<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarter ended March 31, 1997 Commission file no. 1-5029
True North Communications Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-1088161
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
101 East Erie Street, Chicago, Illinois 60611
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number: (312) 425-6500
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
---- ----
There were 24,896,856 shares of the Registrant's 33 1/3 cents per share par
value Common Stock outstanding as of May 12, 1997.
<PAGE>
TRUE NORTH COMMUNICATIONS INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Exhibits
Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1997 3
Consolidated Balance Sheets as of March 31, 1996,
December 31, 1996, and March 31, 1997 4
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1997 5
Note to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Operating Results 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 6. Exhibits and Reports on Form 8-K 8
</TABLE>
2
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31
1996 1997
-------- --------
<S> <C> <C>
Revenues $105,934 $130,601
-------- --------
Costs and Expenses:
Salaries and employee benefits $ 74,074 $ 87,547
Office and general expenses 34,628 41,445
Other (income) expense 6 1,280
-------- --------
Total Costs and Expenses $108,708 $130,272
-------- --------
Income (Loss) Before Provision for Taxes
on Income $ (2,774) $ 329
Provision for Federal, Foreign & State
Income Taxes (1,181) 168
-------- --------
$ (1,593) $ 161
Minority Interest Credit (Expense) 351 (223)
Equity in Earnings (Losses) of
Affiliated Companies 520 277
-------- --------
Net Income $ (722) $ 215
======== ========
Net Income Per Share $ (.03) $ .01
======== ========
Average Number of Common and Common
Equivalent Shares Outstanding 22,904 24,234
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Mar. 31 Dec. 31 Mar. 31
1996 1996 1997
--------- --------- -----------
ASSETS:
- -------
<S> <C> <C> <C>
Cash and short-term investments $ 34,147 $ 56,996 $ 51,232
Accounts receivable, net 373,597 402,786 443,868
Other current assets 53,780 44,464 60,745
-------- -------- ----------
Total current assets $461,524 $504,246 $ 555,845
Property and equipment, net $ 56,467 $ 61,369 $ 62,670
Goodwill 108,046 151,640 213,114
Investment in affiliated companies 186,888 202,397 202,533
Other noncurrent assets 7,580 13,008 16,331
-------- -------- ----------
Total assets $820,505 $932,660 $1,050,493
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Accounts payable and accruals $434,589 $470,911 $ 518,373
Short-term bank borrowings 93,062 79,698 139,442
Current portion of long-term debt 262 270 2,902
Liability for taxes on income 968 2,312 2,828
-------- -------- ----------
Total current liabilities $528,881 $553,191 $ 663,545
-------- -------- ----------
Long-term debt $ 5,577 $ 31,513 $ 32,310
-------- -------- ----------
Accrued future compensation exp. $ 37,632 $ 44,501 $ 44,189
-------- -------- ----------
Other noncurrent liabilities $ 27,174 $ 37,727 $ 48,811
-------- -------- ----------
Obligation to Modem Media partners $ -- $ 24,387 $ --
-------- -------- ----------
Common stock $ 7,848 $ 7,957 $ 8,333
Paid-in capital 116,975 123,740 147,828
Retained earnings 101,549 119,399 115,895
Less-Treasury stock (57) (4,553) (5,109)
Cumulative translation adjustment (5,074) (5,202) (5,309)
-------- -------- ----------
Total stockholders' equity $221,241 $241,341 $ 261,638
-------- -------- ----------
Total liabilities and
stockholders' equity $820,505 $932,660 $1,050,493
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months ended Mar. 31
1996 1997
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
- --------------------------------------------------
Net income $ (722) $ 215
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,342 5,665
Equity earnings of affiliates, net of dividends received 84 (277)
Accounts receivable (39,417) (17,095)
Accounts payable and accruals (18,140) (11,737)
Other current assets (13,810) (14,088)
Other (1,823) (895)
-------- --------
$(69,486) $(38,212)
-------- --------
Cash Provided By (Used For) Financing Activities:
- --------------------------------------------------
Short-term investments and marketable securities $ 267 $ (4,412)
Increase in liability for cash overdrafts 27,386 18,423
Additions to long-term debt 63 146
Payments of long-term debt (105) (41)
Cash dividends paid (3,529) (3,719)
Common stock issuances 3,114 77
Treasury stock purchases -- (556)
Short-term borrowings 43,080 51,420
-------- --------
$ 70,276 $ 61,338
-------- --------
Cash Provided By (Used For) Investment Activities:
- --------------------------------------------------
Purchase of subsidiaries $(19,014) $(30,044)
Capital expenditures (4,343) (3,384)
-------- --------
$(23,357) $(33,428)
-------- --------
Increase (Decrease) In Cash $(22,567) $(10,302)
Balance at beginning of period 48,408 45,946
-------- --------
Balance at end of period $ 25,841 $ 35,644
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
NOTE TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Unaudited)
The condensed financial statements included herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission, and include all adjustments which the Company considers
necessary for a fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The consolidated condensed financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's latest Annual Report on Form 10-K.
Revenues and net income for the first three months of the year should not be
considered reliable indicators of revenues or net income for the entire year
because the Registrant's business is cyclical.
6
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(in thousands, except per share amounts)
Results of Operations
Revenues increased 23.3% to $130,601 in 1997 from $105,934 in 1996. North
American revenues increased 22.4% to $106,402 and International revenues
increased 27.4% to $24,199. Excluding the impact of acquisitions, consolidated
revenues increased 13.6% as a result of new business won during 1996 and 1997.
During the latter part of 1996 and in 1997, the Company purchased several
agencies in North America, Latin America and the Pacific Rim. These acquisitions
contributed $10,269 and $1,534 to the Company's revenues and pretax income,
respectively.
Salaries and benefits expenses increased 18.2% to $87,547 in 1997, compared to
the 23.3% increase in consolidated revenues. As a percent of revenues, this
category of expenses improved from 69.9% in 1996 to 67.0% in 1997. Excluding the
impact of acquisitions, salaries and benefits expenses increased 10.6%, compared
to the Company's organic revenue growth rate of 13.6%.
Office and general expenses increased 19.7% to $41,445 in 1997, compared to the
23.3% increase in consolidated revenues. As a percent of revenues, this category
of expenses improved from 32.7% in 1996 to 31.7% in 1997. Excluding the impact
of acquisitions, office and general expenses increased 10.7%, compared to the
Company's organic revenue growth rate of 13.6%.
The components of "Other Expense" in both years were as follows:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Interest expense $ 2,036 $ 3,187
Interest (income) (868) (1,433)
Unrealized (gain) loss on Shandwick investment (1,162) (474)
------- -------
$ 6 $ 1,280
======= =======
</TABLE>
Net interest expense increased between years due to the fact that the Company is
carrying higher average debt levels in 1997 resulting from its acquisition
program.
Minority interests was income in 1996 of $351, compared to expense of $223 in
1997. During the first quarter of 1996, the Company's 60% owned operations in
Brazil recorded substantial operating losses. During 1997, the Brazilian
operations reported improved results. In addition, during 1996 and 1997, the
Company purchased majority ownerships in agencies in India and Chile.
7
<PAGE>
Equity income declined from $520 in 1996 to $277 in 1997. Approximately half of
the decline is due to the impact of currency on the Company's share of the
results of its European joint venture with Publicis. The remainder of the
decline results from a deterioration in the results of the Company's investment
in a South African affiliate.
Liquidity and Capital Resources
As more fully explained below, the decline in "Cash and short-term investments"
and increases in "Accounts receivable, net", "Other current assets", and "Short-
term bank borrowings" from the beginning of the year reflect the cyclical nature
of the advertising business and are inter-related.
The increase in "Other current assets" is due to the production of client
commercials which will be shown during the summer months. The costs related to
these commercials are billed to clients during the second quarter when the
commercials are completed. Commercial production activity in the last month of
the year is typically low.
The increase in "Accounts receivable, net" is due, in part, to a slowing of
collections which also is typical of the middle portion of the calendar year.
The decrease in "Cash and short-term investments" and the increase in "Short-
term bank borrowings" reflect the higher level of commercial production
activity, as well as the slowing of accounts receivable collections during the
middle parts of the year.
As previously disclosed, the Company continues to contemplate strategic
acquisitions to enhance its worldwide network. During the first quarter of 1997,
the Company completed the acquisition of agencies in India and Europe. In
addition, it made contingent payments related to acquisitions made in prior
years. These payments were financed by the issuance of additional short-term
borrowings.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
27. Financial Data Schedule.
(b) Reports on Form 8-K - None.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRUE NORTH COMMUNICATIONS INC.
(Registrant)
John J. Rezich
------------------------------
(Signature)
John J. Rezich
Vice President, Controller
Chief Accounting Officer
Date: May 13, 1997
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 35,644
<SECURITIES> 15,588
<RECEIVABLES> 449,694
<ALLOWANCES> 5,826
<INVENTORY> 0
<CURRENT-ASSETS> 555,845
<PP&E> 167,385
<DEPRECIATION> 104,715
<TOTAL-ASSETS> 1,050,493
<CURRENT-LIABILITIES> 663,545
<BONDS> 32,310
0
0
<COMMON> 156,161
<OTHER-SE> 105,477
<TOTAL-LIABILITY-AND-EQUITY> 1,050,493
<SALES> 0
<TOTAL-REVENUES> 130,601
<CGS> 0
<TOTAL-COSTS> 126,807
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 278
<INTEREST-EXPENSE> 3,187
<INCOME-PRETAX> 329
<INCOME-TAX> 168
<INCOME-CONTINUING> 215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 215
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
