<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
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 Identification No.)
incorporation or organization)
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
--- ---
The number of shares of Common Stock, 33-1/3 cents par value, outstanding as of
August 4, 2000 was 49,828,428.
<PAGE>
TRUE NORTH COMMUNICATIONS INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2000 and 1999. 3
Unaudited Condensed Consolidated Balance Sheets as of June 30,
2000, and December 31, 1999. 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2000 and 1999. 5
Unaudited Notes to Condensed Consolidated Financial Statements
for the Six Months Ended June 30, 2000 and 1999. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 6. Exhibits and Reports on Form 8-K. 17
</TABLE>
2
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commissions and Fees $ 375,090 $ 355,652 $ 734,678 $ 659,098
---------- ---------- ---------- ----------
Operating Expenses:
Salaries and employee benefits 221,277 217,416 450,632 419,880
Office and general 97,664 98,260 211,252 188,235
---------- ---------- ---------- ----------
Total operating expenses 318,941 315,676 661,884 608,115
---------- ---------- ---------- ----------
Operating Income 56,149 39,976 72,794 50,983
---------- ---------- ---------- ----------
Other Income (Expense):
Interest income 1,130 1,843 2,801 3,465
Interest expense (4,130) (5,458) (7,987) (9,846)
Gains on sales of marketable securities
and other (203) 1,357 (482) 5,479
---------- ---------- ---------- ----------
Total other income (expense) (3,203) (2,258) (5,668) (902)
---------- ---------- ---------- ----------
Income Before Taxes, Minority Interest and
Equity Income 52,946 37,718 67,126 50,081
Provision for income taxes 22,432 16,412 28,529 21,785
---------- ---------- ---------- ----------
Income Before Minority Interest and
Equity Income 30,514 21,306 38,597 28,296
Minority interests (911) (752) 613 (779)
Equity income (loss) of affiliates (2,513) 480 (1,960) 690
---------- ---------- ---------- ----------
Net Income $ 27,090 $ 21,034 $ 37,250 $ 28,207
========== ========== ========== ==========
PER SHARE INFORMATION:
Basic earnings per share $ 0.55 $ 0.45 $ 0.76 $ 0.60
========== ========== ========== ==========
Diluted earnings per share $ 0.54 $ 0.43 $ 0.74 $ 0.58
========== ========== ========== ==========
Average common shares outstanding 49,401 47,296 49,170 46,637
========== ========== ========== ==========
Average common shares outstanding,
assuming dilution 50,621 48,871 50,535 48,235
========== ========== ========== ==========
Cash dividends per common share $ 0.15 $ 0.15 $ 0.30 $ 0.30
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 64,241 $ 118,265
Short-term investments -- 16,858
Marketable securities 626 2,076
Accounts receivable, net 1,033,931 1,020,701
Expenditures billable to clients 71,048 69,512
Other current assets 20,667 19,529
------------ ------------
Total current assets 1,190,513 1,246,941
------------ ------------
NONCURRENT ASSETS:
Property and equipment, net 143,316 156,799
Goodwill, net 467,092 487,787
Investment in affiliated companies 92,765 32,871
Other noncurrent assets 90,094 80,882
------------ ------------
Total noncurrent assets 793,267 758,339
------------ ------------
Total assets $ 1,983,780 $ 2,005,280
============ ============
CURRENT LIABILITIES:
Accounts payable $ 1,102,938 $ 1,034,980
Short-term bank borrowings 71,554 117,847
Income taxes payable 21,359 22,642
Current portion of long-term debt 7,616 9,036
Accrued expenses 178,343 210,283
------------ ------------
Total current liabilities 1,381,810 1,394,788
------------ ------------
NONCURRENT LIABILITIES:
Long-term debt 34,868 36,632
Liability for deferred compensation 68,405 67,723
Other noncurrent liabilities 78,056 139,761
------------ ------------
Total noncurrent liabilities 181,329 244,116
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock -- --
Common stock 16,599 16,295
Paid-in capital 331,039 293,435
Retained earnings 103,061 80,615
Unrealized gain on marketable securities 345 1,179
Cumulative translation adjustment (25,263) (22,304)
Less - treasury stock (1,144) (983)
Less - deferred compensation (3,996) (1,861)
------------ ------------
Total stockholders' equity 420,641 366,376
------------ ------------
Total liabilities and stockholders' equity $ 1,983,780 $ 2,005,280
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income $ 37,250 $ 28,207
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 30,532 26,935
Equity income (loss) of affiliates 1,960 (690)
Other 5,189 6,776
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (60,540) (96,148)
Other assets (17,319) (22,962)
Accounts payable and accrued expenses 92,980 26,488
------------ ------------
Net cash provided (used) by operating activities: 90,052 (31,394)
------------ ------------
Cash flows provided (used) by investing activities:
Purchases of property and equipment (28,627) (24,024)
Acquisitions and investments in businesses (51,237) (56,785)
Deconsolidiation of subsidiary (29,143) --
Maturities of short-term investments 16,502 --
Proceeds from sale of marketable securities -- 139,735
------------ ------------
Net cash provided (used) by investing activities (92,505) 58,926
------------ ------------
Cash flows provided (used) by financing activities:
Increase (decrease) in short-term bank borrowings (46,293) 33,640
Proceeds from issuance of common stock 20,821 5,851
Proceeds from issuance of long-term debt -- 25,852
Payments of long-term debt (2,141) (37,128)
Proceeds from initial public offering of subsidiary -- 42,048
Cash dividends paid (14,804) (14,176)
Payments for purchases of common stock (6,686) (6,989)
------------ ------------
Net cash provided (used) by financing activities (49,103) 49,098
------------ ------------
Effects of exchange rates on cash (2,468) (3,504)
------------ ------------
Net increase (decrease) in cash and cash equivalents (54,024) 73,126
Cash and cash equivalents at beginning of year 118,265 88,685
------------ ------------
Cash and cash equivalents at end of period $ 64,241 $ 161,811
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have
been prepared by True North without audit, and include all adjustments,
consisting only of normal recurring accruals, which True North considers
necessary for a fair presentation. The condensed consolidated financial
statements should be read in conjunction with the financial statements and notes
thereto included in True North's 1999 Annual Report on Form 10-K.
The operating results for the first six months of the year are not
necessarily indicative of the results for the year or other interim periods.
2. ACQUISITIONS
In the first six months of 2000, the cost of advertising and
communication agencies acquired by True North in transactions accounted for as
purchases were $15.6 million. The excess of the purchase price over the fair
value of net tangible assets acquired was $14.6 million and is being amortized
over periods not exceeding 40 years.
In addition, in February 2000, Modem Media, Inc. ("Modem") acquired
100% of the outstanding capital stock of Vivid Holdings, Inc. and its
majority-owned subsidiary, Vivid Publishing, Inc. ("Vivid") for approximately
$63.6 million. The consideration was comprised of approximately $10.2 million in
cash, approximately $14.4 million in Modem common stock (446,010 shares), of
which approximately $4.5 million will remain in escrow as security for the
indemnification obligations of the sellers, and approximately $39.0 million in
value related to employee stock options that were converted to Modem stock
options. The acquisition has been accounted for under the purchase method of
accounting. The preliminary allocation of the excess of purchase price over the
fair value of net assets acquired of approximately $63.8 million is being
amortized over a five-year period and is subject to final determination. As a
result of this transaction, True North recorded a $6.1 million gain, net of $4.6
million of deferred income taxes, as a credit to stockholders' equity.
3. RESTRUCTURING CHARGES
In September 1999, management of True North committed to a formal plan
to restructure its operations and recorded a $76.4 million pre-tax charge in the
third quarter of 1999. The charge covered primarily severance, lease termination
and other exit costs in connection with the combination and integration of True
North's two independent worldwide advertising agency networks. The restructuring
initiatives also included the sale or closing of certain underperforming
business units.
6
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
A summary of components of the restructuring charge is as follows (in
millions):
<TABLE>
<CAPTION>
Severance Lease
and Termination
Termination and Other Impairment
Benefits Exit Costs Loss Total
-------- ---------- ---- -----
<S> <C> <C> <C> <C>
Restructuring reserve, September 30, 1999 $ 41.4 $ 24.2 $ 10.8 $ 76.4
Write-down of impaired assets -- (0.9) (10.8) (11.7)
Cash payments (9.7) (3.2) -- (12.9)
------- ------- ------- -------
Balance, December 31, 1999 31.7 20.1 -- 51.8
Write-down of impaired assets -- (1.2) -- (1.2)
Cash payments (8.3) (2.3) -- (10.6)
------- ------- ------- -------
Balance, March 31, 2000 23.4 16.6 -- 40.0
Write-down of impaired assets -- (0.4) -- (0.4)
Cash payments (5.8) (4.0) -- (9.8)
------- ------- ------- -------
Balance, June 30, 2000 $ 17.6 $ 12.2 $ -- $ 29.8
======= ======= ======= =======
</TABLE>
The involuntary severance and termination benefits portion of the 1999
charge reflected the elimination of approximately 640 positions worldwide,
primarily in international locations. As of June 30, 2000, approximately 595
positions were eliminated and True North anticipates that the severance actions
will be completed by September 30, 2000.
The 1999 charge associated with lease terminations and other exit costs
represented primarily the closure, abandonment and downsizing of office space
globally, including approximately 30 international locations. As of June 30,
2000, approximately 19 facilities were abandoned or downsized. The remaining
actions are expected to be completed by mid-to-late 2000, with the cash portion
of the charge to be paid out over the remaining lease periods, which range from
one to five years.
4. COMPREHENSIVE INCOME
True North classifies its comprehensive income, which includes foreign
currency translation adjustments and unrealized gains and losses on marketable
securities available for sale, as a separate component of stockholders' equity.
Total comprehensive income for the three and six months ended June 30, 2000 and
1999 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income $ 27.1 $ 21.0 $ 37.2 $ 28.2
Foreign currency translation (0.4) 0.7 (3.0) (11.6)
Unrealized gains (losses) on marketable
securities, net of deferred income taxes (0.5) 2.1 (0.8) (3.3)
-------- -------- -------- --------
Total comprehensive income $ 26.2 $ 23.8 $ 33.4 $ 13.3
======== ======== ======== ========
</TABLE>
7
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
5. CONTINGENCIES
On December 2, 1997, Mazda Motor of America, Inc. ("Mazda"), a former
client of True North's subsidiary, Foote Cone & Belding Advertising, Inc.
("FCB"), initiated an arbitration against FCB before the American Arbitration
Association in Los Angeles, California. Mazda seeks indemnity and reimbursement
for liabilities it incurred or expects to incur in connection with automobile
lease advertising that aired in 1996 and 1997. Mazda is currently seeking from
FCB approximately $9.0 million in damages, exclusive of interest, costs and
attorneys' fees, arising from (a) Mazda's settlement of false advertising claims
asserted by the Federal Trade Commission ("FTC"), various state attorneys
general, and a class of consumers and (b) Mazda's settlement on or about
September 30, 1999, of claims asserted by the FTC and various state attorneys
general, which alleged that Mazda violated the consent orders entered in
previous FTC and state attorneys general actions. FCB intends to defend Mazda's
claim vigorously. In addition, FCB has filed a counterclaim in the arbitration
seeking approximately $5.5 million in unpaid commissions for planning and
placing advertising during the final months of FCB's relationship with Mazda.
The arbitration hearing is scheduled for the first quarter of year 2001.
True North is a party to several other lawsuits incidental to its
business. It is not possible at the present time to estimate the ultimate
liability, if any, of True North with respect to such litigation, however,
management believes that any ultimate liability will not be material in relation
to True North's consolidated results of operations or financial position.
6. INVESTMENT IN MODEM MEDIA, INC.
In March 2000, Modem announced that it had filed a registration
statement with the Securities and Exchange Commission relating to a proposed
public offering of 4.5 million shares of its common stock. As part of the
proposed offering, True North was offering to sell 2.5 million shares.
Subsequently, Modem postponed the offering due to adverse market conditions.
On April 26, 2000, True North converted all of its shares of Modem
Class B common stock into Class A common stock. As a result, True North's
voting power was reduced from approximately 80% to approximately 46%.
Accordingly, effective with the second quarter of 2000, Modem is no longer
consolidated in True North's financial statements and is accounted for under
the equity method.
8
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, 2000 VERSUS 1999
GENERAL
True North's net income for the three months ended June 30, 2000, was
$27.1 million, or $0.54 per diluted share. This compares to $21.0 million, or
$0.43 per diluted share, for the three months ended June 30, 1999.
Effective for the second quarter of 2000, True North's voting power in
Modem was reduced to approximately 46%. As a result, Modem's results are no
longer consolidated in True North's financial statements and are now reported
under the equity method of accounting.
The second quarter of 1999 included a pre-tax gain of $1.4 million
($0.8 million after-tax or $0.02 per share) on the sale of True North's holdings
in Publicis S.A.
REVENUES
Consolidated revenues increased $19.4 million, or 5.5%, to $375.1
million for the three months ended June 30, 2000, from $355.7 million in 1999.
Revenues from the U.S. operations increased $25.3 million, or 9.7%, to $286.3
million in 2000, while international revenues decreased 6.2%, or $5.9 million,
to $88.8 million. Excluding the impact of changes in foreign exchange rates,
international revenues were essentially unchanged.
Excluding the impact of deconsolidating Modem in the second quarter
of 2000, consolidated revenues increased $35.5 million or 10.4%.
Approximately 2.7% of this worldwide growth was due to acquisitions (net of
divestitures) while the impact of changes in foreign exchange rates decreased
consolidated revenues by 1.6%. The resultant organic revenue growth from net
new business wins and growth in existing client net expenditures was 9.3%.
OPERATING EXPENSES
Total consolidated operating expenses increased $3.3 million to $319.0
million from $315.7 million in 1999. Acquisitions accounted for approximately
$7.9 million of the increase. Modem's total operating expense were $14.8 million
in the second three months of 1999. Excluding the effects of acquisitions,
divestitures, changes in foreign exchange rates, and the Modem deconsolidation,
total operating expenses increased 5.0% in the second quarter of 2000.
Salaries and benefits increased $3.9 million, or 1.8%, to $221.3
million in 2000 from $217.4 million in the comparable quarter of 1999.
Acquisitions represented approximately $5.4 million of the increase, while the
impact of changes in foreign exchange rates decreased salaries and related
benefit expenses by approximately $2.9 million. Excluding the effects of the
items noted above, as
9
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
well as the effect of Modem's deconsolidation, salaries and related benefits
increased by 5.0%, representing normal salary growth and higher incentive
expense due to the increased level of profitability partially offset by
savings from the restructuring efforts.
Office and general expenses were $97.7 million for the three months
ended June 30, 2000, compared to $98.3 million in 1999, a $0.6 million, or
0.6% decrease. Acquisitions accounted for $2.4 million of the difference,
while the impact of lower foreign exchange rates decreased those expenses by
$1.7 million. Excluding the impact of acquisitions divestitures, changes in
foreign exchange rates, and Modem's impact from deconsolidating its results,
office and general expenses increased by 5.0% in 2000 versus 1999. This
reflects higher goodwill amortization due to acquisitions, higher
depreciation charges from upgrading the facilities and computer systems and
bad debt expense.
RESTRUCTURING AND OTHER CHARGES
In September 1999, management of True North committed to a formal plan
to restructure its operations and recorded a $76.4 million pre-tax charge in the
third quarter of 1999. The charge covered primarily severance, lease termination
and other exit costs in connection with the combination and integration of True
North's two independent worldwide advertising agency networks. The restructuring
initiatives also included the sale or closing of certain underperforming
business units.
The involuntary severance and termination benefits portion of the
1999 charge reflected the elimination of approximately 640 positions
worldwide, primarily in international locations. As of June 30, 2000,
approximately 595 positions were eliminated and True North anticipates that
the remaining severance actions will be completed by September 30, 2000.
The 1999 charge associated with the lease terminations and other
exit costs represented primarily the closure, abandonment and downsizing of
office space globally, including approximately 30 international locations. As
of June 30, 2000, approximately 19 facilities were abandoned or downsized.
The remaining actions are expected to be completed by mid-to-late 2000, with
the cash portion of the charge to be paid out over the remaining lease
periods, which range from one to five years.
The impairment loss on the sale or closing of certain businesses
resulted from the decision to sell two business units, one in the U.S., and one
in the United Kingdom, and to close four other business units and joint
ventures, including the R/GA Digital Studios, which specialized in digital
production for advertising and film companies. These sales or closures are
expected to be completed by September 30, 2000.
10
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
True North anticipates net pre-tax expense savings of approximately
$25.0 million on an annualized basis, with approximately two thirds or more
of such savings occurring in 2000 and the full amount realized in 2001 and
thereafter.
OTHER INCOME (EXPENSES)
Interest income decreased by $0.7 million in the three months ended
June 30, 2000 compared to 1999 primarily due to the effect of deconsolidating
Modem's results in the second quarter of 2000. Interest expenses decreased by
$1.3 million in the second quarter of 2000 versus 1999 due primarily to lower
average debt levels, slightly offset by higher short-term interest rates.
True North recognized a pre-tax gain of $1.4 million in the second
quarter of 1999 on the sales of its holdings in Publicis S.A.
INCOME TAXES
True North's effective tax rate was 42.4% in the second quarter of 2000
versus 43.5% in 1999. The effective rate is higher than the U.S. statutory rate
of 35% primarily due to U.S. state and local income taxes and to the
nondeductibity of certain expenses, including entertainment and amortization of
goodwill.
MINORITY INTERESTS
Minority interest expense in the second quarter of 2000 was $0.9
million versus $0.7 million in 1999. This reflects the impact of net losses in
the operations of Modem in 1999 and its subsequent deconsolidation in the
second quarter of 2000.
EQUITY INCOME (LOSS)
Equity income (loss) was a loss of $2.5 million for the second
quarter of 2000, compared to income of $0.5 million in the corresponding
period of 1999. This decrease is due primarily to True North's share of the
net loss at Modem, which was included as a consolidated entity in 1999.
11
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30, 2000 VERSUS 1999
GENERAL
True North's net income for the six months ended June 30, 2000, was
$37.2 million, or $0.74 per diluted share. This compares to $28.2 million, or
$0.58 per diluted share, for the six months ended June 30, 1999.
The first six months of 1999 included gains on the sale of securities
of $5.4 million ($3.1 million after-tax or $0.06 per diluted share). Excluding
these gains, net income for the first six months of 1999 was $25.1 million or
$0.52 per diluted share.
REVENUES
Consolidated revenues increased $75.6 million, or 11.5%, to $734.7
million for the six months ended June 30, 2000, from $659.1 million in 1999.
Revenues from the U.S. operations increased $80.0 million, or 16.4%, to $568.1
million in 2000, while international revenues decreased 2.6%, or $4.4 million,
to $166.5 million. Excluding the impact of changes in foreign exchange rates,
international revenues increased 3.1%.
Excluding the impact of deconsolidating Modem in the second
quarter of 2000, consolidated revenues increased $75.5 million or 12.0%.
Approximately 4.0% of this worldwide growth was due to acquisitions (net of
divestitures) while the impact of changes in foreign exchange rates decreased
consolidated revenues by 1.3%. The resultant organic revenue growth from net
new business wins and growth in existing client net expenditures was 9.3%.
OPERATING EXPENSES
Total consolidated operating expenses increased $53.8 million to $661.9
million from $608.1 million in 1999. Acquisitions accounted for approximately
$22.8 million of the increase. Excluding the effects of acquisitions,
divestitures, changes in foreign exchange rates, and the impact of
deconsolidating Modem in the second quarter of 2000, total operating expenses
increased 6.3%.
Salaries and benefits increased $30.7 million, or 7.3%, to $450.6
million in 2000 from $419.9 million in the comparable period of 1999.
Acquisitions represented approximately $15.6 million of the increase, while the
impact of changes in foreign exchange rates decreased salaries and related
benefit expenses by approximately $5.4 million. Excluding the effects of the
items noted above, and Modem's deconsolidation, salaries and related benefits
increased by 5.1%, representing normal salary growth progression and higher
incentive expense due to the increased level of profitability partially offset
by savings from the restructuring efforts.
12
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Office and general expenses were $211.3 million for the six months
ended June 30, 2000, compared to $188.2 million in 1999, a $23.1 million, or
12.3% increase. Acquisitions accounted for $7.2 million of the increase,
while lower foreign exchange rates decreased those expenses by $3.2 million.
Excluding the impact of acquisitions, divestitures, changes in foreign
exchange rates, and the Modem deconsolidation, office and general expenses
increased by 9.1% in 2000 versus 1999. This reflects higher goodwill
amortization due to acquisitions, higher depreciation charges from upgrading
the facilities and computer systems and strengthening bad debt reserves.
OTHER INCOME (EXPENSES)
Interest income decreased by $0.7 million in the six months ended June
30, 2000, compared to 1999 primarily due to the impact of deconsolidating Modem.
Interest expense decreased by $1.9 million in the first quarter of 2000 versus
1999 due primarily to lower average debt levels.
True North recognized pre-tax gains of $5.4 million in the first six
months of 1999 on the sales of its holdings in DoubleClick, Inc. and Publicis
S.A.
INCOME TAXES
True North's effective tax rate was 42.5% in the first six months of
2000 versus 43.5% in 1999. The effective rate is higher than the U.S. statutory
rate of 35% primarily due to U.S. state and local income taxes and to the
nondeductibity of certain expenses, including entertainment and amortization of
goodwill.
MINORITY INTERESTS
Minority interest income in the first six months of 2000 was $0.6
million versus an expense of $0.8 million in 1999. This reflects the impact of
deconsolidating Modem in the second quarter of 2000.
EQUITY INCOME (LOSS)
Equity income (loss) was $(2.0) million for the first six months of
2000, compared to income of $0.7 million in the corresponding period of 1999.
This decrease reflects the net losses sustained by Modem in the second
quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, True North's cash and cash equivalents totaled
$64.2 million, which is a decrease of $54.1 million over the 1999 year-end
balance of $118.3 million. This decrease is due primarily to the repayment of
short-term borrowings and the impact of the deconsolidation of Modem.
13
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
OPERATING ACTIVITIES
True North's funds from operating activities consist primarily of
net income adjusted for noncash items, including depreciation and
amortization, and changes in operating assets and liabilities. Cash provided
by operating activities was $90.1 million in the first six months of 2000.
Operating cash flows are impacted by the seasonal spending patterns of
clients. True North's policy is to bill and collect monies from its clients
prior to payments due to the media.
INVESTING ACTIVITIES
True North's net capital expenditures for property and equipment
were $28.6 million for the six months ended June 30, 2000. These expenditures
are primarily related to True North's worldwide investment in technology,
coupled with leasehold improvements related to office moves. True North
anticipates that capital expenditures in 2000 will approximate 1999's level
and has no material commitments for future expenditures.
In the first half of 2000, True North acquired several companies to
enhance its network, primarily in Europe and the U.S. True North anticipates
that it will continue to pursue acquisitions opportunities that will expand
its capabilities and geographical presence.
FINANCING ACTIVITIES
At June 30, 2000, True North was in compliance with all covenants
and conditions related to its Revolving Credit Agreement and other debt
agreements.
In March 2000, Modem announced that it had filed a registration
statement with the Securities and Exchange Commission relating to a proposed
public offering of 4.5 million shares of its common stock. As part of the
proposed offering, True North was offering to sell 2.5 million shares.
Subsequently, Modem postponed the offering due to adverse market conditions.
True North has paid cash dividends at an annual rate of $0.60 per share
over the past ten years. Determination of the payment of dividends is made by
True North'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 2000.
14
<PAGE>
TRUE NORTH COMMUNICATIONS INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
In July 2000, True North's Board of Directors authorized an increase in
its previously announced $30,000,000 stock repurchase program to allow True
North to make systematic repurchases, in open market and privately negotiated
transactions, of an additional $30,000,000 in True North Common Stock. The stock
repurchased under this program would be held as treasury shares for use under
the Company's stock-based benefit programs. Such purchases would be dependent
upon a number of factors, including the price and availability of True North's
shares, general market conditions and the number of shares required for True
North's stock-based benefit programs. The stock repurchase program may be
discontinued at any time.
In the first six months of 2000, True North purchased 163,000 shares at
a cost of $6.7 million. Since the program's inception, True North has purchased
885,618 shares at a cost of $26.8 million.
In May 2000, True North extended its 364-day credit agreement for up to
$75 million of borrowings as part of its $250 million Revolving Credit
Agreement.
True North believes that cash flow from operations, along with current
cash balances, will be sufficient to satisfy working capital and other operating
requirements in 2000. In the event additional funds are required, True North
believes it will have sufficient resources, including borrowing capacity, to
meet such requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
True North's consolidated financial statements are denominated in U.S.
dollars. In 1999 and the first six months of 2000, True North derived
approximately 26% and 23%, respectively, of its revenues from operations outside
the United States. Currency fluctuations may give rise to translation gains and
losses when financial statements of foreign operating units are translated into
U.S. dollars. Significant strengthening of the U.S. dollar against major foreign
currencies could have an adverse impact on True North's results of operations.
In general, True North incurs most of its costs to support the related
revenues in the same currency in which these revenues are billed, thereby
reducing exposure to currency fluctuations. In the past, True North has not
hedged foreign currency profits into U.S. dollars, because management has
believed that, over time, the costs of a hedging program outweigh any benefit of
greater predictability in the Company's U.S. dollar denominated profits.
However, as True North continues to extend the depth and breadth of its foreign
operations, management will from time to time reconsider the issue of whether a
foreign currency-hedging program would be beneficial to its operations.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Response to this item is incorporated by reference to Part 1, Note 5
to the Registrant's unaudited notes to financial statements in this Quarterly
Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 17, 2000, Registrant held its Annual Meeting of Stockholders to
consider and vote upon the following matters:
1. A proposal to elect 11 directors.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
FOR WITHHELD
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
David A. Bell 39,490,649 494,479
-------------------------------------------------------------------------------------------------------------
Joseph A. Califano, Jr. 39,485,847 499,281
-------------------------------------------------------------------------------------------------------------
Donald L. Elliman, Jr. 39,514,140 470,988
-------------------------------------------------------------------------------------------------------------
H. John Greeniaus 39,452,238 532,890
-------------------------------------------------------------------------------------------------------------
Leo-Arthur Kelmenson 39,458,305 526,823
-------------------------------------------------------------------------------------------------------------
Wenda Harris Millard 39,126,733 858,395
-------------------------------------------------------------------------------------------------------------
Michael E. Murphy 39,515,345 469,783
-------------------------------------------------------------------------------------------------------------
J. Brendan Ryan 39,454,390 530,738
-------------------------------------------------------------------------------------------------------------
Donald L. Seeley 39,504,372 480,756
-------------------------------------------------------------------------------------------------------------
Marilyn R. Seymann 39,515,518 469,610
-------------------------------------------------------------------------------------------------------------
Stephan T. Vehslage 39,453,100 532,028
-------------------------------------------------------------------------------------------------------------
</TABLE>
2. A proposal to ratify the appointment of Arthur Andersen LLP as
Registrant's independent accountants.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
39,459,557 356,579 168,992
-------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
PART II. OTHER INFORMATION
(CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Employment Agreement between Eugene Bartley and
Registrant dated as of March 16, 2000.
10.2 Employment Agreement between Dennis McClain and
Registrant dated April 1, 1992, amended as of
August 29, 1997.
10.3 True North Communications Inc. Asset Protection Plan as
amended and restated as of June 1, 2000.
10.4 True North Communications Inc. Senior Management Income
Protection Plan dated as of June 1, 2000.
10.5 Employment Agreement between J. Brendan Ryan and
Registrant dated as of January 1, 2000.
(b) Reports on Form 8-K:
(1) Form 8-K filed on April 26, 2000 reported certain
events concerning the Registrant's conversion of shares
of Modem Media.
(2) Form 8-K filed on May 4, 2000 reported Registrant's
first quarter earnings release.
(3) Form 8-K filed on July 26, 2000 reported Registrant's
second quarter earnings release.
17
<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)
Kevin J. Smith
------------------------------
(Signature)
Kevin J. Smith
Executive Vice President
Chief Financial Officer
Date: August 14, 2000
18
