the date of the audit opinion must be
recorded in the 1994 financial statements. Application of EITF 94-3 to these
financial statements result in this adjustment which under U.S. generally
accepted accounting principles, results in a 1995 charge to earnings of an
equivalent amount (allowing for currency exchange fluctuations). Of the total
amount of this adjustment, $1,273 relates to management and staff severance
actions taken in 1995, $1,637 relates to the 1995 abandonment of excess lease
space, $472 relates to the 1995 closure of a sale promotion agency, and $2,374
relates to legal and other associated restructuring costs incurred in 1995.
During 1996, the restructuring actions commenced in 1995 were completed. Because
the company was able to negotiate more favorable settlement terms on leases and
other actions than previously anticipated, the final true-up of these
restructuring reserves resulted in a one-time increase in 1996 earnings of
$4,987.
5. Under French generally accepted accounting principles, the utilization of tax
credit carryforwards of acquired companies are reflected in earnings. Under U.S.
generally accepted accounting principles, this amount is accounted for as a
reduction of the initial purchase price and related goodwill.
SUPPLEMENTAL NOTE D -
CONSOLIDATED STATEMENTS OF CASH FLOWS
Following are consolidated statements of cash flows of Publicis
Communication prepared by Registrant under U.S. generally accepted accounting
principles (amounts in thousands of dollars):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income 10,470 16,710 27,136
Depreciation and Amortization 24,603 28,948 29,770
Equity Income, Net of Dividends Received (7,360) 3,594 (5,306)
Accounts Receivable (43,741) (16,179) (24,682)
Accounts Payable and Accruals 19,590 14,798 23,036
Other Current Assets (16,935) (2,308) 1,837
Other Noncurrent Assets 2,007 (546) (487)
Noncurrent Liabilities 16,194 15,342 (1,708)
Other 873 (5,541) 12,766
------- ------- -------
5,701 54,818 62,362
------- ------- -------
Cash Flows From Financing Activities:
(Increase) Decrease in Intercompany Loans (2,070) 6,132 (401)
Additions to Debt 44,150 19,054 9,073
Payments of Debt 0 (80,996) (11,013)
Dividends To Shareholders (5,367) (2,430) (8,682)
Common Stock Issuances 0 100,000 0
------- ------- -------
36,713 41,760 (11,023)
------- ------- -------
Cash Flows Used By Investing Activities:
Purchase of Subsidiaries and Affiliates (38,986) (20,555) (8,246)
Capital Expenditures (18,967) (22,278) (22,956)
------- ------- -------
(57,953) (42,833) (31,202)
------- ------- -------
Impact of Currency on Cash Balances 11,167 9,969 (9,317)
------- ------- -------
Increase (Decrease) In Cash (4,372) 63,714 10,820
Cash at Beginning of Year 107,300 102,928 166,642
------- ------- -------
Cash at End of Period 102,928 166,642 177,462
======= ======= =======
</TABLE>
Notes:
1. Publicis Communication paid taxes amounting to $19,973, $26,623, and
$25,082 in 1994, 1995 and 1996, respectively.
2. Publicis Communication paid interest amounting to $14,563, $15,465,
and $11,996 in 1994, 1995 and 1996, respectively.
5
<PAGE>
PUBLICIS COMMUNICATION
CONSOLIDATED FINANCIAL
STATEMENTS 31/12/1996
<PAGE>
PUBLICIS COMMUNICATION
31/12/1996
PAGE 1 : Comparative Consolidated Income Statement.
PAGE 2 : Comparative Consolidated Balance Sheet.
PAGES 3/4 : Consolidated Statement of Change in Financial Statements.
PAGES 5/11 : Notes to the Consolidated Financial Statements.
PAGES 12/14 : List of Consolidated Companies.
<PAGE>
PUBLICIS COMMUNICATION GROUP
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENT
In thousands of French Francs
- --------------------------------------------------------------------------------
YEAR 1995 YEAR 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Billings 18 132 852 19 536 496
Purchases (15 196 560) (16 494 575)
REVENUES 2 936 293
Salaries and Benefits (1 638 275) (1 682 832)
Office and General Expenses (832 111) (863 659)
TOTAL EXPENSES (2 470 386)
OTHER INCOME 17 732
OPERATING PROFIT 483 639
Depreciation (110 724) (114 753)
Provision doubtful debts (16 258) (23 290)
Other provisions (16 033) (20 884)
Interest Income (expense) 14 820 23 772
PROFIT BEFORE TAX 355 445
Exceptional costs 3 043 (5 336)
Profit sharing-statutory (7 263) (8 613)
Income tax (133 111) (128 263)
Profit (equity subsidiaries) 32 747 43 484
NET INCOME 250 861
GROUP SHARE 160 350
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR 1996 % VAR.95/96
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Billings 7.7%
Purchases
REVENUES 3 041 920 3.6%
Salaries and Benefits 2.7%
Office and General Expenses 3.8%
TOTAL EXPENSES (2 546 491) 3.1%
OTHER INCOME 7 635
OPERATING PROFIT 503 064 4.0%
Depreciation
Provision doubtful debts
Other provisions
Interest Income (expense)
PROFIT BEFORE TAX 367 908 3.5%
Exceptional costs
Profit sharing-statutory
Income tax
Profit (equity subsidiaries)
NET INCOME 269 181 7.3%
GROUP SHARE 189 435 18.1%
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION GROUP
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(In thousands of FRF)
<S> <C> <C>
- -----------------------------------------------------------------------------
ASSETS 31.12.1995 31.12.1996
- -----------------------------------------------------------------------------
FIXED ASSETS 1 104 147 1 113 867
============ ------------------------
Intangible Assets (gross) 737 923 773 231
Depreciation and Amortization on Intangible Assets (23 005) (90 677)
Tangible Assets (gross) 681 858 737 598
Depreciation and Amortization on Tangible Assets (441 093) (487 647)
------------------------
NET TANGIBLE AND INTANGIBLE ASSETS 955 683 932 505
Investments (non consolidated companies) 23 781 21 975
Investments (equity subsidiaries) 105 016 135 179
Interco loans 4 896 6 948
Other financial assets 37 106 34 312
Provisions on financial assets (22 335) (17 052)
------------------------
NET FINANCIAL ASSETS 148 464 181 362
------------------------
CURRENT ASSETS 4 217 222 4 448 365
============== ------------------------
Work in progress 212 814 214 757
Advance payments made 47 770 61 792
Accounts receivable (net) 1 947 957 2 246 095
Interco receivable 40 351 111 398
Other debtors 1 150 283 893 294
Cash 818 047 921 029
------------------------
------------------------
OTHER CURRENT ASSETS 63 710 52 375
==================== ------------------------
- -----------------------------------------------------------------------------
TOTAL ASSETS 5 385 079 5 614 608
- -----------------------------------------------------------------------------
LIABILITIES & EQUITY 31.12.1995 31.12.1996
- -----------------------------------------------------------------------------
TOTAL EQUITY 1 459 155 1 626 328
============ ------------------------
Equity (before net income), Group Share 872 932 971 478
Net Income, Group Share 160 350 189 435
------------------------
TOTAL EQUITY GROUP SHARE 1 033 282 1 160 913
Equity (before net income), Non-Group Share 335 361 385 670
Net Income, Non-Group Share 90 512 79 746
------------------------
TOTAL EQUITY NON-GROUP SHARE 425 873 465 415
------------------------
PROVISIONS FOR CONTINGENCIES 329 476 283 948
============================ ------------------------
SHORT TERM LIABILITIES 3 535 315 3 636 991
====================== ------------------------
Borrowings (not banks) 123 682 67 364
Banks 494 736 541 135
Advance payments from clients 148 400 173 156
Accounts payable 1 470 605 1 591 849
Interco payable 24 602 52 974
Other creditors 1 273 290 1 210 512
------------------------
OTHER ACCRUALS 61 134 67 341
============== ------------------------
- -----------------------------------------------------------------------------
TOTAL LIABILITIES 5 385 079 5 614 608
- -----------------------------------------------------------------------------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION GROUP P 1/2
CONSOLIDATED STATEMENT OF CHANGE IN FINANCIAL POSITION
(in thousand FRF)
<TABLE>
<CAPTION>
'000 FRF 1995 1996
SOURCE OF WORKING CAPITAL
- -------------------------
<S> <C> <C>
NET INCOME 250 861 269 181
Depreciation 110 724 114 753
------------------------
Sub-total 361 585 383 934
Equity earnings of affiliates (32 746) (43 483)
Dividends received from affiliates 50 717 16 348
Loan 181 137 0
Other borrowings 0 0
Exchange differences & Others 1 670 362
========================
TOTAL SOURCE 562 363 357 161
APPLICATION OF WORKING CAPITAL
- ------------------------------
Paid out dividends 52 230 74 654
Purchase of interest in affiliated companies 0 0
Investments 120 896 46 103
Increase in other fixed assets 112 169 91 657
========================
TOTAL APPLICATION 285 295 212 414
Increase (decrease) in working capital 277 068 144 747
------- -------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION GROUP P 2/2
CONSOLIDATED STATEMENT OF CHANGE IN FINANCIAL POSITION
(in thousand FRF)
<TABLE>
<CAPTION>
'000 FRF 1995 1996
Increase (decrease) in current assets
- -------------------------------------
<S> <C> <C>
Cash 268 720 102 982
Accounts receivables (net) (12 999) 273 382
Expenditure billable to clients 18 711 1 943
Other current assets 94 682 (195 777)
------------------------
Sub-total 369 114 182 530
Increase (decrease) in current liabilities
- ------------------------------------------
Provision for contingencies 8 905 (31 320)
Accounts payable 5 195 107 222
Bank borrowings 95 268 46 399
Loans and other borrowings (86 116) (56 318)
Other current liabilities 68 794 (28 200)
------------------------
Sub-total 92 046 37 783
Increase (decrease) in working capital 277 068 144 747
- -------------------------------------- ------- -------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF 31/12/1996
I. CONSOLIDATION PRINCIPLES.
------------------------
PUBLICIS COMMUNICATION GROUP'S consolidated financial statements as at
December 31, 1996 have been prepared in accordance with the French
legislation and are in conformity with generally accepted international
accounting principles.
The consolidated financial statements include the accounts of the Company's
wholly owned and majority owned domestic and international subsidiaries.
The subsidiary companies with less than 50% ownership are consolidated on
an equity basis.
The company translates the financial statements of its international
subsidiaries into French Francs using official exchange rates as of
December 31.
II. SUMMARY OF MAJOR ACCOUNTING POLICIES.
------------------------------------
General:
-------
The accounting policies used as at December 31, 1996 are identical to those
used in preparing the consolidated financial statements of the Publicis
Group.
Methods of valuation and presentation of the consolidated financial
statements of the consolidated companies in 1996 are unchanged from those
applied in the previous year with the exception of the norm related to the
evaluation of Retirement Indemnities which was updated (see hereafter
Retirement Indemnities).
Intangible assets:
-----------------
They comprise goodwill on acquisition (differences arising on valuation),
local goodwill, leasehold rights and software.
Acquisition goodwill:
--------------------
Goodwill arising on first time consolidation consist of the difference
between the acquisition cost of shares in consolidated companies and the
Group's share in their net assets restated in accordance with Publicis'
policies and accounting principles at the time of entry in the Group.
These differences are allocated between the goodwill arising on valuation
or on acquisition, according to whether they are, respectively,
identifiable or non-identifiable intangible assets.
<PAGE>
Goodwill arising on valuation is determined on the basis of verifiable,
objective criteria, e.g. market share, trade marks, trade names, clients
lists, brands, revenues and earnings, and are therefore identifiable.
These are not amortized systematically but are subjected to annual review
of their market value on the basis of the parameters used at the time
of their acquisition. A loss provision or depreciation is recorded if their
market value is found to be persistently (more than three years) less than
their acquisition cost.
All acquisition goodwill at the date of this report has been assigned to
valuation differences.
As a result, the consolidated financial statements of Publicis
Communication do not record any differences arising on acquisition. Any
future acquisition goodwill, i.e. unidentifiable intangible assets, would
systematically be amortized over a maximum of 40 years.
Relatively small acquisition goodwill arising on first time consolidation
(generally less than FRF 1 million) is amortized in full the year of its
recognition.
Leasehold rights and local goodwill:
-------------------------------------
These are carried in the balance sheet at their historical acquisition
cost, which consists of their cost at the time of their entry in the
Group's assets.
These items are not amortized, but they are written down when their useful
value is lower than their acquisition cost.
Software:
---------
These comprise software for internal use which are generally amortized
over a period not exceeding three years.
Tangible assets:
----------------
Tangible assets are valued at cost and the depreciation is calculated
according to the most suitable method in order to take into account the
economical criteria. Listed below are the methods most currently used
within the Publicis Communication Group:
Building : 20 years straightline
Leasehold property and improvements : 10 years straightline
Furniture and Equipment : 5-10 years straightline
Motor Vehicles : 4 years straightline
Work in Progress:
-----------------
Work in Progress is valued at the lower of cost and net realisable value.
<PAGE>
Billings:
Publicis Communication's billings mainly consist of sales and advertising
produced and of advertising space.
Media Buying in France:
The Sapin Law, which came into force on March 31, 1993, modified the ground
rules of our business, obliging media buyers to act under an agency contract.
Consequently, media space buying operations conducted by agents (whether
advertising agencies or centralised buying units) on behalf of clients are no
longer recorded in the sales and purchases ledger accounts. Debts and
receivables in respect of these operations are recorded under "Other debtors"
and "Other creditors" in the balance sheet. In order to compare our billings
with figures for previous years, and with those of our international competitors
in our business, the media billings handled by French centralized media buying
units acting under an agency contract are taken in the consolidated billings.
Media buying accounts for less than 10% of our consolidated billings.
Retirement Indemnities:
French Subsidiaries:
In order to take into account the evolution of the labour market and of the
advertising branch particularly, the Publicis norm related to Retirement
Indemnities was updated this year.
Retirement indemnities are now accounted for all employees over 50 years of age
(against 55 previously).
The application of this norm is unchanged: retirement indemnities are shown,
with their related social charges, in the provision for contingencies. The
yearly movements in the provision for the retirement idemnities shown on the
balance sheet are accounted for in the yearly expenses.
For the first application of this new norm, the adjustments in the provision
related to the previous years was charged against equity. The 1996 provision for
retirement indemnities was accounted for under the line "Salaries and
benefits" of the Income Statement.
Consequently, Contingent Liabilities no longer include any retirement
indemnities.
Foreign Subsidiaries:
Retirement indemnities are accrued for in accordance with the laws and
regulations specific to each country.
Income Tax:
All actual and deferred Income Taxes payable are accounted for. Deferred Income
Tax assets or potential fiscal credits are not recognised.
<PAGE>
III) COMMENTS ON THE CONSOLIDATED ACCOUNTS:
-------------------------------------
Companies consolidated:
----------------------
Year 1996 was marked by the following operations:
-in Sweden, 76% stake in GRO&S which became Publicis GRO&S
-in the Netherlands, the acquisition of a 52% stake in BMB by Overad
-in Eastern Europe, various small acquisitions and creations.
Subsidiaries' Contribution in Group activities:
----------------------------------------------
The breakdown of this contribution is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Billings Net income Group Share (1)
- --------------------------------------------------------------------------------
<S> <C> <C>
France 33% 53%
Europe 58% 25%
USA 8% 22%
--------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
(1) Including results of subsidiaries consolidated on an equity basis.
Intangible assets:
-----------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
31/12/1995 Movements 1996 31/12/1996 31/12/1996
------------------------------------------------------------------ ----------
(000 FRF) Gross Acquisitions Disposals Exchange Gross Amortization Net
amount and others amount amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Goodwill 671 359 52 341 (20 081) 2 558 706 177 (63 182) 642 995
Acquired Goodwill 30 123 5 756 (1 848) (64) 33 967 (2 172) 31 795
Software & Others 36 441 0 (3 354) 0 33 087 (25 323) 7 764
- ------------------------------------------------------------------------------------------------------------------
TOTAL 737 923 58 097 (25 283) 2 494 773 231 (90 677) 682 554
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Part (FRF 40 million) of the extraordinary provision registered on Italy in
1994 was applied to the depreciation of our Italian goodwill. It is
included in the above mentioned amount of KFRF 63 182.
Tangible assets:
---------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
31/12/1995 Movements 1996 31/12/1996 31/12/1996
----------------------------------------------------------------------------------- ----------
(000 FRF) Gross Acquisitions Disposals Changes in scope Exchange Gross Amortization Net
amount of consolidation and others amount amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Land & buildings 40 125 0 0 0 859 40 984 (14 248) 26 736
Others 641 733 117 390 (68 441) (10 477) 16 409 696 614 (473 399) 223 215
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 681 858 117 390 (68 441) (10 477) 17 268 737 598 (487 647) 249 951
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Companies on an Equity basis:
----------------------------
True North Communications, listed on the New York Stock Exchange is
included in investments on an equity basis for an amount of KFRF 122 057.
Publicis Communication owns 4 658 000 True North Communications shares
(20%) whose stock market value was KUSD 101 894 as at December 31st, 1996
and KUSD 94 325 as at February 28th, 1997.
Variation in stockholders' Equity:
---------------------------------
The variation of the stockholders' equity between December 31st, 1995 and
December 31st, 1996 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(000 FRF) TOTAL Group share Minority share
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Equity 31/12/1995 1 208 293 872 932 335 361
1995 Net Income 250 861 160 350 90 511
---------------------------------------
Theoritical Equity 31/12/1996 (before 1996 Net Income) 1 459 154 1 033 282 425 872
1996 changes:
Dividends distributed (70 637) (44 400) (26 237)
Provision for Retirement Indemnities (25 792) (22 758) (3 034)
Exchange differences 9 619 7 373 2 246
Changes in companies consolidated and others (15 196) (2 019) (13 177)
- -------------------------------------------------------------------------------------------------
Total Net Equity 31/12/1996 (before 1996 Net Income) 1 357 148 971 478 385 670
- -------------------------------------------------------------------------------------------------
</TABLE>
Provision for Retirement Indemnities:
-------------------------------------
Following the change operated in the evaluation of the provision for
Retirement Indemnities, the complementary provision on previous years was
charged against equity. It amounts to FRF 26 million, of which FRF 23
against the Group Share.
Net Equity of the Group:
-----------------------
The Net Equity of the Group is as follows (000 FRF):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Share capital of the mother company 185 000
Reserves of the mother company 428 719
Consolidated reserves 357 759
- --------------------------------------------------------------------------------
Group's Net Equity as of 31/12/1996 971 478
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Provision for contingencies:
----------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
(000 FRF) 31/12/1995 Variation 31/12/1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pensions-Retirement indemnities 119 538 597 120 135
Provisions for litigations 34 035 (13 265) 20 770
Provisions-General risks 13 588 19 134 32 722
Provisions-Clients risks 34 289 (5 600) 28 689
Extraordinary provision on Italy 59 225 (59 225) 0
Other provisions 68 801 12 831 81 632
- --------------------------------------------------------------------------------
TOTAL 329 476 (45 528) 283 948
- --------------------------------------------------------------------------------
</TABLE>
As already mentioned, KFRF 40 000 of the extraordinary provision on
Italy was affected to the depreciation of the Italian Goodwill.
Consequently it is now shown under the line "depreciation of
intangible assets" of the balance sheet. The remaining amount of this
provision, i.e. KFRF 19 225 is now shown with "Provisions-General
risks".
Income Tax:
-----------
In 1996, Publicis Conseil benefited from an Income Tax saving as a
result of the use of KFRF 44 300 fiscal losses brought by FCAB. As at
December 31st, 1996, KFRF 7 510 ordinary fiscal losses and differed
amortization can be carried forward by Publicis Conseil and KFRF.9 690
by Publicis Communication
Exceptional Costs:
------------------
No exceptional item has to be pointed out.
Consolidated Cash Flow:
-----------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
(000 FRF) 1995 1996 %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Net Income before extraordinary loss 250 861 269 181
Provision for depreciation 110 724 114 753
Cash Flow 361 585 383 934 6%
of which : Group Share 225 065 258 121 15%
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Employees:
----------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
31/12/1995 31/12/1996 % variation 1995/1996
Actual perimeter Constant perimeter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
France 1 816 1 900 5% 5%
Europe 2 487 2 553 3% 4%
USA 290 278 -4% -4%
- -----------------------------------------------------------------------------------------------
TOTAL 4 593 4 731 3% 4%
- -----------------------------------------------------------------------------------------------
</TABLE>
Contingent Liabilities:
-----------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
(000 FRF) Given Received
- -----------------------------------------------------------------------------------
<S> <C> <C>
Discounted bills not yet matured 3 322
Guarantees 1 704 1 188
Hirer purchase-other lease agreements 5 753
Others 487
- -----------------------------------------------------------------------------------
TOTAL 11 266 1 188
- -----------------------------------------------------------------------------------
</TABLE>
Subsequent Events:
------------------
On February 19, 1997 Publicis and True North have reached an agreement resolving
their deep strategic devergences. Upon completion of this accord, each partner
will have its own network and the cross shareholdings will be limited to both
holdings, Publicis Communication and True North.
Under this agreement, Publicis will transfer to True North four former FCB
agencies operating in Paris, London, Lisbon and Athens and True North will be
given additional shares in Publicis Communication. In return, True North will
transfer its 49% stake in Publicis FCB Europe to Publicis Communication.
True North will then hold 26.5% of Publicis Communication (versus 20.83% at
present) and Publicis Communication will retain its 20% stake in True North.
<PAGE>
LISTE DES SOCIETES CONSOLIDEES AU 31 DECEMBRE 1996
A-SOCIETES CONSOLIDEES PAR INTEGRATION GLOBALE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Nom des Societes % Activite Pays Ville
controle
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 - Agences de publicite
PUBLICIS COMMUNICATION 100.00 Financiere France Paris
PUBLICIS CONSEIL 99.61 Publicite France Paris
FCAVB.M.Z. 100.00 Publicite France Paris
Exclamation 100.00 Publicite France Paris
Loeb et Associes 55.00 Publicite France Paris
Mundocom 100.00 Publicite France Paris
Interplans Edition 100.00 Publicite France Paris
Procis 89.40 Publicite France Paris
Publicis Direct 77.04 Publicite France Paris
Directis 77.05 Publicite France Paris
ID3d 69.88 Publicite France Paris
Extension 100.00 Publicite France Paris
Publicis Design 100.00 Publicite France Paris
Motivom 74.50 Publicite France Paris
Media System 99.67 Publicite France Paris
Guillaume Tell 80.00 Publicite France Paris
Verbe 70.00 Publicite France Paris
Publicis Hourra 80.71 Publicite France Lille
Epure 99.67 Publicite France Lille
Publicis Cachemire 66.93 Publicite France Lyon, Clermont-Ferrand
Phreas 99.00 Publicite France Lyon
2eme Communication 51.00 Publicite France Lyon
Publicis Mediterranee 100.00 Publicite France Marseille
Publicis Soleil 50.25 Publicite France Toulouse, Montpellier
Publicis Grand Angle 74.11 Publicite France Brest, Nantes, Rennes
Positif 99.80 Publicite France Brest
Publicis Grand Est/Koufra 63.32 Publicite France Nancy, Dijon, Strasbourg
Publicis Qualigraphie 93.57 Publicite France Rouen, Caen
Reseau Graphic 66.79 Publicite France Rouen
Publicis Atlantique 100.00 Publicite France Bordeaux
Expression 51.00 Publicite France Bordeaux
Racines Grand Centre 66.00 Publicite France Tours
SKT 68.78 Publicite France Paris
Exaudi 99.80 Publicite France Paris
Jacques Schu et Associes 100.00 Publicite France Paris
Hautefeuille Regions 100.00 Publicite France Lyon
Hautefeuille Mediterranee 99.85 Publicite France Nice
Hautefeuille Grenoble 100.00 Publicite France Grenoble
Hautefeuille Besancon 90.00 Publicite France Besancon
O'de Formes 76.00 Publicite France Lyon
O'REP FLB 65.00 Publicite France Lyon
Publicis Alpes 99.85 Publicite France Annecy
Publicis FCB Europe 51.00 Financiere Pays Bas Amsterdam, Paris
Publicis-FCB 100.00 Publicite Autriche Vienne
Publicis-FCB 100.00 Publicite Belgique Bruxelles
Cre-Action - Full Option 53.95 Publicite Belgique Bruxelles
Publicis-FCB Direct 100.00 Publicite Belgique Bruxelles
FCA! BMZ 100.00 Publicite Belgique Bruxelles
Publicis Trzisno Komuniciranje 100.00 Publicite Croatie Zagreb
Publicis-FCB 60.00 Publicite Republique Tcneque Prague
Publicis-FCB 100.00 Publicite Danemark Copenhague
Publicis Torma 60.03 Publicite Finlande Helsinki
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nom des Societes % controle Activite Pays Ville
<S> <C> <C> <C> <C>
FCB 100.00 Publicite France Paris
Groupe Kenya 53.00 Publicite France Paris
Kenya Institutionnel 65.00 Publicite France Paris
Empir 100.00 Publicite France Paris
Empir Media 100.00 Achat d'espaces France Paris
Publicis-FCB Communication 100.00 Financiere Allemagne Dusseldorf
B.M.Z.FCA 64.50 Publicite Allemagne Dusseldorf
More Sales 100.00 Publicite Allemagne Dusseldorf
More Media 90.00 Achat d'espaces Allemagne Dusseldorf
Publicis 100.00 Publicite Allemagne Dusseldorf
Mundocom 100.00 Publicite Allemagne Francfort
Mundo Sales 100.00 Publicite Allemagne Francfort
FCB Hamburg 98.00 Publicite Allemagne Hambourg
Optimedia 100.00 Achat d'espaces Allemagne Dusseldorf
FCB Direct Marketing 90.00 Publicite Allemagne Hambourg
Publicis Vital 90.00 Publicite Allemagne Francfort
B.R.P. 98.00 Publicite Allemagne Dusseldorf
Publicis MCD 74.90 Publicite Allemagne Erlangen, Munich
Contur 100.00 Publicite Allemagne Friedrichsdorf
Contur Identity Design 100.00 Publicite Allemagne Friedrichsdorf
Contec 100.00 Publicite Allemagne Friedrichsdorf
Sisyphos 51.00 Publicite Allemagne Berlin
Publicis Hellas Advertising 100.00 Publicite Grece Athenes
Publicis-FCB Magyarorszag 100.00 Publicite Hongrie Budapest
Publicis-FCB 100.00 Publicite Italie Milan, Rome
FCAI BMZ 100.00 Publicite Italie Milan
Optimedia Italia 100.00 Publicite Italie Milan
Overad 100.00 Financiere Pays-Bas Amsterdam
Publicis-FCB 100.00 Publicite Pays-Bas Amsterdam
Publicis-FCB Eindhoven 100.00 Publicite Pays-Bas Eindhoven
HVR Advertising 100.00 Publicite Pays-Bas La Haye
Mundocom A.A.C. 100.00 Publicite Pays-Bas Amsterdam, Eindhoven
Kern Habbema & Yap 53.00 Publicite Pays-Bas Amsterdam
Bruggenwirth, Mass & Boswinkel 52.00 Publicite Pays-Bas Amsterdam
Overad Property 100.00 Financiere Pays-Bas Amsterdam
Publicis-FCB 100.00 Publicite Norvege Oslo
Publicis-FCB Direct 91.00 Publicite Norvege Oslo
Strategic Marketing 100.00 Publicite Norvege Oslo
Basic 100.00 Publicite Norvege Oslo
Publicis-FCB Reklamebyra 95.00 Publicite Norvege Oslo
Park Reklamebyra 100.00 Publicite Norvege Oslo
Sponsor Marketing 65.00 Publicite Norvege Oslo
Publicis-FCB Polska 70.00 Publicite Pologne Varsovie
FCB Publicidade 83.00 Publicite Portugal Lisbonne
Publicis Publicidade 90.00 Publicite Portugal Lisbonne
BMZ/Park Publicidade 56.44 Publicite Portugal Lisbonne
Comunicar Publicidade e Promocao 90.00 Publicite Portugal Lisbonne
Optimedia Publicidade 93.00 Achat d'espaces Portugal Lisbonne
Publicis-FCB 100.00 Publicite Russie Moscou
Publicis Virgo Komunikacije 60.00 Publicite Slovenie Ljubijana
Publicis-FCB Arge 100.00 Publicite Espagne Madrid, Barcelone
Optimedia 98.00 Achat d'espaces Espagne Madrid
Publicis Etoile 100.00 Publicite Suede Stockholm
Publicis GRO & S 76.00 Publicite Suede Stockholm
Farner Publicis-FCB 90.00 Publicite Suisse Zurich
Bureau d'Etudes Publicitaires BEP 100.00 Publicite Suisse Lausanne
Multi Market Services 100.00 Financiere Grande-Bretagne Londres
Publicis 100.00 Publicite Grande-Bretagne Londres
FCB Advertising 100.00 Publicite Grande-Bretagne Londres
FCB Impact 100.00 Publicite Grande-Bretagne Londres
Mundocom 100.00 Publicite Grande-Bretagne Londres
Optimedia International 100.00 Publicite Grande-Bretagne Londres
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Nom des Societes % Activite Pays Ville
controle
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FCA EUROPE
FCA/BMZ International 100.00 Publicite France Paris
FCA Amsterdam 97.00 Publicite Pays Bas Amsterdam
FCA Walker 77.10 Publicite Pays Bas Amsterdam
FCA Werner & Messelink 60.00 Publicite Pays Bas Amsterdam
FCA London 100.00 Publicite Grande Bretagne Londres
FCA/BMZ CID 100.00 Publicite Espagne Madrid, Barcelone, Seville
WAM 79.76 Publicite France Paris
PUBLICIS BLOOM 96.15 Publicite Estat Unis New York, Dallas
PUBLICIS CENTRE MEDIA 100.00 Achat d'espace France Paris
PUBLICIS CONSULTANTS 100.00 Publicite France Paris
Media Finance 100.00 Publicite France Paris
Idees Dialogue Conseil 100.00 Publicite France Paris
Publicis Consultants Nederland 93.00 Publicite Pays Bas Armsterdam
B-SOCIETES CONSOLIDEES PAR MISE EN EQUIVALENCE
True North Communications 20.00 Publicite Etats-Unis Chicago
Gnomi FCB 40.00 Publicite Grece Athenes
</TABLE>
<PAGE>
[LETTERHEAD OF MAZARS & GUERARD]
We have examined the consolidated balance sheet of PUBLICIS COMMUNICATION and
subsidiaries as of December 31, 1996 and the related consolidated statements of
income, stockholders' equity and changes in financial position for the year in
the period ended December 31, 1996. These statements present a net equity (group
share) of 971.478.000 FF and a net income (group share) of 189.435.000 FF. Our
examination was made in accordance with generally accepted auditing standards
and, accordingly, include such tests of the accounting records and other
auditing procedures that we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the
financial position of PUBLICIS COMMUNICATION and subsidiaries as of December 31,
1996, and the result of their operations and the changes in their financial
position for the year in the period ended December 31, 1996, in conformity with
generally accepted accounting principles applied on a consistent basis.
Paris, 17th March 1997
/s/ Frederic Allilaire /s/ Jose Marette
Frederic Allilaire Jose Marette
[LETTERHEAD OF MAZARS & GUERARD]
<PAGE>
PUBLICIS COMMUNICATION
CONSOLIDATED FINANCIAL
STATEMENTS 31/12/1995
<PAGE>
PUBLICIS COMMUNICATION
31/12/1995
PAGE 1 : Comparative Consolidated Income Statement.
PAGE 2 : Comparative Consolidated Balance Sheet.
PAGES 3/4 : Consolidated Statement of Change in Financial Statements.
PAGES 5/10 : Notes to the Consolidated Financial Statements.
PAGES 11/13 : List of Consolidated Companies.
<PAGE>
<TABLE>
<CAPTION>
PUBLICIS COMMUNICATION GROUP CONSOLIDATED INCOME STATEMENTS
- -------------------------------------------------------------------------------------------------------------
(in thousands of French Francs) YEAR 1994 YEAR 1995 VAR.
%
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Billings 17 562 073 18 132 852 3.3%
Purchases (14 824 544) (15 196 560)
REVENUES 2 737 529 2 936 293 7.3%
Salaries and Benefits (1 511 421) (1 638 275) 8.4%
Office and General Expenses (776 463) (832 111) 7.2%
TOTAL EXPENSES (2 287 884) (2 470 386) 8.0%
OTHER INCOME 19 924 17 732
OPERATING PROFIT 469 569 483 639 3.0%
Depreciation (105 037) (110 724)
Provision doubtful debts (21 378) (16 258)
Other provisions (17 448) (16 033)
Interest income (expense) (20 785) 14 820
PROFIT BEFORE TAX 304 921 355 445 16.6%
Exceptional costs (29 369) 3 043
Profit sharing - statutory (2 779) (7 263)
Income Tax (110 537) (133 111)
Profit (equity subsidiaries) 46 142 32 747
Extraordinary Loss (80 000)
- -------------------------------------------------------------------------------------------------------------
NET INCOME 128 378 250 861 95.4%
GROUP SHARE 70 738 160 350 126.7%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION GROUP
CONSOLIDATED BALANCE SHEET
(In thousands of French Francs)
- ------------------------------------------------------------------------------
A S S E T S 31.12.1994 31.12.1995
- ------------------------------------------------------------------------------
FIXED ASSETS 1 053 291 1 104 147
============ ---------- ----------
Intangible assets (gross) 629 684 737 923
Depreciation & amortization on intangible assets (19 109) (23 005)
Tangible assets (gross) 643 377 681 858
Depreciation & amortization on tangible assets (408 316) (441 093)
---------- ----------
NET TANGIBLE AND INTANGIBLE ASSETS 845 636 955 683
Investments (non consolidated companies) 23 877 23 781
Investments (equity subsidiaries) 136 180 105 016
Interco loans 35 557 4 896
Other financial assets 34 026 37 106
Provision on financial assets (21 985) (22 335)
---------- ----------
NET FINANCIAL ASSETS 207 655 148 464
---------- ----------
CURRENT ASSETS 3 848 894 4 217 222
============== ---------- ----------
Work in progress 194 103 212 814
Advance payments made 64 020 47 770
Accounts receivable (net) 1 960 956 1 947 957
Interco receivable 16 945 40 351
Other debtors 1 063 543 1 150 283
Cash 549 327 818 047
---------- ----------
OTHER CURRENT ASSETS 70 879 63 710
==================== ---------- ----------
---------- ----------
TOTAL ASSETS 4 973 064 5 385 079
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
L I A B I L I T I E S & E Q U I T Y 31.12.1994 31.12.1995
- ------------------------------------------------------------------------------
TOTAL EQUITY 820 323 1 459 155
============ ---------- ----------
Equity (before net income), Group Share 361 434 872 932
Net income, Group Share 70 738 160 350
---------- ----------
TOTAL EQUITY GROUP SHARE 432 172 1 033 282
Equity (before net income), Non-Group Share 330 511 335 361
Net income, Non-Group Share 57 640 90 512
---------- ----------
TOTAL EQUITY NON-GROUP SHARE 388 151 425 873
---------- ----------
PROVISIONS FOR CONTINGENCIES 320 571 329 476
============================ ---------- ----------
SHORT TERM LIABILITIES 3 758 653 3 535 314
====================== ---------- ----------
Borrowings (not banks) 528 661 123 682
Banks 399 468 494 736
Advance payments from clients 133 197 148 400
Accounts payable 1 465 410 1 470 605
Interco payable 49 950 24 602
Other creditors 1 181 967 1 273 289
---------- ----------
OTHER ACCRUALS 73 517 61 134
============== ---------- ----------
---------- ----------
TOTAL LIABILITIES & EQUITY 4 973 064 5 385 079
- ------------------------------------------------------------------------------
<PAGE>
PUBLICIS COMMUNICATION GROUP P 1/2
CONSOLIDATED STATEMENT OF CHANGE IN FINANCIAL POSITION
( -in thousand FRF)
<TABLE>
<CAPTION>
'000 FRF 1994 1995
<S> <C> <C>
SOURCE OF WORKING CAPITAL
NET INCOME 128 378 250 861
Depreciation 105 037 110 724
Extraordinary loss 80 000 0
-----------------------
Sub-total 313 415 361 585
Equity earnings of affiliates (46 142) (32 746)
Dividends received from affiliates 5 413 50 717
Loan 0 181 137
Other borrowings 144 544 0
Exchange differences & others (7 467) 1 670
=======================
TOTAL SOURCE 409 763 562 363
APPLICATION OF WORKING CAPITAL
Paid out dividends 61 508 52 230
Purchase of interest in affiliated companies 23 011 0
Investments 210 819 120 896
Increase in other fixed assets 102 861 112 169
=======================
TOTAL APPLICATION 398 199 285 295
Increase (decrease) in working capital 11 564 277 068
------ -------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION GROUP P 2/2
CONSOLIDATED STATEMENT OF CHANGE IN FINANCIAL POSITION
( -in thousand FRF)
<TABLE>
<CAPTION>
'000 FRF 1994 1995
<S> <C> <C>
Increase (decrease) in current assets
- -------------------------------------
Cash (85 994) 268 720
Accounts receivables (net) 166 028 (12 999)
Expenditure billable to clients 68 765 18 711
Other current assets 100 996 94 682
-----------------------
Sub-total 249 795 369 114
Increase (decrease) in current liabilities
- ------------------------------------------
Provision for contingencies 30 028 8 905
Accounts payable 182 097 5 195
Bank borrowings 17 242 95 268
Loans and other borrowings 82 548 (86 116)
Other current liabilities (73 684) 68 794
-----------------------
Sub-total 238 231 92 046
Increase (decrease) in working capital 11 564 277 068
- -------------------------------------- ------ -------
</TABLE>
<PAGE>
PUBLICIS COMMUNICATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF 31/12/1995
I. CONSOLIDATION PRINCIPLES.
PUBLICIS COMMUNICATION GROUP'S consolidated financial statements as at
December 31, 1995 have been prepared in accordance with the French
legislation and are in conformity with generally accepted international
accounting principles.
The consolidated financial statements include the accounts of the Company's
wholly owned and majority owned domestic and international subsidiaries.
The subsidiary companies with less than 50% ownership are consolidated on
an equity basis.
The company translates the financial statements of its international
subsidiaries into French Francs using official exchange rates as of
December 31.
II. SUMMARY OF MAJOR ACCOUNTING POLICIES.
General :
The accounting policies used as at December 31, 1995 are identical to those
used in preparing the consolidated financial statements of the Publicis
Group.
Tangible and Intangible assets:
Tangible assets are valued at cost and the depreciation is calculated
according to the most suitable method in order to take into account the
economical criteria. Listed below are the methods most currently used
within the Publicis Communication Group :
Building : 20 years straightline
Leasehold property and improvements : 10 years straightline
Furniture and Equipment : 5-10 years straightline
Motor Vehicles : 4 years straightline
Premiums paid to acquire marketable leasehold property and the cost of
acquired goodwill are not amortized except in cases where the estimated
market value is considered to be inferior to the acquisition cost.
<PAGE>
GOODWILL:
- --------
The excess costs over the net book value of subsidiaries, after reallocating
potential capital gains to the assets concerned, by their nature, are
considered:
- - on the one hand, to be intangible assets, justified by elements such as:
market shares, trade marks, clients' lists, brands ... Usually they are not
amortized. However, each year, a careful examination is made to determine
their market value. If their market value is durably inferior to their
acquisition cost, a provision for depreciation is made.
- - on the other hand, to be unidentified elements amortized over a maximum period
of 40 years.
In any case, all goodwill of small value are immediately depreciated at 100%.
The application of the Sapin Law to a full year period has strongly affected the
profitability of our Media buying activities, and could endanger the actual
value of goodwill raised on these companies.
However, given that the restructuration steps taken up to now allowed this
sector to regain its profitability and will have a favorable impact on the
following years, Media buying goodwill has not been depreciated.
WORK IN PROGRESS:
- ----------------
Work in progress is valued at the lower of cost and net realisable value.
BILLINGS:
- --------
Since March 31, 1993, the Sapin law has been changing the accounting principles
applicable to Media Buying activities.
In order to be able to show comparable Billings with last year and to be in line
with the principles applied by our foreign competitors, our consolidated Media
Revenues raised in France have been capitalised using the international multiple
of 6,67.
RETIREMENT INDEMNITIES:
- ----------------------
FRENCH SUBSIDIARIES:
- -------------------
Retirement indemnities acquired by employees over 60 years of age appear, with
their related social charges, in the provision for contingencies.
The yearly movements in the provision for the retirement indemnities shown on
the Balance Sheet are accounted for in the yearly expenses.
Probable retirement indemnities acquired by employees between 55 and 60 years of
age, with their related social charges, are shown in the Contingent Liabilities.
Probable retirement indemnities, acquired by employees under 55 years of age are
not taken into account due to the high turnover in our profession.
<PAGE>
Foreign Subsidiaries:
--------------------
Retirement indemnities are accrued for in accordance with the laws and
regulations specific to each country.
Income Tax:
----------
All actual and deferred Income Taxes payable are accounted for.
Deferred Income Tax assets or potential fiscal credits are not recognised
with the exception of a latent fiscal credit of 36,66% calculated on the
provision for the French statutory profit sharing.
III) COMMENTS ON THE CONSOLIDATED ACCOUNTS:
-------------------------------------
Companies consolidated:
----------------------
Due to the acquisitions of the Contur Group and Sisyphos agency in Germany
as well as the Hautefeuille Group in France, the 1995 scope of
consolidation has been enlarged.
On a constant basis, Publicis Communication's activities would have grown
by 2%.
Subsidiaries' Contribution in Group activities:
----------------------------------------------
The breakdown of this contribution is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Billings Net income Group Share (1)
- --------------------------------------------------------------------------------
<S> <C> <C>
France 34% 50%
Europe 60% 30%
USA 6% 20%
---------------------------------------------------
100% 100%
- --------------------------------------------------------------------------------
</TABLE>
(1) Including results of subsidiaries consolidated on an equity basis.
Intangible assets:
-----------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
31/12/1994 Movements 1995 31/12/1995 31/12/1995
------------------------------------------------------------ ----------
(000 FRF) Gross Acquisitions Disposals Exchange Gross Amortization Net
amount and others amount amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Goodwill 573 356 105 221 0 (7 218) 671 359 (22) 671 337
Acquired Goodwill 24 289 5 834 0 0 30 123 (970) 29 153
Software & Others 32 039 4 402 0 0 36 441 (22 013) 14 428
- -------------------------------------------------------------------------------------------------------------
TOTAL 629 684 115 457 0 (7 218) 737 923 (23 005) 714 918
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Tangible assets:
---------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
31/12/1994 Movements 1995 31/12/1995 31/12/1995
------------------------------------------------------------------------------- ----------
(000 FRF) Gross Acquisitions Disposals Changes in scope Exchange Gross Amortization Net
amount of consolidation and others amount amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Land & buildings 39 243 0 0 0 882 40 125 (12 871) 27 254
Others 604 134 111 390 (70 577) 15 175 (18 389) 641 733 (428 222) 213 511
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL 643 377 111 390 (70 577) 15 175 (17 507) 681 858 (441 093) 240 765
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Companies on an Equity basis:
----------------------------
True North Communications, listed on the New York Stock Exchange is
included in investments on an equity basis for an amount of KFRF 92 895.
Publicis Communication owns 4 658 000 True North Communications shares
(20%) whose stock market value was KUSD 86 173 as at December 31st, 1995
and KUSD 94 325 as at February 29th, 1996.
Variation in stockholders' Equity:
---------------------------------
The variation of the stockholders' equity between December 31st, 1994 and
December 31st, 1995 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(000 FRF) TOTAL Group share Minority share
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Equity 31/12/1994 691 945 361 434 330 511
1994 Net Income 128 378 70 738 57 640
-------------------------------------------
Theoritical Equity 31/12/1995 (before 1995 Net Income) 820 323 432 172 388 151
1995 changes:
Capital increase of the mother company 500 000 500 000 0
Dividends distributed (48 461) (12 150) (36 311)
Exchange differences (16 919) (11 794) (5 125)
Changes in companies consolidated and others (46 650) (35 296) (11 354)
- ------------------------------------------------------------------------------------------------------
Total Net Equity 31/12/1995 (before 1995 Net Income) 1 208 293 872 932 335 361
- ------------------------------------------------------------------------------------------------------
</TABLE>
Net Equity of the Group:
-----------------------
The Net Equity of the Group is as follows (000 FRF):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
<S> <C>
Share capital of the mother company 185 000
Reserves of the mother company 435 143
Consolidated reserves 252 789
- ------------------------------------------------------------------
Group's Net Equity as of 31/12/1995 872 932
- ------------------------------------------------------------------
</TABLE>
<PAGE>
Capital increase:
----------------
In January 1995, a 500 million francs capital increase was made by issuing
500 000 shares, each share having a face value of 100 francs and a share
issue premium of 900 francs. True North Communications only subscribed up
to 35 million francs and Publicis SA the remaining balance.
Since this date, Publicis Communication's ownership is as follows:
Publicis SA 79,17%
True North Communications 20,83%
Provision for contingencies:
---------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(000 FRF) 31/12/1994 Variation 31/12/1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Pensions - Retirement indemnities 113 245 6 293 119 538
Provisions for extraordinary costs - Italy 80 000 (20 775) 59 225
Provisions for litigations 35 903 (1 868) 34 035
Provisions - General risks 13 303 285 13 588
Provisions - Clients risks 37 218 (2 929) 34 289
Other provisions 40 902 27 899 68 801
- -------------------------------------------------------------------------------
TOTAL 320 571 8 905 329 476
- -------------------------------------------------------------------------------
</TABLE>
Income Tax:
----------
In 1995, Publicis Conseil benefited from an Income Tax saving, amounting
to approximately 12.7 million francs, as a result of the fiscal losses
brought by FCAB. As at December 31st, 1995, KF 52 170 ordinary fiscal
losses and differed amortization can be carried forward.
Exceptional Costs:
-----------------
No exceptional item has to be pointed out.
Extraordinary Loss:
------------------
The 80 million francs provision for exceptional restructuration costs and
partial depreciation of Goodwill related to Italy recorded in 1994 by
Publicis FCB Europe has been partially reversed during 1995 for an amount
of 20 million francs.
<PAGE>
Consolidated Cash Flow:
----------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
(000 FRF) 1994 1995 %
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated Net Income before extraordinary loss 108 378 250 861
Provision for depreciation 105 037 110 724
Cash Flow 313 415 361 585 15%
of which : Group Share 172 881 225 065 30%
- -----------------------------------------------------------------------------
</TABLE>
Employees:
---------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
31/12/1994 31/12/1995 % variation 1994/1995
Actual perimeter Constant perimeter
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
France 1 654 1 816 10% 1%
Europe 2 218 2 487 12% 5%
USA 283 290 2% 2%
- --------------------------------------------------------------------------------------------------
TOTAL 4 155 4 593 11% 3%
- --------------------------------------------------------------------------------------------------
</TABLE>
Contingent Liabilities:
----------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(000 FRF) Given
- -----------------------------------------------------------
<S> <C>
Discounted bills not yet matured 3 300
Guarantees 4 443
Pension rights (retirement indemnities) 5 872
Hirer purchase - other lease agreements 5 798
Others 1 559
- -----------------------------------------------------------
TOTAL 20 972
- -----------------------------------------------------------
</TABLE>
<PAGE>
LISTE DES SOCIETES CONSOLIDEES AU 31 DECEMBRE 1995
A- SOCIETES CONSOLIDEES PAR INTEGRATION GLOBALE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
%
Nom des Societes controle Activite Pays Ville
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 - Agences de publicite
PUBLICIS COMMUNICATION 100.00 Financiere France Paris
Publicis Conseil 99.61 Publicite France Paris
FCA/B.M.Z. 100.00 Publicite France Paris
Exclamation 100.00 Publicite France Paris
Loeb et Associes 55.00 Publicite France Paris
Mundocom 100.00 Publicite France Paris
Interplans Edition 100.00 Publicite France Paris
Procis 89.40 Publicite France Paris
Publicis Direct 65.50 Publicite France Paris
ID3D 69.88 Publicite France Paris
Extension 100.00 Publicite France Paris
Publicis Design 100.00 Publicite France Paris
Motivom 74.50 Publicite France Paris
CRC 100.00 Publicite France Paris
Media System 99.66 Publicite France Paris
Media System U.K. 100.00 Publicite Grande Bretagne Londres
Jonction 80.00 Publicite France Paris
Verbe 70.00 Publicite France Paris
Publicis Hourra 80.71 Publicite France Lille
Epure 99.67 Publicite France Lille
Publicis Cachemire 66.93 Publicite France Lyon, Clemont-Ferrand
Phreas 99.00 Publicite France Lyon
2eme Communication 51.00 Publicite France Lyon
Publicis Mediterranee 100.00 Publicite France Marseille
Publicis Soleil 50.25 Publicite France Toulouse, Montpellier
Publicis Grand Angle 76.94 Publicite France Brest, Nantes, Rennes
Positif 99.80 Publicite France Brest
Publicis Grand Est / Koufra 63.32 Publicite France Nancy, Dijon, Strasbourg
Publicis Qualigraphie 91.50 Publicite France Rouen, Caen
Reseau Graphic 59.62 Publicite France Rouen
Publicis Atlantique 95.10 Publicite France Bordeaux
Expression 51.00 Publicite France Bordeaux
Racines Grand Centre 66.00 Publicite France Tours
SKT 70.00 Publicite France Paris
Exaudi 99.80 Publicite France Paris
Hautefeuille Regions 100.00 Publicite France Lyon
Hautefeuille Mediterranee 99.85 Publicite France Nice
Hautefeuille Grenoble 100.00 Publicite France Grenoble
Hautefeuille Besancon 90.00 Publicite France Besancon
O' de Formes 76.00 Publicite France Lyon
O' REP FLB 65.00 Publicite France Lyon
Hautefeuille Annecy 99.85 Publicite France Annecy
Publicis FCB Europe 51.00 Financiere Pays Bas Paris
Publicis-FCB 100.00 Publicite Autriche Vienne
Publicis-FCB 100.00 Publicite Belgique Bruxelles
Cre-Action - Full Option 51.00 Publicite Belgique Bruxelles
Publicis-FCB Direct 100.00 Publicite Belgique Bruxelles
FCA! BMZ 100.00 Publicite Belgique Bruxelles
Publicis FCB 60.00 Publicite Republique Tcheque Prague
Publicis-FCB 100.00 Publicite Danemark Copenhague
Markkinointi Topitorma 45.03 Publicite Finlande Helsinki
FCB SA 100.00 Publicite France Paris
Kenya 53.00 Publicite France Paris
Empir 100.00 Publicite France Paris
Axe Publicite 100.00 Publicite France Paris
Empir Media 100.00 Achat d'espace France Paris
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
%
Nom des Societes controle Activite Pays Ville
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Publicis-FCB Communication 100.00 Financiere Allemagne Dusseldorf
B M Z FCA 64.50 Publicite Allemagne Dusseldorf
More Sales 100.00 Publicite Allemagne Dusseldorf
More Media 90.00 Achat d'espace Allemagne Dusseldorf
Publicis 100.00 Publicite Allemagne Francfort
Mundocom 100.00 Publicite Allemagne Francfort
Mundo Sales 100.00 Publicite Allemagne Francfort
Optimedia 100.00 Achat d'espace Allemagne Dusseldorf
FCB Hamburg 87.00 Publicite Allemagne Hambourg
FCB Direct Marketing 90.00 Publicite Allemagne Hambourg
Publicis Vicom 90.00 Publicite Allemagne Francfort
B R P Unternehmen Kommunikation 51.00 Publicite Allemagne Dusseldorf
Publicis MCD Werbeagentur 74.90 Publicite Allemagne Erlangen, Munich
Publicis MCD Messeagentur 50.00 Publicite Allemagne Erlangen, Munich
Contur 100.00 Publicite Allemagne Friedrichsdorf
Contur Identity Design 100.00 Publicite Allemagne Friedrichsdorf
Contec 100.00 Publicite Allemagne Friedrichsdorf
Sisyphos 51.00 Publicite Allemagne Berlin
Publicis-FCB Magyarorszag 100.00 Publicite Hongrie Budapest
Publicis-FCB 97.50 Publicite Italie Milan, Rome
FCA! BMZ 100.00 Publicite Italie Milan
Optimedia Italia 100.00 Achat d'espace Italie Milan
More Media Sri 70.00 Achat d'espace Italie Milan
Overad 100.00 Financiere Pays-Bas Amsterdam
Publicis-FCB 100.00 Publicite Pays-Bas Amsterdam
Publicis-FCB Eindhoven 100.00 Publicite Pays-Bas Eindhoven
HVR Advertising 100.00 Publicite Pays-Bas La Haye
Mundocom 100.00 Publicite Pays-Bas Amsterdam, Eindhoven
Kern Habbema & Yap 53.00 Publicite Pays-Bas Amsterdam
Overad Property 100.00 Financiere Pays-Bas Amsterdam
Publicis-FCB 84.93 Publicite Norvege Oslo
Publicis-FCB Direct 91.00 Publicite Norvege Oslo
Strategic Marketing 91.00 Publicite Norvege Oslo
Basic 91.00 Publicite Norvege Oslo
Publicis-FCB Reklamebyra 91.00 Publicite Norvege Oslo
Park Reklamebyra 100.00 Publicite Norvege Oslo
Sponsor Marketing 55.00 Publicite Norvege Oslo
Rodsten & Werner Film 100.00 Publicite Norvege Oslo
Publicis-FCB Polska 78.00 Publicite Pologne Varsovie
FCB 83.00 Publicite Portugal Lisbonne
Publicis 90.00 Publicite Portugal Lisbonne
BMZ/Park 56.44 Publicite Portugal Lisbonne
Comunicar 90.00 Publicite Portugal Lisbonne
Optimedia 93.00 Achat d'espace Portugal Lisbonne
Publicis-FCB 100.00 Publicite Russie Moscou
Publicis-FCB Arge 100.00 Publicite Espagne Madrid, Barcelone
Optimedia 98.00 Achat d'espace Espagne Madrid
Famer Publicis-FCB Werbeagentur 90.00 Publicite Suisse Zurich
Bureau d'Etudes Publicitaires BEP 100.00 Publicite Suisse Lausanne
M.M.S. 100.00 Publicite Grande-Bretagne Londres
Publicis 100.00 Publicite Grande-Bretagne Londres
FCB Advertising 100.00 Publicite Grande-Bretagne Londres
FCB Impact 100.00 Publicite Grande-Bretagne Londres
Mundocom 100.00 Publicite Grande-Bretagne Londres
Optimedia International 100.00 Achat d'espace Grande-Bretagne Londres
FCA BMZ International 100.00 Publicite France Paris
Wam 82.00 Publicite France Paris
Lion heart 98.10 Publicite Italie Milan
FCA Amsterdam 85.19 Publicite Pays Bas Amsterdam
FCB Walker 65.70 Publicite Pays Bas Amsterdam
FCA Werner & Messelink 60.00 Publicite Pays Bas Amsterdam
FCA London 100.00 Publicite Grande Bretagne Londres
CID FCA BMZ 75.00 Publicite Espagne Madrid, Barcelona, Seville
Bilbao, Saragosse, Vaience
PUBLICIS BLOOM 96.15 Publicite Etats Unis New York, Dallas
PUBLICIS CENTRE MEDIA 100.00 Achat d'espace France Paris
Credome 99.96 Etudes Medias France Paris
PUBLICIS CONSULTANTS 100.00 Publicite France Paris
Media Finance 100.00 Publicite France Paris
Idees Dialogue Conseil 100.00 Publicite France Paris
Publicis Consultants Nederland 93.00 Publicite Pays Bas Amsterdam
<PAGE>
B- SOCIETES CONSOLIDEES PAR MISE EN EQUIVALENCE
True North Communications 20.00 Publicite Etats-Unis Chicago
Gnomi FCB 40.00 Publicite Grece Athenes
</TABLE>
<PAGE>
[MAZARS LETTERHEAD]
Cabinet Robert Mazars
We have examined the consolidated balance sheet of PUBLICIS COMMUNICATION and
subsidiaries as of December 31, 1995 and the related consolidated statements of
income, stockholders' equity and changes in financial position of the year in
the period ended December 31, 1995. These statements present a new equity
(group share) of 872 932 000 FF and a net income (group share) of 160 350 000
FF. Our examination was made in accordance with generally accepted auditing
standards and, accordingly, include such tests of the accounting records and
other auditing procedures that we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the
financial position of PUBLICIS COMMUNICATION and subsidiaries as of December 31,
1995, and the result of their operations and the changes in their financial
position for the year in the period ended December 31, 1995, in conformity with
generally accepted accounting principles applied on a consistent basis.
Paris, 22 th April 1996
/s/ Frederic Allilaire /s/ Jose Marette
Frederic ALLILAIRE Jose MARETTE
[MAZARS LETTERHEAD]
<PAGE>
PUBLICIS COMMUNICATION
LIST OF CONSOLIDATED COMPANIES AT DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Company Name % Activity Country City
ownership
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A-CONSOLIDATED COMPANIES
1 - Advertising agencies
PUBLICIS COMMUNICATION 100.00 Finance France Paris
PUBLICIS CONSEIL 99.61 Advertising France Paris
FCAVB.M.Z. 100.00 Advertising France Paris
Exclamation 100.00 Advertising France Paris
Loeb et Associes 55.00 Advertising France Paris
Mundocom 100.00 Advertising France Paris
Interplans Edition 100.00 Advertising France Paris
Procis 89.40 Advertising France Paris
Publicis Direct 77.04 Advertising France Paris
Directis 77.05 Advertising France Paris
ID3d 69.88 Advertising France Paris
Extension 100.00 Advertising France Paris
Publicis Design 100.00 Advertising France Paris
Motivom 74.50 Advertising France Paris
Media System 99.67 Advertising France Paris
Guillaume Tell 80.00 Advertising France Paris
Verbe 70.00 Advertising France Paris
Publicis Hourra 80.71 Advertising France Lille
Epure 99.67 Advertising France Lille
Publicis Cachemire 66.93 Advertising France Lyon, Clermont-Ferrand
Phreas 99.00 Advertising France Lyon
2eme Communication 51.00 Advertising France Lyon
Publicis Mediterranee 100.00 Advertising France Marseille
Publicis Soleil 50.25 Advertising France Toulouse, Montpellier
Publicis Grand Angle 74.11 Advertising France Brest, Nantes, Rennes
Positif 99.80 Advertising France Brest
Publicis Grand Est/Koufra 63.32 Advertising France Nancy, Dijon, Strasbourg
Publicis Qualigraphie 93.57 Advertising France Rouen, Caen
Reseau Graphic 66.79 Advertising France Rouen
Publicis Atlantique 100.00 Advertising France Bordeaux
Expression 51.00 Advertising France Bordeaux
Racines Grand Centre 66.00 Advertising France Tours
SKT 68.78 Advertising France Paris
Exaudi 99.80 Advertising France Paris
Jacques Schu et Associes 100.00 Advertising France Paris
Hautefeuille Regions 100.00 Advertising France Lyon
Hautefeuille Mediterranee 99.85 Advertising France Nice
Hautefeuille Grenoble 100.00 Advertising France Grenoble
Hautefeuille Besancon 90.00 Advertising France Besancon
O'de Formes 76.00 Advertising France Lyon
O'REP FLB 65.00 Advertising France Lyon
Publicis Alpes 99.85 Advertising France Annecy
Publicis FCB Europe 51.00 Finance Netherlands Amsterdam, Paris
Publicis-FCB 100.00 Advertising Austria Vienne
Publicis-FCB 100.00 Advertising Belgium Brussels
Cre-Action - Full Option 53.95 Advertising Belgium Brussels
Publicis-FCB Direct 100.00 Advertising Belgium Brussels
FCA! BMZ 100.00 Advertising Belgium Brussels
Publicis Trzisno Komuniciranje 100.00 Advertising Croatia Zagreb
Publicis-FCB 60.00 Advertising Czech Republic Prague
Publicis-FCB 100.00 Advertising Denmark Copenhagen
Publicis Torma 60.03 Advertising Finland Helsinki
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Company Name % Ownership Activity Country City
<S> <C> <C> <C> <C>
FCB 100.00 Advertising France Paris
Groupe Kenya 53.00 Advertising France Paris
Kenya Institutionnel 65.00 Advertising France Paris
Empir 100.00 Advertising France Paris
Empir Media 100.00 Media buying France Paris
Publicis-FCB Communication 100.00 Finance Germany Dusseldorf
B.M.Z.FCA 64.50 Advertising Germany Dusseldorf
More Sales 100.00 Advertising Germany Dusseldorf
More Media 90.00 Media buying Germany Dusseldorf
Publicis 100.00 Advertising Germany Dusseldorf
Mundocom 100.00 Advertising Germany Francfort
Mundo Sales 100.00 Advertising Germany Francfort
FCB Hamburg 98.00 Advertising Germany Hambourg
Optimedia 100.00 Media buying Germany Dusseldorf
FCB Direct Marketing 90.00 Advertising Germany Hambourg
Publicis Vital 90.00 Advertising Germany Francfort
B.R.P. 98.00 Advertising Germany Dusseldorf
Publicis MCD 74.90 Advertising Germany Erlangen, Munich
Contur 100.00 Advertising Germany Friedrichsdorf
Contur Identity Design 100.00 Advertising Germany Friedrichsdorf
Contec 100.00 Advertising Germany Friedrichsdorf
Sisyphos 51.00 Advertising Germany Berlin
Publicis Hellas Advertising 100.00 Advertising Greece Athens
Publicis-FCB Magyarorszag 100.00 Advertising Hungary Budapest
Publicis-FCB 100.00 Advertising Italy Milan, Rome
FCAI BMZ 100.00 Advertising Italy Milan
Optimedia Italia 100.00 Advertising Italy Milan
Overad 100.00 Finance Netherlands Amsterdam
Publicis-FCB 100.00 Advertising Netherlands Amsterdam
Publicis-FCB Eindhoven 100.00 Advertising Netherlands Eindhoven
HVR Advertising 100.00 Advertising Netherlands La Haye
Mundocom A.A.C. 100.00 Advertising Netherlands Amsterdam, Eindhoven
Kern Habbema & Yap 53.00 Advertising Netherlands Amsterdam
Bruggenwirth, Mass & Boswinkel 52.00 Advertising Netherlands Amsterdam
Overad Property 100.00 Finance Netherlands Amsterdam
Publicis-FCB 100.00 Advertising Norway Oslo
Publicis-FCB Direct 91.00 Advertising Norway Oslo
Strategic Marketing 100.00 Advertising Norway Oslo
Basic 100.00 Advertising Norway Oslo
Publicis-FCB Reklamebyra 95.00 Advertising Norway Oslo
Park Reklamebyra 100.00 Advertising Norway Oslo
Sponsor Marketing 65.00 Advertising Norway Oslo
Publicis-FCB Polska 70.00 Advertising Pologne Varsovie
FCB Publicidade 83.00 Advertising Portugal Lisbon
Publicis Publicidade 90.00 Advertising Portugal Lisbon
BMZ/Park Publicidade 56.44 Advertising Portugal Lisbon
Comunicar Publicidade e Promocao 90.00 Advertising Portugal Lisbon
Optimedia Publicidade 93.00 Media buying Portugal Lisbon
Publicis-FCB 100.00 Advertising Russia Moscow
Publicis Virgo Komunikacije 60.00 Advertising Slovenia Ljubijana
Publicis-FCB Arge 100.00 Advertising Spain Madrid, Barcelone
Optimedia 98.00 Media buying Spain Madrid
Publicis Etoile 100.00 Advertising Sweden Stockholm
Publicis GRO & S 76.00 Advertising Sweden Stockholm
Farner Publicis-FCB 90.00 Advertising Switzerland Zurich
Bureau d'Etudes Publicitaires BEP 100.00 Advertising Switzerland Lausanne
Multi Market Services 100.00 Finance United Kingdom London
Publicis 100.00 Advertising United Kingdom London
FCB Advertising 100.00 Advertising United Kingdom London
FCB Impact 100.00 Advertising United Kingdom London
Mundocom 100.00 Advertising United Kingdom London
Optimedia International 100.00 Advertising United Kingdom London
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Company Name % Activity Country City
ownership
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FCA EUROPE
FCA/BMZ International 100.00 Advertising France Paris
FCA Amsterdam 97.00 Advertising Netherlands Amsterdam
FCA Walker 77.10 Advertising Netherlands Amsterdam
FCA Werner & Messelink 60.00 Advertising Netherlands Amsterdam
FCA London 100.00 Advertising United Kingdom London
FCA/BMZ CID 100.00 Advertising Spain Madrid, Barcelona, Seville
WAM 79.76 Advertising France Paris
PUBLICIS BLOOM 96.15 Advertising United States New York, Dallas
PUBLICIS CENTRE MEDIA 100.00 Media buying France Paris
PUBLICIS CONSULTANTS 100.00 Advertising France Paris
Media Finance 100.00 Advertising France Paris
Idees Dialogue Conseil 100.00 Advertising France Paris
Publicis Consultants Nederland 93.00 Advertising Netherlands Armsterdam
B-ACCOUNTED FOR BY THE EQUITY METHOD
True North Communications 20.00 Advertising United States Chicago
Gnomi FCB 40.00 Advertising Greece Athens
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL NOTES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in True North Communications
Inc.'s Annual Report to Shareholders incorporated by reference in this Form
10-K, and have issued our report thereon dated March 28, 1997. Our report on the
consolidated financial statements includes an explanatory paragraph with respect
to the change in method of accounting for certain investments in debt and equity
securities, effective January 1, 1994, as discussed in Note 2 to the
consolidated financial statements. Our audits were made for the purpose of
forming an opinion on those financial statements taken as a whole. Supplemental
Notes A, B, C and D are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic consolidated financial
statements. Supplemental Notes A, B, C and D have been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements.
In our opinion, based upon those procedures applied and the report of the other
auditors, Supplemental Notes A, B, C and D state in all material respects the
financial data required to be set forth therein in relation to Publicis
Communication and the basic consolidated financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois,
March 28, 1997.
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
Date: November 25, 1997
True North Communications Inc.
/s/ John J. Rezich
By: _________________________________
John J. Rezich
Controller (Chief Accounting
Officer)
<PAGE>
Exhibit 13
LOGO
1996 FINANCIAL REPORT
TRUE NORTH COMMUNICATIONS INC.
101 EAST ERIE STREET
CHICAGO, ILLINOIS
60611
312-425-6500
<PAGE>
ABOUT TRUE NORTH
In December 1994 True North Communications Inc. (True North) succeeded
Foote, Cone & Belding Communications, Inc. as the holding company for Foote,
Cone & Belding--America's largest advertising agency--and additional agency
brands, including Mojo, Borders Perrin Norrander, Bayer Bess Vanderwarker and
others. With these brands as the foundation, True North is building a new type
of architecture for a communications firm.
Through planned acquisitions and internal growth, True North has become a
communications company encompassing resources much broader in scope than any
existing advertising holding company. True North's architecture is unique and
includes three new business units:
. TN Technologies Holding Inc.--This company is a leader in digital
interactive marketing, having developed over 500 interactive/new media
marketing programs since 1987. The company combines traditional marketing
skills with capabilities in digital media and communications technologies
to enable clients to more effectively reach and interact with customers
and other key constitutents, including employees, stockholders, suppliers
and other business partners. The company delivers a complete range of
digital interactive marketing products and services including: customized
global intranets; creation, production, updating and maintenance of World
Wide Web sites and other interactive communications vehicles; analysis of
customer requests, purchases and behaviors; delivery of uniform and
updated sales tools for sales forces; and technical consulting. The
company was formed on December 31, 1996 through the combination of TN
Technologies Inc. and a new acquisition, Modem Media.
. TN Media Inc.--This business unit is a global network of the Company's
specialists in the planning and buying of media time and space.
. TN Services Inc.--True North has established this business unit to house
all of its agency support services around the globe, handling all
financial transactions including bill paying, payroll, and accounts
receivable collections; all human resource tasks from insurance to
employee stock purchase plans; and a broad range of other support
services in the areas of legal services, travel and management of leased
facilities.
The architecture of True North is designed to free local agency management
from administration of the media buying and back office support functions and
give them leading edge technology so they can devote their full energy and
creativity to True North's most important endeavor--growing our clients'
business.
In addition to designing and creating effective advertising campaigns for
radio, television and print media, the agency brands under the True North
banner offer clients such additional services as:
. digital and interactive communications
. sales promotion and direct marketing
. yellow pages directory advertising
. healthcare advertising
. public relations
. Hispanic marketing
. market and product research
. package design
. trademark and trade name development
True North agency brands operate fully staffed offices in the United States,
Canada, Latin America, Asia and the Pacific under a number of agency brands.
The Publicis.FCB joint venture, jointly owned by True North and Publicis
Communication, operates fully staffed offices throughout Europe. These offices
handle multinational advertising and national advertising assignments.
REVENUES: True North's principal source of revenues is from its agency
brands that receive:
. commissions and fees earned on advertising placed with the various media,
and,
. commissions and fees earned for the production and preparation of
advertising.
1
<PAGE>
In addition, True North's agency brands receive fees for various other
services performed in connection with advertising, research and marketing
studies.
The Company's client list includes many well-known national and
international advertisers of consumer and industrial goods and services.
During 1996, the ten largest clients accounted for approximately 40% of
consolidated revenues: no single client accounted for as much as 10% of
consolidated revenues.
PERSONNEL: The principal asset of any service company is its people. True
North has an array of employee benefit and training programs to attract and
retain personnel considered to be industry leaders. As of December 31, 1996,
True North employed 5,022 people in its majority-owned offices: 3,070 were
employed in its domestic offices and 1,952 in its international offices. Of
the 5,022 total employees, 1,915 were engaged in the creation and production
of advertising, 1,296 in account management, 844 in media and research
activities, and 967 in administrative and clerical functions.
MARKET PRICE OF STOCK AND DIVIDEND RECORD: True North's Common Stock is
listed on the New York Stock Exchange. Its trading symbol is TNO. The
following table shows the high and low stock price of its Common Stock and
dividends paid each quarter since January 1, 1995, adjusted for the two-for-
one stock split which occurred on February 17, 1995:
<TABLE>
<CAPTION>
PRICE RANGE
----------------- DIVIDENDS
HIGH LOW DECLARED
--------- ------- ---------
1995
<S> <C> <C> <C>
1st Quarter....................................... $21 13/16 $15 3/4 $.15
2nd Quarter....................................... 20 1/4 17 5/8 .15
3rd Quarter....................................... 21 1/2 19 .15
4th Quarter....................................... 20 5/8 18 .15
1996
1st Quarter....................................... $25 $16 3/8 $.15
2nd Quarter....................................... 27 22 1/4 .15
3rd Quarter....................................... 23 3/4 16 3/4 .15
4th Quarter....................................... 24 19 1/2 .15
</TABLE>
At December 31, 1996 True North had approximately 7,300 shareholders. True
North employees owned approximately 18% of the Company's outstanding Common
Stock as of that date, either directly or through various employee benefit
plans.
UNAUDITED QUARTERLY FINANCIAL DATA: Quarterly results (in thousands) and per
share data, adjusted for the two-for-one stock split which occurred on
February 17, 1995, are as follows:
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1995
Revenues................................ $ 95,389 $110,857 $108,654 $124,153
Income (loss) before provision for
income taxes........................... (6,185) 8,117 6,136 6,683
Net income (loss)....................... (11,028) 11,356 4,194 15,131
Net income (loss) per share............. $ (.49) $ .51 $ .19 $ .67
1996
Revenues................................ $105,934 $118,429 $125,803 $142,884
Income (loss) before provision for
income taxes........................... (2,774) 94 10,475 11,419
Net income (loss)....................... (722) 6,049 6,033 16,474
Net income (loss) per share............. $ (.03) $ .26 $ .26 $ .71
</TABLE>
2
<PAGE>
FIVE-YEAR SELECTED FINANCIAL DATA: Select historical financial data (in
thousands, except per share amounts which have been adjusted for the two-for-
one stock split which occurred on February 17, 1995) are as follows:
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C> <C> <C> <C> <C>
Revenues....................... $353,340 $372,666 $403,690 $439,053 $493,050
Net income (loss).............. 21,728 25,714 30,277 19,653 27,834
Net income (loss) per share.... 1.00 1.15 1.34 .87 1.20
Dividends per share............ .60 .60 .60 .60 .60
<CAPTION>
AT DECEMBER 31,
- ---------------
<S> <C> <C> <C> <C> <C>
Working capital................ 5,310 13,745 (16,809) (46,503) (48,945)
Total assets................... 589,359 637,887 673,744 766,102 932,660
Long-term debt (includes
current portion).............. 35,652 36,255 10,885 5,601 31,783
Total liabilities.............. 406,032 437,857 465,987 544,008 691,319
Stockholders' equity........... 183,327 200,030 207,757 222,094 241,341
Book value per share........... 7.95 8.62 9.10 9.51 10.20
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS OF OPERATIONS--1996 COMPARED TO 1995
Revenues from True North's consolidated operations increased 12.3% to
$493,050 in 1996 from $439,053 in 1995. North American revenues increased
15.7% to $396,246 in 1996 while international revenues increased 0.2% to
$96,804.
During the latter part of 1995 and in 1996, True North purchased several
agencies in North America, Latin America and the Pacific Rim. These
acquisitions contributed $47,413 and $5,965 to True North's 1996 revenues and
pretax income respectively.
Salaries and benefits expenses increased 13.5% to $318,539 in 1996.
Excluding the impact of acquisitions, this category of expense increased
approximately 4% between years.
Office and general expenses increased $21,656 or 16.9% between years, higher
than the rate of revenue growth. Excluding acquisitions, the rate of growth
for this expense category was 6%. During the fourth quarter of 1996, True
North experienced high levels of legal and consulting costs related to its
continuing negotiations with Publicis (approximately $1.4 million higher than
1995). In addition, True North continued to invest in new digital advertising
technologies, resulting in higher levels of depreciation expense and
consulting costs.
As more fully explained in Note 14 to the consolidated financial statements,
True North recorded a net pretax charge of $1,356 in the fourth quarter of
1996 related to (1.) severance of two of its former executives and inside
Board members, and, (2.) the execution of a sublease for office space in Los
Angeles, (3.) offset by a gain related to the December 31, 1996 acquisition of
Modem Media.
The increase in interest expense between years is due to higher average
borrowings in 1996 primarily caused by the Company's investment spending
detailed on page 5.
The increase in other income, which primarily represents interest income, is
due to the fact that in 1996 other income includes gains recorded on an
investment in the common stock of a publicly held British public relations
agency. These gains are more fully explained in Note 2.
The effective tax rate was 50.5% in 1996 compared to 25.1% in 1995. As more
fully explained on page 5, the 1995 effective tax rate was impacted by the
favorable settlement of outstanding obligations in several tax
3
<PAGE>
jurisdictions. The 1996 effective tax rate was favorably impacted by the
reversal of $1,000 of valuation allowance related to net operating losses
previously incurred by the Company's Canadian operations. During 1996, the
Company was able to utilize these net operating loss carryforwards to offset
current taxable income. As a result, the related valuation allowance was no
longer required and so was reduced. The various elements of the tax provision
for both 1995 and 1996 are more fully explained in Note 13.
Equity income, which consists primarily of True North's share of European
operations, was $18,286 in 1996 compared to $9,165 in 1995. 1995 equity income
was depressed by the first quarter 1995 Italian restructuring provision of
$7,034. The fourth quarter of 1996 was benefited by the true-up of Italian
restructuring reserves as the Italian operations of the joint venture were
able to negotiate more favorable settlements on leases and other actions than
previously anticipated. This reserve true-up resulted in a one-time increase
in 1996 earnings of $5,759. Actual operating results for Europe were down
$3,862 primarily due to revenue declines and resultant severance actions taken
at several of the joint venture's German locations and also to the
strengthening of the U.S. dollar against European currencies.
RESULTS OF OPERATIONS--1995 COMPARED TO 1994
Revenues from True North's consolidated operations increased 8.8% from
$403,690 in 1994 to $439,053 in 1995. U.S. revenues increased 5.6% to $323,921
and foreign revenues increased 18.8% to $115,132. Excluding the impact of
acquisitions, consolidated revenues would have increased 3.2%.
During 1995, True North acquired the R/GA Digital Media Group and several
advertising agencies in North America, Latin America and the Pacific Rim.
These acquisitions contributed $22,333 and $3,628 to the Company's 1995
revenues and pretax income, respectively.
The 1995 percentage increases in salaries and employee benefit expenses and
office and general expenses were higher than the percentage increase in
consolidated revenues due to the following:
. During 1995, True North continued to build its competency in technology
by staffing new TN Technologies units in its offices and through the
acquisition of R/GA. The salaries and employee benefit expense to revenue
ratio for these units is higher than levels typical of the Company's
established advertising agencies.
. During 1995, True North embarked upon an aggressive program to upgrade
the staffing of its offices in the Asia-Pacific region. True North
believes that this region has the greatest opportunity for growth over
the next several years compared to other areas of the world. As a result,
1995 salaries and employee benefits expense include higher than normal
severance charges as the Company changed personnel and invested in new
management in several of its offices in this region.
. The rate of increase in office and general expense reflects the Company's
commitment to developing state of the art proprietary digital technology
to design and produce all forms of advertising. True North will continue
to invest in its TN Technologies units to maintain its competitive edge.
. Office and general expenses in 1995 were favorably impacted by the
reduction of $1,100 of accruals established in prior years which were no
longer deemed to be necessary.
The provision for doubtful accounts was a credit of $290 in 1995 due to the
favorable settlement of a $600 trade receivable which had previously been
fully reserved.
As more fully explained in Note 14, True North recorded a pretax charge of
$10,185 in the first quarter of 1995 related to the closure of an FCB
operation in the Pacific region and to accrue for charges related to its
disputes with Publicis. The majority of this amount was paid in 1995. The
remainder was paid in 1996.
The increase in interest expense between years is due to higher average
borrowings in 1995 as well as higher average interest rates.
4
<PAGE>
The decline in other income, which in 1995 primarily represents interest
income, is due to the fact that in 1994 other income includes gains recorded on
investments in an interest rate swap and the common stock of a publicly held
British public relations agency. These gains are more fully explained in Note 2.
The effective tax rate was 25.1% in 1995 compared to 44.6% in 1994. During
1995, the Company settled outstanding obligations in several tax jurisdictions
on a favorable basis. As a result, True North recorded a reversal of tax
reserves amounting to $6,214 in 1995. The various elements of the tax provision
for both 1994 and 1995 are more fully explained in Note 13.
Equity income, which consists primarily of True North's share of European
operations, was $9,165 in 1995 compared to $10,203 in 1994. In the first quarter
of 1995, Publicis.FCB Europe recorded a charge related to the previously
disclosed restructuring of its Italian operations. The restructuring was
substantially completed in 1996. True North's share of this charge, which is
reflected as a reduction of equity income, was $7,034. Equity income also
includes a reversal of a previously established estimation reserve related to
the Company's European investment amounting to $1,306. Excluding these one-time
items, True North's share of European operations increased by approximately
$4,700 between years: $1,500 of this improvement was due to favorable currency
exchange rates in 1995 as compared to 1994, and the remainder of this
improvement was due to improvements in the operating results of its Swiss,
British and French operating units.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities have historically represented the
Company's primary source of funding for investment activities. Over the past
five years True North has emphasized the timely collection of accounts
receivable and the careful management of its accounts receivable to accounts
payable ratio, resulting in an optimum accounts receivable to accounts payable
ratio at the end of 1994. During 1995 and 1996, True North 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 that it
can bill to its clients once the related work is completed. As a result of this
shift in client spending patterns, over the last two years True North's accounts
receivable to accounts payable ratio increased as did its investment in
expenditures billable to clients, resulting in lower cash flows from operating
activities. True North continues to review its billing and payment procedures
and believes that this change in client spending patterns will not result in
further significant increases in its accounts receivable to accounts payable
ratio.
The pace of True North's investment spending continues to grow as the
Company has focused its efforts in two areas:
. Capital expenditures--the 1995 increase in capital expenditures was driven
by the relocation of True North's New York office and by the Company's
efforts to maintain its competitive edge in providing digital marketing
services. As anticipated, capital expenditures in 1996 declined by $9,474
from 1995 levels because the New York office move was completed in 1995. In
the future the Company anticipates that capital expenditures will be at
levels comparable to 1996 (capital spending for 1996 was $17,695) due to
True North's commitment to maintain its competitive edge in providing
digital marketing services. True North had no material commitments for
capital expenditures at December 31, 1996.
. Purchase of subsidiaries and interests in affiliated companies--True North
continues to contemplate strategic acquisitions to enhance its worldwide
network. During the past three years, True North completed the acquisition
of several agencies in North America, Latin America and the Pacific rim.
These acquisitions were financed through a combination of existing cash
balances and the issuance of short-term borrowings. As discussed in Note 16,
on December 31, 1996 True North acquired a 64% interest in Modem Media in
exchange for 1,121 shares of its common stock, a 36% interest in the assets
and operations of TN Technologies Inc., and a contingent obligation to pay
$16 million in cash and $4 million in True North common stock in the event
that TN Technologies Holding Inc. (the combined operations of Modem Media
and TN Technologies Inc.) is able to complete an initial public offering of
its common stock. Future acquisitions may be financed through a combination
of cash from existing operations, and the issuance of stock and long-term
borrowings.
5
<PAGE>
True North liquidated the majority of its marketable securities portfolio
during 1995 and issued short-term borrowings during 1995 and 1996 to finance
its investment activities. In addition, as described in Note 6, it improved
its access to long-term financing by entering into a $90 million Revolving
Credit Agreement during 1995 and a $25 million three year term loan during
1996. As further discussed in Note 6, at December 31, 1996 True North had
committed available lines of credit under its Revolving Credit Agreement in the
amount of $90,000. In addition, the Company had available at various banks
uncommitted lines of credit aggregating approximately $118,688 at December 31,
1996, of which $38,990 was unused.
True North has paid cash dividends at an annual rate of $.60 per share over
the past nine years. Determination of the payment of dividends is made by the
Company's Board of Directors on a quarterly basis. True North anticipates that
its cash flow from operations will be adequate to continue payment of
dividends at similar levels in 1997.
PUBLICIS RELATIONSHIP
As previously disclosed, during 1996 True North continued to negotiate a
resolution to its outstanding disputes with Publicis, its partner in their
European joint venture. These negotiations continued until mid-February 1997.
On February 19, 1997, True North and Publicis announced an amicable
settlement of their disputes through the signing of a Memorandum of Agreement
(the "MOA"). The intent of this document is to establish a new legal and
business relationship between the parties so that all disputes between the
parties are resolved and each is free to create its own separate, independent
agency network. A copy of this document is filed as an exhibit to True North's
1996 Form 10-K.
Pursuant to the MOA, Publicis has agreed to transfer its ownership of
certain agencies in France, the United Kingdom, Portugal and Greece to True
North. In exchange, True North has agreed to exchange its 49% interest in the
joint venture for a 26.5% ownership in an newly structured and larger Publicis
(which will, by the terms of the MOA, own 100% of the remaining agencies of
the joint venture). In addition, subject to terms to be agreed at a later
date, True North has agreed to offer to sell to Publicis its ownership in
certain of its second brand agencies in South Africa and Germany, at least a
controlling interest in certain of its second brand agencies in Australia and
New Zealand, and to use its best efforts to assist Publicis in its efforts to
establish agencies in Thailand, India and Argentina.
The MOA contains certain terms intended to provide True North with a means
of selling its resulting equity interest in Publicis either in a public
offering or based upon appraised market values and other specified formulas
contained in the MOA. Under the terms of the MOA, Publicis has agreed to use
its best efforts to cause its common stock to be listed on a major European
stock exchange by no later than December 31, 1998.
The MOA also contains certain provisions addressing several other issues
including, but not limited to: the termination of all adversarial proceedings
by both parties upon execution of a final definitive agreement referred to
below; the use and ownership of each agency's brandnames by the respective
parties; the payment of certain past and future costs incurred by each party
to service the clients of the other party; agreement to continue servicing
clients in markets where one party, but not the other, has established an
office; and, provisions related to the exchange of financial and other
information.
Although the MOA provides that it is legally binding, it recognizes that
certain transactions and other provisions and terms contemplated in the MOA
will require execution of final definitive documents.
Income derived for its shareholdings in Publicis and the European joint
venture have represented a significant percentage of True North's net income
in recent years. The terms and provisions of the MOA are designed to minimize
the impact on ongoing earnings from operations of either party. True North
believes that, if all of the transactions contemplated by the MOA occur, the
earnings impact on its ongoing operations will not be material. In addition,
based upon internally developed valuations of the various operations and
investments which True North will acquire or sell under the terms of the MOA,
the Company believes that the consummation of all of these transactions will
not result in a material gain or loss except for possible tax consequences
discussed below.
6
<PAGE>
However, the ultimate gain or loss recorded on these transactions will be
determined based upon the results of definitive valuation studies performed by
independent valuation experts. In addition, because the MOA contemplates the
restructuring of the legal investments of parties which are subject to
different tax jurisdictions it is impossible to predict, with any degree of
certainty, the potential tax consequences of these transactions because the
actual legal form of the transactions will be determined by the execution of
the final definitive documents referred to above. Even so, based upon
preliminary analysis of these transactions, True North believes that it may
record a material charge to its 1997 earnings related to tax payments arising
from the consummation of these transactions. True North also believes that
these tax consequences will not be material to its consolidated financial
position.
INCLUSION OF FORWARD-LOOKING INFORMATION
Certain statements under the captions "About True North" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of Section
21E(i)(1) of the Exchange Act. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results of the Company to be materially different from any future results
expressed or implied by these statements. Such factors include, among other
things, the following: general economic and business conditions, changes in
demand for the Company's services, changes in competition, the ability of the
Company to integrate acquisitions or complete future acquisitions, interest
rate fluctuations, dependence upon and availability of qualified personnel,
and changes in governmental regulation. In light of these and other
uncertainties, the forward-looking statements included in this document should
not be regarded as a representation by the Company that the Company's plans
and objectives will be achieved.
7
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $403,690 $439,053 $493,050
Costs and Expenses:
Salaries and employee benefits................. $248,955 $280,619 $318,539
Office and general expenses.................... 116,903 128,459 150,115
Provision for doubtful accounts................ 781 (290) 625
Unusual transactions........................... -- 10,185 1,356
Interest expense............................... 7,027 8,087 8,585
Other (income) expense, net.................... (5,972) (2,758) (5,384)
-------- -------- --------
$367,694 $424,302 $473,836
-------- -------- --------
Income before Provision for Income Taxes......... $ 35,996 $ 14,751 $ 19,214
Provision for Federal, Foreign and State Income
Taxes........................................... 16,068 3,705 9,697
-------- -------- --------
$ 19,928 $ 11,046 $ 9,517
Minority Interest Income (Expense)............... 146 (558) 31
Equity in Net Earnings of Affiliated Companies... 10,203 9,165 18,286
-------- -------- --------
Net Income....................................... $ 30,277 $ 19,653 $ 27,834
======== ======== ========
Net Income Per Share............................. $ 1.34 $ .87 $ 1.20
======== ======== ========
Weighted Average Number of Common and Common
Equivalent Shares Outstanding................... 22,678 22,542 23,254
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1995 1996
------ -------- --------
<S> <C> <C>
Current Assets:
Cash..................................................... $ 48,408 $ 45,946
Short-term investments and marketable securities......... 8,573 11,050
Accounts receivable, net of reserve for doubtful accounts
of $4,657 in 1995 and $4,956 in 1996.................... 333,038 402,786
Other current assets..................................... 39,970 44,464
-------- --------
$429,989 $504,246
-------- --------
Property and Equipment:
Land and buildings....................................... $ 443 $ 412
Leasehold improvements................................... 37,872 38,447
Furniture and equipment.................................. 99,809 120,238
-------- --------
$138,124 $159,097
Less--Accumulated depreciation and amortization.......... (83,498) (97,728)
-------- --------
$ 54,626 $ 61,369
-------- --------
Other Assets:
Goodwill, net of accumulated amortization of $28,702 in
1995 and $34,149 in 1996................................ $ 84,934 $151,640
Investment in affiliated companies....................... 187,456 202,397
Other assets............................................. 9,097 13,008
-------- --------
$281,487 $367,045
-------- --------
$766,102 $932,660
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable......................................... $371,767 $417,054
Short-term bank borrowings............................... 49,982 79,698
Liability for federal and foreign taxes on income........ 1,810 2,312
Current portion of long-term debt........................ 199 270
Accrued expenses......................................... 52,734 53,857
-------- --------
$476,492 $553,191
-------- --------
Noncurrent Liabilities:
Long-term debt........................................... $ 5,402 $ 31,513
Liability for deferred compensation...................... 36,538 44,501
Other noncurrent liabilities............................. 25,576 37,727
Obligation to Modem Media partners....................... -- 24,387
-------- --------
$ 67,516 $138,128
-------- --------
Stockholders' Equity:
Preferred stock, $1.00 par value, authorized 100 shares,
none issued............................................. $ -- $ --
Common stock, 33 1/3c par value, authorized 50,000
shares, issued 23,490 in 1995 and 23,872 in 1996........ 7,830 7,957
Paid-in capital.......................................... 116,483 123,740
Retained earnings........................................ 105,800 119,399
Less--Treasury stock, at cost: 128 shares in 1995; 204 in
1996.................................................... (2,661) (4,553)
Cumulative translation adjustment........................ (5,358) (5,202)
-------- --------
$222,094 $241,341
-------- --------
$766,102 $932,660
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
9
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON PAID-IN RETAINED TREASURY TRANSLATION
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT
------ -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.. $7,768 $114,641 $ 83,729 $ (1,021) $(5,087)
Net income.................. -- -- 30,277 -- --
Dividends................... -- -- (13,995) -- --
Common stock issued for
stock options.............. 62 2,018 -- 336 --
Common stock purchased by
Stock Purchase Plan........ -- 1,033 -- 3,306 --
Treasury stock purchased.... -- -- -- (16,281) --
Other common stock
issuances.................. -- 101 -- 7 --
Translation adjustment...... -- -- -- -- 863
------ -------- -------- -------- -------
Balance at December 31, 1994.. $7,830 $117,793 $100,011 $(13,653) $(4,224)
Net income.................. -- -- 19,653 -- --
Dividends................... -- -- (13,864) -- --
Common stock issued for
stock options.............. -- (369) -- 1,301 --
Common stock purchased by
Stock Purchase Plan........ -- (941) -- 9,948 --
Treasury stock purchased.... -- -- -- (257) --
Other common stock
issuances.................. -- -- -- -- --
Translation adjustment...... -- -- -- -- (1,134)
------ -------- -------- -------- -------
Balance at December 31, 1995.. $7,830 $116,483 $105,800 $ (2,661) $(5,358)
Net income.................. -- -- 27,834 -- --
Dividends................... -- -- (14,235) -- --
Common stock issued for
stock options.............. 59 2,165 -- 859 --
Common stock purchased by
Stock Purchase Plan........ 68 5,092 -- 3,273 --
Treasury stock purchased.... -- -- -- (6,024) --
Translation adjustment...... -- -- -- -- 156
------ -------- -------- -------- -------
Balance at December 31, 1996.. $7,957 $123,740 $119,399 $ (4,553) $(5,202)
====== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
10
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES:
Net income..................................... $ 30,277 $ 19,653 $ 27,834
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Gain on sale of assets....................... -- -- (5,800)
Provision for doubtful accounts.............. 781 (290) 625
Depreciation and amortization................ 14,883 17,783 18,976
Unrealized (gain) loss on Shandwick
investment.................................. (1,877) 424 (1,440)
Deferred compensation expense................ 2,794 4,030 7,963
Deferred income taxes........................ 26 (4,583) (1,935)
Equity earnings of affiliates................ (10,203) (9,165) (18,286)
Decrease (increase) in accounts receivable... (19,498) (56,897) (53,338)
Increase (decrease) in accounts payable...... 51,232 43,185 15,794
Decrease (increase) in other current assets.. 2,494 (10,156) (1,387)
Increase (decrease) in accrued expenses...... 2,313 (6,559) 8,889
Dividends received from affiliated companies. 1,890 6,321 3,044
Other........................................ 741 5,721 (1,730)
-------- -------- --------
$ 75,853 $ 9,467 $ (791)
-------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Decrease (increase) in short-term investments
and marketable securities..................... $(11,452) $ 43,468 $ (661)
Increase (decrease) in liability for cash
overdrafts.................................... (764) 1,793 6,061
Increase (decrease) in short-term bank
borrowings.................................... 2,794 42,118 29,716
Additions to long-term debt.................... 34 -- 25,264
Repayments of long-term debt................... (25,904) (5,393) --
Common stock purchased by Stock Purchase Plan.. 4,339 9,007 8,433
Stock option exercises......................... 2,416 932 3,083
Cash dividends paid............................ (13,995) (13,864) (14,235)
Common stock purchased for treasury............ (16,281) (257) (6,024)
-------- -------- --------
$(58,813) $ 77,804 $ 51,637
-------- -------- --------
CASH PROVIDED BY (USED FOR) INVESTMENT
ACTIVITIES:
Purchase of interest in affiliated companies... $ (304) $ (8,114) $ (728)
Capital expenditures........................... (9,716) (27,169) (17,695)
Purchase of subsidiaries....................... (8,533) (28,178) (34,885)
-------- -------- --------
$(18,553) $(63,461) $(53,308)
-------- -------- --------
Increase (decrease) in cash...................... (1,513) 23,810 (2,462)
Balance at beginning of year..................... 26,111 24,598 48,408
-------- -------- --------
Balance at end of year........................... $ 24,598 $ 48,408 $45,946
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
11
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN 000'S, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--The Company (True North) is a global advertising and
communications business. Pages 1 and 2 of this Annual Report contain a more
comprehensive discussion of the nature of True North's operations.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and all wholly owned and majority-owned
subsidiaries. The Company uses the equity method of accounting to record its
investments in 20% to 49% owned affiliated companies.
Use of Estimates--The preparation of these financial statements required the
use of certain estimates by management in determining the Company's assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
Income Recognition--True North records revenue when media placements appear
and production costs are billable. Salaries and other agency costs are charged
to expense at the time incurred.
Property and Depreciation--True North computes depreciation principally
using the straight line method over the estimated useful life of the related
asset. The Company amortizes leasehold improvements over the lesser of the
estimated useful life of the asset or the life of the lease.
Income Taxes--Effective January 1, 1992, True North adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes".
At December 31, 1996, unremitted earnings of foreign subsidiaries and
affiliated companies were approximately $99,225. The Company does not provide
deferred taxes on these earnings because it permanently reinvests such
earnings in these operations.
Goodwill--True North amortizes goodwill over periods from ten to forty
years. Periodically, the Company reviews and, if necessary, adjusts the
carrying value for goodwill based upon current facts and circumstances and its
best estimate of undiscounted future operating earnings of the related
business. Amortization of goodwill, including goodwill of affiliated
companies, amounted to $5,422 in 1994, $6,336 in 1995, and $7,568 in 1996.
Stock Split--On February 17, 1995, the Company paid a 100% stock dividend to
stockholders of record as of January 6, 1995. All per share and share data in
the accompanying financial statements and footnotes have been adjusted to give
effect to this stock dividend.
Earnings Per Share--Earnings per share are computed using the weighted
average number of common shares outstanding during the year. The computation
also reflects the potential issuance of shares under True North's stock option
plans.
12
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES
The Company's current investment portfolio consists of short-term
investments (principally time deposits and money-market funds) and marketable
securities. At December 31, 1995 and 1996, short-term investments and
marketable securities were:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Short-term investments.................................... $5,101 $ 6,556
5% investment in Shandwick, plc........................... 3,472 4,494
------ -------
$8,573 $11,050
====== =======
</TABLE>
During 1994, the Company converted its non-marketable preferred stock
investment in Shandwick, plc, a publicly-held global public relations company,
to common shares of this company. Management designated its investment in the
common shares of Shandwick, plc as "trading securities". In accordance with
the provisions of SFAS No. 115, "Accounting for Certain Debt Investments in
Debt and Equity Securities", this investment was reclassified to short-term
investments and marketable securities and gains of $1,877 and $1,440 in 1994
and 1996 and a loss of $424 in 1995 were recorded to reflect this investment
at quoted market value at each year-end.
During 1993, True North entered into an interest rate swap contract with a
bank which became effective in June 1994. Under this arrangement, the Company
receives LIBOR and pays a fixed rate of 6.1% on a notional amount of $25,000
from June 1994 to June 1999. Because this interest rate swap contract did not
operate as an interest rate hedge against the Company's debt at December 31,
1994, the Company recorded a gain of $1,600 on this instrument to record its
fair market value at that date. During 1995, the Company designated this
financial instrument as a hedge against $25,000 of its borrowings. As a
result, the recorded value of this financial instrument was reclassified to
other assets and is being amortized as an element of interest expense over the
remaining life of the contract. At December 31, 1996, the carrying and fair
market values of this investment were $538 and $(134), respectively.
3. OTHER CURRENT ASSETS
At December 31, 1995 and 1996, other current assets consisted of:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Expenditures billable to clients......................... $28,362 $31,573
Prepaid expenses......................................... 11,608 12,891
------- -------
$39,970 $44,464
======= =======
</TABLE>
4. INVESTMENT IN AFFILIATED COMPANIES
The Company's investment in affiliated companies consists of:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
21% interest in Publicis Communication................. $ 73,179 $ 76,495
49% interest in Publicis.FCB B.V....................... 103,247 114,861
Other.................................................. 11,030 11,041
-------- --------
$187,456 $202,397
======== ========
</TABLE>
13
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized financial information for affiliated companies is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current assets.......................................... $888,358 $898,847
Noncurrent assets....................................... 226,779 216,964
Current liabilities..................................... 808,996 791,672
Long-term debt.......................................... 24 16
Other noncurrent liabilities............................ 82,774 86,136
Shareholders' equity.................................... 223,343 237,987
Revenues................................................ 617,111 626,584
Pretax income........................................... 62,670 73,212
Net income.............................................. 28,945 39,915
</TABLE>
The Company's equity in the net tangible assets of these affiliated
companies was $123,692 at December 31, 1995 and $132,280 at December 31, 1996.
Publicis Conseil, a French advertising agency, is jointly owned by Publicis
Communication (80%) and Publicis.FCB B.V. (20%). Publicis Conseil had total
assets of $411,984 and $397,982 at December 31, 1995 and 1996, and total net
income of $10,913, $14,307 and $12,799 for the years ended December 31, 1994,
1995, and 1996. True North's total investment in Publicis Conseil was
approximately 3% of its assets at December 31, 1995 and 1996. True North's
share of the net earnings of Publicis Conseil was $2,959, $3,310 and $3,275 in
1994, 1995, and 1996.
5. ACCOUNTS PAYABLE
Accounts payable includes the liability for cash overdrafts which represents
checks outstanding in excess of balances maintained at the respective banks.
The liability for cash overdrafts was $35,042 and $44,856 at December 31, 1995
and 1996, respectively.
6. SHORT-TERM BANK BORROWINGS AND LONG-TERM DEBT
Short-term bank borrowings consist principally of amounts borrowed under
domestic and international bank overdraft facilities, lines of credit and
multicurrency credit arrangements. Average aggregate short-term borrowings
were $50,381 in 1995 and $71,122 in 1996, and the maximum amount outstanding
was $89,138 in 1995 and $124,558 in 1996. The weighted average interest rate
for short-term borrowings was 5.6%, 7.0% and 6.4% in 1994, 1995 and 1996,
respectively.
On December 21, 1995 the Company entered into a Revolving Credit Agreement
totaling $90,000 with several banks. This agreement, which expires on December
21, 1998, provides that True North may obtain loans bearing interest at a bid
rate (LIBOR or Fixed), a Reference Rate, or the Eurodollar rate plus a spread,
and requires a facility fee of .175% to .300%, depending upon the Company's
financial performance. During 1995, there were no borrowings under this
agreement. During 1996, the Company borrowed $12,000 under this agreement for
a six month period. These borrowings were repaid prior to December 31, 1996.
On May 24, 1996 the Company entered into a $25 million three year term loan
with two of its banks. The interest rate on this loan is fixed at 6.87%.
In addition to these agreements, the Company had available at various banks
uncommitted lines of credit aggregating approximately $118,688 at December 31,
1996, of which $38,990 was unused. These other lines of credit are subject to
annual renewal and may be withdrawn at the option of the various banks. There
are no commitment fees or compensating balance requirements under these
arrangements. Interest rates are negotiated at the time of each borrowing.
14
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Three Year Term Loan..................................... $ -- $25,000
Other notes and obligations.............................. 5,601 6,783
------ -------
$5,601 $31,783
Less portions due within one year........................ (199) (270)
------ -------
$5,402 $31,513
====== =======
</TABLE>
Scheduled maturities of long-term debt are $270, $6,513, and $25,000 in
1997, 1998, and 1999, respectively.
The long-term debt agreements and Revolving Credit Agreement contain various
restrictive covenants and conditions which include, but are not limited to:
. The Company must maintain a minimum net worth of $165,000, plus 50% of
Adjusted Net Income (as defined) from June 30, 1995, a current ratio of
at least .75, an indebtedness (as defined) to capitalization ratio of no
greater than .4, and a fixed charge coverage ratio of at least 1.5.
At December 31, 1996, the Company was in compliance with all covenants and
conditions related to these agreements.
At December 31, 1996, the Company estimates that the market value of its
debt is not materially different from its financial statement carrying value.
The fair value of this debt was estimated using quoted market prices or
discounted future cash flows.
7. CONTINGENCIES
True North is a party to several lawsuits incidental to its business. It is
not possible at the present time to estimate the ultimate liability, if any,
of the Company with respect to such litigation; however, management believes
that any ultimate liability will not be material in relation to the Company's
consolidated results of operations or financial position.
8. STOCK-BASED COMPENSATION PLANS
The Company has established various stock option plans for officers and key
employees. These plans provide for the issuance of options to purchase common
shares at fair market value on the date of grant. Options vest immediately, or
after three or five years and expire after ten years. The Company may grant
options for up to 3,807 shares under these plans. The Company has granted
options on 3,343 shares through December 31, 1996.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for stock
options awarded under these plans been determined consistent with FASB
Statement No. 123, the Company's net income and earnings per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1995 1996
------- -------
<C> <S> <C> <C>
Net Income: As Reported................................. $19,653 $27,834
Pro Forma................................... $19,164 $26,780
Primary EPS: As Reported................................. .87 1.20
Pro Forma................................... .85 1.15
</TABLE>
15
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
A summary of the status of the Company's stock option plans at December 31,
1994, 1995 and 1996 and changes during the years then ended is presented in
the following table and narrative:
<TABLE>
<CAPTION>
1994 1995 1996
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 1,659 $13.38 2,033 $16.37 2,592 $17.19
Granted........................ 651 22.57 759 19.09 632 19.49
Exercised...................... (202) 11.95 (62) 12.07 (205) 13.39
Forfeited...................... (75) 15.93 (138) 17.85 (169) 19.33
----- ----- -----
Outstanding at end of year..... 2,033 $16.37 2,592 $17.19 2,850 $17.85
===== ====== ===== ====== ===== ======
Exercisable at end of year..... 684 $12.87 959 $14.46 1,241 $16.14
===== ====== ===== ====== ===== ======
Weighted average fair value of
options granted............... $ 6.41 $ 5.79
====== ======
</TABLE>
1,223 of the 2,850 options outstanding at December 31, 1996 have exercise
prices between $9.44 and $19.13, with a weighted average exercise price of
$14.41 and a weighted average remaining contractual life of 5.22 years. 885 of
these options are exercisable. The remaining 1,627 options have exercise
prices between $19.25 and $25.38, with a weighted average price of $20.42 and
a weighted average remaining contractual life of 8.36 years. 356 of these
options are exercisable.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for 1995 and 1996: risk-free interest rates of 7.18%
and 5.67%; expected dividend yields of 2.9%; expected life of 10 years; and
expected volatility of 22.9% and 23.9%.
9. SHAREHOLDERS' RIGHTS PLAN
True North has a Shareholders' Rights Plan that is designed to protect
shareholders from unfair or coercive takeover practices. Under this plan, one
preferred stock purchase right exists for each outstanding share of common
stock. The rights, which expire in November 1998, are exercisable only if a
person or group (excluding True North) acquires 20% (25% in the case of
Publicis Communication and its affiliates) or more of True North's common
stock or announces a tender offer which would result in ownership of 30% or
more of True North's common stock. Each right entitles the holder to purchase
1/2,000 of a share of Series A Junior Participating Preferred Stock
("preferred stock") of the Company at a purchase price of $42.50, subject to
adjustment under certain conditions. At December 31, 1996, 30 shares of the
True North's unissued preferred stock were reserved for issuance upon exercise
of these rights.
Subject to certain conditions and limitations, in the event that True North
is acquired by a person or group, these rights (which have not otherwise been
exercised to acquire True North's preferred stock) entitle the holder to
acquire the common stock of the surviving entity at approximately 50% of fair
market value.
The Board of Directors has the flexibility to (i) redeem outstanding rights
at a rate of $.005 per right, (ii) adjust the thresholds at which these rights
become exercisable, and, (iii) exclude other persons or groups from triggering
the exercisability of these rights.
16
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. DISTRIBUTION OF EARNINGS AND ASSETS
Information about the Company's operations in different geographic areas for
1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
U.S...................................... $306,737 $323,921 $373,058
Foreign.................................. 96,953 115,132 119,992
-------- -------- --------
$403,690 $439,053 $493,050
======== ======== ========
Income (Loss) before Provision for Taxes:
U.S...................................... $ 40,018 $ 23,441 $ 26,195
Foreign.................................. (4,022) (8,690) (6,981)
-------- -------- --------
$ 35,996 $ 14,751 $ 19,214
======== ======== ========
Net Income:
U.S...................................... $ 23,236 $ 18,468 $ 16,007
Foreign.................................. 7,041 1,185 11,827
-------- -------- --------
$ 30,277 $ 19,653 $ 27,834
======== ======== ========
Identifiable Assets:
U.S...................................... $343,464 $395,676 $492,188
Foreign.................................. 330,280 370,426 440,472
-------- -------- --------
$673,744 $766,102 $932,660
======== ======== ========
</TABLE>
11. RETIREMENT AND OTHER EMPLOYEE BENEFIT PLANS
True North and participating U.S. subsidiaries have a profit sharing plan, a
supplemental pension plan, and a stock purchase plan.
The profit sharing and supplemental pension plans are integrated to provide,
for employees who retire at age 65 with 30 or more years of service, annual
retirement benefits of 45% of the highest five-year average compensation
during their last ten years of full-time employment. Under the integration
formula, the profit sharing plan provides the principal funding for employee
retirement benefits. If a retiring employee's profit sharing balance is not
sufficient to fund the minimum benefit described above, the pension plan
provides the necessary supplemental funding to bring the total benefit up to
the level guaranteed by the plans.
True North's annual contribution to the profit sharing plan is based upon
income, as defined in the plan, but may not exceed the amount permitted as
deductible expense under the Internal Revenue Code. Under the stock purchase
plan, True North matches 50% of employee contributions up to the individual
employee limits deductible under the Internal Revenue Code. The combined
profit sharing and stock purchase plan provisions were $10,660 in 1994, $9,264
in 1995, and $8,007 in 1996.
Net pension costs for the supplemental pension plan for 1994, 1995, and 1996
included the following components:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Service cost--benefits earned during the year........... $104 $110 $152
Interest cost on projected benefit obligation........... 216 212 190
Actual return on plan assets............................ (143) (121) (150)
Net amortization and deferral........................... 38 40 39
---- ---- ----
Total pension cost...................................... $215 $241 $231
==== ==== ====
</TABLE>
17
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status and amounts recognized for
the supplemental pension plan at December 31, 1995 and 1996:
1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits $2,180 $2,063
Nonvested benefits 356 161
Additional amounts related to projected wage increases 180 460
------ ------
Actuarial present value of projected benefit obligation $2,716 $2,684
Plan assets at fair value 1,582 1,818
Projected benefit obligation in excess of plan assets $1,134 $ 866
Unrecognized prior service cost 367 338
Unrecognized net loss 292 57
Unrecognized net transition obligation 127 116
------ ------
Accrued periodic pension cost $ 932 $ 469
====== ======
</TABLE>
A salary increase rate of 6% and an investment return rate of 8% were used in
1994, 1995, and 1996. Discount rates of 8%, 8%, and 7.25%, were used in 1994,
1995, and 1996, respectively.
The Company has entered into agreements whereby certain employee directors
and other employees are or will be eligible for part-time employment and/or
deferred compensation upon retirement from full-time employment. The provisions
for these agreements, which are charged to income over the employment period of
these individuals, were $5,949 in 1994, $6,913 in 1995, and $5,321 in 1996.
True North provides limited postretirement medical and life insurance
benefits to employees who retire with at least ten years of service prior to
age 65. Prior to January 1, 1993, the Company accounted for such benefits on
the cash basis. In 1993, the company adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions", on a
prospective basis. Under this method, the Company is amortizing the actuarial
present value of the accumulated postretirement benefit obligation at January
1, 1993 over a twenty year period. In addition, the Company provides for
current year service costs, interest costs and actuarially determined plan
gains and losses.
The components of expense for these postretirement benefits for 1994, 1995,
and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Service cost (benefits earned during the year)............ $353 $294 $292
Interest costs on accumulated postretirement benefit
obligation............................................... 321 372 302
Net amortization and deferral............................. 247 147 84
---- ---- ----
$921 $813 $678
==== ==== ====
</TABLE>
The following table sets forth the funded status and amounts recognized for
True North's postretirement benefit plans in its consolidated balance sheet at
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees............................................... $1,494 $1,324
Fully eligible active participants..................... 498 1,902
Other active plan participants......................... 1,860 874
------ ------
Total accumulated postretirement benefit obligation.... $3,852 $4,100
Plan assets at fair value................................ -- --
------ ------
Accumulated postretirement benefit obligation in excess
of plan assets.......................................... $3,852 $4,100
Unrecognized net transition obligation................... (4,205) (3,958)
Unrecognized net gain.................................... 2,743 2,944
------ ------
Accrued postretirement benefit cost...................... $2,390 $3,086
====== ======
</TABLE>
18
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A discount rate of 7%, 8.5%, and 8% was used in 1994, 1995 and 1996,
respectively. The rate of increase in covered medical benefits used to
determine accumulated postretirement benefits was 12% in 1994, 11% in 1995,
and 10% in 1996. This rate is assumed to decrease by 1% per annum to 6% in
2000 and remain constant thereafter. The medical benefits cost trend rate
assumption does not have a significant effect on the amounts reported. For
example, a 1% increase in the medical benefits cost trend rate would increase
the accumulated postretirement benefit obligation at December 31, 1996 by $360
and 1996 expense by $76.
12. LEASE OBLIGATIONS
True North leases substantially all of its office facilities under operating
leases. Net rental expense on these leases was $40,219 in 1994, $40,279 in
1995 and $43,897 in 1996, after deducting sublease income of $6,476, $12,571,
and $12,494, respectively.
At December 31, 1996, the future minimum rental obligations for these leases
(net of sublease income of approximately $65,872) is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1997..................................... $ 34,015
1998..................................... 32,092
1999..................................... 26,259
2000..................................... 23,691
2001..................................... 21,970
Thereafter............................... 135,980
</TABLE>
13. FEDERAL, FOREIGN AND STATE INCOME TAXES
The domestic and foreign components of pretax income are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Domestic......................................... $35,344 $17,394 $18,255
Foreign.......................................... 652 (2,643) 959
------- ------- -------
$35,996 $14,751 $19,214
======= ======= =======
</TABLE>
The provision for taxes on income consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
U.S.--currently payable.......................... $10,674 $4,088 $ 8,284
--deferred..................................... 26 (4,583) (1,925)
Foreign.......................................... 913 875 2,127
State............................................ 4,455 3,325 1,211
------- ------ -------
$16,068 $3,705 $ 9,697
======= ====== =======
</TABLE>
Deferred and prepaid tax expense results from temporary differences in the
recognition of revenue and expense for tax and financial reporting purposes.
Deferred tax benefits (liabilities) as of December 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
1995 1996
------ -------
<S> <C> <C>
Deferred compensation.................................... $8,821 $ 9,752
Lease reserves........................................... 5,982 8,771
Depreciation and amortization............................ (1,360) (1,724)
Safe harbor leases....................................... (4,838) (4,453)
Tax loss carryforwards................................... 5,628 5,152
Other, net............................................... (5,851) (5,510)
Valuation allowances..................................... (2,412) (1,412)
------ -------
$5,970 $10,576
====== =======
</TABLE>
19
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net current deferred taxes as of December 31, 1995 and 1996 were $5,161 and
$3,751, respectively. Net non-current deferred taxes were $809 and $6,825,
respectively. Valuation allowances have been provided for potentially
unrealizable foreign tax loss carryforwards.
During 1995, True North settled outstanding obligations in several tax
jurisdictions on a favorable basis. As a result, True North recorded a
reversal of tax reserves amounting to $6,214 in 1995. The 1996 effective tax
rate was favorably impacted by the reversal of $1,000 of valuation allowance
related to net operating losses previously incurred by the Company's Canadian
operations. During 1996 True North was able to utilize these net operating
loss carryforwards to offset current taxable income. As a result, the related
valuation allowance was no longer required and so was reduced. The
reconciliation of the U.S. statutory rate to the effective income tax rate is
as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ----- ----
<S> <C> <C> <C>
At statutory rate..................................... 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit............... 8.0 14.6 4.1
Higher (lower) aggregate effective tax rate on foreign
operations........................................... (0.1) 6.5 5.2
Tax effect of nondeductible amortization.............. 3.3 10.3 10.2
Reversal of excess tax reserves....................... -- (42.1) --
Other................................................. (1.6) .8 (4.0)
---- ----- ----
44.6% 25.1% 50.5%
==== ===== ====
</TABLE>
14. UNUSUAL TRANSACTIONS
In the first quarter of 1995, the Company recorded a pretax charge of
$10,185. Of this amount, $3,560 related to the closure of an FCB operation in
the Pacific region and $6,625 represented the accrual of charges related to
its disputes with Publicis. Additionally, included in the line, "Equity in Net
Earnings of Affiliated Companies", was a charge of $7,034 related to the
previously disclosed restructuring of the Italian operations of the
Publicis.FCB European joint venture.
In the fourth quarter of 1996, the Company recorded a net pretax charge of
$1,356. During the fourth quarter of 1996, the Company severed two of its
executives and Board members resulting in a pretax charge of $4,169.
Additionally, the Company executed a sublease for office space in Los Angeles
resulting in a pretax charge of $2,987. These charges were partially offset by
the $5,800 pretax gain which the Company recorded related to the acquisition
of Modem Media (see Note 16). Additionally, included in the line, "Equity in
Net Earnings of Affiliated Companies", is a credit of $5,759 related to the
true-up of Italian restructuring reserves, established in 1994 and 1995, as
the Italian operations of the joint venture were able to negotiate more
favorable settlements on leases other actions than previously anticipated.
This credit was partially offset by a charge against 1996 earnings of
approximately $1,900 related to severance actions taken at several of the
joint venture's German operations.
15. SUPPLEMENTAL CASHFLOW DATA
Interest and taxes paid in 1994, 1995, and 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Interest.......................................... $ 6,085 $ 6,507 $ 6,529
Taxes............................................. 13,919 10,868 14,588
</TABLE>
20
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
True North maintains only minimal cash balances in its foreign subsidiaries.
As a result, the impact of changes in currency rates on True North's cash
balances is insignificant.
16. ACQUISITIONS
During 1994, 1995 and 1996, True North purchased several agencies located in
North America, Latin America and the Pacific Rim. Agencies purchased during
the latter part of 1995 and in 1996 contributed $47,413 and $5,965 to True
North's 1996 revenues and pretax income, respectively. Had these acquisitions
taken place on January 1 of the previous years, consolidated revenues and
income would not have been significantly different from reported amounts.
On December 31, 1996, True North acquired a 64% interest in Modem Media
Advertising Limited Partnership ("Modem Media"), a technology-based marketing
communications firm, in exchange for an absolute obligation to issue 1,121 of
its common shares (issued on January 7, 1997) valued at $24,387, and a 36%
interest in the assets and operations of TN Technologies Inc. valued by
appraisal experts at $8,203. In addition, True North is obligated to make a
$16 million cash payment and a $4 million payment in shares of its common
stock to the former owners of this agency in the event that the combined
operations of Modem Media and TN Technologies Inc. (known as TN Technologies
Holding Inc.) are able to complete an initial public offering of its common
stock. The difference between the initial purchase price and the fair value of
assets acquired in this transaction amounting to $36,465 has been allocated to
goodwill and is being amortized over a twenty year period.
As a result of this transaction, True North recorded a pre-tax gain of
$5,800 relating to the difference between the appraised fair value and the
book value of the 36% interest in the assets and operations of TN Technologies
Inc. paid to the former owners of Modem Media.
The following unaudited pro forma summary presents True North's consolidated
results of operations as if this business combination had occurred on January
1, 1996:
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Revenues......................................................... $511,155
Net income....................................................... 27,450
Earnings per share............................................... $ 1.13
</TABLE>
The above amounts are based upon certain assumptions and estimates which
True North believes to be reasonable. The pro forma results do not necessarily
represent results which would have occurred if the business combination had
taken place at the date and on the basis assumed.
17. SUBSEQUENT EVENTS
As described in "Management's Discussion and Analysis--Publicis
Relationship" included in this Annual Report to Stockholders, on February 19,
1997 True North agreed to an amicable restructuring of its relationship with
Publicis S.A. and certain of its affiliates.
During the first quarter of 1997 True North acquired Wilkens International,
a European advertising network with principal offices in Germany, Spain, Italy
and Eastern Europe. The total cost of this acquisition was approximately
$21,600 in cash plus the assumption of net liabilities (including the
assumption of short and long-term debt of approximately $12,000) totaling
approximately $18,694. True North financed this acquisition using existing
debt facilities.
21
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The financial statements and related financial information included in this
annual report are the responsibility of management. They have been reported in
conformity with generally accepted accounting principles. In preparing these
financial statements, management has necessarily included some amounts which
are based on its best estimates and judgments. True North maintains systems of
internal accounting and financial control designed to provide reasonable
assurance that its assets are safeguarded against loss from unauthorized use
or disposition, and that transactions are executed and recorded in accordance
with established procedures. These systems of internal controls are reviewed,
modified and improved as changes occur in business conditions and operations.
Arthur Andersen LLP, our independent public accountants, are engaged to
audit and to report on our consolidated financial statements. In performing
their audit in accordance with generally accepted auditing standards, they
evaluate our systems of internal accounting control, review selected
transactions, and carry out other auditing procedures to the extent they
consider necessary in expressing their informed professional opinion on our
financial statements.
The Audit Committee, composed of nonemployee members of the Board of
Directors, meets periodically with management, the independent certified
public accountants, and the internal auditors. This Committee reviews audit
plans and assesses the adequacy of internal controls and financial reporting.
Both the independent certified public accountants and internal auditors have
direct access to the Audit Committee.
Bruce Mason Dale F. Perona
Chairman/CEO Secretary and Treasurer
John J. Rezich
Controller
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of True North Communications Inc.:
We have audited the accompanying consolidated balance sheets of True North
Communications Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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
Publicis Communication for each of the three years in the period ended December
31, 1996, the investment in which is reflected in the accompanying financial
statements using the equity method of accounting. The investment in Publicis
Communication represents approximately 8.2% and 9.6% of total assets as of
December 31, 1996 and 1995, respectively. The equity in its net earnings was
$5,109,000, $2,906,000 and $1,687,000 for the years ended December 31, 1996,
1995, and 1994, respectively. The financial statements of Publicis Communication
were audited by other auditors whose reports have been furnished to us and our
opinion, insofar as it relates to the amounts included for Publicis
Communication, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of True North Communications Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 115--Accounting for
Certain Investments in Debt and Equity Securities, effective January 1, 1994.
Arthur Andersen LLP
Chicago, Illinois,
March 28, 1997.
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